<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-19861
----------------
IMPERIAL CREDIT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
California 95-4054791
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
23550 Hawthorne Boulevard, Building 1, Suite 110 Torrance, California 90505
(Address of principal executive offices) (Zip Code)
(310) 373-1704
(Registrant's telephone number, including area code)
----------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<S> <C>
Title of each class Name of each exchange on which registered
Common Stock, no par value Nasdaq National Market
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based upon the closing sales price of its Common Stock on March 15,
1999 on the Nasdaq National Market was approximately $345,897,301.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The number of shares of Common Stock outstanding as of March 15, 1999:
36,822,068.
DOCUMENTS INCORPORATED BY REFERENCE (not applicable)
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ITEM 1. BUSINESS..................................................... 3
ITEM 2. PROPERTIES................................................... 40
ITEM 3. LEGAL PROCEEDINGS............................................ 40
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 42
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS......................................... 43
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA......................... 45
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 48
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK... 74
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 75
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 138
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 139
ITEM 11. EXECUTIVE COMPENSATION....................................... 142
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 148
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 149
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.................................................... 157
</TABLE>
Forward-Looking Statements
Certain information contained in this report constitutes forward-looking
statements under the Securities Act and the Exchange Act. These forward-
looking statements can be identified by the use of forward-looking terminology
including, but not limited, "may," "will," "expect," "intend," "should,"
"anticipate," "estimate," or "believe" or comparable terminology. Our actual
results may differ materially from those contained in the forward-looking
statements.
2
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ITEM 1. BUSINESS
General
We are a diversified commercial lending, financial services and investment
holding company with consolidated assets of $2.4 billion as of December 31,
1998. We were organized in 1986 and our headquarters are located in Torrance,
California. We offer a wide variety of financial services and investment
products nationwide.
Our principal business activities consist of the operation of our wholly and
majority owned operating subsidiaries, and managing our equity investments in
publicly traded companies, and other income producing assets. We offer loan
and lease products and provide asset management, investment banking and
brokerage services in the following sectors:
. Business Finance Lending. Our business finance lending is conducted
through our subsidiaries, Southern Pacific Bank, and Imperial Business
Credit.
. Southern Pacific Bank. Southern Pacific Bank ("SPB") is a $2.0 billion
industrial bank. Its business finance lending is offered through its
divisions and subsidiaries which consist of:
Coast Business Credit: provides asset-based commercial business
loans to small and mid-sized companies.
PrinCap Mortgage Warehouse: provides warehouse lending to
residential mortgage bankers.
Loan Participation and Investment Group: Invests in and purchases
senior secured debt of other companies (referred to as a
"participation") in the secondary market.
. Imperial Business Credit: provides equipment leasing to small and medium
sized businesses through this wholly-owned subsidiary.
. Multifamily and Commercial Mortgage Lending. Our multifamily and
commercial mortgage lending operations are conducted through the Income
Property Lending Division of SPB.
. Advisory and Asset Management Services. Our advisory and asset
management services are conducted through:
. Imperial Credit Commercial Asset Management Corporation--this
subsidiary manages the day to day operations of Imperial Credit
Commercial Mortgage Investment Corp. (Nasdaq Symbol: ICMI), a
publicly traded real estate investment trust with investments in
multifamily and commercial properties, loans, and securities.
. Imperial Credit Asset Management, Inc.--this subsidiary manages
investments in various collateralized loan obligation and hedge
funds.
. Investment Banking and Brokerage Services. Our investment banking and
brokerage services are conducted through Imperial Capital Group, LLC.
This holding company for a registered investment broker/dealer provides
investment opportunities and research to individuals and institutional
investors. We own approximately 60% of Imperial Capital Group's voting
equity.
Business Strategy
In 1995, we began to reposition, transform and diversify our core business
activities from the traditional mortgage banking operations of originating and
selling conforming residential mortgage loans to offering higher margin loan,
lease, investment and financial services products. We sponsored initial public
offerings of our non-conforming residential mortgage lending business,
franchise mortgage lending business, and two Real Estate Investment Trusts. We
have repositioned and diversified our loan and lease products by focusing on
the expansion, creation and acquisition of additional businesses in niche
segments of the financial services industry, including commercial mortgage
banking and business finance lending. When acquiring new businesses or
targeting expansion opportunities, we seek to retain existing management and
recruit additional experienced management to increase growth and profitability
and to reduce the risks associated with operating the newly acquired entity.
3
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Our near-term focus is to build upon our existing core businesses and de-
emphasize or divest ourselves of under-performing operations. We continuously
monitor and review the performance of our subsidiaries and lines of business.
To refocus our operations in higher yielding business opportunities, we may
consider possible sales of certain of our assets which may include certain of
our equity interests. However, as of March 25, 1999, we have no formal
agreements regarding any such sale other than the planned sale of our 38.4%
ownership in Franchise Mortgage Acceptance Company as a result of its recently
announced merger with Bay View Capital Corporation. See Item 1 Business--
Equity Investments in Other Publicly Traded Entities. Also, our senior debt
indentures restrict our ability to negotiate certain sales of our assets. We
do not know if we will be able to sell these assets profitably or at all.
Should we acquire or start any new businesses in the future, we would seek to
either retain control of the day-to-day operations of any significant
subsidiary or substantially divest ourselves of our holdings in such
subsidiary should it conduct a public offering.
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 multifamily and commercial real estate loans
originated by SPB and leases originated by Imperial Business Credit 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 commercial investment companies,
. 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.
Business Finance Lending
Coast Business Credit
General
Coast Business Credit ("CBC") provides senior loans that are secured by the
assets of the borrower. CBC is located in Los Angeles, California, and it has
historically conducted its lending business activities in the Western United
States with 15 loan production offices as of December 31, 1998. During 1998
and 1997, CBC expanded its business by opening loan production centers in:
<TABLE>
<S> <C>
Atlanta Minneapolis
Baltimore Phoenix
Chicago Portland
Cleveland Providence
Detroit Seattle
Dallas
</TABLE>
Loan Portfolio
CBC's principal business is asset-based lending to small-to medium-sized
businesses with annual revenues ranging from approximately $10 million to $100
million. CBC has historically concentrated its lending efforts in the
technology industry. As the table below shows, many of CBC's outstanding loans
at December 31, 1998, 1997 and 1996 were made to technology companies. We
believe that CBC's relationships with venture capital investors and its
industry expertise contribute to CBC's ability to distinguish itself from its
competitors and grow its lending relationships.
4
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Set forth below is a summary of CBC's loan portfolio at December 31, 1998,
1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Commitments............. $1,050,400 $803,300 $547,700
Outstanding loans....... 633,299 484,800 288,500
Outstanding loans to
technology companies... 208,800 201,800 115,600
Outstanding unfunded
commitments............ 417,100 318,400 259,200
Average outstanding
balance per customer... 3,700 3,400 2,800
Weighted average yield.. 13.09% 13.88% 12.41%
</TABLE>
Loan Products and Originations
CBC's loans typically have maturities of two to five years, providing
borrowers with greater flexibility to manage their borrowing needs. These
loans have an automatic renewal for an additional one year at the end of the
contract term unless terminated by either party (usually requiring 60 days
written notice prior to the end of the term). Loans are categorized based on
the type of collateral securing the loan.
Accounts Receivable Loans. Accounts receivable loans are revolving lines of
credit that are secured principally by accounts receivable. Each borrower's
customers normally make their payments directly to CBC, usually on a daily
basis. CBC deposits the payments daily and applies the funds to the borrowers'
loan balances. CBC typically lends up to 80% of the principal balance of
accounts receivable that meet its eligibility requirements. CBC's auditors
conduct quarterly audits of the collateral and financial condition of each
borrower.
Inventory Loans. Inventory loans are typically revolving lines of credit
secured by eligible inventory that is restricted to raw materials and finished
goods. Inventory loans are generally made in conjunction with accounts
receivable loans to qualifying borrowers. Borrowers are required to provide
CBC with monthly inventory designations and these reports are compared to the
borrower's financial statements for accuracy. CBC typically advances loan
proceeds in amounts ranging from 25% to 75% of the eligible inventory value,
with the percentage advanced varying, depending upon the characteristics of
the inventory.
Participation Loans. Participation loans consist of term loans or revolving
lines of credit in which CBC and other lenders (banks or other asset-based
lenders) jointly lend to borrowers when the loan amount exceeds the lending
limits of an individual lender.
Other Loans. CBC also makes term loans secured by real property, equipment
or other fixed assets. These are typically term loans with three- to five-year
amortization periods, but are due and payable upon termination of the master
loan and security agreement.
Set forth below is a table showing (1) the principal amount of CBC's
outstanding loans and (2) the percentage of CBC's portfolio of each loan type
at December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
Outstanding % of Outstanding % of Outstanding % of
Balance Total Balance Total Balance Total
----------- ----- ----------- ----- ----------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Accounts receivable
loans.................. $520.4 82.2% $344.2 71.0% $208.1 72.1%
Inventory loans......... 94.5 14.9 55.1 11.4 34.9 12.1
Participation loans
purchased.............. 50.0 7.9 85.5 17.6 48.4 16.8
------ ----- ------ ----- ------ -----
Participation loans
sold................... (31.6) (5.0) -- -- (2.9) (1.0)
------ ----- ------ ----- ------ -----
Total................. $633.3 100.0% $484.8 100.0% $288.5 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
5
<PAGE>
Set forth below is a table showing CBC's outstanding loan balances and
commitment balances by industry at December 31, 1998:
<TABLE>
<CAPTION>
At December 31, 1998
-----------------------------------
Outstanding % of Commitment % of
Balance Total Balance Total
----------- ----- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Wholesale trade durables............... $126,242 19.9% $ 179,371 17.1%
Business services...................... 81,199 12.7 130,200 12.4
Communications......................... 73,795 11.7 116,502 11.1
Industrial machinery and equipment
manufacturing......................... 37,835 6.0 58,017 5.5
Electronic and electrical equipment
manufacturing......................... 36,181 5.7 83,725 8.0
Electric, gas, and sanitary............ 34,263 5.4 65,900 6.3
Miscellaneous retail................... 29,394 4.6 50,000 4.7
Trucking and warehousing............... 21,028 3.3 24,000 2.3
Lumber and wood products............... 18,777 3.0 25,500 2.4
Food product manufacturing............. 18,443 2.9 34,500 3.3
Wholesale trade nondurables............ 15,622 2.5 25,226 2.4
Health services........................ 14,948 2.4 17,500 1.7
Food stores............................ 12,531 2.0 15,000 1.4
Other.................................. 113,041 17.9 224,985 21.4
-------- ----- ---------- -----
Total................................ $633,299 100.0% $1,050,426 100.0%
======== ===== ========== =====
</TABLE>
Underwriting
Before a credit line proposal letter is issued and a line of credit is
established, CBC conducts a due diligence review of the prospective client
that includes the following:
. client's principals
. client's business
. customer base
. financial statements and other financial records
. legal documentation
. samples of invoices and related documentation
. operational matters
. accounts receivable and accounts payable
. analysis of collectibility of commercial receivables and other potential
collateral
. public record searches for liens
. credit reviews of the prospective client and its principals
. contacting major customers and suppliers to identify potential problems
. on-site audit of the prospective client's invoice, bookkeeping and
collection procedures to verify that they are properly conducted and
operationally compatible with CBC's operations
For high technology borrowers, particular emphasis is placed on
understanding the underlying value of the technology itself, including the
value of the borrower's intangible assets.
After the preliminary review and due diligence, CBC requires the prospective
borrower to provide a deposit for fees and then schedules an audit. If CBC
will be lending against inventory, equipment or real estate, then it will
order appraisals. CBC's auditing staff conducts an audit generally consisting
of a due diligence review of the prospective borrower's accounting and
financial records, including a statistical review of accounts receivable and
charge-off history. CBC's auditors then submit their audit reports and work
papers to CBC's credit committee for review prior to the extension of credit.
6
<PAGE>
In making a decision to approve a credit line, CBC establishes credit limits
under the revolving credit line. It also analyzes the prospective client's
customer base to assure compliance with CBC's policies. These procedures
generally limit CBC's overall exposure to account debtors, especially with
respect to privately held or non-investment grade borrowers. When deemed
necessary for credit approval, CBC may obtain guarantees or other types of
security from a client or its affiliates and may also obtain subordination and
intercreditor agreements from the borrower's other lenders.
Although CBC's underwriting guidelines specify a review of the factors
described above, CBC does not rely on a rigid scoring system to approve
prospective borrowers. Decisions to enter into a relationship with a
prospective client are made on a case-by-case basis.
CBC's underwriting guidelines and policies provide that, prior to each loan
funding, the account executive assigned to the borrower:
. obtains the original or a copy of the invoice to be sent to the borrower
and the purchase order (if one is required by CBC) related to such
invoice,
. confirms the validity and accuracy of a representative sampling of
invoices and
. mails a letter, on the borrower's letterhead, to the new borrower's
customers which introduces CBC and requests that payment be made
directly to CBC.
Each additional funding depends upon the borrower maintaining both
sufficient collateral and compliance with the terms and conditions of the loan
documents.
Credit Monitoring and Controls
An assigned CBC account executive monitors each borrower's credit,
collateral and advances. All account executives are required to meet with each
of their assigned borrowers at least quarterly to:
. monitor the borrower's business,
. physically inspect the borrower's facilities and equipment, and
. discuss any potential problems the borrower may be experiencing.
CBC monitors borrowers' accounts receivable using three reports. The first
is an accounts receivable aging analysis report prepared monthly by the loan
processor and reviewed by the account executive. This report includes details
pertaining to account concentrations and aging trends. The second is an
accounts receivable activity summary prepared weekly by the loan processor and
reviewed by the account executive, summarizing borrowings, repayments and
pledged collateral. The third is a daily report prepared by the borrower and
reviewed by the account executive to determine credit availability for a
particular day.
If liquidation is required for a borrower to repay an outstanding loan, then
CBC attempts to effect a consensual possession of the collateral property and
joint collection of accounts receivable. In certain instances, court action
may be required to ensure collection of receivables and possession of pledged
assets.
Pricing and Funding
CBC typically charges its customers prime plus 2% to 3% (exclusive of loan
fees) on the outstanding balance of their loans. We believe that CBC's loan
pricing is competitive. In addition, CBC attempts to be flexible in the
structuring of its revolving credit lines and to provide prompt service in
order to gain an advantage over its competitors. When competing against more
traditional lenders, CBC competes less on price and more on flexibility and
speed of funding. CBC strives to fund its initial loan advance within three
weeks of receiving the required information, and future advances generally by
the next business day after receiving required documentation.
7
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Asset Quality
CBC has experienced loan losses of approximately $2.1 million since we
acquired it in 1995. The amount of non-performing assets attributable to CBC's
business at December 31, 1998, 1997 and 1996 were $1.1 million, $1.0 million
and $0, respectively.
The amount of net charge-offs relating to CBC's loans for 1998, 1997 and
1996 were $1.1 million, $1.0 million and $0, respectively.
Marketing
CBC obtains business through referrals from:
. banks
. venture capitalists
. accounting firms
. management consultants
. existing borrowers
. other finance companies
. independent brokers
. other affiliates of our company
CBC's marketing officers call on CBC's referral sources to identify and
receive introductions to potential clients and to identify potential clients
from database searches. CBC believes that it currently pays its marketing
personnel competitive base salaries and commissions based on funded
transactions. CBC intends that this will motivate and reward the creation of
new business and the renewal of existing business. Commissions can be a
significant portion of the total compensation paid to CBC's marketing
personnel. CBC's marketing personnel do not have credit decision authority.
PrinCap Mortgage Warehouse
General
PrinCap has been a subsidiary of SPB since SPB acquired the assets of
PrinCap in October 1997. PrinCap's primary business is residential mortgage
warehouse lending to mostly small to medium sized brokers and mortgage bankers
on a national basis. PrinCap is located in Voorhees, New Jersey and has
historically conducted its lending activities in the Eastern United States,
although it has customer relationships nationwide. PrinCap's typical loan
commitment is $5.0 million. As of December 31, 1998, PrinCap's maximum loan
commitment was $20.0 million. PrinCap's mortgage warehouse lending provides
short-term interim funding to finance residential mortgages originated by the
brokers until the mortgages are sold in the secondary market. The warehouse
funding allows the broker to accumulate and pool the loans until resale.
The following table sets forth certain information regarding PrinCap's
warehouse loan fundings at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
At December 31,
------------------
1998 1997
-------- --------
(Dollars in
thousands)
<S> <C> <C>
Commitments............................................ $401,500 $247,100
Outstanding loans...................................... 181,001 122,488
Outstanding unfunded commitments....................... 220,499 124,612
Average outstanding balance per customer............... 1,602 1,655
Weighted average yield................................. 9.94% 10.27%
</TABLE>
8
<PAGE>
PrinCap's outstanding balances to customers by geographic location were as
follows at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------
1998 1997
------------------- ---------------------
% of Loans
in % of Loans
Amount Portfolio Amount in Portfolio
-------- ---------- -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
New York.............................. $ 41,177 22.75% $ 34,323 28.02%
Michigan.............................. 40,854 22.57 22,533 18.40
Maryland.............................. 26,865 14.84 23,393 19.10
Florida............................... 25,844 14.28 8,318 6.79
New Jersey............................ 14,700 8.12 16,597 13.55
Indiana............................... 10,757 5.94 -- --
California............................ 241 0.13 8,806 7.19
Other................................. 20,563 11.37 8,518 6.95
-------- ------ -------- ------
Total............................... $181,001 100.00% $122,488 100.00%
======== ====== ======== ======
</TABLE>
Typically, PrinCap, through SPB, serves as the sole funding source for its
mortgage warehouse lending customers under short-term revolving credit
agreements. PrinCap has developed relationships with a number of mortgage
brokers and is constantly seeking to expand its customer base.
PrinCap has entered into a participation agreement with SPB pursuant to
which SPB funds 100% of PrinCap's warehouse loans to brokers. PrinCap's
warehouse loans are shown on our financial statements under "Loans Held for
Investment."
PrinCap derives revenues from referral fees from SPB and net interest income
on its portfolio of warehouse lines based on the amount of warehouse loans
extended and transaction fees from the broker for each loan file processed.
Brokers pay interest on funds drawn based on the prime rate plus a percentage.
The transaction fees are determined pursuant to an established fee schedule.
Underwriting
Warehouse loans are underwritten in accordance with both PrinCap's and SPB's
policies and procedures. Interested loan originators who contact or are
contacted by PrinCap are asked to prepare a loan application which seeks
detailed information on the originator's business. After evaluating the
application and independently verifying the applicant's credit history, if the
originator appears to be a likely candidate for approval, PrinCap personnel
will visit the originator and review, among other things, its:
. business organization
. management
. reputation
. quality control
. funding sources
. risk management
. loan volume and historical delinquency rate
. financial condition
. contingent obligations
. regulatory compliance
If the originator meets the established criteria, its application is
submitted for approval and the broker enters into a credit facility agreement
with PrinCap. The credit facilities provide for the maximum percentage of any
single mortgage loan that will be advanced, fees received for each loan, the
interest rate and the terms of
9
<PAGE>
repayment; and they are generally renewable annually if the broker meets all
applicable requirements.
All funds advanced to the mortgage brokers are secured by the underlying
mortgages including assignment of the promissory note, deed of trust and all
instruments and documents comprising the loan documentation on each loan
funded by PrinCap and a personal guaranty by the principals of the broker.
PrinCap will only fund loans that have been pre-approved for purchase by third
party investors who forward payments directly to PrinCap upon their acceptance
of final loan documentation. The loans are normally sold no more than 45 days
after origination to third party private investors.
Credit Monitoring and Controls
PrinCap attempts to minimize the risk of making warehouse loans by, among
other things:
(1) requiring that each loan funded be committed for purchase by a third
party investor,
(2) directly receiving payment from secondary market investors when the
loans are sold and remitting any balance to the borrower after deducting
the amount borrowed for that particular loan,
(3) visiting the originator's office from time to time to review its
financial and other records, and
(4) monitoring each originator by periodically reviewing each
originator's financial statements, auditor's letter to the originator's
board of directors, loan production delinquency and commitment reports.
Pricing and Funding
Princap typically charges its customers Prime plus 2% (exclusive of loan
fees) on the outstanding balance under their warehouse lines. Loan fees range
between $75 and $140 dollars per loan placed on the line.
Asset Quality
The amount of non-performing assets attributable to PrinCap's business at
December 31, 1998 and 1997 were $4.1 million and $0, respectively. PrinCap
experienced no charge-offs or recoveries during the years ended December 31,
1998 and 1997.
Marketing
Princap markets its business by attending industry tradeshows generally on a
monthly basis, and through advertising in such publications as Origination
News, the California Mortgage Press and the National Mortgage Professional.
Loan Participation and Investment Group
The Loan Participation and Investment Group ("LPIG") was formed by SPB in
September 1995. This Group invests in and purchases senior secured debt of
other companies (referred to as a "participation") in the secondary market.
The following table sets forth certain information regarding LPIG's
commitments and outstanding balances at December 31, 1998, 1997 and 1996 as
follows:
<TABLE>
<CAPTION>
At December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Commitments.................................... $523,300 $483,700 $267,000
Loans outstanding.............................. 222,100 196,400 160,700
Average yields................................. 8.21% 8.72% 8.80%
</TABLE>
None of the loan participations of LPIG were 30 days or more delinquent
during the past two years.
10
<PAGE>
Imperial Business Credit, Inc.
General
Imperial Business Credit's ("IBC") corporate headquarters are located in San
Diego, California. IBC carries out its business equipment leasing operations
from both its headquarters and its major sales offices in Irvine, California,
Denver, Colorado, and Atlanta, Georgia.
IBC's lease originations totaled $114.3 million in 1998 and $151.4 million
in 1997. During 1998, IBC securitized $118.7 million of leases compared to
$213.6 million during 1997.
IBC serviced $242.7 million of leases at December 31, 1998 as compared to
$247.4 million of leases at December 31, 1997.
Lease Finance Operations
IBC specializes in originating, acquiring, selling, securitizing and
servicing non-cancellable, full-payout equipment leases for small and medium-
sized business in various industries throughout the United States. IBC
primarily focuses on small-ticket leases with contract amounts between $5,000
and $75,000.
IBC derives its earnings from gains recognized on the securitization or sale
of leases, from the spread on portfolios held for investment and loans held
for sale during the warehouse period and from servicing and related ancillary
fees on its servicing portfolio. In each securitization, IBC receives advances
based on a percentage which is less than the aggregate present value of cash
flows from an undifferentiated pool of leases, effectively overcollaterizing
lease-backed notes or certificates. Over the life of the lease pool
securitized, IBC is eligible to receive the excess cash flow resulting from
the difference between the lease payments received and the payment of:
(1) principal and interest to investors in lease-backed notes or
certificates and
(2) backup servicing and trustee fees and other securitization expenses
In consideration for servicing the leases in the securitized portfolios, IBC
receives a servicing fee of 1.23% of the aggregate contract balances
outstanding and, in addition, is entitled to receive all late fees and other
miscellaneous fees related to the portfolio. In 1998, gain on sale of leases
through securitization transactions represented 31% of IBC's total revenues.
Net interest income constituted 27% and servicing related fees represented 36%
of IBC's total revenues.
Products
IBC has historically emphasized full payout leases with terms of 24 to 60
months. Generally, these leases are categorized as direct finance leases.
11
<PAGE>
The following table sets forth IBC's lease originations by equipment type
for the periods presented:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31, 1997 Year Ended December 31, 1996
---------------------------------- ---------------------------------- ----------------------------------
Number of Principal Number of Principal Number of Principal
Leases Amount % of Total Leases Amount % of Total Leases Amount % of Total
Originated Originated Originations Originated Originated Originations Originated Originated Originations
---------- ---------- ------------ ---------- ---------- ------------ ---------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Computers........ 1,130 $ 22,990 20.1% 1,981 $ 39,294 26.0% 857 $21,331 24.5%
Automotive....... 1,574 17,474 15.3 1,843 15,879 10.5 475 4,279 4.9
Furniture and
fixtures........ 522 12,232 10.7 984 18,407 12.2 242 5,963 6.8
Heavy equipment.. 524 10,775 9.4 430 9,449 6.2 163 3,938 4.5
Restaurant....... 864 10,074 8.8 1,047 13,072 8.6 395 6,238 7.2
Manufacturing/Machine
work............ 178 5,174 4.5 441 12,003 7.9 380 11,289 13.0
Health/Sports
equipment....... 117 3,719 3.3 152 4,005 2.6 125 3,069 3.5
Print/Typeset
equipment....... 107 2,337 2.0 136 3,418 2.3 141 3,251 3.7
Dry
cleaning/Washing. 34 1,235 1.1 102 2,385 1.6 102 2,387 2.7
Clothing
manufacture..... 10 520 0.5 38 1,451 1.0 59 2,373 2.7
Radio and
television
production
equipment....... 527 7,277 6.4 374 7,883 5.2 202 3,838 4.4
Other............ 1,092 20,511 17.9 1,251 24,166 15.9 1,204 19,251 22.1
----- -------- ----- ----- -------- ----- ----- ------- -----
Total........... 6,679 $114,318 100.0% 8,779 $151,412 100.0% 4,345 $87,207 100.0%
===== ======== ===== ===== ======== ===== ===== ======= =====
</TABLE>
IBC uses a standard, non-cancellable, full-payment finance lease. The
substantial majority of the leases originated by IBC provides that the lessee
may purchase the equipment for $1.00 at the expiration of the lease, with the
remainder of the leases calling for either a mandatory 10% firm price buy-out
or an optional fair market value buy-out. IBC records a maximum residual value
of 10% of the original equipment cost of leases other than those leases with a
$1.00 buy-out.
Underwriting
IBC carefully screens its origination sources by checking personal and
company financial and credit information, and verifying the reputations of
these sources in the industry. Broker and certain vendor originators are
compensated by IBC on a commission basis. Origination sources retain liability
for leases only insofar as there is any fraud or misrepresentation in the
applications or documentation. Because each of the lease originators is an
independent contractor, IBC cannot require its lease originators to direct
lease funding opportunities to IBC.
Upon receipt of an application, IBC begins an investigation of the
creditworthiness of the applicant. Based upon management's experience, IBC has
developed credit underwriting policies and procedures intended to select
creditworthy equipment lessees. IBC credit underwriting procedures are based
upon the use of, among other things, pre-screened broker referrals,
standardized lease application documents, credit investigations, and in
certain transactions, tax returns, financial statements and other relevant
credit information concerning the lessee. IBC focuses on the time the business
has been owned and operated, type of business and the applicant's credit
requirements.
Once a lease has been approved, a standardized lease agreement and other
documents are prepared. Lease approvals are applicable for 90 days and with
quoted rates for 60 days. When the equipment is shipped and installed, IBC
verifies that the lessee has received and accepted the equipment before paying
the vendor's invoice. In general, IBC makes payments to vendors within one day
of receipt of the lessee's acceptance of equipment.
12
<PAGE>
Credit Monitoring and Controls
IBC services all leases that have been originated or purchased by it. IBC's
servicing activities, with respect to both leases retained by IBC or leases
securitized or sold to third parties, consist of:
. collecting, accounting for and posting all payments received
. responding to lessee inquiries
. taking all necessary action to maintain the security interest granted in
the leased equipment
. investigating delinquencies and taking appropriate action
. communicating with the lessee to obtain timely payments
. repossessing and reselling the collateral when necessary and
. generally monitoring each lease
IBC believes that its ability to monitor lessee performance and collect
payments is primarily a function of its collection and support systems. IBC's
customer service and collection staff are centralized in its San Diego,
California office. IBC's collections policy is designed to identify payment
problems sufficiently early to permit IBC to quickly address delinquencies
and, when necessary, to act to preserve equity in the equipment leased.
Collection procedures are intended to commence immediately upon payments
becoming 11 days past due.
Pricing
IBC typically charges its customers a fixed rate of 12% to 17% on the
original equipment cost financed. We believe IBC's lease pricing is
competitive.
Delinquencies and Repossessions
The following table sets forth the amount of non-performing assets
attributable to IBC's leasing operations at December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
At December 31,
------------------------
1998 1997 1996
------ ------- -------
(Dollars In thousands)
<S> <C> <C> <C>
Nonaccrual leases............................... $ 669 $ 981 $ 1,228
Other assets owned.............................. 702 4,437 --
------ ------- -------
Total NPA's..................................... 1,371 5,418 1,228
====== ======= =======
Total leases and other assets owned............. $8,115 $21,015 $89,341
====== ======= =======
Total NPA's as a percentage of leases and other
assets owned................................... 16.9% 25.8% 1.4%
</TABLE>
Marketing and Origination Network
IBC originates new lease contracts mainly from vendors and brokers, with a
small amount coming from existing customers. Each lease originator has been
reviewed and approved by IBC and has demonstrated an ability to generate
significant volumes of leases with a credit quality that is consistent with
IBC's credit policies. From its offices in California, Colorado and Georgia.
IBC employs 20 sales representatives to originate lease contracts from
approximately 225 vendors and 350 brokers.
The small ticket broker/lessor business is processed primarily through the
Denver marketing unit. The commercial division for the broker/lessor
originated business is located in the San Diego office. The vendor referral
originated business is generated primarily by the Atlanta, Richmond and Irvine
marketing units.
13
<PAGE>
Multifamily and Commercial Mortgage Lending
We conduct our commercial mortgage lending operations through the Income
Property Lending Division of SPB.
Income Property Lending Division
General
The Income Property Lending Division ("IPL") of SPB was formed in February
1994 to expand our apartment and commercial property lending business. As of
December 31, 1998, it had 24 loan origination offices in California,
Washington, Oregon, Colorado, Texas, Arizona, Illinois, Minnesota, Michigan,
Ohio, Georgia, Massachusetts, Florida and New Jersey.
Loan Portfolio
The focus of IPL's lending activities is the small loan market for multi-
family apartments and commercial buildings. The following table sets forth the
loan activity for IPL for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
At December 31,
--------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Loans funded................................... $366,074 $295,896 $261,000
Loan securitizations........................... -- 203,100 276,000
Whole loan sales............................... 304,169 196,800 --
Loans serviced for others...................... 759,247 665,598 276,000
</TABLE>
Loan Products and Originations
IPL generally seeks to make 70% of its loans secured by apartment buildings
and 30% of its loans secured by commercial properties. Most of the IPL's
business is generated through in-house loan representatives who market the
loans directly to mortgage brokers and borrowers. IPL also uses direct
mailing, referrals from brokers and real estate developers. Most of the IPL's
loans have been secured by properties in California. Margins varied over the
6-month LIBOR index ranging from 2.75% to 5.0% depending on product type,
property location and credit history of the borrower. IPL's loan programs
include 30-year adjustable rate loans tied to the 6-month LIBOR, 1-year
Treasury, or Bank of America prime indexes. IPL also originates fixed rate
loans which accounted for approximately 67% of IPL's loan production in 1998.
Substantially all of IPL's loans contain provisions restricting prepayments
of such loans. Prepayment provisions included in fixed rate loan documents
provide for a prepayment fee equal to a percentage of the unpaid loan balance.
Such restrictions may prohibit prepayments in whole or in part during a
specified period of time and/or require the payment of a prepayment fee in
connection with the prepayment thereof. Such prepayment restrictions can, but
do not necessarily, provide a deterrent to prepayments.
IPL may from time to time originate loans with a balloon payment due at
maturity. The ability of a borrower to pay such amount will normally depend on
its ability to fully refinance the loan or sell the related property at a
price sufficient to permit the borrower to make balloon payments.
Underwriting
SPB believes that IPL uses conservative underwriting criteria, which include
a maximum loan-to-value ratio of 70% and minimum debt coverage ratio of 1.2x
on all loans.
With respect to apartment loans, IPL uses standard government agency
documentation and approved independent appraisers. IPL's underwriting is
intended to assess the economic value of the mortgaged property
14
<PAGE>
and the financial capabilities, credit standing and managerial ability of the
borrower. Appraisals and field inspections, performed by SPB approved
appraisers and certified inspectors, and title insurance are required for each
loan. With respect to the loans secured by commercial properties, IPL's
policies typically require that the usage is permitted under local zoning and
use ordinances and the use of the commercial space is compatible with the
property and neighborhood. The property must have a stable occupancy history,
be located in a good market for the commercial property and have adequate
parking. IPL also looks at the state of repairs of the property, whether there
are any unacceptable covenants, if the property is to code, and any
environmental hazards.
IPL also looks at the borrower's financial statements to determine the
borrower's equity in the property. IPL analyzes whether the borrower will be
able to meet all of the mortgaged property's loan obligations and if the
borrower holds other property and how those other properties are performing.
IPL also looks at the borrower's income as a possible source of repayment for
the loan.
Pricing
IPL establishes pricing of the loans at least once every business day based
on prevailing interest rates and general market conditions. The standard
pricing is based on factors such as the anticipated price it would receive
upon sale or securitization of the loan, the anticipated interest spread
realized during the period of accumulating loans, the targeted profit margin
and the anticipated costs associated with sale or securitization.
Credit Monitoring and Controls
SPB services all loans that have been originated by IPL. These servicing
activities, with respect to both loans retained by SPB or loans securitized or
sold to third parties, consist of:
.collecting, accounting for and posting all payments received
.responding to inquires
.investigating delinquencies and taking appropriate action
.communicating with the borrowers to obtain timely payments
.repossessing and reselling the collateral when necessary and
.generally monitoring each loan.
Asset Quality
The following table sets forth the amount of non-performing assets
attributable to IPL's operations at December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
At December 31,
---------------------------
1998 1997 1996
-------- ------- --------
(Dollars In thousands)
<S> <C> <C> <C>
Nonaccrual loans................................ $ 992 $ 1,601 $ 4,473
OREO............................................ 964 465 2,067
-------- ------- --------
Total NPA's..................................... $ 1,956 $ 2,066 $ 6,540
======== ======= ========
Total loans and OREO............................ $146,420 $59,838 $182,650
======== ======= ========
Total NPA's as a percentage of loans and OREO... 1.34% 3.45% 3.58%
</TABLE>
Advisory and Asset Management
We conduct advisory and asset management services through our wholly owned
subsidiaries Imperial Credit Commercial Asset Management Corporation and
Imperial Credit Asset Management, Inc.
15
<PAGE>
Imperial Credit Commercial Asset Management Corp.
Imperial Credit Commercial Asset Management Corp. ("ICCAMC") was formed in
1997 and manages the day-to-day operations of Imperial Credit Commercial
Mortgage Investment Corp. ("ICCMIC") pursuant to a management agreement more
fully described in Item 13. Certain Relationships and Certain Transactions--
Relationships with ICCMIC--ICCMIC Management Agreement. ICCMIC is a publicly
traded corporation which elects to be taxed as a real estate investment trust
that invests primarily in performing multi-family and commercial real estate
loans, direct investments in real estate and commercial mortgage-backed
securities.
In October 1997, ICCMIC completed its initial public offering and sold
approximately 34.5 million shares of common stock at $15.00 per share
resulting in net proceeds of approximately $481.2 million. We purchased
2,970,000 shares of ICCMIC common stock in the offering and an additional
100,000 shares in December 1997. As of December 31, 1998, we owned 3,070,000
shares or 10.8% of the common stock of ICCMIC. For the year ended December 31,
1998, ICCAMC earned $6.3 million in management fees pursuant to the management
agreement compared to $940,000 for the year ended December 31, 1997. At
December 31, 1998, ICCMIC had total assets of $757.2 million.
During the third quarter of 1998, ICCMIC's stock price declined to $9.75 per
share as compared to our book value of $13.98 per share. As a result of the
decline in market value of ICCMIC's common stock, we wrote-down our investment
in ICCMIC to $9.75 per share and recognized an impairment loss of $13.0
million. See Item 7. Managements' Discussion and Analysis of Financial
Condition and Results of Operations for more information.
Imperial Credit Asset Management, Inc.
Imperial Credit Asset Management, Inc. ("ICAM") was formed in April 1998.
ICAM manages Pacifica Partners I L.P., Cambria Investment Partnership I, L.P.,
and Catalina Investment Partnership I, L.P. Pacifica Partners I is a $500
million collateralized loan obligation fund we launched in August 1998.
Pacifica Partners I's assets consist of approximately $400 million in
nationally syndicated bank loans and approximately $100 million in high yield
bonds. We invested net cash of $18.7 million in the subordinated and equity
interests of Pacifica Partners. The return on our investment was 22.3% for
1998. We did not experience any impairment related write-downs in this
investment. Additionally, we receive net management fees of approximately 60
basis points on total assets under management. For the year ended December 31,
1998, ICAM earned management fees of $1.1 million from managing Pacific
Partners I.
We also invested $10.0 million in Cambria which is a hedge fund that invests
in syndicated bank loans. At December 31, 1998, Cambria had total assets under
management of approximately $130.0 million. The return on our investment for
1998 was 1%. We did not experience any impairment related write-downs in this
investment. ICAM earns fees equal to one percent of assets under management
plus a 20% incentive fee for positive returns for each calendar year. For the
year ended December 31, 1998, ICAM earned management fees of $139,000 from
managing Cambria.
We made no investment in Catalina Investment Partnership I, L.P..
Investment Banking and Brokerage
Imperial Capital Group, LLC
Imperial Capital Group, LLC ("ICG") is a majority-owned subsidiary formed in
July 1997. ICG together with its subsidiaries, Imperial Capital, LLC and
Imperial Asset Management, LLC, offer individual and institutional investors
financial products and services. Imperial Capital, LLC, is a registered
broker/dealer with the United States Securities and Exchange Commission and is
a member of the National Association of Securities Dealers, Inc. It provides
investment opportunities and research to individual and institutional
investors, raises private and public capital for middle market companies, and
trades debt, equity and asset backed securities.
16
<PAGE>
Imperial Asset Management, LLC, is an investment advisor registered with the
United States Securities and Exchange Commission, and provides investment
management services to high net worth individuals and institutional clients.
ICG raised $190.0 million for its corporate clients in 1998 and $323.0 million
in 1997 through private placement debt and equity offerings. For the year
ended December 31, 1998, ICG generated $18.5 million in investment banking and
brokerage fee revenues compared to $7.7 million in 1997. As a result of the
turmoil in the financial markets in late 1998, which had a negative impact on
ICG's trading securities, ICG recorded a loss of $3.9 million for 1998.
Other Activities
Statewide Documentation, Inc.
In July 1998, we acquired the assets of Statewide Documentation, Inc.
("Statewide") for a purchase price of $5.0 million worth of our common stock.
Statewide initially began its operations in 1981. Its primary business is
providing loan documentation preparation and loan closing services nationwide.
Additionally, Statewide markets insurance products and provides national
notary and recording services. Statewide uses a pool of over 1,200 active
field representatives to support over 2,000 loan closings per month. For the
period from our acquisition in July of 1998 through December 31, 1998,
Statewide earned loan closing fees of $845,000.
Statewide has developed a proprietary document preparation and delivery
system. This state of the art system provides new document preparation for
Statewide's clients with substantial flexibility and speed, often allowing new
documents to be processed within an hour of original receipt. Statewide
utilizes a remote ordering system, whereby, rather than completing a document
order form, a client can input all necessary data into its own desktop
computer and transmit that information using Statewide's internet site.
Statewide has implemented a four-step quality control system to ensure
reliability and confidentiality upon receipt of a document order. The
information is immediately transferred into Statewide's data entry department
where it is entered into the document preparation system. Once entered, it is
reviewed by the quality control department, then transferred to Statewide's
printing department. All information is reviewed before allowing the loan
documents to be printed. Once the loan documents have been signed, they are
returned to Statewide's office for an additional review to verify the
documents are returned and dated correctly. Completed documents are returned
to the clients' offices the next business day.
Total Return Swaps
As a part of the Pacifica Partners I LP collateralized loan obligation
("CLO") fund launched by the Company in August 1998, the Company delivered
subordinate bonds of approximately $51 million into a total rate of return
swap with the Canadian Imperial Bank of Commerce ("CIBC"). The provisions of
the swap entitle the Company to receive the total return on the subordinate
bonds delivered and pay a floating payment of LIBOR plus a weighted average
spread of 1.36%. The Company delivered $17.8 million in cash and various
equity securities to CIBC as collateral for the swap. These amounts are
classified as Trading Securities on the consolidated balance sheet at
December 31, 1998.
During the years ended December 31, 1998 and 1997, we entered into total
rate of return swap contracts for investment purposes with various investment
bank counterparties, the provisions of which entitle our company to receive
the total return on various commercial loans and pay for a floating payment of
one month LIBOR plus a spread. These contracts are off balance sheet
instruments. As of December 31, 1998 and 1997, we were party to total rate of
return swap contracts with a total notional amount of $155.4 million and
$150.6 million, under which we were obligated to pay one month LIBOR plus a
weighted average spread of 0.75% and 0.78%, respectively. The weighted average
remaining life of these contracts was 32.1 months and 37.1 months as of
December 31, 1998 and 1997. For the years ended December 31, 1998 and 1997, we
recognized $4.3 million and $448,000 in income on total return swaps,
respectively.
17
<PAGE>
Equity Investments in Other Publicly Traded Entities
In addition to our core businesses, we have equity investments in other
publicly traded entities.
Franchise Mortgage Acceptance Company
Franchise Mortgage Acceptance Company ("FMC") is a publicly traded company
(Nasdaq Symbol: FMAX) that originates and services loans and equipment leases
to small businesses. We sponsored FMC's initial public offering in November
1997 and sold a portion of our holdings raising $59.7 million. As of December
31, 1998, we owned 11,023,492 shares or 38.4% of the outstanding common stock
of FMC. Our investment in FMC is reflected on our consolidated balance sheet
as "Investment in Franchise Mortgage Acceptance Company" and is accounted for
pursuant to the equity method of accounting. Our investment in FMC contributed
$3.2 million and $41.8 million to our revenues in 1998 and 1997, respectively.
In addition, as part of the initial public offering of FMC, we recorded a
total gain on sale of FMC common stock of $92.1 million in 1997.
FMC originates long-term fixed and variable rate loan and lease products and
sells the loans and leases either through securitizations or whole loan sales
to institutional purchasers on a servicing retained basis. FMC also
periodically makes equity investments or receives contingent equity
compensation as part of its core lending and leasing business. For the year
ended December 31, 1998, FMC originated or acquired $2.1 billion of franchise
loans and securitized $1.1 billion of loans. For the year ended December 31,
1997, FMC originated or acquired $801.0 million of franchise loans and
securitized $483.1 million of loans.
FMC primarily focuses on established national and regional franchise and
other branded concepts, which include:
. restaurants and fast food franchises
. service stations
. convenience stores
. truck stops
. car washes
. quick lube businesses
. funeral homes
. cemeteries
. golf courses and practice facilities
In April 1998, pursuant to its acquisition of Bankers Mutual, FMC also began
originating multi-family and income property loans.
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.
In accordance with the terms of the definitive agreement, Bay View will
acquire all of the common stock of FMC for consideration currently 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.
18
<PAGE>
Impac Mortgage Holdings, Inc.
Impac Mortgage Holdings, Inc. ("IMH" ) is a publicly traded real estate
investment trust (AMEX symbol: IMH). We spun IMH out as a public company in
November 1995 and our subsidiary, Imperial Credit Advisors, Inc., acted as its
manager until December 31, 1997.
Pursuant to a Termination Agreement entered into in December 1997, related
to the Management Agreement between Imperial Credit Advisors, Inc. and IMH, we
received 2,009,310 shares of IMH common stock and certain securitization-
related assets, and, in exchange, we canceled a note receivable from its
subsidiary, Impac Funding. As of December 31, 1998, we owned 7.7% of the
outstanding common stock of IMH.
During 1998, IMH's common stock substantially declined in value. We judged
that this decline was other than temporary, and as a result, we wrote-down our
investment in IMH to $5.00 per share and recognized an impairment charge of
$24.5 million. At December 31, 1998, our investment in IMH common stock was
carried at its fair value of $4.56 per share. We received cash dividends of
$2.9 million for the year ended December 31, 1998. In the fourth quarter of
1998, IMH did not declare a quarterly cash dividend. See Item 7. Managements'
Discussion and Analysis of Financial Condition and Results of Operations for
more information concerning our accounting treatment of this matter.
Southern Pacific Funding Corporation
Southern Pacific Funding Corporation ("SPFC") was a publicly traded sub-
prime mortgage banking company which originated, purchased and sold high
yielding, single family sub-prime mortgage loans. We spun SPFC out as a public
company in June 1996 and sold a portion of our holdings raising $64.6 million.
As of December 31, 1998, we owned 9,742,500 shares of SPFC common stock,
representing 47.0% of the outstanding common stock. In October 1998, SPFC
petitioned for Chapter 11 bankruptcy protection under the Federal bankruptcy
laws. As a result of SPFC's bankruptcy filing, we wrote-off $82.6 million. Our
stockholdings are reflected on our consolidated balance sheet as "Investment
in SPFC and, until SPFC's bankruptcy filing and termination of new business
activities, were accounted for pursuant to the equity method of accounting.
See Item 7. Managements' Discussion and Analysis of Financial Condition and
Results of Operations for more information concerning our accounting treatment
of this matter.
Discontinued and De-emphasized Operations
Auto Marketing Network, Inc.
During the third quarter of 1998, we discontinued the operations of Auto
Marketing Network, Inc ("AMN"). AMN financed the purchase of new and used
automobiles primarily to sub-prime borrowers on a nationwide basis. Since the
acquisition of AMN in March 1997, it had recorded losses and experienced
significant increases in non-performing assets, loan charge-offs and loan loss
provisions.
Losses from AMN's discontinued operations, net of taxes were as follows:
<TABLE>
<CAPTION>
Disposition
Period from Period from Period from
August 1, 1998 to January 1, 1998 to March 17 to
December 31, 1998 July 31, 1998 December 31, 1997
----------------- ------------------ -----------------
<S> <C> <C> <C>
Loss from discontinued
operations............. $ -- $3,232 $25,347
Loss on disposal of AMN. 11,276 -- --
------- ------ -------
Net loss from
discontinued
operations............. $11,276 $3,232 $25,347
======= ====== =======
</TABLE>
The loss on disposal of AMN included charges (net of taxes) for the
following items:
. $5.6 million for securities valuation
. $1.2 million for disposition of furniture and equipment and other assets
. $5.6 million for estimated future servicing obligations to a third party
servicer
19
<PAGE>
. $1.3 million in liquidation allowances for nonaccrual loans and
repossessed autos
. $2.1 million in severance pay, occupancy and general and administrative
expenses
The charges listed above were partially offset by the estimated net interest
income on loans and securities for the next year (disposition period) of $4.5
million.
AMN's outstanding warehouse line of credit of $9.2 million and $20.1 million
are classified as other borrowings in the consolidated balance sheets at
December 31, 1998 and 1997, respectively.
The net assets of AMN's discontinued operations were as follows:
<TABLE>
<CAPTION>
At December 31,
----------------
1998 1997
------- --------
<S> <C> <C>
Loans held for sale........................................ $15,161 $ 23,333
Securities held for sale................................... 7,844 6,809
Retained interests in securitization....................... 11,280 20,210
Income taxes receivable.................................... 10,725 15,520
Other net assets (liabilities)............................. 1,802 (10,924)
------- --------
$46,812 $ 54,948
======= ========
</TABLE>
As of July 31, 1998 (measurement date), management determined to cease
operations at Auto Marketing Network, Inc. ("AMN"). Accordingly, a disposal
plan was formulated, whereby daily operations of AMN were terminated in two
months. It is management's plan to sell remaining assets within one year of
the measurement date.
Consumer Credit Division
Consumer Credit Division ("CCD"), a division of SPB, closed its operations
in December 1998. The costs of closing this division were immaterial. We
decided that the returns generated by CCD were not meeting our profitability
expectations, and that the time necessary to improve profitability did not
justify further investment.
CCD was formed in early 1994 to offer loans primarily to finance home
improvements and consumer goods. Home improvement loans ranged from $5,000 to
$350,000 and the loans were typically secured by a junior lien. CCD also
purchased unsecured installment sales contracts to finance certain home
improvements.
Total CCD loans outstanding were $30.5 million at December 31, 1998 and
$35.0 million at December 31, 1997. We sold $14.6 million of these loans in
1998 and at December 31, 1998 we held $29.4 million of these loans for sale.
At December 31, 1998 $162,000, or 0.40% of the outstanding loans were 90 days
or more delinquent while at December 31, 1997 $108,000, or 0.26%, of the
outstanding loans were 90 days or more delinquent.
Auto Lending Division
The Auto Lending Division ("ALD"), a division of SPB, closed its operations
in February 1999. The costs of closing this division were immaterial. The
significant losses we incurred from this business in 1998 caused us to re-
evaluate the future prospects of ALD. We determined that the ALD would not
meet our future profitability expectations, and that the time necessary to
improve profitability did not justify further investment.
ALD offered loans primarily to finance automobile purchases for sub prime
borrowers. ALD also purchased automobile loans from other independent loan
originators. When we made the decision to close the operations of ALD in 1998,
we wrote down the value of ALD's loans held for sale by $21.5 million. At
December 31, 1998, we held $69.0 million of ALD loans for sale, net of a $9.6
million valuation allowance. In 1998, we sold a total of $71.6 million of
ALD's loans.
20
<PAGE>
Imperial Credit Worldwide, Ltd.
Imperial Credit Worldwide is a holding company for our international finance
activities and is a majority owner of Credito Imperial Argentina ("CIA"), a
mortgage banking company conducting residential mortgage business in
Argentina. Due to the decline in the Latin American financial market, CIA
ceased originating loans for its portfolio in October 1998. Total loans held
for sale at December 31, 1998 were $30.0 million. At December 31, 1998, these
loans are carried on our company's books at their estimated fair value of
$22.8 million.
Loans and Leases Held for Investment
The following table sets forth certain information regarding our loans and
leases held for investment. Substantially all of our company's loans and
leases held for investment are held by Southern Pacific Bank and are funded by
FDIC insured deposits:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans secured by real
estate:
One to four family...... $ 125,616 $ 205,788 $ 375,476 $228,721 $ 897,494
Multi-family............ 56,229 17,261 2,527 7,028 82,004
Commercial.............. 25,677 13,202 11,011 133,189 30,287
---------- ---------- ---------- -------- ----------
207,522 236,251 389,014 368,938 1,009,785
Leases.................. 1,048 7,745 99,717 7,297 23,667
Installment loans....... 26,511 147,603 34,248 1,900 4,290
Franchise loans......... 50,520 62,219 115,910 46,766 --
Asset based loans....... 633,299 484,828 288,528 154,252 --
Loan participations..... 222,106 196,420 160,672 87,726 --
Mortgage warehouse
lines.................. 181,001 122,488 -- -- --
Commercial loans........ 34,509 35,861 13,260 22,378 5,882
---------- ---------- ---------- -------- ----------
1,356,516 1,293,415 1,101,349 689,257 1,043,624
Loans in process........ (5,636) (7,081) -- -- --
Unamortized premium
(discount)............. 3,109 2,211 (6,336) (5,217) (5,900)
Deferred loan fees...... (9,014) (9,104) (6,415) (1,540) (1,114)
---------- ---------- ---------- -------- ----------
1,344,975 1,279,441 1,088,598 682,500 1,036,610
Allowance for loan
losses................. (24,880) (26,954) (19,999) (13,729) (7,054)
---------- ---------- ---------- -------- ----------
Total................. $1,320,095 $1,252,487 $1,068,599 $668,771 $1,029,556
========== ========== ========== ======== ==========
</TABLE>
Our loans and leases held for investment are primarily:
. first and second lien mortgages secured by residential and income
producing real property in California,
. leases secured by equipment,
. installment loans secured by real estate or automobiles,
. loans to experienced franchisees of national and regional restaurant
franchises,
. asset-based loans to middle market companies mainly in California,
. syndicated commercial loan participations,
. warehouse loans to residential mortgage loan brokers.
Although we continue to diversify our portfolio, a substantial portion of
our debtors' ability to honor their contracts is dependent upon the economy of
California. A decline in California real estate values may adversely
21
<PAGE>
affect the underlying loan collateral. In order to reduce our risk of loss on
any one credit, we have historically sought to maintain a fairly low average
loan size within the portfolio of loans held for investment. The average loan
size and single largest loan held for investment, excluding loans originated
by CBC, at December 31, 1998 were $118,000 and $21.6 million compared to
$122,000 and $18.8 million at December 31, 1997. The largest loan held for
investment at December 31, 1998 and December 31, 1997 was a performing real
estate loan secured by a first deed of trust.
Non-performing assets consist of nonaccrual loans, loans with modified
terms, other real estate owned ("OREO") and other repossessed assets. Our
policy is to place all loans 90 days or more past due on nonaccrual. The
former mortgage banking operations' OREO arises primarily through foreclosure
on mortgage loans repurchased from investors, typically due to a breach of
representations or warranties.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset Quality for more information about our allowance
for loan and lease losses.
22
<PAGE>
The following table sets forth the amount of non-performing assets
attributable to our former mortgage banking operations, AMN and to all of our
other lending activities:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
-------------------------------- -------------------------------- ---------------------- ----------------------
Former Former Former Former
All Other Mortgage Auto All Other Mortgage Auto All Other Mortgage All Other Mortgage
Lending Banking Marketing Lending Banking Marketing Lending Banking Lending Banking
Activities Operations Network Activities Operations Network Activities Operations Activities Operations
---------- ---------- --------- ---------- ---------- --------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nonaccrual loans:
One to four
family.......... $ 18,374 $ 202 $ -- $ 27,573 $ 6,874 $ -- $ 24,711 $19,928 $ 2,652 $ 20,990
Commercial
loans........... 13,118 -- -- 5,058 -- -- 3,052 -- 1,824 --
Multifamily
property........ 1,437 -- -- 1,837 -- 1,421 -- 5,522 --
Leases and
installment..... 1,822 -- 4,576 6,608 -- 22,681 997 -- -- --
---------- ------ ------- ---------- ------- ------- ---------- ------- ---------- --------
Total nonaccrual
loans............ 34,751 202 4,576 41,076 6,874 22,681 30,181 19,928 9,998 20,990
---------- ------ ------- ---------- ------- ------- ---------- ------- ---------- --------
OREO:
One to four
family.......... 6,863 317 -- 2,552 5,774 -- 6,639 3,508 1,937 4,173
Commercial
property........ 1,074 -- -- 2,526 -- -- 1,200 -- 211 --
Multi-family
property........ 430 -- -- 53 -- -- 867 -- 858 --
---------- ------ ------- ---------- ------- ------- ---------- ------- ---------- --------
Total OREO....... 8,367 317 -- 5,131 5,774 -- 8,706 3,508 3,006 4,173
---------- ------ ------- ---------- ------- ------- ---------- ------- ---------- --------
Loans with
modified terms:
One to four
family.......... -- -- -- -- -- -- 800 -- 870 --
Commercial
property........ -- -- -- -- -- -- 456 -- -- --
Multi-family
property........ -- -- -- -- -- -- -- -- -- --
---------- ------ ------- ---------- ------- ------- ---------- ------- ---------- --------
Total loans with
modified terms... -- -- -- -- -- -- 1,256 -- 870 --
---------- ------ ------- ---------- ------- ------- ---------- ------- ---------- --------
Repossessed
property:
Equipment held
for sale........ 702 -- -- 4,437 -- -- -- -- -- --
Repossessed
vehicles........ -- -- 531 -- -- 4,563 -- -- -- --
---------- ------ ------- ---------- ------- ------- ---------- ------- ---------- --------
Total repossessed
property......... 702 -- 531 4,437 -- 4,563 -- -- -- --
---------- ------ ------- ---------- ------- ------- ---------- ------- ---------- --------
Total NPA's...... $ 43,820 $ 519 $ 5,107 $ 50,644 $12,648 $27,244 $ 40,143 $23,436 $ 13,874 $ 25,163
========== ====== ======= ========== ======= ======= ========== ======= ========== ========
Total loans, OREO
and repossessed
property......... $1,682,910 $6,691 $16,550 $1,438,139 $24,087 38,989 $2,012,704 $40,955 $1,168,783 $869,463
Total NPA's as a
percentage of
loans, OREO and
repossessed
property......... 2.60% 7.76% 30.86% 3.52% 52.51% 69.88% 1.99% 57.22% 1.19% 2.89%
<CAPTION>
1994
----------------------
Former
All Other Mortgage
Lending Banking
Activities Operations
---------- -----------
<S> <C> <C>
Nonaccrual loans:
One to four
family.......... $ 4,012 $ 5,697
Commercial
loans........... 2,201 --
Multifamily
property........ 1,195 --
Leases and
installment..... -- --
---------- -----------
Total nonaccrual
loans............ 7,408 5,697
---------- -----------
OREO:
One to four
family.......... 1,217 1,277
Commercial
property........ 445 --
Multi-family
property........ 329 --
---------- -----------
Total OREO....... 1,991 1,277
---------- -----------
Loans with
modified terms:
One to four
family.......... 76 --
Commercial
property........ -- --
Multi-family
property........ -- --
---------- -----------
Total loans with
modified terms... 76 --
---------- -----------
Repossessed
property:
Equipment held
for sale........ -- --
Repossessed
vehicles........ -- --
---------- -----------
Total repossessed
property......... -- --
---------- -----------
Total NPA's...... $ 9,475 $ 6,974
========== ===========
Total loans, OREO
and repossessed
property......... $216,555 $1,094,144
Total NPA's as a
percentage of
loans, OREO and
repossessed
property......... 4.38% 0.64%
</TABLE>
Excludes non-accrual loans held for sale which we carried at the lower of cost
or market.
23
<PAGE>
Funding
Our liquidity requirements are met primarily by SPB deposits and to a lesser
extent warehouse lines and securitizations. Business operations conducted
through divisions of SPB are primarily financed through deposits, our capital
contributions, and Federal Home Loan Bank borrowings.
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 "--Regulation" for a
more detailed description of regulations governing SPB. SPB obtains the
necessary liquidity to fund its own lending activities primarily through:
.FDIC insured deposits
.borrowings from the Federal Home Loan Bank
At December 31, 1998 and 1997, SPB had total deposits of approximately $1.7
billion and $1.2 billion, respectively (amounts in both years exclude our
deposits maintained with SPB). 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. However,
customers are not offered check writing services or comparable demand deposit
accounts. Generally, certificates of deposit are offered for terms of one to
12 months. See "--Regulation--Industrial Bank Operations--Limitations on Types
of Deposits" for a description of limitations on types of deposits that SPB,
as an industrial bank, can accept.
The following table sets forth the distribution of SPB's deposit accounts
(prior to eliminating inter-company transactions) and the weighted average
nominal interest rates on each category of deposits:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------
1998 1997
---------------------------- ----------------------------
Weighted Weighted
Average Average
% of Interest % of Interest
Amount Deposits Rate Amount Deposits Rate
---------- -------- -------- ---------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings accounts........ $ 57,249 3.3% 4.27% $ 62,274 5.2% 3.55%
Time deposits of less
than $100,000.......... 1,199,825 69.9 5.61 891,102 74.9 5.91
Time deposits of
$100,000 and over...... 459,614 26.8 5.62 236,465 19.9 5.89
---------- ----- ---- ---------- ----- ----
Total................. $1,716,688 100.0% 5.57% $1,189,841 100.0% 5.79%
========== ===== ==== ========== ===== ====
</TABLE>
The following table sets forth the dollar amount of deposits by time
remaining to maturity:
<TABLE>
<CAPTION>
At December 31
---------------------------------------
1998 1997
------------------- -------------------
% of % of
Amount Deposits Amount Deposits
---------- -------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Three months or less.................... $ 552,077 32.2% $ 449,414 37.8%
Over three months through six months.... 452,782 26.4 296,512 24.9
Over six months through twelve months... 478,000 27.8 357,326 30.0
Over twelve months...................... 233,829 13.6 86,589 7.3
---------- ----- ---------- -----
Total................................. $1,716,688 100.0% $1,189,841 100.0%
========== ===== ========== =====
</TABLE>
24
<PAGE>
The following table sets forth the time certificates greater than $100,000
by time remaining to maturity:
<TABLE>
<CAPTION>
At December 31
-----------------------------------
1998 1997
----------------- -----------------
% of % of
Amount Deposits Amount Deposits
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Three months or less........................ $129,479 28.1% $ 87,771 37.1%
Over three months through six months........ 148,832 32.4 76,277 32.3
Over six months through twelve months....... 114,803 25.0 55,330 23.4
Over twelve months.......................... 66,500 14.5 17,087 7.2
-------- ----- -------- -----
Total..................................... $459,614 100.0% $236,465 100.0%
======== ===== ======== =====
</TABLE>
Interest expense associated with certificates of deposit of $100,000 and
over was approximately $24.2 million for the year ended December 31, 1998,
$15.6 million for the year ended December 31, 1997 and $13.6 million for the
year ended December 31, 1996.
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. Certain levels of growth of SPB's assets
and deposits require notice to the FDIC.
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 December 31, 1998, $20.0 million was
outstanding bearing an average interest rate of 5.93%.
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 December 31, 1998, we
had the following warehouse lines, reverse repurchase facilities and notes
payable:
<TABLE>
<CAPTION>
Interest Index
Rate Commitment Outstanding (basis points) Expiration Date
-------- ---------- ----------- -------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Greenwich Capital
Financial (AMN)........ 6.89% $100,000 $ 9,193 Libor plus 125 April 30, 1999
Lehman Brothers (Corona
Film Finance Fund)..... 4.75 66,692 66,692 Fixed rate January 7, 1999
First Union National
Bank (ICII)............ 5.22 14,879 14,879 Fixed rate January 29, 1999
Greenwich Capital
Financial (ICII)....... 5.94 4,382 4,382 Fixed rate January 14, 1999
First Union National
Bank (IBC)............. 8.07 15,000 5,904 Libor plus 245 March 31, 1999
Other notes payable
(ICII)................. 8.00 -- 1,220 Fixed Rate None
-------- --------
5.29 $200,953 $102,270
======== ========
</TABLE>
As of March 25, 1999, IBC has received approval for a $10.0 million
warehouse line of credit from a third party financial institution which will
replace IBC's line of credit expiring on March 31, 1999.
25
<PAGE>
Securitization Transactions and Loan Sales
Securitizations of Assets
As a fundamental part of our business and financing strategy prior to 1998,
we sold a significant amount of our loans and leases through securitization,
except for loans held for investment by SPB. Securitizations were performed
historically by our prior divisions and subsidiaries: FMC, SPFC and AMN. We
have; however, de-emphasized the use of securitizations as part of our
refocused business strategy. During 1998, IBC was the only subsidiary that
sold assets through securitizations.
In a securitization, the cash flows of the underlying receivables, such as
loans and leases, are apportioned to bonds having various credit ratings,
yields and maturities. These bonds, which are collateralized by the underlying
loans and leases, are sold to investors at market prices. In most cases, we
retain the servicing of the loans and leases; servicing is the process of
collecting the payments from the borrowers and remitting the required payments
to the investors. We are paid a fee for such servicing, which is earned
monthly and collected from the remittances on the loans and leases.
When we sell loans and leases in a securitization, we recognize a gain to
the extent that the selling price in cash exceeds the carrying value of the
loans and leases sold based on the estimated relative fair values of the loans
and leases sold, any assets we obtain and any liabilities we incur in the
securitization. The assets we obtain when we securitize loans and leases
include, generally, a retained interest, which may be one or more of the
bonds, servicing assets and call options. The liabilities we incur when we
securitize loans and leases include, generally, recourse obligations, put
options and servicing liabilities. The retained interest we obtain in a
securitization represents, generally, a credit enhancement for the investors
in that this interest is either subordinated to the other bonds sold or
represents an overcollateralization amount. In either case, as holder of the
retained interest, we incur the risk of loss and prepayment on the underlying
loans and leases and will be last to receive the cash flows apportioned to
such retained interests.
At the time of the securitization, the retained interest and servicing
assets are established at their fair values. Because an active market does not
exist for these types of assets, we generally estimate their fair values by
discounting cash flows we expect to receive from them. In discounting the cash
flows, we make estimates of loan prepayments, loan defaults and loan losses.
These estimates are based on actual prepayments in our servicing portfolios
tempered by our expectation of how future changes in interest rates will
impact prepayments, and actual default and loss rates we have experienced for
the types of loans and leases sold. The discount rate we use is that rate
determined by us to be the rate used by other market participants under
similar circumstances.
We evaluate the carrying value of the retained interests and servicing
assets on a quarterly basis by re-estimating their fair values using updated
assumptions for prepayments, default and loss rates, and discount rate. When
the estimated fair value of these assets is less than their carrying value, we
take a loss for the deficiency by reducing our income.
Based on our comparison of the carrying values of these assets to their
estimated fair values, we took a loss of $4.4 million during 1998. Similar
losses could occur in the future and may have a material adverse effect on our
net income. See Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations.
At December 31, 1998, and 1997 our consolidated balance sheets include the
following retained interests, interest-only and subordinated securities and
servicing assets (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
Retained interest and servicing assets 1998 1997
-------------------------------------- ------- -------
<S> <C> <C>
Subordinated and interest only securities included in
securities available for sale................................. $ 8,395 $14,223
Interest only securities included with trading securities...... 17,189 27,357
Servicing rights............................................... 4,329 4,731
Retained interest in loan and lease securitizations............ 27,011 22,895
</TABLE>
26
<PAGE>
For further information, see notes 1, 6 and 7 of Notes to Consolidated
Financial Statements included in Item 8.
During 1998, we only securitized leases originated by IBC. For the years
ended December 31, 1998, 1997 and 1996, we securitized loans and leases
totaling $118.7 million, $919.0 million and $1.3 billion, respectively.
We sold $288.5 million of loans in 1998 and $196.8 million of loans in 1997
through whole loan sales transactions. Virtually all loans sold through whole
loan sales were originated by IPL.
Competition
The businesses in which we operate are highly competitive. We face
significant competition from companies that may be substantially larger and
have more capital than we do. These competitors include:
.other commercial and consumer finance lenders
.commercial banks
.credit unions
.thrift institutions and securities firms
.savings and loan associations
.other thrift and loan companies
.corporate and governmental debt securities
.money market mutual funds
Competition can take many forms, including convenience in obtaining a loan
or lease, customer service, marketing and distribution channels and interest
rates and fees charged to borrowers.
Regulation
We are subject to extensive regulation in the United States at both the
Federal and state level. Current regulation affects our:
.warehouse lending business,
.loan origination and credit activities,
.maximum interest rates, finance and other charges,
.disclosure to customers,
.terms of secured transactions,
.collection, repossession and claims handling procedures,
.multiple qualification and licensing requirements for doing business in
various jurisdictions, and
.other trade practices.
Our subsidiary, ICG is required to register as a broker-dealer with certain
Federal and state securities regulatory agencies and with the United States
Securities and Exchange Commission as a registered investment advisor. We are
also a member of the National Association of Securities Dealers as part of our
investment banking and brokerage businesses.
27
<PAGE>
Truth in Lending
The Truth in Lending Act ("TILA") and the regulations of the Board of
Governors and the Federal Reserve System, specifically Regulation Z, contain
disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans
and credit transactions in order to give them the ability to compare credit
terms. TILA also guarantees consumers a three day right to cancel certain
credit transactions, including loans of the type we originate. We believe that
we are in compliance with TILA in all material respects. The enforcement
provisions applicable to TILA grant broad powers to the appropriate federal
regulatory agencies or the Federal Trade Commission to enforce TILA with
respect to those entities not otherwise subject to federal regulations, such
as our company. TILA also contains criminal penalties for willful violations
and grants a private right of action with specified statutory damage awards
for certain violations. If we were found not to be in compliance with TILA
with respect to certain loans, aggrieved borrowers could have the right to
back out of their mortgage loan transactions and to demand the return of
finance charges paid to us, and other damages provided under TILA. Regulation
Z also contains rescission "tolerances" which limit the rule's rescission
remedy to disclosure inaccuracies of the finance charge which amount to over
one percent of the face amount of the note and rescission rights after the
initiation of foreclosure proceedings under certain circumstances.
TILA applies to all individuals and businesses that regularly extend
consumer credit which is subject to a finance charge or is payable by a
written agreement in more than four installments and is primarily for
personal, family or household purposes. As such, TILA is applicable to our
company and our subsidiaries. Generally, TILA requires a creditor to make
certain disclosures to the consumer concerning, among other things, finance
charges and annual percentage rates. In addition to these general
requirements, TILA also requires additional disclosures in connection with
certain types of mortgage loans.
These additional disclosure requirements apply to loans (other than mortgage
loans to finance the acquisition or initial construction of a dwelling) with
(i) total points and fees upon origination in excess of eight percent of the
loan amount or $435, whichever is greater or (ii) an annual percentage rate of
more than ten percentage points higher than comparably maturing United States
Treasury securities ("Covered Loans"). Effective January 1, 1998, the $400
figure was adjusted by the Board of Governors of the Federal Reserve System to
$435 until December 31, 1998, in accordance with Regulation Z. These TILA
provisions prohibit lenders from originating Covered Loans that are
underwritten solely on the basis of the borrower's home equity without regard
to the borrower's ability to repay the loan.
We believe that only a small portion of loans we originated after October
1995 (the effective date of the requirements) are of the type that are subject
to these additional restrictions. Our policy is to apply underwriting criteria
to all Covered Loans that take into consideration the borrower's ability to
repay.
TILA also prohibits lenders from including prepayment fee clauses in Covered
Loans to borrowers except in cases in which the penalty can be exercised only
during the first five years following consummation of the loan, the consumer's
total monthly debt-to-income ratio does not exceed 50% and the Covered Loans
are not used to refinance existing loans originated by the same lender. We
will continue to collect prepayment fees on loans originated prior to October
1995 (the effective date of the prepayment provision of TILA) and on
non-Covered Loans, as well as on Covered Loans in permitted circumstances, but
the level of prepayment fee revenue may decline in future years. TILA imposes
other restrictions on Covered Loans, including restrictions on balloon
payments and negative amortization features, which we do not believe will have
a material impact on our operations.
Other Lending Laws
We are also required to comply with the Equal Credit Opportunity Act of
1974, as amended ("ECOA"), which prohibits creditors from discriminating
against applicants on the basis of race, color, religion, sex, age or marital
status. The ECOA also prohibits discrimination in the extension of credit
based on the fact that all or
28
<PAGE>
part of the applicant's income derives from a public assistance program or the
fact that the applicant has in good faith exercised any right under the
Consumer Credit Protection Act. Regulation B promulgated under ECOA restricts
creditors from obtaining certain types of information from loan applicants. It
also requires certain disclosures by the lender regarding consumer rights and
requires lenders to advise applicants of the reasons for any credit denial. In
instances where the applicant is denied credit or the rate or charge for loans
increases as a result of information obtained from a consumer credit agency,
another statute, the Fair Credit Reporting Act of 1970 ("FCRA"), as amended,
requires lenders to supply the applicant with the name and address of the
reporting agency; the FCRA also imposes other reporting and disclosure
requirements on creditors.
We are also subject to the Real Estate Settlement Procedures Act of 1974, as
amended, and are required to file an annual report with the Department of
Housing and Urban Development pursuant to the Home Mortgage Disclosure Act.
In addition, we are subject to various other Federal and state laws, rules
and regulations governing, among other things, the licensing of, and
procedures which must be followed by, mortgage lenders and servicers, and
disclosures which must be made to consumer borrowers. Failure to comply with
such laws may result in civil and criminal liability and, in some cases,
consumer borrowers have the right to rescind their mortgage loans and to
demand the return of finance charges they paid to us.
In addition, certain of the loans we originate or purchase such as Title I
home improvement loans, are insured by an agency of the Federal government.
Such loans are subject to extensive government regulation.
Environmental Liability
We may foreclose on properties securing loans that are in default in the
course of our business. There is a risk that hazardous or toxic substances or
petroleum constituents could be on such properties.
In such event, we could be held responsible for the cost of cleaning up or
removing such waste depending upon the lender's activities, and such cost
could exceed the value of the underlying properties.
Under the laws of certain states, contaminated property may be subject to a
lien on the property to assure payment for cleanup costs. In several states,
such a lien has priority over the lien of an existing mortgage or owner's
interest.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
("CERCLA"), a lender may become liable for cleanup of a property and adjacent
properties that are contaminated by releases from the mortgaged property if
the lender engages in certain activities.
In 1996 CERCLA was amended to eliminate Federal lender liability under
CERCLA in certain circumstances, including foreclosure if the lender resells
the property at the earliest practicable, commercially reasonable time on
commercially reasonable terms. In addition, the amendments defined the term
"participation in management," which provided some guidance to lenders about
the nature of activities that would and would not give rise to liability under
CERCLA. These amendments do not apply to state environmental laws. Also,
foreclosure and other activities on contaminated property may subject a lender
to state tort liability.
Future Laws
Because each of our businesses is highly regulated, the applicable laws,
rules and regulations are subject to modification and change. There are
currently proposed various laws, rules and regulations which, if adopted,
could impact our operations. We cannot assure you that these proposed laws,
rules and regulations, or other such laws, rules or regulations will not be
adopted in the future.
If adopted, they could make compliance more difficult or expensive, restrict
our ability to originate, broker, purchase or sell loans, further limit or
restrict the amount of commissions, interest and other charges we earn on
loans we originate, broker, purchase or sell, or otherwise adversely affect
our business or prospects.
29
<PAGE>
Industrial Bank Operations
SPB is subject to regulation, supervision and examination under both Federal
and California law. SPB is subject to supervision and regulation by the
California Department of Financial Institutions (the "DFI") and by the FDIC.
In states other than California where SPB operates loan production offices,
SPB may be subject to certain state and local laws, including those governing
qualifications to do business.
We are not regulated or supervised by the DFI, the FDIC, the Federal Reserve
Board or any other bank regulatory authority, except indirectly with respect
to the general regulatory and enforcement authority of the DFI and the FDIC
over transactions and dealings between our company or any of our affiliates
and SPB, and except with respect to both the specific limitations regarding
ownership of the capital stock of a parent company of any industrial bank and
the specific limitations regarding the payment of dividends from SPB discussed
below.
General
SPB is governed by the California Industrial Banking Law, also known as the
California Industrial Loan Law, and the rules and regulations of the DFI that,
among other things, regulate in certain limited circumstances the maximum
interest rates payable on, and the terms of, certain industrial bank deposits
as well as the collateral requirements, maximum maturities and repayment terms
of the various types of loans that are permitted to be made by California
chartered industrial loan companies, also known as industrial banks, thrift
and loan companies or thrifts. As SPB's primary regulator, the DFI has broad
supervisory and enforcement authority with respect to SPB and its
subsidiaries. The enforcement authority of the DFI over industrial banks,
includes the ability to impose penalties for and to seek correction of
violations of laws or regulations or unsafe or unsound practices by assessing
monetary penalties, issuing cease and desist or removal and prohibition orders
against a company, its directors, officers or employees and other persons,
initiating injunctive actions or even taking possession of the business and
property of an industrial bank. In general, such enforcement actions may be
initiated for violations of laws, regulations, cease and desist orders or the
industrial bank's articles of incorporation or for unsafe or unsound
conditions or practices. Certain provisions of the California Industrial
Banking Law also provide for the institution of civil or criminal actions
against industrial banks and their officers, directors, employees and
affiliates with respect to violations of the law and related regulations.
SPB's investment certificates (hereinafter referred to as "deposits") are
insured by the Bank Insurance Fund of the FDIC to the full extent permissible
by law. As an insurer of deposits, the FDIC issues regulations, conducts
examinations, requires the filing of reports and generally regulates the
operations of institutions to which it provides deposit insurance. SPB is
subject to the rules and regulations of the FDIC to the same extent as other
state financial institutions that are insured by that entity. This regulation
is intended primarily for the protection of depositors, and to ensure services
for the public's convenience and advantage and to ensure the safety and
soundness of the regulated institution. Either notice to or approval by the
FDIC and the DFI is required before any merger, consolidation or change in
control, or the establishment, relocation or closure of a branch office of
SPB. However, only the DFI's approval is required to establish a loan
production office limited to the solicitation of loans.
The DFI may exempt, by order or regulation, from the application
requirement, the establishment of a branch or loan production office if the
DFI finds such application and approval not necessary to regulate a company.
To date, no regulation has been promulgated. Orders are commonly issued on a
case-by-case basis.
The FDIC, as insurer of SPB's deposits, also has broad enforcement authority
over other insured state-chartered industrial banks, including the power in
appropriate circumstances to issue cease-and-desist orders and removal and
prohibition orders and to terminate the insurance of their insured accounts.
The FDIC is required to notify the DFI of its intent to take certain types of
enforcement actions with respect to a California chartered, FDIC-insured
industrial bank and of the grounds therefor. If satisfactory corrective action
is not effectuated within an appropriate time, the FDIC may proceed with its
enforcement action. The FDIC may also terminate the deposit insurance of any
insured depository institution if it determines that the institution has
engaged or is
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engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law, regulation, order
or any condition imposed by in writing by the FDIC. The DFI also has the
authority, independent of the FDIC, to issue cease and desist orders, impose
operating restrictions, and take other actions to assure the safety and
soundness of the institution.
The FDIC completed an information systems exam of SPB in May 1998 and the
FDIC and DFI completed a joint examination of SPB for the period ended March
31, 1998. As a result of the examinations, the FDIC requested that SPB enter
into two written memoranda of understanding ("MOUs") addressing deficiencies
identified by the FDIC in SPB's accounting systems and controls, and perceived
deficiencies in SPB's Y2K readiness and contingency planning. The FDIC's
concerns involved:
(1) significant levels of unreconciled general ledger items on SPB's
books and records which, according to the regulatory agencies, compromised
the integrity of SPB's general ledger entries, as well as the integrity and
validity of SPB's financial statements, and
(2) SPB's lack of a written Y2K action/contingency plan which complied
with applicable federal regulatory guidance, as well as SPB's failure to
meet general FDIC deadlines for Y2K testing and credit evaluation
procedures.
The first MOU addressing these issues was signed by the FDIC, and SPB on
November 2, 1998. Under this MOU, SPB is required to take a number of actions
to address and correct the accounting and Y2K preparedness concerns of the
FDIC. On January 19, 1999, the FDIC and DFI issued a second MOU as a result of
the 1998 joint exam, which addressed accounting controls and policies and
alleged violations of law. Under the second MOU, SPB is required to:
(1) adopt and implement policies to provide adequate accounting controls
consistent with safe and sound banking practices,
(2) eliminate or correct violations of law described in the FDIC/DFI
examination, and
(3) achieve and maintain regulatory capital requirements applicable to a
"well capitalized" depository institution. In addition, under the second
MOU, SPB is allowed to pay dividends to ICII in accordance with its normal
dividend policy. Our policy allows SPB to pay cash dividends of up to 35%
of SPB's net income. Our policy further states that SPB is prohibited from
paying any cash dividend if it is not, immediately prior and subsequent to
the dividend, a "well-capitalized" institution within the meaning of FDIC
regulations.
To respond to the FDIC's criticisms and comply with the requirements of the
May 1998 information systems MOU, in April of 1998 SPB retained 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 currently reconciles 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, and
recent informal conversations with the FDIC indicate that the FDIC is
satisfied with SPB's progress on its Y2K remedial efforts. SPB has addressed,
or is addressing, the other items of concern described in the FDIC/DFI
examination and referenced in the second MOU.
In the first quarter of 1999, SPB has received an interim satisfactory
rating from the FDIC related to SPB's Y2K preparedness and contingency
planning.
The FDIC and DFI each has the authority to take a variety of informal and
formal remedial and other enforcement actions with regard to violations of
law, and unsafe and unsound banking practices, including,
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among other things, the institution of proceedings or actions imposing or
seeking memoranda of understanding, injunctions, cease and desist orders,
criminal or civil penalties, removal from office, the placing of SPB into
conservatorship or receivership, or the revocation of SPB's charter. The MOU
is one such instance of an informal remedial action which the FDIC or DFI may
take. Although we do not believe that further enforcement action is warranted
at this time under the circumstances, any such enforcement could have a
material adverse effect on the Company.
Limitations on Investments
Subject to restrictions imposed by California law, SPB is permitted to make
secured and unsecured consumer and non-consumer loans. The maximum term for
repayment of loans made by industrial banks may be as long as 40 years and 30
days depending upon collateral and priority of the lender's lien on the
collateral, except that loans with repayment terms in excess of 30 years and
30 days may not in the aggregate exceed five percent of total outstanding
loans and obligations of the industrial bank. Although secured loans may
generally be repayable in unequal periodic payments during their respective
terms, consumer loans secured by real property with terms in excess of three
years must be repayable in substantially equal periodic payments unless such
loans were made or purchased by the industrial bank under the Garn-St. Germain
Depository Institutions Act of 1982 (which applies primarily to one to four
unit residential loans).
California law limits lending activities outside of California to no more
than 20% of total assets or 40% with the approval of the DFI. California law
contains requirements for the diversification of the loan portfolios of
industrial banks. An industrial bank with outstanding deposits may not, among
other things:
. make any loan secured primarily by unimproved real property in an amount
in excess of 10% of its paid up and unimpaired capital stock and surplus
not available for dividends;
. lend an amount in excess of five percent of its paid-up and unimpaired
capital stock and surplus not available for dividends upon the security
of the stock of any one corporation;
. make loans to, or hold the obligations of, any one person as primary
obligor in an aggregate principal amount exceeding 20% of its paid-up
and unimpaired capital stock and surplus not available for dividends;
. have more than 70% of its total assets in loans that have remaining
terms to maturity in excess of seven years (as defined) and are secured
solely or primarily by real property; and
. have more than 40% of its assets in loans to borrowers who do not reside
in or have a place of business in the state of California; provided,
however, that certain loans that are sold within 90 days are excluded
from such portfolio limitation.
Additionally, any loan or obligation primarily secured by real property, or
real and personal property, having a principal balance in excess of $10,000,
must have a loan-to-value ratio as defined, less than 90%, subject to certain
exceptions, including such assets held for 90 days or less or saleable to
institutional investors evidenced by irrevocable commitments to pay. SPB had
paid-up and unimpaired capital stock and surplus not available for dividends
of $150.0 million and $125.0 million at December 31, 1998 and 1997.
At December 31, 1998 and 1997, SPB was in compliance with its California
investment law restrictions. SPB originates and holds a portion of our loans
held for sale, of which a majority have a maturity of greater than seven
years. SPB believes that it will be able to continue to meet its requirements
by managing the types of loans originated and where the loans are domiciled.
Under California law, industrial banks are generally limited to investments
that are legal investments for commercial banks. An industrial bank may
acquire real property only in satisfaction of debts previously contracted,
pursuant to certain foreclosure transactions, or as may be necessary as
premises for the transaction of
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its business, in which case such investment is limited to one-third of an
industrial bank's paid-in capital stock and surplus not available for
dividends.
Effective January 1, 1997, as a result of changes in the California
Industrial Loan Law passed in 1996, SPB may invest in the capital stock,
obligations, or other securities of one or more corporations, subject to rules
or orders prescribed by the DFI, if such investment would be lawful for
commercial banks. California chartered commercial banks may invest in equity
securities of one or more subsidiary corporations upon receiving authorization
from the DFI.
Under Federal law, SPB is considered an insured non-member state bank, and
as such, it may make any equity investment, including an investment in the
equity securities of an operating subsidiary, that is permissible for a
national bank.
Operating subsidiaries include corporations, limited liability companies or
similar entities. In turn, operating subsidiaries of national banks may engage
in activities that are part of, or incidental to the business of banking, as
determined by the Office of the Comptroller of the Currency (the "OCC").
Transactions With Affiliates
Under California law, an industrial bank generally may not make any loan to,
or hold an obligation of, any of its directors or officers or any director or
officer of its holding company or affiliates, except in specified cases and
subject to regulation by the DFI. In addition, an industrial bank may not make
any loan to, or hold an obligation of, any of its shareholders or any
shareholder of its holding company or affiliates, except that this prohibition
does not apply to persons who own less than 10% of the stock of a holding
company or an affiliate that is listed on a national securities exchange. As a
result of these requirements, SPB may not make loans to ICII or other
affiliates or purchase a contract, loan or chose in action of ICII or other
affiliates other than subsidiaries of SPB. Exemptions from these restrictions
are available for:
. purchase of loans from affiliates which are licensed mortgage brokers
(such as ICII) or other certain types of licensed lenders, subject to
prior approval of the DFI;
. purchase of loans pursuant to a sale and repurchase agreement between
SPB and an affiliated company; or
. purchase of loans from a subsidiary of SPB or a corporation in which SPB
owns 50% or more of its common stock.
However, these purchases would be subject to strict limitations under
Federal law. Federal law also limits transactions between SPB and its
affiliates. Generally, such transactions must be on terms and under
conditions, including credit standards, that are substantially the same, or at
least as favorable to SPB, as those prevailing at the time for comparable
transactions with or involving other nonaffiliated companies. In addition, SPB
is prohibited from engaging in "covered transactions" with an affiliate if the
aggregate amount of such transactions with any one affiliate would exceed 10%
of SPB's capital stock and surplus, or in the case of all affiliates, if the
aggregate amount of such transactions exceeds 20% of SPB's capital stock and
surplus. "Covered transactions" include loans or extensions of credit to an
affiliate, a purchase of or investment in securities issued by an affiliate, a
purchase of assets from an affiliate (subject to certain exemptions), the
acceptance of securities issued by an affiliate as collateral security for a
loan or extension of credit to any person or company, or the issuance of a
guarantee, acceptance, or letter of credit on behalf of an affiliate. For
certain "covered transactions," collateral requirements in specified amounts
will be applicable. SPB also is prohibited from purchasing low-quality assets
from its affiliates, except under limited circumstances. SPB engages in many
transactions which involve its affiliates, including ICII and our other
subsidiaries. As such, many of the transactions between ICII, our affiliates
and SPB are subject to Federal and state affiliate transaction regulations.
Further, under Federal law, a transaction by SPB with any person shall be
deemed to be a transaction with an affiliate to the extent that the proceeds
of the transaction are used for the benefit of, or transferred to that
affiliate.
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The term "affiliate" excludes any company other than a bank, that is a
subsidiary of SPB, unless the FDIC has determined by regulation or order not
to exclude such subsidiary. Absent such determination, transactions conducted
between SPB and its non-bank subsidiaries would not be subject to the amount
limitations and collateral requirements under federal law. This exemption,
however, is unavailable for transactions between a bank and a subsidiary that
engages in activities not permissible for the parent depository institution.
Under the California Industrial Loan Law, unless the DFI has issued a permit
authorizing such sale, it is unlawful for SPB to offer or sell any security in
an issuer transaction which offer or sale is subject to applicable provisions
of the California Corporate Securities Act of 1968, as amended. Effective July
1, 1997, any offer to an affiliate or institutional or registered investor
under the California Corporate Securities Act of 1968, as amended, is exempt
from the permit requirement, subject to certain conditions. (See "--Recent
Legislation")
The DFI, however, has authority to exempt any such transaction which the DFI
determines is not comprehended within the purposes of the qualification
requirements and which the DFI finds not necessary or appropriate in the
public interest or for the protection of investors. The DFI also has authority
to impose conditions in any permit, including legends restricting
transferability, impounding proceeds, or other conditions deemed reasonable
and necessary in the public interest.
Capital; Limitations on Borrowings
Under California law, an industrial bank is subject to certain leverage
limitations that are not generally applicable to commercial banks or savings
and loan associations. In particular, an industrial bank that has been in
operation in excess of 60 months may have outstanding at any time deposits not
to exceed 20 times paid-up and unimpaired capital and surplus as restricted in
its by-laws as not available for dividends, with the exact limitation subject
to order by the DFI. The DFI has issued an order to SPB authorizing the
maximum 20 times leverage standard.
Industrial banks are not permitted to borrow, except by the issuance of
investment certificates, in an amount exceeding 300% of outstanding capital
stock, surplus and undivided profits, without the DFI's prior consent. All
sums borrowed in excess of 150% of outstanding capital stock, surplus and
undivided profits must be unsecured borrowings or, if secured, approved in
advance by the DFI, and be included as certificates of deposit for purposes of
computing the above ratios; however, collateralized FHLB advances and, as of
January 1, 1999, borrowings from the FDIC and the Federal Reserve Bank, are
also excluded for this test of secured borrowings and are not specifically
limited by California law.
FDIC regulations contain risk-based capital adequacy standards applicable to
financial institutions like SPB whose deposits are insured by the FDIC. These
guidelines provide a measure of capital adequacy and are intended to reflect
the degree of risk associated with both on and off balance sheet items,
including residential loans sold with recourse, legally binding loan
commitments and standby letters of credit. Because ICII, unlike SPB, is not
directly regulated by any bank regulatory agency, it is not subject to any
minimum capital requirements. See "--Holding Company Regulations."
A financial institution's risk-based capital ratio is calculated by dividing
its qualifying capital by its risk-weighted assets. Financial institutions
generally are expected to meet a minimum ratio of qualifying total capital to
risk-weighted assets of 8%, of which at least 50% of qualifying total capital
must be in the form of core capital (Tier 1), which includes common stock,
noncumulative perpetual preferred stock, minority interests in equity capital
accounts of combined subsidiaries and mortgage servicing rights and a
percentage of purchased credit card relationships, subject to certain amount
limitations. Supplementary capital (Tier 2) consists of the allowance for loan
losses up to 1.25% of risk-weighted assets, cumulative preferred stock,
intermediate-term preferred stock, hybrid capital instruments and term
subordinated debt. The risk-based capital standards were amended in September
1998 so that up to 45 percent of the pre-tax net unrealized holding gains on
certain available-for-sale equity securities could be included for the Tier 2
capital calculation. The maximum amount of Tier 2 capital that
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may be recognized for risk-based capital purposes is limited to 100% of Tier 1
capital (after any deductions for disallowed intangibles).
The aggregate amount of term subordinated debt and intermediate term
preferred stock that may be treated as Tier 2 capital is limited to 50% of
Tier 1 capital. Certain other limitations and restrictions apply as well. At
December 31, 1998 and 1997, the Tier 2 capital of SPB consisted of its
allowance for loan losses and $35.0 million in term subordinated indebtedness.
The FDIC has adopted a 3% minimum leverage ratio that is intended to
supplement risk-based capital requirements and to ensure that all financial
institutions, even those that invest predominantly in low risk assets,
continue to maintain a minimum level of core capital. A financial
institution's minimum leverage ratio is determined by dividing its Tier 1
capital by its quarterly average total assets, less intangibles not includable
in Tier 1 capital.
The FDIC rules provide that a minimum leverage ratio of 3% is required for
institutions that have been determined to be in the highest category used by
regulators to rate financial institutions. All other organizations are
required to maintain leverage ratios of at least 100 to 200 basis points above
the 3% minimum. At December 31, 1998 and 1997, SPB was in compliance with all
of its capital requirements.
Prompt Corrective Action
The FDIC regulations contain a prompt corrective action rule which was
adopted in response to requirements under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") requires the federal banking
regulators to take "prompt corrective action" with respect to banks that do
not meet minimum capital requirements. The FDIC's rules provide that an
institution is "well capitalized" if its risk-based capital ratio is 10% or
greater; its Tier 1 risk-based capital ratio is 6% or greater; its leverage
ratio is 5% or greater; and the institution is not subject to a capital
directive of a federal bank regulatory agency. A bank is "adequately
capitalized" if its risk-based capital ratio is 8% or greater; its Tier 1
risk-based capital ratio is 4% or greater; and its leverage ratio is 4% or
greater (3% or greater for the highest rated institutions).
An institution is considered "undercapitalized" if its risk-based capital
ratio is less than 8%; its Tier 1 risk-based capital ratio is less than 4%, or
its leverage ratio is 4% or less (less than 3% for the highest rated
institutions). An institution is "significantly undercapitalized" if its risk-
based capital ratio is less than 6%; its Tier 1 risk-based capital ratio is
less than 3%; or its leverage ratio is less than 3%. A bank is deemed to be
"critically undercapitalized" if its ratio of tangible equity (Tier 1 capital)
to total assets is equal to or less than 2%. An institution may be deemed to
be in a capitalization category that is lower than is indicated by its actual
capital position if it engages in unsafe or unsound banking practices. Under
this standard, SPB is currently "well capitalized". This classification;
however, is a regulatory capital classification used for internal regulatory
purposes, and is not necessarily indicative of SPB's financial condition and
operations.
Undercapitalized institutions are required to submit a capital restoration
plan for improving capital. In order to be accepted, such plan must include a
financial guaranty from the institution's holding company that the institution
will return to capital compliance. If such a guarantee were deemed to be a
commitment to maintain capital under the Federal Bankruptcy Code, a claim for
a subsequent breach of the obligations under such guarantee in a bankruptcy
proceeding involving the holding company would be entitled to a priority over
third party general unsecured creditors of the holding company.
Undercapitalized institutions: are prohibited from making capital
distributions or paying management fees to controlling persons; may be subject
to growth limitations; are restricted from ongoing acquisitions, branching and
entering into new lines of business, and transactions with affiliates; and are
limited in the appointment of additional directors or senior executive
officers. Finally, the institution's regulatory agency has discretion to
impose certain of the restrictions generally applicable to significantly
undercapitalized institutions.
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In the event an institution is deemed to be significantly undercapitalized,
it may be required to: sell stock; merge or be acquired; restrict transactions
with affiliates; restrict interest rates paid; divest a subsidiary; or dismiss
specified directors or officers. If the institution is a bank holding company,
it may be prohibited from making any capital distributions without prior
approval of the Federal Reserve Board and may be required to divest its
subsidiaries.
A critically undercapitalized institution is generally prohibited from
making payments on subordinated debt and may not, without the approval of its
principal bank supervisory agency, enter into a material transaction other
than in the ordinary course of business; engage in any covered transaction; or
pay excessive compensation or bonuses. Critically undercapitalized
institutions are subject to appointment of a receiver or conservator.
Effectively, the FDIC would have general enforcement powers over SPB and our
company in the event that SPB is deemed undercapitalized.
SPB's Capital Ratios. The following tables indicate SPB's capital ratios
under (1) the California leverage limitation, (2) the FDIC risk-based capital
requirements, and (3) the FDIC minimum leverage ratio at December 31, 1998.
<TABLE>
<CAPTION>
Well
Minimum Capitalized
Actual Requirement Requirement
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
California Leverage Limitation... $179,022 10.45% $ 85,688 5.00% $ N/A N/A%
Risk-based Capital............... 221,657 11.12% 159,410 8.00% 199,264 10.00%
Risk-based Tier 1 Capital........ 167,823 8.42% 79,705 4.00% 119,558 6.00%
FDIC Leverage Ratio.............. 167,823 8.62% 77,861 4.00% 97,326 5.00%
</TABLE>
Limitations on Types of Deposits
Because of limitations contained in the Industrial Banking Law, and to
maintain the exemption from the BHCA ("'Holding Company Regulations"), SPB
currently offers investment certificates in the form of passbook accounts and
certificates of deposit. SPB does not offer demand deposit accounts.
Insurance Premiums
The FDIC administers two separate deposit insurance funds, the Bank
Insurance Fund ("BIF"), which insures the deposits of institutions which were
insured by the FDIC prior to the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), and the Savings Association Insurance Fund
("SAIF"), which insures the deposits of institutions which were insured by the
Federal Savings and Loan Insurance Corporation prior to the enactment of
FIRREA. SPB's insurance premium for the year ended December 31, 1998 was
approximately $510,000.
As required by FDICIA, the FDIC has established a risk-based system for
setting deposit insurance assessments. Under the risk-based assessment system,
an institution's insurance assessments vary depending on the level of capital
the institution holds and the degree to which it is of supervisory concern to
the FDIC. Once an insurance fund has reached its designated reserve ratio of
1.25%, and as long as there are no outstanding borrowings by the FDIC from the
United States Treasury, the FDIC is not permitted to charge assessment
premiums that would increase the reserve ratio of the insurance fund above its
designated reserve ratio. The BIF reached its designated reserve ratio in
1995.
Recent Legislation
A new California state regulatory agency was created in 1996 known as the
Department of Financial Institutions ("DFI"). The DFI became effective July 1,
1997. All California state chartered depository
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institutions are now licensed and regulated after July 1, 1997 by the DFI,
which includes banks, savings associations, credit unions, and banks. SPB, an
industrial bank, is subject to the jurisdiction of the DFI as its state
regulator. Certain administrative and most examination staff personnel
transferred to the DFI from the California State Banking Department. Former
California Department of Banking senior staff personnel, including persons in
the office of general counsel and senior examination staff of the DFI, who are
unfamiliar with the Industrial Banking Law will be interpreting the Industrial
Banking Law.
The 1996 California legislation that created the DFI also authorized the use
of the word "bank" by industrial banks, such as SPB, in their names. Effective
October 8, 1997, Southern Pacific Thrift and Loan changed its name to
"Southern Pacific Bank." That legislation also granted the DFI jurisdiction
over the issuance of securities by a thrift and loan company requiring
application and permit unless otherwise exempt.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act")
was enacted which, among other things, imposes on BIF-insured deposits a
special premium assessment on domestic deposits at one-fifth the premium rate
imposed on SAIF-insured deposits, which will be used to pay the interest on
Financial Corporation ("FICO") bonds issued by the federal government as part
of the savings association bailout provisions of the 1989 FIRREA legislation.
In the year 2000, however, the Funds Act requires BIF-insured institutions to
share in the payment of the FICO obligations on a pro rata basis with all
savings institutions, with annual assessments expected to equal approximately
2.4 basis points until the year 2017, and to be completely phased out by 2019.
In addition, on December 6, 1996, the FDIC determined to continue the
current downward adjustment to the assessment rate schedule applicable to
deposits of BIF institutions for the semi-annual assessment period beginning
January 1, 1997. For such period, and for succeeding semi-annual periods, the
BIF assessment rates will range from 0 to 27 basis points. In addition, in
accordance with the Funds Act, the FDIC eliminated the minimum assessment
amount for BIF-insured institutions. SPB's combined FDIC and FICO assessment
rate for 1998 was approximately 4.2 cents per $100 of deposits. We cannot
predict if, when and how frequently SPB's deposit insurance assessment rates
will change or whether such changes will have a material effect on the bank.
Safety and Soundness Guidelines
In July 1995, certain federal bank regulatory agencies, including the FDIC,
adopted Interagency Guidelines establishing standards for safety and soundness
as required by the FDICIA. In accordance with these Guidelines, institutions are
required to establish policies and procedures regarding the following:
(1) internal controls and information
(2) internal audit systems
(3) loan documentation
(4) credit underwriting
(5) interest rate exposure
(6) asset growth
In addition, under these Guidelines institutions must maintain safeguards to
prevent the payment of compensation and fees which are excessive or could lead
to a material loss for the institution. The federal bank regulatory agencies
recently amended the Interagency Guidelines to include asset quality and
earnings standards. The new guidelines require an institution to identify
problem assets and estimate inherent losses. The earnings standards under the
revised guidelines require an institution to establish monitoring and
reporting systems.
In October 1998, the federal bank regulatory agencies, including the FDIC,
issued joint guidelines which establish Year 2000 standards for safety and
soundness. The guidelines establish standards for management and
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boards of directors in developing and managing Year 2000 project plans,
validating remediation efforts, and planning contingencies.
Holding Company Regulations
The Competitive Equality Banking Act of 1987 ("CEBA") subjected certain
previously unregulated companies to regulation as bank holding companies by
expanding the definition of the term "bank" in the BHCA. SPB remained exempt
from the definition of "bank" under the BHCA, and therefore we are exempt from
regulation as a bank holding company. SPB may cease to fall within those
exceptions if it engages in certain operational practices, including accepting
demand deposit accounts. SPB currently has no plans to engage in any
operational practice that would cause it to fall outside of one or more of the
exceptions to the term "bank" as defined by CEBA. Pursuant to CEBA, we are
treated as if we are a bank holding company for the limited purposes of
applying certain restrictions on loans to insiders, transactions with
affiliates and anti-tying provisions.
Limitations on Dividends
Under the California Industrial Banking Law, an industrial bank may declare
dividends on its capital stock only if it has at least $750,000 of unimpaired
capital stock plus additional capital stock of $50,000 for each branch office.
In addition, no distribution of dividends is permitted unless:
(1) such distribution would not exceed an industrial bank's retained
earnings;
(2) any payment would not result in a violation of the approved minimum
capital to thrift and loan certificate of deposit ratio; and/or
(3) after giving effect to the distribution, both
(a) the sum of an industrial bank's assets (net of goodwill,
capitalized research and development expenses and deferred charges)
would be not less than 125% of its liabilities (net of deferred taxes,
deferred income and other deferred credits), and
(b) current assets would be not less than current liabilities (except
that if a thrift and loan's average earnings before taxes for the last
two fiscal years had been less than average interest expense, current
assets must be not less than 125% of current liabilities).
Under California law, in order for capital (including surplus) of an
institution to be included in calculating the leverage limitation described
above, thrift institutions must amend their by-laws to restrict such capital
from the payment of dividends.
The amount of restricted capital maintained by an industrial bank also
provides the basis for establishing the maximum amount that a thrift may lend
to one borrower. As of December 31, 1998, 1997 and 1996, $150.0 million,
$125.0 million and $80.5 million, respectively, of SPB's capital was so
restricted.
The FDIC has advised insured institutions that the payment of cash dividends
in excess of current earnings from operations is inappropriate and may be
cause for supervisory action. As a result of this policy, thrift and loans may
find it difficult to pay dividends out of retained earnings from historical
periods prior to the most recent fiscal year or to take advantage of earnings
generated by extraordinary items.
Under the Financial Institutions Supervisory Act and FIRREA, federal
regulators also have authority to prohibit financial institutions from
engaging in business practices which are considered to be unsafe or unsound.
It is possible, depending upon the financial condition of a thrift and other
factors, that such regulators could assert that the payment of dividends in
some circumstances might constitute unsafe or unsound practices and prohibit
payment of dividends even though technically permissible.
Pursuant to FDICIA, SPB is prohibited from paying dividends if the payment
of such dividends would cause the institution to become "undercapitalized."
These limitations on the payment of dividends may restrict our ability to
utilize cash from SPB which may have been otherwise available to us for
working capital.
38
<PAGE>
Limitations on Acquisitions of Voting Stock of the Company
Any person who wishes to acquire 10% or more of the capital stock or capital
of a California industrial bank or 10% or more of the voting capital stock or
other securities giving control over management of its parent company must
obtain the prior written approval of the DFI. Similarly, the federal Change in
Bank Control Act of 1978 requires any person or company that obtains "control"
of an insured depository institution to notify the appropriate Federal banking
agency, which would be the FDIC in the case of SPB, 60 days prior to the
proposed acquisition. If the FDIC has not issued a notice disapproving the
proposed acquisition within that time period (including a possible 120 day
extension), the person may retain its interest in such institution. For
purposes of the statute, "control" is defined as the power, directly or
indirectly, to direct the management or policies of an insured depository
institution or to vote 25% or more of any class of voting securities of an
insured depository institution. However, there is a rebuttable presumption
that any person acquiring 10% or more of any class of voting securities of
said institution is presumed to have "control." In such cases, such person
must file an application for approval with the FDIC or rebut the presumption.
Restrictions on Investments by Imperial Bank
At December 31, 1998, Imperial Bank owned 8,941,106 shares. or 24.3% of our
outstanding common stock. Imperial Bancorp ("Bancorp") is the owner of all of
the outstanding capital stock of Imperial Bank.
FDICIA restricts the ability of state chartered banks, such as Imperial
Bank, to hold equity securities and required impermissible investments to be
disposed of before December 19, 1996. Imperial Bank acquired its interest in
our Company at its formation, which interest has been reduced by our sale of
common stock to third parties, as well as through a sale of stock by Imperial
Bank subsequent to our initial public offering.
The Federal Reserve Board has advised Bancorp that it considers the
retention by the Bank of its shares of ICII stock to be in violation of the
BHCA. This position is apparently the consequence of the Federal Reserve
Board's view that ICII is engaged in activities which are not determined by
regulation to be a closely related activity and that Bancorp did not file or
obtain a notice or approval to engage in such activities in accordance with
Regulation Y.
On March 29, 1999, Bancorp announced that it intends to engage an investment
banker to dispose of its investment in our company. Because Imperial Bank owns
less than 50% of our outstanding shares and we are operated as a company
independent of Imperial Bank and Bancorp, we believe that, in the event of an
insolvency, bankruptcy or receivership proceeding involving Imperial Bank or
Bancorp, a court, exercising reasonable judgment after full consideration of
all relevant factors, would not order the substantive consolidation of our
assets and liabilities with either Imperial Bank or Bancorp.
Employees
As of December 31, 1998, we had 657 employees on a full-time equivalent
("FTE") basis, as follows:
<TABLE>
<S> <C>
Southern Pacific Bank.................................................. 345
Imperial Business Credit............................................... 99
Imperial Capital Group................................................. 93
Imperial Credit Industries, Inc........................................ 63
Imperial Credit Worldwide.............................................. 23
Imperial Credit Commercial Asset Management Corp. ..................... 20
Statewide Documentation, Inc. ......................................... 14
---
Total................................................................ 657
===
</TABLE>
We believe that our relations with these employees are satisfactory. We are
not a party to any collective bargaining agreement.
39
<PAGE>
Our Preparation for the Year 2000
The Year 2000 issue (commonly referred to as "Y2K") is the result of
computer programs being written using two digits, rather than four digits, to
define the applicable year. The Y2K issue, which is common to most
corporations, concerns the inability of information and other systems,
primarily (but not exclusively) computer software programs, to properly
recognize and process date-sensitive information as the year 2000 approaches.
This problem could produce miscalculations, generate erroneous data or even
cause a computer system to fail.
Our operations rely heavily upon computer systems for our daily operations,
particularly including the accurate processing of financial records. Although
we have undertaken measures to evaluate and test our information systems
functions, we do not know if all of our vendors and borrowers will solve such
issues in a successful and timely fashion. If our company, our vendors, or our
borrowers do not solve such issues in a timely manner, the Y2K issue could
have a material adverse impact on our businesses, financial condition, results
of operations and cash flows.
Bank regulatory agencies have issued additional guidance under which they
are assessing Y2K readiness. In its May 1998 examination of SPB, the FDIC
concluded that SPB's Y2K preparedness and contingency planning was in need of
improvement and required SPB to sign a memorandum of understanding to address
these deficiencies. See "Business Industrial Bank Operations Regulation."
While SPB believes that these concerns have been addressed at this time, and
SPB has received an interim satisfactory rating from the FDIC, the failure of
a financial institution, such as SPB, to take appropriate action to address
Y2K issues may result in enforcement actions. These actions could have a
material adverse effect on SPB, result in the imposition of civil money
penalties, result in the delay (or receipt of an unfavorable or critical
evaluation of management of a financial institution in connection with a
regulatory review) of applications seeking to acquire other entities or
otherwise expand the institution's activities or in the case of serious and
continuing deficiencies, result in SPB's being placed into conservatorship or
receivership.
SPB's, IBC's and FMC's credit risk associated with its borrowers may
increase as a result of problems such borrowers may have resolving their own
Y2K issues. Although it is not possible to evaluate the magnitude of any
potential increased credit risk at this time, the impact of the Y2K issue on
borrowers could result in increases in SPB's, IBC's, FMC's problem loans and
leases and credit losses in future years.
For additional information regarding the Y2K issue and the steps we are
taking in response, see Item 7. Management's Discussion and Analysis and
Results of Operations--Year 2000 Compliance.
ITEM 2. PROPERTIES
Our executive offices occupy approximately 27,485 square feet of space in
Torrance, California at a current monthly rental of approximately $38,500.
SPB's executive offices occupy approximately 22,500 square feet of space in
Los Angeles, California at a current monthly rental of $44,100.
Our former administrative facilities occupy approximately 35,687 square feet
of space in Santa Ana Heights, California. We lease these facilities pursuant
to a ten-year lease, which commenced September 1, 1992. Since we moved to
Torrance, these premises have been and will continue to be sublet.
We currently lease offices in Beverly Hills, San Diego, Newport Beach and
Irvine, California, as well as in Denver, Colorado; Tulsa, Oklahoma; New York,
NY; and Boca Raton, Florida. SPB and its divisions operate in California
through branches and loan production offices and in other states through loan
production offices and representatives.
ITEM 3. 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
40
<PAGE>
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
$4.0 million. In July 1998, our company and the other defendants filed an
answer and counterclaim seeking recovery from Resnick. A binding arbitration
is currently scheduled to take place in April 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 have moved to
dismiss the complaint.
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 Paul B. Lasiter
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 was granted
on February 22, 1999.
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
41
<PAGE>
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 parties are presently
engaged in pretrial discovery.
We intend to vigorously defend all of the above lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
42
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock has been quoted in the over-the-counter market on the
Nasdaq National Market under the symbol "ICII" since May 18, 1992. The
following table sets forth the high and low closing sales prices for our
common stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1998
First Quarter.............................................. $27.38 $17.25
Second Quarter............................................. $27.00 $18.88
Third Quarter.............................................. $26.25 $ 5.75
Fourth Quarter............................................. $11.63 $ 3.63
1997
First Quarter.............................................. $27.38 $20.13
Second Quarter............................................. $21.00 $13.44
Third Quarter.............................................. $26.88 $18.06
Fourth Quarter............................................. $28.50 $17.63
</TABLE>
At March 25, 1999, the closing sales price of our common stock as reported
by the Nasdaq National Market was $8.84. At March 25, 1999, there were
approximately 1,000 shareholders of record.
We have not paid cash dividends on our common stock and we do not anticipate
paying cash dividends on our common stock in the foreseeable future. We
presently intend to retain earnings for use in our operations and the
expansion of our business. The indentures for our 9 7/8% Senior Notes and our
Resettable Rate Debentures restrict our payment of cash dividends. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources. SPB is subject to certain
regulatory restrictions on the payment of dividends. See Item 1. Business--
Industrial Bank Operations--Limitations on Dividends.
Share Repurchase Programs. In the fourth quarter of 1997, our board of
directors authorized the repurchase of up to 1.9 million shares, or
approximately 5%, of our outstanding shares of common stock. During 1998, we
repurchased and retired 1.9 million shares of common stock under this program
at an average price of $10.62 per share.
In the third quarter of 1998, our board of directors authorized an
additional share repurchase program to buy back up to 3.7 million shares, or
approximately 10%, of our outstanding shares of common stock. As of December
31, 1998, we had repurchased and retired 570,878 shares of common stock under
this program at an average price of $6.72 per share. All of our repurchases
effected pursuant to our stock repurchase programs were effected in compliance
with Rule 10b-18 under the Securities Exchange Act of 1934.
Preferred Share Purchase Rights. On October 12, 1998, we distributed
preferred share purchase rights as a dividend to our shareholders of record at
the rate of one right for each outstanding share of our common stock. The
rights are attached to our common stock and will only be exercisable and trade
separately if a person or group acquires or announces the intent to acquire
15% or more of our common stock (25% or more for any person or group currently
holding 15% or more of our common stock). Each right will entitle shareholders
to buy one-hundredth of a share of a new series of junior participating
preferred stock at an exercise price of $40. If our company is acquired in a
merger or other transaction after a person has acquired 15 percent or more of
our outstanding common stock (25% or more for any person or group currently
holding 15% or more of our common stock), each right will entitle the
shareholder to purchase, at the right's then-current exercise price, a number
of the acquiring company's common shares having a market value of twice such
price. The acquiring person would not be entitled to exercise these rights. In
addition, if a person or group acquires 15% or more of our company's
43
<PAGE>
common stock, each right will entitle the shareholder (other than the
acquiring person) to purchase , at the right's then-current exercise price, a
number of shares of our company's common stock having a market value of twice
such price. Following the acquisition by a person of 15% or more of our common
stock and before an acquisition of 50% or more of our common stock, our board
of directors may exchange the rights (other than the rights owned by such
person) at an exchange ratio of one share of common stock per right. Before a
person or group acquires beneficial ownership of 15% (or 25% as applicable) or
more of our common stock, the rights are redeemable for $.0001 per right at
the option of our board of directors. The rights will expire on October 2,
2008 unless redeemed prior to that date. Our board is also authorized to
reduce the ownership thresholds referred to above to not less than 10%. The
rights are intended to enable all of our shareholders to realize the long-term
value of their investment in our company.
44
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following schedules set forth selected consolidated financial data as of
or for each of the years in the five-year period ended December 31, 1998. Such
selected consolidated financial data should be read in conjunction with the
consolidated financial statements and notes thereto and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Interest on loans and
leases....................... $ 200,827 $176,146 $188,242 $120,244 $79,173
Interest on investments....... 28,965 24,776 10,807 6,630 3,610
Interest on other finance
activities................... 6,048 2,678 8,422 2,608 --
--------- -------- -------- -------- -------
Total interest income....... 235,840 203,600 207,471 129,482 82,783
Interest expense.............. 123,106 118,213 135,036 95,728 61,674
--------- -------- -------- -------- -------
Net interest income......... 112,734 85,387 72,435 33,754 21,109
Provision for loan and lease
losses....................... 15,450 20,975 9,773 5,450 5,150
--------- -------- -------- -------- -------
Net interest income after
provision for loan and
lease losses............... 97,284 64,412 62,662 28,304 15,959
Gain on sale of loans and
leases....................... 14,888 69,737 88,156 39,557 8,628
Loan servicing income......... 11,983 9,474 1,680 12,718 16,332
Investment banking and
brokerage fees............... 18,463 7,702 -- -- --
Asset management fees......... 7,591 5,810 3,347 -- --
Gain on termination of REIT
advisory agreement........... -- 19,046 -- -- --
(Loss) gain on sale of
securities................... (592) 112,185 82,690 -- --
Loss on impairment of
securities................... (120,138) -- -- -- --
Mark to market on securities
and loans held for sale...... (42,388) (341) -- -- --
Gain on sale of servicing
rights....................... -- -- 7,591 3,578 30,837
Equity in net income of
SPFC......................... 12,739 25,869 -- -- --
Equity in net income (loss)
of FMC....................... 3,235 (3,050) -- -- --
Other income.................. 13,118 4,060 10,807 1,152 1,048
--------- -------- -------- -------- -------
Total other income.......... (81,101) 250,492 194,271 57,005 56,845
--------- -------- -------- -------- -------
Total revenues.............. 16,183 314,904 256,933 85,309 72,804
Expenses:
Personnel expense............. 61,636 51,609 48,355 34,053 33,477
Other expenses................ 59,200 63,252 50,694 27,127 28,037
--------- -------- -------- -------- -------
Total expenses.............. 120,836 114,861 99,049 61,180 61,514
--------- -------- -------- -------- -------
(Loss) income from
continuing operations
before income taxes,
minority interest and
extraordinary item......... (104,653) 200,043 157,884 24,129 11,290
Income taxes................... (44,064) 74,267 69,874 10,144 4,685
Minority interest in (loss)
income of consolidated
subsidiaries.................. (1,464) 10,513 12,026 (208) --
--------- -------- -------- -------- -------
(Loss) income from continuing
operations before
extraordinary item........... (59,125) 115,263 75,984 14,193 6,605
Loss from discontinued
operations of AMN, net of
income taxes.................. (3,232) (25,347) -- -- --
Loss on disposal of AMN, net of
income taxes.................. (11,276) -- -- -- --
--------- -------- -------- -------- -------
(Loss) income before
extraordinary item........... (73,633) 89,916 75,984 14,193 6,605
Extraordinary item-Loss on
early extinguishment of debt,
net of income taxes........... -- (3,995) -- -- --
Extraordinary item-Repurchase
of Senior Notes, net of income
taxes......................... -- -- -- -- 919
--------- -------- -------- -------- -------
Net (loss) income............. $ (73,633) $ 85,921 $ 75,984 $ 14,193 $ 7,524
========= ======== ======== ======== =======
Comprehensive (loss) income... $ (76,745) $ 82,837 $ 77,783 $ 15,992 $10,735
========= ======== ======== ======== =======
Basic income per share(1):
(Loss) income from continuing
operations................... $ (1.55) $ 2.99 $ 2.11 $ 0.45 $ 0.21
Loss from discontinued
operations, net of income
taxes........................ (0.08) (0.66) -- -- --
Loss on disposal of AMN, net
of income taxes.............. (0.30) -- -- -- --
Extraordinary item-Loss on
early extinguishment of
debt, net of income Taxes.... -- (0.10) -- -- --
Extraordinary item-Repurchase
of Senior Notes, net of
income taxes................. -- -- -- -- 0.03
--------- -------- -------- -------- -------
Net (loss) income per common
share...................... $ (1.93) $ 2.23 $ 2.11 $ 0.45 $ 0.24
========= ======== ======== ======== =======
Diluted income per share(1):
(Loss) income from continuing
operations................... $ (1.55) $ 2.82 $ 1.95 $ 0.40 $ 0.19
Loss from discontinued
operations, net of income
taxes........................ (0.08) (0.62) -- -- --
Loss on disposal of AMN, net
of income taxes.............. (0.30) -- -- -- --
Extraordinary item-Loss on
early extinguishment of
debt, net of income Taxes.... -- (0.10) -- -- --
Extraordinary item-Repurchase
of Senior Notes, net of
income taxes................. -- -- -- -- 0.03
--------- -------- -------- -------- -------
Net (loss) income per common
share...................... $ (1.93) $ 2.10 $ 1.95 $ 0.40 $ 0.22
========= ======== ======== ======== =======
Weighted average diluted
shares outstanding........... 38,228 40,855 38,975 35,122 33,582
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Cash Flow Data:
Net cash (used in)
provided by operating
activities............ $ (37,135) $ 18,563 $ (31,135) $(1,173,703) $ 961,579
Net cash (used in)
provided by investing
activities............ (174,982) (320,627) 244,177 140,961 (796,638)
Net cash provided by
(used in) financing
activities............ 464,510 273,196 (177,961) 1,047,004 (177,314)
--------- --------- --------- ----------- ---------
Net increase
(decrease) in cash.. $ 252,393 $ (28,868) $ 35,081 $ 14,262 $ (12,373)
========= ========= ========= =========== =========
Operating and Financial
Data(2):
<CAPTION>
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Loans and leases
originated:
ICII................. $ -- $ -- $ 310 $ 1,816 $ 4,260
ICW.................. 33 1 -- -- --
SPB.................. 513 398 531 724 NA(3)
SPFC................. -- -- 790 288 190
FMC.................. -- 511 450 164 --
IBC.................. 114 151 87 36 --
--------- --------- --------- ----------- ---------
Total.............. $ 660 $ 1,061 $ 2,168 $ 3,028 $ 4,450
========= ========= ========= =========== =========
Loans and leases
securitized:
ICII................. $ -- $ -- $ -- $ 177 $ --
SPB.................. -- 203 277 511 46
SPFC................. -- -- 657 165 --
FMC.................. -- 344 325 105 --
IBC.................. 119 214 87 85 --
--------- --------- --------- ----------- ---------
Total.............. $ 119 $ 761 $ 1,346 $ 1,043 $ 46
========= ========= ========= =========== =========
Outstanding balance of
loans and leases
securitized
(at end of
period)(4)............ $ 834 $ 1,277 $ 2,118 $ 1,047 $ 45
Selected Ratios:
Ratio of indebtedness
to total
capitalization (at
end of period)(5)..... 55.4% 47.2% 40.5% 46.1% 51.4%
Average equity to
average assets........ 12.81 11.30 7.27 4.72 4.86
Return on average
common equity......... (25.16) 34.95 45.55 17.59 10.57
Return on average
assets................ (3.22) 3.95 3.31 0.82 0.51
SPB Regulatory Capital
Ratios (at end of
period):
California leverage
limitation(6)......... 10.45% 13.20% 13.50% 11.58% 11.50%
Risk-based--Tier 1..... 8.42 8.75 9.71 11.72 14.21
Risk-based--Total...... 11.12 12.25 10.87 13.18 15.13
FDIC Leverage Ratio.... 8.62 8.30 9.35 8.04 8.08
Asset Quality Ratios (at
end of period):
Nonperforming assets
as a percentage of
total assets.......... 2.06% 4.31% 2.64% 1.55% 1.16%
Allowance for loan and
lease losses as a
percentage of non-
performing loans...... 65.11 53.87 38.94 44.30 53.83
Net charge-offs as a
percentage of average
total loans and
leases
held for
investment(7)......... 1.92 2.72 0.94 0.36 0.23
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash................... $ 297,772 $ 45,379 $ 74,247 $ 39,166 $ 24,904
Interest-bearing
deposits.............. 1,415 103,738 3,369 267,776 10,600
Securities............. 235,423 227,468 84,296 5,963 18,817
Loans and leases held
for sale.............. 323,699 153,469 940,096 1,341,810 263,807
Loans and leases held
for investment, net... 1,320,095 1,252,487 1,068,599 668,771 1,029,556
Retained interests in
loan and lease
securitizations....... 27,011 22,895 159,707 58,272 4,558
Total assets........... 2,417,183 2,094,389 2,470,639 2,510,635 1,420,409
Deposits............... 1,711,328 1,156,022 1,069,184 1,092,989 934,621
Borrowings from FHLB... 20,000 45,000 140,500 190,000 295,000
Remarketed par
securities............ 70,000 70,000 -- -- --
Other borrowings....... 102,270 144,841 694,352 992,810 --
Senior and convertible
subordinated notes.... 219,858 219,813 163,209 80,472 80,344
Total liabilities...... 2,183,662 1,770,456 2,231,131 2,416,533 1,344,536
Shareholders' equity... $ 233,521 $ 323,933 $ 239,508 $ 94,102 $ 75,873
</TABLE>
- --------
(1) Income per share and weighted average shares outstanding reflect 1-for-10,
1-for-10 and 1-for-19 stock dividends paid in 1996, respectively, a 3-for-
2 stock split effected in 1995 and a 2-for-1 stock split effected in 1996.
All per share amounts reflect the adoption of SFAS No. 128.
(2) Does not include loans originated or securitized by ICIFC. Excludes SPFC
and FMAC loan origination and securitization activity for periods
subsequent to their respective deconsolidations.
(3) Information not available.
(4) Represents the outstanding balance of loans and leases securitized,
excluding loans held for sale and investment.
(5) Ratio of (i) non-funding indebtedness to (ii) non-funding indebtedness
plus total shareholders' equity.
(6) Ratio of (i) SPB's total shareholders' equity to (ii) total deposits.
(7) Excluding charge-offs at AMN, the ratio of charge-offs to average loans
held for investment was 0.59% in 1998 and 1.16% in 1997.
47
<PAGE>
ITEM 7. 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. We had consolidated assets of $2.4 billion as of December 31,
1998. We are a diversified commercial lending, financial services and
investment holding company, organized in 1986. 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"), Imperial Credit
Asset Management, Inc. ("ICAM") and Imperial Capital Group, LLC ("ICG").
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 multifamily and commercial real estate loans
originated by SPB and leases originated by Imperial Business Credit 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 commercial investment companies,
. 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 by focusing on the creation or acquisition of additional
businesses in the financial services industry 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.
See Item 1. Business for more information about our primary businesses.
Results of Operations
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
General Consolidated Results and Business Line Introduction
We reported a consolidated net loss for the year ended December 31, 1998 of
$73.6 million or $1.93 diluted loss per share. For the year ended December 31,
1997, we reported net income of $85.9 million or $2.10 diluted income per
share. We reported a basic consolidated loss per share for the year ended
December 31, 1998 of $1.93. For the year ended December 31, 1997 we reported
basic net income per share of $2.23. Our consolidated net income for the year
ended December 31, 1997, included an extraordinary item "Loss on early
extinguishment of debt, net of income taxes," of $4.0 million, or $0.10 in
basic and diluted loss per common share.
The $298.7 million decrease in our revenues and the $159.6 million decrease
in our net income was due primarily to non-recurring non-cash impairment and
mark-to-market charges of $162.5 million that we incurred as a result of the
financial and liquidity crisis in the capital markets during the third quarter
of 1998.
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Comparatively, we recorded large gains on sales of stock in SPFC, FMC and IMH,
along with a large gain on the termination of our advisory agreement with IMH
which aggregated $131.2 million in 1997. The lack of such gains coupled with
the impairment and mark-to-market charges we recognized in 1998 were the
primary drivers for the significant difference in our operating results over
the two year period. Our net interest income increased by $27.3 million to
$112.7 million in 1998 as compared to $85.4 million in 1997. The increase in
net interest income was primarily due to increased average balances of
outstanding loans from our higher yielding commercial loan portfolios in 1998
as compared to 1997. We fund the vast majority of the loans we originate with
the Federal Deposit Insurance Corporation ("FDIC") insured deposits of SPB.
The weighted average cost of SPB's deposits was 5.57% at December 31, 1998 as
compared to 5.79% at December 31, 1997.
Our total expenses increased by $5.9 million to $120.8 million in 1998 as
compared to $114.9 million in 1997. Our personnel expense increased by $10.0
million, our occupancy expense increased by $1.4 million, and our professional
services, telephone and other communications, and general and administrative
expenses increased by $7.7 million in 1998 as compared to 1997. The primary
reason for these increases was the inclusion of Imperial Capital Group's
("ICG") and PrinCap Mortgage Warehouse, Inc.'s ("PrinCap") operations, which
were formed or acquired in the fourth quarter of 1997, for the entire year of
1998. Our total expenses also increased at Coast Business Credit ("CBC") as a
result of their continuing national expansion over the course of 1998.
Partially offsetting these increases were decreases in our amortization of
servicing rights of $1.6 million, and our real estate owned expenses of $7.4
million.
To summarize our results for 1998, the decrease in our net income in 1998
from 1997 was attributable to several factors. These factors included:
. Impairment losses on equity securities;
. Negative mark-to-market adjustments on our loans and securities held for
sale;
. Reduced revenues from the sale of our loans and leases;
. No gains from the sales of equity securities;
. No gain on the termination of advisory agreements;
. Reduced revenues from our equity investments;
. Increased overall levels of expenses.
These factors were partially offset by the following positive items:
. Increasing net interest income and an improved net interest margin;
. Increasing investment banking and brokerage fees;
. Increasing asset management fees.
We manage our business by looking at the results of operations from each one
of our business units. Each of the factors listed above have affected at least
one of our different business units. Our core business units include:
. Coast Business Credit--an asset-based lending business;
. PrinCap--a residential loan warehouse line business;
. Income Property Lending--a multifamily and commercial mortgage banking
business;
. Imperial Business Credit--a small ticket equipment leasing business;
. Loan Participation and Investment Group--a division of SPB investing in
nationally syndicated bank loans;
. Imperial Capital Group--an investment banking and brokerage business;
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. Asset Management Activities--Real Estate Investment Trust ("REIT") and
investment fund management business;
. Other Core Operations--Our holding company investments and support
functions, and the administrative and servicing operations of Southern
Pacific Bank.
We also operated some other businesses in 1998 and 1997 that we consider our
"non-core" businesses. These are businesses that we have made the decision to
de-emphasize during 1998 and 1999. We group these businesses into the
following categories:
. Equity investments--Franchise mortgage lending, sub prime residential
mortgage banking business;
. De-emphasized/Discontinued/Exited Businesses--Consumer lending, auto
lending, and foreign mortgage lending businesses.
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. Following is a summary of these businesses' results of operations
in 1998 as compared to 1997.
Coast Business Credit
CBC had total net revenues of $42.9 million, total expenses of $21.2
million, and net income of $12.4 million in 1998. CBC had total net revenues
of $30.0 million, total expenses of $15.3 million and net income of $9.0
million in 1997.
CBC was able to increase both its net revenues and net income by
substantially increasing the amount of loans it made and increasing its
average outstanding loan balance. CBC's average loans outstanding for 1998
were $592.6 million, and its loans outstanding at year end were $633.3
million. CBC's average loans outstanding for 1997 were $406.1 million, and its
loans outstanding at year end were $484.8 million. 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. As a result of the $186.5 million increase in CBC's
average loans outstanding, CBC's net interest income has increased $12.8
million to $42.6 million in 1998 from $29.8 million in 1997. Our average yield
on CBC's loans decreased to 13.09% in 1998 from 13.88% in 1997. The decrease
in CBC's yield resulted from downward movements in the prime rate during the
3rd & 4th quarters of 1998. All of CBC's loans were funded with the FDIC
insured deposits of SPB.
CBC recorded loan loss provisions of $3.5 million in 1998 and $4.9 million
in 1997. At December 31, 1998 CBC had non-accrual loans totaling $1.1 million,
or 0.18% of its outstanding loans. At December 31, 1997 CBC had non-accrual
totaling $1.0 million.
CBC also earned other income in the form of loan, prepayment, and audit fees
charged to its customers. CBC earned other income totaling $3.8 million in
1998 as compared $5.2 million in 1997. In 1997, one of CBC's larger credits
prepaid, resulting in a prepayment fee of $2.5 million on one single credit.
In 1998, while CBC did receive prepayment fees, there were no prepayments of
similar large credit accounts.
CBC's total expenses increased by approximately $6.0 million in 1998 as
compared to 1997. During 1998, CBC's personnel expense increased by $3.5
million to $13.3 million, and general and administrative expenses increased by
$600,000 to $2.9 million as compared to 1997. These increases were primarily
the result of CBC's geographic expansion into several major metropolitan areas
of the United States throughout 1998.
PrinCap Mortgage Warehouse, Inc.
PrinCap had total net revenues of $8.5 million, total expenses of $3.0
million, and net income of $3.2 million in 1998. PrinCap had total net
revenues of $1.6 million, total expenses of $738,000, and net income of
$515,000 in 1997. We acquired the assets of PrinCap in October of 1997.
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PrinCap was also able to increase both its net revenues and net income by
substantially increasing the amount of loans it made and increasing its
average outstanding loan balance. PrinCap's average loans outstanding for 1998
were $164.3 million, and its loans outstanding at year end were $181.0
million. PrinCap's loans outstanding at year end 1997 were $122.5 million. The
average balance of PrinCap's loans from the date of our acquisition through
December 31, 1997 was $118.0 million. As a result of the increase in loans
outstanding and a full year of operations with our company, PrinCap's net
interest income increased $5.5 million to $6.9 million in 1998 from $1.4
million in 1997. We earned an average yield on PrinCap's loans of 9.94% in
1998 and 10.27% in 1997, and all of PrinCap's loans were funded with the FDIC
insured deposits of SPB. The decrease in Princap's yield reflects downward
movement in the prime rate during the 3rd & 4th quarters of 1998.
PrinCap recorded loan loss provisions of $704,000 in 1998 and $435,000 in
1997. Since our acquisition, PrinCap has not charged off any loans. At
December 31, 1998 PrinCap had non-accrual loans totaling $4.1 million, or
2.29% of its outstanding loans. At December 31, 1997 PrinCap had no non-
accrual loans.
PrinCap also earned other income in the form of loan and audit fees charged
to its customers of $2.3 million in 1998 and $588,000 in 1997.
PrinCap's total expenses increased primarily as a result of our owning
PrinCap for all of 1998 as compared to three months in 1997. PrinCap's total
expenses of $3.0 million in 1998 were largely made up of $1.3 million in
personnel expense, $453,000 in amortization of goodwill, and $723,000 in
general and administrative expenses.
Income Property Lending
Income Property Lending ("IPL") had total net revenues of $17.5 million,
total expenses of $11.7 million, and net income of $3.3 million in 1998. IPL
had total net revenues of $41.2 million, total expenses of $7.4 million, and
net income of $20.6 million in 1997.
IPL's total net revenues decreased significantly in 1998 as compared to
1997. In early and mid 1998, several of IPL's competitors lowered the interest
rates charged to their borrowers for their loans. In order to remain
competitive, we also lowered the interest rates that IPL charged to its
borrowers. IPL originated $366.1 million of loans in 1998 and $295.9 million
of loans in 1997. Even though IPL was able to originate more loans in 1998
than in 1997, the lower average interest rate on the loans originated in 1998
as compared to 1997 decreased the value of IPL's loan portfolio. IPL sold
$288.5 million of its loans in 1998 generating cash gain on sale of $8.8
million, or 3.05% of the principal balance of loans sold. IPL sold for cash
and securitized $399.9 million of its loans in 1997 generating gain on sale of
$25.3 million, or 6.33% of the principal balance of loans sold. IPL's net
interest income for 1998 also decreased $4.0 million to $6.7 million due to
the lower average rate charged to IPL's borrowers, and due to a lower average
balance of loans outstanding. IPL's average loans outstanding for 1998 were
$96.4 million, and its loans outstanding at year end were $145.5 million.
IPL's average loans outstanding for 1997 were $144.2 million, and its loans
outstanding at year end were $59.4 million. All of IPL's loans were funded
with the FDIC insured deposits of SPB.
IPL recorded net recoveries of $345,000 in 1998 and $1.9 million in 1997.
IPL had no net charge-offs in 1998 or 1997. At December 31, 1998 IPL had non-
accrual loans totaling $992,000, or 0.69% of its outstanding loans. At
December 31, 1997 IPL had non-accrual loans totaling $1.6 million, or 2.70% of
its outstanding loans
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 $1.6 million in 1998 and $3.3 million in 1997. These amounts
include all servicing fees on loans serviced for others. The decrease was
primarily due to increased competition in 1998, which required IPL to reduce
the amount of fees charged to its borrowers.
IPL's total expenses increased by $4.3 million in 1998. IPL's personnel
costs increased by $2.6 million in 1998 for a total of $6.9 million. IPL's
general and administrative costs increased by $832,000 for a total of
$2.5 million. These expenses increased primarily as a result of increased
activity in IPL's loan origination and servicing operations related to the
continued expansion of IPL's business.
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Imperial Business Credit
Imperial Business Credit ("IBC") had total net revenues of $9.6 million,
total expenses of $11.3 million, and a net loss of $1.0 million in 1998. IBC
had total net revenues of $18.3 million, total expenses of $11.6 million, and
net income of $4.1 million in 1997.
IBC's total net revenues decreased significantly in 1998 as compared to
1997. In early and mid 1998, several of IBC's competitors lowered the interest
rates charged to their borrowers for their leases, increasing the demand for
their leases in comparison to IBC's lease products. We made the decision not
to significantly lower the rates we were charging borrowers for the leases
originated by IBC. This had the effect of lowering IBC's total lease
originations and increasing the average cost of each lease originated by IBC
in 1998 as compared to 1997. The average rate charged to IBC's borrowers was
13.6% in 1998 and 14.6% in 1997. IBC originated $114.3 million of leases in
1998 and $151.4 million of leases in 1997. Even though IBC was able to
substantially maintain the rate it charged its lease customers in 1998 as
compared to 1997, the increased cost per lease originated by IBC resulted in
significantly decreased profit margins for IBC. IBC securitized $118.7 million
of its loans in 1998 generating gain on sale revenue of $4.1 million, or 3.4%
of the principal balance of leases securitized. IBC securitized $213.6 million
of its leases in 1997 generating gain on sale revenue of $7.9 million, or 3.7%
of the principal balance of leases securitized. In late 1998, several of IBC's
competitors increased the rates they charged their borrowers. As a result, the
demand for leases from IBC's competitors decreased and IBC was able to
originate an increased number of leases in a less competitive environment.
IBC's net interest income also decreased in 1998 as compared to 1997
primarily due to a lower average outstanding balance of leases. IBC's average
leases outstanding for 1998 were $11.3 million, and its leases outstanding at
year end were $7.4 million. IBC's average leases outstanding for 1997 were
$46.7 million, and its leases outstanding at year end were $16.6 million. We
earned an average yield on IBC's leases of 13.6% in 1998 and 14.6% in 1997.
All of IBC's leases are initially funded with a warehouse line of credit, and
then permanently funded through a securitization facility. Primarily as a
result of the significant decrease in the average balance of IBC's leases
outstanding in 1998 as compared to 1997, IBC's net interest income decreased
$2.0 million to $3.6 million in 1998 from $5.6 million in 1997.
IBC also earned other income from servicing leases delivered into its
securitization facility, and incurred mark-to-market charges related to its
retained interests and securities from its securitizations. IBC earned total
net other income of $3.3 million in 1998 and $5.9 million in 1997. The
decrease in other revenue results primarily from mark-to-market charges on
IBC's retained interests and securities from its lease securitizations of $2.3
million in 1998.
IBC's total expenses remained relatively constant in 1998 as compared to
1997. The major components of IBC's expenses in 1998 were personnel expense of
$5.6 million, professional services of $1.2 million, and general and
administrative expenses of $2.6 million. The major components of IBC's
expenses in 1997 were personnel expense of $6.3 million, professional services
of $697,000, and general and administrative expenses of $2.4 million.
IBC recorded a loan loss provision of $1.3 million in 1998 and $1.1 million
in 1997. IBC had net recoveries of $239,000 in 1998 and net charge-offs of
$3.9 million in 1997. At December 31, 1998 IBC had non-accrual leases totaling
$669,000 or 9.0% of its outstanding loans. At December 31, 1997 IBC had non-
accrual leases totaling $981,000 or 5.9% of its outstanding leases.
Loan Participation and Investment Group
The Loan Participation and Investment Group ("LPIG") had total net revenues
of $8.9 million, total expenses of $2.3 million, and net income of $3.8
million in 1998. LPIG had total net revenues of $6.5 million, total expenses
of $2.2 million, and net income of $2.6 million in 1997.
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LPIG was also able to increase both its net revenues and net income by
increasing the amount of participations it invested in and increasing its
average outstanding loan balance, while maintaining its expense levels.
LPIG's average loans outstanding for 1998 were $240.1 million, and its loans
outstanding at year end were $222.1 million. LPIG's average loans outstanding
for 1997 were $187.7 million, and its loans outstanding at year end were
$196.4 million. We earned an average yield on LPIG's loans of 8.21% in 1998
and 8.72% in 1997, and all of LPIG's loans were funded with the FDIC insured
deposits of SPB. As a result of the $52.4 million increase in LPIG's average
loans outstanding, LPIG's net interest income has increased $1.2 million to
$8.3 million in 1998 from $7.1 million in 1997.
LPIG recorded a loan loss recovery of $391,000 in 1998 and a loan loss
provision of $564,000 in 1997. LPIG has never had a loan charge-off. At both
December 31, 1998 and December 31, 1997, LPIG had no non-accrual loans.
LPIG also earned other income, primarily in the form of loan fees. In 1998,
LPIG earned other income totaling $156,000. In 1997, LPIG earned no other
income.
The total expenses of LPIG were relatively unchanged in 1998 as compared to
1997. The major components of LPIG's expenses in 1998 were personnel expense
of $1.1 million, professional services of $225,000 and general and
administrative expense of $694,000.
We have made the decision to let LPIG's existing balance of loans run-off
over the next few quarters. While LPIG has earned a reasonable risk-adjusted
return in 1998 and 1997, 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
on-balance sheet 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, formed in December 1997, had total net revenues of $18.4 million, total
expenses of $22.3 million, and a net loss of $1.4 million in 1998. ICG had
total net revenues of $8.5 million, total expenses of $6.1 million, and net
income of $878,000 in 1997. We formed ICG in the fourth quarter of 1997. ICG's
business includes a registered broker/dealer and an asset manager that offer
individual and corporate investors a wide range of financial products and
services.
ICG's revenues declined in 1998 as compared to 1997 since ICG raised less
money for their customers through corporate finance transactions. ICG's
investment banking and brokerage fees were $18.5 million for 1998 as compared
to $7.7 million for 1997. ICG raised $190.0 million for its corporate clients
in 1998 and $323.0 million in 1997 through private placement debt and equity
offerings.
ICG's total expenses increased by $16.2 million in 1998 as compared to 1997,
as we operated ICG for the entire year of 1998, and only one quarter in 1997.
The major components of ICG's expenses in 1998 were personnel expense of $13.7
million, occupancy expense of $756,000, telephone and other communications
expense of $1.2 million, and general and administrative expense of $5.3
million.
Asset Management Activities
Our Asset Management Activities ("AMA") had total net revenues of $7.0
million, total expenses of $3.8 million, and net income of $1.8 million in
1998. AMA had total net revenues of $25.0 million, total expenses of $8.7
million, and net income of $9.9 million in 1997.
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Our AMA revenues decreased significantly in 1998 as compared to 1997
primarily due to the large revenues we generated from the termination of our
management agreement with IMH in 1997. Excluding the gain we recognized from
the Termination Agreement (discussed below), our net AMA revenues increased by
$1.0 million in 1998 as compared to 1997. Our AMA revenues increased primarily
due to growth in our assets under management. Currently we manage three
different classes of assets for others. These classes include a commercial
mortgage and equity REIT, a collateralized loan obligation fund, and leveraged
bank debt hedge funds. Our total assets under management were $1.5 billion at
December 31, 1998 and $495.1 million at December 31, 1997.
Our total expenses from our AMA decreased by $4.8 million in 1998 as
compared to 1997. Excluding expenses incurred in 1997 in connection with the
Termination Agreement (discussed below) of $6.0 million, our AMA expenses
increased by $1.2 million. This increase was primarily due to increased
personnel expenses from additional employees conducting our AMA business.
In 1997, we recognized a nonrecurring gain on the termination of a REIT
advisory agreement of $19.0 million. In 1995, we entered into a management
agreement with Impac Mortgage Holdings, Inc. ("IMH"), in which we agreed to
advise IMH on its day-to-day operations, a service for which we were paid a
management fee. In 1997, we negotiated the termination with IMH of the
management agreement (the "Termination Agreement"). Under the Termination
Agreement, we received 2,009,310 shares of IMH common stock and certain
securitization-related assets, and we agreed to cancel a $29.1 million note
receivable that we had from ICI Funding Corporation ("ICIFC"), which is now
known as Impac Funding Corporation, the loan origination unit of IMH. We
recorded the IMH common stock on our books at its fair value of approximately
$35.0 million, and the securitization-related assets on our books at their
fair values of approximately $13.1 million, for a total value of $48.1
million. This amount ($48.1 million), when netted with the $29.1 million
cancellation of our ICIFC note receivable resulted in a net gain to us from
the Termination Agreement of approximately $19.0 million.
Other Core Operations
Our Other Core Operations ("OCO") had negative net revenues of $39.5
million, total expenses of $18.3 million, and a net loss of $33.1 million in
1998. OCO had total net revenues of $6.9 million, total expenses of $26.7
million, and net loss of $16.0 million in 1997.
Our OCO include those areas of business we conduct at our holding company
and support operations. Such areas include interest and dividend income from
parent company loans and equity investments, loan servicing income, 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
provided support to our subsidiaries through executive management's oversight
and advice, accounting and legal services, merger and acquisitions advice,
human resources administration, office services, and management information
systems support.
OCO earned interest and dividend income of $30.1 million in 1998 and $28.9
million in 1997. OCO incurred interest expense of $30.4 million in 1998 and
$25.6 million in 1997. The increase in OCO's interest expense was primarily
attributable to increased borrowing costs associated with the Company's $70.0
million of Remarketed Par Securities issued during 1997.
In 1998, OCO recognized impairment charges on our equity investments in
Impac Mortgage Holdings, Inc. ("IMH") and Imperial Credit Commercial Mortgage
Investment Corp. ("ICMI"). Our book value of IMH stock was $4.56 per share and
our book value of ICMI stock was $9.375 per share at December 31, 1998. During
the third quarter of 1998 the market value of our equity holdings in IMH and
ICMI declined substantially. We determined that the declines in IMH's and
ICMI's stock prices were other than temporary. Therefore, we recorded pre-tax
write-downs of $24.5 million on our IMH common stock and $13.0 million on our
ICMI common stock. These write-downs reduced our book value of IMH from $17.88
to $5.00 per common share and our book value of ICMI from $13.98 to $9.75 per
share. There were no impairment charges in 1997.
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In 1998 OCO also recognized negative mark-to-market charges on our trading
securities. These securities included our investment in Pacifica Partners I
and various mortgage backed securities. We wrote down the securities at OCO by
$5.0 million in 1998 and $341,000 in 1997.
Total expenses of OCO decreased by $8.4 million. The decrease was primarily
due to two factors. First, in 1997 we recognized a $3.7 million charge on the
restructuring of our investment in DRI (discussed below) for which there was
no comparable expense incurred in 1998. Second, we had much better experience
in the liquidation and administration of our real estate owned in 1998 as
compared to 1997. We recognized net income from our real estate owned of
$548,000 in 1998 and net expense of $4.5 million in 1997.
In 1997, OCO incurred a loss on the restructuring of our loan to
Dabney/Resnick/Imperial LLC ("DRI") of $3.7 million. In 1996, we made a loan
to DRI, an investment banking firm. DRI offered full service investment
banking, brokerage, and asset management services. In late 1997, we formed a
new business, ICG (discussed above). In connection with the formation of ICG,
we recognized a pre-tax charge of $3.7 million relating to the restructuring
of our loan to DRI. Substantially all of the assets and personnel of DRI were
acquired or hired by ICG.
Equity Investments
The Equity Investments generated negative net revenues of $66.5 million,
total expenses of $122,000, and a net loss of $38.2 million in 1998. Equity
investments generated total net revenues of $159.9 million, total expenses of
$16.2 million, and net income of $81.5 million in 1997.
Equity Investments include our portion of the net income or loss from
Southern Pacific Funding Corporation ("SPFC") and Franchise Mortgage
Acceptance Company ("FMC"). The Equity Investments generated equity in the net
income of SPFC and FMC of $16.0 million in 1998 and $22.8 million in 1997.
This represents our share of SPFC's and FMC's net income or loss for 1998 and
1997, based on our ownership percentage of SPFC and FMC. The decrease was due
primarily to SPFC's bankruptcy in 1998. As a result of the bankruptcy, we only
recognized income from SPFC for the first half of 1998 as compared to the
entire year of 1997.
Our Equity Investments also incurred a large impairment loss in 1998 as
compared to no such loss in 1997. 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, we wrote-off our total investment in and loan to
SPFC. Our write-off was $82.6 million for the year ended December 31, 1998.
In 1997, we recognized a significant gain on the sale of our FMC stock. We
had no gains from the sale of FMC stock in 1998. In 1997, we sold 3.6 million
of our FMC shares in FMC's initial public offering at $18.00 per share,
generating net proceeds of $59.7 million and a corresponding gain of $48.9
million. We also recognized a gain of $43.2 million as a result of an
adjustment to the basis of our investment in FMC due to FMC's capital raised
in the offering and our reduced ownership percentage in FMC. As a result of
FMC's initial public offering, our ownership percentage of FMC common stock
was reduced to 38.4%. Accordingly, we account for our investment in FMC under
the equity method.
In 1997 we also recognized gains from the sale of our SPFC stock. In 1997,
we sold 370,000 shares of our SPFC common stock at $16.63 per share generating
net proceeds of $6.2 million and a gain of $4.3 million. We also sold an
additional 500,000 shares of our SPFC common stock in 1997, generating net
proceeds of $7.6 million and a gain of $5.2 million. These sales reduced our
ownership percentage of SPFC common stock to 47%. Accordingly, until its
bankruptcy and our corresponding write-off of our investment in SPFC, we
accounted for our investment in SPFC under the equity method.
The total expenses from our Equity Investments decreased by $16.0 million in
1998 as compared to 1997. This decrease results from the consolidation of FMC
in the first nine months of 1997, as compared to no consolidation in 1998.
Throughout the first nine months of 1997, our ownership percentage in FMC was
66.7%, and accordingly, FMC 's operating results were consolidated with ours.
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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.
In accordance with the terms of the definitive agreement, Bay View will
acquire all of the common stock of FMC for consideration currently valued at
approximately $309 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. 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.
De-emphasized/Discontinued/Exited Businesses
The De-emphasized/Discontinued/Exited Businesses ("Exited Businesses")
generated net revenues of $9.6 million, total expenses of $27.0 million, and a
net loss of $24.6 million in 1998. The Exited Businesses generated total net
revenues of $15.6 million, total expenses of $19.2 million, and a net loss of
$27.5 million in 1997.
We have decided to either discontinue or exit some of the businesses we had
been conducting as divisions of SPB, or separate consolidated subsidiaries. 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. None of our de-emphasized, discontinued, or exited
business lines was a profitable business.
We classify the following significant operations as Exited Businesses: our
Auto Lending, Alternative Residential Mortgage, and Consumer Loan Divisions of
SPB; Credito Imperial Argentina, ("CIA") our residential loan production
business in Argentina; and Auto Marketing Network, Inc., our sub-prime
automobile finance company. Our Exited Businesses also include our former
mortgage banking operations, certain problem loan or securities portfolios,
and any loan portfolios at SPB from businesses for which we are no longer
originating new loans.
Our Exited Businesses earned interest income of $77.7 million in 1998 and
$59.3 million in 1997. The Exited Businesses incurred interest expense of
$31.6 million in 1998 and $35.6 million in 1997. The increase in interest
income and expense was primarily attributable to a larger average outstanding
balance of loans and securities from those operations classified as Exited
Businesses in 1998 as compared to 1997.
In 1998, the Exited Businesses recognized impairment charges on our held for
sale loan and securities portfolios, of $31.6 million. Our affected loan
portfolios included our automobile loans at SPB and our Argentinian
residential mortgage loans at CIA. We wrote down SPB's automobile loans by
$21.5 million and CIA's residential loans by $7.3 million. Our affected
securities portfolios include the retained interests we received from IMH in
connection with the Termination Agreement discussed under Asset Management
Activities. We wrote down the retained interests in our Exited Businesses by
$2.0 million in 1998. There were no mark-to-market charges on any of these
portfolios in 1997.
Total expenses at our Exited Businesses were $27.0 million in 1998 as
compared to $19.2 million in 1997. The increase in total expenses of $7.8
million was primarily due to increased personnel, professional services, and
general and administrative expenses at SPB's Auto and Consumer Credit
divisions.
In 1998 and 1997, our Exited Businesses recognized provisions for losses on
the repurchase of our former mortgage banking operation loans. The provision
in 1998 was $4.8 million and the provision in 1997 was
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$5.4 million. These provisions resulted from our analysis of our potential
exposure to losses on the future repurchase of loans sold to investors from
our former mortgage banking operations. We believe that these provisions
adequately provide for known and estimated future losses from the repurchase
of our former mortgage banking operations loans.
Also included in our Exited Businesses are the results of our discontinued
operation, AMN, for 1998 and 1997. We recognized net losses from these
discontinued operations of $14.5 million in 1998 and $25.3 million in 1997.
Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenue
General
Our consolidated net income for the year ended December 31, 1997 was $85.9
million or $2.10 diluted income per share as compared to $76.0 million or
$1.95 diluted income per share for the year ended December 31, 1996. Basic
consolidated income per share for the year ended December 31, 1997 was $2.23
per share as compared to $2.11 per share for the previous year. Consolidated
net income for the year ended December 31, 1997, includes a net loss from
discontinued operations of $25.3 million, or $0.62 loss per diluted share, and
an extraordinary loss on early extinguishment of debt of $4.0 million, or
$0.10 per common share, net of tax. The increase in net income is attributable
to several factors including: gains on sale of stock in SPFC, FMC and IMH; a
gain on the termination of a Real Estate Investment Trust ("REIT") advisory
agreement; an increase in net interest income; and an improved net interest
margin. These positive factors were partially offset by an increase in total
expenses and the provision for loan and lease losses.
Total Interest Income
For the year ended December 31, 1997, total interest income decreased to
$203.6 million from $207.5 million for the year ended December 31, 1996. The
decrease in total interest income is primarily attributable to a 113 basis
point or 11.61% increase in the average yield on interest-earning assets
offset by a $251.0 million or 12.05% decrease in the average balance of
interest-earning assets. The increase in the average yield on interest-earning
assets from 1996 is primarily attributable to increases in the average yields
on loans held for investment and sale reflecting a more diversified and
higher-yielding mix of loan products relative to 1996. The decrease in the
average balance of interest-earning assets compared to 1996 is primarily due
to a decrease in the average balance of loans held for sale of $634 million
offset by an increase in the average balance of loans held for investment of
$329.5 million. The comparison of total interest income for 1997 and 1996 is
also impacted by the deconsolidations of SPFC, ICIFC and FMAC. Excluding
SPFC's and ICIFC's interest income for all of 1996 and FMAC's interest income
for the fourth quarter of 1997, total interest income for the year ended
December 31, 1996 would have been $133.7 million compared to actual of $207.5
million.
Total Interest Expense
For the year ended December 31, 1997, total interest expense decreased to
$118.3 million from $135.0 million for the year ended December 31, 1996. The
decrease in total interest expense is primarily attributable to a $161.4
million or 8.0% decrease in the average balance of interest-bearing
liabilities and a 32 basis point or 4.8% decrease in the average cost of
interest-bearing liabilities. The decrease in the average balance of interest-
bearing liabilities relative to 1996 resulted primarily from a decrease in the
average balance of borrowings due to the deconsolidations of SPFC and ICIFC.
This decrease was partially offset by an $154.3 million increase in average
deposits. The increase in the average cost of interest-bearing liabilities is
primarily attributable to the relatively higher borrowing costs associated
with the Company's Remarketed Par Securities issued during 1997. The
comparison of total interest expense for 1997 and 1996 is also impacted by
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the deconsolidations of SPFC, ICIFC and FMAC. Excluding SPFC's and ICIFC's
interest expense for all of 1996 and FMAC's interest expense for the fourth
quarter of 1996, total interest expense for the year ended December 31, 1996
would have been $93.8 million compared to actual of $135.0 million.
Net Interest Margin
For the year ended December 31, 1997, the consolidated net interest margin
increased to 4.55%, an increase of 115 basis points, as compared to the
consolidated net interest margin of 3.40% for the year ended December 31,
1996. The increase in net interest margin is due primarily to the
aforementioned increases in the average yields on loans held for investment
and sale due to a more diversified and higher-yielding mix of loan products
relative to 1996.
Provision for Loan and Lease Losses
The provision for loan and lease losses increased to $21.0 million for the
year ended December 31, 1997, as compared to $9.8 million for the year ended
December 31, 1996. The large increase in the provision for loan losses is
primarily the result of an increase in total nonaccrual loans and net charge-
offs of $5.0 million and $22.5 million, respectively. The increase in total
nonaccrual loans came mainly from the AMN loan portfolio and are reflective of
the continuing change in the composition of the overall loan portfolio to
higher yielding loan products that carry higher relative credit risk. For
further discussion see "Business--Loans Held for Investment" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Asset Quality".
Gain on Sale of Loans and Leases
Gain on sale of loans and leases decreased to $69.7 million for the year
ended December 31, 1997 from $88.2 million for 1996. Gain on sale of loans and
leases consists primarily of gains recorded upon the sale of loans and leases,
net of associated expenses, and to a lesser extent, fees received on the
origination of loans, and fees received for commitments to fund loans. Gains
on sale of loans and leases decreased during 1997 primarily as a result of the
impact of the deconsolidations of SPFC and ICIFC for the entire year of 1997
and the deconsolidation of FMAC for the fourth quarter of 1997 and a lower
volume of loan and lease securitizations as compared to 1996. During 1997, the
Company completed loan and lease securitizations totaling $760.5 million as
compared to $1.3 billion during 1996. For 1997 and 1996, total loan and lease
securitizations were as follows:
<TABLE>
<CAPTION>
1997 1996
------ --------
(In millions)
<S> <C> <C>
Nonconforming residential loans......................... $ -- $ 656.9
Multifamily and commercial loans........................ 203.1 277.0
Franchise loans......................................... 343.8 325.1
Equipment leases........................................ 213.6 87.0
------ --------
$760.5 $1,346.0
====== ========
</TABLE>
We also completed two bulk sales of loans with a total principal balance of
$197.8 million for the year ended December 31, 1997.
Loan Servicing Income
Loan servicing income for the year ended December 31, 1997, increased to
$9.5 million as compared to $1.7 million for the year ended December 31, 1996.
Loan servicing income increased primarily due to a decrease in the level of
foreclosure and liquidation costs associated with our former residential
mortgage loan servicing portfolio and due to an increase in the average
outstanding balance of loans and leases serviced for others.
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Equity in Net Income of SPFC
Equity in the net income of SPFC for the year ended December 31, 1997 was
$25.9 million as compared to $0 for the year ended December 31, 1996, and
represents our share of SPFC's net income based on the Company's ownership
percentage. The increase in the equity in net income of SPFC is due to the
difference in accounting methods used for the Company's investment in SPFC at
December 31, 1997 and 1996. At December 31, 1997, the Company's ownership
percentage in SPFC was 47.0%, and accordingly, we accounted for its investment
in SPFC using the equity method. At December 31, 1996, our ownership
percentage in SPFC was 51.2%, and accordingly, SPFC's operating results were
consolidated with those of our company.
Equity in Net Loss of FMAC
Equity in the net loss of FMAC was $3.1 million for the period commencing
October 1, 1997 through December 31, 1997, as compared to $0 for the year
ended December 31, 1996 and represents our share of FMAC's net loss for the
quarter ended December 31, 1997, based on our ownership percentage. FMC's net
loss resulted from the deferred tax charges associated with converting to a
fully taxable corporation from a limited liability entity.
The increase in the equity in net loss of FMAC is due to the difference in
accounting methods used for our investment in FMAC at December 31, 1997 and
1996. At December 31, 1997, our ownership percentage in FMAC was 38.4%, and
accordingly, we accounted for our investment in FMAC using the equity method.
At December 31, 1996, our ownership percentage in FMAC was 66.7%, and
accordingly, FMAC 's operating results were consolidated with those of our
company. In conjunction with the FMC initial public offering during the fourth
quarter of 1997 discussed below, we included in our consolidated operating
results nine months of FMAC's operating results for 1997.
Investment Banking and Brokerage Fees
Investment banking and brokerage fees were $7.7 million for the year ended
December 31, 1997, compared to $0 for the year ended December 31, 1996. During
the fourth quarter of 1997, we formed a new subsidiary, ICG, which includes a
registered broker/dealer and an asset management company offering individual
and corporate investors a wide range of financial products and services.
During the fourth quarter of 1997, ICG raised $323 million for corporate
clients through private placement debt and equity offerings generating
investment banking and brokerage fees of $7.7 million.
Gain on Sale of Servicing Rights
Gain on sale of servicing rights decreased to $0 for the year ended December
31, 1997, from $7.6 million for the year ended December 31, 1996. During 1996,
we sold mortgage loan servicing rights relating to $3.2 billion in loans,
resulting in pre-tax gains of $7.6 million. Gains on the sale of servicing
rights consist of the cash proceeds received on the "bulk" sale of servicing
rights, net of the related capitalized purchased or originated servicing
rights. We did not recognize any gain or loss on the sale of servicing rights
in 1997.
Gain on Sale of Securities
We recognized a gain on sale of FMC stock of $92.1 million for the year
ended December 31, 1997, compared to $0 for the year ended December 31, 1996.
Our franchise lending business was conducted through FMAC until November 1997,
at which time FMAC merged into FMC, a Delaware corporation formed for the
purpose of succeeding to the business of FMAC, and FMC completed an initial
public offering of its common stock.
We sold into FMC's initial public offering 3.6 million shares at $18.00 per
share generating net proceeds of $59.7 million and a corresponding gain of
$48.9 million. Additionally, we recognized a gain of $43.2 million resulting
from the adjustment in the basis of its investment in FMC due to the offering
and our reduced
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ownership percentage. At the time of FMC's initial public offering and at
December 31, 1997, our percentage ownership of FMC common stock was 38.4%.
Accordingly, FMC is no longer consolidated and our investment in FMC is
accounted for under the equity method.
We recognized a gain on sale of SPFC stock of $9.5 million for the year
ended December 31, 1997, compared to $51.2 million for the year ended December
31, 1996. Our nonconforming residential lending business was conducted through
SPFC until June 1996, at which time SPFC completed an initial public offering
of its common stock pursuant to which we were a selling shareholder. During
the first quarter of 1997, we sold 370,000 shares of SPFC common stock at
$16.63 per share generating net proceeds of $6.2 million and a gain of $4.3
million. This transaction reduced our ownership percentage in SPFC from 51.2%
at December 31, 1996, to 49.4% at March 31, 1997. Accordingly, SPFC is no
longer consolidated and our investment in SPFC is accounted for under the
equity method in 1997. During the third quarter of 1997, we sold an additional
500,000 shares of SPFC common stock generating net proceeds of $7.6 million
and a gain of $5.2 million. This transaction further reduced our ownership
interest in SPFC to 47% at December 31, 1997. During the year ended December
31, 1996, we sold a total of 5.0 million shares of SPFC in two separate
offerings resulting in gains totaling $51.2 million.
Additionally, during 1996, as part of its initial public offering, SPFC sold
5.2 million shares to the public, resulting in a corresponding gain to our
company of $31.4 million based on the difference between our equity ownership
in SPFC after the sale and such equity ownership prior to the sale, using our
respective SPFC ownership percentages.
We recognized a gain on sale of IMH stock of $11.5 million for the year
ended December 31, 1997, compared to $0 for the year ended December 31, 1996.
During 1995, we sold our mortgage conduit operations and SPB's warehouse
lending operations to IMH. In exchange for these assets, we received
approximately 11.8% of the common stock of IMH. During 1997, we sold our
common stock in IMH resulting in a gain of $11.5 million.
Gain on Termination of REIT Advisory Agreement
We recognized a nonrecurring gain on termination of a REIT advisory
agreement of $19.0 million for the year ended December 31, 1997. In
conjunction with the aforementioned exchange of our assets for IMH stock, ICAI
entered into a management agreement with IMH pursuant to which ICAI advised
upon the day-to-day operations of IMH and for which it was paid a management
fee. In December 1997, IMH and our company negotiated a termination of the
management agreement (the "Termination Agreement"). The consideration received
by our company pursuant to the Termination Agreement was comprised of
2,009,310 shares of IMH common stock and certain securitization-related
assets. Additionally, we agreed to cancel our note receivable from ICI Funding
Corporation ("ICIFC"), a former subsidiary of ICII which is now known as Impac
Funding Corporation and is the origination unit of IMH, in the amount of $29.1
million. The IMH common stock and the securitization-related assets were
recorded by our company at their fair values of approximately $35.0 million
and $13.1 million, respectively, for a total of $48.1 million. This amount,
when netted with the $29.1 million cancellation of the ICIFC note receivable
resulted in the gain on termination of the management agreement of
approximately $19.0 million.
Expenses
Personnel Expense
Personnel expense increased to $51.6 million for the year ended December 31,
1997 as compared to $48.4 million for the year ended December 31, 1996. This
increase reflects our acquisition and expansion activities. The comparison of
personnel expense for 1997 and 1996 is also impacted by the deconsolidations
of SPFC, ICIFC and FMAC. Excluding SPFC's and ICIFC's personnel expense for
all of 1996 and FMAC's personnel expense for the fourth quarter of 1996, total
personnel expense for the year ended December 31, 1996 would have been $29.8
million compared to actual of $48.4 million.
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Amortization of Servicing Rights
Amortization of servicing rights increased to $3.1 million for the year
ended December 31, 1997 as compared to $1.1 million for the year ended
December 31, 1996. The increase primarily resulted from an increase in
prepayment rates on the underlying serviced loan portfolio. The comparison of
amortization of servicing rights for 1997 and 1996 is also impacted by the
deconsolidation of ICIFC.
Occupancy Expense
Occupancy expense decreased to $4.3 million for the year ended December 31,
1997 as compared to $4.7 million for the year ended December 31, 1996. This
decrease is a result of the deconsolidations of SPFC, ICIFC and FMAC.
Excluding SPFC's and ICIFC's occupancy expense for all of 1996 and FMAC's
occupancy expense for the fourth quarter of 1996, total occupancy expense for
the year ended December 31, 1996 would have been $3.8 million compared to
actual of $4.7 million.
Net Expenses of Other Real Estate Owned
Net expenses of other real estate owned ("OREO") decreased to $6.5 million
for the year ended December 31, 1997 as compared to $7.0 million for the year
ended December 31, 1996. The decreases in net expenses of OREO resulted from a
corresponding decline in OREO losses and writedowns related to the Company's
former mortgage banking operations.
Professional Services Expense
Professional services expense increased to $9.7 million for the year ended
December 31, 1997 as compared to $9.6 million for the year ended December 31,
1996. This increase reflects our acquisition and expansion activities. The
comparison of professional services expense for 1997 and 1996 is also impacted
by the deconsolidations of SPFC, ICIFC and FMAC. Excluding SPFC's and ICIFC's
professional services expense for all of 1996 and FMAC's professional services
expense for the fourth quarter of 1996, total professional services expense
for the year ended December 31, 1996 would have been $7.9 million compared to
actual of $9.6 million.
Loss on Restructuring of Dabney/Resnick/Imperial, LLC ("DRI")
We recognized a loss on restructuring of its loan to DRI of $3.7 million for
the year ended December 31, 1997, compared to $0 for the year ended December
31, 1996. During the fourth quarter of 1996, we announced the closing of its
investment in DRI, an investment banking firm. DRI offered full service
investment banking, brokerage, and asset management services. As discussed
above, during the fourth quarter of 1997, we began operations of a new
subsidiary, ICG, which includes a registered broker/dealer and an asset
management company offering individual and corporate investors a wide range of
financial products and services. In connection with the formation of ICG, we
recognized a pre-tax charge of $3.7 million relating to the restructuring of
its loan to DRI. As part of the DRI restructuring, substantially all of the
assets and personnel of DRI were acquired or hired by ICG.
Provision for Loss on Repurchase of Former Mortgage Banking Loans
We recognized a provision for loss on repurchase of mortgage banking loans
of $5.4 million for the year ended December 31, 1997, compared to $0 for the
year ended December 31, 1996. During 1997, we completed an analysis of its
potential exposure from losses on the repurchase of those loans still
remaining from its former mortgage banking operations. The completion of this
analysis resulted in the aforementioned $5.4 million charge being taken during
the fourth quarter of 1997.
Amortization of Goodwill
Our amortization of goodwill was $2.5 million for the year ended December
31, 1997, compared to $1.9 million for the year ended December 31, 1996. The
increase in amortization of goodwill is primarily attributable to the
formation of ICG in 1997.
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Other Expenses
All other expenses (including data processing expense, FDIC insurance
premiums, telephone and other communications, and general and administrative
expense) for the year ended December 31, 1997 totaled $28.1 million compared
to $22.7 million for the year ended December 31, 1996. This increase reflects
the Company's acquisition and expansion activities.
Income Taxes
Our effective tax rate was 39% and 44% for the years ended December 31, 1997
and 1996, respectively. The decrease in the effective tax rate for 1997
primarily reflects the recovery of deferred taxes related to the FMC initial
public offering. For further information see Note 21 to the consolidated
financial statements.
Minority Interest in Income (Loss) of Consolidated Subsidiaries
Our minority interest in income (loss) of consolidated subsidiaries was
$10.5 million for the year ended December 31, 1997, compared to $12.0 million
for the year ended December 31, 1996. The comparison of our minority interest
in income (loss) of consolidated subsidiaries for 1997 and 1996 is also
impacted by the deconsolidations of SPFC, ICIFC and FMAC.
Excluding our minority interest in income (loss) of SPFC and ICIFC for all
of 1996 and FMAC for the fourth quarter of 1996, total minority interest in
income (loss) of consolidated subsidiaries for the year ended December 31,
1996 would have been $2.1 million compared to actual of $12.0 million.
Extraordinary Item--Loss on Early Extinguishment of Debt
During the first quarter of 1997, we successfully completed a $200.0 million
offering of 9.875% Senior Notes due 2007. A portion of the proceeds from the
offering were used to repurchase $69.8 million of 9.75% Senior Notes due 2004
for which we recorded an extraordinary after-tax charge of $4.0 million. We
engaged in the new issuance in order to obtain a more favorable debt covenant
package and to raise new capital to support its growing businesses.
Year 2000 Compliance
We are aware of the issues associated with the century date change and the
potential impact on our computing environment. The "Y2K" problem can best be
described as the inability of a computer system to differentiate between 1900
and 2000. Since many existing computer programs store the year in two digits
rather than four, "01" could be interpreted as either "1901" or "2001".
Systems that calculate, compare or sort using the incorrect date may cause
erroneous results, ranging from system malfunction to inaccurate or incomplete
processing.
State of Readiness
We do not have any in-house developed proprietary systems to renovate. All
of our systems and software were supplied by reputable vendors with national
and international client bases. These firms are committed to addressing the
Y2K issue and have been working closely with our company.
Consistent with the requirements of the Memorandum of Understanding ("MOU")
described below, we have concentrated the majority of our efforts on ensuring
the full compliance of SPB. At SPB, we have assigned a full-time Year 2000
Project Manager and retained the services of an outside consulting firm to
test and certify all of SPB's mission critical systems. An active program to
educate our depositors and assess the Y2K risk of our borrowers has also been
undertaken. At each of our other subsidiaries, an operating manager has been
assigned the responsibility for their Y2K Project with assistance being
provided by our Management Information Systems group.
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A full Y2K assessment of all systems, facilities and peripheral devices was
conducted in the fourth quarter of 1997. As a result of that assessment, only
two critical systems were deemed to be non-compliant. One of those systems was
replaced in December 1998 and will run in a parallel mode through the first
half of 1999 to ensure complete integrity. The other was outsourced to a Y2K
compliant service provider in February 1999. We have contacted all of our
major systems, software and third party service providers and have received
assurances that they are fully compliant. Since vendor certification alone is
not acceptable to many of the regulatory agencies, we have begun an extensive
program of integration testing.
Year 2000 Project Status
We adopted the bank regulatory agencies' recommended approach of Awareness,
Assessment, Renovation, Validation and Implementation. The Awareness and
Assessment phases were completed during the third quarter of 1998. Renovation
has consisted of replacing the systems mentioned earlier and upgrading a
portion of our personal computer network. Notwithstanding the exceptions noted
above, the Implementation phase is essentially complete and we are currently
operating on the Y2K compliant version of nearly all its systems and software.
The fourth quarter of 1998 and the first quarter of 1999 were dedicated to the
Validation phase. We achieved a success rate of over 95% when it tested all of
the personal computers and verified that they could handle the century date
change. Test scripts have been developed, resources assigned and schedules
established to certify all of our mission critical systems. This effort will
be completed by March 31, 1999.
Costs to Address the Y2K Issue
We originally established a budget of nearly $2.0 million for the Year 2000
Project. This was based on the potential need to replace several major
systems. That need has not materialized since testing has certified those
systems to be fully Y2K compliant. The total direct cost to achieve Y2K
compliance is now estimated at less than $1.0 million. We expect to fund these
costs through operating cash flows.
Contingency Plans
We are also developing contingency plans to mitigate any problems that may
arise as a result of the century date change. Business Resumption plans are
being updated with specific emphasis on Y2K. Alternative service providers
have been identified and special staffing schedules are being developed for
the weekend of January 1st and 2nd, 2000.
However, despite all the preparation, planning and testing, there can be no
assurance that either the compliance process or contingency plan will
circumvent a partial or total system interruption. In addition, there can be
no assurance that the impact of any failure on the part of our company or our
software vendors and third party service providers to adequately address the
Y2K issue or that our depositors concerned about the possibility of computer
failure may seek to withdraw their funds from our company will not have a
material adverse effect on our business, financial condition or operating
results.
Liquidity and Capital Resources
General
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,
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We have financed our lending activities through warehouse lines of credit
and repurchase facilities with financial institutions, equity and debt
offerings in the capital markets, deposits or borrowings at SPB 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 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 December 31, 1998 and 1997, SPB had maximum FHLB borrowings
available equal to $36.6 million and $45.8 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 year ended
December 31, 1998 was $45.0 million, with an average outstanding balance of
$24.5 million. The outstanding balance of FHLB advances was $20.0 million at
December 31, 1997. The FHLB advances are secured by certain real estate loans
with a carrying value of $49.9 million and $104.7 million at December 31, 1998
and 1997, respectively.
As of December 31, 1998, SPB's deposit portfolio which consists primarily of
certificate accounts increased approximately $526.8 million to $1.7 billion at
December 31, 1998 from $1.2 billion at December 31, 1997.
SPB has been able to acquire new deposits through its local marketing
strategies as well as domestic money markets. Additionally, SPB maintains
liquidity in the form of cash and interest-bearing deposits with financial
institutions. 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.
In addition to warehouse lines of credit and SPB borrowings, we have also
accessed the capital markets to fund our operations. In April 1996, we
completed a secondary stock offering of 4,879,808 shares of its common stock
at $13.00 per share, for net proceeds of $59.2 million.
In January 1997, we issued $200.0 million principal amount of the 9.875%
Senior Notes and used a portion of the proceeds to purchase approximately
$69.8 million of the 9.75% Senior Notes. We contributed $35.0 million of the
proceeds to SPB in the form of subordinated indebtedness.
During the second quarter of 1997, we issued $70.0 million of Senior Notes
under a proprietary product known as "ROPES." These securities can be redeemed
at par upon their maturity or remarketed as 30 year capital instruments. Under
current tax law, the interest payments on these securities are tax-deductible.
The proceeds from the offering are being used for capital contributions to
subsidiaries, strategic acquisitions, investments and general corporate
purposes.
During the fourth quarter of 1997, FMC completed an initial public offering
of its common stock pursuant to which we were was a selling stockholder. FMC,
our company, and another selling stockholder received net proceeds from such
offering of approximately $114.3 million, $59.7 million and $18.5 million,
respectively. As of December 31, 1998 and 1997, the Company's ownership
percentage in FMC was 38.4%.
In June 1996, SPFC completed an initial public offering of its common stock
pursuant to which we were a selling shareholder. We received net proceeds from
such offering of approximately $35.9 million. In November 1996, (i) SPFC
issued $75.0 million of convertible subordinated notes due 2006 and (ii) we
sold 1.0 million shares of our SPFC common stock for net proceeds of
approximately $28.0 million.
In the first quarter of 1997, we sold 370,000 shares of common stock
investment in SPFC, generating net proceeds of $6.2 million.
64
<PAGE>
Limitations on Dividends
Under the California Industrial Loan Law, an industrial bank may declare
dividends on its capital stock only if it has at least $750,000 of unimpaired
capital stock plus additional capital stock of $50,000 for each branch office.
In addition, no distribution of dividends is permitted unless: (i) such
distribution would not exceed an industrial bank's retained earnings, (ii) any
payment would not result in a violation of the approved minimum capital to
industrial bank certificate of deposit ratio and (iii) after giving effect to
the distribution, either (y) the sum of an industrial bank's assets (net of
goodwill, capitalized research and development expenses and deferred charges)
would be not less than 125% of its liabilities (net of deferred taxes,
deferred income and other deferred credits), and (z) current assets would be
not less than current liabilities (except that if an industrial bank's average
earnings before taxes for the last two fiscal years had been less than average
interest expense, current assets must be not less than 125% of current
liabilities).
Under California law, in order for capital (including surplus) of an
institution to be included in calculating the leverage limitation described
above, industrial banks must amend their by-laws to restrict such capital from
the payment of dividends. The amount of restricted capital maintained by an
industrial bank also provides the basis for establishing the maximum amount
that an industrial bank may lend to one single borrower. As of December 31,
1998 and December 31, 1997, $150.0 million and $125.0 million, respectively,
of SPB's capital was so restricted.
The FDIC has advised insured institutions that the payment of cash dividends
in excess of current earnings from operations is inappropriate and may be
cause for supervisory action. As a result of this policy, industrial banks may
find it difficult to pay dividends out of retained earnings from historical
periods prior to the most recent fiscal year or to take advantage of earnings
generated by extraordinary items.
Under the Financial Institutions Supervisory Act and FIRREA, federal
regulators also have authority to prohibit financial institutions from
engaging in business practices which are considered to be unsafe or unsound.
It is possible, depending upon the financial condition of an industrial bank
and other factors, that such regulators could assert that the payment of
dividends in some circumstances might constitute unsafe or unsound practices
and prohibit payment of dividends even though technically permissible.
Pursuant to FDICIA, SPB is prohibited from paying dividends if the payment
of such dividends would cause the institution to become "undercapitalized."
These limitations on the payment of dividends may restrict the Company's
ability to utilize cash from SPB which may have been otherwise available to
our company for working capital.
Lines of Credit and Warehouse Facilities
We have warehouse lines of credit and repurchase facilities under which we
have available an aggregate of approximately $201.0 million in financing at
December 31, 1998.
Imperial Business Credit
IBC primarily funds its lease originations through the use of an interim
bank warehouse facility and a permanent revolving securitization facility. The
securitization facility utilizes a trust structure and has a five-year
revolving period, which expires in November 2002, and a three and one-half
year amortization period.
The IBC Lease Receivables Trust 1997-2 ("1997-2 Trust") was created pursuant
to a pooling and servicing agreement among IBC, as originator, IBC Funding
Corp. ("IFC"), IBC's wholly-owned special purpose subsidiary, as seller, and
Norwest Bank Minnesota, as trustee and back-up servicer. IBC sells its lease
originations to IFC under a sale and contribution agreement ("IBC Agreement"),
which simultaneously assigns its rights in the leases to the Trust in exchange
for trust certificates. The Class A certificates are sold to Triple-A One
Funding Corp., a special purpose corporation administered by Capital Markets
Assurance Corporation ("CAPMAC"), which issues commercial paper to fund its
acquisitions. The Class A purchase limit under the facility is $250 million
and as of December 31, 1998, there was approximately $197.9 million of Class A
Certificates outstanding.
65
<PAGE>
IFC assigns all receivables acquired pursuant to the IBC Agreement to the
1997-2 Trust. The transactions are accounted for as sales for reporting
purposes under generally accepted accounting principles ("GAAP") and as
financings for tax purposes. IFC assigns all its rights, title and interest in
the leases, together with a security interest in the underlying leased
equipment, which ownership and security interests have been perfected under
the Uniform Commercial Code. Payments of the purchase price are made directly
from payments by lessees on the lease receivables.
Multifamily and Commercial Mortgage Lending
During the years ended December 31, 1998 and 1997, SPB securitized $0 and
$203.1 million of IPL multi-family and commercial mortgage loans,
respectively. Additionally, during the years ended December 31, 1998 and 1997,
IPL sold for cash $304.2 million and $196.8 million of loans, respectively.
Auto Marketing Network
AMN has a warehouse lending agreement with Greenwich Capital Financial
Products ("GCFP") whereby GCFP provides warehouse funding for AMN's
receivables and obligations. AMN's receivables and obligations are guaranteed
by ICII. The warehouse lending agreement generally allows borrowings from GCFP
in respect of eligible receivables. To the extent that the receivable becomes
delinquent greater than 60 days or is defaulted on, the loan in respect of
such receivable must generally be repaid. The warehouse lending agreement is
AMN's principal source of financing. During the year ended December 31, 1998
and 1997, AMN securitized $0 and $158.6 millon of auto loans.
Inflation
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Company's operations. Unlike industrial companies, nearly all of
the assets and liabilities of the Company are monetary in nature.
As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Inflation
affects the Company primarily through its effect on interest rates, since
interest rates normally increase during periods of high inflation and decrease
during periods of low inflation.
Asset Quality
The provision for loan and lease losses was $15.5 million in 1998, as
compared to $21.0 million in 1997 and $9.8 million in 1996. The increased
level of provision for loan losses for 1998 and 1997 was primarily the result
of an increase in net charge-offs related to our Exited Businesses. See Item 7
- --Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations.
66
<PAGE>
The following table summarizes certain information regarding our allowance
for loan and lease losses and losses on OREO:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of
period..................... $ 26,954 $ 19,999 $13,729 $ 7,054 $ 3,255
Provision for loan and lease
losses..................... 15,450 20,975 9,773 5,450 5,150
Business acquisitions and
bulk loan purchases........ -- 577 4,500 4,320 --
Sale of leases.............. -- (900) -- -- --
Deconsolidation of ICIFC.... -- (687) -- -- --
Loans charged off........... (22,100) (13,586) (8,326) (3,106) (1,436)
Recoveries on loans
previously charged off..... 4,576 576 323 11 85
-------- -------- ------- ------- -------
Net charge-offs............. (17,524) (13,010) (8,003) (3,095) (1,351)
Allowance at end of period.. $ 24,880 $ 26,954 $19,999 $13,729 $ 7,054
======== ======== ======= ======= =======
OREO losses:
OREO writedowns and
expenses................. $ (1,498) $ 2,074 $ 4,171 $ 2,870 $ 1,088
Loss (gain) on sale of
OREO..................... 597 4,453 2,843 (957) (119)
-------- -------- ------- ------- -------
Total OREO (gains)
losses................. $ (901) $ 6,527 $ 7,014 $ 1,913 $ 969
======== ======== ======= ======= =======
</TABLE>
The percentage of the allowance for loan and lease losses to nonaccrual
loans will not remain constant due to the changing nature of our portfolio. We
analyze the collateral for each non-performing loan to determine potential
loss exposure, and in conjunction with other factors, this loss exposure
contributes to the overall assessment of the adequacy of the allowance for
loan and lease losses. On an ongoing basis, we monitor the loan and lease
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 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 portfolio.
Loans and leases that we believe are uncollectible 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 we
believe are appropriate based upon our evaluation of the known and inherent
risks in the loan and lease portfolio. While we believe that the current
allowance for loan and lease losses is sufficient, future additions to the
allowance may be necessary.
Total nonaccrual loans decreased to $39.5 million at December 31, 1998, as
compared to $70.6 million at December 31, 1997 and $50.1 million at December
31, 1996. Total nonaccrual loans as a percentage of loans and leases held for
investment were 2.92% at December 31, 1998 as compared to 5.46% at December
31, 1997 and 4.55% at December 31, 1996. The following table summarizes net
charge-offs by loan type.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1998 1997 1996
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Residential mortgage.......................... $ (2,205) $ (5,920) $(2,485)
Multifamily................................... (450) (420) (1,095)
Commercial.................................... (407) (955) (465)
Leases........................................ 239 (3,920) (3,142)
Consumer and auto loans....................... (14,701) (1,795) (816)
-------- -------- -------
Net charge-offs............................. $(17,524) $(13,010) $(8,003)
======== ======== =======
</TABLE>
67
<PAGE>
The allocation of the Company's allowance for loan and lease losses and the
percentage of loans and leases by loan type to total loans and leases as of
December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Percentage of Percentage of
Loans and Leases Loans and Leases
Allocated to Total Loans Allocated to Total Loans
Allowance and Leases Allowance and Leases
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Loans secured by real
estate:
One to four family.... $ 2,664 9.3% $ 8,077 15.9%
Multi-family.......... 1,299 4.1 779 1.3
Commercial............ 128 1.9 312 1.1
------- ----- ------- -----
4,091 15.3 9,168 18.3
Leases.................. -- 0.1 124 0.6
Consumer and auto loans. 1,567 1.9 4,344 11.4
Franchise loans......... 934 3.7 634 4.8
Asset based loans....... 10,764 46.7 4,840 37.5
Other commercial loans.. 7,310 32.3 3,656 27.4
------- ----- ------- -----
20,575 84.7 13,598 81.7
Unallocated............. 214 -- 4,188 --
------- ----- ------- -----
$24,880 100.0% $26,954 100.0%
======= ===== ======= =====
</TABLE>
Although the above table allocates the allowance for loan and lease losses
by loan types, the total allowance is available to absorb losses on all loans
and leases.
The ratio of the allowance for loan and lease losses to total loans held for
investment was 1.84%, 2.10%, and 1.82% at December 31, 1998, 1997, and 1996,
respectively. The ratio of the allowance for loan losses to nonaccrual loans
was 65.1% at December 31, 1998 as compared to 53.9% at December 31, 1997 and
38.9% at December 31, 1996. We evaluate expected losses on nonaccrual loans on
a loan-by-loan basis and we believe that the allowance is adequate to cover
both expected losses on nonaccrual loans and inherent losses in the remainder
of our loans and leases held for investment portfolio.
The percentage of the allowance for loan and lease losses to nonaccrual
loans does not remain constant due to the changing nature of our loan
portfolio. We analyze the collateral for each nonperforming loan to determine
our potential loss exposure, and in conjunction with other factors, this loss
exposure contributes to the overall assessment of the adequacy of the
allowance for loan and lease losses. On an ongoing basis, we monitor the loan
portfolio and evaluate the adequacy of the allowance for loan 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 we deem to be uncollectible are charged to the allowance
for loan losses.
Recoveries on loans previously charged off are credited to the allowance.
Provisions for loan losses are charged to expense and credited to the
allowance in amounts we deem appropriate based on our evaluation of the known
and inherent risks in the loan portfolio. Future additions to the allowance
for loan losses may be necessary. For further information, see Item 1--
"Business--Loans Held for Investment."
68
<PAGE>
Asset/Liability Management and Market Risk
General
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of falling interest rates, the net earnings of an institution with a
positive gap theoretically may be adversely affected due to its interest-
earning assets repricing to a greater extent than its interest-bearing
liabilities.
Conversely, during a period of rising interest rates, theoretically, the net
earnings of an institution with a positive gap position may increase as it is
able to invest in higher yielding interest-earning assets at a more rapid rate
than its interest-bearing liabilities reprice.
In addition, a positive gap may not protect an institution with a large
portfolio of ARM's from increases in interest rates for extended time periods
as such instruments generally have periodic and lifetime interest rate caps.
Our ARM's are predominantly tied to LIBOR. Interest rates and the resulting
cost of funds increases in a rapidly increasing rate environment could exceed
the cap levels on these loan products and negatively impact net interest
income.
We manage portfolio interest rate risk through the aggressive marketing and
funding of adjustable rate loans, which generally reprice at least semi-
annually and are generally indexed to LIBOR. As a result of this strategy, at
December 31, 1998, our total interest-earning assets maturing or repricing
within one year exceeded its total interest-bearing liabilities maturing or
repricing in the same time by $462.7 million, representing a positive
cumulative gap ratio of 129.31%. We closely monitor our interest rate risk as
such risk relates to operational strategies. Our cumulative gap position is at
a level satisfactory to management and we are attempting to maintain a
positive gap position in light of the current interest rate environment.
However, there can be no assurances that we will be able to maintain a
positive gap position or that our strategies will not result in a negative gap
position in the future. The level of the movement of interest rates, up or
down, is an uncertainty and could have a negative impact on the earnings of
our company.
Hedging
We have implemented various hedging strategies with respect to its
origination of loans and leases for sale. To date, this has included selling
short comparable maturity United States Treasury securities and preselling
leases through prefunding accounts in its securitizations. We are subject to
the risk of rising interest rates between the time we commit to fund or
purchase leases at a fixed price and the time we sell or securitize those
leases.
Historically, to mitigate this risk, we entered into transactions designed
to hedge interest rate risks, including mandatory and optional forward selling
of mortgage-backed securities or United States Treasury securities, and buying
and selling of futures on United States Treasury securities. We determine the
nature and quantity of these hedging transactions based on various factors
including market conditions and the expected volume of mortgage loan
originations and purchases.
We believe our hedging programs are cost-effective and provide a level of
protection against interest rate risks. However, an effective hedging strategy
is complex and no hedging strategy can completely insulate our company from
interest rate risks. In addition, hedging involves transaction and other costs
which could increase
69
<PAGE>
as the period covered by the hedging protection increases. Such costs could
also increase in periods of risk and fluctuating interest rates. Therefore, we
may be prevented from effectively hedging our interest rate risks, without
significantly reducing our company's return on equity.
Total Rate of Return Swaps
During 1998 and 1997, we entered into total rate of return swap contracts
for investment purposes with various counterparties, the provisions of which
entitle the our company to receive the total return on various commercial
loans in exchange for a floating payment of one month LIBOR plus a spread.
These contracts are off balance sheet instruments. As of December 31, 1998 and
1997 , the Company was party to total rate of return swap contracts with a
total notional amount of $155.4 million and $150.6 million, under which our
company was obligated to pay one month LIBOR plus a weighted average spread of
0.75% and 0.78%, respectively. The weighted average remaining life of these
contracts was 32.1 months and 37.1 months as of December 31, 1998 and 1997.
For the years ended December 31, 1998 and 1997, our company recognized income
of $4.3 million and $448,000 on our total return swaps, respectively.
As a part of the Pacifica Partners I LP collateralized loan obligation
("CLO") fund launched by the Company in August 1998, the Company delivered
subordinate bonds of approximately $51 million into a total rate of return
swap with the Canadian Imperial Bank of Commerce ("CIBC"). The provisions of
the swap entitle the Company to receive the total return on the subordinate
bonds delivered and pay a floating payment of LIBOR plus a weighted average
spread of 1.36%. The Company delivered $17.8 million in cash and various
equity securities to CIBC as collateral for the swap. These amounts are
classified as Trading Securities on the consolidated balance sheet at
December 31, 1998.
Risk Management and Market Sensitive Instruments
Interest rate risk is managed within a tight duration band, and credit risk
is managed by maintaining high average quality ratings and diversified sector
exposure within the securities and loan portfolios. In connection with its
investment and risk management objectives, we also use financial instruments
whose market value is at least partially determined by, among other things,
levels of or changes in domestic interest rates (short-term or long-term),
prepayment rates, equity markets or credit ratings/spreads.
Using financial modeling and other techniques, we regularly evaluate the
appropriateness of investments relative to management-approved investment
guidelines and the business objective of the portfolios. We operate within
these investment guidelines by maintaining a mix of loans and investments that
diversifies our assets.
The following discussion about our risk management activities includes
"forward-looking statements" that involve risk and uncertainties. Set forth
below are management's projections of hypothetical net losses in fair value of
shareholders' equity of our market sensitive financial instruments if certain
assumed changes in market rates and prices were to occur (sensitivity
analysis). While we believe that the assumed market rate changes are
reasonably possible in the near term, actual results may differ, particularly
as a result of any management actions that would be taken to mitigate such
hypothetical losses in fair value of shareholders' equity. Based on our
overall exposure to interest rate risk and equity price risk, we believe that
these changes in market rates and prices would not materially affect the
consolidated near-term financial position, results of operations or cash flows
of our company.
Interest Rate Risk. Assuming immediate increases of 100 and 200 basis points
in interest rates the net hypothetical increase in fair value of shareholders'
equity related to financial and derivative instruments is estimated to be $7.1
million and $13.8 million (after tax), or 3.06% and 5.91%, of total
shareholders' equity, respectively, at December 31, 1998. The Company believes
that an interest rate shift of this magnitude represents a moderately
advantageous scenario. Assuming immediate decreases of 100 and 200 basis
points in interest rates the net hypothetical loss in fair value of
shareholders' equity related to financial and derivative instruments is
estimated to be $7.6 million and $15.8 million (after tax), or 3.27% and
6.76%, of total shareholders' equity, respectively, at December 31, 1998. The
Company believes that an interest rate shift of this magnitude represents a
moderately adverse scenario.
70
<PAGE>
The effect of interest rate risk on potential near-term net income, cash
flow and fair value was determined based on commonly used models. The models
project the impact of interest rate changes on a wide range of factors,
including duration, prepayment, put options and call options. Fair value was
estimated based on the net present value of cash flows or duration estimates,
using a representative set of likely future interest rate scenarios.
Equity Price Risk The Company's available for sale equity securities
includes the common stock of ICCMIC and IMH. Assuming an immediate decrease of
10% in equity prices for such equity securities, the hypothetical loss in fair
value of shareholders' equity related equity securities is estimated to be
$2.2 million after tax or 0.96% of total shareholders' equity at December 31,
1998. Assuming an immediate increase of 10% in equity prices for such equity
securities, the hypothetical gain in fair value of shareholders' equity
related equity securities is estimated to be $2.2 million after tax or 0.96%
of total shareholders' equity at December 31, 1998.
71
<PAGE>
Repricing/Maturity of Interest-Earning Assets and Interest-Bearing Liabilities
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998, which we
anticipate to reprice or mature in each of the future time periods shown. The
amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual terms of the asset or liability.
<TABLE>
<CAPTION>
At December 31, 1998
--------------------------------------------------------------------------
More than More than
More than More than More than 3 Years 5 Years More Non
3 Months 3 Months to 6 Months 1 Year to to 5 to than Interest
or Less 6 Months to 1 Year 3 Years Years 10 Years 10 Years Bearing
---------- ----------- --------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Cash............ $ 297,772 $ -- $ -- $ -- $ -- $ -- $ -- $ --
Interest earning
deposits....... 1,415 -- -- -- -- -- -- --
Trading
securities..... 162,356 -- -- -- -- -- -- --
Securities
available for
sale........... 68,410 -- -- -- -- -- -- --
FHLB stock...... 4,657 -- -- -- -- -- -- --
Mortgage loans
held for sale.. 323,699 -- -- -- -- -- -- --
Loans held for
investment, net
of unearned
discount and
deferred loan
fees(1)........ 1,098,158 54,518 30,688 56,867 38,891 22,943 30,684 12,226
---------- --------- --------- --------- -------- --------- ------- --------
Total interest-
earning
assets......... 1,956,467 54,518 30,688 56,867 38,891 22,943 30,684 12,226
Less:
Allowance for
loan losses.... -- -- -- -- -- -- -- (24,880)
---------- --------- --------- --------- -------- --------- ------- --------
Net interest-
earning assets. 1,956,467 54,518 30,688 56,867 38,891 22,943 30,684 (12,654)
Non-interest-
earning assets. -- -- -- -- -- -- -- 238,779
---------- --------- --------- --------- -------- --------- ------- --------
Total assets.... $1,956,467 $ 54,518 $ 30,688 $ 56,867 $ 38,891 $ 22,943 $30,684 $226,125
========== ========= ========= ========= ======== ========= ======= ========
Interest-bearing
liabilities:
Deposits........ $ 520,774 $ 453,438 $ 482,451 $ 233,524 $ 130 $ -- $21,011 $ --
Borrowings from
FHLB........... 20,000 -- -- -- -- -- -- --
Other
borrowings..... 102,270 -- -- -- -- -- -- --
Senior Notes.... -- -- -- -- -- 219,858 -- --
Remarketed Par
Securities..... -- -- -- -- 70,000 -- -- --
---------- --------- --------- --------- -------- --------- ------- --------
Total interest-
bearing
liabilities.... 643,044 453,438 $ 482,451 $ 233,524 70,130 219,858 21,011 --
Non-interest
bearing
liabilities.... -- -- -- -- -- -- -- 60,206
Shareholders'
equity......... -- -- -- -- -- -- -- 233,521
---------- --------- --------- --------- -------- --------- ------- --------
Total
liabilities and
shareholders'
equity......... $ 643,044 $ 453,438 $ 482,451 $ 233,524 $ 70,130 $ 219,858 $21,011 $293,727
========== ========= ========= ========= ======== ========= ======= ========
Interest rate
sensitivity
gap(2)......... $1,313,423 $(398,920) $(451,763) $(176,657) $(31,239) $(196,915) $ 9,673 $(12,654)
========== ========= ========= ========= ======== ========= ======= ========
Cumulative
interest
sensitivity
Gap............ $1,313,423 $ 914,503 $ 462,740 $ 286,083 $254,844 $ 57,929 $67,602 $ 54,948
========== ========= ========= ========= ======== ========= ======= ========
Cumulative
interest
sensitivity gap
as a percentage
of total
assets......... 54.34% 37.83% 19.14% 11.84% 10.54% 2.40% 2.80%
Cumulative net
interest
earning assets
as a percentage
of cumulative
interest-
bearing
liabilities.... 304.25% 183.40% 129.31% 115.78% 113.54% 102.76% 103.18%
<CAPTION>
Total
-----------
<S> <C>
Interest-earning
assets:
Cash............ $ 297,772
Interest earning
deposits....... 1,415
Trading
securities..... 162,356
Securities
available for
sale........... 68,410
FHLB stock...... 4,657
Mortgage loans
held for sale.. 323,699
Loans held for
investment, net
of unearned
discount and
deferred loan
fees(1)........ 1,344,975
-----------
Total interest-
earning
assets......... 2,203,284
Less:
Allowance for
loan losses.... (24,880)
-----------
Net interest-
earning assets. 2,178,404
Non-interest-
earning assets. 238,779
-----------
Total assets.... $2,417,183
===========
Interest-bearing
liabilities:
Deposits........ $1,711,328
Borrowings from
FHLB........... 20,000
Other
borrowings..... 102,270
Senior Notes.... 219,858
Remarketed Par
Securities..... 70,000
-----------
Total interest-
bearing
liabilities.... 2,123,456
Non-interest
bearing
liabilities.... 60,206
Shareholders'
equity......... 233,521
-----------
Total
liabilities and
shareholders'
equity......... $2,417,183
===========
Interest rate
sensitivity
gap(2)......... $ 54,948
===========
Cumulative
interest
sensitivity
Gap............
Cumulative
interest
sensitivity gap
as a percentage
of total
assets.........
Cumulative net
interest
earning assets
as a percentage
of cumulative
interest-
bearing
liabilities.... 102.59%
</TABLE>
- -------
(1) For purposes of the gap analysis, unearned discount and deferred fees are
pro rated for loans receivable.
(2) Interest sensitivity gap represents the difference between net interest-
earning assets and interest-bearing liabilities.
72
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates.
Additionally, certain assets, such as ARM's, have features which restrict
changes in interest rates on a short term basis and over the life of the
asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those
reflected in the table. Finally, the ability of many borrowers to service
their may decrease in the event of an interest rate increase.
Average Balance Sheet
The following tables set forth certain information relating to our company
for 1998, 1997, and 1996. The yields and costs are derived by dividing income
or expense by the average balance of assets or liabilities, respectively, for
the periods shown except where noted otherwise. Average balances are derived
from average month-end balances. Management does not believe that the use of
average monthly balances instead of average daily balances has caused any
material differences in the information presented. The average balance of
loans receivable includes loans on which we have discontinued accruing
interest. The yields and costs include fees which are considered adjustments
to yields.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ---------------------------
Yield/ Yield/ Yield/
Average Average Average Average Average Average
Balance Interest Cost Balance Interest Cost Balance Interest Cost
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
ASSETS:
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investments and
interest-earning
deposits.............. $ 242,246 $ 28,674 11.84% $ 219,664 $ 24,157 11.00% $ 143,067 $ 9,862 6.89%
FHLB stock............. 5,031 291 5.78 10,334 619 5.99 15,853 945 5.96
Loans held for sale.... 232,670 31,375 13.48 507,225 65,561 12.93 1,140,790 101,170 8.87
Loans held for
investment, net(1).... 1,410,477 169,452 12.01 1,109,038 110,585 9.97 779,522 87,072 11.17
Retained interest and
capitalized excess
servicing fees
receivable............. 31,956 6,048 18.93 29,064 2,678 9.21 53,052 8,422 15.87
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Total interest-
earning assets...... 1,922,380 235,840 12.27 1,875,325 203,600 10.86 2,132,284 207,471 9.73
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Non interest-earning
assets................. 316,116 197,431 163,055
Net assets of
discontinued
operations............. 45,477 102,351 --
---------- ---------- ----------
Total assets......... $2,283,973 $2,175,107 $2,295,339
========== ========== ==========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY:
---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing
liabilities:
Deposits............... $1,512,057 $ 87,030 5.76% $1,218,123 $ 71,014 5.83% $1,063,799 $ 60,999 5.73%
Borrowings from
Imperial Bank......... -- -- -- -- -- -- 3,311 302 9.12
Borrowings from FHLB... 24,451 1,631 6.67 57,154 3,327 5.82 201,693 12,055 5.98
Other borrowings....... 69,844 4,150 5.94 327,076 17,896 5.47 645,313 52,050 8.07
Senior Notes........... 219,837 22,392 10.19 209,672 21,671 10.34 88,365 8,955 10.13
Remarketed Par
Securities............ 70,000 7,903 11.29 39,101 4,305 11.01 -- -- --
Convertible
subordinated
debentures............ -- -- -- -- -- -- 10,068 675 6.70
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Total interest-
bearing liabilities. 1,896,189 123,106 6.49 1,851,126 118,213 6.39 2,012,549 135,036 6.71
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Non interest-bearing
liabilities............ 95,122 78,117 115,962
Shareholders' equity.... 292,662 245,864 166,828
---------- ---------- ----------
Total liabilities and
shareholders'
Equity.............. $2,283,973 $2,175,107 $2,295,339
========== ========== ==========
Net interest rate
spread................. $112,734 5.78% $ 85,387 4.47% $ 72,435 3.02%
======== ======== ========
Net interest margin..... 5.86% 4.55% 3.40%
Ratio of interest-
earning assets to
interest-bearing
liabilities............ 101.38% 101.31% 105.95%
</TABLE>
- -------
(1) Net of deferred income and the allowance for loan losses, includes
nonaccrual loans.
73
<PAGE>
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest
income also depends upon the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them,
respectively.
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our net interest income and interest expense during
the periods indicated. Information is provided in each category with respect
to (i) changes attributable to changes in volume (changes in volume multiplied
by prior rate), (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume), (iii) changes in interest due to both rate and
volume and (iv) the net change.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 Over 1997 1997 Over 1996
--------------------------------------- ----------------------------------------
Volume Rate Rate/Volume Total Volume Rate Rate/Volume Total
-------- ------- ----------- -------- -------- -------- ----------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase/(decrease) in:
Investments and
interest- bearing
deposits.............. $ 2,484 $ 1,845 $ 188 $ 4,517 $ 5,278 $ 5,880 $ 3,137 $ 14,295
FHLB stock............. (318) (22) 12 (328) (329) 5 (2) (326)
Loans held for sale.... (35,500) 2,790 (1,476) (34,186) (56,197) 46,316 (25,728) (35,609)
Loans held for
investment, net....... 30,053 22,624 6,190 58,867 36,807 (9,354) (3,940) 23,513
Retained interest and
capitalized excess
servicing fees
receivable............ 266 2,825 279 3,370 (3,807) (3,533) 1,596 (5,744)
-------- ------- ------- -------- -------- -------- -------- --------
Total interest
income.............. (3,015) 30,062 5,193 32,240 (18,248) 39,314 (24,937) (3,871)
-------- ------- ------- -------- -------- -------- -------- --------
Deposits............... 17,136 (853) (267) 16,016 8,843 1,064 108 10,015
Borrowings from
Imperial Bank......... -- -- -- -- (302) -- -- (302)
FHLB borrowings........ (1,903) 486 (279) (1,696) (8,643) (323) 238 (8,728)
Other borrowings....... (14,071) 1,537 (1,212) (13,746) (25,682) (16,778) 8,306 (34,154)
Senior Notes........... 1,051 (315) (15) 721 12,288 186 242 12,716
Remarketed Par
Securities............ 3,402 109 87 3,598 4,305 -- -- 4,305
Convertible Notes...... -- -- -- -- (675) -- -- (675)
-------- ------- ------- -------- -------- -------- -------- --------
Total interest
expense............. 5,615 964 (1,686) 4,893 (9,866) (15,851) 8,894 (16,823)
-------- ------- ------- -------- -------- -------- -------- --------
Change in net interest
income................. $ (8,630) $29,098 $ 6,879 $ 27,347 $ (8,382) $ 55,165 $(33,831) $ 12,952
======== ======= ======= ======== ======== ======== ======== ========
</TABLE>
Recent Accounting Pronouncements
The Company is affected by recent accounting pronouncements. For a
description of these standards and the effect, if any, adoption has had or
will have on the Company's consolidated financial statements, see "Note 3 of
Notes to Consolidated Financial Statements."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7--"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset/Liability Management and Market Risk."
74
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................... 76
Consolidated Balance Sheets................................................ 77
Consolidated Statements of Operations and Comprehensive Income............. 78
Consolidated Statements of Changes in Shareholders' Equity................. 80
Consolidated Statements of Cash Flows...................................... 81
Notes to Consolidated Financial Statements................................. 83
</TABLE>
All supplemental schedules are omitted as inapplicable or because the
required information is included in the consolidated financial statements or
notes thereto.
75
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Imperial Credit Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Imperial
Credit Industries, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations and comprehensive income,
changes in shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Imperial
Credit Industries, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
Los Angeles, California
January 26, 1999
76
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
------
Cash................................................... $ 297,772 $ 45,379
Interest bearing deposits.............................. 1,415 103,738
Investment in Federal Home Loan Bank stock............. 4,657 5,646
Securities held for trading, at market................. 162,356 120,905
Securities available for sale, at market............... 68,410 100,917
Loans and leases held for sale, net.................... 323,699 153,469
Loans and leases held for investment, net.............. 1,320,095 1,252,487
Servicing rights....................................... 4,329 4,731
Retained interest in loan and lease securitizations.... 27,011 22,895
Accrued interest receivable............................ 10,114 9,687
Premises and equipment, net............................ 11,664 7,583
Other real estate owned, net........................... 8,684 10,905
Goodwill............................................... 37,498 35,607
Investment in Southern Pacific Funding Corporation..... -- 65,303
Investment in Franchise Mortgage Acceptance Company.... 56,334 53,099
Other assets........................................... 36,333 47,090
Net assets of discontinued operations.................. 46,812 54,948
---------- ----------
Total assets......................................... $2,417,183 $2,094,389
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits............................................... $1,711,328 $1,156,022
Borrowings from Federal Home Loan Bank................. 20,000 45,000
Other borrowings....................................... 102,270 144,841
Remarketed Par Securities.............................. 70,000 70,000
Senior Notes........................................... 219,858 219,813
Accrued interest payable............................... 25,421 21,484
Accrued income taxes payable........................... 3,840 76,048
Minority interest in consolidated subsidiaries......... 3,217 3,174
Other liabilities...................................... 27,728 34,074
---------- ----------
Total liabilities.................................... 2,183,662 1,770,456
---------- ----------
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized; none
issued or outstanding................................. -- --
Common stock, no par value. Authorized 80,000,000
shares; 36,785,898 and 38,791,439 shares issued and
outstanding at December 31, 1998 and 1997,
respectively.......................................... 129,609 147,109
Retained earnings...................................... 101,265 174,898
Shares held in deferred executive compensation plan.... 3,833 --
Accumulated other comprehensive (loss) income--
unrealized (loss) gain on securities available for
sale, net............................................. (1,186) 1,926
---------- ----------
Total shareholders' equity........................... 233,521 323,933
---------- ----------
Total liabilities and shareholders' equity........... $2,417,183 $2,094,389
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
77
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Revenue:
Interest on loans and leases.................... $ 200,827 $176,146 $188,242
Interest on investments......................... 28,965 24,776 10,807
Interest on other finance activities............ 6,048 2,678 8,422
--------- -------- --------
Total interest income......................... 235,840 203,600 207,471
Interest on deposits............................ 87,030 71,014 60,999
Interest on other borrowings.................... 5,781 21,223 64,407
Interest on long term debt...................... 30,295 25,976 9,630
--------- -------- --------
Total interest expense........................ 123,106 118,213 135,036
--------- -------- --------
Net interest income........................... 112,734 85,387 72,435
Provision for loan and lease losses............. 15,450 20,975 9,773
--------- -------- --------
Net interest income after provision for loan
and lease losses............................... 97,284 64,412 62,662
--------- -------- --------
Gain on sale of loans and leases................ 14,888 69,737 88,156
Loan servicing income........................... 11,983 9,474 1,680
Investment banking and brokerage fees........... 18,463 7,702 --
Asset management fees........................... 7,591 5,810 3,347
Gain on termination of REIT advisory agreement.. -- 19,046 --
(Loss) gain on sale of securities............... (592) 112,185 82,690
Loss on impairment of equity securities......... (120,138) -- --
Mark to market on securities and loans held for
sale........................................... (42,388) (341) --
Gain on sale of servicing rights................ -- -- 7,591
Equity in net income of Southern Pacific
Funding Corporation............................ 12,739 25,869 --
Equity in net income (loss) of Franchise
Mortgage Acceptance Company.................... 3,235 (3,050) --
Other income.................................... 13,118 4,060 10,807
--------- -------- --------
Total other income............................ (81,101) 250,492 194,271
--------- -------- --------
Total revenue................................... 16,183 314,904 256,933
--------- -------- --------
Expenses:
Personnel expense............................... 61,636 51,609 48,355
Amortization of servicing rights................ 1,486 3,088 1,121
Occupancy expense............................... 5,750 4,319 4,653
Net (income) expenses of other real estate
owned.......................................... (901) 6,527 7,014
Professional services........................... 10,848 9,665 9,559
Telephone and other communications.............. 3,692 2,222 2,917
Amortization of Goodwill........................ 2,686 2,491 1,875
Loss on restructuring of loan to
Dabney/Resnick/Imperial, LLC................... -- 3,709 --
Provision for loss on repurchase of former
mortgage banking loans......................... 4,750 5,400 --
General and administrative expense.............. 30,889 25,831 23,555
--------- -------- --------
Total expenses................................ 120,836 114,861 99,049
--------- -------- --------
(Loss) income from continuing operations before
income taxes, minority interest and
extraordinary item............................. (104,653) 200,043 157,884
Income taxes.................................... (44,064) 74,267 69,874
Minority interest in (loss) income of
consolidated subsidiaries...................... (1,464) 10,513 12,026
--------- -------- --------
(Loss) income from continuing operations before
extraordinary item............................. (59,125) 115,263 75,984
Loss from discontinued operations of AMN (net
of $2.1 million and $15.5 million of income
taxes in 1998 and 1997, respectively).......... (3,232) (25,347) --
Loss on disposal of AMN including provision of
$3.7 million for operating losses during
phase-out period (net of $6.6 million of
income taxes).................................. (11,276) -- --
--------- -------- --------
(Loss) income before extraordinary item......... (73,633) 89,916 75,984
Extraordinary item--Loss on early
extinguishment of debt, net of income taxes.... -- (3,995) --
--------- -------- --------
Net (loss) income............................. $ (73,633) $ 85,921 $ 75,984
========= ======== ========
Other Comprehensive income:
Unrealized (losses) gains on securities
available for sale............................. (5,333) 3,332 3,132
Reclassification adjustment for (gains) loss
included in noninterest income................. (53) (8,668) --
Income taxes.................................... (2,274) (2,252) 1,333
--------- -------- --------
Other comprehensive (loss) income............. (3,112) (3,084) 1,799
--------- -------- --------
Comprehensive (loss) income................... $ (76,745) $ 82,837 $ 77,783
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
78
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME--(Continued)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Basic (loss) income per share:
(Loss) income from continuing operations before
extraordinary item.............................. $ (1.55) $ 2.99 $ 2.11
Loss from discontinued operations, net of income
taxes........................................... (0.08) (0.66) --
Loss on disposal of AMN, net of income taxes..... (0.30) -- --
Extraordinary item--Loss on early extinguishment
of debt, net of income taxes.................... -- (0.10) --
-------- -------- --------
Net (loss) income per common share............... $ (1.93) $ 2.23 $ 2.11
======== ======== ========
Diluted (loss) income per share:
(Loss) income from continuing operations before
extraordinary item.............................. $ (1.55) $ 2.82 $ 1.95
Loss from discontinued operations, net of income
taxes........................................... (0.08) (0.62) --
Loss on disposal of AMN, net of income taxes..... (0.30) -- --
Extraordinary item--Loss on early extinguishment
of debt, net of income taxes.................... -- (0.10) --
-------- -------- --------
Net (loss) income per common share............... $ (1.93) $ 2.10 $ 1.95
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
79
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Shares Other Total
Shares Common Retained Held in Comprehensive Shareholders'
Outstanding Stock Earnings DEC Plan Income (Loss) Equity
----------- -------- -------- -------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 34,990 $ 77,898 $ 12,993 $ -- $ 3,211 $ 94,102
Exercise of stock
options................ 868 1,671 -- -- -- 1,671
Issuance of common
stock.................. 2,440 59,228 -- -- -- 59,228
Unrealized appreciation
on securities available
for sale, net.......... -- -- -- -- 1,799 1,799
Tax benefit from
exercise of stock
options................ -- 6,851 -- -- -- 6,851
Repurchase and
retirement of stock.... (7) (127) -- -- -- (127)
Net income, 1996........ -- -- 75,984 -- -- 75,984
------ -------- -------- ------ ------- --------
Balance, December 31,
1996................... 38,291 145,521 88,977 -- 5,010 239,508
Exercise of stock
options................ 530 1,332 -- -- -- 1,332
Unrealized depreciation
on securities available
for sale, net.......... -- -- -- -- (3,084) (3,084)
Tax benefit from
exercise of stock
options................ -- 807 -- -- -- 807
Repurchase and
retirement of stock and
warrants............... (30) (551) -- -- -- (551)
Net income, 1997........ -- -- 85,921 -- -- 85,921
------ -------- -------- ------ ------- --------
Balance, December 31,
1997................... 38,791 147,109 174,898 -- 1,926 323,933
Exercise of stock
options................ 244 1,037 -- -- -- 1,037
Stock held for deferred
compensation plan...... -- (3,833) -- 3,833 -- --
Issuance of common stock
for Statewide
Documentation, Inc.
acquisition............ 236 5,000 -- -- -- 5,000
Unrealized depreciation
on securities available
for sale, net.......... -- -- -- -- (3,112) (3,112)
Tax benefit from
exercise of stock
options................ -- 4,601 -- -- -- 4,601
Repurchase and
retirement of stock and
warrants............... (2,485) (24,305) -- -- -- (24,305)
Net loss, 1998.......... -- -- (73,633) -- -- (73,633)
------ -------- -------- ------ ------- --------
Balance, December 31,
1998................... 36,786 $129,609 $101,265 $3,833 $(1,186) $233,521
====== ======== ======== ====== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
80
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1998 1997 1996
--------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
(Loss) income from continuing
operations............................. $ (59,125) $ 115,263 $ 75,984
Adjustments to reconcile (loss) income
from continuing operations to net cash
provided by (used in) operating
activities:
Cash used in discontinued operations.. (1,824) (22,112) --
Provision for loan and lease losses... 15,450 20,975 9,773
Loss on impairment of equity
securities........................... 120,138 -- --
Mark to market on securities and loans
held for sale........................ 42,388 -- --
Loss on restructuring of loan to
Dabney/Resnick/Imperial, LLC......... -- 3,709 --
Provision for loss on repurchase of
former mortgage banking loans........ 4,750 5,400 --
Loss on closure of mortgage banking
operation............................ -- -- 3,800
Depreciation.......................... 3,714 4,180 3,483
Amortization of goodwill.............. 2,686 2,491 1,875
Amortization of servicing rights...... 1,486 3,088 1,121
Accretion of discount................. (6,048) (2,678) (8,422)
Gain on sale of servicing rights...... -- -- (7,591)
Gain on sale of loans and leases...... (14,888) (69,737) (88,156)
Loss (gain) on sale of stock.......... 592 (112,185) (82,690)
Gain on termination of REIT advisory
agreement............................ -- (19,046) --
Equity in net earnings of SPFC........ (12,739) (25,869) --
Equity in net (earnings) loss of FMC.. (3,235) 3,050 --
Loss on sale of OREO.................. 597 4,453 2,843
Writedowns of capitalized excess
servicing............................ -- -- 4,675
(Recovery) writedowns on other real
estate owned......................... (2,075) 892 3,252
(Benefit) provision for deferred
income taxes......................... (55,540) 40,294 22,104
Originations of loans held for sale... (660,000) (1,061,500) (1,939,200)
Purchase of trading securities........ (146,187) (126,083) (25,180)
Sales of trading securities........... 113,819 48,369 --
Sales and collections on loans held
for sale............................. 673,426 1,149,839 2,159,055
Net change in capitalized excess
servicing............................ -- -- 33,234
Other, net............................ (54,520) 55,770 (201,095)
--------- ----------- -----------
Net cash (used in) provided by operating
activities............................... (37,135) 18,563 (31,135)
--------- ----------- -----------
Cash flows from investing activities:
Net decrease (increase) in interest
bearing deposits....................... 102,323 (100,369) 264,407
Proceeds from sale of servicing rights.. -- 2,213 10,011
Proceeds from sale of other real estate
owned.................................. 13,743 21,171 1,202
Purchase of securities available for
sale................................... (17,551) (42,938) (48,553)
Sales of securities available for sale.. 8,818 5,404 --
Net change in loans held for investment. (276,629) (173,965) (27,651)
Purchases of premises and equipment..... (7,833) (4,549) (5,442)
Proceeds from sale of stock............. 867 85,388 64,625
Purchases of Federal Home Loan Bank
stock.................................. -- (3,634) (7,652)
Redemption of stock in Federal Home Loan
Bank................................... 1,280 15,140 13,250
Cash utilized for acquisitions.......... -- (124,488) (20,020)
--------- ----------- -----------
Net cash (used in) provided by investing
activities............................... (174,982) (320,627) 244,177
--------- ----------- -----------
</TABLE>
81
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1998 1997 1996
-------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits.......... $555,306 $ 86,838 $ (23,805)
Advances from Federal Home Loan Bank......... 44,500 50,000 434,000
Repayments of advances from Federal Home Loan
Bank........................................ (69,500) (145,500) (483,500)
Proceeds from issuance of convertible
subordinated debentures..................... -- -- 72,162
(Decrease) increase in other borrowings...... (42,571) 143,505 (186,463)
Repayment of bonds........................... -- -- (111,995)
Proceeds from issuance of Senior Notes due
2007........................................ -- 194,500 --
Proceeds from issuance of Remarketed Par
Securities.................................. -- 68,075 --
Repayments of Senior Notes due 2004.......... -- (73,241) --
Proceeds from resale of Senior Notes due
2004........................................ -- -- 7,384
Proceeds from issuance of common stock....... -- -- 59,228
Repurchase and retirement of common stock and
warrants.................................... (24,305) (551) (127)
Net change in minority interest.............. 43 (51,762) 53,484
Proceeds from exercise of stock options...... 1,037 1,332 1,671
-------- --------- ---------
Net cash provided by (used in) financing
activities.................................... 464,510 273,196 (177,961)
Net change in cash............................. 252,393 (28,868) 35,081
Cash at beginning of year...................... 45,379 74,247 39,166
-------- --------- ---------
Cash at end of year............................ $297,772 $ 45,379 $ 74,247
======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
82
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
1. Organization
Imperial Credit Industries, Inc., was incorporated in 1986 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 investment 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 intercompany
balances and transactions with consolidated subsidiaries have been eliminated.
2. Operating Activities
General Business Activities
In 1995, the Company began to diversify away from the conforming residential
mortgage lending business, the Company's traditional focus, and into other
select lending businesses. The Company expanded several existing businesses
and commenced several new businesses, including non-conforming residential
mortgage banking, commercial mortgage banking, business lending and consumer
lending. The Company's loans and leases by operating segments consist
primarily of the following: commercial mortgage banking, income producing
property loans and business lending--equipment leasing, asset-based lending,
and participations in syndicated commercial loans. The Company solicits loans
and leases from brokers on a wholesale and portfolio basis and originates
loans directly with borrowers. The majority of the Company's loans and leases
are funded by FDIC insured deposits at SPB.
Coast Business Credit
Coast Business Credit ("CBC"), a divison of SPB, was acquired from Coast
Federal Bank in 1995 and provides senior loans that are secured by the assets
of the borrower. Coast is headquartered in Los Angeles, California, and it has
3 loan production offices in California and has opened additional offices in
Atlanta, Baltimore, Chicago, Cleveland, Detroit, Houston, Minneapolis,
Phoenix, Portland, Providence and Seattle. At December 31, 1998 and 1997, CBC
had total commitments of $1.1 billion and $803.3 million, of which
$633.3 million and $484.8 million of loans were outstanding, respectively.
PrinCap Mortgage Warehouse
In October 1997, the Company's wholly-owned subsidiary, SPB, acquired
substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and
PrinCap Mortgage Backed, L.P. (collectively, "PrinCap") and contributed such
assets to a subsidiary. The acquisition was accounted for as a purchase, and
the purchase price of $123.7 million was allocated to the net assets acquired
based on their fair value resulting in goodwill of $6.8 million.
PrinCap's primary business is residential mortgage warehouse lending to
small to medium sized brokers and mortgage bankers on a national basis. At
December 31, 1998 PrinCap had commitments outstanding and loans of $401.5
million and $181.0 million, repectively, as compared to $124.6 million and
$122.5 million, respectively, at December 31, 1997.
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Property Lending Division
The Income Property Lending Division ("IPL") of SPB was formed in February
1994 to expand our apartment and commercial property lending business. As of
December 31, 1998, it had 24 loan origination offices in California,
Washington, Oregon, Colorado, Texas, Arizona, Illinois, Minnesota, Michigan,
Ohio, Georgia, Massachusetts, Florida and New Jersey.
At December 31, 1998 and 1997, IPL's loans outstanding were $225.7 million
and $157.2 million, respectively. For the year ended December 31, 1998 and
1997, IPL originated $366.1 million and $295.9 million of loans, respectively.
Loan Participation and Investment Group
The Loan Participation and Investment Group ("LPIG") was formed by SPB in
September 1995. This Group invests in and purchases senior secured debt of
other companies (referred to as a "participation") in the secondary market. At
December 31, 1998, LPIG had commitments and outstanding loans of $523.3
million and $222.1 million, respectively, as compared to $483.7 million and
$196.4 million, respectively at December 31, 1997.
Imperial Credit Commercial Asset Management Corp.
ICCAMC, a wholly-owned subsidiary, manages the day to day operations of
Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC"), a real estate
investment trust which invests primarily in performing multi-family and
commercial real estate loans and mortgage-backed securities. In October 1997,
ICCMIC completed its initial public offering and sold approximately 34.5
million shares of common stock at $15.00 per share resulting in net proceeds
of approximately $481.2 million. The Company purchased 2,970,000 shares of
ICCMIC common stock in the offering and an additional 100,000 shares in
December 1997 for a total of $43.0 million. As of December 31, 1998, the
Company owned 10.8% of the common stock of ICCMIC. For the year ended December
31, 1998 and from the period of initial public offering (October 1997) through
December 31, 1997, ICCAMC earned $6.3 million and $940,000, respectively, in
management fees from ICCMIC. In addition, the Company has received cash
dividends of $3.6 million and $399,000 during the year ended December 31, 1998
and from the period of initial public offering (October 1997) through December
31, 1997, respectively. During the third quarter of 1998 the market value of
the Company's equity holdings in ICCMIC declined substantially to $9.75 per
common share as compared to the Company's book value of $13.98 per common
share.
Management judged the decline in ICCMIC's stock price to be other than
temporary and, therefore, the Company wrote-down its investment in ICCMIC to
$9.75 per common share and recorded a pretax writedown of $13.0 million. The
carying value of the company's investment in ICCMIC was $9.375 per share as of
December 31, 1998.
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total revenue and expenses from ICCAMC for the years ended December 31, 1998
and 1997 were $6.3 million and $3.0 million and $940,000 and $499,000,
respectively.
Imperial Credit Asset Management, Inc.
Imperial Credit Asset Management, Inc. ("ICAM") was formed in April 1998.
ICAM manages Pacifica Partners I L.P., Cambria Investment Partnership I, L.P.,
and Catalina Investment Partnership I, L.P. Pacifica Partners I is a $500
million collateralized loan obligation fund the Company launched in August
1998. Pacifica Partners I's assets consist of approximately $400 million in
nationally syndicated bank loans and approximately $100 million in high yield
bonds. Cambria is a hedge fund that invests in syndicated bank loans. At
December 31, 1998, Cambria had total assets under management of approximately
$130.0 million.
Imperial Capital Group
In 1996, the Company acquired a 1% interest in Dabney/Resnick/Imperial LLC
("DRI"), an investment banking firm located in Beverly Hills, California and
purchased a warrant to acquire an additional 48% ownership. During the fourth
quarter of 1997, the Company formed a new subsidiary, ICG, which includes a
registered broker/dealer and an asset management company offering individual
and corporate investors a wide range of financial products and services. For
the year ended December 31, 1997, in connection with the formation of ICG, the
Company recognized a pre-tax charge of $3.7 million relating to the
restructuring of its loan to DRI. As part of the DRI restructuring,
substantially all of the assets and personnel of DRI were acquired or hired by
ICG. During the year ended December 31, 1998 and the fourth quarter of 1997,
ICG raised $190 million and $323 million for corporate clients through private
placement debt and equity offerings generating investment banking and
brokerage fees of $18.5 million and $7.7 million, respectively. At December
31, 1998, the Company's ownership interest in ICG was approximately 60%.
Imperial Business Credit
The Company conducts its commercial equipment leasing business through its
wholly owned subsidiary, IBC. IBC began its commercial leasing business
through the acquisition of First Concord Acceptance Corporation in 1995 and
Avco Leasing Services, Inc. in 1996. IBC's lease originations were $114.3
million and $151.3 million, and it securitized and sold $118.7 million and
$213.6 million during the years ended December 31, 1998, and 1997,
respectively.
Franchise Mortgage Acceptance Company
On June 30, 1995, the Company completed the acquisition of certain net
assets from Greenwich Capital Financial Products, Inc. and formed Franchise
Mortgage Acceptance Company LLC ("FMAC"), a limited liability company, in
which the Company had a 66.7% ownership interest. The acquisition was
accounted for as a purchase and the purchase price of $7.6 million, which
included $3.8 million in contingent consideration for loans in the pipeline,
was allocated to the net assets acquired based on their fair value resulting
in goodwill of approximately $4.0 million. The Company's franchise lending
business was conducted through FMAC until November 1997, at which time FMAC
merged into FMC, a Delaware corporation formed for the purpose of succeeding
to the business of FMAC, and FMC completed an initial public offering of its
common stock. The Company sold into FMC's initial public offering 3,568,175
shares at $18.00 per share generating net proceeds of $59.7 million and a gain
of $48.9 million. Additionally, the Company recognized a gain of $43.2 million
resulting from the adjustment in the basis of its investment in FMC due to the
offering and its reduced ownership percentage. At December 31, 1998 and 1997,
the Company owned 11,023,492 shares or 38.4% of FMC common stock. Accordingly,
FMC's operating results were no longer consolidated with those of the Company
and the Company's investment in FMC is accounted for under the equity method.
The market price of FMC common stock at December 31, 1998 was $7.75 per share.
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impac Mortgage Holdings, Inc. and Impac Funding Corporation
During 1995, the Company sold its mortgage conduit operations and SPB's
warehouse lending operations to Impac Mortgage Holdings, Inc. ("IMH"),
formerly Imperial Credit Mortgage Holdings, Inc. In exchange for these assets,
the Company received approximately 11.8% of the common stock of IMH.
Additionally, Imperial Credit Advisors, Inc. ("ICAI") entered into a
management agreement with IMH pursuant to which ICAI advised upon the day-to-
day operations of IMH and for which it was paid a management fee. During 1997,
the Company sold its common stock interest in IMH for a gain of approximately
$11.5 million. In December 1997, IMH and the Company negotiated a termination
of the management agreement (the "Termination Agreement"). The consideration
received by the Company pursuant to the Termination Agreement was $44 million,
comprised of 2,009,310 shares of IMH common stock and certain securitization-
related assets. Additionally, the Company agreed to cancel its note receivable
from ICI Funding Corporation ("ICIFC"), a former subsidiary of ICII which is
now known as Impac Funding Corporation and is the origination unit of IMH, in
the amount of $29.1 million. During the first quarter of 1997, the Company
disposed of its common stock interest in ICIFC at a loss of $100,000.
At December 31, 1997, the IMH common stock and the securitization-related
assets were recorded by the Company at their estimated fair values of
approximately $35.0 million and $13.1 million, respectively, for a total of
$48.1 million. This amount, when netted with the $29.1 million cancellation of
the ICIFC note receivable, resulted in the gain on termination of the
management agreement of approximately $19.0 million. During the third quarter
of 1998 the market value of the Company's equity holdings in IMH declined
substantially. Management judged the decline in IMH's stock price to be other
than temporary, therefore, the Company recorded a pre-tax writedown of $24.5
million. This writedown reduced the Company's book value from $17.88 to $5.00
per common share. At December 31, 1998, the Company owned 1,887,110 common
shares or 7.68% of the outstanding common shares of IMH. The company's
carrying value of IMH stock was $4.56 per share at December 31, 1998.
Southern Pacific Funding Corporation
In 1996, a substantial portion of the Company's operations were conducted
through its sub-prime residential lending subsidiary, Southern Pacific Funding
Corporation ("SPFC"). In June 1996, SPFC completed an initial public offering
of its common stock pursuant to which ICII was a selling shareholder. SPFC and
the Company sold 5.2 million shares and 3.5 million shares, respectively, at
$11.33 per share. In a secondary offering, the Company sold 1.5 million SPFC
shares at $19.83 per share. The Company recognized a gain on sale of the SPFC
shares it owned of $51.2 million, which is net of offering expenses and the
Company's cost basis in the shares. The Company also recognized a gain of
$31.4 million related to the stock sold by SPFC. The gain related to the stock
sold by SPFC is based on the difference between the Company's equity ownership
in SPFC after the sale and such equity ownership prior to the sale, using the
Company's respective SPFC ownership percentages. During the first quarter of
1997, the Company sold 370,000 shares of SPFC common stock at $16.63 per share
generating net proceeds of $6.2 million and a gain of $4.3 million. Such
transactions reduced the Company's ownership percentage in SPFC from 51.2% at
December 31, 1996, to 49.4% at March 31, 1997. Accordingly, SPFC's operating
results were no longer consolidated with those of the Company and the
Company's investment in SPFC is accounted for under the equity method.
During the third quarter of 1997, the Company sold an additional 500,000
shares of SPFC common stock generating net proceeds of $7.6 million and a gain
of $5.2 million, reducing the Company's ownership percentage to 9,742,500
common shares or 47.0% of SPFC's outstanding common stock at December 31,
1997. The Company did not sell shares of SPFC stock during the year ended
December 31, 1998.
On October 1, 1998, SPFC petitioned for Chapter 11 bankruptcy protection
under the Federal bankruptcy laws in the U.S. Bankruptcy Court for the
District of Oregon. As a result of SPFC declaring Chapter 11
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
bankruptcy and the resultant decline in its common stock to below one dollar
per share, the Company wrote-off its total investment in and loan to SPFC. The
write-off was $82.6 million for the year ended December 31, 1998.
3. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities and disclosure of
contingent liabilities as of the dates of the balance sheets and revenues and
expenses for the periods presented. Significant balance sheet items which
could be materially affected by such estimates include: the allowance for loan
and lease losses, securities held for sale or available for sale, and the
carrying value of the Company's trading securities securitization related
assets and loans held for sale. Actual results could differ significantly from
management's estimates. Prior years' consolidated financial statements have
been reclassified to conform to the 1998 presentation including the
discontinuation of the operations of AMN in 1998. Factors affecting the
comparability of the financial statements between periods include the
deconsolidation of FMC in the fourth quarter of 1997 and the deconsolidation
of SPFC in the first quarter of 1997.
The Company operates in several segments as more fully described in note 14.
These segments are managed separately because each requires different levels
of resources and serves different markets. The Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information," during 1998 and has provided the required
segment disclosures for 1998, 1997 and 1996 in note 14.
Investment Securities
The Company classifies investment securities as trading or available for
sale. Securities held for trading are reported at fair value with unrealized
gains and losses included in operations, and securities available for sale are
reported at fair value with unrealized gains and losses, net of related income
taxes, included as a separate component of shareholders' equity in accumulated
other comprehensive income.
Realized gains and losses on securities available for sale are included in
income and are derived using the specific identification method for
determining the cost of securities sold.
Premiums and discounts are amortized over the life of the securities by use
of the interest method. When a decline in value of a security is judged to be
other than temporary, it is written down to fair value by a charge to
earnings.
Loans and Leases Held for Sale
Loans and leases held for sale are carried at the lower of aggregate cost or
market, which is based on sale commitments or prices for similar products.
Loans and leases which are ineligible for sale, generally those 90 days past
due, are transferred to loans held for investment at the lower of cost or
market on the date of transfer.
Loans and Leases Held for Investment
Loans and leases held for investment are recorded at the contractual amounts
owed by borrowers adjusted for unamortized discounts, premiums, unearned
income, undisbursed funds, deferred loan fees and the allowance for loan and
lease losses. Interest income is recorded on the accrual basis in accordance
with the terms of receivables, except that interest accruals are discontinued
when the payment of principal or interest is 90 or more
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
days past due or when repayment of principal and interest in full is doubtful.
In general, payments received on nonaccrual loans are applied to the principal
outstanding until the loan is restored to accrual status.
A loan is impaired when it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The measurement of impairment may be based on (i) the present value
of the expected future cash flows of the impaired loan discounted at the
loan's original effective interest rate, (ii) the observable market price of
the impaired loan or (iii) the fair value of the collateral. If the recorded
investment of the loan exceeds the measure of impairment , a valuation
allowance is recorded in the amount of the excess. For all loans secured by
real estate, the Company measures impairment by utilizing the fair value of
the collateral; for other loans, discounted cash flows are used to measure
impairment. The Company's income recognition policies for impaired loans are
consistent with those on nonaccrual loans. All loans designated as impaired
are either placed on nonaccrual status or are designated as restructured.
Payments received on impaired loans are applied to the principal outstanding
until the loan is returned to accrual status.
On an ongoing basis, management monitors the loan and lease portfolio and
evaluates the adequacy of the allowance for loan and lease losses. In
determining the adequacy of the allowance for loan and lease losses,
management considers such factors as historical loss experience, underlying
collateral values, known problem loans, evaluations made by bank regulatory
authorities, assessment of economic conditions and other appropriate data to
identify the risks in the loan and lease portfolio. The amount of the
allowance for loan and lease losses is based on estimates and ultimate losses
may vary from current estimates. Loans deemed by management to be
uncollectible are charged to the allowance for loan and lease losses.
Recoveries on loans previously charged off are credited to the allowance for
loan losses. Provisions for loan and lease losses are charged to expense and
credited to the allowance for loan and lease losses in amounts that satisfy
regulatory requirements and are deemed appropriate by management based upon
its evaluation of the known and inherent risks in the portfolio.
Management believes that the allowance for loan and lease losses is
adequate. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the SPB allowance for
loan losses. Such agencies may require SPB to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
Servicing Assets
Servicing assets are recorded when the Company sells or securitizes loans
and retains the servicing rights. The total cost of the mortgage loans is
allocated to the mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values. Purchased servicing
rights represent the cost of acquiring the rights. Servicing rights are
amortized in proportion to, and over the period of, estimated future net
servicing income.
The Company assesses the servicing rights portfolio for impairment based on
the fair value of those rights with any impairment recognized through a
valuation allowance. In order to determine the fair value of the loan
servicing assets, the company uses market prices under comparable servicing
sales contracts, when available. Alternatively, it uses a valuation model that
calculates the present value of future cash flows. Assumptions used in the
valuation model include market discount rates, estimated default rates and
estimated prepayment speeds. Prepayment speeds and default estimates are based
on the actual prepayment and default histories of the underlying loan pool.
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Retained Interest in Loan and Lease Securitizations
The Company adopted on January 1, 1997, Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement specifies when financial
assets and liabilities are to be removed from an entity's financial
statements, the accounting for servicing assets and liabilities and the
accounting for assets that can be contractually prepaid in such a way that the
holder would not recover substantially all of its recorded investment.
Under SFAS 125, an entity recognizes only assets it controls and liabilities
it has incurred, discontinues recognition of assets only when control has been
surrendered, and discontinues recognition of liabilities only when they have
been extinguished. SFAS 125 requires that the selling entity continue to carry
retained interests, including servicing assets, relating to assets it no
longer recognizes. Such retained interests are based on the relative fair
values of the retained interests of the subject assets at the date of
transfer. Transfers not meeting the criteria for sale recognition are
accounted for as a secured borrowing with a pledge of collateral. SFAS 125
requires an entity to recognize its obligation to service financial assets
that are retained in a transfer of assets in the form of a servicing asset or
liability. The servicing asset or liability is amortized in proportion to, and
over the period of, net servicing income or loss. Servicing assets and
liabilities are assessed for impairment based on their fair value.
The implementation of SFAS 125 did not have a material impact on the
Company's financial condition or results of operation. Under the provisions of
SFAS 125, securitization interests retained by the Company as a result of
securitization transactions are held as either available for sale or trading.
The Company may create retained interests in loan and lease securitizations
as a result of the sale of loans and leases into securitization trusts. Loan
and lease securitizations have specific credit enhancement requirements in the
form of overcollateralization which must be met before the Company receives
cash flows due. As the securitized assets generate excess cash flows, they are
initially used to pay down the balance of the pass-through certificates until
such time as the ratio of securitized assets to pass-through certificates
reaches the overcollateralization requirement specified in each
securitization.
This overcollateralization amount is carried on the balance sheet as
retained interest in loan and lease securitizations. After the
overcollateralization requirement and the other requirements specified in the
pooling and servicing agreement have been met, the Company begins to receive
the cash flows from any subordinated bonds or residual interests retained on a
monthly basis. Retained interest in loan and lease securitizations is
classified as a trading asset. To the extent that the future performance
results are less than the Company's initial performance estimates, the
Company's retained interest in loan and lease securitizations will be written
down through a charge to operations. Accretion of income under the interest
method on retained interest in securitizations is included in the caption
"Interest on other financing activities" in the accompanying consolidated
statements of operations and comprehensive income (loss).
In determining the estimated fair values of the retained interest in loan
and lease securitizations, the Company estimates the cash flows received by
the Company after being released by the respective trust and discounts such
cash flows at interest rates determined by management to be rates market
participants would use in similar circumstances. Discount rates ranged from
and 14% to 28% and 11% to 28%, as of and for the years ended December 31, 1998
and 1997, respectively. Quoted market prices are not available as no active
market exists for retained interest in loan and lease securitizations. In
estimating the cash flows, the Company considers default and prepayment rates.
The default rates used by the Company as of and for the years ended
December 31, 1998 and 1997 have ranged from 1% to 8% and 2.0% to 18.5%,
respectively, and the prepayment rates used by the Company have ranged from 4%
to 55% and 0.25% to 48.0%, respectively.
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loan Sales and Related Gain or Loss
Loans are sold through either securitizations or whole loan sales with
servicing retained by the Company. Securitizations typically require credit
enhancements in the form of cash reserves or overcollateralization that are
reflected as retained interest in loan and lease securitizations on the
balance sheet. Sales are recognized when the transaction settles and the risks
and rewards of ownership are determined to have been passed to the purchaser.
Gain is recognized to the extent that the selling prices exceed the carrying
value of the loans sold based on the estimated relative fair values of the
assets transferred, assets obtained and liabilities incurred. The assets
obtained in a sale include, generally, retained interest in loan and lease
securitizations, loan servicing assets, and call options. Liabilities incurred
in a sale include, generally, recourse obligations, put options, and servicing
liabilities. In the securitizations completed to date, the Company retained
call options giving it the right to repurchase loans sold when the outstanding
amount of such loans is 1% to 10% or less of the original amount sold,
depending on the terms of the related securitization. As these call options
are equivalent to a cleanup call, the Company has ascribed no value to them.
The securitizations completed to date had no put option features.
Loan Origination Fees
Origination fees received on loans held for sale, net of direct costs
related to the origination of the loans, are deferred until the time of sale
and are included in the computation of the gain or loss on the sale of the
related loans. Commitment fee income is deferred until each loan is funded and
sold, and recorded as a part of the gain on sale of the loan in the same
percentage as such loan is to the total commitment. Any remaining deferred
commitment fee income is recognized at expiration of the commitment. When
exercise of such commitment is deemed remote, the fee is recognized over the
remaining commitment period.
Origination fees on loans held for investment, net of direct costs related
to the origination of the loans, are deferred and amortized over the
contractual lives of the related loans using the interest method. When a loan
is classified as a nonaccrual loan, the related net deferred origination fees
are no longer amortized.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation on premises and equipment is recorded using the
straight-line method over the estimated useful lives of individual assets (3
to 7 years). Leasehold improvements are amortized over the terms of their
related leases or the estimated useful lives of improvements, whichever is
shorter.
Interest Bearing Deposits
Interest bearing deposits consist of time certificates, investment in
federal funds and money market accounts. Amounts are carried at cost which
approximates market value.
Other Real Estate Owned
Foreclosed real estate is transferred from the loan portfolio at the lower
of the carrying value of the loan or net fair value of the property less
estimated selling costs and is classified as other real estate owned ("OREO").
The excess carrying value, if any, of the loan over the estimated fair value
of the collateral based on appraisal or broker opinion of value less estimated
selling costs is charged to the allowance for loan losses. Any subsequent
impairments in value are recognized through a valuation allowance. Gains and
losses from sales of OREO, provisions for losses on OREO, and net operating
expenses of OREO are recorded in operations and
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
included in the caption "net expenses of other real estate owned" in the
accompanying consolidated statements of operations and comprehensive income
(loss).
Income Taxes
The Company files a combined California franchise tax return and a
consolidated Federal income tax return with all of its operating subsidiaries
except ICG. The Company accounts for income taxes using the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Goodwill
Goodwill is amortized on a straight-line basis over its estimated useful
life of 15 years. Goodwill is reviewed for possible impairment when events or
changed circumstances may affect the underlying basis of the asset. Impairment
is measured by discounting operating income of the related entity at an
appropriate discount rate. At December 31, 1998 and 1997, Goodwill is
presented net of accumulated amortization of $7.4 million and $4.7 million,
respectively.
Debt Issue Costs
Capitalized debt issue costs are included in Other Assets and are amortized
to interest expense over the life of the related debt using the interest
method.
Hedging Loans Held for Sale
The Company regularly sells or securitizes fixed and variable rate mortgage
loans. To offset the effects of interest rate fluctuations on the value of its
fixed-rate loans held for sale, the Company in certain cases will hedge its
interest rate risk related to loans held for sale by selling United States
Treasury futures contracts. Unrealized and realized gains and losses on such
positions are deferred as an adjustment to the carrying value of loans and
leases held for sale and included in income as gain or loss on sale of loans
when the related loans are sold.
Management has determined that hedge accounting is appropriate for the
Company's hedging program because the hedged loans expose the Company to price
risk. The futures contracts reduce that risk and are designated as hedges, and
at the inception of the hedge and throughout the hedge period, there is a high
correlation between the price of the futures contracts and the fair value of
the loans being hedged. In the event correlation does not remain high, the
futures contracts will cease to be accounted for as hedges and a gain or loss
will be recognized to the extent the futures results have not been offset by
the price changes of the hedged loans.
Total Rate of Return Swaps
The Company has entered into total rate of return swap contracts with
various investment bank counterparties, the provisions of which entitle the
Company to receive the total return on various commercial and income property
loans and securities in exchange for a floating payment of one month LIBOR
plus a spread.
91
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
These contracts are off-balance sheet financial instruments. The Company's
cash collateral held by the counterparties is included in trading securities.
Net income or expense on these contracts is included in interest income, and
the contracts are carried at their estimated fair values.
Equity Investments
Equity investments are carried under the equity method of accounting.
Accordingly, the Company records as a part of its earnings its ownership
percentage of the equity investment's net income. Dividends received from such
subsidiaries, if any, are credited to the investment balance and not recorded
as earnings.
The Company records gains from the sale of stock in subsidiaries carried
under the equity method based on the difference between the Company's equity
ownership after the sale and such equity ownership prior to the sale, using
the Company's respective ownership percentages. Deferred income tax
liabilities on such gains are accrued at the time such gains are recognized.
Stock Based Compensation
As permitted by SFAS No. 123, "Accounting for Stock Based Compensation", the
Company accounts for stock based employee compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. The Company provides the pro forma
and plan disclosures as set forth in SFAS 123.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," during 1998 and has elected to present a
statement of operations and comprehensive income. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances, excluding those resulting
from investments by and distributions to owners. Comprehensive income
generally includes net income, foreign currency items, minimum pension
liability adjustments, and unrealized gains and losses on investments in
certain debt and equity investments (i.e., securities available for sale).
Adoption of this accounting standard had no impact on the Company's financial
condition and results of operations, as the standard is one of disclosure
only.
Income (Loss) Per Share
Diluted loss per share for 1998 was calculated using the weighted average
number of shares outstanding for the year ended December 31, 1998. Diluted
income per share for 1997 and 1996 were calculated using the weighted average
number of diluted common shares outstanding including common stock equivalents
which consist of certain outstanding dilutive stock options. The following
table reconciles the number of shares used in the computations of basic and
diluted income (loss) per share for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Weighted-average common shares outstanding
during the year used to compute basic
income per share.......................... 38,228,325 38,610,952 36,062,776
Assumed common shares issued on exercise of
dilutive stock Options.................... -- 2,244,321 2,912,058
---------- ---------- ----------
Number of common shares used to compute
diluted income per share.................. 38,228,325 40,855,273 38,974,834
========== ========== ==========
</TABLE>
92
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging
activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment, (b) a hedge of the exposure
to variable cash flows of a forecasted transaction, or (c) a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available for sale security, or a foreign-
currency-denominated forecasted transaction.
Under SFAS 133, an entity that elects to apply hedge accounting is required
to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk. This statement
is effective for the Company on January 1, 2000. Management is in the process
of determining what effect, if any, adoption of this statement will have on
the financial position and results of operations of the Company.
In October 1998, the Financial Accounting Standards Board "FASB" issued
Statement No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise, an amendment of FASB Statement No. 65." Under SFAS 134, after the
securitization of a mortgage loan held for sale, any retained mortgage-backed
securities shall be classified in accordance with the provisions of Statement
115. However, a mortgage banking enterprise must classify as trading any
retained mortgage-backed securities that it commits to sell before or during
the securitization process. SFAS 134 is effective for the first quarter
beginning after December 15, 1998 and enterprises may reclassify mortgage-
backed securities and other beneficial interests retained after the
securitization of mortgage loans held for sale from the trading category,
except for those with sales commitments in place when the Statement is
initially applied. Management does not believe the adoption of this statement
will have a significant impact on the financial position or results of
operations of the Company.
93
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Supplemental Disclosure of Cash Flow Information
The following information supplements the statements of cash flows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Cash paid during the period for:
Interest........................................ $119,169 $119,144 $134,251
Income taxes.................................... 5,884 24,611 24,134
Significant non-cash activities:
Loans transferred from held for investment to
held for sale.................................. 197,518 -- --
Loans transferred to OREO or repossessed assets. 10,046 29,359 14,203
Loans transferred from held for sale to held for
investment..................................... -- 37,007 197,141
Loans to facilitate the sale of OREO............ 1,011 2,347 1,871
Retained interest in loan and lease
securitizations capitalized.................... 7,182 23,592 6,908
Transfer of securities from available for sale
to trading..................................... -- 15,178 --
Securities received in consideration of IMH
Termination Agreement.......................... -- 48,167 --
Cancellation of note receivable from ICIFC in
consideration of IMH Termination Agreement..... -- 29,121 --
Change in unrealized gain (loss) on securities
available for sale............................. (3,112) (3,084) 1,799
Deconsolidation of SPFC, ICIFC and FMAC:
Decrease in loans held for sale................. -- 768,025 --
Decrease in interest only and residual
certificates................................... -- 87,017 --
Decrease in retained interest in loan
securitizations................................ -- 30,035 --
Decrease in servicing rights.................... -- 23,142 --
Decrease in accrued interest receivable......... -- 5,026 --
Decrease in other borrowings.................... -- 693,016 --
Decrease in convertible subordinated debt....... -- 75,000 --
Purchase of Statewide Documentation, Inc.:
Assets acquired, including goodwill of $5,000... 5,050 -- --
Liabilities assumed............................. 50 -- --
Common stock issued............................. 5,000 -- --
Purchase of PrinCap Mortgage Warehouse, Inc.
assets:
Assets acquired, including goodwill of $6,800... -- 123,767 --
Liabilities assumed............................. -- 29 --
Cash paid....................................... -- 123,738 --
Purchase of Auto Marketing Network:
Assets acquired, including goodwill of $20,770.. -- 82,484 --
Liabilities assumed............................. -- 81,734 --
Cash paid....................................... -- 750 --
</TABLE>
94
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Investment in FHLB Stock
As a member of the FHLB system, the Company's wholly owned subsidiary, SPB,
is required to maintain an investment in the capital stock of the FHLB in an
amount at least equal to the greater of 1% of residential mortgage assets, or
5% of outstanding borrowings (advances), or 0.3% of total assets. FHLB stock
and loans are pledged to secure FHLB advances.
6. Trading Securities
The following table provides a summary of trading securities as of December
31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
U.S. Treasury Securities................................ $ 82,528 $ 79,751
FLRT 1996-A interest-only securities.................... 7,575 8,541
SPTL 1997 C-1 interest-only securities.................. 5,585 6,637
SPTL 1996 C-1 interest-only securities.................. 4,029 12,179
Commercial mortgage-backed securities................... 9,387 --
Collateralized loan obligation--Pacifica Partners I LP
investment............................................. 17,837 --
Collateral for total return swap-syndicated loans....... 20,265 8,190
Other................................................... 15,150 5,607
-------- --------
$162,356 $120,905
======== ========
</TABLE>
Gross unrealized gains and losses on trading securities included in income
were $0 and $13.6 million, and $709,000 and $835,000 for the years ended
December 31, 1998 and 1997. There were no gross unrealized gains or losses on
trading securities included in income for the year ended December 31, 1996.
95
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Securities Available for Sale
The following table provides a summary of securities available for sale with
a comparison of amortized cost and fair values as of December 31, 1998 and
1997.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
- ----------------- --------- ---------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C>
IMH common stock...................... $ 9,436 $ -- $ (844) $ 8,592
ICCMIC common stock................... 29,933 -- (1,151) 28,782
Cambria Investment Partnership
leveraged bank debt.................. 10,000 54 -- 10,054
Preferred Stock --Auto Finance Group.. 6,500 -- -- 6,500
Avalon total return fund.............. 5,000 -- (113) 4,887
IBC 1997-2 Class B-1 subordinated
bond................................. 4,814 -- -- 4,814
IBC 1997-2 Class C-1 interest-only
security............................. 3,581 -- -- 3,581
Other................................. 1,200 -- -- 1,200
------- ------ ------- --------
$70,464 $ 54 $(2,108) $ 68,410
======= ====== ======= ========
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- ----------------- --------- ---------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C>
IMH common stock...................... $35,037 $ 879 $ -- $ 35,916
ICCMIC common stock................... 42,938 1,961 -- 44,899
Avalon total return fund.............. 5,000 492 -- 5,492
IBC 1997-2 Class B-1 subordinated
bond................................. 4,585 -- -- 4,585
IBC 1997-2 Class C-1 interest-only
security............................. 9,638 -- -- 9,638
Other................................. 387 -- -- 387
------- ------ ------- --------
$97,585 $3,332 $ -- $100,917
======= ====== ======= ========
</TABLE>
Gross realized gains and losses on the sale of available for sale securities
were $0 and $592,000, and $11.5 million and $936,000, respectively, for the
years ended December 31, 1998 and 1997. There were no sales of available for
sale securities for the year ended December 31, 1996.
Gross realized losses on investments in IMH and ICCMIC common stock
resulting from a decline in market value judged by management to be other than
temporary were $24.5 million and $13.0 million, respectively, for the year
ended December 31, 1998.
96
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Loans and Leases Held for Sale
Loans and leases held for sale, at the lower of cost or market, consisted of
the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Loans secured by real estate:
One-to four family.................................... $ 71,189 $ 13,169
Multi-family and commercial........................... 143,763 126,739
-------- --------
214,952 139,908
Automobile loans........................................ 68,975 --
Installment loans....................................... 29,384 --
Leases.................................................. 10,388 13,561
-------- --------
$323,699 $153,469
======== ========
</TABLE>
At December 31, 1998, loans held for sale were net of $16.8 million lower of
cost or market valuation allowance. At December 31, 1998 and 1997, loans held
for sale included nonaccrual loans of $11.1 million and $0, respectively.
Nonaccrual loans are presented in the table above at the lower of cost or
market value.
9. Loans and Leases Held for Investment, net
Loans and leases held for investment consisted of the following at December
31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
Loans secured by real estate:
One-to four family............................... $ 125,616 $ 205,788
Multi-family..................................... 56,229 17,261
Commercial....................................... 25,677 13,202
---------- ----------
207,522 236,251
Leases............................................. 1,048 7,745
Consumer and auto loans............................ 26,511 147,603
Franchise loans.................................... 50,520 62,219
Asset based loans.................................. 633,299 484,828
Loan participations................................ 222,106 196,420
Mortgage warehouse lines........................... 181,001 122,488
Commercial loans................................... 34,509 35,861
---------- ----------
1,356,516 1,293,415
Loans in process................................... (5,636) (7,081)
Unamortized premium................................ 3,109 2,211
Deferred loan fees................................. (9,014) (9,104)
---------- ----------
1,344,975 1,279,441
Allowance for loan and lease losses.............. (24,880) (26,954)
---------- ----------
$1,320,095 $1,252,487
========== ==========
</TABLE>
The Company's loans and leases held for investment are primarily comprised
of first and second lien mortgages secured by residential and income producing
real property in California, leases secured by equipment,
97
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
asset based loans to middle market companies mainly in California, loans to
experienced franchisees of nationally recognized restaurant concepts, and
participations in syndicated commercial loans. As a result, the loan portfolio
has a high concentration in the same geographic region. Although the Company
has a diversified portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent upon the economy of California.
Activity in the allowance for loan and lease losses was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997 1996
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Balance, beginning of year................... $ 26,954 $ 19,999 $13,729
Provision for loan and lease losses.......... 15,450 20,975 9,773
Business acquisitions and bulk loan
purchases................................... -- 577 4,500
Sale of leases............................... -- (900) --
Deconsolidation of ICIFC..................... -- (687) --
Loans charged off............................ (22,100) (13,586) (8,326)
Recoveries on loans previously charged off... 4,576 576 323
-------- -------- -------
Net charge-offs.............................. (17,524) (13,010) (8,003)
-------- -------- -------
Balance, end of period....................... $ 24,880 $ 26,954 $19,999
======== ======== =======
</TABLE>
The following table summarizes net charge-offs by loan type.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1998 1997 1996
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Residential mortgage.......................... $ (2,205) $ (5,920) $(2,485)
Multifamily................................... (450) (420) (1,095)
Commercial.................................... (407) (955) (465)
Leases........................................ 239 (3,920) (3,142)
Consumer and auto loans....................... (14,701) (1,795) (816)
-------- -------- -------
Net charge-offs............................. $(17,524) $(13,010) $(8,003)
======== ======== =======
</TABLE>
As of December 31, 1998 and 1997 and 1996, non-accrual loans totaled $39.5
million, $70.6 million, and $50.1 million, respectively. Interest income
foregone on nonaccrual loans was $2.2 million, $1.8 million, and $1.1 million,
for the years ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, impaired loans and the related allowance for
loan and lease losses were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------- -----------------------------
Specific Specific
Allowance Allowance
Recorded for Carrying Recorded for Carrying
Investment Losses Value Investment Losses Value
---------- --------- -------- ---------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans:
Continuing operations. $34,953 $(820) $34,133 $47,950 $(5,350) $42,600
Discontinued
operations of AMN.... 4,576 -- 4,576 22,681 -- 22,681
------- ----- ------- ------- ------- -------
Total impaired
loans.............. $39,529 $(820) $38,709 $70,631 $(5,350) $65,281
======= ===== ======= ======= ======= =======
</TABLE>
98
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impaired loans averaged $27.3 million, $43.6 million, and $33.3 million
during 1998, 1997 and 1996 respectively. At December 31, 1998 and 1997, total
impaired loans were comprised of $31.1 million and $40.1 million which had
$820,000 and $5.4 million of specific allowances for losses and $8.4 million
and $30.5 million with no related specific allowance. There were no impaired
loans without a related allowance for losses at December 31, 1996.
10. Restructuring
Restructuring charges of $3.8 million were recognized during the year ended
December 31, 1996. The charge represents those costs incurred in connection
with the Company's exit from the conforming mortgage banking business. During
the first quarter of 1996, the Company committed itself to, and began the
execution of, an exit plan that specifically identified the necessary actions
to be taken to complete the exit from the origination, sale and servicing of
conforming residential mortgage loans. During 1996, the Company sold the
majority of its wholesale mortgage origination offices and disposed of fixed
assets related to its former conforming residential mortgage lending business.
The Company's exit plan was completed in 1998.
Activity in the allowance for restructuring charges during 1998, 1997 and
1996 was as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
Allowance Charges Charges Charges Balance
Provided Incurred Incurred Incurred December 31, 1998
--------- -------- -------- -------- -----------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Disposition of wholesale
mortgage origination
offices................ $2,500 $(2,354) $(146) $-- $ --
Disposal of fixed
assets................. 1,000 (886) (114) -- --
Other................... 300 -- (229) (71) --
------ ------- ----- ---- -----
Total................. $3,800 $(3,240) $(489) $(71) $ --
====== ======= ===== ==== =====
</TABLE>
11.Servicing Rights
Changes in servicing rights were as follows:
<TABLE>
<CAPTION>
Year Ended December
31,
------------------------
1998 1997 1996
------ ------- -------
(In thousands)
<S> <C> <C> <C>
Beginning Balance....... $4,731 $14,887 $18,428
Additions............... 1,084 2,981 10,970
Decrease as a result of
the ICIFC
deconsolidation........ -- (8,785) --
Sales of servicing
rights................. -- (1,264) (13,390)
Amortization............ (1,486) (3,088) (1,121)
------ ------- -------
Ending balance.......... $4,329 $ 4,731 $14,887
====== ======= =======
</TABLE>
The servicing portfolio associated with servicing rights at December 31,
1998 and 1997 was $732.6 million and $665.3 million, respectively.
99
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12.Premises and Equipment, net
Premises and equipment consisted of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
-------- -------
(In thousands)
<S> <C> <C>
Premises and equipment.................................... $ 18,659 $12,587
Leasehold improvements.................................... 1,685 1,358
-------- -------
20,344 13,945
Less accumulated depreciation and amortization............ (8,680) (6,362)
-------- -------
$ 11,664 $ 7,583
======== =======
</TABLE>
13. Discontinued Operations
Auto Marketing Network ("AMN")
In March 1997, the Company acquired all the outstanding common stock of AMN,
a sub-prime auto lender engaged in the financing of new and used motor
vehicles on a national basis, for $750,000. As part of the acquisition, the
Company advanced $11.6 million to repay amounts owed pursuant to operating
lines of credit and for working capital purposes. The acquisition was recorded
using the purchase method of accounting. The purchase price was allocated to
the net assets acquired based on their fair value and goodwill of
approximately $20.8 million was recorded. Since the March 1997 acquisition
date, AMN posted operating losses and experienced significant increases in
non-performing assets, loan charge-offs and loan loss provisions. In December
1997, the Company developed revised operating projections which indicated that
the goodwill resulting from the AMN acquisition was not recoverable.
Accordingly, the remaining goodwill balance of $20.1 million was written off
during the fourth quarter of 1997.
As of July 31, 1998 (measurement date), management determined to cease
operations at Auto Marketing Network, Inc. ("AMN"). Accordingly, a disposal
plan was formulated, whereby daily operations of AMN were terminated in two
months. It is management's plan to sell remaining assets within one year of
the measurement date.
Losses from AMN's discontinued operations, net of tax, were as follows: (In
thousands)
<TABLE>
<CAPTION>
Disposition Period from Period from Period from
August 1, 1998 to January 1, 1998 to March 17 to
December 31, 1998 July 31, 1998 December 31, 1997
----------------------- ------------------ -----------------
<S> <C> <C> <C>
Loss from discontinued
operations............. $ -- $3,232 $25,347
Loss on disposal of AMN. 11,276 -- --
------- ------ -------
Net loss from
discontinued
operations............. $11,276 $3,232 $25,347
======= ====== =======
</TABLE>
The loss on disposal of AMN included charges (net of taxes) for the
following items: $5.6 million for securities and retained interest valuation,
$1.2 million for the disposition of furniture and equipment, $5.6 million for
estimated future servicing obligations to a third party servicer, $1.3 million
in liquidation allowances for nonaccrual loans and repossessed autos, $2.1
million in severance pay, occupancy and general and administrative expenses.
The charges listed above were partially offset by the estimated net interest
income on loans and securities for the next year (disposition period) of $4.5
million. The loss from discontinued operations includes interest expense on
intercompany borrowings at the standard intercompany rate.
100
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The net assets of AMN's discontinued operations were as follows:
<TABLE>
<CAPTION>
At December 31, At December 31,
--------------- ---------------
1998 1997
--------------- ---------------
<S> <C> <C>
Loans held for sale.......................... $15,161 $ 23,333
Securities held for sale..................... 7,844 6,809
Retained interests........................... 11,280 20,210
Income tax asset............................. 10,725 15,520
Other net assets (liabilities)............... 1,802 (10,924)
------- --------
$46,812 $ 54,948
======= ========
</TABLE>
AMN's warehouse lines of credit of $9.2 million and $20.1 million are
classified as other borrowings in the consolidated balance sheets at December
31, 1998 and 1997.
Total nonperforming AMN loans were $4.6 million as of December 31, 1998 as
compared to $22.7 million at December 31, 1997. AMN's allowance for loan
losses was $857,000 at December 31, 1998 as compared to $11.1 million at
December 31, 1997.
14. 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 describes the 10 business segments.
Loan Participation and Investment Group ("LPIG"), a division of SPB, invests
in and purchases senior secured debt of other companies (referred to as a
"participation") in the secondary market. LPIG's principal sources of revenue
are interest earned on participation loans and loan commitment fees. LPIG's
principal expenses are interest expense allocations from deposits, inter-
company borrowings, and general and administrative expenses.
Coast Business Credit ("CBC"), a division of SPB, provides asset-based
lending to small-to-medium sized businesses secured by the assets of the
borrower. CBC's principal source of revenue is interest earned on asset-based
loans. CBC's principal expenses are interest expense allocations from
deposits, inter-company borrowings, and general and administrative expenses.
101
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PrinCap Mortgage Warehouse ("PrinCap"), a subsidiary of SPB, provides
residential mortgage warehouse lending to mostly small to medium sized brokers
and mortgage bankers on a national basis. PrinCap derives revenues from
referral fees and interest income on its portfolio of warehouse lines based on
the amount of warehouse loans extended and transaction fees from the broker
for each loan file processed. PrinCap's principal expenses are interest
expense allocations from deposits, inter-company borrowings, and general and
administrative expenses.
Income Property Lending Division ("IPL"), a division of SPB, provides
multifamily and commercial mortgage lending to the small loan market for
multi-family apartments and commercial buildings. IPL's principal source of
revenue is gain on sale of and interest earned on mortgage loans. IPL's
principal expenses are interest expense allocations from deposits, inter-
company borrowings, and general and administrative expenses.
Imperial Capital Group, LLC ("ICG"), a majority-owned subsidiary of the
Company, offers individual and institutional investors financial products and
services. ICG provides investment opportunities and research to individual and
institutional investors, raises private and public capital for middle market
companies, trades debt, equity and asset backed securities and provides
investment management services to high net worth individuals. ICG's principal
sources of revenue are investment banking and brokerage fees, gains and losses
on securities trading and mark to market valuations on securities held for
trading. ICG's principal expenses are inter-company interest expense and
general and administrative expenses.
Imperial Business Credit ("IBC"), a wholly owned subsidiary of the Company,
originates, acquires, sells, securitizes and services non-cancellable, full-
payout equipment leases for small and medium-sized businesses in various
industries throughout the United States. IBC derives its principal revenue
from gains recognized on the securitization or sale of leases, from the spread
on portfolios held for investment and held for sale during the warehouse
period and from servicing and related ancillary fees on its servicing
portfolio. IBC's principal expenses are interest expense from warehouse lines
of credit, inter-company borrowings, and general and administrative expenses.
De-emphasized/Discontinued/Exited Businesses ("Exited Businesses"),
represents the Company's business units it decided to either de-emphasize,
discontinue, or exit. The Company decided to de-emphasize, discontinue or exit
these business lines because they were not meeting the Company's 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. Each of the de-
emphasized, discontinued or exited business lines was not a profitable
business.
The Company includes the following significant operations in Exited
Businesses: Auto Lending, Alternative Residential Mortgage, and Consumer Loan
Divisions of SPB, and Credito Imperial Argentina ("CIA"), the Company's
residential loan production business in Argentina. Exited Businesses also
includes the Company' former mortgage banking operations, certain problem loan
or securities portfolios, and any loan portfolios at SPB from businesses which
are no longer originating new loans. Exited Businesses' principal sources of
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.
Equity Investments, represents the Company's equity investments in other
publicly traded companies. At December 31, 1998, the Company owned equity
interests of 38.4% and 47.2% in two companies; FMC and SPFC. This segment's
source of revenue is the Company's common stock ownership percentage in the
equity investments' reported net income or loss in addition to gains on sales
of the equity investments' stock by the Company, or write-downs from the
impairment of the equity investment. In October 1998, SPFC petitioned for
Chapter 11 bankruptcy protection under the Federal bankruptcy laws. SPFC has
been de-listed from the New York Stock Exchange. As a result of SPFC's
bankruptcy filing, we incurred a write-off totaling $82.6 million. At December
31, 1998, the Company's investment in SPFC was $0.
102
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Asset Management Activities ("AMA"), includes two wholly owned subsidiaries,
ICCAMC and ICAM. ICCAMC receives management fee income for overseeing the day-
to-day operations of ICCMIC. ICCAMC's principal expenses are general and
administrative expenses. ICAM's principal source of revenues are management
fee income for managing the assets of Pacifica Partners I L.P., Cambria
Investment Partnership I, L.P., and Catalina Investment Partnership I, L.P. .
ICAM's principal expenses are general and administrative expenses.
Other Core Operations ("OCO"), includes those areas of business conducted
at the holding company as well as other support operations. Such areas include
interest and dividend income from parent company loans and equity investments,
loan servicing income, interest expense on long-tem debt, mark-to-market
charges on the securities invested in at the holding company, and the costs of
support functions. The company provides support to its subsidiaries through
executive management's oversight and advice, accounting and legal services,
merger and acquisitions advice, human resources administration, office
services, and management information systems support.
Income taxes are allocated to the segments based on their separate income or
loss before income taxes. The Company evaluates segment performance based net
income of the segment. Interest is charged on intercompany borrowings and
certain operating expenses are allocated from Other Core Operations to other
segments.
Eliminations The Company has outstanding inter-company debt to SPB and ICG
of $35.0 million and $6.3 million, respectively. All inter-company debt and
corresponding interest are eliminated in consolidation. Additionally, the
Companys investments in subsidiaries and inter-company management fees are
included in eliminations.
The following represents the operating results and selected financial data
by major business segments for 1998, 1997 and 1996:
103
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
At or for the year ended December 31, 1998
------------------------------------------------------------------------------------------------------
Loan
Participation Income Imperial De-emphasized/
And Coast PrinCap Property Imperial Business Discontinued/ Asset
Investment Business Mortgage Lending Capital Credit, Exited Equity Management
Group Credit Warehouse Division Group Inc. Businesses Investments Activities
------------- -------- --------- -------- -------- -------- -------------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total loans,
net............. $221,030 $623,748 $179,284 $144,573 $ -- $ 7,413 $459,977 $ 1,162 $ --
Total assets.... 241,854 628,636 186,257 146,250 6,774 44,899 813,931 60,098 3,831
Total deposits.. 222,009 674,956 196,410 162,939 -- -- 457,417 -- --
Interest income. 21,569 76,916 16,747 13,336 (185) 5,823 77,650 83 19
Interest
expense......... 13,249 34,299 9,817 6,659 124 1,353 31,581 -- --
Provision for
loan and lease
(recovery)
losses.......... (391) 3,523 704 (345) -- 1,300 10,659 -- --
External
revenue......... 8,877 42,869 8,533 17,471 18,411 10,538 10,296 (66,496) 7,143
Intercompany
revenue......... -- -- -- -- -- -- -- -- --
Intercompany
expense......... -- -- -- -- -- 910 739 -- 121
Mark to market
on securities
and loans held
for sale........ (2,104) (904) (263) (178) -- (2,305) (31,641) -- --
Loss on
impairment of
equity
securities...... -- -- -- -- -- -- -- (82,600) --
Equity in net
income of SPFC.. -- -- -- -- -- -- -- 12,739 --
Equity in net
income of FMC... -- -- -- -- -- -- -- 3,235 --
Total revenue... 8,877 42,869 8,533 17,471 18,411 9,628 9,557 (66,496) 7,022
Depreciation.... 96 779 99 299 473 141 576 -- 33
Amortization of
goodwill........ -- 1,113 453 -- 36 950 -- -- --
Amortization of
servicing
rights.......... -- -- -- -- -- -- -- -- (365)
Income taxes.... 2,819 9,267 2,352 2,476 (1,012) (716) (7,489) (28,449) 1,360
Net income
(loss) from
continuing
operations...... $ 3,783 $ 12,435 $ 3,157 $ 3,323 $(1,358) $ (960) $(10,049) $(38,169) $1,825
<CAPTION>
Other Core
Operations Eliminations Consolidated
---------- ------------ ------------
<S> <C> <C> <C>
Total loans,
net............. $ 47,907 $(41,300) $1,643,794
Total assets.... 331,578 (46,925) 2,417,183
Total deposits.. (2,403) -- 1,711,328
Interest income. 28,295 (4,413) 235,840
Interest
expense......... 30,437 (4,413) 123,106
Provision for
loan and lease
(recovery)
losses.......... -- -- 15,450
External
revenue......... (41,289) (170) 16,183
Intercompany
revenue......... 1,770 -- 1,770
Intercompany
expense......... -- -- 1,770
Mark to market
on securities
and loans held
for sale........ (4,993) -- (42,388)
Loss on
impairment of
equity
securities...... (37,538) -- (120,138)
Equity in net
income of SPFC.. -- -- 12,739
Equity in net
income of FMC... -- -- 3,235
Total revenue... (39,519) (170) 16,183
Depreciation.... 1,218 -- 3,714
Amortization of
goodwill........ 134 -- 2,686
Amortization of
servicing
rights.......... 1,851 -- 1,486
Income taxes.... (24,672) -- (44,064)
Net income
(loss) from
continuing
operations...... $(33,112) $ -- $ (59,125)
</TABLE>
104
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
At or for the year ended December 31, 1997
----------------------------------------------------------------------------------------------------------
Loan
Participation Income Imperial De-emphasized/
And Coast PrinCap Property Imperial Business Discontinued/
Investment Business Mortgage Lending Capital Credit, Exited Equity Asset
Group Credit Warehouse Division Group Inc. Businesses Investments Managers Other
------------- -------- --------- -------- -------- -------- -------------- ----------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total loans..... $195,554 $479,922 $121,888 $58,282 $ -- $16,578 $502,367 $ -- $ -- $ 72,665
Total assets.... 195,554 496,230 140,058 58,282 12,720 51,640 701,238 118,402 5,815 371,959
Total deposits.. 175,743 425,615 105,703 53,145 -- -- 408,436 -- -- (12,620)
Interest income. 17,458 50,360 3,265 22,834 767 10,899 59,270 18,847 189 24,354
Interest
expense......... 10,343 20,577 1,834 12,126 -- 2,903 35,573 13,921 -- 25,579
Provision for
loan and lease
losses
(recovery)...... 564 4,937 435 (1,930) -- 1,075 10,894 -- -- 5,000
External
revenue......... 6,483 30,045 1,584 41,201 8,486 20,662 15,584 161,720 25,353 2,348
Intercompany
revenue......... -- -- -- -- -- -- -- -- -- 4,562
Intercompany
expense......... -- -- -- -- -- 2,363 14 1,866 319 --
Mark to market
on securities
and loans held
for sale........ -- -- -- -- -- -- -- -- -- (341)
Equity in net
income of SPFC.. -- -- -- -- -- -- -- 25,869 -- --
Equity in net
loss of FMC..... -- -- -- -- -- -- -- (3,050) -- --
Total revenue... 6,483 30,045 1,584 41,201 8,486 18,299 15,570 159,854 25,034 6,910
Depreciation.... 91 284 24 122 635 190 364 298 15 2,157
Amortization of
goodwill........ -- 1,113 113 -- -- 955 -- 310 -- --
Amortization of
Servicing
rights.......... -- -- -- -- -- -- -- -- 637 1,579
Income taxes.... 1,699 5,788 332 13,252 566 2,641 (1,419) 52,533 6,408 (7,755)
Net income
(loss) from
continuing
operations...... $ 2,637 $ 8,984 $ 515 $20,566 $ 878 $ 4,099 $ (2,202) $ 81,532 $ 9,946 $(12,036)
<CAPTION>
Eliminations Consolidated
------------ ------------
<S> <C> <C>
Total loans..... $(41,300) $1,405,956
Total assets.... (57,509) 2,094,389
Total deposits.. -- 1,156,022
Interest income. (4,643) 203,600
Interest
expense......... (4,643) 118,213
Provision for
loan and lease
losses
(recovery)...... -- 20,975
External
revenue......... 1,438 314,904
Intercompany
revenue......... -- 4,562
Intercompany
expense......... -- 4,562
Mark to market
on securities
and loans held
for sale........ -- (341)
Equity in net
income of SPFC.. -- 25,869
Equity in net
loss of FMC..... -- (3,050)
Total revenue... 1,438 314,904
Depreciation.... -- 4,180
Amortization of
goodwill........ -- 2,491
Amortization of
Servicing
rights.......... 872 3,088
Income taxes.... 222 74,267
Net income
(loss) from
continuing
operations...... $ 344 115,263
</TABLE>
105
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
At or for the year ended December 31, 1996
---------------------------------------------------------------------------------------------------------
Loan
Participation Income Imperial De-emphasized/
And Coast PrinCap Property Imperial Business Discontinued/
Investment Business Mortgage Lending Capital Credit, Exited Equity Asset
Group Credit Warehouse Division Group Inc. Businesses Investments Managers Other
------------- -------- --------- -------- -------- -------- -------------- ----------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total loans,
net............. $159,791 $285,528 $ -- $178,032 $ -- $ 94,413 $ 954,493 $296,746 $ 347 $ 39,345
Total assets.... 159,791 299,875 -- 178,032 -- 118,474 1,096,110 457,317 4,727 156,878
Total deposits.. 138,444 239,958 -- 155,600 -- -- 538,264 -- -- (3,082)
Interest income. 9,155 30,865 -- 19,476 -- 5,961 111,250 19,712 174 12,552
Interest
expense......... 9,169 17,142 -- 16,883 -- 1,901 60,904 12,342 -- 16,695
Provision for
loan and lease
losses.......... 907 3,405 -- 1,671 -- -- 3,790 -- -- --
External
revenue......... 787 10,345 -- 9,455 -- 9,256 53,533 117,282 3,904 51,652
Intercompany
revenue......... -- -- -- -- -- -- -- -- -- 2,325
Intercompany
expense......... -- -- -- -- -- 2,325 -- -- -- --
Total revenue... 787 10,345 -- 9,455 -- 6,931 53,533 117,282 3,904 53,977
Depreciation.... 64 150 -- 127 -- 133 447 117 3 2,442
Amortization of
goodwill........ -- 1,099 -- -- -- 364 -- 412 -- --
Amortization of
Servicing
rights.......... -- -- -- -- -- -- 614 -- 106 401
Income taxes.... (382) 1,034 -- 2,344 -- 1,209 15,847 37,022 640 11,816
Net Income
(loss) from
continuing
operations...... $ (416) $ 1,124 $ -- $ 2,549 $ -- $ 1,314 $ 17,234 $ 40,260 $ 696 $ 12,848
<CAPTION>
Eliminations Consolidated
------------ ------------
<S> <C> <C>
Total loans,
net............. $ -- $2,008,695
Total assets.... (565) 2,470,639
Total deposits.. -- 1,069,184
Interest income. (1,674) 207,471
Interest
expense......... -- 135,036
Provision for
loan and lease
losses.......... -- 9,773
External
revenue......... 719 256,933
Intercompany
revenue......... -- 2,325
Intercompany
expense......... -- 2,325
Total revenue... 719 256,933
Depreciation.... -- 3,483
Amortization of
goodwill........ -- 1,875
Amortization of
Servicing
rights.......... -- 1,121
Income taxes.... 344 69,874
Net Income
(loss) from
continuing
operations...... $ 375 $ 75,984
</TABLE>
106
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Deposits
Deposits of $100,000 and over totaled approximately $459.6 million and
$236.5 million at December 31, 1998 and 1997, respectively. Interest expense
associated with certificates of deposit of $100,000 and over was approximately
$24.2 million, $15.6 million, and $13.6 million, for the years ended December
31, 1998, 1997, and 1996, respectively.
16. Borrowings from Federal Home Loan Bank
SPB is approved as a member of the Federal Home Loan Bank ("FHLB") to borrow
up to a maximum of 35% of the assets of SPB. 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. At December 31, 1998 and
1997, all of the outstanding borrowings from the FHLB were scheduled to mature
within one year. The FHLB advances are secured by the investment in stock of
the FHLB and certain real estate mortgage loans with a carrying value of $49.9
million and $104.7 million at December 31, 1998 and 1997, respectively. At
December 31, 1998, 1997 and 1996, FHLB borrowings are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at year end........................... $20,000 $ 45,000 $140,500
Maximum outstanding at any month end.......... 45,000 109,500 338,000
Average balance during the year............... 24,451 57,154 201,693
Weighted average rate during the year......... 6.67% 5.82% 5.98%
Weighted average rate at year end............. 5.93% 6.71% 6.30%
</TABLE>
Interest expense on borrowings from the FHLB was $1.6 million, $3.3 million,
and $12.1 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
17. Other Borrowings
Other borrowings primarily consist of revolving warehouse lines of credit to
fund the Company's and its subsidiaries' lending activities. At December 31,
1998 and 1997, approximately $84 million and $159 million of loans and
securities were pledged as collateral for other borrowings. These lines of
credit are short term borrowings used in the normal course of business.
Certain covenants exist in regards to the IBC line of credit with which IBC
had no events of default existing upon receipt of a waiver. IBC has received
approval for a $10 million warehouse line of credit from a third party
financial institution, which will replace IBC's line of credit expiring on
March 31, 1999. ICII and its subsidiaries have various revolving warehouse
lines of credit and repurchase facilities available at December 31, 1998, as
follows:
<TABLE>
<CAPTION>
Interest Index
Rate Commitment Outstanding (basis points) Expiration Date
-------- ---------- ----------- -------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Greenwich Capital
Financial (AMN)........ 6.89% $100,000 $ 9,193 Libor plus 125 April 30, 1999
Lehman Brothers (Corona
Film Finance Fund)..... 4.75 66,692 66,692 Fixed rate January 7, 1999
First Union National
Bank (ICII)............ 5.22 14,879 14,879 Fixed rate January 29, 1999
Greenwich Capital
Financial (ICII)....... 5.94 4,382 4,382 Fixed rate January 14, 1999
First Union National
Bank (IBC)............. 8.07 15,000 5,904 Libor plus 245 March 31, 1999
Other notes payble
(ICII)................. 8.00 -- 1,220 Fixed rate None
-------- --------
5.29 $200,953 $102,270
======== ========
</TABLE>
107
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ICII and its subsidiaries had various revolving warehouse lines of credit
and repurchase facilities available at December 31, 1997, as follows:
<TABLE>
<CAPTION>
Interest Index
Rate Commitment Outstanding (basis points) Expiration Date
-------- ---------- ----------- -------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Greenwich Capital
Financial (AMN)........ 7.25% $125,000 $ 20,058 Libor plus 125 March 10, 1998
Donaldson, Lufkin and
Jenrette (Corona Film
Finance Fund).......... 5.85 79,591 79,591 Fixed rate January 7, 1998
Core States (IBC)....... 7.83 30,000 10,192 Libor plus 220 October 6, 1998
Morgan Stanley (SPB).... 6.51 200,000 35,000 Libor plus 50 October 1, 1998
---- -------- --------
6.37 $434,591 $144,841
==== ======== ========
</TABLE>
Interest expense on warehouse lines of credit and repurchase facilities was
$4.2 million, $17.9 million, and $52.3 million for the years ended December
31, 1998, 1997 and 1996, respectively.
18. Remarketed Par Securities
During the second quarter of 1997, Imperial Credit Capital Trust I
("ICCTI"), a wholly-owned subsidiary of the Company organized for the sole
purpose of issuing trust securities, issued $70.0 million of 10.25% Remarketed
Par Securities ("ROPES") due June 14, 2002 at par. The ROPES are secured by
resettable rate debentures which are general unsecured obligations of the
Company and can be redeemed at par upon their maturity or remarketed as 30
year capital instruments at the Company's option. Under current tax law, the
interest payments on these securities are tax-deductible. The proceeds from
the offering were used for capital contributions to subsidiaries, strategic
acquisitions, investments and general corporate purposes. Interest expense on
the ROPES was $7.8 million and $4.3 million for the years ended December 31,
1998 and 1997.
The Trust Indenture for the ROPES includes provisions which limit the
ability of the Company to incur additional indebtedness or issue certain stock
of the Company, to make certain investments, engage in certain transactions
with affiliates, create restrictions on the ability of subsidiaries to pay
dividends or certain other distributions, create liens and encumbrances, or
allow its subsidiaries to issue certain classes of stock. As of December 31,
1998, the Company was in compliance with the debt covenants related to the
ROPES.
19. Senior Notes
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------
Face Unamortized Carrying
Value Discount Value
-------- ----------- --------
<S> <C> <C> <C>
9.75% Senior Notes due 2004................. $ 20,174 $(316) $ 19,858
9.875% Senior Notes due 2007................ 200,000 -- 200,000
-------- ----- --------
$220,174 $(316) $219,858
======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------
Face Unamortized Carrying
Value Discount Value
-------- ----------- --------
<S> <C> <C> <C>
9.75% Senior Notes due 2004................. $ 20,174 $(361) $ 19,813
9.875% Senior Notes due 2007................ 200,000 -- 200,000
-------- ----- --------
$220,174 $(361) $219,813
======== ===== ========
</TABLE>
108
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the first quarter of 1997, the Company successfully completed a
$200.0 million offering of 9.875% Senior Notes due 2007 (the "9.875% Senior
Notes"). A portion of the proceeds from the offering was used to repurchase
$69.8 million of the outstanding 9.75% Senior Notes due 2004 (the "9.75%
Senior Notes") on which the Company recorded an extraordinary after-tax loss
of $4.0 million. The remaining proceeds were used to make capital
contributions to subsidiaries, strategic acquisitions, investments, and for
general corporate purposes. The effective interest rate on the tendered notes
was approximately 10.8% after the amortization of original issue discount and
capitalized debt issue costs. The effective interest rate on the new notes is
approximately 10.4% after the amortization of capitalized debt issue costs.
The Company engaged in the tender offer and new issuance in order to obtain a
more favorable debt covenant package and to raise new capital to support its
growing businesses.
The 9.875% Senior Notes may be redeemed after January 15, 2002 at the option
of the Company until maturity at a declining premium, plus accrued interest.
The 9.875% Senior Notes are general unsecured obligations of the Company
ranking pari passu with all senior indebtedness of the Company, but are
effectively subordinated to the liabilities of SPB. The Indenture for the
9.875% Senior Notes includes provisions which limit the ability of the Company
to incur additional indebtedness or issue certain stock of the Company, to
make certain investments, engage in certain transactions with affiliates,
create restrictions on the ability of subsidiaries to pay dividends or certain
other distributions, create liens and encumbrances, or allow its subsidiaries
to issue certain classes of stock. As of December 31, 1998, the Company was in
compliance with the debt covenants related to the 9.875% Senior Notes.
In January 1994, the Company issued $90.0 million of 9.75% Senior Notes due
2004. At both December 31, 1998 and 1997, $20.2 million of the 9.75% Senior
Notes were outstanding. The 9.75% Senior Notes may be redeemed after January
15, 1999 at the option of the Company until maturity at a declining premium,
plus accrued interest. The 9.75% Senior Notes are unsecured and rank pari
passu with all other senior unsecured indebtedness of the Company, but are
effectively subordinated to the deposits of SPB.
The Indenture for the 9.75% Senior Notes includes provisions which limit the
ability of the Company to incur additional indebtedness or issue certain stock
of the Company, to make certain investments, engage in certain transactions
with affiliates, create restrictions on the ability of subsidiaries to pay
dividends or certain other distributions, create liens and encumbrances, or
allow its subsidiaries to issue certain classes of stock. As of December 31,
1998, the Company was in compliance with the debt covenants related to the
9.75% Senior Notes.
Total interest expense on the Senior Notes for the years ended December 31,
1998, 1997 and 1996 was $22.5 million, $21.7 million, and $9.0 million,
respectively.
20. Preferred and Common Stock
The Company has authorized 8,000,000 shares of Preferred Stock. The Board
has the authority to issue the preferred stock in one or more series, and to
fix the designations, rights, preferences, privileges, qualifications and
restrictions, including dividend rights, conversion rights, voting rights,
rights and terms of redemption, liquidation preferences and sinking fund
terms, any or all of which may be greater than the rights of the Common Stock.
In the fourth quarter of 1997, the Company's board of directors authorized
the repurchase of up to approximately 5% of the company's common stock, or as
much as 1.9 million shares. During 1998, the Company repurchased and retired
1.9 million shares of common stock under this program at an average price of
$10.62 per share.
109
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the third quarter of 1998, the Company announced an additional share
repurchase program to buy back up to 10% or approximately 3.7 million shares
of the Company's outstanding shares of common stock. As of December 31, 1998,
the Company has repurchased 570,878 common shares at an average price of $6.72
under the 10% stock repurchase program.
On July 1, 1998 the Company establised a deferred executive compensation
plan. From July 1, 1998 through December 31, 1998, the plan's trustee acquired
366,023 shares of common stock for the benefit of the Company's management and
directors under its deferred executive compensation plan at an average price
of $10.47.
On October 12, 1998, the Company distributed preferred share purchase rights
as a dividend to its shareholders of record at the rate of one right for each
outstanding share of its common stock. The rights are attached to the
Company's common stock and will only be exercisable and trade separately if a
person or group acquires or announces the intent to acquire 15% or more of the
Company's common stock (25% or more for any person or group currently holding
15% or more of the Company's common stock). Each right will entitle
shareholders to buy one-hundredth of a share of a new series of junior
participating preferred stock at an exercise price of $40. If the Company is
acquired in a merger or other transaction after a person has acquired 15
percent or more of the Company's outstanding common stock (25% or more for any
person or group currently holding 15% or more of the Company's common stock),
each right will entitle the shareholder to purchase, at the right's then-
current exercise price, a number of the acquiring company's common shares
having a market value of twice such price. The acquiring person would not be
entitled to exercise these rights. In addition, if a person or group acquires
15% or more of the Company's common stock, each right will entitle the
shareholder (other than the acquiring person) to purchase, at the right's
then-current exercise price, a number of shares of the Company's common stock
having a market value of twice such price. Following the acquisition by a
person of 15% or more of the Company's common stock and before an acquisition
of 50 percent or more of the Company's common stock, the Company's board of
directors may exchange the rights (other than the rights owned by such person)
at an exchange ratio of one share of common stock per right. Before a person
or group acquires beneficial ownership of 15 percent (or 25% as applicable) or
more of the Company's common stock, the rights are redeemable for $.0001 per
right at the option of the Company's board of directors. The rights will
expire on October 2, 2008 unless redeemed prior to that date. The Company's
board is also authorized to reduce the ownership thresholds referred to above
to not less than 10%. The rights are intended to enable all of the Company's
shareholders to realize the long-term value of their investment in the
Company.
21. Income Taxes
Income taxes are included in the accompanying consolidated statement of
income as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997 1996
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Income taxes from:
Continuing operations........................ $(44,064) $ 74,267 $69,874
Discontinued operations...................... (8,675) (15,520) --
Extraordinary item........................... -- (2,919) --
-------- -------- -------
Total...................................... $(52,739) $ 55,828 $69,874
======== ======== =======
</TABLE>
110
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's income taxes from continuing operations for the years ended
December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Current:
Federal...................................... $ 6,140 $28,848 $31,138
State........................................ 2,019 8,108 12,210
-------- ------- -------
Total current taxes........................ 8,159 36,956 43,348
-------- ------- -------
Deferred:
Federal...................................... (39,701) 31,324 16,009
State........................................ (15,839) 8,970 6,095
-------- ------- -------
Total deferred taxes....................... (55,540) 40,294 22,104
-------- ------- -------
Taxes credited to shareholders' equity......... 3,317 2,916 4,422
Reduction of deferred tax liability due to FMC
public offering............................... -- (5,899) --
-------- ------- -------
Taxes on income before extraordinary item...... (44,064) 74,267 69,874
======== ======= =======
</TABLE>
The amounts previously reported as the current and deferred portions of the
tax provision for 1997 were revised based upon determinations made when the
1997 tax returns were filed. Such changes within the total provision occur
because all tax alternatives available to the Company are not decided upon
until all relevant tax data have been accumulated serveral months after year-
end.
The Company had current income taxes receivable from continuing operations
of approximately $11.4 million at December 31, 1998 and current income taxes
payable of $5.3 million at December 31, 1997. Included in the net assets of
discontinued operations were income taxes receivable of $10.7 million and
$15.5 million at December 31, 1998 and 1997, respectively.
111
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes arise from differences in the timing of recognition of
income and expense for tax and financial reporting purposes. The following
table shows the primary components of the Company's net deferred tax liability
at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowances for loan and lease losses...................... $ 4,552 $ 7,106
Mark to market on securities and loans held for sale...... 13,024 --
Leases.................................................... 385 413
State taxes............................................... 1,339 7,769
Executive stock options................................... 419 488
Unrealized loss on securities available for sale.......... 868 --
Deferred compensation..................................... 642 --
-------- --------
Total................................................... 21,229 15,776
-------- --------
Deferred tax liabilities:
Sales/investments in subsidiaries and equity securities... (27,926) (77,383)
Servicing rights.......................................... (1,353) (1,649)
Other financing activities................................ (1,950) --
Deferred loan fees........................................ (3,472) (3,728)
Unrealized gain on securities available for sale.......... -- (1,396)
Depreciation.............................................. (289) (585)
Other..................................................... (91) --
FHLB stock dividends...................................... (1,364) (1,791)
-------- --------
Total................................................... (36,445) (86,532)
-------- --------
Net deferred tax liability.................................. $(15,216) $(70,756)
======== ========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Management considers the scheduled reversal
of deferred tax liabilities and available tax carrybacks and future taxable
income in making this assessment. Based upon the schedule of reversals, future
taxable income and available tax carrybacks, management believes it is more
likely than not the Company will realize the deferred tax assets.
A reconciliation of the statutory Federal corporate income tax rate of 35%
to the effective income tax rate on income or loss from continuing operations
is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. federal income tax rate.................. 35.0% 35.0% 35.0%
Increase (reduction) in rate resulting from:
State income taxes, net of Federal benefit............ 8.3 5.5 7.5
Reduction of deferred tax liability due to FMC public
offering............................................. -- (3.0) --
Other, net............................................ (1.2) (0.4) 1.8
---- ---- ----
Effective income tax rate............................... 42.1% 37.1% 44.3%
==== ==== ====
</TABLE>
112
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
22. Employee Benefit Plans
Profit Sharing and 401(k) Plan
Under the Company's 401(k) plan, employees may elect to enroll on the first
of any month, provided that they have been employed for at least six months.
Employees may contribute up to 14% of their salaries. The Company will match
50% of the first 4% of employee contributions. The Company recorded 401(k)
matching expense of $457,000, $246,000, and $305,000, for the years ended
December 31, 1998, 1997 and 1996, respectively.
An additional Company contribution may be made at the discretion of the
Company. Should a discretionary contribution be made, the contribution would
first be allocated to those employees deferring salaries in excess of 4%. The
matching contribution would be 50% of any deferral in excess of 4% up to a
maximum deferral of 8%.
Should discretionary contribution funds remain following the allocation
outlined above, any remaining Company matching funds would be allocated as a
50% match of employee contributions on the first 4% of the employee's
deferrals. No discretionary contributions were charged to operations for the
years ended December 31, 1998, 1997, and $350,000 was charged to operations
for discretionary contributions for 1996.
Company matching contributions are made as of December 31st each year.
1992 Stock Option Plan
A total of 2,292,632 shares of the Company's Common Stock has been reserved
for issuance under the Company's 1992 Incentive Stock Option and Nonstatutory
Stock Option Plan (the "1992 Stock Option Plan"), which expires by its own
terms in 2002. A total of 868,813 and 1,082,493 options were outstanding at
December 31, 1998 and 1997, respectively.
The 1992 Stock Option Plan provides for the grant of "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and nonqualified stock options
("NQSOs") to employees, officers, directors and consultants of the Company.
Incentive stock options may be granted only to employees. The 1992 Stock
Option Plan is administered by the Board of Directors or a committee appointed
by the Board, which determines the terms of options granted, including the
exercise price, the number of shares subject to the option, and the option's
exercisability.
The exercise price of all options granted under the 1992 Stock Option Plan
must be at least equal to the fair market value of such shares on the date of
grant. The maximum term of options granted under the 1992 Stock Option Plan is
10 years. With respect to any participant who owns stock representing more
than 10% of the voting rights of the Company's outstanding capital stock, the
exercise price of any option must be at least equal to 110% of the fair market
value on the date of grant.
1996 Stock Option Plan
The Company adopted the 1996 Stock Option, Deferred Stock and Restricted
Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of
ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards
consisting of deferred stock, restricted stock, stock appreciation rights and
limited stock appreciation rights ("Awards"). The 1996 Stock Option Plan is
administered by a committee of directors appointed by the Board of Directors
(the "Committee"). ISOs may be granted to the officers and key employees of
the Company or any of its subsidiaries.
The exercise price for any option granted under the 1996 Stock Option Plan
may not be less than 100% (110% in the case of ISOs granted to an employee who
is deemed to own in excess of 10% of the outstanding
113
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common Stock) of the fair market value of the shares of Common Stock at the
time the option is granted. The purpose of the 1996 Stock Option Plan is to
provide a means of performance-based compensation in order to attract and
retain qualified personnel and to provide an incentive to those whose job
performance affects the Company. The effective date of the 1996 Stock Option
Plan was June 21, 1996.
A total of 3,000,000 shares of the Company's Common Stock has been reserved
for issuance under the 1996 Stock Option Plan and a total of 1,937,220 and
1,453,200 options were outstanding at December 31, 1998 and 1997,
respectively.
If an option granted under the 1996 Stock Option Plan expires or terminates,
or an Award is forfeited, the shares subject to any unexercised portion of
such option or Award will again become available for the issuance of further
options or Awards under the 1996 Stock Option Plan.
Unless previously terminated by the Board of Directors, no options or Awards
may be granted under the 1996 Stock Option Plan after June 21, 2006.
Options granted under the 1996 Stock Option Plan will become exercisable
upon the terms of the grant made by the Committee. Awards will be subject to
the terms and restrictions of the Award made by the Committee. The Committee
has discretionary authority to select participants from among eligible persons
and to determine at the time an option or Award is granted and in the case of
options, whether it is intended to be an ISO or a NQSO.
Under current law, ISOs may not be granted to any individual who is not also
an officer or employee of the Company or any subsidiary.
Each option must terminate no more than 10 years from the date it is granted
(or five years in the case of ISOs granted to an employee who is deemed to own
in excess of 10% of the combined voting power of the Company's outstanding
Common Stock). Options may be granted on terms providing for exercise in whole
or in part at any time or times during their respective terms, or only in
specified percentages at stated time periods or intervals during the term of
the option, as determined by the Committee. The exercise price of any option
granted under the 1996 Stock Option Plan is payable in full (i) in cash, (ii)
by surrender of shares of the Company's Common Stock already owned by the
option holder having a market value equal to the aggregate exercise price of
all shares to be purchased including, in the case of the exercise of NQSOs,
restricted stock subject to an Award under the 1996 Stock Option Plan, (iii)
by cancellation of indebtedness owed by the Company to the optionholder, or
(iv) by any combination of the foregoing.
The Board of Directors may from time to time revise or amend the 1996 Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding options or Award without such participant's consent or may,
without shareholder approval, increase the number of shares subject to the
1996 Stock Option Plan or decrease the exercise price of a stock option to
less than 100% of fair market value on the date of grant (with the exception
of adjustments resulting from changes in capitalization), materially modify
the class of participants eligible to receive options or Awards under the 1996
Stock Option Plan, materially increase the benefits accruing to participants
under the 1996 Stock Option Plan or extend the maximum option term under the
1996 Stock Option Plan.
114
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of changes in outstanding stock options under the 1992 and 1996
Stock Option Plans follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares in thousands Shares Price Shares Price Shares price
------------------- ------ -------- ------ -------- ------ --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, January 1. 2,536 11.41 2,589 $8.58 1,637 $2.94
Options granted................ 1,093 11.52 470 18.72 1,609 13.62
Options exercised.............. (177) 5.26 (430) 2.61 (295) 2.61
Options canceled............... (646) 16.70 (93) 10.56 (362) 8.32
----- ----- -----
Options outstanding, December
31............................ 2,806 10.62 2,536 11.41 2,589 8.58
===== ===== =====
Options Exercisable............ 911 9.20 678 6.95 551 2.47
</TABLE>
There were 1,189,081 options available for future grants at December 31,
1998.
Effective January 1, 1996, The Company adopted the disclosure requirements
of SFAS 123, and continued to measure its employee stock-based compensation
arrangements under the provisions of APB 25. Accordingly, no compensation
expense has been recognized for the stock option plans. Had compensation
expense for the Company's stock option plans been determined based on the fair
value at the grant date for awards after 1994 consistent with the provisions
of SFAS 123, the Company's net (loss) income and (loss) income per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1998 1997 1996
-------- ------- -------
(In thousands, except
per share data)
<S> <C> <C> <C>
Net (loss) income:
As reported................................... $(73,633) $85,921 $75,984
Pro forma..................................... (74,996) 81,707 74,733
Basic (loss) income per share:
As reported................................... $ (1.93) $ 2.23 $ 2.11
Pro forma..................................... (1.96) 2.12 2.07
Diluted (loss) income per share:
As reported................................... $ (1.93) $ 2.10 $ 1.95
Pro forma..................................... (1.96) 2.00 1.92
</TABLE>
The effects of applying SFAS 123 for disclosing compensation cost may not be
representative of the effects on reported net income (loss) for future years.
The weighted average fair value at date of grant of options granted during
1998, 1997 and 1996 was $4.79, $11.27, and $6.22 per option, respectively. The
fair value of options at the date of grant was estimated using the Black-
Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Expected life (years)................................. 5.11 5.53 3.40
Interest rate......................................... 4.54% 5.76% 5.48%
Volatility............................................ 66.81 64.33 57.51
Dividend yield........................................ 0.00% 0.00% 0.00%
</TABLE>
115
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred Executive Compensation Plans
Effective July 1, 1998, the Company adopted our Deferred Executive
Compensati on Plan (the "DEC Plan 1") and the Deferred Executive Compensation
Plan 2 (the "DEC Plan 2", and together with the DEC Plan 1, the "DEC Plans").
The DEC Plans are each administered by a committee appointed by the board of
directors. Any employee who has an annual base salary of at least $100,000 or
who had an annual base salary of at least $100,000 in the prior year and
directors may elect to participate in the DEC Plans. A participant's annual
base salary includes all cash compensation excluding bonuses, commissions,
employee benefits, stock options, relocation expenses, incentive payments,
non-monetary awards, automobile and other allowances. Participants in the DEC
Plans may defer up to 50% of their annual base salary and commissions and/or
up to 100% of their annual bonus payments. Benefits accrued under the DEC
Plans will be paid to all participants, other than participants who have
voluntarily resigned their positions, in the form of a lifetime annuity issued
by a life insurance company. DEC Plan benefits accrue through retirement so
long as the participant remains employed by our company. Participants who
voluntarily resign prior to retirement will be paid all of their vested
benefits under the DEC Plans. If the Company terminates the DEC Plans, the
Company may elect to pay participants in a lump sum, or in a lifetime annuity.
Deferred compensation contributed to DEC Plan 1 is invested in the Company's
common stock. The Company matches contributions to the DEC Plan 1, to be paid
in our common stock, on a dollar-for-dollar basis up to $50,000 per
participant. The Company also reserves the right to make discretionary
matches, to be paid in its common stock, in any year. Matching contributions
vest 50% a year, commencing one year from the date of the matching
contribution. Matching contributions vest completely if a participating
employee retires, becomes permanently disabled, or dies.
Deferred compensation contributed to DEC Plan 2 may be invested in certain
mutual and money market funds. The Company will not make matching
contributions to the DEC Plan 2. All DEC Plan 2 contributions are completely
vested immediately. The Company incurred $248,000 in expense for matching
contributions to DEC Plan 1 during the year ended December 31, 1998. DEC Plan
1 owned a total of 366,021 shares of ICII common stock at December 31, 1998.
23. Executive Compensation
Employment Agreements
On January 1, 1997, the Company entered into five-year employment contracts
with H. Wayne Snavely, Chairman of the Board, President and Chief Executive
Officer, Kevin E. Villani, Executive Vice President Finance, and a Director
and Stephen J. Shugerman, a Director, and Vice-Chairman of SPB, which provide
for minimum annual aggregate compensation of $1 million, subject to adjustment
for inflation, plus an annual bonus approved by the Company's Board of the
Directors based on the attainment of performance objectives, including the
Company's return on equity, income per share and increase in the price of the
Company's common stock. The total cash compensation of the three senior
officers is limited in the aggregate to $3.0 million annually.
Stock Options
On January 1, 1992, options were granted to three senior officers of the
Company to purchase a total of 2,292,628 shares, adjusted for stock dividends
and splits, of the Company's Common Stock. The exercise price of these options
is $0.89 per share of common stock for one-half of the options, with the other
half exercisable at $1.40 per share. These options became exercisable in
September 1995 (vesting was accelerated from January 1, 1997). These options
expire on December 1, 2001 and are not covered by the Company's 1992 or 1996
Stock Option Plans.
116
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Compensation expense relating to these options was recorded in the Company's
consolidated financial statements over a four year period which ended December
31, 1995 for an amount representing the difference between the exercise price
of the options and the market price of the Company's stock at the grant date.
The aggregate amount of compensation expense recognized on these stock options
since their grant date was $2,178,000.
24. Interest Rate Swaps
The Company may enter into interest rate cap, floor, and swap transactions
to manage its exposure to fluctuations in interest rates and market movements
in securities values. These instruments involve, to varying degrees, elements
of credit and interest rate risk. The contract or notional amounts do not
represent exposure to credit loss. Risk originates from the inability of
counterparties to meet the terms of the contracts and from market movements in
securities values and interest rates. The Company controls the credit risk of
its interest rate cap, floor and swap agreements through credit approvals,
limits and monitoring procedures.
During the years ended December 31, 1998 and 1997, the Company entered into
total rate of return swap contracts for investment purposes with various
investment bank counterparties, the provisions of which entitle the Company to
receive the total return on various commercial loans and pay for a floating
payment of one month LIBOR plus a spread. These contracts are off balance
sheet instruments. As of December 31, 1998 and 1997, the Company was party to
total rate of return swap contracts with a total notional amount of $155.4
million and $150.6 million, under which the Company was obligated to pay one
month LIBOR plus a weighted average spread of 0.75% and 0.78%, respectively.
The weighted average remaining life of these contracts was 32.1 months and
37.1 months as of December 31, 1998 and 1997. For the years ended December 31,
1998 and 1997, the Company recognized $4.3 million and $448,000 in income on
total return swaps, respectively.
As a part of the Pacifica Partners I LP collateralized loan obligation
("CLO") fund launched by the Company in August 1998, the Company delivered
subordinate bonds of approximately $51 million into a total rate of return
swap with the Canadian Imperial Bank of Commerce ("CIBC"). The provisions of
the swap entitle the Company to receive the total return on the subordinate
bonds delivered and pay a floating payment of LIBOR plus a weighted average
spread of 1.36%. The Company delivered $17.8 million in cash and various
equity securities to CIBC as collateral for the swap. These amounts are
classified as Trading Securities on the consolidated balance sheet at
December 31, 1998.
As a part of the SPB securitization in the third quarter of 1997 of $277.0
million of multi-family and commercial mortgage loans, the Company delivered
subordinate bonds of approximately $22 million into a total rate of return
swap with JP Morgan. The provisions of the swap entitle the Company to receive
the total return on the subordinate bonds delivered in exchange for a floating
payment of LIBOR plus a spread of 1.95%. The swap was an off balance sheet
instrument, and it expired on September 30, 1997.
25. Commitments and Contingencies
Loan Servicing
As of December 31, 1998 and 1997 the Company was servicing loans and leases
for others, directly and through sub-servicing arrangements, totaling
approximately $930.0 million and $1.3 billion, respectively.
Related fiduciary funds held in trust for investors in non-interest bearing
accounts totaled $7.6 million and $8.3 million at December 31, 1998 and 1997,
respectively. These funds are segregated in special bank accounts and are held
as deposits at SPB. The Company is a guarantor of certain performances and
lease servicing by IBC. The Company is a guarantor for AMN's performance with
regards to the Auto Trust 1997-A securitization.
117
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Sales of Loans and Servicing Rights
In the ordinary course of business, the Company is exposed to liability
under representations and warranties made to purchasers and insurers of leases
and mortgage loans and the purchasers of servicing rights. Under certain
circumstances, the Company is required to repurchase mortgage loans if there
has been a breach of representations or warranties. The Company provided $4.8
million and $5.4 million in 1998 and 1997, respectively, as an allowance for
losses on repurchases of former mortgage banking loans. At December 31, 1998,
the related repurchase liability totalled $5.1 million.
During the years ended December 31, 1998 and 1997, respectively, the Company
retained servicing rights on $190.0 million and $197.8 million of mortgage
loans sold through traditional secondary market channels and $118.7 million
and $919.1 million on loans and leases sold through securitizations.
Additionally, during the year ended December 31, 1998 and 1997,
respectively, the Company released servicing rights to the purchasers on
$215.3 million and $61.1 million of mortgage loans sold.
Loan Commitments
As of December 31, 1998 and 1997, the Company had unfunded open loan
commitments amounting to $1.0 billion and $655.3 million, respectively, to
fund loans. There is no exposure to credit loss in this type of commitment
until the loans are funded. Interest rate risk is mitigated by the use of
variable rate loan contracts.
Forward Contracts and Futures
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to reduce its own exposure to fluctuations in
interest rates. These financial instruments include forward delivery contracts
with major dealers in mortgage-backed securities and financial futures
contracts. The contract or notional amounts of those instruments reflect the
extent of involvement the Company has in particular classes of financal
instruments. The contract or notional amounts on forward and future contracts
do not represent exposure to credit risk. Risk originates from the inability
of counterparties to meet the terms of the contracts and from market movments
in interest rates and securities values.
As of December 31, 1998 and 1997, the Company had open positions of $0 and
$16.4 million related to the sales of United States Treasury futures contracts
hedging the interest rate risk on fixed rate loans held for sale. At December
31, 1997, the Company had an unrealized gain of $277,000 on the open position.
Lease Commitments
Minimum rental commitments under all noncancelable operating leases at
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
1999..................................... $ 4,225
2000..................................... 3,634
2001..................................... 3,297
2002..................................... 2,196
2003..................................... 1,466
Thereafter............................... 11
-------
Total.................................. $14,829
=======
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 was $5.3
million, $4.0 million, and $4.2 million, respectively.
118
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Legal Proceedings
The Company and one of its 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
$4.0 million. In July 1998, the Company and the other defendants filed an
answer and counterclaim seeking recovery from Resnick. A binding arbitration
is currently scheduled to take place in April 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, The Company and its 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 have moved to
dismiss the complaint.
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 Paul B. Lasiter
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, thus resulting in an artificial inflation of Imperial Credit
Industries,
119
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inc.'s stock price. These alleged class actions which have been filed or
transferred to the Central District of California 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 are currently pending to
consolidate all of these alleged ICII class action lawsuits in the U.S.
District Court for the Central District of California along with a motion to
appoint lead counsel was granted on February 22, 1999.
The Company is 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, the Company
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 the Company
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 parties are presently engaged in pretrial discovery.
All of the above referenced actions are being actively defended and although
the ultimate outcome can not be estimated, management believes, based in part
upon the advice of legal counsel, that none of these proceedings will have a
material effect on the Company's financial condition or results of operations.
The Company is involved in additional litigation arising in the normal
course of business.
26. Fair Value of Financial Instruments
Financial instruments include securities, loans receivable, time deposits
and various off-balance sheet items. Because no market exists for a portion of
the Company's loans held for investment and securitization related assets,
fair value estimates are based on judgments regarding credit risk, investor
expectation of future economic conditions, normal cost of administration and
other risk characteristics, including interest rate and prepayment risk. These
estimates are subjective in nature and involve uncertainties and matters of
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. In addition, the fair
value estimates presented do not include the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Financial Assets
The carrying values of cash, interest bearing deposits, FHLB stock, and
accrued interest receivable are considered to approximate fair value. The
carrying values of securities held for trading and available for sale
approximate fair value. Such market value is determined by reference to quoted
market prices. When quoted market prices are not available, fair value is
estimated by reference to market values for similar securities or by
discounting cash flows at an appropriate risk rate. The fair value of loans
and leases held for sale is based on sale commitments or prices for similar
products. The fair value of loans held for investment is estimated using a
combination of techniques, including discounting estimated future cash flows
and quoted market prices for similar instruments, taking into consideration
the varying degrees of credit risk.
The fair value of servicing rights and securitization related assets is
estimated by discounting future cash flows using appropriate risk, default and
prepayment rates. The fair value of investments in unconsolidated publicly
traded affiliates is based on quoted market prices.
120
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Financial Liabilities
The carrying amounts of deposits due on demand and accrued interest payable
is considered to approximate fair value. For fixed maturity deposits, fair
value is estimated by discounting estimated future cash flows using currently
offered rates for deposits of similar maturities. The fair value of debt is
based on rates currently available to the Company for debt with similar terms
and remaining maturities.
Off-Balance Sheet Financial Instruments
The fair value of lending commitments is estimated using the fees currently
charged to options, into similar agreements; such estimated fair value is not
material. The fair value of interest rate swaps, forward treasury contracts,
interest rate futures and interest rate swaps is based on quoted market
prices. Total rate of return swaps are carried in securities held for trading
at their fair value.
The estimated fair values of the Company's financial instruments at December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Assets:
Cash............................... $ 297,772 $ 297,772 $ 45,379 $ 45,379
Interest bearing deposits.......... 1,415 1,415 103,738 103,738
Investment in Federal Home Loan
Bank stock........................ 4,657 4,657 5,646 5,646
Securities held for trading........ 162,356 162,356 120,905 120,905
Securities available for sale...... 68,410 68,410 100,917 100,917
Loans and leases held for sale..... 323,699 323,699 153,469 159,160
Loans and leases held for
investment, net................... 1,320,095 1,325,237 1,252,487 1,279,441
Servicing rights................... 4,329 4,329 4,731 4,731
Retained interest in loan and lease
securitizations................... 27,011 27,011 22,895 22,895
Accrued interest receivable........ 10,114 10,114 9,687 9,687
Investments in unconsolidated
subsidiaries...................... 56,334 85,432 118,402 330,427
Liabilities:
Deposits........................... $1,711,328 $1,719,382 $1,156,022 $1,160,294
Borrowings from Federal Home Loan
Bank.............................. 20,000 20,000 45,000 45,000
Other borrowings................... 102,270 102,270 144,841 144,841
Remarketed par securities.......... 70,000 47,950 70,000 70,000
Senior notes....................... 219,858 147,305 219,813 219,474
Accrued interest payable........... 25,421 25,421 21,484 21,484
Off Balance Sheet Items:
Forward treasury contracts......... -- -- 277 277
</TABLE>
121
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
27. Summary of Quarterly Financial Information (unaudited)
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Gain on sale of loans.............. $ 5,572 $ 3,273 $ 3,807 $ 2,236
Net interest income................ 25,745 29,070 29,077 28,842
Other revenues (1)................. 19,173 23,760 (147,150) 8,228
Provision for loan and lease
losses............................ 3,000 4,300 9,500 (1,350)
Other expenses..................... 23,938 25,759 39,330 31,809
Net income (loss).................. 12,900 16,262 (109,440) 6,645
Income (loss) per share:
Basic............................ $ 0.33 $ 0.42 $ (2.83) $ 0.18
Diluted.......................... $ 0.32 $ 0.40 $ (2.83) $ 0.18
Year ended December 31, 1997
Gain on sale of loans.............. $ 8,626 $28,138 $ 20,973 $ 12,000
Net interest income................ 19,685 19,434 23,360 22,908
Other revenues..................... 13,555 10,186 25,445 131,569
Provision for loan and lease
losses............................ 2,650 3,600 3,400 11,325
Other expenses..................... 20,373 24,086 30,303 40,099
Net income......................... 7,037 14,073 14,589 50,222
Income per share:
Basic............................ $ 0.18 $ 0.37 $ 0.38 $ 1.29
Diluted.......................... $ 0.17 $ 0.35 $ 0.36 $ 1.22
</TABLE>
- --------
(1) Other revenues for the three months ended September 30, 1998 includes
loss on impairment of equity securities, mark to market write-downs on
securities and loans held for sale.
28. Selected Financial Information of Subsidiaries and Equity Investment
The following represents summarized financial information with respect to
the operations of SPB, a significant wholly-owned subsidiary of ICII and FMC a
38.4% owned equity investment.
<TABLE>
<CAPTION>
As of and for the Year Ended
December 31,
--------------------------------
Southern Pacific Bank 1998 1997 1996
--------------------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Total assets................................ $1,977,564 $1,503,807 $1,384,008
Deposits.................................... 1,716,688 1,189,841 1,072,266
Borrowings from Federal Home Loan Bank...... 20,000 45,000 140,500
Other borrowings............................ 35,000 70,000 --
Stockholder's equity........................ 179,022 157,082 144,798
Interest income............................. 194,934 151,570 131,184
Interest expense............................ 95,647 80,452 73,141
Noninterest income.......................... 3,380 40,112 15,149
Noninterest expense......................... 61,799 42,991 21,846
Provision for loan losses................... 12,500 14,900 8,938
Income before taxes......................... 28,368 53,339 42,408
Net income.................................. 16,393 30,824 24,399
</TABLE>
122
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
As of and for the Year
Ended December 31,
--------------------------
Franchise Mortgage Acceptance Company 1998 1997 1996
------------------------------------- -------- -------- --------
(In thousands)
<S> <C> <C> <C>
Total assets..................................... $676,314 $422,232 $160,176
Borrowings....................................... 483,763 256,220 143,139
Stockholders' equity............................. 146,713 138,422 14,457
Interest income.................................. 55,439 26,758 16,130
Interest expense................................. 38,320 21,602 14,489
Gain on sale of loans............................ 40,146 52,117 18,671
Noninterest expense.............................. 53,766 24,755 12,242
Income before taxes.............................. 13,811 35,721 9,324
Net income....................................... 8,291 20,720 9,324
</TABLE>
The following represents condensed consolidating financial information as of
December 31, 1998 and December 31, 1997, and for the years ended December 31,
1998, 1997 and 1996, with respect to the financial position, results of
operations and cash flows of the Company and its wholly-owned and majority-
owned subsidiaries. On January 17, 1997, the Company sold $200 million of
9.875% Senior Notes due 2007. As of December 31, 1998, 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 December 31, 1998, the non-guarantor subsidiaries are
SPB, ICG and ICCTI. FMC was a guarantor subsidiary through September 30, 1997.
Each of the guarantees is full and unconditional and joint and several. The
summarized consolidated financial information is presented in lieu of separate
financial statements and other related disclosures of the wholly-owned
subsidiary guarantors as management has determined that such information is
not material to investors. None of the subsidiary guarantors is restricted
from making distributions to the Company.
123
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 1998
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
------
Cash.................... $ 3,224 $ 725 $ 296,259 $ (2,436) $ 297,772
Interest bearing
deposits............... 2,281 423 (1,289) -- 1,415
Investments in Federal
Home Loan Bank stock... -- -- 4,657 -- 4,657
Securities available for
sale and trading....... 118,622 8,421 113,723 (10,000) 230,766
Loans held for sale..... 1,698 33,160 288,841 -- 323,699
Loans held for
investment, net........ 45,029 7,467 1,302,599 (35,000) 1,320,095
Servicing rights........ -- 365 3,964 -- 4,329
Retained interest in
loan and lease
securitizations........ -- 27,011 -- -- 27,011
Investment in FMC....... 56,334 -- -- -- 56,334
Investment in
subsidiaries........... 276,863 -- -- (276,863) --
Goodwill................ -- 16,959 20,539 -- 37,498
Other assets............ 32,248 12,200 24,272 (1,925) 66,795
Net assets of
discontinued
operations............. 43,624 3,188 -- -- 46,812
-------- -------- ---------- --------- ----------
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>
124
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Year ended December 31, 1998
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Interest income......... $ 30,082 $ 12,962 $197,209 $ (4,413) $ 235,840
Interest expense........ 30,617 1,131 95,771 (4,413) 123,106
--------- -------- -------- -------- ---------
Net interest (expense)
income................. (535) 11,831 101,438 -- 112,734
Provision for loan and
lease losses........... -- 2,950 12,500 -- 15,450
--------- -------- -------- -------- ---------
Net interest (expense)
income after
provision for loan
and lease losses...... (535) 8,881 88,938 -- 97,284
--------- -------- -------- -------- ---------
Gain on sale of loans
and leases............. 46 4,790 10,052 -- 14,888
Loan servicing (expense)
income................. (434) 4,907 7,510 -- 11,983
Brokerage commission and
investment banking
fees................... -- -- 18,633 (170) 18,463
Asset management fees... -- 7,591 -- -- 7,591
Loss on sale of equity
securities............. (179) (50) (363) -- (592)
Loss on impairment of
equity securities...... (120,138) -- -- -- (120,138)
Mark to market on
securities and loans
held for sale.......... (4,993) (11,604) (25,791) -- (42,388)
Dividends received from
subsidiaries........... 25,410 -- -- (25,410) --
Equity in net income of
FMC.................... 3,235 -- -- -- 3,235
Equity in net income of
SPFC................... 12,739 -- -- -- 12,739
Other income............ 362 1,292 11,464 -- 13,118
--------- -------- -------- -------- ---------
Total other income..... (83,952) 6,926 21,505 (25,580) (81,101)
--------- -------- -------- -------- ---------
Total revenues....... (84,487) 15,807 110,443 (25,580) 16,183
--------- -------- -------- -------- ---------
Expenses:
Personnel expense....... 4,415 9,715 47,506 -- 61,636
Amortization of
servicing rights....... -- (365) 1,851 -- 1,486
Occupancy expense....... 1,267 942 3,541 -- 5,750
Net (income) expenses of
other real estate
owned.................. (548) 459 (812) -- (901)
Professional services... 2,897 2,773 5,348 (170) 10,848
Amortization of
goodwill............... -- 1,084 1,602 -- 2,686
Provision for loss on
loan repurchase........ 4,750 -- -- -- 4,750
General, administrative
and other expense...... 3,493 4,121 26,967 -- 34,581
--------- -------- -------- -------- ---------
Total expenses......... 16,274 18,729 86,003 (170) 120,836
--------- -------- -------- -------- ---------
(Loss) income from
continuing operations
before income taxes,
minority interest,
deferred inter-company
expense and
extraordinary item..... (100,761) (2,922) 24,440 (25,410) (104,653)
Income taxes............ (55,061) (981) 11,978 -- (44,064)
Minority interest in
(loss) income of
consolidated
subsidiaries........... (1,552) 88 22 (22) (1,464)
--------- -------- -------- -------- ---------
(Loss) income from
continuing operations
before equity in
undistributed income of
subsidiaries........... (44,148) (2,029) 12,440 (25,388) (59,125)
Equity in undistributed
(loss) income of
subsidiaries........... (29,485) -- -- 29,485 --
--------- -------- -------- -------- ---------
(Loss) income from
continuing operations.. (73,633) (2,029) 12,440 4,097 (59,125)
Loss from discontinued
operations............. -- (3,232) -- -- (3,232)
Loss on disposal of AMN. -- (11,276) -- -- (11,276)
--------- -------- -------- -------- ---------
Net (loss) income....... $ (73,633) $(16,537) $ 12,440 $ 4,097 $ (73,633)
========= ======== ======== ======== =========
</TABLE>
125
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Year ended December 31, 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............. $(50,644) $(27,150) 39,006 $ 1,653 $ (37,135)
-------- -------- --------- -------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits..... 29,109 726 72,488 -- 102,323
Purchase of securities
available for sale... (16,651) (900) -- -- (17,551)
Sale of securities
available for sale... -- 8,818 -- -- 8,818
Net change loans held
for investment....... 10,884 15,738 (303,251) -- (276,629)
Proceeds of sale of
OREO................. 2,558 9,360 1,825 -- 13,743
Proceeds of sales of
IMH stock............ 867 -- -- -- 867
Purchases of premises
and equipment........ (1,721) (671) (5,441) -- (7,833)
Redemption of FHLB
stock................ -- -- 1,280 -- 1,280
Net change in
investment in
subsidiaries......... 4,591 -- -- (4,591) --
-------- -------- --------- -------- ---------
Net cash provided by
(used in) investing
activities............. 29,637 33,071 (233,099) (4,591) (174,982)
-------- -------- --------- -------- ---------
Cash flows from
financing activities:
Net change in
deposits............. -- -- 523,924 31,382 555,306
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........... 19,261 (15,153) (47,911) 1,232 (42,571)
Capital contributions
from ICII............ (4,332) 4,332 -- -- --
Dividends paid to
ICII................. 20,915 (16,915) (4,000) -- --
Proceeds from exercise
of stock options..... 1,037 -- -- -- 1,037
Net change in minority
interest............. (1,574) (111) 22 1,706 43
Repurchase and
retirement of stock.. (24,305) -- -- -- (24,305)
-------- -------- --------- -------- ---------
Net cash provided by
(used in) financing
activities............. 11,002 (27,847) 447,035 34,320 464,510
-------- -------- --------- -------- ---------
Net change in cash.... (10,005) (21,926) 252,942 31,382 252,393
Cash at beginning of
period............... 13,229 22,651 43,317 (33,818) 45,379
-------- -------- --------- -------- ---------
Cash at end of period. $ 3,224 $ 725 $ 296,259 $ (2,436) $ 297,772
======== ======== ========= ======== =========
</TABLE>
126
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 1997
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
ASSETS
------
<S> <C> <C> <C> <C> <C>
Cash.................... $ 13,229 $ 22,651 $ 43,317 $ (33,818) $ 45,379
Interest bearing
deposits............... 31,390 1,148 71,200 -- 103,738
Investments in Federal
Home Loan Bank stock... -- -- 5,646 -- 5,646
Securities available for
sale and trading....... 107,671 14,223 99,928 -- 221,822
Loans and leases held
for sale............... 12,138 14,593 126,738 -- 153,469
Loans and leaes held for
investment, net........ 59,347 30,710 1,197,430 (35,000) 1,252,487
Servicing rights........ -- -- 4,731 -- 4,731
Retained interest in
loan and lease
securitizations........ -- 22,895 -- -- 22,895
Investment in SPFC...... 65,303 -- -- -- 65,303
Investment in FMC....... 53,099 -- -- -- 53,099
Investment in
subsidiaries........... 281,454 -- -- (281,454) --
Goodwill................ -- 13,229 22,378 -- 35,607
Other assets............ 33,525 18,199 26,475 (2,934) 75,265
Net assets of
discontinued
operations............. 45,961 28,562 -- (19,575) 54,948
-------- -------- ---------- --------- ----------
Total assets.......... $703,117 $166,210 $1,597,843 $(372,781) $2,094,389
======== ======== ========== ========= ==========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C> <C>
Deposits................ $ -- $ -- $1,189,840 $ (33,818) $1,156,022
Other borrowings........ -- 30,250 196,528 (36,937) 189,841
Remarketed Par
Securities............. 72,165 (2,165) -- -- 70,000
Senior notes............ 219,813 -- -- -- 219,813
Minority interest in
consolidated
subsidiaries........... 946 20 111 2,097 3,174
Other liabilities....... 86,260 20,751 45,167 (20,572) 131,606
-------- -------- ---------- --------- ----------
Total liabilities..... 379,184 48,856 1,431,646 (89,230) 1,770,456
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- 12,000 -- (12,000) --
Common stock............ 147,109 127,305 87,177 (214,482) 147,109
Retained earnings....... 174,898 (21,951) 79,020 (57,069) 174,898
Accumulated other
comprehensive income... 1,926 -- -- -- 1,926
-------- -------- ---------- --------- ----------
Total shareholders'
equity............... 323,933 117,354 166,197 (283,551) 323,933
-------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity. $703,117 $166,210 $1,597,843 $(372,781) $2,094,389
======== ======== ========== ========= ==========
</TABLE>
127
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Year ended December 31, 1997
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Interest income......... $28,916 $ 8,399 $170,928 $ (4,643) $203,600
Interest expense........ 25,703 2,779 94,374 (4,643) 118,213
------- -------- -------- -------- --------
Net interest income..... 3,213 5,620 76,554 -- 85,387
Provision for loan and
lease losses........... 5,000 1,075 14,900 -- 20,975
------- -------- -------- -------- --------
Net interest income
after provision for
loan and lease losses. (1,787) 4,545 61,654 -- 64,412
------- -------- -------- -------- --------
(Loss) gain on sale of
loans and leases....... (4,427) 7,908 66,256 -- 69,737
Loan servicing (expense)
income................. (2,283) 3,943 6,942 872 9,474
Brokerage commission and
investment banking
fees................... -- -- 7,702 -- 7,702
Asset management fees... -- 5,810 -- -- 5,810
Gains on sale of
securities............. 110,317 411 891 566 112,185
Gain on termination of
REIT contract.......... -- 19,046 -- -- 19,046
Mark to market on
securities and loans
held for sale.......... (341) -- -- -- (341)
Dividends received from
subsidiaries........... 27,514 -- -- (27,514) --
Equity in net income of
SPFC................... 25,869 -- -- -- 25,869
Equity in net loss of
FMC.................... (3,050) -- -- -- (3,050)
Other (expense) income.. (2,573) 1,820 4,813 -- 4,060
------- -------- -------- -------- --------
Total other income..... 151,026 38,938 86,604 (26,076) 250,492
------- -------- -------- -------- --------
Total revenues......... 149,239 43,483 148,258 (26,076) 314,904
------- -------- -------- -------- --------
Expenses:
Personnel expense....... 4,682 8,548 38,379 -- 51,609
Amortization of
servicing rights....... 1,580 636 -- 872 3,088
Occupancy expense....... 1,310 598 2,411 -- 4,319
Net expenses of other
real estate owned...... 4,513 (254) 2,268 -- 6,527
Professional services... 3,611 1,046 5,008 -- 9,665
Amortization of
goodwill............... -- 955 1,536 -- 2,491
Provision for loss on
loan repurchase........ 5,400 -- -- -- 5,400
Loss on restructuring to
Dabney/Resnick/Imperial,
LLC.................... 3,709 -- -- -- 3,709
General, administrative
and other expense...... 4,922 8,880 14,251 -- 28,053
------- -------- -------- -------- --------
Total expenses......... 29,727 20,409 63,853 872 114,861
------- -------- -------- -------- --------
Income before income
taxes, minority
interest, deferred
inter-company expense
and extraordinary item. 119,512 23,074 84,405 (26,948) 200,043
Income taxes............ 41,611 9,902 22,515 239 74,267
Minority interest in
income of consolidated
subsidiaries........... 10,513 -- 11 (11) 10,513
------- -------- -------- -------- --------
Income (loss) from
continuing operations
before deferred
inter-company expense.. 67,388 13,172 61,879 (27,176) 115,263
Deferred inter-company
expense, net of income
taxes.................. (327) -- -- 327 --
------- -------- -------- -------- --------
Income (loss) from
continuing operations
before equity in
undistributed income of
subsidiaries........... 67,715 13,172 61,879 (27,503) 115,263
Equity in undistributed
income of subsidiaries. 22,201 -- -- (22,201) --
------- -------- -------- -------- --------
Income (loss) from
continuing operations.. 89,916 13,172 61,879 (49,704) 115,263
Loss from discontinued
operations............. -- (25,347) -- -- (25,347)
------- -------- -------- -------- --------
Income (loss) before
extraordinary item..... 89,916 (12,175) 61,879 (49,704) 89,916
Extraordinary item--Loss
on early extinguishment
of debt,
net of income taxes.... (3,995) -- -- -- (3,995)
------- -------- -------- -------- --------
Net income (loss)....... $85,921 $(12,175) $ 61,879 $(49,704) $ 85,921
======= ======== ======== ======== ========
</TABLE>
128
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Year ended December 31, 1997
<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............. $ (19,966) $ 7,312 $ 834,215 $(802,998) $ 18,563
--------- -------- --------- --------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits..... (31,390) (986) (70,797) 2,804 (100,369)
Purchase of securities
available for sale... (42,938) -- -- -- (42,938)
Sale of securities
available for sale... -- -- 29,354 (23,950) 5,404
Net change loans held
for investment....... (56,088) 47,751 (272,429) 106,801 (173,965)
Proceeds from sales of
stock................ 83,117 411 1,295 565 85,388
Investment in Imperial
Credit Asset
Resolution Inc. ..... (74,810) -- -- 74,810 --
Cash utilized for
acquisitions......... (750) -- (123,738) -- (124,488)
Net change in
investment in
subsidiaries......... (11,803) -- -- 11,803 --
Other, net............ 3,645 (2,513) (40,377) 69,586 30,341
--------- -------- --------- --------- ---------
Net cash (used in)
provided by investing
activities............. (131,017) 44,663 (476,692) 242,419 (320,627)
--------- -------- --------- --------- ---------
Cash flows from
financing activities:
Net change in
deposits............. -- -- 117,575 (30,737) 86,838
Advances from Federal
Home Loan Bank....... -- -- 50,000 -- 50,000
Repayments of advances
from Federal Home
Loan Bank............ -- -- (145,500) -- (145,500)
Net change in other
borrowings........... (15,363) (58,518) (290,113) 507,499 143,505
Proceeds from offering
of Senior Notes...... 194,500 -- -- -- 194,500
Borrowings from
Imperial Credit
Investment Corp...... 10,000 -- -- (10,000) --
Proceeds from offering
of Remarketed
Securities........... 68,075 -- -- -- 68,075
Repurchase of Senior
Notes................ (73,241) -- -- -- (73,241)
Dividends paid to
ICII................. 18,450 -- (18,450) -- --
Net change in minority
interest............. (44,203) -- 111 (7,670) (51,762)
Other, net............ 781 20 (92,754) 92,734 781
--------- -------- --------- --------- ---------
Net cash provided by
(used in) financing
activities............. 158,999 (58,498) (379,131) 551,826 273,196
--------- -------- --------- --------- ---------
Net change in cash.... 8,016 (6,523) (21,608) (8,753) (28,868)
Cash at beginning of
period............... 5,213 7,973 64,926 (3,865) 74,247
--------- -------- --------- --------- ---------
Cash at end of period. $ 13,229 $ 1,450 $ 43,318 $ (12,618) $ 45,379
========= ======== ========= ========= =========
</TABLE>
129
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED INCOME STATEMENT
Year ended December 31, 1996
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Interest income......... $14,877 $ 3,811 $193,963 $ (5,180) $207,471
Interest expense........ 16,696 1,901 127,181 (10,742) 135,036
------- ------- -------- -------- --------
Net interest income..... (1,819) 1,910 66,782 5,562 72,435
Provision for loan and
lease losses........... -- 9,625 148 9,773
------- ------- -------- -------- --------
Net interest income
after provision for
loan and lease losses. (1,819) 1,910 57,157 5,414 62,662
------- ------- -------- -------- --------
(Loss) gain on sale of
loans.................. (937) 2,617 86,090 386 88,156
Loan servicing (expense)
income................. (3,706) 3,095 11,444 (9,153) 1,680
Gain on sale of
servicing rights....... 6,249 -- -- 1,342 7,591
Gains on sale of
securities............. 82,690 -- -- -- 82,690
Dividends received from
subsidiaries........... 6,200 -- -- (6,200) --
Other income............ 741 3,214 6,162 4,037 14,154
------- ------- -------- -------- --------
Total other income..... 91,237 8,926 103,696 (9,588) 194,271
------- ------- -------- -------- --------
Total revenues......... 89,418 10,836 160,853 (4,174) 256,933
------- ------- -------- -------- --------
Expenses:
Personnel expense....... 8,757 2,997 36,837 (236) 48,355
Amortization of
servicing rights....... 402 106 613 -- 1,121
Occupancy expense....... 1,994 229 2,352 78 4,653
Net expenses of other
real estate owned...... 4,969 -- 765 1,280 7,014
General, administrative
and other expense...... 14,746 3,645 18,884 631 37,906
------- ------- -------- -------- --------
Total expenses......... 30,868 6,977 59,451 1,753 99,049
------- ------- -------- -------- --------
Income before income
taxes, minority
interest, deferred
inter- company expense
and extraordinary item. 58,550 3,859 101,402 (5,927) 157,884
Income taxes............ 28,830 1,606 39,135 303 69,874
------- ------- -------- -------- --------
Income before minority
interest, deferred
inter-company expense
and extraordinary item. 29,720 2,253 62,267 (6,230) 88,010
Minority interest in of
consolidated
subsidiaries........... 12,026 -- 12,026
------- ------- -------- -------- --------
Income before deferred
inter-company expense.. 17,694 2,253 62,267 (6,230) 75,984
Deferred inter-company
expense, net of income
taxes.................. (1,383) 1,383 --
------- ------- -------- -------- --------
Income before equity in
undistributed income of
subsidiaries........... 19,077 2,253 62,267 (7,613) 75,984
Equity in undistributed
income of subsidiaries. 56,907 (56,907) --
------- ------- -------- -------- --------
Net income.............. $75,984 $ 2,253 $ 62,267 $(64,520) $ 75,984
======= ======= ======== ======== ========
</TABLE>
130
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Year ended December 31, 1996
<TABLE>
<CAPTION>
Other Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
Activities............. $ 141,782 $ 28,949 $(222,480) $ 20,614 $ (31,135)
--------- --------- --------- --------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits..... -- (163) 265,206 (636) 264,407
Proceeds of sales of
servicing rights..... 31,799 -- -- (21,788) 10,011
Purchase of securities
available for sale... -- (887) (41,704) (5,962) (48,553)
Net change in loans
held for investment.. (5,310) (86,213) (37,354) 101,226 (27,651)
Cash utilized for
acquisitions......... -- (20,020) -- -- (20,020)
Proceeds from sale of
SPFC stock........... 64,625 -- -- -- 64,625
Net change in
investment in
subsidiaries......... (155,759) -- -- 155,759 --
Other, net............ 3,762 (524) (6,425) 4,545 1,358
--------- --------- --------- --------- ---------
Net cash (used in)
provided by investing
activities............. (60,883) (107,807) 179,723 233,144 244,177
--------- --------- --------- --------- ---------
Cash flows from
financing activities:
Net change in
deposits............. -- -- (20,984) (2,821) (23,805)
Advances from Federal
Home Loan Bank....... -- -- 434,000 -- 434,000
Repayments of advances
from Federal Home
Loan Bank............ -- -- (483,500) -- (483,500)
Proceeds from
convertible
subordinated
Debentures........... -- -- 72,162 -- 72,162
Net change in other
borrowings........... (196,363) 88,768 105,266 (184,134) (186,463)
Proceeds from issuance
of common Stock...... 59,228 -- 53,798 (53,798) 59,228
Repayment of bonds.... -- -- (111,995) -- (111,995)
Net change in minority
interest............. 43,697 -- -- 9,787 53,484
Other, net............ 9,159 -- 26,400 (26,631) 8,928
--------- --------- --------- --------- ---------
Net cash (used in)
provided by financing
activities............. (84,279) 88,768 75,147 (257,597) (177,961)
--------- --------- --------- --------- ---------
Net change in cash.... (3,380) 9,910 32,390 (3,839) 35,081
Cash at beginning of
period............... 8,593 (1,937) 32,536 (26) 39,166
--------- --------- --------- --------- ---------
Cash at end of period. $ 5,213 $ 7,973 $ 64,926 $ (3,865) $ 74,247
========= ========= ========= ========= =========
</TABLE>
131
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
29. SPB Regulatory Matters
General
SPB is subject to federal and state regulation and periodic examinations by
the California Department of Financial Institutions and the FDIC. SPB's
ability to pay dividends is limited by federal and state regulation.
California Regulations
California industrial loan law establishes minimum capital levels and other
ratios that limit the ability of the Bank to pay dividends. Under these
regulations, SPB cannot pay dividends if the amount of SPB's non-demand
deposits is greater than 20 times the amount of SPB's "capital not available
for dividends." "Capital not available for dividends" is the amount of equity
capital that is established by the Board of Directors through an amendment to
SPB's by-laws. At its January 1998 meeting, the Directors approved a by-law
amendment declaring $150 million of capital not available for dividends,
representing a $25 million increase from the previously declared amount. At
December 31, 1998 and 1997, the relationships of non-demand deposits to
capital not available for dividends were 11.4 times and 9.5 times,
respectively.
Federal Deposit Insurance Corporation Regulations
SPB is subject to capital requirements as administered by the FDIC. Failure
to meet minimum capital requirements can initiate certain mandatory--and
possibly additional discretionary--actions by the FDIC that, if undertaken,
could have a direct material effect on SPB's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, SPB must meet specific capital guidelines that
involve quantitative measures of SPB's assets, liabilities and certain off-
balance sheet items as calculated under regulatory accounting practices. SPB's
capital amounts and classifications are also subject to qualitative judgments
by the FDIC with respect to components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require SPB to maintain minimum amounts and ratios, set forth in the table
below, of Total and Tier-1 capital to risk-weighted assets and Tier-1 capital
to average assets. Management believes, as of December 31, 1998, that SPB
meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the FDIC
categorized SPB as well-capitalized under the regulatory framework for prompt
and corrective action. To be categorized as well-capitalized, SPB must
maintain minimum total risk-based, Tier-1 risk-based and Tier-1 leverage
ratios. The following table sets forth the capital categories and the SPB's
ratios as of December 31, 1998:
The following table sets forth the capital categories and the Bank's ratios
as of December 31, 1998:
<TABLE>
<CAPTION>
Total Tier1 Tier-1
Risk-based Risk based Leverage
Captial Category Ratio Ratio Ratio
---------------- ---------- ---------- --------
<S> <C> <C> <C>
Well-capitalized.............................. greater than 10% greater than 6% greater than 5%
or equal to or equal to or equal to
Adequately capitalized........................ greater than 8% greater than 4% greater than 4%
or equal to or equal to or equal to
Under-capitalized............................. less than 8% less than 4% less than 4%
or equal to or equal to or equal to
Significantly under-capitalized............... less than 6% less than 3% less than 3%
or equal to or equal to or equal to
Southern Pacific Bank, December 31, 1998...... 11.12% 8.42% 8.62%
</TABLE>
132
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents SPB's actual capital ratios and the
corresponding minimum and well capitalized capital ratio requirements under
the (i) California Leverage limitation, (ii) FDIC Risk-based Capital and Tier
1 Capital regulations, and (iii) the FDIC Leverage ratio regulation as of
December 31, 1998 and 1997.
December 31, 1998
<TABLE>
<CAPTION>
Well
Minimum Capitalized
Actual Requirement Requirement
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
California Leverage Limitation... $179,022 10.45% $ 85,688 5.00% $ -- --%
Risk-based Capital............... 221,657 11.12% 159,410 8.00% 199,264 10.00%
Risk-based Tier 1 Capital........ 167,823 8.42% 79,705 4.00% 119,558 6.00%
FDIC Leverage Ratio.............. 167,823 8.62% 77,861 4.00% 97,326 5.00%
December 31, 1997
<CAPTION>
Well
Minimum Capitalized
Actual Requirement Requirement
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
California Leverage Limitation... $157,082 13.20% $ 59,476 5.00% $ -- -- %
Risk-based Capital............... 190,673 12.25% 124,583 8.00% 155,729 10.00%
Risk-based Tier 1 Capital........ 136,206 8.75% 62,292 4.00% 93,437 6.00%
FDIC Leverage Ratio.............. 136,206 8.30% 65,644 4.00% 82,055 5.00%
</TABLE>
The FDIC completed an information systems exam of SPB in May 1998 and the
FDIC and DFI completed a joint examination of SPB for the period ended March
31, 1998. As a result of the examinations, the FDIC requested that SPB enter
into two written memoranda of understanding ("MOUs") addressing deficiencies
identified by the FDIC in SPB's accounting systems and controls, and perceived
deficiencies in SPB's Y2K readiness and contingency planning.
The first MOU regarding systems and controls and Y2K was signed by the FDIC
and SPB on November 2, 1998. Under this MOU, SPB is required to take a number
of actions to address and correct the accounting and Y2K preparedness concerns
of the FDIC. On January 19, 1999, the FDIC and DFI issued a second MOU as a
result of the 1998 joint exam, which addressed accounting controls and
policies and alleged violations of law. Under the second MOU, SPB is required
to:
(1) adopt and implement policies to provide adequate accounting controls
consistent with safe and sound banking practices,
(2) eliminate or correct violations of law described in the FDIC/DFI
examination, and
(3) achieve and maintain regulatory capital requirements applicable to a
"well capitalized" depository institution. In addition, under the second
MOU, SPB is allowed to pay dividends to ICII in accordance with its normal
dividend policy. Our policy allows SPB to pay cash dividends of up to 35%
of SPB's net income. Our policy further states that SPB is prohibited from
paying any cash dividend if it is not, immediately prior and subsequent to
the dividend, a "well-capitalized" institution within the meaning of FDIC
regulations.
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.
133
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 second MOU.
In the first quarter of 1999, SPB has received an interim satisfactory
rating from the FDIC related to SPB's Y2K preparedness and contingency
planning.
The FDIC and DFI each has the authority to take a variety of informal and
formal remedial and other enforcement actions with regard to violations of
law, and unsafe and unsound banking practices, including, among other things,
the institution of proceedings or actions imposing or seeking memoranda of
understanding, injunctions, cease and desist orders, criminal or civil
penalties, removal from office, the placing of SPB into conservatorship or
receivership, or the revocation of SPB's charter. The MOU is one such instance
of an informal remedial action which the FDIC or DFI may take. Although we do
not believe that further enforcement action is warranted at this time under
the circumstances, any such enforcement could have a material adverse effect
on the Company.
SPB's management believes it has initiated actions to correct the
deficiencies identified in the reports of examination, has commenced monthly
reporting to its Board of Directors of actions taken and has provided written
reports, on a monthly basis, to the Regional Director of the FDIC.
134
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
30. Imperial Credit Industries, Inc. (Parent Company Only)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
ASSETS
------
Cash........................................................ $ 3,224 $ 13,229
Interest bearing deposits................................... 2,281 31,390
Securities available for sale............................... 69,115 86,695
Trading securities.......................................... 49,507 20,976
Loans held for sale......................................... 1,698 12,138
Loans held for investment, net.............................. 45,029 59,347
Premises and equipment, net................................. 2,808 2,272
Other real estate owned, net................................ 318 1,158
Investment in SPFC.......................................... -- 65,303
Investment in FMC........................................... 56,334 53,099
Investment in subsidiaries.................................. 276,863 281,454
Accrued interest on loans................................... 3,216 3,320
Other assets................................................ 25,906 26,775
Net assets of discontinued operations....................... 43,624 45,961
-------- --------
Total assets.............................................. $579,923 $703,117
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Remarketed Par Securities................................... $ 72,165 $ 72,165
Other borrowings............................................ 20,481 1,220
Senior Notes................................................ 219,858 219,813
Minority interest in consolidated subsidiaries.............. (628) 946
Other liabilities........................................... 34,526 85,040
-------- --------
Total liabilities......................................... 346,402 379,184
-------- --------
Shareholders' equity:
Common stock, no par value, authorized 80,000,000 shares;
36,785,898 and 38,791,439 shares issued and outstanding
at December 31, 1998 and 1997, respectively.............. 129,609 147,109
Retained earnings......................................... 101,265 174,898
Shares held in deferred executive compensation plan....... 3,833 --
Accumulated other comprehensive income-unrealized (loss)
gain on securities available for sale, net............... (1,186) 1,926
-------- --------
Total shareholders' equity.............................. 233,521 323,933
-------- --------
Total liabilities and shareholders' equity.............. $579,923 $703,117
======== ========
</TABLE>
135
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997 1996
--------- -------- -------
(In thousands)
<S> <C> <C> <C>
Revenues:
Interest income................................ $ 30,082 $ 28,916 $14,877
Interest expense............................... 30,617 25,703 16,696
--------- -------- -------
Net interest income (expense)................ (535) 3,213 (1,819)
Provision for loan and lease losses............ -- 5,000 --
--------- -------- -------
Net interest expense after provision for loan
and lease losses.............................. (535) (1,787) (1,819)
Gain (loss) on sale of loans................... 46 (4,427) (937)
Loan servicing expense......................... (434) (2,283) (3,706)
Gain on sale of servicing rights............... -- -- 6,249
(Loss) on impairment of securities............. (120,138) -- --
(Loss) gain on sale of securities.............. (179) 110,317 82,690
Mark to market on securities................... (4,993) (341) --
Dividends received from subsidiaries........... 25,410 27,514 6,200
Equity in net income of SPFC................... 12,739 25,869 --
Equity in net income (loss) of FMC............. 3,235 (3,050) --
Other income (loss)............................ 362 (2,573) 741
--------- -------- -------
Total other income........................... (83,952) 151,026 91,237
--------- -------- -------
Total revenue.................................. (84,487) 149,239 89,418
--------- -------- -------
Expenses:
Personnel expense.............................. 4,415 4,682 8,757
Occupancy expense.............................. 1,267 1,310 1,994
Other expense.................................. 10,592 23,735 20,117
--------- -------- -------
Total expenses............................... 16,274 29,727 30,868
--------- -------- -------
(Loss) income before income taxes, minority
interest, deferred inter-Company items and
extraordinary item............................ (100,761) 119,512 58,550
Income taxes................................... (55,061) 41,611 28,830
--------- -------- -------
(Loss) income before minority interest,
deferred inter-company items and extraordinary
item.......................................... (45,700) 77,901 29,720
Minority interest in (loss) income of
consolidated subsidiaries..................... (1,552) 10,513 12,026
Deferred inter-company (expense) income, net of
income taxes.................................. -- (327) (1,383)
--------- -------- -------
(Loss) income before extraordinary item........ (44,148) 67,715 19,077
Extraordinary item--Loss on extinguishment of
debt, net of income Taxes..................... -- (3,995) --
--------- -------- -------
(Loss) income before equity in undistributed
income of subsidiaries........................ (44,148) 63,720 19,077
Equity in undistributed (loss) income of
subsidiaries, net of income taxes(1).......... (29,485) 22,201 56,907
--------- -------- -------
Net (loss) income............................ $ (73,633) $ 85,921 $75,984
========= ======== =======
Other comprehensive (loss) income.............. (3,112) (3,084) 1,799
--------- -------- -------
Comprehensive (loss) income.................. $ (76,745) $ 82,837 $77,783
========= ======== =======
</TABLE>
- --------
(1) Includes net loss from discontinued operations of $14.5 million and $25.3
million for 1998 and 1997, respectively.
136
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net cash (used in) provided by operating
activities...................................... $(50,644) $(19,966) $141,782
-------- -------- --------
Cash flows from investing activities:
Net change in interest bearing deposits........ 29,109 (31,390) --
Proceeds from bulk sale of servicing rights.... -- -- 31,799
Purchase of servicing rights................... -- -- --
Proceeds from sale of other real estate owned.. 2,558 4,637 2,953
Purchase of securities available for sale...... (16,651) (42,938) --
Investment in Imperial Credit Asset Resolution
Inc. ......................................... -- (74,810) --
Proceeds from sale of SPFC stock............... -- 13,707 64,625
Proceeds from sale of FMC stock................ -- 59,731 --
Proceeds from sale of IMH stock................ 867 9,679 --
Net change in loans held for investment........ 10,884 (56,088) (5,310)
Net change in investment in subsidiaries....... 4,591 (11,803) (155,759)
Cash utilized for acquisitions................. -- (750) --
(Purchase) disposal of premises and equipment.. (1,721) (992) 809
-------- -------- --------
Net cash provided by (used by) investing
activities...................................... 29,637 (131,017) (60,883)
-------- -------- --------
Cash flows from financing activities:
Proceeds from offering of Senior Notes due
2007.......................................... -- 194,500 --
Proceed from offering of Remarketed Par
Securities.................................... -- 68,075 --
Repayments of Senior Notes due 2004............ -- (73,241) --
Borrowings from Imperial Credit Investment
Corporation................................... -- 10,000 --
Proceeds from resale of Senior Notes due 2004.. -- -- 7,615
Proceeds from issuance of common stock......... -- -- 59,228
Repurchase and retirement of common stock and
warrants...................................... (24,305) (551) (127)
Capital contributions to consolidated
subsidiaries.................................. (4,332) -- --
Dividends received from consolidated
subsidiaries.................................. 20,915 18,450 --
Proceeds from exercise of stock options........ 1,037 1,332 1,671
Net change in other borrowings................. 19,261 (15,363) (196,363)
Net change in minority interest................ (1,574) (44,203) 43,697
-------- -------- --------
Net cash provided by (used in) financing
activities...................................... 11,002 158,999 (84,279)
-------- -------- --------
Net change in cash............................... (10,005) 8,016 (3,380)
Cash at beginning of year........................ 13,229 5,213 8,593
-------- -------- --------
Cash at end of year.............................. $ 3,224 $ 13,229 $ 5,213
======== ======== ========
</TABLE>
137
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Disclosure of Cash Flow Information
The following information supplements the condensed statements of cash
flows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Cash paid during the period for:
Interest........................................... $28,892 $19,349 $16,315
Significant non-cash activities:
Loans transferred to OREO.......................... $ 2,798 $ 6,751 $ 8,479
Loans transferred from held for sale to held for
investment........................................ -- -- 197,141
Change in unrealized gain on securities available
for sale, net..................................... (3,112) (3,084) 1,799
Assets contributed to SPB.......................... 9,547 -- --
</TABLE>
31. Unaudited Subsequent Event
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 the Company
selling to Bay View its 38.4% ownership in FMC. In accordance with the terms
of the definitive agreement, Bay View will acquire all of the common stock of
FMC for consideration currently valued at approximately $309.0 million. Each
share of FMC common stock will be exchanged for, 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
December 31, 1998, the Company's book value of its investment in FMC was $5.11
per common share.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
138
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position with Company
---- --- ---------------------
<C> <C> <S>
H. Wayne Snavely(1)................ 57 Chairman of the Board, President and
Chief Executive Officer
Executive Vice President and Chief
Brad S. Plantiko(1)................ 43 Financial Officer
Kevin E. Villani(1)................ 50 Executive Vice President, Finance
Irwin L. Gubman(1)................. 57 General Counsel and Secretary
Paul B. Lasiter.................... 32 Senior Vice President and Controller
John G. Getzelman(1)............... 56 President of SPB
Stephen J. Shugerman(1)............ 51 Director and Vice-Chairman of SPB
Joseph R. Tomkinson................ 51 Director
Robert S. Muehlenbeck(2)........... 51 Director
G. Louis Graziadio, III(2)......... 49 Director
Perry A. Lerner(2)(3).............. 55 Director
James Clayburn LaForce, Jr.(2)(3).. 69 Director
</TABLE>
- --------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
H. Wayne Snavely has been our Chairman of the Board and Chief Executive
Officer since December 1991 and President since February 1996. Mr. Snavely
served as a director of Imperial Bank from 1975 to 1983 and from 1993 to
January 1998. Mr. Snavely is Chairman of the Board of FMC and ICCMIC.
Brad S. Plantiko has been Executive Vice President and Chief Financial
Officer of the Company since July 1998. From October 1980 to July 1998, Mr.
Plantiko was with KPMG Peat Marwick, LLP, where he was partner in-charge of
its finance company services for the western United States. Mr. Plantiko has
more than 17 years of experience serving banks, thrifts, mortgage banks and
finance companies. He serves on the Board of Visitors of the Graduate School
of Business Management at Pepperdine University. Mr. Plantiko is a member of
the American Institute and the California Society of Certified Public
Accountants. Mr. Plantiko is a director of FMC.
Kevin E. Villani has been our Executive Vice President, Finance, since July
1998. Mr. Villani was our Executive Vice President and Chief Financial Officer
from September 1995 through July 1998. Mr. Villani is President of ICAM,
serves as a member of our Board of Directors, and is Vice Chairman of the
Board of ICCMIC. Mr. Villani joined the University of Southern California as
the Wells Fargo Visiting Professor of Finance in 1990 and remained on the
full-time faculty through 1997. From 1985 to 1990, he was the Executive Vice
President and Chief Financial Officer for Imperial Corporation of America.
From 1982 to 1985, Mr. Villani served in various capacities at the Federal
Home Loan Mortgage Corporation, including Chief Economist and Chief Financial
Officer.
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From 1975 to 1982, he served as the Financial Economist, The Director for
the Division of Housing Finance Analysis and The Deputy Assistant Secretary
for the Office of Economic Affairs and Chief Economist for the Department of
Housing and Urban Development. From 1990 through 1995, Mr. Villani also served
as a full-time consulting economist at the World Bank and International
Finance Corporation on housing, banking, finance and investment issues in
emerging markets. Mr. Villani has published over 100 books and articles on
financial markets and instruments.
Irwin L. Gubman has been our General Counsel and Secretary since October
1996. From February 1992 to September 1996, Mr. Gubman was a Partner at
Coudert Brothers serving in various capacities including syndicated lending,
structured finance, and regulatory matters. From December 1970 to September
1991, Mr. Gubman served in various capacities at Bank of America, most
recently as Senior Vice President and Associate General Counsel. From March
1968 to October 1970, Mr. Gubman was an Attorney Advisor for the U.S. Arms
Control and Disarmament Agency. From September 1967 to March 1968, Mr. Gubman
was a Legal Advisor to the Government of Liberia.
Paul B. Lasiter has been our Senior Vice President and Controller since
November 1992. From June 1988 to November 1992, Mr. Lasiter was a Supervising
Senior Accountant for KPMG Peat Marwick, specializing in the financial
institutions industry. Mr. Lasiter is a Certified Public Accountant.
John Getzelman has been President of SPB since December 1998. Prior to this,
Mr. Getzelman was President of Community Bank of Pasadena, California from
1992 through 1998. From 1971 to 1992, Mr. Getzelman was associated with
Security Pacific Corporation including 16 years on international assignments
in Latin America and Asia. Mr. Getzelman served as Chairman and CEO of Rainier
Bank in Seattle, a subsidiary of Security Pacific from 1988 to 1992. Mr.
Getzelman is a member of the Board of Trustees of Seattle University, a member
of the boards of the House Ear Institute and the Pasadena Symphony. He is also
a member of the Visiting Committee of the University of Southern California.
Stephen J. Shugerman has been a Director since December 1991. From June 1987
until December 1998, Mr. Shugerman was President of SPB. Mr. Shugerman has
been Vice-Chairman of SPB since December 1998. From June 1985 to May 1987, Mr.
Shugerman was President of ATI Thrift & Loan Association, a privately owned
thrift and loan association, and, from 1979 to 1985, he was Senior Vice
President of Imperial Thrift and Loan Association, a former subsidiary of
Imperial Bank. Mr. Shugerman has recently served as President of the
California Association of Thrift & Loan Companies.
Joseph R. Tomkinson has been a Director since December 1991. Mr. Tomkinson
has been the Vice Chairman of the Board and Chief Executive Officer of IMH
since August 1995. Mr. Tomkinson served as President of ICII from January 1992
to February 1996 and from 1986 to January 1992, he was President of Imperial
Bank Mortgage, a subsidiary of Imperial Bank, one of the companies combined to
become ICII in 1992. From 1984 to 1986, he was employed as Executive Vice
President of Loan Production for American Mortgage Network, a privately owned
mortgage bank. Mr. Tomkinson is the Chairman and Chief Executive Officer of
Impac Commercial Holdings, Inc., a commercial REIT and a Director of BNC
Mortgage, Inc., a residential real estate lending company
Robert S. Muehlenbeck has been a Director since December 1991. Mr.
Muehlenbeck retired in 1998 as an Executive Vice President of Imperial Bank
with primary responsibility for corporate finance and mergers and
acquisitions. In addition, he also served as President of Imperial Ventures,
Inc., Imperial Bank's venture capital small business investment company and
President of Imperial Credit Corp., an investment and mezzanine lending
entity. Mr. Muehlenbeck was formerly the President of Seaborg, Incorporated
and has been involved in commercial and residential real estate development
and finance activities.
G. Louis Graziadio, III has been a Director since February 1992. Mr.
Graziadio has been Chairman of the Board and Chief Executive Officer of
Ginarra Holdings, Inc. (as well as predecessor and affiliated companies)
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since 1979. Ginarra Holdings, Inc. is a privately held California corporation
engaged in a wide range of investment activities. Mr. Graziadio has been
actively involved, since 1972, in real estate development, construction and
home building. Mr. Graziadio was a Director of FMC and is a director of
Imperial Bancorp and Imperial Trust Company, an indirect subsidiary of
Imperial Bancorp.
Perry A. Lerner has been a Director since May 1992. He has been a principal
in the investment firm of Crown Capital Group, Inc., since 1996. Mr. Lerner
was with the law firm of O'Melveny & Myers from 1982 to 1997, having been a
partner with the firm from 1984 to 1996. Mr. Lerner was an Attorney-Advisor of
the International Tax Counsel of the United States Treasury Department from
1973 to 1976. Mr. Lerner is a Director of FMC, and Boss Holdings Inc., a
specialty consumer products company.
James Clayburn LaForce, Jr. has been a Director since May 1992. From July
1978 to July 1993, Mr. LaForce was the Dean of The Anderson School, University
of California at Los Angeles. In addition, Mr. LaForce was appointed in
January 1991 to the position of Acting Dean of the Hong Kong University of
Science and Technology, Hong Kong. Mr. LaForce is a Director of Rockwell
International Corp., Jacobs Engineering Group, Inc., Timkon Co., a steel alloy
company, Motor Cargo Industries, a transportation company and Blackrock Funds,
Payden & Rygel Funds and Provident Investment Counsel, investment companies.
Our directors hold office until the next annual meeting of shareholders and
until their successors are elected and qualified, or until their earlier
resignation or removal. All officers are appointed by and serve at the
discretion of our Board of Directors, subject to employment agreements, where
applicable. There are no family relationships between any of our directors or
officers. George L. Graziadio, Jr., the President, Chief Executive Officer and
the Chairman of the Board of Directors of Imperial Bancorp ("Bancorp"), is the
father of G. Louis Graziadio, III. The Graziadio family and related entities
are significant shareholders of Bancorp.
No directors or executive officers were involved in any petitions under the
Federal bankruptcy laws during the past five years, except Mr. Snavely was the
Chairman and Mr. Shugerman was a Director of Southern Pacific Funding
Corporation.
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ITEM 11. EXECUTIVE COMPENSATION
The members of our board of directors who are not employees of our company
receive cash compensation of $5,000 per quarter and $500 for each board of
directors meeting attended and for each committee meeting attended which is
not on the same day as another board meeting. In addition, these non-employee
directors receive options to purchase 10,000 shares of our common stock which
vest on the one-year anniversary of the date of grant and become first
exercisable one year from the date of the grant at a price equal to the fair
market value of the common stock on the date of the grant, and which expire on
the tenth anniversary of the date of the grant.
The following table provides information concerning the cash and non-cash
compensation earned and received by our Chief Executive Officer and our four
highly compensated executive officers (the "Named Executive Officers"), other
than our Chief Executive Officer, whose salary and bonus during the fiscal
year ended December 31, 1998 exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------ ------------
Fiscal Other Annual Options
Name and Principal Position Year Salary Bonus Compensation Granted
- --------------------------- ------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
H. Wayne Snavely........... 1998 $502,114 $ -- $78,640(1) --
President, Chief Executive 1997 450,000 700,000 29,082(1) --
Officer and Chairman 1996 300,000 700,000 28,564(1) 400,000(2)
Kevin E. Villani........... 1998 $352,691 $150,000 71,110(3) 34,000(2)
Executive Vice President,
Finance(4) 1997 300,000 266,666 17,082(3) 50,000(2)
1996 200,000 200,000 12,986(3) 84,000(2)
Stephen J. Shugerman....... 1998 $304,224 $ -- 71,325(5) --
Vice-Chairman of SPB(6) 1997 250,000 501,000 21,882(5) --
1996 200,000 400,000 20,963(5) 100,000(2)
Irwin L. Gubman............ 1998 $201,532 $125,000 $18,557(7) 26,800(2)
General Counsel and 1997 200,000 200,000 16,852(7) 70,000(2)
Secretary 1996 50,000 30,000 750(7) 30,000(2)
Brad S. Plantiko........... 1998 $ 77,403 $ 99,519 $55,815(8) 84,000(2)
Executive Vice President
and
Chief Financial Officer
</TABLE>
- --------
(1) In 1998, 1997 and 1996, consists of (1) a car allowance paid by our
company of $18,000, $18,000 and $18,000, respectively, and (2) aggregate
contributions paid by our company of $60,640, $11,082 and $10,564,
respectively, under employee benefit plans.
(2) See "--Stock Option Plans" for details regarding the terms of such
options.
(3) In 1998, 1997 and 1996, consists of (1) a car allowance paid by our
company of $10,615, $6,000 and $6,000, respectively, and (2) aggregate
contributions paid by our company of $60,495, $11,082 and $6,986,
respectively, under employee benefit plans.
(4) Mr. Villani served as Chief Financial Officer until July 1998.
(5) In 1998, 1997 and 1996, consists of (1) a car allowance paid by our
company of $10,800, $10,800 and $10,800, respectively, and (2) aggregate
contributions paid by our company of $60,525, $11,082 and $10,163,
respectively.
(6) Mr. Shugerman resigned as President of SPB effective December 1998. Mr.
Shugerman is the Vice-Chairman of SPB.
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(7) In 1998, 1997 and 1996, consists of (1) a car allowance paid by our
company of $8,307, $6,000 and $750, respectively, and (2) aggregate
contributions paid by our company of $10,250, $10,852 and $0,
respectively, under employee benefit plans.
(8) In 1998 and 1997, consists of (1) a car allowance paid by our company of
$3,980 and (2) aggregate contributions paid by our company of $51,835
under employee benefit plans.
Option Grants, Exercises and Year End Values
<TABLE>
<CAPTION>
Potential
Realized Value
at Assumed
Annual Rates of
Stock Price
Exercise Appreciation
1998 Percentage Price for Option Term
Options of Total per Expiration ---------------
Name Granted Grants Option Date 5% 10%
---- ------- ---------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Kevin E. Villani......... 34,000 3.11% 10.06 12/01/03 94,499 208,819
Irwin L. Gubman.......... 26,800 2.45% 10.06 12/01/03 74,488 164,598
Brad S. Plantiko......... 50,000 4.57% 18.50 08/11/03 255,560 564,722
Brad S. Plantiko......... 34,000 3.11% 10.00 12/01/03 93,936 207,573
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
<TABLE>
<CAPTION>
Number of Number of
Unexercised Unexercised Senior
Options at FY- Management Options
End Under the at FY-End Under Value of all Unexercised
Shares Option Plan the Option Plan In-the-Money Options at
Acquired on Value Exercisable/ Exercisable/ December 31, 1998
Name Exercise Realized Unexercisable(1) Unexercisable(2) Exercisable/Unexercisable(3)
---- ----------- -------- ---------------- ------------------ ----------------------------
<S> <C> <C> <C> <C> <C>
H. Wayne Snavely........ -- $ -- 160,000/240,000 917,052 $6,632,693/$ --
Kevin E. Villani........ -- -- 70,000/150,800 -- /-- 60,100/ 60,100
Stephen J. Shugerman.... -- -- 40,000/ 60,000 158,524/-- 1,105,681/ --
Irwin L. Gubman......... -- -- 26,000/100,800 -- /-- -- / --
Brad S. Plantiko........ -- -- -- / 84,000 -- /-- -- / --
</TABLE>
- --------
(1) For a description of the terms of such options, see "--Stock Option
Plans--1992 Stock Option Plan."
(2) For a description of the terms of such options, see "--Senior Management
Stock Options."
(3) Based on a price per share of $8.38, which was the price of a share of our
common stock as quoted on the Nasdaq National Market at the close of
business on December 31, 1998
Employment Agreements
As of January 1, 1997, Mr. Snavely entered into a five-year employment
agreement at an annual base salary of $450,000, subject to adjustment, plus an
annual bonus based on attainment of performance objectives, including our
company's return on equity, earnings per share and increase in the price of
our company's common stock. Mr. Snavely's total cash compensation may not
exceed $1.5 million annually.
As of January 1, 1997, Mr. Villani entered into a five-year employment
agreement at an annual base salary of $300,000, subject to adjustment, plus an
annual bonus based on attainment of performance objectives identical to the
objectives established for Mr. Snavely. Mr. Villani's total cash compensation
may not exceed $700,000 annually.
As of January 1, 1997, Mr. Shugerman entered into a five-year employment
agreement at an annual base salary of $250,000, subject to adjustment, plus an
annual bonus based on attainment of performance objectives, including our
company's earnings per share and certain qualitative objectives with respect
to the performance of SPB. Mr. Shugerman's total cash compensation may not
exceed $750,000 annually.
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Pursuant to the employment agreements with Messrs. Snavely, Villani and
Shugerman, they are each entitled to receive compensation following their
termination, as follows: (1) with cause: base salary shall be paid through the
date on which termination occurs, or (2) without cause (or for "good reason"
as defined in the employment agreement), base salary shall be paid through the
date of termination together with the pro-rata portion of any cash bonus award
the employee would be entitled to receive at year end and a severance amount
equal to base salary reduced by the employee's projected primary social
security benefit. The severance amount shall be further reduced if the
executive becomes employed by another company or becomes an independent
contractor of another company and shall be eliminated entirely if such other
company is determined by our board of directors to compete with our company.
Compensation Committee Interlocks and Insider Participation
Our company's Compensation Committee consists of Messrs. Muehlenbeck,
Graziadio, Lerner and LaForce. Mr. Muehlenbeck retired in 1998 as an Executive
Vice President of Imperial Bank. Mr. Graziado is a Director of Imperial
Bancorp and Imperial Trust Company. Mr Lerner is the Manager of Corona Film
Finance Fund (in which ICII is an investor).
Termination Protection Agreements
In January 1999, we entered into termination protection agreements with
Messrs. Snavely, Villani, Gubman & Plantiko. The agreements provide for
severance payments to those senior executives in the event of a change in
control of our company and a subsequent termination of any one of these senior
executives within three years of a change in control for any reason. The
senior executives will receive a lump sum payment of three times their
respective base salaries and their highest bonus earned in any of the last
three fiscal years preceding the change in control and a percentage of their
respective bonuses for the year in which the change of control occurs.
In addition, we will continue to provide these senior executives with
medical, dental, life insurance, disability and accidental death and
dismemberment benefits until the third anniversary of the termination unless
the executive becomes employed by another employer, in which case these
coverages will be secondary to those provided by the new employer. All
deferred compensation in respect of each senior executive will also become
fully vested and we will pay such executive in cash all deferred compensation
and any unpaid portion of the executive's bonus. Any amounts payable to an
executive will include additional amounts to cover certain taxes resulting
from those payments.
A change in control for purposes of the termination protection agreements
includes the following events: (1) any person or persons become the beneficial
owner of at least 40% of our outstanding common stock other than by the
acquisition of such common stock directly from our company, or (2) any merger
or other business combination, liquidation or sale of substantially all of our
assets where our shareholders and any trustee or fiduciary of our employee
benefit plans our less than 60% of the surviving corporation, or (3) within
any 24 month period, the persons who were directors immediately before the
beginning of such period cease to constitute at least a majority of our board,
or the board of any successor corporation.
Senior Management Stock Options
Effective January 1992, members of senior management received ten year
options to purchase shares of our company's common stock. Such options are not
covered by our option plans described below. The exercise price of these
options is $0.89 per share for one-half of the options, with the other half
exercisable at $1.40 per share. These options are currently exercisable. H.
Wayne Snavely, Joseph R. Tomkinson, and Stephen J. Shugerman were granted
917,053, 917,053 and 458,526 of such options, respectively.
In April 1996, Mr. Tomkinson sold 750,000 shares of our common stock he
acquired under the option agreement described above. In November 1996, Mr.
Shugerman sold 300,000 shares of our common stock he acquired under the option
agreement described above.
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The Company recognizes compensation expense with respect to the senior
management stock options because they were granted at less than the estimated
market value of our common stock. The total compensation expense was $2.2
million, all of which was recognized as of December 31, 1997. See Note 23 of
Notes to Consolidated Financial Statements.
Stock Option Plans
1992 Stock Option Plan
A total of 2,292,632 shares of our Common Stock has been reserved for
issuance under our 1992 Incentive Stock Option and Nonstatutory Stock Option
Plan (the "1992 Stock Option Plan"), which expires by its own terms in 2002. A
total of 868,813 options were outstanding at December 31, 1998.
The 1992 Stock Option Plan provides for the grant of "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and nonqualified stock options
("NQSOs") to employees, officers, directors and consultants. ISOs may be
granted only to employees. The 1992 Stock Option Plan is administered by our
board of directors or a committee appointed by our board, which determines the
terms of options granted, including the exercise price, the number of shares
subject to the option, and the option's exercisability.
The exercise price of all options granted under the 1992 Stock Option Plan
must be at least equal to the fair market value of such shares on the date of
grant. The maximum term of options granted under the 1992 Stock Option Plan is
10 years.
With respect to any participant who owns stock representing more than 10% of
the voting rights of our outstanding capital stock, the exercise price of any
option must be at least equal to 110% of the fair market value on the date of
grant.
1996 Stock Option Plan
In 1996, we adopted our 1996 Stock Option, Deferred Stock and Restricted
Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of
ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards
consisting of deferred stock, restricted stock, stock appreciation rights and
limited stock appreciation rights ("Awards").
The 1996 Stock Option Plan is administered by a committee of directors
appointed by the board of directors (the "Committee"). ISOs may be granted to
the officers and key employees of the Company or any of its subsidiaries. The
exercise price for any option granted under the 1996 Stock Option Plan may not
be less than 100% (110% in the case of ISOs granted to an employee who is
deemed to own in excess of 10% of our outstanding common stock) of the fair
market value of the shares of common stock at the time the option is granted.
The purpose of the 1996 Stock Option Plan is to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to those whose job performance affects
our company. The effective date of the 1996 Stock Option Plan was June 21,
1996. A total of 3,000,000 shares of our common stock is reserved for issuance
under the 1996 Stock Option Plan and a total of 1,937,220 options were
outstanding at December 31, 1998.
If an option granted under the 1996 Stock Option Plan expires or terminates,
or an Award is forfeited, the shares subject to any unexercised portion of
such option or Award will again become available for the issuance of further
options or Awards under the 1996 Stock Option Plan.
Unless previously terminated by our board of directors, no options or Awards
may be granted under the 1996 Stock Option Plan after June 21, 2006.
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Options granted under the 1996 Stock Option Plan will become exercisable
upon the terms of the grant made by the Committee. Awards will be subject to
the terms and restrictions of the Award made by the Committee. The Committee
has discretionary authority to select participants from among eligible persons
and to determine at the time an option or Award is granted and in the case of
options, whether it is intended to be an ISO or a NQSO. Under current law,
ISOs may not be granted to any individual who is not also an officer or
employee of our company or any subsidiary.
Each option must terminate no more than 10 years from the date it is granted
(or five years in the case of ISOs granted to an employee who is deemed to own
in excess of 10% of the combined voting power of our outstanding common
stock). Options may be granted on terms providing for exercise in whole or in
part at any time or times during their respective terms, or only in specified
percentages at stated time periods or intervals during the term of the option,
as determined by the Committee.
The exercise price of any option granted under the 1996 Stock Option Plan is
payable in full:
(1) in cash,
(2) by surrender of shares of the Company's Common Stock already owned by
the option holder having a market value equal to the aggregate exercise
price of all shares to be purchased including, in the case of the exercise
of NQSOs, restricted stock subject to an Award under the 1996 Stock Option
Plan,
(3) by cancellation of indebtedness owed by the Company to the
optionholder, or
(4) by any combination of the foregoing.
Our board of directors may from time to time revise or amend the 1996 Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding options or Award without such participant's consent or may,
without shareholder approval, increase the number of shares subject to the
1996 Stock Option Plan or decrease the exercise price of a stock option to
less than 100% of fair market value on the date of grant (with the exception
of adjustments resulting from changes in capitalization), materially modify
the class of participants eligible to receive options or Awards under the 1996
Stock Option Plan, materially increase the benefits accruing to participants
under the 1996 Stock Option Plan or extend the maximum option term under the
1996 Stock Option Plan.
Profit Sharing and 401(k) Plan
On July 1, 1993, we terminated participation in Imperial Bancorp's 401(k)
and profit sharing plans, and we established our own 401(k) plan. On September
30, 1993, Imperial Bancorp transferred all plan assets to our company.
Under our 401(k) plan, employees may elect to enroll on the first of any
month, provided that they have been employed for at least six months.
Employees may contribute up to 14% of their salaries. We will match 50% of the
first 4% of employee contributions. We recorded 401(k) matching expense of
$457,000, $246,000 and $305,000, for the years ended December 31, 1998, 1997,
and 1996, respectively.
We may make an additional contribution at our discretion. If we made a
discretionary contribution, the contribution would first be allocated to those
employees deferring salaries in excess of 4%. The matching contribution would
be 50% of any deferral in excess of 4% up to a maximum deferral of 8%.
If discretionary contribution funds remain following the allocation outlined
above, then any remaining company discretionary contributions would be
allocated as a 50% match of employee contributions, on the first 4% of the
employee's deferrals. Discretionary contributions of $0, $0 and $350,000 were
charged to operations in 1998, 1997 and 1996, respectively.
We make matching contributions as of December 31st each year.
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Deferred Executive Compensation Plans
Effective July 1, 1998, we adopted our Deferred Executive Compensation Plan
(the "DEC Plan 1") and our Deferred Executive Compensation Plan 2 (the "DEC
Plan 2", and together with the DEC Plan 1, the "DEC Plans"). The DEC Plans are
each administered by a committee appointed by our board of directors. Any of
our employees who have an annual base salary of at least $100,000 or who had
an annual base salary of at least $100,000 in the prior year and our directors
may elect to participate in the DEC Plans. A participant's annual base salary
includes all cash compensation excluding bonuses, commissions, employee
benefits, stock options, relocation expenses, incentive payments, non-monetary
awards, automobile and other allowances. Participants in the DEC Plans may
defer up to 50% of their annual base salary and commissions and/or up to 100%
of their annual bonus payments. Benefits accrued under the DEC Plans will be
paid to all participants, other than participants who have voluntarily
resigned their positions, in the form of a lifetime annuity issued by a life
insurance company. DEC Plan benefits accrue through retirement so long as the
participant remains employed by our company. Participants who voluntarily
resign prior to retirement will be paid all of their vested benefits under the
DEC Plans. If we terminate the DEC Plans, we may elect to pay participants in
a lump sum, or in a lifetime annuity.
Deferred compensation contributed to DEC Plan 1 will be invested in our
common stock. We will match contributions to the DEC Plan 1, to be paid in our
common stock, on a dollar-for-dollar basis up to $50,000 per participant. We
also reserve the right to make discretionary matches, to be paid in our common
stock, in any year. Matching contributions will vest 50% a year, commencing
one year from the date of the matching contribution. Matching contributions
will vest completely if a participating employee retires, becomes permanently
disabled, or dies.
Deferred compensation contributed to DEC Plan 2 may be invested in certain
mutual and money market funds. We will not make matching contributions to the
DEC Plan 2. All DEC Plan 2 contributions are completely vested immediately.
Limitations on Directors' Liabilities and Indemnification
Our company and our subsidiaries' Articles of Incorporation and Bylaws
provide for indemnification of our officers and directors to the full extent
permitted by law. The General Corporation Law of the State of California
permits a corporation to limit, under certain circumstances, a director's
liability for monetary damages in actions brought by or in the right of the
corporation. Our company's and our subsidiaries' Articles of Incorporation
also provide for the elimination of the liability of directors for monetary
damages to the full extent permitted by law.
We also entered into agreements to indemnify our directors and officers in
addition to the indemnification provided for in the Articles of Incorporation
and Bylaws. These agreements, among other things, indemnify our directors and
officers for certain expenses (including attorneys' fees), judgments, fines,
and settlement amounts incurred in any action or proceeding, including any
action by or in the right of our company, on account of services as our
director or officer, as a director or officer of any of our subsidiaries, or
as a director or officer of any other enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and officers.
We have directors' and officers' liability insurance in the amount of $20.0
million. At present, there is no pending litigation or proceeding involving a
director, officer or employee of the Company as to which indemnification is
sought, nor are we aware of any threatened litigation or proceeding that may
result in claims for indemnification, except as set forth in Item 2. Legal
Proceedings.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Company's Common Stock as of March
15, 1999, by (I) each director of the Company, (ii) the Chief Executive
Officer and the four most highly compensated executive officers whose salary
exceeded $100,000 for the year ended December 31, 1998, (iii) each person who
is known to the Company to own beneficially more than 5% of the Common Stock,
and (iv) all directors and executive officers of the Company as a group.
Unless otherwise indicated, the Company believes that the beneficial owners of
the Common Stock listed below have sole investment and voting power with
respect to such shares, subject to community property laws where applicable.
<TABLE>
<CAPTION>
Number of Shares % of Total
Beneficial Owner(1) Beneficially Owned Outstanding(2)
------------------- ------------------ --------------
<S> <C> <C>
Imperial Bank(3).......................... 8,941,106 23.0%
Wallace R. Weitz & Company(4)............. 8,888,100 23.0
Wellington Management Co.(4).............. 3,808,340 9.8
H. Wayne Snavely(5)....................... 1,607,734 4.2
Stephen J. Shugerman(6)................... 301,178 *
G. Louis Graziadio, III(7)................ 183,935 *
Joseph R. Tomkinson(8).................... 106,808 *
Perry A. Lerner(9)........................ 116,514 *
Robert S. Muehlenbeck(10)................. 98,792 *
J. Clayburn LaForce(11)................... 78,422 *
Kevin E. Villani(12)...................... 101,681 *
Paul B. Lasiter(13)....................... 65,093 *
Irwin L. Gubman(14)....................... 46,899 *
Brad S. Plantiko.......................... 32,691 *
John G. Getzelman......................... -- *
All Directors and Officers as a Group (12
persons)(15)............................. 2,742,623 7.1%
</TABLE>
- --------
* Less than 1%.
(1) Each of such persons may be reached through our company at 23550
Hawthorne Boulevard, Building One, Suite 110, Torrance, California 90505,
telephone (310) 791-8020.
(2) Percentage ownership is based on 40,343,055 shares of common stock
outstanding as of March 15, 1999.
(3) Imperial Bank, headquartered in Los Angeles, California, is a California
chartered bank whose deposits are insured by the FDIC. The address of
Imperial Bank is 9920 La Cienega Boulevard, Inglewood, California 90301.
(4) Based upon a Schedule 13G filed with the Company reflecting beneficial
ownership as of December 31, 1999. The shares are owned by various
investment advisory clients of Wallace R. Weitz & Co. and Wellington
Management Company (or of Wellington Trust Company, National
Association, WMC's wholly-owned subsidiary), which is deemed a
beneficial owner of the shares only by virtue of the direct or indirect
investment and/or voting discretion they possess pursuant to the
provisions of investment advisory agreements with such clients.
(5) Includes 1,117,052 shares subject to stock options exercisable within 60
days of March 15, 1999.
(6) Includes 198,524 shares subject to stock options exercisable within 60
days of March 15, 1999.
(7) Includes 165,922 shares subject to stock options exercisable within 60
days of March 15, 1999.
(8) Includes 40,000 shares subject to stock options exercisable within 60
days of March 15, 1999. Mr. Tomkinson resigned as an officer of the
Company in February 1996 but remains a director.
(9) Includes 106,422 shares subject to stock options exercisable within 60
days of March 15, 1999.
(10) Includes 70,022 shares subject to stock options exercisable within 60
days of March 15, 1999.
(11) Includes 78,422 shares subject to stock options exercisable within 60
days of March 15, 1999.
(12) Includes 80,000 shares subject to stock options exercisable within 60
days of March 15, 1999.
(13) Includes 12,000 shares subject to stock options exercisable within 60
days of March 15, 1999.
(14) Includes 26,000 shares subject to stock options exercisable within 60
days of March 15, 1999.
(15) Includes 1,894,364 shares subject to stock options exercisable within 60
days of March 15, 1999.
148
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS
Sale of Holdings by Principal Shareholder
At December 31, 1998, Imperial Bank owned 8,941,106 shares of common stock,
or 24.3% of our company. Imperial Bancorp ("Bancorp") is the owner of all of
the outstanding capital stock of Imperial Bank.
The Federal Reserve Board has advised Bancorp that it considers the
retention by the Bank of its shares of ICII stock to be in violation of the
BHCA. This position is apparently the consequence of the Federal Reserve
Board's view that ICII is engaged in activities which are not determined by
regulation to be closely related activity and that Bancorp did not file or
obtain a notice or approval to engage in such activities in accordance with
Regulation Y.
On March 29, 1999, Bancorp announced that it intends to engage an investment
banker to dispose of its investment in our company.
G. Louis Grazladio also serves on the board of directors of Bancorp. See
Item 10. Directors and Executive Officers of the Registrant.
Arrangements with SPFC
From the point of commencement of operations until March 1994, SPB served as
the servicer of SPFC's loans. From March 1994 through September 1995, SPFC
subcontracted all of its servicing obligations under mortgage loans originated
or acquired on a servicing released basis to ICII pursuant to a servicing
agreement containing fees and other terms that were comparable to industry
standards. In addition, ICII was the servicer of loans securitized by SPFC in
1994 and 1995 under the respective pooling and servicing agreements. Effective
May 1, 1996, ICII transferred the servicing for all of SPFC's loans it
serviced to Advanta Mortgage Corp. USA ("Advanta") or subcontracted with
Advanta to perform such servicing functions.
Relationships with IMH
In December 1997, we negotiated a termination of the management agreement
between ICAI and IMH (the "Termination Agreement"). We received consideration
pursuant to the Termination Agreement comprised of 2,009,310 shares of IMH
common stock and certain securitization-related assets. Additionally, we
agreed to cancel our note receivable from ICIFC, the origination unit of IMH,
in the amount of $29.1 million. We recorded the IMH common stock and the
securitization related assets at their estimated fair values of approximately
$35.0 million and $13.1 million, respectively, for a total of $48.1 million.
This amount, when netted with the $29.1 million cancellation of the ICIFC note
receivable resulted in the gain on termination of the management agreement of
approximately $19.0 million.
Pursuant to the IMH Registration Rights Agreement IMH agreed to file one or
more registration statements under the Securities Act in the future for shares
of IMH held by ICAI pursuant to the Termination Agreement, subject to certain
conditions. Pursuant to the IMH Registration Rights Agreement, IMH will use
its reasonable efforts to cause such registration statements to be kept
continuously effective for the public sale from time to time of the shares of
IMH held by ICAI pursuant to the Termination Agreement. ICAI contributed the
shares to ICII. At December 31, 1998, we owned 1,887,110 shares of IMH common
stock.
Relationships with FMC
At December 31, 1998, we owned 11,023,492 shares of FMC or 38.4% of FMC's
outstanding common stock. In addition, Mr. Snavely is the Chairman of FMC's
board of directors, and Mr. Plantiko is a Director of FMC. We entered into
certain agreements with FMC in connection with FMC's initial public offering.
These agreements were developed in the context of a parent/subsidiary
relationship and therefore are not the result of arm's-length negotiations
between independent parties. It is the intention of FMC and ICII that such
agreements
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<PAGE>
and the transactions provided for therein, taken as a whole, are fair to both
parties, while continuing certain mutually beneficial arrangements. However,
there can be no assurance that each of such agreements, or the transactions
provided for therein, have been effected on terms at least as favorable to FMC
as could have been obtained from unaffiliated parties. Additional or modified
arrangements and transactions may be entered into by FMC, ICII, and their
respective subsidiaries. Any such future arrangements and transactions will be
determined through negotiation between FMC and ICII, and it is possible that
conflicts of interest will be involved. All transactions by and between FMC
and ICII must be approved by a majority of the disinterested directors of FMC.
FMC Services Agreement
FMC and ICII entered into a services agreement effective as of November 18,
1997 (the "FMC Services Agreement") under which ICII continues to provide
human resource administration and certain accounting functions to FMC. We
charge fees for each of the services we provide under the FMC Services
Agreement based upon usage. The FMC Services Agreement had an initial term
that ended November 24, 1998. FMC may terminate the FMC Services Agreement, in
whole or in part, upon one month's written notice. We will provide FMC with
insurance coverage and self insurance programs, including health insurance,
under the FMC Services Agreement. We charge FMC for coverage based upon a pro
rata portion of our costs of the various policies. We believe that the terms
of the FMC Services Agreement are as favorable to FMC as could be obtained
from independent third parties.
ICII Registration Rights Agreement
FMC entered into a registration rights agreement (the "ICII Registration
Rights Agreement") pursuant to which FMC has agreed to file one or more
registration statements under the Securities Act in the future for shares of
FMC held by ICII, subject to certain conditions. Pursuant to the ICII
Registration Rights Agreement, FMC will use its reasonable efforts to cause
such registration statements to be kept continuously effective for the public
sale from time to time of the shares of FMC held by ICII. Also, under the ICII
Registration Rights Agreement, FLRT, Inc. may piggyback its shares onto any
registration statement concerning shares of the FMC's common stock held by
ICII; provided however than for a period of three years following the date of
the proposed initial public offering, FLRT, Inc. is limited in the amount of
shares of FMC's common stock it can sell to that amount authorized pursuant to
Rule 144. Thereafter, FLRT, Inc. has registration rights similar to those
granted to ICII under the ICII Registration Rights Agreement without any
volume limitations.
Transactions Involving SPB
In July 1995, FMAC sold approximately $3.8 million of servicing rights to
SPB, resulting in a gain of $31,000. At December 31, 1997 and 1996, there was
approximately $0 and $183 million, respectively, of loans outstanding
underlying this subservicing arrangement. FMAC received approximately 13 basis
points for providing such services. ICII purchased the servicing rights from
SPB in December 1997. FMC then purchased the servicing rights from ICII for
$2.2 million.
FMC also has a master purchase and sale agreement with SPB to originate
loans for SPB under mutual agreement, and subject to SPB underwriting each
such loan prior to sale of such loans. Under this agreement, FMC also has the
ability to repurchase loans, under mutual agreement with SPB. There is no
specified commitment by either party, and each individual sale is negotiated
separately as to pricing. This agreement has no expiration date. FMC does not
expect to originate a significant volume of loans for SPB under this
arrangement in the future.
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<PAGE>
Borrowings and Guarantees
In consideration of ICII's guarantee of FMC's warehouse lines of credit and
repurchase facilities, FMC pays to ICII monthly a fee equal to 15 basis points
on FMC's committed warehouse lines covered by such guarantee. For the year
ended December 31, 1998, the amount of such guarantee fees was $428,000. ICII
will not guarantee any of FMC's future warehouse lines of credit and
repurchase facilities.
ICII guaranteed FMC's lease obligations for its executive and administrative
offices located in Los Angeles, California and Greenwich, Connecticut. The
parties to the leases are currently negotiating a release of such guarantees.
ICII will not guarantee any of FMC's future leases.
ICII and FLRT, Inc. agreed to indemnify FMC against any and all liability
that FMC and its stockholders (other than ICII and FLRT, Inc.) may incur as a
result of the lawsuit of DeWald et al. vs. Knyal, et al.
Proposed Merger of FMC
On March 11, 1999, Franchise Mortgage and Bay View Capital Corporation
announced that they have executed a definitive merger agreement providing for
the merger of FMC with Bay View Capital Corporation.
In accordance with the terms of the Definitive Agreement, Bay View will
acquire all of the common stock of FMC for consideration currently 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.
Other Arrangements and Transactions With FMC
In the ordinary course of business, FMC has conducted transactions with
certain of its officers and directors and with affiliated companies and
entities. All such transactions are conducted at "arm's length" in accordance
with FMC's policies.
Relationships with ICCMIC
ICCMIC Management Agreement
On October 20, 1997, ICCMIC entered into a management agreement (the "ICCMIC
Management Agreement") with Imperial Credit Commercial Asset Management
Corporation ("ICCAMC"), a wholly-owned subsidiary of ICII, for an initial term
expiring on October 20, 1999. Thereafter, successive extensions, each for a
period not to exceed two years, may be made by agreement between ICCMIC and
ICCAMC, subject to the affirmative vote of a majority of ICCMIC's independent
directors. Mr. Snavely is the Chairman of ICCMIC's board of directors and Mr.
Villani is a director of ICCMIC
ICCMIC may terminate, or decline to renew the term of, the ICCMIC Management
Agreement without cause at any time after the first two years upon 60 days
written notice by a majority vote of the independent directors; provided that
a termination fee will be due. In addition, ICCMIC has the right to terminate
the ICCMIC Management Agreement upon the occurrence of certain specified
events, including a material breach by ICCAMC of any provision contained in
the ICCMIC Management Agreement that remains uncured at the end of the
applicable cure period, without the payment of any termination fee.
Pursuant to the provisions of the ICCMIC Management Agreement, ICCAMC is at
all times subject to the supervision of ICCMIC's board of directors and has
only such functions and authority as ICCMIC delegates to
151
<PAGE>
it. ICCAMC advises the board of directors as to the activities and operations
of ICCMIC. ICCAMC is responsible for the day-to-day operations of ICCMIC
pursuant to the authority granted to it by ICCMIC's board of directors under
the ICCMIC Management Agreement, and ICCAMC performs (or causes to be
performed) such services and activities relating to the assets and operations
of ICCMIC as may be directed by ICCMIC's board of directors or as ICCAMC
otherwise considers appropriate. ICCAMC will be reimbursed for (or charge
ICCMIC directly for) ICCAMC's costs and expenses in employing third-parties to
perform due diligence tasks on assets purchased or considered for purchase by
ICCMIC.
Fees under the management agreement are payable in arrears. ICCAMC's base
and incentive fees and reimbursable costs and expenses are calculated by
ICCAMC within 45 days after the end of each quarter, and such calculation
promptly delivered to ICCMIC. ICCMIC is obligated to pay such fees, costs and
expenses within 60 days after the end of each fiscal quarter. ICCMIC paid
ICCAMC $6.3 million in fees related to the ICCMIC Management Agreement during
the year ended December 31, 1998.
Right of First Offer
Pursuant to the ICCMIC Management Agreement, ICCAMC will not assume any
responsibility other than to render the services called for thereunder and
will not be responsible for any action of ICCMIC's board of directors in
following or declining to follow its advice or recommendations. ICCAMC, its
directors and its officers will not be liable to ICCMIC, any subsidiary of
ICCMIC, the independent directors, ICCMIC's stockholders or any subsidiary's
stockholders for acts performed in accordance with and pursuant to the ICCMIC
Management Agreement, except by reason of acts constituting bad faith, willful
misconduct, gross negligence or reckless disregard of their duties under the
ICCMIC Management Agreement. ICCMIC has agreed to indemnify ICCAMC, its
directors and its officers with respect to all expenses, losses, damages,
liabilities, demands, charges and claims arising from acts of ICCAMC not
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of duties, performed in good faith in accordance with and pursuant
to the ICCMIC Management Agreement.
The ICCMIC Management Agreement does not limit or restrict the right of
ICCAMC or any of its officers, directors, employees or affiliates to engage in
any business or to render services of any kind to any other person, including
the purchase of, or rendering advice to others purchasing, assets that meet
ICCMIC's policies and criteria, except that ICCAMC may not manage or advise
another REIT or other entity that invests or intends to invest primarily in
commercial and multifamily mortgage loans or subordinated commercial or
multifamily interests in mortgage backed securities. Moreover, the directors
and certain of the executive officers of ICCAMC executed non-compete
agreements that preclude them from leaving ICCAMC and, under certain
circumstances, forming or joining another REIT that invests or intends to
invest primarily in commercial and multifamily mortgage loans or subordinated
interests in commercial mortgage backed securities.
ICII and its affiliates, including SPB, expect to continue to originate
mortgage loans and interests in mortgage backed securities. SPB has entered
into an agreement granting ICCMIC, as long as the ICCMIC Management Agreement
is in effect, a right of first offer to purchase, in addition to the initial
investments made by ICCMIC, not less than $150 million annually of multifamily
and commercial mortgage loans typical of those originated by SPB. Although not
contractually committed to do so, ICCMIC intends to purchase mortgage loans
offered to it pursuant to the foregoing right of first offer, subject to
compliance with the guidelines and underwriting criteria as established and
modified from time to time by ICCMIC's independent directors. ICCMIC purchased
$190.0 million of mortgage loans from SPB in the year ended December 31, 1998.
ICCMIC expects to maintain a relationship with ICII and SPB in which ICCMIC
will be a ready, willing and able purchaser of interests in mortgage backed
securities that may be sold from time to time by SPB. Although no binding
commitment will exist on the part of ICII, SPB or ICCMIC regarding the sale
and purchase of interests in mortgage backed securities, ICCMIC expects to be
able to purchase interests in mortgage backed securities from SPB at prices
and on terms meeting ICCMIC's investment criteria.
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<PAGE>
ICCMIC expects that ICII and SPB will continue to offer to sell assets to
ICCMIC on terms and at prices that, in the aggregate, will be fair to both
parties, subject to compliance with the guidelines. In deciding whether to
acquire any such asset, ICCAMC may consider, among other factors, whether
acquisition of the asset will enhance ICCMIC's ability to achieve or exceed
ICCMIC's risk adjusted target rate of return established for that period by
ICCMIC's board of directors, whether the asset otherwise is well-suited for
ICCMIC and whether ICCMIC is financially able to take advantage of the
investment opportunity. If an asset that otherwise meets all of ICCMIC's
criteria for asset acquisition is being offered to ICCMIC at a price that is
greater, or on terms that are less favorable, than would be required by third
parties for similar assets in bona fide arms' length transactions, ICCAMC
would be expected to recommend that ICCMIC decline to acquire that asset at
the quoted price and terms, notwithstanding the relationship among ICCMIC,
ICII and SPB.
Other Transactions
From time to time, SPB may act as the servicer for ICCMIC's loans. SPB will
receive fees for such services pursuant to applicable pooling and servicing
agreements. SPB received loan servicing fees pursuant to applicable pooling
and servicing agreements from ICCMIC during the year ended December 31, 1998.
ICCMIC, on the one hand, and ICII and its affiliates, on the other, will
enter into a number of relationships other than those governed by the ICCMIC
Management Agreement, some of which may give rise to conflicts of interest.
Moreover, three of the members of the board of directors of ICCMIC and all of
its officers are also employed by ICCAMC or its affiliates.
The relationships between ICCMIC, on the one hand, and ICII and its
affiliates, on the other, are governed by policy guidelines approved by a
majority of ICCMIC's independent directors. The guidelines establish certain
parameters for the operations of ICCMIC, including quantitative and
qualitative limitations on ICCMIC's assets that may be acquired. The
guidelines are to assist and instruct ICCAMC and to establish restrictions
applicable to transactions with ICII and its affiliates. A majority of the
independent directors approved the acquisition of the initial investments by
ICCMIC from ICII and SPB. However, subsequent to the acquisition of the
initial investments, ICCAMC may enter into transactions on behalf of ICCMIC
with ICII and its affiliates based upon the guidelines approved by the
independent directors. Such transactions will be reviewed on a quarterly basis
to insure compliance with the guidelines.
Mortgage Loan and Other Asset Purchases
In 1998, ICCMIC purchased a pool of multifamily and commercial mortgage
loans from SPB and from the Company for an aggregate purchase price of
approximately $190.0 million plus interest.
ICCMIC may acquire additional assets from ICII and its affiliates in the
future. Any such acquisitions will be in accordance with the guidelines
approved by a majority of ICCMIC's independent directors. The terms of a
particular transaction, however, will not be approved in advance by ICCMIC's
independent directors in all cases. The independent directors will review any
such transactions quarterly to insure compliance with the guidelines, but in
doing so they, by necessity, will rely primarily on information and analysis
provided to them by ICCAMC.
Equity Investment
As of December 31, 1998, we own 10.8% of the outstanding common stock of
ICCMIC. ICCMIC is managed by ICCAMC, our wholly owned subsidiary. ICCMIC
invests primarily in performing multifamily and commercial loans and in
mortgage backed securities. ICCAMC also has received stock options pursuant to
the ICCMIC Option Plan. We have agreed to retain our shares of ICCMIC at least
until October 20, 1999, but we may dispose of its shares any time thereafter.
Notwithstanding the foregoing, if ICCMIC terminates the ICCMIC Management
Agreement, we may dispose of our shares at that time.
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The market in which ICCMIC acquires assets is characterized by rapid
evolution of products and services and, thus, there may in the future be
relationships between ICCMIC, ICCAMC, and affiliates of ICCAMC in addition to
those described herein.
Other Matters
In October 1997, we loaned H. Wayne Snavely, our Chairman and Chief
Executive Officer, and Kevin E. Villani, our Executive Vice President,
Finance, $1,999,998 and $999,992, respectively, for the purposes of assisting
each of them to purchase ICCMIC common stock. The loans are each evidenced by
a promissory note maturing June 14, 2002, secured by a deed of trust and stock
of ICCMIC held by such individuals. The notes bears interest at an annual rate
of 10.4% and are payable in semi-annual installments commencing June 15, 1998.
At March 1, 1999, the remaining balances are $234,000 and $0, for Messrs.
Snavely and Villani, respectively. These loans were made in our ordinary
course of business, on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions
with other persons, and did not involve more than normal risk of
collectability or present other unfavorable features.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Imperial Credit Industries, Inc.
/s/ H. Wayne Snavely
By: _________________________________
H. Wayne Snavely
Chairman of the Board,
President
and Chief Executive Officer
Date: March 30, 1999
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints H. Wayne Snavely and Irwin L. Gubman and each
of them, his true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution for him and in his name, place and stead, in
any and all capacities to sign any and all amendments to this Annual Report on
From 10-K, and to file the same, with all exhibits thereto, and other
documents in connection wherewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each said attorneys-in fact and agents or any of them or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ H. Wayne Snavely Chairman of the Board, March 30, 1999
____________________________________ President and Chief
(H. Wayne Snavely) Executive Officer and
Director (Principal
Executive Officer)
/s/ Brad S. Plantiko Executive Vice President and March 30, 1999
____________________________________ Chief Financial Officer
(Brad S. Plantiko) (Principal Financial
Officer and Principal
Accounting Officer)
/s/ Kevin E. Villani Executive Vice President, March 30, 1999
____________________________________ Finance and Director March
(Kevin E. Villani) 30, 1999
/s/ Stephen J. Shugerman Director March 30, 1999
____________________________________
(Stephen J. Shugerman)
</TABLE>
155
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Joseph R. Tomkinson Director March 30, 1999
____________________________________
(Joseph R. Tomkinson)
/s/ Robert S. Muehlenbeck Director March 30, 1999
____________________________________
(Robert S. Muehlenbeck)
/s/ G. Louis Graziadio, III Director March 30, 1999
____________________________________
(G. Louis Graziadio, III)
/s/ Perry A. Lerner Director March 30, 1999
____________________________________
(Perry A. Lerner)
/s/ James Clayburn LaForce, Jr. Director March 30, 1999
____________________________________
(James Clayburn LaForce, Jr.)
</TABLE>
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<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8K
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
3.1(S) Articles of Incorporation, as amended of Registrant.
3.2(S) Bylaws of Registrant.
4.1(S) Form of Common Stock Certificate.
4.2# Indenture relating to 9 7/8% Senior Notes, dated as of January 23,
1997, with forms of 9 7/8% Senior Notes.
4.3+ Certificate of Trust of Imperial Credit Capital Trust I.
4.4+ Amended and Restated Declaration of Trust of Imperial Credit
Capital Trust I, with form of Remarketed Redeemable Par
Securities, dated June 9, 1997.
4.5+ Indenture relating to the Resettable Rate Debentures, dated as of
June 9, 1997, with forms of Resettable Rate Debentures.
4.6+ Remarketing Agreement, by and among, the Registrant, the Trust and
Lehman Brothers, Inc., dated as of June 9, 1997.
4.7+ Guarantee Agreement by the Registrant, for the benefit of the
Holders of Remarketed Redeemable Par Securities, Series B.
10.1(S) Form of Indemnification Agreement for directors and officers.
10.2(S) 1992 Incentive Stock Option Plan and Nonstatutory Stock Option Plan
and form of Stock Option Agreement thereunder.
10.3* 1996 Stock Option, Deferred Stock and Restricted Stock Plan
effective as of June 21, 1996.
10.4(S) Senior Management Stock Option Agreement dated effective as of
January 1, 1992 by and between Registrant and H. Wayne Snavely.
10.5** Senior Management Stock Option Agreement dated effective as of
January 1, 1992 by and between Registrant and Joseph R. Tomkinson.
10.6** Senior Management Stock Option Agreement dated effective as of
January 1, 1992 by and between Registrant and Stephen J.
Shugerman.
10.7** Amendment No. 1 to Senior Management Stock Option Agreement by and
between Registrant and H. Wayne Snavely, effective as of January
1, 1992.
10.8** Amendment No. 1 to Senior Management Stock Option Agreement by and
between Registrant and Joseph R. Tomkinson, effective as of
January 1, 1992.
10.9** Amendment No. 1 to Senior Management Stock Option Agreement by and
between Registrant and Stephen J. Shugerman, effective as of
January 1, 1992.
10.10** Amendment No. 2 to Senior Management Stock Option by and between
Registrant and H. Wayne Snavely, effective as of September 30,
1995.
10.11** Amendment No. 2 to Senior Management Stock Option by and between
Registrant and Joseph R. Tomkinson, effective as of September 30,
1995.
10.12** Amendment No. 2 to Senior Management Stock Option by and between
Registrant and Stephen J. Shugerman, effective as of September 30,
1995.
10.13*** Employment agreement dated as of January 1, 1997 by and between
Registrant and H. Wayne Snavely.
10.14*** Employment agreement dated as of January 1, 1997 by and between
Registrant and Kevin E. Villani.
10.15*** Employment agreement dated as of January 1, 1997 by and between
Registrant and Stephen J. Shugerman.
10.16*** Registration Rights Agreement dated as of August 26, 1997, by and
among Registrant, FLRT, Inc., and Franchise Mortgage Acceptance
Company.
10.17+ Agreement for Purchase and Sale of Real Estate Loans between
Southern Pacific Bank and Imperial Credit Commercial Mortgage
Investment Corp., dated as of October 1, 1997.
10.18+ Agreement for Purchase and Sale of Mortgage-Backed Securities
between Southern Pacific Bank and Imperial Credit Commercial
Mortgage Investment Corp., dated as of October 22, 1997.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.19+ Agreement for Purchase of Mortgage-Backed Securities between
Registrant and Imperial Credit Commercial Mortgage Investment
Corp., dated as of October 22, 1997.
10.20*** Registration Rights Agreement dated as of December 29, 1997, by and
between ICAI and IMH.
10.21*** Termination Agreement dated as of December 19, 1997, by and between
ICAI and IMH.
10.22*** Promissory Note Secured by Stock Pledge and Deed of Trust dated as
of October 21, 1997, between Registrant and H. Wayne Snavely.
10.23*** Promissory Note Secured by Stock Pledge and Deed of Trust dated as
of October 21, 1997, between Registrant and Kevin E. Villani.
10.24 Deferral of Executive Compensation Plan I effective July 1, 1998.
10.25 Deferral of Executive Compensation Plan, Plan I, effective January
1, 1999.
10.26 Deferral of Executive Compensation Plan, Plan II, Effective
January 1, 1999.
10.27 Termination Protection Agreement, effective as of January 27, 1999,
by and between Registrant and Kevin E. Villani.
10.28 Termination Protection Agreement, effective as of January 27, 1999,
by and between Registrant and H. Wayne Snavely.
10.29 Termination Protection Agreement, effective as of January 27, 1999,
by and between Registrant and Irwin L. Gubman.
10.30 Termination Protection Agreement, effective as of January 27, 1999,
by and between Registrant and Brad S. Plantiko.
11 Statement Regarding Computation of Earnings Per Share.
21 Subsidiaries of Registrant.
23.1.1 Consent of KPMG LLP.
24 Power of Attorney (included on signature page of Form 10-K).
27 Financial Data Schedule
</TABLE>
- --------
(S) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-45606) and Amendments No. 1, 2 and 3 filed with the
SEC on February 10, 1992, April 20, 1992, May 7, 1992 and May 18, 1992,
respectively.
+ Incorporated by reference to Registrant's Registration Statement on Form
S-4 (Registration No. 333-30809) filed on July 3, 1997.
# Incorporated by reference to Registrant's Registration Statement on Form
S-4 (Registration No. 333-22141) filed with the SEC on February 19, 1997.
* Incorporated by reference to Registrant's Registration Statement on Form
S-8 (Registration No. 333-13805) filed October 9, 1996.
** Incorporated by reference to Registrant's Registration Statement on Form
S-8 (Registration No. 333-15149) filed October 31, 1996.
*** Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997.
+ Incorporated by reference to Imperial Credit Commercial Mortgage
Investment Corp.=s Form 10-Q for the quarter ended September 30, 1997.
158
<PAGE>
EXHIBIT 10.24
Imperial Credit Industries, Inc.
Deferral of Executive Compensation
Plan
PLAN DOCUMENT
Effective Date
July 1,1998
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
DEFERRAL OF EXECUTIVE COMPENSATION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Purpose................................................................. 4
ARTICLE 1 DEFINITIONS................................................. 4
ARTICLE 2 ELIGIBILITY AND ENROLLMENT.................................. 6
2.1 Eligibility................................................... 6
2.2 Enrollment Requirements....................................... 7
ARTICLE 3 EMPLOYMENT STATUS........................................... 7
3.1 Employment.................................................... 7
3.2 No Employment Agreement Created............................... 7
ARTICLE 4 COMPENSATION DEFERRALS...................................... 7
4.1 Deferral Elections............................................ 7
4.2 Deferral Enrollment and Election Period....................... 8
4.3 Deferral Election Changes..................................... 8
4.4 Vesting of Deferrals.......................................... 8
ARTICLE 5 INVESTMENT OPTIONS.......................................... 8
5.1 The Committee Shall Select Investment Options................. 8
5.2 Changes in Investment Options................................. 8
ARTICLE 6 COMPANY MATCH............................................... 9
6.1 Basic Company Match........................................... 9
6.2 Discretionary Match........................................... 9
6.3 Transfer of ICII Stock........................................ 9
6.4 Vesting....................................................... 9
ARTICLE 7 BENEFITS.................................................... 9
7.1 Pre-Retirement Death Benefit.................................. 9
7.2 Termination Benefit on Voluntary Resignation.................. 9
7.3 Total and Permanent Disability................................ 9
7.4 Retirement Benefits...........................................10
ARTICLE 8 BENEFICIARY DESIGNATION.....................................10
8.1 Beneficiary...................................................10
8.2 Beneficiary Designation, Change, Spousal Consent..............10
8.3 No Beneficiary; No Beneficiary Designation....................10
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ARTICLE 9 FUNDING.....................................................11
9.1 "Rabbi Trust".................................................11
9.2 Plan Trustee..................................................11
9.3 Company Insolvency............................................11
ARTICLE 10 LEAVE OF ABSENCE............................................11
10.1 Paid Leave of Absence.........................................11
10.2 Unpaid Leave of Absence.......................................11
ARTICLE 11 TERMINATION, AMENDMENT OR MODIFICATION......................12
11.1 Termination...................................................12
11.2 Amendment.....................................................12
ARTICLE 12 PLAN ADMINISTRATION.........................................12
12.1 Committee Responsibilities and Duties.........................12
12.2 Binding Effect of Decisions...................................12
12.3 Indemnity of Committee........................................13
ARTICLE 13 CLAIMS PROCEDURE............................................13
13.1 Presentation of Claim.........................................13
13.2 Notification of a Decision....................................13
13.3 Review of a Denied Claim......................................13
13.4 Decision on Appeal............................................13
13.5 Legal Action..................................................14
ARTICLE 14 MISCELLANEOUS...............................................14
14.1 Non-qualified Plan............................................14
14.2 Unsecured General Creditor....................................14
14.3 Nonassignability..............................................14
14.4 Not a Contract of Employment..................................14
14.5 Governing Law.................................................15
14.6 Notice........................................................15
14.7 Spouse's Interest.............................................15
14.8 Validity......................................................15
14.9 Legal Fees to Enforce Rights After Change in Control..........15
</TABLE>
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
DEFERRAL OF EXECUTIVE COMPENSATION PLAN
Purpose
-------
The purpose of the ICII Deferral of Executive Compensation Plan ("DEC Plan") is
to provide a benefit to a select group of highly compensated employees and
Directors of ICII and its subsidiaries who contribute materially to the success
of Imperial Credit Industries, Inc. ("ICII").
The DEC Plan will allow the highly compensated employees and Director of ICII
and its subsidiaries to defer income on a pre-tax basis and will create an
incentive for the participants to increase their ownership in ICII.
ARTICLE 1
DEFINITIONS
-----------
For purposes of the DEC Plan, the following terms or phrases shall have the
following indicated meanings:
1.1 "Account Balance" shall mean the balance in a Participant's Deferral
Account that is held in the Trust. The Account Balance is a bookkeeping
entry only and shall be utilized as a measurement of the amounts to be paid
to a Participant, or his or her beneficiary.
1.2 "Annual Base Salary" shall mean the annual cash compensation, paid by-
weekly, relating to services performed during any calendar year, excluding
bonuses, commissions, employee benefits, stock options, relocation
expenses, incentive payments, non-monetary awards, automobile and other
allowances paid to a Participant for employment services rendered. Annual
Base Salary shall be calculated before reduction for compensation
voluntarily deferred or contributed by the Participants pursuant to all
qualified or non-qualified plans under Code Sections 125, 401(k), 402(e)(3)
or 402(h).
1.3 "Annual Bonus" shall mean any compensation, in addition to Annual Base
Salary or Commissions paid to a Participant as an Employee under any annual
bonus, incentive bonus or cash incentive plans.
1.4 "Annual Deferral Amount" shall mean that portion of a Participant's Annual
Base Salary, Commissions, Annual Bonus and Director's Fees that a
Participant defers in any one Plan Year.
1.5 "Beneficiary" shall mean one or more persons, trusts, estates or other
entities, designated in accordance with Article 8, that are entitled to
receive benefits under this Plan upon the death of a Participant.
<PAGE>
DEC Plan
Page 5
1.6 "Board" shall meant the Board of Directors of Imperial Credit Industries,
Inc.
1.7 "Commission" shall mean compensation received for producing business with
the amount being determined by a formula (e.g. percentage of sales
volume).
1.8 "Committee" shall mean the administration committee for the DEC Plan as
described in Article 12.
1.9 "Company" shall mean Imperial Credit Industries, Inc., its subsidiaries
and any successor to all or substantially all of the Company's assets or
business.
1.10 "Company Match" shall mean the amount contributed by ICII to the Plan in
accordance with Article 6.1 of the Plan.
1.11 "Deferral Account" shall mean (i) the sum of all of a Participant's Annual
Deferral Amounts, (ii) plus all Company Match and Discretionary Match
amounts contributed by the Company in conformity with the Plan, plus (iii)
amounts credited in accordance with all the applicable crediting
provisions of this Plan that relate to the Participant's Deferral Account,
less (iv) all distributions made to Participant or his or her Beneficiary
pursuant to the Plan that relate to his or her Deferral Account.
1.12 "Director" shall mean any non-Employee member of the Board of Directors of
ICII of Southern Pacific Bank or any future ICII subsidiary companies.
1.13 "Disability" shall mean the period of disability during which a
Participant qualifies for disability benefits under the Participant's
Company's disability plan.
1.14 "Discretionary Match" shall mean the amount that may be contributed to the
Plan by the ICII Board in accordance with Article 6.2 of the Plan.
1.15 "Employee" shall mean a person who is an employee of ICII, Southern
Pacific Bank, Auto Marketing Network, Inc., Imperial Business Credit,
Inc., Imperial Capital Group, LLC, Imperial Credit Asset Management, Inc.,
Imperial Credit Advisors, Inc., Imperial Credit Commercial Mortgage Asset
Management Corporation, Skypark Capital Management, Inc., or any future
ICII subsidiary companies.
1.16 "Participant" shall mean any (i) Director or (ii) any Employee who earned
$100,000 annually in the previous calendar year or whose annual base
salary is $100,000 or more (iii) who elects to participate in the Plan
and, (iv) who signs a Plan Agreement and an Election and Beneficiary
Designation Form. A spouse or former spouse of a Participant shall not be
treated as a Participant in the Plan or have an Account Balance under the
<PAGE>
DEC Plan
Page 6
Plan, even if he or she has interest in the Participant's benefits under
the Plan as a result of applicable law or property settlements resulting
from legal separation or divorce.
1.17 "Plan" shall mean the ICII Deferral of Executive Compensation Plan.
1.18 "Plan Agreement" shall mean a written agreement, as may be amended from
time to time, which is entered into by and between the Participant and the
Company.
1.19 "Plan Year" shall mean a period beginning January 1 of each calendar year
and continuing through December 31 of such calendar year.
1.20 "Pre-Retirement Survivor Benefit" shall mean the benefit paid to the
Beneficiary of a Participant in the event of the Participant's death prior
to retirement.
1.21 "Rabbi Trust" or "Trust" shall mean the trust that has been established to
fund the DEC Plan.
1.22 "Retirement" or "Normal Retirement Age" shall be on or after that date on
which the Participant's age plus years of service shall be equal to or
greater than 65. A Participant who reaches Normal Retirement Age may not
receive distributions if the Participant is still employed by ICII or its
subsidiaries.
1.23 "Termination of Employment" shall mean the discontinuance of employment
with ICII or its subsidiaries as an employee or a Director for any reason
other than retirement, disability, death or an authorized leave of
absence.
1.24 "Unforeseeable Financial Emergency" shall mean an unanticipated emergency
that is caused by an event beyond the control of the Participant that
would result in severe financial hardship for the Participant.
1.25 "Vesting" shall mean the period of time that the Company Match must remain
in the Trust, and the Participant must remain employed by ICII or its
subsidiaries before the Participant is entitled to the Company Match.
ARTICLE 2
ELIGIBILITY AND ENROLLMENT
--------------------------
2.1 Eligibility
-----------
In order for an Employee to become a Participant in the ICII DEC Plan, the
Employee
<PAGE>
DEC Plan
Page 7
must earn $100,000 or more annually. To determine eligibility,
the Committee will ensure that (i) the Employee earned $100,000 or more in
the previous Calendar Year, or (ii) the Employee's current annual base
salary is $100,000 or more.
Eligible employees and Directors shall enroll no later than the first day
of the Plan Year, or on the first day of the month following the month in
which the Employee or Director meets all eligibility criteria.
2.2 Enrollment Requirements
-----------------------
As a condition of participation, each eligible Employee or Director shall
complete, execute and return a DEC Plan Agreement and an Election and
Beneficiary Designation Form to the Committee. The Committee may, at its
discretion, require Participants to complete other enrollment requirements.
ARTICLE 3
EMPLOYMENT STATUS
-----------------
3.1 Employment
----------
The Company agrees, subject to Section 3.2 below, to employ Participant in
such capacity as the Company may determine, with such duties,
responsibilities and compensation as determined by the Board of Directors,
or as delegated to the ICII or subsidiary Chief Executive Officer.
Participant agrees, while employed by Company, to devote his/her attention
exclusively to the business of the Company and to use best efforts to
provide faithful and satisfactory service to the Company.
3.2 No Employment Agreement Created
-------------------------------
No provision of this Plan shall be deemed to restrict or limit any existing
employment agreement by and between the Company and the Participant, nor
shall any conditions herein create specific employment rights to the
Participant nor limit the right of the Company to discharge the Participant
with or without cause. In a similar fashion, no provision shall limit the
Participant's rights to voluntarily sever employment at any time, and the
employment relationship between the Company and the Participant shall
continue to be "at will", unless subject to a contract for a specific term.
<PAGE>
DEC Plan
Page 8
ARTICLE 4
COMPENSATION DEFERRALS
----------------------
4.1 Deferral Elections
------------------
A Participant may elect to defer up to fifty percent (50%) of Annual Base
Salary and Commissions and/or up to one hundred percent (100%) of Annual
Bonus payments in the DEC Plan. A Director may defer up to one hundred
percent (100%) of the Director's retainer and meeting fees.
4.2 Deferral Enrollment and Election Period
---------------------------------------
Eligible Participants are required to enroll within thirty (30) days prior
to a new Plan Year by completing and submitting all appropriate forms to
the Committee. Employees hired during a Plan Year or whose Annual Base
Salary compensation is increased to $100,000 or more during a Plan Year,
and newly appointed Directors are eligible to enroll on the first day of
the month following the month they meet the eligibility requirements.
4.3 Deferral Election Changes
-------------------------
Participants have the right to amend or discontinue the election deferral
percentage provided they notify the Committee, in writing, within fifteen
(15) days of the next ensuing Plan Year. Failure to notify the Committee
within fifteen (15) days of the next ensuing Plan Year (and those that
follow) shall constitute a waiver by Participant to elect a different
compensation reduction percentage and a reaffirmation and notification to
continue the compensation reduction levels selected in the immediately
preceding Plan Year.
Deferral elections made by a Participant cannot be changed or discontinued
during a Plan Year. This is an IRS requirement for executive deferred
compensation plans.
4.4 Vesting of Deferrals
--------------------
A Participant shall be 100% vested at all times in his/her Deferral
Account.
ARTICLE 5
INVESTMENT OPTIONS
------------------
5.1 The Committee Shall Select Investment Options
---------------------------------------------
The Committee shall select the investment options that are available to all
Participants. The Committee will annually review the performance of the
investments and make changes as deemed appropriate.
The Plan will always offer ICII common stock as an investment option.
<PAGE>
DEC Plan
Page 9
5.2 Changes in Investment Options
-----------------------------
Participants may change the investments they have selected other than ICII
common stock, which has been allocated a Company Match, on a quarterly
basis. To make the changes, Participants must notify the Committee, in
writing, no later than fifteen (15) days prior to the beginning of the
quarter.
ARTICLE 6
COMPANY MATCH
-------------
6.1 Basic Company Match
-------------------
ICII shall make a basic Company Match to the DEC Plan on December 31 of
each Plan Year. The basic Company Match will be equal to $1.00 for every
$1.00 the Participant defers to purchase ICII common stock up to a maximum
annual Company Match of $50,000.
ICII will not provide a Company Match to deferrals invested in investment
choices other than ICII stock. The basic Company Match will be made
exclusively in the form of ICII common stock.
Participants must be employed by ICII or its subsidiaries on the last date
of the Plan Year to be eligible for the basic Company Match.
6.2 Discretionary Match
-------------------
The ICII Board of Directors may direct a Discretionary Match to
Participants. The Board shall determine the method of distribution of the
Discretionary Match, and the method may change from year to year.
Participants must be employed by ICII or its subsidiaries on the last date
of the Plan Year to become eligible for the Discretionary Match.
6.3 Transfer of ICII Stock
----------------------
Participants who receive a Company Match on deferrals invested in ICII
common stock are not permitted to request the Committee to sell the
Participant's ICII common stock that was matched by ICII with a basic
Company Match or Discretionary Match.
Participants may request the Committee to sell ICII common stock that they
have purchased with deferrals in excess of the Company Match limits of
$50,000 annually (or such greater amount as may have been allocated a
Discretionary Match).
<PAGE>
DEC Plan
Page 10
6.4 Vesting
-------
All contributions to Participants through the basic Company Match and
Discretionary Match will vest on a two (2) year rolling vesting schedule.
The matches shall vest fifty percent (50%) after the completion of the
first Plan Year for which the match is contributed. The match will be one
hundred percent (100%) vested after the completion of the second Plan Year
following the year for which the match is contributed.
If an Employee retires, becomes permanently disabled or dies, all Company
Match and Discretionary Match contributions shall immediately become fully
vested.
ARTICLE 7
BENEFITS
--------
7.1 Pre-Retirement Death Benefit
----------------------------
In the event a Participant dies while still an Employee of the Company, the
Company agrees to pay the Participant's Beneficiary on the first day of the
month following the date of death, the amount credited to Participant,
including all Company Match and Discretionary Match contributions, which
shall become fully vested, in the form of a lifetime annuity issued by a
life insurance company (with a rating by Standard & Poors of "AA-" or
better).
7.2 Termination Benefit on Voluntary Resignation
--------------------------------------------
Should the Participant terminate employment for reasons other than
retirement, disability or death, Participant shall receive from the Company
and the Company agrees to pay the Participant on the first day of the month
following the Termination of Employment, the amount credited to the
Participant's Account Balance, including all vested portions of the Company
Match and Discretionary Match. All non-vested portions of the Company
Match and Discretionary Match shall be forfeited to the Plan.
7.3 Total and Permanent Disability
------------------------------
In the event the Participant shall become totally or permanently disabled
(either physically or mentally), all as defined by the Social Security
Administration, while still an Employee of the Company, the Company agrees
to pay the Participant on the first day of the month following the date of
the Disability, the amount credited to the Participant, including all
Company Match and Discretionary Match, which shall become fully vested, in
the form of a lifetime annuity issued by a life insurance company (with a
rating by Standard & Poors of "AA-" or better), as requested by the
Participant.
7.4 Retirement Benefits
-------------------
If the Participant remains in the employment of the Company until the
Normal Retirement Age defined in Article 1.22, the Participant shall be
entitled to receive from
<PAGE>
DEC Plan
Page 11
the Company, and the Company agrees to pay Participant on the first day of
the month following the Normal Retirement Date, provided Participant is no
longer employed by ICII or its subsidiaries, the amount credited to
Participant's account, including Company Match and Discretionary Match,
which will become fully vested, in the form of a lifetime annuity issued by
a life insurance company (with a rating by Standard & Poors of "AA-" or
better), as requested by Participant.
ARTICLE 8
BENEFICIARY DESIGNATION
-----------------------
8.1 Beneficiary
-----------
Each Participant shall have the right, at any time, to designate a
Beneficiary(ies) (both primary as well as contingent) to receive benefits
payable under the DEC Plan upon the death of the Participant.
8.2 Beneficiary Designation, Change, Spousal Consent
------------------------------------------------
Each Participant shall designate a Beneficiary by completing the
Beneficiary Designation section of the Election and Beneficiary Designation
Form and submitting it to the Committee, or its designated agent. A
Participant shall have the right to change a Beneficiary by completing,
signing and returning an Election and Beneficiary Designation Form to the
Committee or designated agent.
If the Participant is married and names someone other than his or her
spouse as a Beneficiary, the Participant must have his or her spouse sign a
spousal consent (which must be notarized) and return it to the Committee or
its designated agent.
The Committee shall rely on the last Election and Beneficiary Designation
Form filed by the Participant and received by the Committee prior to his or
her death.
8.3 No Beneficiary; No Beneficiary Designation
------------------------------------------
If a Participant fails to designate a Beneficiary, then the Participant's
spouse (if any) shall be deemed to be the Beneficiary. If all designated
Beneficiaries (primary and contingent) are deceased at the time of the
distribution of the Participant's account, all benefits shall be made
payable to the executor or personal representative of the Participant's
estate.
<PAGE>
DEC Plan
Page 12
ARTICLE 9
FUNDING
-------
9.1 "Rabbi Trust"
-------------
The DEC Plan shall be funded through the establishment of a Rabbi Trust as
defined by the Internal Revenue Service in Revenue Procedure 92-64.
9.2 Plan Trustee
------------
Company shall deposit with a Plan Trustee in the Rabbi Trust various
amounts, which shall become the principal of the Trust to be held,
administered and disposed of by Trustee as provided by the Plan.
9.3 Company Insolvency
------------------
In the event the Company becomes insolvent, Trustee shall discontinue
payments to Plan Participants to their Beneficiaries and shall hold the
assets of the Trust for the benefit of Company's general creditors.
Participants or their Beneficiaries have the right as general creditors of
the Company with respect to benefits due under the Plan or otherwise.
ARTICLE 10
LEAVE OF ABSENCE
----------------
10.1 Paid Leave of Absence
---------------------
If a Participant is authorized by the Company for any reason to take a
paid leave of absence from employment, the Participant shall continue to
be considered employed and the Company shall continue to withhold
deferrals from Participant's earnings.
10.2 Unpaid Leave of Absence
-----------------------
If a Participant is authorized by the Company for any reason to take an
unpaid leave of absence, the Participant shall continue to be considered
employed and the Participant shall be excused from making deferrals until
the date the leave of absence expires and the Participant returns to a
paid status.
<PAGE>
DEC Plan
Page 13
ARTICLE 11
TERMINATION, AMENDMENT OR MODIFICATION
--------------------------------------
11.1 Termination
-----------
Company anticipates that it will continue the DEC Plan for an indefinite
period of time; however, there is no guarantee that the Company will not
terminate the DEC Plan at any time in the future. The Company reserves the
right to discontinue its sponsorship of the DEC Plan at any time by action
of its Board of Directors.
Upon the termination of the DEC Plan, the Participants shall have all
Company Match and Discretionary Match balances fully vested. Furthermore,
the Company may, at its discretion, pay the Participant the amount
credited to Participant's account in the form of a lump sum or in the form
of a lifetime annuity issued by a life insurance company (with a rating by
Standard & Poors of "AA-" or better).
11.2 Amendment
---------
Company may at any time, amend or modify the DEC Plan in whole or in part
by action of the Board of Directors; provided that (i) no amendment or
modification shall be effective to decrease or restrict the value of a
Participant's Account Balance in existence at the time of the amendment or
modification; and (ii) no amendment or modification has any effect on
benefits being received by a Participant or Beneficiary who has become
entitled to benefits as of the date of amendment or modification.
ARTICLE 12
PLAN ADMINISTRATION
-------------------
12.1 Committee Responsibilities and Duties
-------------------------------------
The DEC Plan shall be administered by the DEC Plan Committee. The
Committee will be appointed by the Board of Directors, and shall have the
discretion and authority to (i) make, amend, interpret and enforce all
appropriate rules and regulations for the administration of the Plan and
(ii) decide or resolve any and all questions including interpretations of
this Plan.
Any individual serving on the Committee who is a Participant shall not
vote or act on any matter relating solely to himself or herself.
<PAGE>
DEC Plan
Page 14
12.2 Binding Effect of Decisions
---------------------------
The decisions or actions of the Committee with respect to any question in
connection with the administration, interpretation and application of the
Plan and the rules and regulations promulgated hereunder shall be final
and conclusive and binding upon all persons having any interest in the
Plan.
12.3 Indemnity of Committee
----------------------
Company shall indemnify and hold the Committee members blameless against
any and all claims, losses, damages, expenses and liabilities arising from
any action or failure to act with respect to the Plan, except in the case
of willful misconduct by the Committee or any of its members.
ARTICLE 13
CLAIMS PROCEDURE
----------------
13.1 Presentation of Claim
---------------------
Any Participant or Beneficiary of a deceased Participant may deliver to
the Committee a written claim for determination with respect to the
Participant's Account Balances. All claims must be made within ninety (90)
days of the date on which the event that caused the claim to arise
occurred.
13.2 Notification of a Decision
--------------------------
The Committee shall consider a claim within thirty (30) days of the claims
being filed and shall notify the Participant or Beneficiary in writing of
the determination of the claim.
13.3 Review of a Denied Claim
------------------------
Within sixty (60) days after receiving a notice from the Committee that a
claim, in whole or in part, has been denied, a Participant or Beneficiary
(or a duly authorized representative) may file a written appeal with the
Committee for a review of the denial. Thereafter, but not later than
thirty (30) days after the review procedure began, the Participant or
Beneficiary (or a duly authorized representative):
a. may review pertinent documents;
b. may submit documents; and/or
c. may request a hearing, which the Committee may grant, at its sole
discretion.
13.4 Decision on Appeal
------------------
The Committee shall submit its written decision on the appeal of a denial
within thirty (30) days of the submission of a written request for review
of a denial, unless a hearing is
<PAGE>
DEC Plan
Page 15
held, in which case the Committee's decision must be rendered within
ninety (90) days after the date of the written request for review of a
denial.
13.5 Legal Action
------------
A Participant or Beneficiary must comply with the foregoing provisions of
this Article as a prerequisite to commencing any legal action with respect
to any claim for benefits under this Plan.
ARTICLE 14
MISCELLANEOUS
-------------
14.1 Non-qualified Plan
------------------
The Plan is intended to be a non-qualified plan within the meaning of Code
Section 401(a) and that "is unfunded and is maintained by an employer
primarily for the purpose of providing deferred compensation for a select
group of management or highly compensated employees" within the meaning of
ERISA Sections 201(2), 301(a)(3) and 401(a).
14.2 Unsecured General Creditor
--------------------------
Participants and their Beneficiaries, heirs and successors shall have no
legal or equitable rights, interests or claims in any property or assets
of the Company. For purposes of the payment of benefits under this Plan,
any and all of the Company's assets shall be, and remain, the general,
unpledged, unrestricted assets of the Company. The Company's obligation
under the Plan shall be merely that of an unfunded and unsecured promise
to pay money in the future.
14.3 Nonassignability
----------------
Neither a Participant nor any other person shall have the right to
commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise
encumber, transfer, hypothecate, alienate or convey in advance or actual
receipt, the amounts, if any, payable hereunder, or any part thereof,
which are unassignable and non-transferable. No part of the amount payable
shall, prior to actual payment, be subject to seizure, attachment,
garnishment or sequestration for the payment of any debts, judgments,
alimony or separate maintenance owed by a Participant, be transferrable by
operation of law in the event of a Participant's bankruptcy or insolvency
or be transferable to a spouse as a result of a property settlement or
otherwise.
<PAGE>
DEC Plan
Page 16
14.4 Not a Contract of Employment
----------------------------
The terms and conditions of this Plan shall not be deemed to constitute a
contract of employment between Company and the Participant. Such
employment is hereby acknowledgeable to be an "at will" employment
relationship which can be terminated at any time for any reason, or no
reason, with or without cause, and with or without notice, unless
expressly provided in a written employment agreement.
14.5 Governing Law
-------------
The provisions of this Plan shall be construed and interpreted according
to the internal laws of the State of California without regard to its
conflict of laws principles.
14.6 Notice
------
Any notice or filing required or permitted to be given to the Committee
under this Plan shall be sufficient if in writing and hand delivered, or
sent by registered or certified mail, to the address below:
Imperial Credit Industries, Inc.
DEC Committee
23550 Hawthorne Boulevard
Bldg.1, Suite 230
Torrance, CA 90505
Any notice or filing required or permitted to be given to a Participant
under this Plan shall be sufficient if in writing and hand delivered or
sent by mail to the last known address of the Participant.
14.7 Spouse's Interest
-----------------
The interest in the benefits hereunder for a spouse of a Participant who
dies prior to the Participant shall automatically pass to the Participant
and shall not be transferable by such spouse in any manner, including but
not limited to such spouse's will.
14.8 Validity
--------
In case any provisions of the Plan shall be illegal or invalid for any
reason, said illegality or invalidity shall not affect the remaining parts
hereof, but his Plan shall be construed and enforced as if such illegal or
invalid provisions had never been inserted herein.
14.9 Legal Fees to Enforce Rights After Change in Control
----------------------------------------------------
The Company is aware that upon the occurrence of a Change in Control, the
Board of Directors or a shareholder, or any successor corporation might
cause or attempt to cause the Company or such successor to refuse to
comply with its obligations under the Plan and might cause or attempt to
cause the Company to institute litigation seeking to deny Participants the
benefits intended under the Plan. Accordingly, if, following a Change in
Control, it should appear to any Participant that the Company or any
successor
<PAGE>
DEC Plan
Page 17
corporation has failed to comply with any of its obligations under the
Plan or any agreement thereunder or, if the Company or any other person
takes any action to declare the Plan void or unenforceable or institutes
any litigation or other legal action designed to deny, diminish or to
recover from any Participant the benefits intended to be provided, then
the Company irrevocably authorizes such Participant to retain counsel of
his or her choice at the expense of the Company to represent such
Participant in connection with the initiation or defense of any litigation
or other legal action, whether by or against the Company or any director,
officer, shareholder or other person affiliated with the Company or any
successor thereto in any jurisdiction.
IN WITNESS WHEREOF, the Company has signed this Plan as of June 16, 1998.
-------
"Company"
Imperial Credit Industries, Inc.
By: /s/ W. David Hourigan
-------------------------------
Title: Vice President, Human Resources
-------------------------------
<PAGE>
EXHIBIT 10.25
Imperial Credit Industries, Inc.
Deferral of Executive Compensation
Plan I
PLAN I DOCUMENT
Effective Date
January 1, 1999
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
DEFERRAL OF EXECUTIVE COMPENSATION PLAN I
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
Purpose............................................................... 5
Article 1 DEFINITIONS......................................... 5
Article 2 ELIGIBILITY AND ENROLLMENT.......................... 7
Article 2.1 Eligibility......................................... 7
Article 2.2 Enrollment Requirements............................. 7
Article 3 EMPLOYMENT STATUS................................... 8
Article 3.1 Employment.......................................... 8
Article 3.2 No Employment Agreement Created..................... 8
Article 4 COMPENSATION DEFERRALS.............................. 8
Article 4.1 Deferral Elections.................................. 8
Article 4.2 Deferral Enrollment and Election Period............. 8
Article 4.3 Deferral Election Changes........................... 8
Article 4.4 Vesting of Deferrals................................ 9
Article 5 INVESTMENT OPTIONS.................................. 9
Article 5.1 The Committee Shall Select Investment Options....... 9
Article 6 COMPANY MATCH....................................... 9
Article 6.1 Basic Company Match................................. 9
Article 6.2 Discretionary Match................................. 9
Article 6.3 Vesting............................................. 9
Article 7 BENEFITS............................................ 10
Article 7.1 Pre-Retirement Death Benefit........................ 10
Article 7.2 Termination Benefit on Voluntary Resignation........ 10
Article 7.3 Total and Permanent Disability...................... 10
Article 7.4 Retirement Benefits................................. 10
Article 8 BENEFICIARY DESIGNATION............................. 11
Article 8.1 Beneficiary......................................... 11
Article 8.2 Beneficiary Designation, Change, Spousal Consent.... 11
Article 8.3 No Beneficiary; No Beneficiary Designation.......... 11
Article 9 FUNDING............................................. 11
Article 9.1 "Rabbi Trust"....................................... 11
Article 9.2 Plan Trustee........................................ 11
Article 9.3 Company Insolvency.................................. 11
Article 10 LEAVE OF ABSENCE.................................... 12
Article 10.1 Paid Leave of Absence............................... 12
Article 10.2 Unpaid Leave of Absence............................. 12
Article 11 TERMINATION, AMENDMENT OR MODIFICATION.............. 12
Article 11.1 Termination......................................... 12
Article 11.2 Amendment........................................... 12
Article 12 PLAN ADMINISTRATION................................. 13
Article 12.1 Committee Responsibilities and Duties............... 13
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
Article 12.2 Binding Effect of Decisions......................... 13
Article 12.3 Indemnity of Committee.............................. 13
Article 13 CLAIMS PROCEDURE.................................... 13
Article 13.1 Presentation of Claim............................... 13
Article 13.2 Notification of a Decision.......................... 13
Article 13.3 Review of a Denied Claim............................ 13
Article 13.4 Decision on Appeal.................................. 14
Article 13.5 Legal Action........................................ 14
Article 14 MISCELLANEOUS....................................... 14
Article 14.1 Non-qualified Plan.................................. 14
Article 14.2 Unsecured General Creditor.......................... 14
Article 14.3 Nonassignability.................................... 14
Article 14.4 Not a Contract of Employment........................ 15
Article 14.5 Governing Law....................................... 15
Article 14.6 Notice 15
Article 14.7 Spouse's Interest................................... 15
Article 14.8 Validity............................................ 15
Article 14.9 Legal Fees to Enforce Rights After Change in Control 15
</TABLE>
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
DEFERRAL OF EXECUTIVE COMPENSATION PLAN I
Purpose
-------
The purpose of the ICII Deferral of Executive Compensation Plan I ("DEC Plan I")
is to provide a benefit to a select group of highly compensated employees and
Directors of ICII and its subsidiaries who contribute materially to the success
of Imperial Credit Industries, Inc. ("ICII").
The DEC Plan I will allow the highly compensated employees and Director of ICII
and its subsidiaries to defer income on a pre-tax basis and will create an
incentive for the participants to increase their ownership in ICII.
ARTICLE 1
DEFINITIONS
-----------
For purposes of the DEC Plan I, the following terms or phrases shall have the
following indicated meanings:
1.1 "According Balance" shall mean the balance in a Participant's Deferral
Account that is held in the Trust. The Account Balance is a bookkeeping
entry only and shall be utilized as a measurement of the amounts to be paid
to a Participant, or his or her beneficiary.
1.2 "Annual Base Salary" shall mean the annual cash compensation, paid by-
weekly, relating to services performed during any calendar year, excluding
bonuses, commissions, employee benefits, stock options, relocation
expenses, incentive payments, non-monetary awards, automobile and other
allowances paid to a Participant for employment services rendered. Annual
Base Salary shall be calculated before reduction for compensation
voluntarily deferred or contributed by the Participants pursuant to all
qualified or non-qualified plans under Code Sections 125, 401(k), 402(e)(3)
or 402(h).
1.3 "Annual Bonus" shall mean any compensation, in addition to Annual Base
Salary or Commissions paid to a Participant as an Employee under any annual
bonus, incentive bonus or cash incentive plans.
1.4 "Annual Deferral Amount" shall mean that portion of a Participant's Annual
Base Salary, Commissions, Annual Bonus and Director's Fees that a
Participant defers in any one Plan Year.
1.5 "Beneficiary" shall mean one or more persons, trusts, estates or other
entities, designated in accordance with Article 8, that are entitled to
receive benefits under this Plan upon the death of a Participant.
1.6 "Board" shall meant the Board of Directors of Imperial Credit Industries,
Inc.
<PAGE>
DEC Plan I
Page 5
1.7 "Commission" shall mean compensation received for producing business with
the amount being determined by a formula (e.g. percentage of sales volume).
1.8 "Committee" shall mean the administration committee for the DEC Plan I as
described in Article 12.
1.9 "Company" shall mean Imperial Credit Industries, Inc., its subsidiaries and
any successor to all or substantially all of the Company's assets or
business.
1.10 "Company Match" shall mean the amount contributed by ICII to the Plan in
accordance with Article 6.1 of the Plan.
1.11 "Deferral Account" shall mean (i) the sum of all of a Participant's Annual
Deferral Amounts, (ii) plus all Company Match and Discretionary Match
amounts contributed by the Company in conformity with the Plan, plus (iii)
amounts credited in accordance with all the applicable crediting provisions
of this Plan that relate to the Participant's Deferral Account, less (iv)
all distributions made to Participant or his or her Beneficiary pursuant to
the Plan that relate to his or her Deferral Account.
1.12 "Director" shall mean any non-Employee member of the Board of Directors of
ICII of Southern Pacific Bank or any future ICII subsidiary companies.
1.13 "Disability" shall mean the period of disability during which
Participant qualifies for disability benefits under the Participant's
Company's disability plan.
1.14 "Discretionary Match" shall mean the amount that may be contributed to the
Plan by the ICII Board in accordance with Article 6.2 of the Plan.
1.15 "Employee" shall mean a person who is an employee of ICII, Southern
Pacific Bank, Imperial Business Credit, Inc., Imperial Capital Group, LLC,
Imperial Credit Asset Management, Inc., Imperial Credit Advisors, Inc.,
Imperial Credit Commercial Mortgage Asset Management Corporation, Skypark
Capital Management, Inc., or any future ICII subsidiary companies.
1.16 "Participant" shall mean any (i) Director or (ii) any Employee who earned
$100,000 annually in the previous calendar year or whose annual base salary
is $100,000 or more (iii) who elects to participate in the Plan and, (iv)
who signs a Plan Agreement and an Election and Beneficiary Designation
Form. A spouse or former spouse of a Participant shall not be treated as a
Participant in the Plan or have an Account Balance under the Plan, even if
he or she has interest in the Participant's benefits under the Plan as a
result of applicable law or property settlements resulting from legal
separation or divorce.
1.17 "Plan" shall mean the ICII Deferral of Executive Compensation Plan I.
<PAGE>
DEC Plan I
Page 6
1.18 "Plan I Agreement" shall mean a written agreement, as may be amended from
time to time, which is entered into by and between the Participant and the
Company.
1.19 "Plan Year" shall mean a period beginning January 1 of each calendar year
and continuing through December 31 of such calendar year.
1.20 "Pre-Retirement Survivor Benefit" shall mean the benefit paid to the
Beneficiary of a Participant in the event of the Participant's death prior
to retirement.
1.21 "Rabbi Trust" or "Trust" shall mean the trust that has been established to
fund the DEC Plan I.
1.22 "Retirement" or "Normal Retirement Age" shall be on or after that date on
which the Participant's age plus years of service shall be equal to or
greater than 65. A Participant who reaches Normal Retirement Age may not
receive distributions if the Participant is still employed by ICII or its
subsidiaries.
1.23 "Termination of Employment" shall mean the discontinuance of employment
with ICII or its subsidiaries as an employee or a Director for any reason
other than retirement, disability, death or an authorized leave of absence.
1.24 "Unforeseeable Financial Emergency" shall mean an unanticipated emergency
that is caused by an event beyond the control of the Participant that would
result in severe financial hardship for the Participant.
1.25 "Vesting" shall mean the period of time that the Company Match must remain
in the Trust, and the Participant must remain employed by ICII or its
subsidiaries before the Participant is entitled to the Company Match.
ARTICLE 2
ELIGIBILITY AND ENROLLMENT
--------------------------
2.1 Eligibility
-----------
In order for an Employee to become a Participant in the ICII DEC Plan I,
the Employee must earn $100,000 or more annually. To determine
eligibility, the Committee will ensure that (i) the Employee earned
$100,000 or more in the previous Calendar Year, or (ii) the Employee's
current annual base salary and/or earnings is $100,000 or more.
Eligibility employees and Directors shall enroll no later than the first
day of the Plan Year, or on the first day of the month following the month
in which the Employee or Director meets all eligibility criteria.
<PAGE>
DEC Plan I
Page 7
2.2 Enrollment Requirements
-----------------------
As a condition of participation, each eligible Employee or Director shall
complete, execute and return a DEC Plan I Agreement and an Election and
Beneficiary Designation Form to the Committee. The Committee may, at its
discretion, require Participants to complete other enrollment requirements.
ARTICLE 3
EMPLOYMENT STATUS
-----------------
3.1 Employment
----------
The Company agrees, subject to Section 3.2 below, to employ Participant in
such capacity as the Company may determine, with such duties,
responsibilities and compensation as determined by the Board of Directors,
or as delegated to the ICII or subsidiary Chief Executive Officer.
Participant agrees, while employed by Company, to devote his/her attention
exclusively to the business of the Company and to use best efforts to
provide faithful and satisfactory service to the Company.
3.2 No Employment Agreement Created
-------------------------------
No provision of this Plan shall be deemed to restrict or limit any existing
employment agreement by and between the Company and the Participant, nor
shall any conditions herein create specific employment rights to the
Participant nor limit the right of the Company to discharge the Participant
with or without cause. In a similar fashion, no provision shall limit the
Participant's rights to voluntarily sever employment at any time, and the
employment relationship between the Company and the Participant shall
continue to be "at will", unless subject to a contract for a specific term.
ARTICLE 4
COMPENSATION DEFERRALS
----------------------
4.1 Deferral Elections
------------------
A Participant may elect to defer up to fifty percent (50%) of Annual Base
Salary and Commissions and/or up to one hundred percent (100%) of Annual
Bonus payments in the DEC Plan I. A Director may defer up to one hundred
percent (100%) of the Director's retainer and meeting fees.
4.2 Deferral Enrollment and Election Period
---------------------------------------
Eligible Participants are required to enroll within thirty (30) days prior
to a new Plan
<PAGE>
DEC Plan I
Page 8
Year by completing and submitting all appropriate forms to
the Committee. Employees hired during a Plan Year or whose Annual Base
Salary compensation is increased to $100,000 or more during a Plan Year,
and newly appointed Directors are eligible to enroll on the first day of
the month following the month they meet the eligibility requirements.
4.3 Deferral Election Changes
-------------------------
Participants have the right to amend or discontinue the election deferral
percentage provided they notify the Committee, in writing, within fifteen
(15) days of the next ensuing Plan Year. Failure to notify the Committee
within fifteen (15) days of the next ensuing Plan Year (and those that
follow) shall constitute a waiver by Participant to elect a different
compensation reduction percentage and a reaffirmation and notification to
continue the compensation reduction levels selected in the immediately
preceding Plan Year.
Deferral elections made by a Participant cannot be changed or discontinued
during a Plan Year. This is an IRS requirement for executive deferred
compensation plans.
4.4 Vesting of Deferrals
--------------------
A Participant shall be 100% vested at all times in his/her Deferral
Account.
ARTICLE 5
INVESTMENT OPTIONS
------------------
5.1 The Committee Shall Select Investment Options
---------------------------------------------
The Committee shall select the investment options that are available to all
Participants.
Plan I will only offer ICII common stock as an investment option.
ARTICLE 6
COMPANY MATCH
-------------
6.1 Basic Company Match
-------------------
ICII shall make a basic Company Match to the DEC Plan on December 31 of
each Plan Year. The basic Company Match will be equal to $1.00 for every
$1.00 the Participant defers to purchase ICII common stock up to a maximum
annual Company Match of $50,000.
ICII will not provide a Company Match to deferrals invested in investment
choices other than ICII stock. The basic Company Match will be made
exclusively in the form of ICII
<PAGE>
DEC Plan I
Page 9
common stock.
Participants must be employed by ICII or its subsidiaries on the last date
of the Plan Year to be eligible for the basic Company Match.
6.2 Discretionary Match
-------------------
The ICII Board of Directors may direct a Discretionary Match to
Participants. The Board shall determine the method of distribution of the
Discretionary Match, and the method may change from year to year.
Page Seven Participants must be employed by ICII or its subsidiaries on the
last date of the Plan Year to be eligible for the Discretionary Match.
6.3 Vesting
-------
All contributions to Participants through the basic Company Match and
Discretionary Match will vest on a two (2) year rolling vesting schedule.
The matches shall vest fifty percent (50%) after the completion of the
first Plan Year for which the match is contributed. The match will be one
hundred percent (100%) vested after the completion of the second Plan Year
following the year for which the match is contributed.
If an Employee retires, becomes permanently disabled or dies, all Company
Match and Discretionary Match contributions shall immediately become fully
vested.
ARTICLE 7
BENEFITS
--------
7.1 Pre-Retirement Death Benefit
----------------------------
In the event a Participant dies while still an Employee of the Company, the
Company agrees to pay the Participant's Beneficiary the amount credited to
Participant, including all Company Match and Discretionary Match
contributions, which shall become fully vested, in the form of a lifetime
annuity issued by a life insurance company (with a rating by Standard &
Poors of "AA-" or better).
7.2 Termination Benefit on Voluntary Resignation
--------------------------------------------
Should the Participant terminate employment for reasons other than
retirement, disability or death, Participant shall receive from the Company
and the Company agrees to pay the Participant the amount credited to the
Participant's Account Balance, including all vested portions of the Company
Match and Discretionary Match. All non-vested portions of the Company
Match and Discretionary Match shall be forfeited to the Plan.
<PAGE>
DEC Plan I
Page 10
7.3 Total and Permanent Disability
------------------------------
In the event the Participant shall become totally or permanently disabled
(either physically or mentally), all as defined by the Social Security
Administration, while still an Employee of the Company, the Company agrees
to pay the Participant the amount credited to the Participant, including
all Company Match and Discretionary Match, which shall become fully vested,
in the form of a lifetime annuity issued by a life insurance company (with
a rating by Standard & Poors of "AA-" or better), as requested by the
Participant.
7.4 Retirement Benefits
-------------------
If the Participant remains in the employment of the Company until the
Normal Retirement Age defined in Article 1.22, the Participant shall be
entitled to receive from the Company, and the Company agrees to pay
Participant provided Participant is no longer employed by ICII or its
subsidiaries, the amount credited to Participant's account, including
Company Match and Discretionary Match, which will become fully vested, in
the form of a lifetime annuity issued by a life insurance company (with a
rating by Standard & Poors of "AA-" or better), as requested by
Participant.
ARTICLE 8
BENEFICIARY DESIGNATION
-----------------------
8.1 Beneficiary
-----------
Each Participant shall have the right, at any time, to designate a
Beneficiary(ies) (both primary as well as contingent) to receive benefits
payable under the DEC Plan I upon the death of the Participant.
8.2 Beneficiary Designation, Change, Spousal Consent
------------------------------------------------
Each Participant shall designate a Beneficiary by completing the
Beneficiary Designation section of the Election and Beneficiary Designation
From and submitting it to the Committee, or its designated agent. A
Participant shall have the right to change a Beneficiary by completing,
signing and returning an Election and Beneficiary Designation Form to the
Committee or designated agent.
If the Participant is married and names someone other than his or her
spouse as a Beneficiary, the Participant must have his or her spouse sign a
spousal consent (which must be notarized) and return it to the Committee or
its designated agent.
The Committee shall rely on the last Election and Beneficiary Designation
Form filed by the Participant and received by the Committee prior to his or
her death.
<PAGE>
DEC Plan I
Page 11
8.3 No Beneficiary; No Beneficiary Designation
------------------------------------------
If a Participant fails to designate a Beneficiary, then the Participant's
spouse (if any) shall be deemed to be the Beneficiary. If all designated
Beneficiaries (primary and contingent) are deceased at the time of the
distribution of the Participant's account, all benefits shall be made
payable to the executor or personal representative of the Participant's
estate.
ARTICLE 9
FUNDING
-------
9.1 "Rabbi Trust"
-------------
The DEC Plan I shall be funded through the establishment of a Rabbi Trust
as defined by the Internal Revenue Service in Revenue Procedure 92-64.
9.2 Plan Trustee
------------
Company shall deposit with a Plan Trustee in the Rabbi Trust various
amounts, which shall become the principal of the Trust to be held,
administered and disposed of by Trustee as provided by the Plan.
9.3 Company Insolvency
------------------
In the event the Company becomes insolvent, Trustee shall discontinue
payments to Plan Participants to their Beneficiaries and shall hold the
assets of the Trust for the benefit of Company's general creditors.
Participants or their Beneficiaries have the right as general creditors of
the Company with respect to benefits due under the Plan or otherwise.
ARTICLE 10
LEAVE OF ABSENCE
----------------
10.1 Paid Leave of Absence
---------------------
If a Participant is authorized by the Company for any reason to take a paid
leave of absence from employment, the Participant shall continue to be
considered employed and the Company shall continue to withhold deferrals
from Participant's earnings.
10.2 Unpaid Leave of Absence
-----------------------
If a Participant is authorized by the Company for any reason to take an
unpaid leave of absence, the Participant shall continue to be considered
employed and the Participant shall be excused from making deferrals until
the date the leave of absence expires and the Participant returns to a paid
status.
<PAGE>
DEC Plan I
Page 12
ARTICLE 11
TERMINATION, AMENDMENT OR MODIFICATION
--------------------------------------
11.1 Termination
-----------
Company anticipates that it will continue the DEC Plan I for an indefinite
period of time; however, there is no guarantee that the Company will not
terminate the DEC Plan I at any time in the future. The Company reserves
the right to discontinue its sponsorship of the DEC Plan I at any time by
action of its Board of Directors.
Upon the termination of the DEC Plan I, the Participants shall have all
Company Match and Discretionary Match balances fully vested. Furthermore,
the Company may, at its discretion, pay the Participant the amount credited
to Participant's account in the form of a lump sum or in the form of a
lifetime annuity issued by a life insurance company (with a rating by
Standard & Poors of "AAA-" or better).
11.2 Amendment
---------
Company may at any time, amend or modify the DEC Plan I in whole or in part
by action of the Board of Directors; provided that (i) no amendment or
modification shall be effective to decrease or restrict the value of a
Participant's Account Balance in existence at the time of the amendment or
modification; and (ii) no amendment or modification has any effect on
benefits being received by a Participant or Beneficiary who has become
entitled to benefits as of the date of amendment or modification.
ARTICLE 12
PLAN ADMINISTRATION
-------------------
12.1 Committee Responsibilities and Duties
-------------------------------------
The DEC Plan I shall be administered by the DEC Plan I Committee. The
Committee will be appointed by the Board of Directors, and shall have the
discretion and authority to (i) make, amend, interpret and enforce all
appropriate rules and regulations for the administration of the Plan and
(ii) decide or resolve any and all questions including interpretations of
this Plan.
Any individual serving on the Committee who is a Participant shall not vote
or act on any matter relating solely to himself or herself.
12.2 Binding Effect of Decisions
---------------------------
The decisions or actions of the Committee with respect to any question in
connection with the administration, interpretation and application of the
Plan and the rules and regulations promulgated hereunder shall be final and
conclusive and binding upon all persons having any interest in the Plan.
<PAGE>
DEC Plan I
Page 13
12.3 Indemnity of Committee
----------------------
Company shall indemnify and hold the Committee members blameless against
any and all claims, losses, damages, expenses and liabilities arising from
any action or failure to act with respect to the Plan, except in the case
of willful misconduct by the Committee or any of its members.
ARTICLE 13
CLAIMS PROCEDURE
----------------
13.1 Presentation of Claim
---------------------
Any Participant or Beneficiary of a deceased Participant may deliver to the
Committee a written claim for determination with respect to the
Participant's Account Balances. All claims must be made within ninety (90)
days of the date on which the event that caused the claim to arise
occurred.
13.2 Notification of a Decision
--------------------------
The Committee shall consider a claim within thirty (30) days of the claims
being filed and shall notify the Participant or Beneficiary in writing of
the determination of the claim.
13.3 Review of a Denied Claim
------------------------
Within sixty (60) days after receiving a notice from the Committee that a
claim, in whole or in part, has been denied, a Participant or Beneficiary
(or a duly authorized representative) may file a written appeal with the
Committee for a review of the denial. Thereafter, but not later than
thirty (30) days after the review procedure began, the Participant or
Beneficiary (or a duly authorized representative):
a. may review pertinent documents;
b. may submit documents; and/or
c. may request a hearing, which the Committee may grant, at its sole
discretion.
13.4 Decision on Appeal
------------------
The Committee shall submit its written decision on the appeal of a denial
within thirty (30) days of the submission of a written request for review
of a denial, unless a hearing is held, in which case the Committee's
decision must be rendered within ninety (90) days after the date of the
written request for review of a denial.
<PAGE>
DEC Plan I
Page 14
13.5 Legal Action
------------
A Participant or Beneficiary must comply with the foregoing provisions of
this Article as a prerequisite to commencing any legal action with respect
to any claim for benefits under this Plan.
ARTICLE 14
MISCELLANEOUS
-------------
14.1 Non-qualified Plan
------------------
The Plan is intended to be a non-qualified plan within the meaning of Code
Section 401(a) and that "is unfunded and is maintained by an employer
primarily for the purpose of providing deferred compensation for a select
group of management or highly compensated employees" within the meaning of
ERISA Sections 201(2), 301(a)(3) and 401(a).
14.2 Unsecured General Creditor
--------------------------
Participants and their Beneficiaries, heirs and successors shall have no
legal or equitable rights, interests or claims in any property or assets of
the Company. For purposes of the payment of benefits under this Plan, any
and all of the Company's assets shall be, and remain, the general,
unpledged, unrestricted assets of the Company. The Company's obligation
under the Plan shall be merely that of an unfunded and unsecured promise to
pay money in the future.
14.3 Nonassignability
----------------
Neither a Participant nor any other person shall have the right to commute,
sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber,
transfer, hypothecate, alienate or convey in advance or actual receipt, the
amounts, if any, payable hereunder, or any part thereof, which are
unassignable and non-transferable. No part of the amount payable shall,
prior to actual payment, be subject to seizure, attachment, garnishment or
sequestration for the payment of any debts, judgments, alimony or separate
maintenance owed by a Participant, be transferrable by operation of law in
the event of a Participant's bankruptcy or insolvency or be transferable to
a spouse as a result of a property settlement or otherwise.
14.4 Not a Contract of Employment
----------------------------
The terms and conditions of this Plan shall not be deemed to constitute a
contract of employment between Company and the Participant. Such
employment is hereby acknowledgeable to be an "at will" employment
relationship which can be terminated at any time for any reason, or no
reason, with or without cause, and with or without notice, unless expressly
provided in a written employment agreement.
<PAGE>
DEC Plan I
Page 15
14.5 Governing Law
-------------
The provisions of this Plan shall be construed and interpreted according to
the internal laws of the State of California without regard to its conflict
of laws principles.
14.6 Notice
------
Any notice or filing required or permitted to be given to the Committee
under this Plan shall be sufficient if in writing and hand delivered, or
sent by registered or certified mail, to the address below:
Imperial Credit Industries, Inc.
DEC Committee
23550 Hawthorne Boulevard
Bldg.1, Suite 230
Torrance, CA 90505
Any notice or filing required or permitted to be given to a Participant
under this Plan shall be sufficient if in writing and hand delivered or
sent by mail to the last known address of the Participant.
14.7 Spouse's Interest
-----------------
The interest in the benefits hereunder for a spouse of a Participant who
dies prior to the Participant shall automatically pass to the Participant
and shall not be transferable by such spouse in any manner, including but
not limited to such spouse's will.
14.8 Validity
--------
In case any provisions of the Plan shall be illegal or invalid for any
reason, said illegality or invalidity shall not affect the remaining parts
hereof, but his Plan shall be construed and enforced as if such illegal or
invalid provisions had never been inserted herein.
14.9 Legal Fees to Enforce Rights After Change in Control
----------------------------------------------------
The Company is aware that upon the occurrence of a Change in Control, the
Board of Directors or a shareholder, or any successor corporation might
cause or attempt to cause the Company or such successor to refuse to comply
with its obligations under the Plan and might cause or attempt to cause the
Company to institute litigation seeking to deny Participants the benefits
intended under the Plan. Accordingly, if, following a Change in Control,
it should appear to any Participant that the Company or any successor
corporation has failed to comply with any of its obligations under the Plan
or any agreement thereunder or, if the Company or any other person takes
any action to declare the Plan void or unenforceable or institutes any
litigation or other legal action designed to deny, diminish or to recover
from any Participant the benefits intended to be provided, then the Company
irrevocably authorizes such Participant to retain counsel of his or her
choice at the expense of the Company to represent such Participant in
connection with the initiation or defense of any litigation or other legal
action, whether by or against the
<PAGE>
DEC Plan I
Page 16
Company or any director, officer, shareholder or other person affiliated
with the Company or any successor thereto in any jurisdiction.
IN WITNESS WHEREOF, the Company has signed this Plan as of November 17, 1998.
"Company"
Imperial Credit Industries, Inc.
By: /s/ W. David Hourigan
-------------------------------
Title: V.P. Human Resources
-------------------------------
<PAGE>
EXHIBIT 10.26
Imperial Credit Industries, Inc.
Deferral of Executive Compensation
Plan II
PLAN II DOCUMENT
Effective Date
January 1, 1999
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
DEFERRAL OF EXECUTIVE COMPENSATION PLAN II
TABLE OF CONTENTS
<TABLE>
<S> <C>
Purpose............................................................... 4
Article 1 DEFINITIONS......................................... 4
Article 2 ELIGIBILITY AND ENROLLMENT.......................... 6
Article 2.1 Eligibility......................................... 6
Article 2.2 Enrollment Requirements............................. 7
Article 3 EMPLOYMENT STATUS................................... 7
Article 3.1 Employment.......................................... 7
Article 3.2 No Employment Agreement Created..................... 7
Article 4 COMPENSATION DEFERRALS.............................. 7
Article 4.1 Deferral Elections.................................. 7
Article 4.2 Deferral Enrollment and Election Period............. 8
Article 4.3 Deferral Election Changes........................... 8
Article 4.4 Vesting of Deferrals................................ 8
Article 5 INVESTMENT OPTIONS.................................. 8
Article 5.1 The Committee Shall Select Investment Options....... 8
Article 5.2 Changes in Investment Options....................... 8
Article 6 COMPANY MATCH....................................... 9
Article 6.1 Company Match....................................... 9
Article 7 BENEFITS............................................ 9
Article 7.1 Pre-Retirement Death Benefit........................ 9
Article 7.2 Termination Benefit on Voluntary Resignation........ 9
Article 7.3 Total and Permanent Disability...................... 9
Article 7.4 Retirement Benefits................................. 9
Article 8 BENEFICIARY DESIGNATION............................. 10
Article 8.1 Beneficiary......................................... 10
Article 8.2 Beneficiary Designation, Change, Spousal Consent.... 10
Article 8.3 No Beneficiary; No Beneficiary Designation.......... 10
Article 9 FUNDING............................................. 10
Article 9.1 "Rabbi Trust"....................................... 10
Article 9.2 Plan Trustee........................................ 10
Article 9.3 Company Insolvency.................................. 11
Article 10 LEAVE OF ABSENCE.................................... 11
Article 10.1 Paid Leave of Absence............................... 11
Article 10.2 Unpaid Leave of Absence............................. 11
Article 11 TERMINATION, AMENDMENT OR MODIFICATION.............. 11
Article 11.1 Termination......................................... 11
Article 11.2 Amendment........................................... 11
Article 12 PLAN ADMINISTRATION................................. 12
Article 12.1 Committee Responsibilities and Duties............... 12
Article 12.2 Binding Effect of Decisions......................... 12
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Article 12.3 Indemnity of Committee.............................. 12
Article 13 CLAIMS PROCEDURE.................................... 12
Article 13.1 Presentation of Claim............................... 12
Article 13.2 Notification of a Decision.......................... 13
Article 13.3 Review of a Denied Claim............................ 13
Article 13.4 Decision on Appeal.................................. 13
Article 13.5 Legal Action........................................ 14
Article 14 MISCELLANEOUS....................................... 14
Article 14.1 Non-qualified Plan.................................. 14
Article 14.2 Unsecured General Creditor.......................... 14
Article 14.3 Nonassignability.................................... 14
Article 14.4 Not a Contract of Employment........................ 14
Article 14.5 Governing Law....................................... 15
Article 14.6 Notice 15
Article 14.7 Spouse's Interest................................... 15
Article 14.8 Validity............................................ 15
Article 14.9 Legal Fees to Enforce Rights After Change in Control 15
</TABLE>
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
DEFERRAL OF EXECUTIVE COMPENSATION PLAN II
Purpose
-------
The purpose of the ICII Deferral of Executive Compensation Plan II ("DEC Plan
II") is to provide a benefit to a select group of highly compensated employees
and Directors of ICII and its subsidiaries who contribute materially to the
success of Imperial Credit Industries, Inc. ("ICII").
The DEC Plan II will allow the highly compensated employees and Director of ICII
and its subsidiaries to defer income on a pre-tax basis and will create an
incentive for the participants to increase their ownership in ICII.
ARTICLE 1
DEFINITIONS
-----------
For purposes of the DEC Plan II, the following terms or phrases shall have the
following indicated meanings:
1.1 "According Balance" shall mean the balance in a Participant's Deferral
Account that is held in the Trust. The Account Balance is a bookkeeping
entry only and shall be utilized as a measurement of the amounts to be paid
to a Participant, or his or her beneficiary.
1.2 "Annual Base Salary" shall mean the annual cash compensation, paid by-
weekly, relating to services performed during any calendar year, excluding
bonuses, commissions, employee benefits, stock options, relocation
expenses, incentive payments, non-monetary awards, automobile and other
allowances paid to a Participant for employment services rendered. Annual
Base Salary shall be calculated before reduction for compensation
voluntarily deferred or contributed by the Participants pursuant to all
qualified or non-qualified plans under Code Sections 125, 401(k), 402(e)(3)
or 402(h).
1.3 "Annual Bonus" shall mean any compensation, in addition to Annual Base
Salary or Commissions paid to a Participant as an Employee under any annual
bonus, incentive bonus or cash incentive plans.
1.4 "Annual Deferral Amount" shall mean that portion of a Participant's Annual
Base Salary, Commissions, Annual Bonus and Director's Fees that a
Participant defers in any one Plan Year.
1.5 "Beneficiary" shall mean one or more persons, trusts, estates or other
entities, designated in accordance with Article 8, that are entitled to
receive benefits under this Plan upon the death of a Participant.
1.6 "Board" shall meant the Board of Directors of Imperial Credit Industries,
Inc.
<PAGE>
DEC Plan II
Page 5
1.7 "Commission" shall mean compensation received for producing business with
the amount being determined by a formula (e.g. percentage of sales volume).
1.8 "Committee" shall mean the administration committee for the DEC Plan II as
described in Article 12.
1.9 "Company" shall mean Imperial Credit Industries, Inc., its subsidiaries and
any successor to all or substantially all of the Company's assets or
business.
1.10 "Company Match" shall mean the amount contributed by ICII to the Plan in
accordance with Article 6.1 of the Plan.
1.11 "Deferral Account" shall mean (i) the sum of all of a Participant's Annual
Deferral Amounts, plus (ii) amounts credited in accordance with all the
applicable crediting provisions of this Plan that relate to the
Participant's Deferral Account, less (iii) all distributions made to
Participant or his or her Beneficiary pursuant to the Plan that relate to
his or her Deferral Account.
1.12 "Director" shall mean any non-Employee member of the Board of Directors of
ICII of Southern Pacific Bank or any future ICII subsidiary companies.
1.13 "Disability" shall mean the period of disability during which a
Participant qualifies for disability benefits under the Participant's
Company's disability plan.
1.14 "Employee" shall mean a person who is an employee of ICII, Southern
Pacific Bank, Imperial Business Credit, Inc., Imperial Capital Group, LLC,
Imperial Credit Asset Management, Inc., Imperial Credit Advisors, Inc.,
Imperial Credit Commercial Mortgage Asset Management Corporation, Skypark
Capital Management, Inc., or any future ICII subsidiary companies.
1.15 "Participant" shall mean any (i) Director or (ii) any Employee who earned
$100,000 annually in the previous calendar year or whose annual base salary
is $100,000 or more (iii) who elects to participate in the Plan and, (iv)
who signs a Plan Agreement and an Election and Beneficiary Designation
Form. A spouse or former spouse of a Participant shall not be treated as a
Participant in the Plan or have an Account Balance under the Plan, even if
he or she has interest in the Participant's benefits under the Plan as a
result of applicable law or property settlements resulting from legal
separation or divorce.
1.16 "Plan" shall mean the ICII Deferral of Executive Compensation Plan II.
1.17 "Plan II Agreement" shall mean a written agreement, as may be amended from
time to time, which is entered into by and between the Participant and the
Company.
<PAGE>
DEC Plan II
Page 6
1.18 "Plan Year" shall mean a period beginning January 1 of each calendar year
and continuing through December 31 of such calendar year.
1.19 "Pre-Retirement Survivor Benefit" shall mean the benefit paid to the
Beneficiary of a Participant in the event of the Participant's death prior
to retirement.
1.20 "Rabbi Trust" or "Trust" shall mean the trust that has been established to
fund the DEC Plan II.
1.21 "Retirement" or "Normal Retirement Age" shall be on or after that date on
which the Participant's age plus years of service shall be equal to or
greater than 65. A Participant who reaches Normal Retirement Age may not
receive distributions if the Participant is still employed by ICII or its
subsidiaries.
1.22 "Termination of Employment" shall mean the discontinuance of employment
with ICII or its subsidiaries as an employee or a Director for any reason
other than retirement, disability, death or an authorized leave of absence.
1.23 "Unforeseeable Financial Emergency" shall mean an unanticipated emergency
that is caused by an event beyond the control of the Participant that would
result in severe financial hardship for the Participant.
1.24 "Vesting" shall mean the period of time that the Company Match must remain
in the Trust, and the Participant must remain employed by ICII or its
subsidiaries before the Participant is entitled to the Company Match.
ARTICLE 2
ELIGIBILITY AND ENROLLMENT
--------------------------
2.1 Eligibility
-----------
In order for an Employee to become a Participant in the ICII DEC Plan II,
the Employee must earn $100,000 or more annually. To determine
eligibility, the Committee will ensure that (i) the Employee earned
$100,000 or more in the previous Calendar Year, or (ii) the Employee's
current annual base salary and/or earnings is $100,000 or more.
Eligibility employees and Directors shall enroll no later than the first
day of the Plan Year, or on the first day of the month following the month
in which the Employee or Director meets all eligibility criteria.
<PAGE>
DEC Plan II
Page 7
2.2 Enrollment Requirements
-----------------------
As a condition of participation, each eligible Employee or Director shall
complete, execute and return a DEC Plan II Agreement and an Election and
Beneficiary Designation Form to the Committee. The Committee may, at its
discretion, require Participants to complete other enrollment requirements.
ARTICLE 3
EMPLOYMENT STATUS
-----------------
3.1 Employment
----------
The Company agrees, subject to Section 3.2 below, to employ Participant in
such capacity as the Company may determine, with such duties,
responsibilities and compensation as determined by the Board of Directors,
or as delegated to the ICII or subsidiary Chief Executive Officer.
Participant agrees, while employed by Company, to devote his/her attention
exclusively to the business of the Company and to use best efforts to
provide faithful and satisfactory service to the Company.
3.2 No Employment Agreement Created
-------------------------------
No provision of this Plan shall be deemed to restrict or limit any existing
employment agreement by and between the Company and the Participant, nor
shall any conditions herein create specific employment rights to the
Participant nor limit the right of the Company to discharge the Participant
with or without cause. In a similar fashion, no provision shall limit the
Participant's rights to voluntarily sever employment at any time, and the
employment relationship between the Company and the Participant shall
continue to be "at will", unless subject to a contract for a specific term.
ARTICLE 4
COMPENSATION DEFERRALS
----------------------
4.1 Deferral Elections
------------------
A Participant may elect to defer up to fifty percent (50%) of Annual Base
Salary and Commissions and/or up to one hundred percent (100%) of Annual
Bonus payments in the DEC Plan II. A Director may defer up to one hundred
percent (100%) of the Director's retainer and meeting fees.
<PAGE>
DEC Plan II
Page 8
4.2 Deferral Enrollment and Election Period
---------------------------------------
Eligible Participants are required to enroll within thirty (30) days prior
to a new Plan Year by completing and submitting all appropriate forms to
the Committee. Employees hired during a Plan Year or whose Annual Base
Salary compensation is increased to $100,000 or more during a Plan Year,
and newly appointed Directors are eligible to enroll on the first day of
the month following the month they meet the eligibility requirements.
4.3 Deferral Election Changes
-------------------------
Participants have the right to amend or discontinue the election deferral
percentage provided they notify the Committee, in writing, within fifteen
(15) days of the next ensuing Plan Year. Failure to notify the Committee
within fifteen (15) days of the next ensuing Plan Year (and those that
follow) shall constitute a waiver by Participant to elect a different
compensation reduction percentage and a reaffirmation and notification to
continue the compensation reduction levels selected in the immediately
preceding Plan Year.
Deferral elections made by a Participant cannot be changed or discontinued
during a Plan Year. This is an IRS requirement for executive deferred
compensation plans.
4.4 Vesting of Deferrals
--------------------
A Participant shall be 100% vested at all times in his/her Deferral
Account.
ARTICLE 5
INVESTMENT OPTIONS
------------------
5.1 The Committee Shall Select Investment Options
---------------------------------------------
The Committee shall select the investment options that are available to all
Participants. The Committee will annually review the performance of the
investments and make changes as deemed appropriate.
5.2 Changes in Investment Options
-----------------------------
Participants may change the investments they have selected on a quarterly
basis. To make the changes, Participants must notify the Committee, in
writing, no later than fifteen (15) days prior to the beginning of the
quarter.
<PAGE>
DEC Plan II
Page 9
ARTICLE 6
COMPANY MATCH
-------------
6.1 Company Match
-------------
There will be no Company Match in DEC Plan II.
ARTICLE 7
BENEFITS
--------
7.1 Pre-Retirement Death Benefit
----------------------------
In the event a Participant dies while still an Employee of the Company, the
Company agrees to pay the Participant's Beneficiary the amount credited to
Participant in the form of a lifetime annuity issued by a life insurance
company (with a rating by Standard & Poors of "AA-" or better).
7.2 Termination Benefit on Voluntary Resignation
--------------------------------------------
Should the Participant terminate employment for reasons other than
retirement, disability or death, Participant shall receive from the Company
and the Company agrees to pay the Participant the amount credited to the
Participant's Account Balance.
7.3 Total and Permanent Disability
------------------------------
In the event the Participant shall become totally or permanently disabled
(either physically or mentally), all as defined by the Social Security
Administration, while still an Employee of the Company, the Company agrees
to pay the Participant the amount credited to the Participant in the form
of a lifetime annuity issued by a life insurance company (with a rating by
Standard & Poors of "AA-" or better), as requested by the Participant.
7.4 Retirement Benefits
-------------------
If the Participant remains in the employment of the Company until the
Normal Retirement Age defined in Article 1.22, the Participant shall be
entitled to receive from the Company, and the Company agrees to pay
Participant provided Participant is no longer employed by ICII or its
subsidiaries, the amount credited to Participant's account in the form of a
lifetime annuity issued by a life insurance company (with a rating by
Standard & Poors of "AA-" or better), as requested by Participant.
<PAGE>
DEC Plan II
Page 10
ARTICLE 8
BENEFICIARY DESIGNATION
-----------------------
8.1 Beneficiary
-----------
Each Participant shall have the right, at any time, to designate a
Beneficiary(ies) (both primary as well as contingent) to receive benefits
payable under the DEC Plan II upon the death of the Participant.
8.2 Beneficiary Designation, Change, Spousal Consent
------------------------------------------------
Each Participant shall designate a Beneficiary by completing the
Beneficiary Designation section of the Election and Beneficiary Designation
From and submitting it to the Committee, or its designated agent. A
Participant shall have the right to change a Beneficiary by completing,
signing and returning an Election and Beneficiary Designation Form to the
Committee or designated agent.
If the Participant is married and names someone other than his or her
spouse as a Beneficiary, the Participant must have his or her spouse sign a
spousal consent (which must be notarized) and return it to the Committee or
its designated agent.
The Committee shall rely on the last Election and Beneficiary Designation
Form filed by the Participant and received by the Committee prior to his or
her death.
8.3 No Beneficiary; No Beneficiary Designation
------------------------------------------
If a Participant fails to designate a Beneficiary, then the Participant's
spouse (if any) shall be deemed to be the Beneficiary. If all designated
Beneficiaries (primary and contingent) are deceased at the time of the
distribution of the Participant's account, all benefits shall be made
payable to the executor or personal representative of the Participant's
estate.
ARTICLE 9
FUNDING
-------
9.1 "Rabbi Trust"
-------------
The DEC Plan II shall be funded through the establishment of a Rabbi Trust
as defined by the Internal Revenue Service in Revenue Procedure 92-64.
9.2 Plan Trustee
------------
Company shall deposit with a Plan Trustee in the Rabbi Trust various
amounts, which shall become the principal of the Trust to be held,
administered and disposed of by Trustee as provided by the Plan.
<PAGE>
DEC Plan II
Page 11
9.3 Company Insolvency
------------------
In the event the Company becomes insolvent, Trustee shall discontinue
payments to Plan Participants to their Beneficiaries and shall hold the
assets of the Trust for the benefit of Company's general creditors.
Participants or their Beneficiaries have the right as general creditors of
the Company with respect to benefits due under the Plan or otherwise.
ARTICLE 10
LEAVE OF ABSENCE
----------------
10.1 Paid Leave of Absence
---------------------
If a Participant is authorized by the Company for any reason to take a paid
leave of absence from employment, the Participant shall continue to be
considered employed and the Company shall continue to withhold deferrals
from Participant's earnings.
10.2 Unpaid Leave of Absence
-----------------------
If a Participant is authorized by the Company for any reason to take an
unpaid leave of absence, the Participant shall continue to be considered
employed and the Participant shall be excused from making deferrals until
the date the leave of absence expires and the Participant returns to a paid
status.
ARTICLE 11
TERMINATION, AMENDMENT OR MODIFICATION
--------------------------------------
11.1 Termination
-----------
Company anticipates that it will continue the DEC Plan II for an indefinite
period of time; however, there is no guarantee that the Company will not
terminate the DEC Plan II at any time in the future. The Company reserves
the right to discontinue its sponsorship of the DEC Plan II at any time by
action of its Board of Directors.
Upon the termination of the DEC Plan II, the Company may, at its
discretion, pay the Participant the amount credited to Participant's
account in the form of a lump sum or in the form of a lifetime annuity
issued by a life insurance company (with a rating by Standard & Poors of
"AA-" or better).
11.2 Amendment
---------
Company may at any time, amend or modify the DEC Plan II in whole or in
part by action of the Board of Directors; provided that (i) no amendment or
modification shall be effective to decrease or restrict the value of a
Participant's Account Balance in existence at the time of the amendment or
modification; and (ii) no amendment or modification has
<PAGE>
DEC Plan II
Page 12
any effect on benefits being received by a Participant or Beneficiary who
has become entitled to benefits as of the date of amendment or
modification.
ARTICLE 12
PLAN ADMINISTRATION
-------------------
12.1 Committee Responsibilities and Duties
-------------------------------------
The DEC Plan II shall be administered by the DEC Plan II Committee. The
Committee will be appointed by the Board of Directors, and shall have the
discretion and authority to (i) make, amend, interpret and enforce all
appropriate rules and regulations for the administration of the Plan and
(ii) decide or resolve any and all questions including interpretations of
this Plan.
Any individual serving on the Committee who is a Participant shall not vote
or act on any matter relating solely to himself or herself.
12.2 Binding Effect of Decisions
---------------------------
The decisions or actions of the Committee with respect to any question in
connection with the administration, interpretation and application of the
Plan and the rules and regulations promulgated hereunder shall be final and
conclusive and binding upon all persons having any interest in the Plan.
12.3 Indemnity of Committee
----------------------
Company shall indemnify and hold the Committee members blameless against
any and all claims, losses, damages, expenses and liabilities arising from
any action or failure to act with respect to the Plan, except in the case
of willful misconduct by the Committee or any of its members.
ARTICLE 13
CLAIMS PROCEDURE
----------------
13.1 Presentation of Claim
---------------------
Any Participant or Beneficiary of a deceased Participant may deliver to the
Committee a written claim for determination with respect to the
Participant's Account Balances. All claims must be made within ninety (90)
days of the date on which the event that caused the claim to arise
occurred.
<PAGE>
DEC Plan II
Page 13
13.2 Notification of a Decision
--------------------------
The Committee shall consider a claim within thirty (30) days of the claims
being filed and shall notify the Participant or Beneficiary in writing of
the determination of the claim.
13.3 Review of a Denied Claim
------------------------
Within sixty (60) days after receiving a notice from the Committee that a
claim, in whole or in part, has been denied, a Participant or Beneficiary
(or a duly authorized representative) may file a written appeal with the
Committee for a review of the denial. Thereafter, but not later than
thirty (30) days after the review procedure began, the Participant or
Beneficiary (or a duly authorized representative):
a. may review pertinent documents;
b. may submit documents; and/or
c. may request a hearing, which the Committee may grant, at its sole
discretion.
13.4 Decision on Appeal
------------------
The Committee shall submit its written decision on the appeal of a denial
within thirty (30) days of the submission of a written request for review
of a denial, unless a hearing is held, in which case the Committee's
decision must be rendered within ninety (90) days after the date of the
written request for review of a denial.
<PAGE>
DEC Plan II
Page 14
13.5 Legal Action
------------
A Participant or Beneficiary must comply with the foregoing provisions of
this Article as a prerequisite to commencing any legal action with respect
to any claim for benefits under this Plan.
ARTICLE 14
MISCELLANEOUS
-------------
14.1 Non-qualified Plan
------------------
The Plan is intended to be a non-qualified plan within the meaning of Code
Section 401(a) and that "is unfunded and is maintained by an employer
primarily for the purpose of providing deferred compensation for a select
group of management or highly compensated employees" within the meaning of
ERISA Sections 201(2), 301(a)(3) and 401(a).
14.2 Unsecured General Creditor
--------------------------
Participants and their Beneficiaries, heirs and successors shall have no
legal or equitable rights, interests or claims in any property or assets of
the Company. For purposes of the payment of benefits under this Plan, any
and all of the Company's assets shall be, and remain, the general,
unpledged, unrestricted assets of the Company. The Company's obligation
under the Plan shall be merely that of an unfunded and unsecured promise to
pay money in the future.
14.3 Nonassignability
----------------
Neither a Participant nor any other person shall have the right to commute,
sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber,
transfer, hypothecate, alienate or convey in advance or actual receipt, the
amounts, if any, payable hereunder, or any part thereof, which are
unassignable and non-transferable. No part of the amount payable shall,
prior to actual payment, be subject to seizure, attachment, garnishment or
sequestration for the payment of any debts, judgments, alimony or separate
maintenance owed by a Participant, be transferrable by operation of law in
the event of a Participant's bankruptcy or insolvency or be transferable to
a spouse as a result of a property settlement or otherwise.
14.4 Not a Contract of Employment
----------------------------
The terms and conditions of this Plan shall not be deemed to constitute a
contract of employment between Company and the Participant. Such
employment is hereby acknowledgeable to be an "at will" employment
relationship which can be terminated at any time for any reason, or no
reason, with or without cause, and with or without notice, unless expressly
provided in a written employment agreement.
<PAGE>
DEC Plan II
Page 15
14.5 Governing Law
-------------
The provisions of this Plan shall be construed and interpreted according to
the internal laws of the State of California without regard to its conflict
of laws principles.
14.6 Notice
------
Any notice or filing required or permitted to be given to the Committee
under this Plan shall be sufficient if in writing and hand delivered, or
sent by registered or certified mail, to the address below:
Imperial Credit Industries, Inc.
DEC Committee
23550 Hawthorne Boulevard
Bldg.1, Suite 230
Torrance, CA 90505
Any notice or filing required or permitted to be given to a Participant
under this Plan shall be sufficient if in writing and hand delivered or
sent by mail to the last known address of the Participant.
14.7 Spouse's Interest
-----------------
The interest in the benefits hereunder for a spouse of a Participant who
dies prior to the Participant shall automatically pass to the Participant
and shall not be transferable by such spouse in any manner, including but
not limited to such spouse's will.
14.8 Validity
--------
In case any provisions of the Plan shall be illegal or invalid for any
reason, said illegality or invalidity shall not affect the remaining parts
hereof, but his Plan shall be construed and enforced as if such illegal or
invalid provisions had never been inserted herein.
14.9 Legal Fees to Enforce Rights After Change in Control
----------------------------------------------------
The Company is aware that upon the occurrence of a Change in Control, the
Board of Directors or a shareholder, or any successor corporation might
cause or attempt to cause the Company or such successor to refuse to comply
with its obligations under the Plan and might cause or attempt to cause the
Company to institute litigation seeking to deny Participants the benefits
intended under the Plan. Accordingly, if, following a Change in Control,
it should appear to any Participant that the Company or any successor
corporation has failed to comply with any of its obligations under the Plan
or any agreement thereunder or, if the Company or any other person takes
any action to declare the Plan void or unenforceable or institutes any
litigation or other legal action designed to deny, diminish or to recover
from any Participant the benefits intended to be provided, then the Company
irrevocably authorizes such Participant to retain counsel of his or her
choice at the expense of the Company to represent such Participant in
connection with the initiation or defense of any litigation or other legal
action, whether by or against the
<PAGE>
DEC Plan II
Page 16
Company or any director, officer, shareholder or other person affiliated
with the Company or any successor thereto in any jurisdiction.
IN WITNESS WHEREOF, the Company has signed this Plan as of November 17, 1998.
"Company"
Imperial Credit Industries, Inc.
By: /s/ W. David Hourigan
-----------------------------
Title: V.P., Human Resources
-----------------------------
<PAGE>
EXHIBIT 10.27
TERMINATION PROTECTION AGREEMENT
--------------------------------
AGREEMENT effective January 27, 1999 between Imperial Credit Industries,
Inc., a California Corporation (the "Company") and Kevin E. Villani (the
"Executive").
Executive, who is a senior executive of the Company, is a skilled and
dedicated employee who has important management responsibilities and talents
which benefit the Company and its affiliates. The Company believes that its
best interests will be served if Executive is encouraged to remain with the
Company. The Company has determined that the Company's ability to retain
Executive as an employee will be significantly enhanced if Executive is provided
with fair and reasonable protection from the potential effects of a change in
ownership or control of the Company. Accordingly, the Company and Executive
agree as follows:
1. Defined Terms.
-------------
Unless otherwise indicated, capitalized terms used in this Agreement which are
defined in Schedule A shall have the meanings set forth in Schedule A.
2. Effective Date; Term.
--------------------
This Agreement shall commence on the date hereof (the "Effective Date") and
shall continue in effect through December 31, 2000; provided, however, the term
-------- -------
of this Agreement shall automatically be extended for one additional year beyond
2000 and successive one year periods thereafter, unless, not later than January
30 of each calendar year, commencing in 2000, the Company shall have given
notice that it does not wish to extend this Agreement for an additional year
beyond such calendar year, in which event this Agreement shall continue to be
effective until the end of its then remaining term; provided, further, that,
-------- -------
notwithstanding any such notice by the Company not to extend, if a Change in
Control shall have occurred during the original or any extended term of this
Agreement, this Agreement shall continue in effect for a period of 36 months
beyond such Change in Control.
3. Change in Control Benefits.
--------------------------
If Executive's employment with the Company or its affiliates is terminated (a)
at any time within the three years following a Change in Control by the Company
or its affiliates without Cause or by Executive for Good Reason, or (b) by
Executive for any reason during the 30 day period beginning on the first
anniversary of a Change in Control (the effective date of any such termination
hereafter referred to as the "Termination Date"), Executive shall be entitled to
the benefits provided hereafter in this Section 3 and as otherwise set forth in
this Agreement. If Executive's employment is terminated prior to a Change in
Control at the request or suggestion of any individual or entity acquiring
ownership and control of the Company, this Agreement shall become effective upon
the subsequent occurrence of a Change in Control involving such acquirer, and
Executive's Termination Date shall be deemed to have occurred immediately
1
<PAGE>
following the Change in Control, with the result that Executive shall be
entitled to the benefits provided hereafter in this Section 3 and as otherwise
set forth in this Agreement.
A. Severance Benefits. Within five business days after the Termination
------------------
Date, the Company shall pay Executive a lump sum amount, in cash, equal to:
(i) three times the sum of:
(a) Executive's Base Salary, and
(b) Executive's highest Bonus earned in respect of any of the
last three Company fiscal years preceding the Change in
Control, and
(ii) Executive's Target Bonus multiplied by a fraction, the numerator
of which shall equal the number of days Executive was employed by the
Company or an affiliate in the calendar year in which the Termination
Date occurs and the denominator of which shall equal 365.
B. Continued Welfare Benefits. Until the third anniversary of the
--------------------------
Termination Date, the Company shall, at its expense, provide Executive with
medical, dental, life insurance, disability and accidental death and
dismemberment benefits at the highest level provided to Executive during
the period beginning immediately prior to the Change in Control and ending
on the Termination Date; provided, however, that if Executive becomes
-------- -------
employed by a new employer, the coverages provided by the Company pursuant
to this sentence shall become secondary to those coverages provided by the
new employer.
C. Payment of Accrued But Unpaid Amounts. Within five business days after
-------------------------------------
the Termination Date, (i) all deferred compensation (including any
deferrals and matches on those deferrals in the Company's Deferral of
Executive Compensation Plan I or the Company's Deferral of Executive
Compensation Plan II) shall become fully vested and (ii) the Company shall
pay Executive, in cash, (A) any unpaid portion of Executive's Bonus accrued
with respect to the full calendar year ended prior to the Termination Date;
and (B) all unpaid deferred compensation of Executive.
D. Effect on Existing Plans and Employment Agreements. All Change in
--------------------------------------------------
Control provisions applicable to Executive and contained in any plan,
program, agreement or arrangement maintained on the Effective Date (or
thereafter) by the Company or any affiliate (including, but not limited to,
any stock option or pension plan) shall remain in effect through the date
of a Change in Control (as altered by this Agreement), and for such period
thereafter as is necessary to carry out such provisions and provide the
benefits payable thereunder, and may not be altered in a manner which
adversely affects Executive without Executive's prior written approval. No
benefits shall be paid to Executive, however, under any severance plan
maintained generally for the employees of the Company or any affiliate if
Executive is eligible to receive benefits under this Section 3.
Notwithstanding the provisions of Section 4 hereof, any payments or
benefits
2
<PAGE>
provided under this Agreement shall be reduced by any payments or benefits
Executive receives as a result of his termination of employment under an
employment agreement between the Company or any affiliate and Executive (an
"Employment Agreement"). In addition, any non-competition or non-
solicitation covenant in an Employment Agreement or other agreement between
the Company or any affiliate and Executive shall lapse on the date of a
Change in Control.
E. Outplacement Counseling. For the three year period following the
-----------------------
Termination Date, the Company shall reimburse all reasonable expenses
incurred by Executive (up to 20% of Base Salary per year) for professional
outplacement services by qualified consultants selected by Executive.
4. Mitigation.
----------
A. Executive shall not be required to mitigate damages or the amount of
any payment provided for under this Agreement by seeking other employment
or otherwise, and compensation earned from such employment or otherwise
shall not reduce the amounts otherwise payable under this Agreement. No
amounts payable under this Agreement shall be subject to reduction or
offset in respect of any claims which the Company (or any other person or
entity) may have against Executive.
5. Gross-Up.
--------
A. In the event that any payment or benefit received or to be received by
Executive pursuant to the terms of this Agreement (the "Contract Payment")
or in connection with Executive's termination of employment or contingent
upon a Change in Control of the Company pursuant to any plan or arrangement
or other agreement with the Company (or any affiliate) ("Other Payments"
and, together with the Contract Payments, the "Payments") would be subject
to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code,
as determined as provided below, the Company shall pay to Executive, at the
time specified in Section 5(B) below, an additional amount (the "Gross-Up
Payment") such that the net amount retained by Executive, after deduction
of the Excise Tax on the Payments and any federal, state and local income
or other tax and Excise Tax upon the payment provided for by this Section
5(A), and any interest, penalties or additions to tax payable by Executive
with respect thereto, shall be equal to the total value of the Payments at
the time such Payments are to be made. For purposes of determining whether
any of the Payments will be subject to the Excise Tax and the amounts of
such Excise Tax, (1) the total amount of the Payments shall be treated as
parachute payments" within the meaning of Section 280G(b)(2) of the Code,
and all "excess parachute payments" within the meaning of Section
280G(b)(1) of the Code shall be treated as subject to the Excise Tax,
except to the extent that, in the opinion of independent tax counsel
selected by the Company's independent auditors and reasonably acceptable to
Executive ("Tax Counsel"), a Payment (in whole or in part) does not
constitute a "parachute payment" within the meaning of Section 280G(b)(2)
of the Code, or such "excess parachute payments" (in whole or in part) are
not subject to the Excise
3
<PAGE>
Tax, (2) the amount of the Payments that shall be treated as subject to the
Excise Tax shall be equal to the lesser of (A) the total amount of the
Payments or (B) the amount of "excess parachute payments" within the
meaning of Section 280G(b)(1) of the Code (after applying clause (1)
hereof), and (3) the value of any noncash benefits or any deferred payment
or benefit shall be determined by Tax Counsel in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, Executive shall be deemed
to pay federal income tax at the highest marginal rates of federal income
taxation applicable to individuals in the calendar year in which the Gross-
Up Payment is to be made and state and local income taxes at the highest
effective rates of taxation applicable to individuals as are in effect in
the state and locality of Executive's residence or place of employment in
the calendar year in which the Gross-Up Payment is to be made.
B. The Gross-Up Payments provided for in Section 5(A) hereof shall be
made upon the earlier of (i) the payment to Executive of any Payment or
(ii) the imposition upon Executive or payment by Executive of any Excise
Tax.
C. The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by
the Company of a Gross-Up Payment. Such notification shall be given as
soon as practicable but no later than 10 business days after the Executive
is informed in writing of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to be
paid. The Executive shall not pay such claim prior to the expiration of
the 30 day period following the date on which the Executive gives such
notice to the Company (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If the Company
notifies the Executive in writing prior to the expiration or such period
that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim;
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company and reasonably satisfactory to the Executive.
(iii) cooperate with the Company in good faith in order to
effectively contest such claim; and
(iv) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs
-------- -------
and expenses (including, but not limited to, additional interest and
penalties and related legal, consulting or other similar fees) incurred in
connection with such contest and shall
4
<PAGE>
indemnify and hold the Executive harmless, on an after-tax basis, for any
Excise Tax or other tax (including interest and penalties with respect
thereto) imposed as a result of such representation and payment of costs
and expenses.
D. The Company shall control all proceedings taken in connection with such
contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearing and conferences with the
taxing authority in respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner, and the Executive agrees to
prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine; provided, however, that if the
-------- -------
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive on an
interest-free basis, and shall indemnify and hold the Executive harmless,
on an after-tax basis, from any Excise Tax or other tax (including interest
or penalties with respect thereto) imposed with respect to such advance or
with respect to any imputed income with respect to such advance; and
provided, further, that if the Executive is required to extend the statute
-------- -------
of limitations to enable the Company to contest such claim, the Executive
may limit this extension solely to such contested amount. The Company's
control of the contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and the Executive shall be
entitled to settle or contest, as the case may be, any other issue raised
by the Internal Revenue Service or any other taxing authority. In
addition, no position may be taken nor any final resolution be agreed to by
the Company without the Executive's consent if such position or resolution
could reasonably be expected to adversely affect the Executive (including
any other tax position of the Executive unrelated to the matters covered
hereby).
E. As a result of the uncertainty in the application of Section 4999 of
the Code at the time of a determination by the Company or the Tax Counsel
hereunder, it is possible that Gross-Up Payments which will not have been
made by the Company should have been made ("Underpayment"), consistent with
the calculations required to be made hereunder. In the event that the
Company exhausts its remedies, as set forth above, and the Executive
thereafter is required to pay to the Internal Revenue Service an additional
amount, the Company or the Tax Counsel shall determine the amount of the
Underpayment that has occurred and any such Underpayment shall promptly be
paid by the Company to or for the benefit of the Executive.
F. If, after the receipt by Executive of the Gross-Up Payment or an amount
advanced by the Company in connection with the contest of an Excise Tax
claim, the Executive receives any refund with respect to such claim, the
Executive shall promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by the Executive of an amount advanced by
the Company in connection with an Excise Tax claim, a determination is made
that Executive shall not be entitled to any refund with respect to such
claim and the Company does not notify the Executive in writing of its
intent to contest the denial of
5
<PAGE>
such refund prior to the expiration of 30 days after such determination,
such advance shall be forgiven and shall not be required to be repaid.
6. Termination for Cause.
---------------------
Nothing in this Agreement shall be construed to prevent the Company or its
affiliates from terminating Executive's employment for Cause. If Executive is
terminated for Cause, the Company shall have no obligation to make any payments
under this Agreement, except for payments that may otherwise be payable under
then existing employee benefit plans, programs and arrangements of the Company
and its affiliates.
7. Indemnification; Director's and Officer's Liability Insurance.
-------------------------------------------------------------
Executive shall, after the Termination Date, retain all rights to
indemnification under applicable law or under the applicable Company's Articles
of Incorporation or By-Laws, as they may be amended or restated from time to
time. In addition, the Company shall maintain Director's and Officer's
liability insurance on behalf of Executive, at the level in effect immediately
prior to the Termination Date, for the three-year period following the
Termination Date, and throughout the period of any applicable statute of
limitations.
8. Confidential Information.
------------------------
Except as required by law or by any court or administrative agency, during the
six-month period following the Termination Date, Executive shall not disclose to
any person, or use to the significant disadvantage of any of the Company or its
affiliates, any Confidential Information; provided that nothing contained in
--------
this Section 8 shall prevent Executive from being employed by a competitor or
any of the Company or utilizing Executive's general skills, experience, and
knowledge, including those developed while employed by any of the Company or its
affiliates.
9. Disputes.
--------
Any dispute or controversy arising under or in connection with this Agreement
shall be settled exclusively by arbitration in Los Angeles, California or, at
the option of Executive, in the county where Executive then resides, in
accordance with the Rules of the American Arbitration Association then in
effect, except that Executive may, at Executive's option, bring that action in a
court of competent jurisdiction, even if the Company has earlier instituted an
action hereunder. Judgement may be entered on an arbitrator's award relating to
this Agreement in any court having jurisdiction.
10. Costs of Proceedings.
--------------------
The Company shall pay all costs and expenses, including attorneys' fees and
disbursements, at least monthly, of Executive in connection with any legal
proceeding (including arbitration), whether instituted by the Company or
Executive, relating to the interpretation or enforcement of any provision of
this Agreement, except that if Executive instituted the proceeding and the
judge, arbitrator or other individual presiding over the proceeding
affirmatively finds that Executive
6
<PAGE>
instituted the proceeding in bad faith, Executive shall pay all costs and
expenses, including attorneys' fees and disbursements, of Executive. The Company
shall pay prejudgment interest on any money judgment obtained by Executive as a
result of such a proceeding, calculated at the prime rate of The Chase Manhattan
Bank, as in effect from time to time, from the date that payment should have
been made to Executive under this Agreement.
11. Assignment.
----------
Except as otherwise provided herein, this Agreement shall be binding upon, inure
to the benefit of and be enforceable by the Company and Executive and their
respective heirs, legal representatives, successors and assigns. If the Company
shall be merged into or consolidated with another entity, the provisions of this
Agreement shall be binding upon and inure to the benefit of the entity surviving
such merger or resulting from such consolidation. The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business or assets of the Company,
by agreement in form and substance satisfactory to Executive, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. The provisions of this Section 11 shall continue to apply to
each subsequent employer of Executive hereunder in the event of any subsequent
merger, consolidation or transfer of assets of such subsequent employer.
12. Withholding.
-----------
Notwithstanding the provisions of Sections 4 and 5 hereof, the Company may, to
the extent required by law, withholding applicable federal, state and local
income and other taxes from any payments due to Executive hereunder.
13. Applicable Law.
--------------
This Agreement shall be governed by and construed in accordance with the laws of
the State of California applicable to contracts made and to be performed
therein.
14. Entire Agreement.
----------------
This Agreement constitutes the entire agreement between the parties regarding
the subject matter hereof. This Agreement may be changed only by a written
agreement executed by the Company and Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement on the 29th
day of January, 1999.
IMPERIAL CREDIT INDUSTRIES, INC.
/s/ Kevin E. Villani By: /s/ H. Wayne Snavely
- ----------------------------- ----------------------------------
Executive: Kevin E. Villani H. Wayne Snavely
7
<PAGE>
Schedule A
CERTAIN DEFINITIONS
As used in this Agreement, and unless the context requires a different
meaning, the following terms, when capitalized, have the meaning indicated:
"Average Bonus" means the average Bonus earned by Executive in respect of
-------------
the last three full fiscal years of the Company ending prior to the Change in
Control, excluding any Bonus paid in such years in respect of a partial year of
employment.
"Base Salary" means Executive's annual rate of base salary in effect on the
-----------
date of the Change in Control or the Termination Date, whichever is higher.
"Board" means the Company's Board of Directors.
-----
"Bonus" means the amount payable to Executive under the Company's
-----
applicable annual bonus plan with respect to a Company fiscal year.
"Cause" means either of the following:
-----
(i) the willful and continued failure to Executive to perform
substantially his or her duties with the Company or its affiliates (other
than any such failure resulting from incapacity due to physical or mental
illness), after a written demand for substantial performance is delivered
to Executive by the Board or an elected officer of the Company which
specifically identifies the manner in which the Board or the elected
officer believes that Executive has not substantially performed his or her
duties; or
(ii) (A) Executive's conviction of, or plea of guilty or nolo contendere
to, a felony or (B) the willful engaging by Executive in gross misconduct
which is materially and demonstrably injurious to the Company.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause (except for Cause pursuant to (ii)(A) above) unless and
until there shall have been delivered to Executive a copy of a resolution duly
adopted by the affirmative vote of not less than three-quarters (3/4) of the
outside (i.e., nonemployee) directors at a meeting of the Board called and held
for such purpose (after reasonable notice to Executive and an opportunity for
Executive, together with Executive's counsel, to be heard before the Board),
finding that, in the good faith opinion of the Board, Executive was guilty of
conduct set forth above and specifying the particulars thereof in detail.
"Change in Control" means the first to occur of any of the following dates:
-----------------
8
<PAGE>
(i) any person or person acting in concert (excluding Company benefit
plans) becomes the beneficial owner of securities of the Company having at
least 40% of the voting power of the Company's then outstanding securities
(unless the event causing the 40% threshold to be crossed is an acquisition
of voting common securities directly from the Company); or
(ii) any merger or other business combination of the Company, liquidation
of the Company or sale or substantially all of the Company's assets (any of
which is a "Transaction") other than a Transaction immediately following
-----------
which the shareholders of the Company and any trustee or fiduciary of any
Company employee benefit plan immediately prior to the Transaction own at
least 60% of the voting power, directly or indirectly, of the surviving
corporation following the Transaction; or
(iii) within any 24 month period, the persons who were directors
immediately before the beginning of such period (the "Incumbent Directors")
-------------------
shall cease (for any reason other than death) to constitute at least a
majority of the Board or the board of directors of a successor to the
Company. For this purpose, any director who was not a director at the
beginning of such period shall be deemed to be an Incumbent Director if
such director was elected to the Board by, or on the recommendation of or
with the approval of, at least two-thirds of the directors who then
qualified as Incumbent Directors (so long as such director was not
nominated by a person who has expressed an intent to effect a Change in
Control or engage in a proxy or other control contest).
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Company" means Imperial Credit Industries, Inc.
-------
"Confidential Information" means nonpublic information relating to the
------------------------
business plans, marketing plans, customers or employees of the Company or its
affiliates other than information the disclosure of which cannot reasonably be
expected to adversely affect the business of the Company or its affiliates.
"Good Reason" means any of the following actions, without Executive's
-----------
express prior written approval, other than due to Executive's Permanent
Disability or death:
(i) Executive's base salary is reduced below the Base Salary;
(ii) Executive's annual Bonus is reduced below the Average Bonus;
(iii) Executive's duties, titles or responsibilities are diminished in
comparison to the duties, titles and responsibilities enjoyed by Executive
immediately prior to the Change in Control;
(iv) the incentive compensation programs, welfare plans and pension plans
offered to Executive are materially diminished in comparison to the
incentive compensation
9
<PAGE>
programs, welfare plans and pension plans enjoyed by Executive immediately
prior to the Change in Control.
(v) the relocation of Executive's principal place of business to a
location more than 15 miles from where Executive was based immediately
prior to the Change in Control; or
(vi) the failure of the Company to obtain a satisfactory agreement from any
successor to assume and agree to perform the Agreement, as contemplated in
Section 11 of this Agreement.
Executive's continued employment shall not constitute consent to, or a waiver of
rights with respect to, any circumstances constituting Good Reason hereunder.
"Permanent Disability" means Executive's inability, by reason of any
--------------------
physical or mental impairment, to substantially perform the significant aspects
of his regular duties which inability is reasonably contemplated to continue for
at least one year from its incurrence.
"Target Bonus" means the annual bonus payable to Executive for the year in
------------
which a Change in Control occurs, calculated on the assumption that Executive
and the Company or those entities or business units within the Company on whose
performance Executive's bonus depends achieve the applicable target performance
goals established under the applicable bonus plan with respect to that year. If
no target performance goals for the year in which the Change in Control occurs
have been set prior to the Change in Control, the Target Bonus shall be
determined by substituting, in the previous sentence, the prior year for the
year in which a Change in Control occurs, or the bonus amount accrued for that
Executive in the Company's approved annual budget applicable to that Executive,
whichever is higher.
10
<PAGE>
EXHIBIT 10.28
TERMINATION PROTECTION AGREEMENT
--------------------------------
AGREEMENT effective January 27, 1999 between Imperial Credit Industries,
Inc., a California Corporation (the "Company") and H. Wayne Snavely (the
"Executive")
Executive, who is a senior executive of the Company, is a skilled and
dedicated employee who has important management responsibilities and talents
which benefit the Company and its affiliates. The Company believes that its
best interests will be served if Executive is encouraged to remain with the
Company. The Company has determined that the Company's ability to retain
Executive as an employee will be significantly enhanced if Executive is provided
with fair and reasonable protection from the potential effects of a change in
ownership or control of the Company. Accordingly, the Company and Executive
agree as follows:
1. Defined Terms.
-------------
Unless otherwise indicated, capitalized terms used in this Agreement which are
defined in Schedule A shall have the meanings set forth in Schedule A.
2. Effective Date; Term.
--------------------
This Agreement shall commence on the date hereof (the "Effective Date") and
shall continue in effect through December 31, 2000; provided, however, the term
-------- -------
of this Agreement shall automatically be extended for one additional year beyond
2000 and successive one year periods thereafter, unless, not later than January
30 of each calendar year, commencing in 2000, the Company shall have given
notice that it does not wish to extend this Agreement for an additional year
beyond such calendar year, in which event this Agreement shall continue to be
effective until the end of its then remaining term; provided, further, that,
-------- -------
notwithstanding any such notice by the Company not to extend, if a Change in
Control shall have occurred during the original or any extended term of this
Agreement, this Agreement shall continue in effect for a period of 36 months
beyond such Change in Control.
3. Change in Control Benefits.
--------------------------
If Executive's employment with the Company or its affiliates is terminated (a)
at any time within the three years following a Change in Control by the Company
or its affiliates without Cause or by Executive for Good Reason, or (b) by
Executive for any reason during the 30 day period beginning on the first
anniversary of a Change in Control (the effective date of any such termination
hereafter referred to as the "Termination Date"), Executive shall be entitled to
the benefits provided hereafter in this Section 3 and as otherwise set forth in
this Agreement. If Executive's employment is terminated prior to a Change in
Control at the request or suggestion of any individual or entity acquiring
ownership and control of the Company, this Agreement shall become effective upon
the subsequent occurrence of a Change in Control involving such acquirer, and
Executive's Termination Date shall be deemed to have occurred immediately
1
<PAGE>
following the Change in Control, with the result that Executive shall be
entitled to the benefits provided hereafter in this Section 3 and as otherwise
set forth in this Agreement.
A. Severance Benefits. Within five business days after the Termination
------------------
Date, the Company shall pay Executive a lump sum amount, in cash, equal to:
(i) three times the sum of:
(a) Executive's Base Salary, and
(b) Executive's highest Bonus earned in respect of any of the
last three Company fiscal years preceding the Change in
Control, and
(ii) Executive's Target Bonus multiplied by a fraction, the numerator
of which shall equal the number of days Executive was employed by the
Company or an affiliate in the calendar year in which the Termination
Date occurs and the denominator of which shall equal 365.
B. Continued Welfare Benefits. Until the third anniversary of the
--------------------------
Termination Date, the Company shall, at its expense, provide Executive with
medical, dental, life insurance, disability and accidental death and
dismemberment benefits at the highest level provided to Executive during
the period beginning immediately prior to the Change in Control and ending
on the Termination Date; provided, however, that if Executive becomes
-------- -------
employed by a new employer, the coverages provided by the Company pursuant
to this sentence shall become secondary to those coverages provided by the
new employer.
C. Payment of Accrued But Unpaid Amounts. Within five business days after
-------------------------------------
the Termination Date, (i) all deferred compensation (including any
deferrals and matches on those deferrals in the Company's Deferral of
Executive Compensation Plan I or the Company's Deferral of Executive
Compensation Plan II) shall become fully vested and (ii) the Company shall
pay Executive, in cash, (A) any unpaid portion of Executive's Bonus accrued
with respect to the full calendar year ended prior to the Termination Date;
and (B) all unpaid deferred compensation of Executive.
D. Effect on Existing Plans and Employment Agreements. All Change in
--------------------------------------------------
Control provisions applicable to Executive and contained in any plan,
program, agreement or arrangement maintained on the Effective Date (or
thereafter) by the Company or any affiliate (including, but not limited to,
any stock option or pension plan) shall remain in effect through the date
of a Change in Control (as altered by this Agreement), and for such period
thereafter as is necessary to carry out such provisions and provide the
benefits payable thereunder, and may not be altered in a manner which
adversely affects Executive without Executive's prior written approval. No
benefits shall be paid to Executive, however, under any severance plan
maintained generally for the employees of the Company or any affiliate if
Executive is eligible to receive benefits under this Section 3.
Notwithstanding the provisions of Section 4 hereof, any payments or
benefits
2
<PAGE>
provided under this Agreement shall be reduced by any payments or benefits
Executive receives as a result of his termination of employment under an
employment agreement between the Company or any affiliate and Executive (an
"Employment Agreement"). In addition, any non-competition or non-
solicitation covenant in an Employment Agreement or other agreement between
the Company or any affiliate and Executive shall lapse on the date of a
Change in Control.
E. Outplacement Counseling. For the three year period following the
-----------------------
Termination Date, the Company shall reimburse all reasonable expenses
incurred by Executive (up to 20% of Base Salary per year) for professional
outplacement services by qualified consultants selected by Executive.
4. Mitigation.
----------
A. Executive shall not be required to mitigate damages or the amount of
any payment provided for under this Agreement by seeking other employment
or otherwise, and compensation earned from such employment or otherwise
shall not reduce the amounts otherwise payable under this Agreement. No
amounts payable under this Agreement shall be subject to reduction or
offset in respect of any claims which the Company (or any other person or
entity) may have against Executive.
5. Gross-Up.
--------
A. In the event that any payment or benefit received or to be received by
Executive pursuant to the terms of this Agreement (the "Contract Payment")
or in connection with Executive's termination of employment or contingent
upon a Change in Control of the Company pursuant to any plan or arrangement
or other agreement with the Company (or any affiliate) ("Other Payments"
and, together with the Contract Payments, the "Payments") would be subject
to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code,
as determined as provided below, the Company shall pay to Executive, at the
time specified in Section 5(B) below, an additional amount (the "Gross-Up
Payment") such that the net amount retained by Executive, after deduction
of the Excise Tax on the Payments and any federal, state and local income
or other tax and Excise Tax upon the payment provided for by this Section
5(A), and any interest, penalties or additions to tax payable by Executive
with respect thereto, shall be equal to the total value of the Payments at
the time such Payments are to be made. For purposes of determining whether
any of the Payments will be subject to the Excise Tax and the amounts of
such Excise Tax, (1) the total amount of the Payments shall be treated as
parachute payments" within the meaning of Section 280G(b)(2) of the Code,
and all "excess parachute payments" within the meaning of Section
280G(b)(1) of the Code shall be treated as subject to the Excise Tax,
except to the extent that, in the opinion of independent tax counsel
selected by the Company's independent auditors and reasonably acceptable to
Executive ("Tax Counsel"), a Payment (in whole or in part) does not
constitute a "parachute payment" within the meaning of Section 280G(b)(2)
of the Code, or such "excess parachute payments" (in whole or in part) are
not subject to the Excise
3
<PAGE>
Tax, (2) the amount of the Payments that shall be treated as subject to the
Excise Tax shall be equal to the lesser of (A) the total amount of the
Payments or (B) the amount of "excess parachute payments" within the
meaning of Section 280G(b)(1) of the Code (after applying clause (1)
hereof), and (3) the value of any noncash benefits or any deferred payment
or benefit shall be determined by Tax Counsel in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, Executive shall be deemed
to pay federal income tax at the highest marginal rates of federal income
taxation applicable to individuals in the calendar year in which the Gross-
Up Payment is to be made and state and local income taxes at the highest
effective rates of taxation applicable to individuals as are in effect in
the state and locality of Executive's residence or place of employment in
the calendar year in which the Gross-Up Payment is to be made.
B. The Gross-Up Payments provided for in Section 5(A) hereof shall be
made upon the earlier of (i) the payment to Executive of any Payment or
(ii) the imposition upon Executive or payment by Executive of any Excise
Tax.
C. The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by
the Company of a Gross-Up Payment. Such notification shall be given as
soon as practicable but no later than 10 business days after the Executive
is informed in writing of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to be
paid. The Executive shall not pay such claim prior to the expiration of
the 30 day period following the date on which the Executive gives such
notice to the Company (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If the Company
notifies the Executive in writing prior to the expiration or such period
that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim;
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company and reasonably satisfactory to the Executive.
(iii) cooperate with the Company in good faith in order to
effectively contest such claim; and
(iv) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs
-------- -------
and expenses (including, but not limited to, additional interest and
penalties and related legal, consulting or other similar fees) incurred in
connection with such contest and shall
4
<PAGE>
indemnify and hold the Executive harmless, on an after-tax basis, for any
Excise Tax or other tax (including interest and penalties with respect
thereto) imposed as a result of such representation and payment of costs
and expenses.
D. The Company shall control all proceedings taken in connection with such
contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearing and conferences with the
taxing authority in respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner, and the Executive agrees to
prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine; provided, however, that if the
-------- -------
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive on an
interest-free basis, and shall indemnify and hold the Executive harmless,
on an after-tax basis, from any Excise Tax or other tax (including interest
or penalties with respect thereto) imposed with respect to such advance or
with respect to any imputed income with respect to such advance; and
provided, further, that if the Executive is required to extend the statute
-------- -------
of limitations to enable the Company to contest such claim, the Executive
may limit this extension solely to such contested amount. The Company's
control of the contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and the Executive shall be
entitled to settle or contest, as the case may be, any other issue raised
by the Internal Revenue Service or any other taxing authority. In
addition, no position may be taken nor any final resolution be agreed to by
the Company without the Executive's consent if such position or resolution
could reasonably be expected to adversely affect the Executive (including
any other tax position of the Executive unrelated to the matters covered
hereby).
E. As a result of the uncertainty in the application of Section 4999 of
the Code at the time of a determination by the Company or the Tax Counsel
hereunder, it is possible that Gross-Up Payments which will not have been
made by the Company should have been made ("Underpayment"), consistent with
the calculations required to be made hereunder. In the event that the
Company exhausts its remedies, as set forth above, and the Executive
thereafter is required to pay to the Internal Revenue Service an additional
amount, the Company or the Tax Counsel shall determine the amount of the
Underpayment that has occurred and any such Underpayment shall promptly be
paid by the Company to or for the benefit of the Executive.
F. If, after the receipt by Executive of the Gross-Up Payment or an amount
advanced by the Company in connection with the contest of an Excise Tax
claim, the Executive receives any refund with respect to such claim, the
Executive shall promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by the Executive of an amount advanced by
the Company in connection with an Excise Tax claim, a determination is made
that Executive shall not be entitled to any refund with respect to such
claim and the Company does not notify the Executive in writing of its
intent to contest the denial of
5
<PAGE>
such refund prior to the expiration of 30 days after such determination,
such advance shall be forgiven and shall not be required to be repaid.
6. Termination for Cause.
---------------------
Nothing in this Agreement shall be construed to prevent the Company or its
affiliates from terminating Executive's employment for Cause. If Executive is
terminated for Cause, the Company shall have no obligation to make any payments
under this Agreement, except for payments that may otherwise be payable under
then existing employee benefit plans, programs and arrangements of the Company
and its affiliates.
7. Indemnification; Director's and Officer's Liability Insurance.
-------------------------------------------------------------
Executive shall, after the Termination Date, retain all rights to
indemnification under applicable law or under the applicable Company's Articles
of Incorporation or By-Laws, as they may be amended or restated from time to
time. In addition, the Company shall maintain Director's and Officer's
liability insurance on behalf of Executive, at the level in effect immediately
prior to the Termination Date, for the three-year period following the
Termination Date, and throughout the period of any applicable statute of
limitations.
8. Confidential Information.
------------------------
Except as required by law or by any court or administrative agency, during the
six-month period following the Termination Date, Executive shall not disclose to
any person, or use to the significant disadvantage of any of the Company or its
affiliates, any Confidential Information; provided that nothing contained in
--------
this Section 8 shall prevent Executive from being employed by a competitor or
any of the Company or utilizing Executive's general skills, experience, and
knowledge, including those developed while employed by any of the Company or its
affiliates.
9. Disputes.
--------
Any dispute or controversy arising under or in connection with this Agreement
shall be settled exclusively by arbitration in Los Angeles, California or, at
the option of Executive, in the county where Executive then resides, in
accordance with the Rules of the American Arbitration Association then in
effect, except that Executive may, at Executive's option, bring that action in a
court of competent jurisdiction, even if the Company has earlier instituted an
action hereunder. Judgement may be entered on an arbitrator's award relating to
this Agreement in any court having jurisdiction.
10. Costs of Proceedings.
--------------------
The Company shall pay all costs and expenses, including attorneys' fees and
disbursements, at least monthly, of Executive in connection with any legal
proceeding (including arbitration), whether instituted by the Company or
Executive, relating to the interpretation or enforcement of any provision of
this Agreement, except that if Executive instituted the proceeding and the
judge, arbitrator or other individual presiding over the proceeding
affirmatively finds that Executive
6
<PAGE>
instituted the proceeding in bad faith, Executive shall pay all costs and
expenses, including attorneys' fees and disbursements, of Executive. The Company
shall pay prejudgment interest on any money judgment obtained by Executive as a
result of such a proceeding, calculated at the prime rate of The Chase Manhattan
Bank, as in effect from time to time, from the date that payment should have
been made to Executive under this Agreement.
11. Assignment.
----------
Except as otherwise provided herein, this Agreement shall be binding upon, inure
to the benefit of and be enforceable by the Company and Executive and their
respective heirs, legal representatives, successors and assigns. If the Company
shall be merged into or consolidated with another entity, the provisions of this
Agreement shall be binding upon and inure to the benefit of the entity surviving
such merger or resulting from such consolidation. The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business or assets of the Company,
by agreement in form and substance satisfactory to Executive, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. The provisions of this Section 11 shall continue to apply to
each subsequent employer of Executive hereunder in the event of any subsequent
merger, consolidation or transfer of assets of such subsequent employer.
12. Withholding.
-----------
Notwithstanding the provisions of Sections 4 and 5 hereof, the Company may, to
the extent required by law, withholding applicable federal, state and local
income and other taxes from any payments due to Executive hereunder.
13. Applicable Law.
--------------
This Agreement shall be governed by and construed in accordance with the laws of
the State of California applicable to contracts made and to be performed
therein.
14. Entire Agreement.
----------------
This Agreement constitutes the entire agreement between the parties regarding
the subject matter hereof. This Agreement may be changed only by a written
agreement executed by the Company and Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement on the 29th
day of January, 1999.
IMPERIAL CREDIT INDUSTRIES, INC.
/s/ H. Wayne Svavely By: /s/ Robert S. Muehlenbeck
- -------------------------------- ---------------------------
Executive: H. Wayne Snavely Robert S. Muehlenbeck
Chairman, Compensation Committee
7
<PAGE>
Schedule A
CERTAIN DEFINITIONS
As used in this Agreement, and unless the context requires a different
meaning, the following terms, when capitalized, have the meaning indicated:
"Average Bonus" means the average Bonus earned by Executive in respect of
-------------
the last three full fiscal years of the Company ending prior to the Change in
Control, excluding any Bonus paid in such years in respect of a partial year of
employment.
"Base Salary" means Executive's annual rate of base salary in effect on the
-----------
date of the Change in Control or the Termination Date, whichever is higher.
"Board" means the Company's Board of Directors.
-----
"Bonus" means the amount payable to Executive under the Company's
-----
applicable annual bonus plan with respect to a Company fiscal year.
"Cause" means either of the following:
-----
(i) the willful and continued failure to Executive to perform
substantially his or her duties with the Company or its affiliates (other
than any such failure resulting from incapacity due to physical or mental
illness), after a written demand for substantial performance is delivered
to Executive by the Board or an elected officer of the Company which
specifically identifies the manner in which the Board or the elected
officer believes that Executive has not substantially performed his or her
duties; or
(ii) (A) Executive's conviction of, or plea of guilty or nolo contendere
to, a felony or (B) the willful engaging by Executive in gross misconduct
which is materially and demonstrably injurious to the Company.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause (except for Cause pursuant to (ii)(A) above) unless and
until there shall have been delivered to Executive a copy of a resolution duly
adopted by the affirmative vote of not less than three-quarters (3/4) of the
outside (i.e., nonemployee) directors at a meeting of the Board called and held
for such purpose (after reasonable notice to Executive and an opportunity for
Executive, together with Executive's counsel, to be heard before the Board),
finding that, in the good faith opinion of the Board, Executive was guilty of
conduct set forth above and specifying the particulars thereof in detail.
"Change in Control" means the first to occur of any of the following dates:
-----------------
8
<PAGE>
(i) any person or person acting in concert (excluding Company benefit
plans) becomes the beneficial owner of securities of the Company having at
least 40% of the voting power of the Company's then outstanding securities
(unless the event causing the 40% threshold to be crossed is an acquisition
of voting common securities directly from the Company); or
(ii) any merger or other business combination of the Company, liquidation
of the Company or sale or substantially all of the Company's assets (any of
which is a "Transaction") other than a Transaction immediately following
-----------
which the shareholders of the Company and any trustee or fiduciary of any
Company employee benefit plan immediately prior to the Transaction own at
least 60% of the voting power, directly or indirectly, of the surviving
corporation following the Transaction; or
(iii) within any 24 month period, the persons who were directors
immediately before the beginning of such period (the "Incumbent Directors")
-------------------
shall cease (for any reason other than death) to constitute at least a
majority of the Board or the board of directors of a successor to the
Company. For this purpose, any director who was not a director at the
beginning of such period shall be deemed to be an Incumbent Director if
such director was elected to the Board by, or on the recommendation of or
with the approval of, at least two-thirds of the directors who then
qualified as Incumbent Directors (so long as such director was not
nominated by a person who has expressed an intent to effect a Change in
Control or engage in a proxy or other control contest).
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Company" means Imperial Credit Industries, Inc.
-------
"Confidential Information" means nonpublic information relating to the
------------------------
business plans, marketing plans, customers or employees of the Company or its
affiliates other than information the disclosure of which cannot reasonably be
expected to adversely affect the business of the Company or its affiliates.
"Good Reason" means any of the following actions, without Executive's
-----------
express prior written approval, other than due to Executive's Permanent
Disability or death:
(i) Executive's base salary is reduced below the Base Salary;
(ii) Executive's annual Bonus is reduced below the Average Bonus;
(iii) Executive's duties, titles or responsibilities are diminished in
comparison to the duties, titles and responsibilities enjoyed by Executive
immediately prior to the Change in Control;
(iv) the incentive compensation programs, welfare plans and pension plans
offered to Executive are materially diminished in comparison to the
incentive compensation
9
<PAGE>
programs, welfare plans and pension plans enjoyed by Executive immediately
prior to the Change in Control.
(v) the relocation of Executive's principal place of business to a
location more than 15 miles from where Executive was based immediately
prior to the Change in Control; or
(vi) the failure of the Company to obtain a satisfactory agreement from any
successor to assume and agree to perform the Agreement, as contemplated in
Section 11 of this Agreement.
Executive's continued employment shall not constitute consent to, or a waiver of
rights with respect to, any circumstances constituting Good Reason hereunder.
"Permanent Disability" means Executive's inability, by reason of any
--------------------
physical or mental impairment, to substantially perform the significant aspects
of his regular duties which inability is reasonably contemplated to continue for
at least one year from its incurrence.
"Target Bonus" means the annual bonus payable to Executive for the year in
------------
which a Change in Control occurs, calculated on the assumption that Executive
and the Company or those entities or business units within the Company on whose
performance Executive's bonus depends achieve the applicable target performance
goals established under the applicable bonus plan with respect to that year. If
no target performance goals for the year in which the Change in Control occurs
have been set prior to the Change in Control, the Target Bonus shall be
determined by substituting, in the previous sentence, the prior year for the
year in which a Change in Control occurs, or the bonus amount accrued for that
Executive in the Company's approved annual budget applicable to that Executive,
whichever is higher.
10
<PAGE>
EXHIBIT 10.29
TERMINATION PROTECTION AGREEMENT
--------------------------------
AGREEMENT effective January 27, 1999 between Imperial Credit Industries,
Inc., a California Corporation (the "Company") and Irwin L. Gubman (the
"Executive").
Executive, who is a senior executive of the Company, is a skilled and
dedicated employee who has important management responsibilities and talents
which benefit the Company and its affiliates. The Company believes that its
best interests will be served if Executive is encouraged to remain with the
Company. The Company has determined that the Company's ability to retain
Executive as an employee will be significantly enhanced if Executive is provided
with fair and reasonable protection from the potential effects of a change in
ownership or control of the Company. Accordingly, the Company and Executive
agree as follows:
1. Defined Terms.
-------------
Unless otherwise indicated, capitalized terms used in this Agreement which are
defined in Schedule A shall have the meanings set forth in Schedule A.
2. Effective Date; Term.
--------------------
This Agreement shall commence on the date hereof (the "Effective Date") and
shall continue in effect through December 31, 2000; provided, however, the term
-------- -------
of this Agreement shall automatically be extended for one additional year beyond
2000 and successive one year periods thereafter, unless, not later than January
30 of each calendar year, commencing in 2000, the Company shall have given
notice that it does not wish to extend this Agreement for an additional year
beyond such calendar year, in which event this Agreement shall continue to be
effective until the end of its then remaining term; provided, further, that,
-------- -------
notwithstanding any such notice by the Company not to extend, if a Change in
Control shall have occurred during the original or any extended term of this
Agreement, this Agreement shall continue in effect for a period of 36 months
beyond such Change in Control.
3. Change in Control Benefits.
--------------------------
If Executive's employment with the Company or its affiliates is terminated (a)
at any time within the three years following a Change in Control by the Company
or its affiliates without Cause or by Executive for Good Reason, or (b) by
Executive for any reason during the 30 day period beginning on the first
anniversary of a Change in Control (the effective date of any such termination
hereafter referred to as the "Termination Date"), Executive shall be entitled to
the benefits provided hereafter in this Section 3 and as otherwise set forth in
this Agreement. If Executive's employment is terminated prior to a Change in
Control at the request or suggestion of any individual or entity acquiring
ownership and control of the Company, this Agreement shall become effective upon
the subsequent occurrence of a Change in Control involving such acquirer, and
Executive's Termination Date shall be deemed to have occurred immediately
1
<PAGE>
following the Change in Control, with the result that Executive shall be
entitled to the benefits provided hereafter in this Section 3 and as otherwise
set forth in this Agreement.
A. Severance Benefits. Within five business days after the Termination
------------------
Date, the Company shall pay Executive a lump sum amount, in cash, equal to:
(i) three times the sum of:
(a) Executive's Base Salary, and
(b) Executive's highest Bonus earned in respect of any of the
last three Company fiscal years preceding the Change in
Control, and
(ii) Executive's Target Bonus multiplied by a fraction, the numerator
of which shall equal the number of days Executive was employed by the
Company or an affiliate in the calendar year in which the Termination
Date occurs and the denominator of which shall equal 365.
B. Continued Welfare Benefits. Until the third anniversary of the
--------------------------
Termination Date, the Company shall, at its expense, provide Executive with
medical, dental, life insurance, disability and accidental death and
dismemberment benefits at the highest level provided to Executive during
the period beginning immediately prior to the Change in Control and ending
on the Termination Date; provided, however, that if Executive becomes
-------- -------
employed by a new employer, the coverages provided by the Company pursuant
to this sentence shall become secondary to those coverages provided by the
new employer.
C. Payment of Accrued But Unpaid Amounts. Within five business days after
-------------------------------------
the Termination Date, (i) all deferred compensation (including any
deferrals and matches on those deferrals in the Company's Deferral of
Executive Compensation Plan I or the Company's Deferral of Executive
Compensation Plan II) shall become fully vested and (ii) the Company shall
pay Executive, in cash, (A) any unpaid portion of Executive's Bonus accrued
with respect to the full calendar year ended prior to the Termination Date;
and (B) all unpaid deferred compensation of Executive.
D. Effect on Existing Plans and Employment Agreements. All Change in
--------------------------------------------------
Control provisions applicable to Executive and contained in any plan,
program, agreement or arrangement maintained on the Effective Date (or
thereafter) by the Company or any affiliate (including, but not limited to,
any stock option or pension plan) shall remain in effect through the date
of a Change in Control (as altered by this Agreement), and for such period
thereafter as is necessary to carry out such provisions and provide the
benefits payable thereunder, and may not be altered in a manner which
adversely affects Executive without Executive's prior written approval. No
benefits shall be paid to Executive, however, under any severance plan
maintained generally for the employees of the Company or any affiliate if
Executive is eligible to receive benefits under this Section 3.
Notwithstanding the provisions of Section 4 hereof, any payments or
benefits
2
<PAGE>
provided under this Agreement shall be reduced by any payments or benefits
Executive receives as a result of his termination of employment under an
employment agreement between the Company or any affiliate and Executive (an
"Employment Agreement"). In addition, any non-competition or non-
solicitation covenant in an Employment Agreement or other agreement between
the Company or any affiliate and Executive shall lapse on the date of a
Change in Control.
E. Outplacement Counseling. For the three year period following the
-----------------------
Termination Date, the Company shall reimburse all reasonable expenses
incurred by Executive (up to 20% of Base Salary per year) for professional
outplacement services by qualified consultants selected by Executive.
4. Mitigation.
----------
A. Executive shall not be required to mitigate damages or the amount of
any payment provided for under this Agreement by seeking other employment
or otherwise, and compensation earned from such employment or otherwise
shall not reduce the amounts otherwise payable under this Agreement. No
amounts payable under this Agreement shall be subject to reduction or
offset in respect of any claims which the Company (or any other person or
entity) may have against Executive.
5. Gross-Up.
--------
A. In the event that any payment or benefit received or to be received by
Executive pursuant to the terms of this Agreement (the "Contract Payment")
or in connection with Executive's termination of employment or contingent
upon a Change in Control of the Company pursuant to any plan or arrangement
or other agreement with the Company (or any affiliate) ("Other Payments"
and, together with the Contract Payments, the "Payments") would be subject
to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code,
as determined as provided below, the Company shall pay to Executive, at the
time specified in Section 5(B) below, an additional amount (the "Gross-Up
Payment") such that the net amount retained by Executive, after deduction
of the Excise Tax on the Payments and any federal, state and local income
or other tax and Excise Tax upon the payment provided for by this Section
5(A), and any interest, penalties or additions to tax payable by Executive
with respect thereto, shall be equal to the total value of the Payments at
the time such Payments are to be made. For purposes of determining whether
any of the Payments will be subject to the Excise Tax and the amounts of
such Excise Tax, (1) the total amount of the Payments shall be treated as
parachute payments" within the meaning of Section 280G(b)(2) of the Code,
and all "excess parachute payments" within the meaning of Section
280G(b)(1) of the Code shall be treated as subject to the Excise Tax,
except to the extent that, in the opinion of independent tax counsel
selected by the Company's independent auditors and reasonably acceptable to
Executive ("Tax Counsel"), a Payment (in whole or in part) does not
constitute a "parachute payment" within the meaning of Section 280G(b)(2)
of the Code, or such "excess parachute payments" (in whole or in part) are
not subject to the Excise
3
<PAGE>
Tax, (2) the amount of the Payments that shall be treated as subject to the
Excise Tax shall be equal to the lesser of (A) the total amount of the
Payments or (B) the amount of "excess parachute payments" within the
meaning of Section 280G(b)(1) of the Code (after applying clause (1)
hereof), and (3) the value of any noncash benefits or any deferred payment
or benefit shall be determined by Tax Counsel in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, Executive shall be deemed
to pay federal income tax at the highest marginal rates of federal income
taxation applicable to individuals in the calendar year in which the Gross-
Up Payment is to be made and state and local income taxes at the highest
effective rates of taxation applicable to individuals as are in effect in
the state and locality of Executive's residence or place of employment in
the calendar year in which the Gross-Up Payment is to be made.
B. The Gross-Up Payments provided for in Section 5(A) hereof shall be made
upon the earlier of (i) the payment to Executive of any Payment or (ii) the
imposition upon Executive or payment by Executive of any Excise Tax.
C. The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by
the Company of a Gross-Up Payment. Such notification shall be given as
soon as practicable but no later than 10 business days after the Executive
is informed in writing of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to be
paid. The Executive shall not pay such claim prior to the expiration of
the 30 day period following the date on which the Executive gives such
notice to the Company (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If the Company
notifies the Executive in writing prior to the expiration or such period
that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim;
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company and reasonably satisfactory to the Executive.
(iii) cooperate with the Company in good faith in order to
effectively contest such claim; and
(iv) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs
-------- -------
and expenses (including, but not limited to, additional interest and
penalties and related legal, consulting or other similar fees) incurred in
connection with such contest and shall
4
<PAGE>
indemnify and hold the Executive harmless, on an after-tax basis, for any
Excise Tax or other tax (including interest and penalties with respect
thereto) imposed as a result of such representation and payment of costs
and expenses.
D. The Company shall control all proceedings taken in connection with such
contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearing and conferences with the
taxing authority in respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner, and the Executive agrees to
prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine; provided, however, that if the
-------- -------
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive on an
interest-free basis, and shall indemnify and hold the Executive harmless,
on an after-tax basis, from any Excise Tax or other tax (including interest
or penalties with respect thereto) imposed with respect to such advance or
with respect to any imputed income with respect to such advance; and
provided, further, that if the Executive is required to extend the statute
-------- -------
of limitations to enable the Company to contest such claim, the Executive
may limit this extension solely to such contested amount. The Company's
control of the contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and the Executive shall be
entitled to settle or contest, as the case may be, any other issue raised
by the Internal Revenue Service or any other taxing authority. In
addition, no position may be taken nor any final resolution be agreed to by
the Company without the Executive's consent if such position or resolution
could reasonably be expected to adversely affect the Executive (including
any other tax position of the Executive unrelated to the matters covered
hereby).
E. As a result of the uncertainty in the application of Section 4999 of
the Code at the time of a determination by the Company or the Tax Counsel
hereunder, it is possible that Gross-Up Payments which will not have been
made by the Company should have been made ("Underpayment"), consistent with
the calculations required to be made hereunder. In the event that the
Company exhausts its remedies, as set forth above, and the Executive
thereafter is required to pay to the Internal Revenue Service an additional
amount, the Company or the Tax Counsel shall determine the amount of the
Underpayment that has occurred and any such Underpayment shall promptly be
paid by the Company to or for the benefit of the Executive.
F. If, after the receipt by Executive of the Gross-Up Payment or an amount
advanced by the Company in connection with the contest of an Excise Tax
claim, the Executive receives any refund with respect to such claim, the
Executive shall promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by the Executive of an amount advanced by
the Company in connection with an Excise Tax claim, a determination is made
that Executive shall not be entitled to any refund with respect to such
claim and the Company does not notify the Executive in writing of its
intent to contest the denial of
5
<PAGE>
such refund prior to the expiration of 30 days after such determination,
such advance shall be forgiven and shall not be required to be repaid.
6. Termination for Cause.
---------------------
Nothing in this Agreement shall be construed to prevent the Company or its
affiliates from terminating Executive's employment for Cause. If Executive is
terminated for Cause, the Company shall have no obligation to make any payments
under this Agreement, except for payments that may otherwise be payable under
then existing employee benefit plans, programs and arrangements of the Company
and its affiliates.
7. Indemnification; Director's and Officer's Liability Insurance.
-------------------------------------------------------------
Executive shall, after the Termination Date, retain all rights to
indemnification under applicable law or under the applicable Company's Articles
of Incorporation or By-Laws, as they may be amended or restated from time to
time. In addition, the Company shall maintain Director's and Officer's
liability insurance on behalf of Executive, at the level in effect immediately
prior to the Termination Date, for the three-year period following the
Termination Date, and throughout the period of any applicable statute of
limitations.
8. Confidential Information.
------------------------
Except as required by law or by any court or administrative agency, during the
six-month period following the Termination Date, Executive shall not disclose to
any person, or use to the significant disadvantage of any of the Company or its
affiliates, any Confidential Information; provided that nothing contained in
--------
this Section 8 shall prevent Executive from being employed by a competitor or
any of the Company or utilizing Executive's general skills, experience, and
knowledge, including those developed while employed by any of the Company or its
affiliates.
9. Disputes.
--------
Any dispute or controversy arising under or in connection with this Agreement
shall be settled exclusively by arbitration in Los Angeles, California or, at
the option of Executive, in the county where Executive then resides, in
accordance with the Rules of the American Arbitration Association then in
effect, except that Executive may, at Executive's option, bring that action in a
court of competent jurisdiction, even if the Company has earlier instituted an
action hereunder. Judgement may be entered on an arbitrator's award relating to
this Agreement in any court having jurisdiction.
10. Costs of Proceedings.
--------------------
The Company shall pay all costs and expenses, including attorneys' fees and
disbursements, at least monthly, of Executive in connection with any legal
proceeding (including arbitration), whether instituted by the Company or
Executive, relating to the interpretation or enforcement of any provision of
this Agreement, except that if Executive instituted the proceeding and the
judge, arbitrator or other individual presiding over the proceeding
affirmatively finds that Executive
6
<PAGE>
instituted the proceeding in bad faith, Executive shall pay all costs and
expenses, including attorneys' fees and disbursements, of Executive. The Company
shall pay prejudgment interest on any money judgment obtained by Executive as a
result of such a proceeding, calculated at the prime rate of The Chase Manhattan
Bank, as in effect from time to time, from the date that payment should have
been made to Executive under this Agreement.
11. Assignment.
----------
Except as otherwise provided herein, this Agreement shall be binding upon, inure
to the benefit of and be enforceable by the Company and Executive and their
respective heirs, legal representatives, successors and assigns. If the Company
shall be merged into or consolidated with another entity, the provisions of this
Agreement shall be binding upon and inure to the benefit of the entity surviving
such merger or resulting from such consolidation. The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business or assets of the Company,
by agreement in form and substance satisfactory to Executive, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. The provisions of this Section 11 shall continue to apply to
each subsequent employer of Executive hereunder in the event of any subsequent
merger, consolidation or transfer of assets of such subsequent employer.
12. Withholding.
-----------
Notwithstanding the provisions of Sections 4 and 5 hereof, the Company may, to
the extent required by law, withholding applicable federal, state and local
income and other taxes from any payments due to Executive hereunder.
13. Applicable Law.
--------------
This Agreement shall be governed by and construed in accordance with the laws of
the State of California applicable to contracts made and to be performed
therein.
14. Entire Agreement.
----------------
This Agreement constitutes the entire agreement between the parties regarding
the subject matter hereof. This Agreement may be changed only by a written
agreement executed by the Company and Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement on the 29th
day of January, 1999.
IMPERIAL CREDIT INDUSTRIES, INC.
/s/ Irwin L. Gubman By: /s/ H. Wayne Snavely
- ------------------------------ -------------------------------
Executive: Irwin L. Gubman H. Wayne Snavely
7
<PAGE>
Schedule A
CERTAIN DEFINITIONS
As used in this Agreement, and unless the context requires a different
meaning, the following terms, when capitalized, have the meaning indicated:
"Average Bonus" means the average Bonus earned by Executive in respect of
-------------
the last three full fiscal years of the Company ending prior to the Change in
Control, excluding any Bonus paid in such years in respect of a partial year of
employment.
"Base Salary" means Executive's annual rate of base salary in effect on the
-----------
date of the Change in Control or the Termination Date, whichever is higher.
"Board" means the Company's Board of Directors.
-----
"Bonus" means the amount payable to Executive under the Company's
-----
applicable annual bonus plan with respect to a Company fiscal year.
"Cause" means either of the following:
-----
(i) the willful and continued failure to Executive to perform
substantially his or her duties with the Company or its affiliates (other
than any such failure resulting from incapacity due to physical or mental
illness), after a written demand for substantial performance is delivered
to Executive by the Board or an elected officer of the Company which
specifically identifies the manner in which the Board or the elected
officer believes that Executive has not substantially performed his or her
duties; or
(ii) (A) Executive's conviction of, or plea of guilty or nolo contendere
to, a felony or (B) the willful engaging by Executive in gross misconduct
which is materially and demonstrably injurious to the Company.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause (except for Cause pursuant to (ii)(A) above) unless and
until there shall have been delivered to Executive a copy of a resolution duly
adopted by the affirmative vote of not less than three-quarters (3/4) of the
outside (i.e., nonemployee) directors at a meeting of the Board called and held
for such purpose (after reasonable notice to Executive and an opportunity for
Executive, together with Executive's counsel, to be heard before the Board),
finding that, in the good faith opinion of the Board, Executive was guilty of
conduct set forth above and specifying the particulars thereof in detail.
"Change in Control" means the first to occur of any of the following dates:
-----------------
8
<PAGE>
(i) any person or person acting in concert (excluding Company benefit
plans) becomes the beneficial owner of securities of the Company having at
least 40% of the voting power of the Company's then outstanding securities
(unless the event causing the 40% threshold to be crossed is an acquisition
of voting common securities directly from the Company); or
(ii) any merger or other business combination of the Company, liquidation
of the Company or sale or substantially all of the Company's assets (any of
which is a "Transaction") other than a Transaction immediately following
-----------
which the shareholders of the Company and any trustee or fiduciary of any
Company employee benefit plan immediately prior to the Transaction own at
least 60% of the voting power, directly or indirectly, of the surviving
corporation following the Transaction; or
(iii) within any 24 month period, the persons who were directors
immediately before the beginning of such period (the "Incumbent Directors")
-------------------
shall cease (for any reason other than death) to constitute at least a
majority of the Board or the board of directors of a successor to the
Company. For this purpose, any director who was not a director at the
beginning of such period shall be deemed to be an Incumbent Director if
such director was elected to the Board by, or on the recommendation of or
with the approval of, at least two-thirds of the directors who then
qualified as Incumbent Directors (so long as such director was not
nominated by a person who has expressed an intent to effect a Change in
Control or engage in a proxy or other control contest).
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Company" means Imperial Credit Industries, Inc.
-------
"Confidential Information" means nonpublic information relating to the
------------------------
business plans, marketing plans, customers or employees of the Company or its
affiliates other than information the disclosure of which cannot reasonably be
expected to adversely affect the business of the Company or its affiliates.
"Good Reason" means any of the following actions, without Executive's
-----------
express prior written approval, other than due to Executive's Permanent
Disability or death:
(i) Executive's base salary is reduced below the Base Salary;
(ii) Executive's annual Bonus is reduced below the Average Bonus;
(iii) Executive's duties, titles or responsibilities are diminished in
comparison to the duties, titles and responsibilities enjoyed by Executive
immediately prior to the Change in Control;
(iv) the incentive compensation programs, welfare plans and pension plans
offered to Executive are materially diminished in comparison to the
incentive compensation
9
<PAGE>
programs, welfare plans and pension plans enjoyed by Executive immediately
prior to the Change in Control.
(v) the relocation of Executive's principal place of business to a
location more than 15 miles from where Executive was based immediately
prior to the Change in Control; or
(vi) the failure of the Company to obtain a satisfactory agreement from any
successor to assume and agree to perform the Agreement, as contemplated in
Section 11 of this Agreement.
Executive's continued employment shall not constitute consent to, or a waiver of
rights with respect to, any circumstances constituting Good Reason hereunder.
"Permanent Disability" means Executive's inability, by reason of any
--------------------
physical or mental impairment, to substantially perform the significant aspects
of his regular duties which inability is reasonably contemplated to continue for
at least one year from its incurrence.
"Target Bonus" means the annual bonus payable to Executive for the year in
------------
which a Change in Control occurs, calculated on the assumption that Executive
and the Company or those entities or business units within the Company on whose
performance Executive's bonus depends achieve the applicable target performance
goals established under the applicable bonus plan with respect to that year. If
no target performance goals for the year in which the Change in Control occurs
have been set prior to the Change in Control, the Target Bonus shall be
determined by substituting, in the previous sentence, the prior year for the
year in which a Change in Control occurs, or the bonus amount accrued for that
Executive in the Company's approved annual budget applicable to that Executive,
whichever is higher.
10
<PAGE>
EXHIBIT 10.30
TERMINATION PROTECTION AGREEMENT
--------------------------------
AGREEMENT effective January 27, 1999 between Imperial Credit Industries,
Inc., a California Corporation (the "Company") and Brad S. Plantiko (the
"Executive").
Executive, who is a senior executive of the Company, is a skilled and
dedicated employee who has important management responsibilities and talents
which benefit the Company and its affiliates. The Company believes that its
best interests will be served if Executive is encouraged to remain with the
Company. The Company has determined that the Company's ability to retain
Executive as an employee will be significantly enhanced if Executive is provided
with fair and reasonable protection from the potential effects of a change in
ownership or control of the Company. Accordingly, the Company and Executive
agree as follows:
1. Defined Terms.
-------------
Unless otherwise indicated, capitalized terms used in this Agreement which are
defined in Schedule A shall have the meanings set forth in Schedule A.
2. Effective Date; Term.
--------------------
This Agreement shall commence on the date hereof (the "Effective Date") and
shall continue in effect through December 31, 2000; provided, however, the term
-------- -------
of this Agreement shall automatically be extended for one additional year beyond
2000 and successive one year periods thereafter, unless, not later than January
30 of each calendar year, commencing in 2000, the Company shall have given
notice that it does not wish to extend this Agreement for an additional year
beyond such calendar year, in which event this Agreement shall continue to be
effective until the end of its then remaining term; provided, further, that,
-------- -------
notwithstanding any such notice by the Company not to extend, if a Change in
Control shall have occurred during the original or any extended term of this
Agreement, this Agreement shall continue in effect for a period of 36 months
beyond such Change in Control.
3. Change in Control Benefits.
--------------------------
If Executive's employment with the Company or its affiliates is terminated (a)
at any time within the three years following a Change in Control by the Company
or its affiliates without Cause or by Executive for Good Reason, or (b) by
Executive for any reason during the 30 day period beginning on the first
anniversary of a Change in Control (the effective date of any such termination
hereafter referred to as the "Termination Date"), Executive shall be entitled to
the benefits provided hereafter in this Section 3 and as otherwise set forth in
this Agreement. If Executive's employment is terminated prior to a Change in
Control at the request or suggestion of any individual or entity acquiring
ownership and control of the Company, this Agreement shall become effective upon
the subsequent occurrence of a Change in Control involving such acquirer, and
Executive's Termination Date shall be deemed to have occurred immediately
1
<PAGE>
following the Change in Control, with the result that Executive shall be
entitled to the benefits provided hereafter in this Section 3 and as otherwise
set forth in this Agreement.
A. Severance Benefits. Within five business days after the Termination
------------------
Date, the Company shall pay Executive a lump sum amount, in cash, equal to:
(i) three times the sum of:
(a) Executive's Base Salary, and
(b) Executive's highest Bonus earned in respect of any of the
last three Company fiscal years preceding the Change in
Control, and
(ii) Executive's Target Bonus multiplied by a fraction, the numerator
of which shall equal the number of days Executive was employed by the
Company or an affiliate in the calendar year in which the Termination
Date occurs and the denominator of which shall equal 365.
B. Continued Welfare Benefits. Until the third anniversary of the
--------------------------
Termination Date, the Company shall, at its expense, provide Executive with
medical, dental, life insurance, disability and accidental death and
dismemberment benefits at the highest level provided to Executive during
the period beginning immediately prior to the Change in Control and ending
on the Termination Date; provided, however, that if Executive becomes
-------- -------
employed by a new employer, the coverages provided by the Company pursuant
to this sentence shall become secondary to those coverages provided by the
new employer.
C. Payment of Accrued But Unpaid Amounts. Within five business days after
-------------------------------------
the Termination Date, (i) all deferred compensation (including any
deferrals and matches on those deferrals in the Company's Deferral of
Executive Compensation Plan I or the Company's Deferral of Executive
Compensation Plan II) shall become fully vested and (ii) the Company shall
pay Executive, in cash, (A) any unpaid portion of Executive's Bonus accrued
with respect to the full calendar year ended prior to the Termination Date;
and (B) all unpaid deferred compensation of Executive.
D. Effect on Existing Plans and Employment Agreements. All Change in
--------------------------------------------------
Control provisions applicable to Executive and contained in any plan,
program, agreement or arrangement maintained on the Effective Date (or
thereafter) by the Company or any affiliate (including, but not limited to,
any stock option or pension plan) shall remain in effect through the date
of a Change in Control (as altered by this Agreement), and for such period
thereafter as is necessary to carry out such provisions and provide the
benefits payable thereunder, and may not be altered in a manner which
adversely affects Executive without Executive's prior written approval. No
benefits shall be paid to Executive, however, under any severance plan
maintained generally for the employees of the Company or any affiliate if
Executive is eligible to receive benefits under this Section 3.
Notwithstanding the provisions of Section 4 hereof, any payments or
benefits
2
<PAGE>
provided under this Agreement shall be reduced by any payments or benefits
Executive receives as a result of his termination of employment under an
employment agreement between the Company or any affiliate and Executive (an
"Employment Agreement"). In addition, any non-competition or non-
solicitation covenant in an Employment Agreement or other agreement between
the Company or any affiliate and Executive shall lapse on the date of a
Change in Control.
E. Outplacement Counseling. For the three year period following the
-----------------------
Termination Date, the Company shall reimburse all reasonable expenses
incurred by Executive (up to 20% of Base Salary per year) for professional
outplacement services by qualified consultants selected by Executive.
4. Mitigation.
----------
A. Executive shall not be required to mitigate damages or the amount of
any payment provided for under this Agreement by seeking other employment
or otherwise, and compensation earned from such employment or otherwise
shall not reduce the amounts otherwise payable under this Agreement. No
amounts payable under this Agreement shall be subject to reduction or
offset in respect of any claims which the Company (or any other person or
entity) may have against Executive.
5. Gross-Up.
--------
A. In the event that any payment or benefit received or to be received by
Executive pursuant to the terms of this Agreement (the "Contract Payment")
or in connection with Executive's termination of employment or contingent
upon a Change in Control of the Company pursuant to any plan or arrangement
or other agreement with the Company (or any affiliate) ("Other Payments"
and, together with the Contract Payments, the "Payments") would be subject
to the excise tax (the "Excise Tax") imposed by Section 4999 of the Code,
as determined as provided below, the Company shall pay to Executive, at the
time specified in Section 5(B) below, an additional amount (the "Gross-Up
Payment") such that the net amount retained by Executive, after deduction
of the Excise Tax on the Payments and any federal, state and local income
or other tax and Excise Tax upon the payment provided for by this Section
5(A), and any interest, penalties or additions to tax payable by Executive
with respect thereto, shall be equal to the total value of the Payments at
the time such Payments are to be made. For purposes of determining whether
any of the Payments will be subject to the Excise Tax and the amounts of
such Excise Tax, (1) the total amount of the Payments shall be treated as
parachute payments" within the meaning of Section 280G(b)(2) of the Code,
and all "excess parachute payments" within the meaning of Section
280G(b)(1) of the Code shall be treated as subject to the Excise Tax,
except to the extent that, in the opinion of independent tax counsel
selected by the Company's independent auditors and reasonably acceptable to
Executive ("Tax Counsel"), a Payment (in whole or in part) does not
constitute a "parachute payment" within the meaning of Section 280G(b)(2)
of the Code, or such "excess parachute payments" (in whole or in part) are
not subject to the Excise
3
<PAGE>
Tax, (2) the amount of the Payments that shall be treated as subject to the
Excise Tax shall be equal to the lesser of (A) the total amount of the
Payments or (B) the amount of "excess parachute payments" within the
meaning of Section 280G(b)(1) of the Code (after applying clause (1)
hereof), and (3) the value of any noncash benefits or any deferred payment
or benefit shall be determined by Tax Counsel in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, Executive shall be deemed
to pay federal income tax at the highest marginal rates of federal income
taxation applicable to individuals in the calendar year in which the Gross-
Up Payment is to be made and state and local income taxes at the highest
effective rates of taxation applicable to individuals as are in effect in
the state and locality of Executive's residence or place of employment in
the calendar year in which the Gross-Up Payment is to be made.
B. The Gross-Up Payments provided for in Section 5(A) hereof shall be made
upon the earlier of (i) the payment to Executive of any Payment or (ii) the
imposition upon Executive or payment by Executive of any Excise Tax.
C. The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by
the Company of a Gross-Up Payment. Such notification shall be given as
soon as practicable but no later than 10 business days after the Executive
is informed in writing of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to be
paid. The Executive shall not pay such claim prior to the expiration of
the 30 day period following the date on which the Executive gives such
notice to the Company (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If the Company
notifies the Executive in writing prior to the expiration or such period
that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim;
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company and reasonably satisfactory to the Executive.
(iii) cooperate with the Company in good faith in order to
effectively contest such claim; and
(iv) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs
-------- -------
and expenses (including, but not limited to, additional interest and
penalties and related legal, consulting or other similar fees) incurred in
connection with such contest and shall
4
<PAGE>
indemnify and hold the Executive harmless, on an after-tax basis, for any
Excise Tax or other tax (including interest and penalties with respect
thereto) imposed as a result of such representation and payment of costs
and expenses.
D. The Company shall control all proceedings taken in connection with such
contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearing and conferences with the
taxing authority in respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner, and the Executive agrees to
prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Company shall determine; provided, however, that if the
-------- -------
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive on an
interest-free basis, and shall indemnify and hold the Executive harmless,
on an after-tax basis, from any Excise Tax or other tax (including interest
or penalties with respect thereto) imposed with respect to such advance or
with respect to any imputed income with respect to such advance; and
provided, further, that if the Executive is required to extend the statute
-------- -------
of limitations to enable the Company to contest such claim, the Executive
may limit this extension solely to such contested amount. The Company's
control of the contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and the Executive shall be
entitled to settle or contest, as the case may be, any other issue raised
by the Internal Revenue Service or any other taxing authority. In
addition, no position may be taken nor any final resolution be agreed to by
the Company without the Executive's consent if such position or resolution
could reasonably be expected to adversely affect the Executive (including
any other tax position of the Executive unrelated to the matters covered
hereby).
E. As a result of the uncertainty in the application of Section 4999 of
the Code at the time of a determination by the Company or the Tax Counsel
hereunder, it is possible that Gross-Up Payments which will not have been
made by the Company should have been made ("Underpayment"), consistent with
the calculations required to be made hereunder. In the event that the
Company exhausts its remedies, as set forth above, and the Executive
thereafter is required to pay to the Internal Revenue Service an additional
amount, the Company or the Tax Counsel shall determine the amount of the
Underpayment that has occurred and any such Underpayment shall promptly be
paid by the Company to or for the benefit of the Executive.
F. If, after the receipt by Executive of the Gross-Up Payment or an amount
advanced by the Company in connection with the contest of an Excise Tax
claim, the Executive receives any refund with respect to such claim, the
Executive shall promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by the Executive of an amount advanced by
the Company in connection with an Excise Tax claim, a determination is made
that Executive shall not be entitled to any refund with respect to such
claim and the Company does not notify the Executive in writing of its
intent to contest the denial of
5
<PAGE>
such refund prior to the expiration of 30 days after such determination,
such advance shall be forgiven and shall not be required to be repaid.
6. Termination for Cause.
---------------------
Nothing in this Agreement shall be construed to prevent the Company or its
affiliates from terminating Executive's employment for Cause. If Executive is
terminated for Cause, the Company shall have no obligation to make any payments
under this Agreement, except for payments that may otherwise be payable under
then existing employee benefit plans, programs and arrangements of the Company
and its affiliates.
7. Indemnification; Director's and Officer's Liability Insurance.
-------------------------------------------------------------
Executive shall, after the Termination Date, retain all rights to
indemnification under applicable law or under the applicable Company's Articles
of Incorporation or By-Laws, as they may be amended or restated from time to
time. In addition, the Company shall maintain Director's and Officer's
liability insurance on behalf of Executive, at the level in effect immediately
prior to the Termination Date, for the three-year period following the
Termination Date, and throughout the period of any applicable statute of
limitations.
8. Confidential Information.
------------------------
Except as required by law or by any court or administrative agency, during the
six-month period following the Termination Date, Executive shall not disclose to
any person, or use to the significant disadvantage of any of the Company or its
affiliates, any Confidential Information; provided that nothing contained in
--------
this Section 8 shall prevent Executive from being employed by a competitor or
any of the Company or utilizing Executive's general skills, experience, and
knowledge, including those developed while employed by any of the Company or its
affiliates.
9. Disputes.
--------
Any dispute or controversy arising under or in connection with this Agreement
shall be settled exclusively by arbitration in Los Angeles, California or, at
the option of Executive, in the county where Executive then resides, in
accordance with the Rules of the American Arbitration Association then in
effect, except that Executive may, at Executive's option, bring that action in a
court of competent jurisdiction, even if the Company has earlier instituted an
action hereunder. Judgement may be entered on an arbitrator's award relating to
this Agreement in any court having jurisdiction.
10. Costs of Proceedings.
--------------------
The Company shall pay all costs and expenses, including attorneys' fees and
disbursements, at least monthly, of Executive in connection with any legal
proceeding (including arbitration), whether instituted by the Company or
Executive, relating to the interpretation or enforcement of any provision of
this Agreement, except that if Executive instituted the proceeding and the
judge, arbitrator or other individual presiding over the proceeding
affirmatively finds that Executive
6
<PAGE>
instituted the proceeding in bad faith, Executive shall pay all costs and
expenses, including attorneys' fees and disbursements, of Executive. The Company
shall pay prejudgment interest on any money judgment obtained by Executive as a
result of such a proceeding, calculated at the prime rate of The Chase Manhattan
Bank, as in effect from time to time, from the date that payment should have
been made to Executive under this Agreement.
11. Assignment.
----------
Except as otherwise provided herein, this Agreement shall be binding upon, inure
to the benefit of and be enforceable by the Company and Executive and their
respective heirs, legal representatives, successors and assigns. If the Company
shall be merged into or consolidated with another entity, the provisions of this
Agreement shall be binding upon and inure to the benefit of the entity surviving
such merger or resulting from such consolidation. The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business or assets of the Company,
by agreement in form and substance satisfactory to Executive, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. The provisions of this Section 11 shall continue to apply to
each subsequent employer of Executive hereunder in the event of any subsequent
merger, consolidation or transfer of assets of such subsequent employer.
12. Withholding.
-----------
Notwithstanding the provisions of Sections 4 and 5 hereof, the Company may, to
the extent required by law, withholding applicable federal, state and local
income and other taxes from any payments due to Executive hereunder.
13. Applicable Law.
--------------
This Agreement shall be governed by and construed in accordance with the laws of
the State of California applicable to contracts made and to be performed
therein.
14. Entire Agreement.
----------------
This Agreement constitutes the entire agreement between the parties regarding
the subject matter hereof. This Agreement may be changed only by a written
agreement executed by the Company and Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement on the 29th
day of January, 1999.
IMPERIAL CREDIT INDUSTRIES, INC.
/s/ Brad S. Plantiko By: /s/ H. Wayne Snavely
- ------------------------------- -----------------------------------
Executive: Brad S. Plantiko H. Wayne Snavely
7
<PAGE>
Schedule A
CERTAIN DEFINITIONS
As used in this Agreement, and unless the context requires a different
meaning, the following terms, when capitalized, have the meaning indicated:
"Average Bonus" means the average Bonus earned by Executive in respect of
-------------
the last three full fiscal years of the Company ending prior to the Change in
Control, excluding any Bonus paid in such years in respect of a partial year of
employment.
"Base Salary" means Executive's annual rate of base salary in effect on the
-----------
date of the Change in Control or the Termination Date, whichever is higher.
"Board" means the Company's Board of Directors.
-----
"Bonus" means the amount payable to Executive under the Company's
-----
applicable annual bonus plan with respect to a Company fiscal year.
"Cause" means either of the following:
-----
(i) the willful and continued failure to Executive to perform
substantially his or her duties with the Company or its affiliates (other
than any such failure resulting from incapacity due to physical or mental
illness), after a written demand for substantial performance is delivered
to Executive by the Board or an elected officer of the Company which
specifically identifies the manner in which the Board or the elected
officer believes that Executive has not substantially performed his or her
duties; or
(ii) (A) Executive's conviction of, or plea of guilty or nolo contendere
to, a felony or (B) the willful engaging by Executive in gross misconduct
which is materially and demonstrably injurious to the Company.
Notwithstanding the foregoing, Executive shall not be deemed to have been
terminated for Cause (except for Cause pursuant to (ii)(A) above) unless and
until there shall have been delivered to Executive a copy of a resolution duly
adopted by the affirmative vote of not less than three-quarters (3/4) of the
outside (i.e., nonemployee) directors at a meeting of the Board called and held
for such purpose (after reasonable notice to Executive and an opportunity for
Executive, together with Executive's counsel, to be heard before the Board),
finding that, in the good faith opinion of the Board, Executive was guilty of
conduct set forth above and specifying the particulars thereof in detail.
"Change in Control" means the first to occur of any of the following dates:
-----------------
8
<PAGE>
(i) any person or person acting in concert (excluding Company benefit
plans) becomes the beneficial owner of securities of the Company having at
least 40% of the voting power of the Company's then outstanding securities
(unless the event causing the 40% threshold to be crossed is an acquisition
of voting common securities directly from the Company); or
(ii) any merger or other business combination of the Company, liquidation
of the Company or sale or substantially all of the Company's assets (any of
which is a "Transaction") other than a Transaction immediately following
-----------
which the shareholders of the Company and any trustee or fiduciary of any
Company employee benefit plan immediately prior to the Transaction own at
least 60% of the voting power, directly or indirectly, of the surviving
corporation following the Transaction; or
(iii) within any 24 month period, the persons who were directors
immediately before the beginning of such period (the "Incumbent Directors")
-------------------
shall cease (for any reason other than death) to constitute at least a
majority of the Board or the board of directors of a successor to the
Company. For this purpose, any director who was not a director at the
beginning of such period shall be deemed to be an Incumbent Director if
such director was elected to the Board by, or on the recommendation of or
with the approval of, at least two-thirds of the directors who then
qualified as Incumbent Directors (so long as such director was not
nominated by a person who has expressed an intent to effect a Change in
Control or engage in a proxy or other control contest).
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Company" means Imperial Credit Industries, Inc.
-------
"Confidential Information" means nonpublic information relating to the
------------------------
business plans, marketing plans, customers or employees of the Company or its
affiliates other than information the disclosure of which cannot reasonably be
expected to adversely affect the business of the Company or its affiliates.
"Good Reason" means any of the following actions, without Executive's
-----------
express prior written approval, other than due to Executive's Permanent
Disability or death:
(i) Executive's base salary is reduced below the Base Salary;
(ii) Executive's annual Bonus is reduced below the Average Bonus;
(iii) Executive's duties, titles or responsibilities are diminished in
comparison to the duties, titles and responsibilities enjoyed by Executive
immediately prior to the Change in Control;
(iv) the incentive compensation programs, welfare plans and pension plans
offered to Executive are materially diminished in comparison to the
incentive compensation
9
<PAGE>
programs, welfare plans and pension plans enjoyed by Executive immediately
prior to the Change in Control.
(v) the relocation of Executive's principal place of business to a
location more than 15 miles from where Executive was based immediately
prior to the Change in Control; or
(vi) the failure of the Company to obtain a satisfactory agreement from any
successor to assume and agree to perform the Agreement, as contemplated in
Section 11 of this Agreement.
Executive's continued employment shall not constitute consent to, or a waiver of
rights with respect to, any circumstances constituting Good Reason hereunder.
"Permanent Disability" means Executive's inability, by reason of any
--------------------
physical or mental impairment, to substantially perform the significant aspects
of his regular duties which inability is reasonably contemplated to continue for
at least one year from its incurrence.
"Target Bonus" means the annual bonus payable to Executive for the year in
------------
which a Change in Control occurs, calculated on the assumption that Executive
and the Company or those entities or business units within the Company on whose
performance Executive's bonus depends achieve the applicable target performance
goals established under the applicable bonus plan with respect to that year. If
no target performance goals for the year in which the Change in Control occurs
have been set prior to the Change in Control, the Target Bonus shall be
determined by substituting, in the previous sentence, the prior year for the
year in which a Change in Control occurs, or the bonus amount accrued for that
Executive in the Company's approved annual budget applicable to that Executive,
whichever is higher.
10
<PAGE>
EXHIBIT 11
IMPERIAL CREDIT INDUSTRIES, INC
STATEMENT REGARDING COMPUTATION OF (LOSS) EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1998 1997 1996
---------- --------- --------
<S> <C> <C> <C>
(Loss) income from continuing operations before extraordinary item.................... (59,125) 115,263 75,984
Loss from discontinued operations of AMN net of income taxes.......................... (3,232) (25,347) --
Loss on disposal of AMN, net of income taxes.......................................... (11,276) -- --
-------- -------- -------
(Loss) income before extraordinary item............................................... (73,633) 89,916 75,984
Extraordinary item--Loss on early extinguishment of debt, net of income taxes......... -- (3,995) --
-------- -------- -------
Net (loss) income..................................................................... $(73,633) $ 85,921 $75,984
======== ======== =======
Weighted average common shares used to compute
basic income per share............................................................... 38,228 38,611 36,063
Assumed common shares issued on exercise of stock options.............................. -- 2,244 2,912
-------- -------- -------
Number of common shares used to compute diluted income per share....................... 38,228 40,855 38,975
======== ======== =======
Basic (loss) income per share:
- ----------------------------------------------------------------------------------------
(Loss) income from continuing operations before extraordinary item.................... $ (1.55) $ 2.99 $ 2.11
Loss from discontinued operations, net of income taxes................................ (0.08) (0.66) --
Loss on disposal of AMN, net of income taxes.......................................... (0.30) -- --
Extraordinary item--Loss on early extinguishment of debt, net of income taxes......... -- (0.10) --
-------- -------- -------
Net (loss) income per common share.................................................... $ (1.93) $ 2.23 $ 2.11
======== ======== =======
Diluted (loss) income per share:
- ----------------------------------------------------------------------------------------
(Loss) income from continuing operations before extraordinary item.................... $ (1.55) $ 2.82 $ 1.95
Loss from discontinued operations, net of income taxes................................ (0.08) (0.62) --
Loss on disposal of AMN, net of income taxes.......................................... (0.30) -- --
Extraordinary item--Loss on early extinguishment of debt, net of income taxes......... -- (0.10) --
-------- -------- -------
Net (loss) income per common share.................................................... $ (1.93) $ 2.10 $ 1.95
======== ======== =======
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Subsidiary Name State of Incorporation
--------------- ----------------------
<S> <C>
Southern Pacific Bank California
Imperial Business Credit, Inc. California
Imperial Credit Advisors, Inc. California
Imperial Credit Worldwide, Ltd. California
Imperial Credit Commercial Asset California
Management Corporation
Imperial Capital Group, LLC Delaware
</TABLE>
<PAGE>
EXHIBIT 23.1.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Imperial Credit Industries, Inc.:
We consent to incorporation by reference in the registration statements
(Nos. 333-13805 and 333-15149) on Form S-8 and (Nos. 333-22141 and 333-30809)
on Form S-4 of Imperial Credit Industries, Inc. of our report dated January
26, 1999, relating to the consolidated balance sheets of Imperial Credit
Industries, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations and comprehensive income,
changes in shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998, which report appears in the
December 31, 1998 annual report on Form 10-K of Imperial Credit Industries,
Inc.
KPMG LLP
Los Angeles, California
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 297,772 45,379
<INT-BEARING-DEPOSITS> 1,415 103,738
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 162,356 120,905
<INVESTMENTS-HELD-FOR-SALE> 68,410 100,917
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 1,668,674 1,432,910
<ALLOWANCE> 24,880 26,954
<TOTAL-ASSETS> 2,417,183 2,094,389
<DEPOSITS> 1,711,328 1,156,022
<SHORT-TERM> 122,270 189,841
<LIABILITIES-OTHER> 60,206 134,780
<LONG-TERM> 289,858 289,813
0 0
0 0
<COMMON> 129,609 147,109
<OTHER-SE> 101,265 174,898
<TOTAL-LIABILITIES-AND-EQUITY> 2,417,183 2,094,389
<INTEREST-LOAN> 200,827 176,146
<INTEREST-INVEST> 28,965 24,776
<INTEREST-OTHER> 6,048 2,678
<INTEREST-TOTAL> 235,840 203,600
<INTEREST-DEPOSIT> 87,030 71,014
<INTEREST-EXPENSE> 123,106 118,213
<INTEREST-INCOME-NET> 112,734 85,387
<LOAN-LOSSES> 15,450 20,975
<SECURITIES-GAINS> (592) 112,185
<EXPENSE-OTHER> 119,372 125,374
<INCOME-PRETAX> (104,653) 200,043
<INCOME-PRE-EXTRAORDINARY> (73,633) 89,916
<EXTRAORDINARY> 0 (3,995)
<CHANGES> 0 0
<NET-INCOME> (73,633) 85,921
<EPS-PRIMARY> (1.93) 2.23
<EPS-DILUTED> (1.93) 2.10
<YIELD-ACTUAL> 5.86 4.55
<LOANS-NON> 39,529 70,631
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 26,954 19,999
<CHARGE-OFFS> 22,100 13,586
<RECOVERIES> 4,576 576
<ALLOWANCE-CLOSE> 24,880 26,954
<ALLOWANCE-DOMESTIC> 24,880 26,954
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 214 4,188
</TABLE>
