<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Commission File number: 0-19861
IMPERIAL CREDIT INDUSTRIES, INC.
CALIFORNIA 95-4054791
---------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
23550 Hawthorne Boulevard, Building 1, Suite 110
Torrance, California 90505
(310) 373-1704
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(b) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest possible date:
Class Shares Outstanding at July 31, 2000
----- -----------------------------------
Common Stock, no par value 32,096,361
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<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
-------------------------------
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
--------------------
----
<S> <C>
Consolidated Balance Sheets - June 30, 2000 and December 31, 1999..................... 2
Consolidated Statements of Operations and Comprehensive Income (Loss) - Three
and six months ended June 30, 2000 and 1999........................................ 3
Consolidated Statements of Cash Flows - Six months ended June 30, 2000 and 1999....... 4
Consolidated Statement of Changes in Shareholders' Equity
-- Six months ended June 30, 2000..................................................... 5
Notes to Consolidated Financial Statements............................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operationss 18
--------------------------------------------------------------------------------------
Item 3. Qualitative and Quantitative Disclosures about Market Risk............................ 35
----------------------------------------------------------
PART II -- OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings.................................................................... 36-37
Item 2. Changes in Securities................................................................ 37
Item 3. Defaults Upon Senior Securities...................................................... 37
Item 4. Submission of Matters to a Vote of Security Holders.................................. 37
Item 5. Other Information.................................................................... 37
Item 6. Exhibits and Reports on Form 8-K..................................................... 37
Signatures........................................................................... 38
</TABLE>
Forward Looking Statements
Certain statements contained herein are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
Section 27 of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
may be identified by reference to a future period(s) or by the use of forward-
looking terminology, such as "may," "will," "intend," "should,"
"expect," "anticipate," "estimate" or "continue" or the negatives
thereof or other comparable terminology. Our actual results could differ
materially from those anticipated in such forward-looking statements due to a
variety of factors. These factors include but are not limited to: the demand for
our products; competitive factors in the businesses in which we compete; adverse
changes in the securities markets; inflation and changes in the interest rate
environment that reduce margins or the fair value of financial instruments;
changes in national, regional or local business conditions or economic
environments; government fiscal and monetary policies; legislative or regulatory
changes that affect our business; factors inherent in the valuation and pricing
of commercial loans; other factors generally understood to affect the value of
commercial loans and commercial real estate; and the other risks detailed in our
8-K dated May 17, 1999 as filed with the Securities and Exchange Commission (the
"SEC"); periodic reports on Forms 10-Q, 8-K and 10-K and any amendments with
respect thereto filed with the SEC; and other filings made by our company with
the SEC.
1
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
--------------------
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
-------- ------------
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash................................................................................ $ 124,749 $ 33,898
Interest bearing deposits........................................................... 104,049 248,182
Investment in Federal Home Loan Bank stock.......................................... 3,980 6,960
Securities held for trading, at market.............................................. 156,971 160,805
Securities available for sale, at market............................................ 74,190 74,374
Loans and leases held for sale, net................................................. 391,989 289,398
Loans and leases held for investment, net of unearned income and
deferred loan fees................................................................. 1,371,986 1,273,073
Less: Allowance for loan and lease losses.......................................... (50,142) (31,841)
---------- ----------
Loans held for investment, net...................................................... 1,321,844 1,241,232
Real property....................................................................... 77,876 --
Servicing rights.................................................................... 847 802
Retained interest in loan and lease securitizations................................. 12,099 10,220
Accrued interest receivable......................................................... 17,999 8,272
Premises and equipment, net......................................................... 13,046 13,576
Other real estate owned and other repossessed assets, net........................... 4,339 4,894
Goodwill............................................................................ 35,124 34,961
Accrued income taxes receivable..................................................... 1,998 --
Other assets........................................................................ 25,076 36,549
Net assets of discontinued operations............................................... 37,320 37,492
---------- ----------
Total assets........................................................ $2,403,496 $2,201,615
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits............................................................................ $1,826,507 $1,614,758
Borrowings from Federal Home Loan Bank.............................................. 30,000 --
Other borrowings.................................................................... 69,313 74,309
Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures of the company ("ROPES")................ 48,305 61,750
Senior Notes........................................................................ 176,945 185,185
Accrued interest payable............................................................ 22,699 18,811
Accrued income taxes payable........................................................ -- 16,101
Minority interest in consolidated subsidiaries...................................... 3,607 2,684
Goodwill............................................................................ 35,757 --
Other liabilities................................................................... 24,886 22,637
---------- ----------
Total liabilities................................................... 2,238,019 1,996,235
---------- ----------
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized; none issued or outstanding............ -- --
Common stock, no par value. Authorized 80,000,000 shares; 32,321,661
and 33,198,661 shares issued and outstanding at June 30, 2000 and
December 31, 1999, respectively.................................................... 94,257 97,220
Retained earnings................................................................... 63,735 98,437
Shares held in deferred executive compensation plan................................. 7,043 7,107
Accumulated other comprehensive income-
unrealized gain on securities available for sale, net.............................. 442 2,616
---------- ----------
Total shareholders' equity......................................................... 165,477 205,380
---------- ----------
Total liabilities and shareholders' equity......................................... $2,403,496 $2,201,615
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
----- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income:
Interest on loans and leases....................................... $ 52,189 $ 42,128 $ 97,180 $ 89,705
Interest on investments............................................ 7,771 6,018 15,116 13,063
Interest on other finance activities............................... 624 603 1,238 2,545
-------- -------- -------- --------
Total interest income.............................................. 60,584 48,749 113,534 105,313
Interest Expense:
Interest on deposits............................................... 27,016 19,974 51,244 42,608
Interest on other borrowings....................................... 2,376 837 4,022 1,947
Interest on long term debt......................................... 6,017 7,570 12,395 15,139
-------- -------- -------- --------
Total interest expense......................................... 35,409 28,381 67,661 59,694
-------- -------- -------- --------
Net interest income............................................ 25,175 20,368 45,873 45,619
Provision for loan and lease losses................................ 63,156 22,255 87,175 24,455
-------- -------- -------- --------
Net interest (expense) income after provision for loan and lease
losses............................................................ (37,981) (1,887) (41,302) 21,164
-------- -------- -------- --------
Fee and Other Income:
Gain on sale of loans and leases................................... 220 801 353 3,761
Asset management fees.............................................. 777 3,000 1,639 6,009
Investment banking and brokerage activities........................ 7,154 5,606 14,808 11,910
Loan servicing income.............................................. 1,453 1,481 2,979 3,439
Gain on sale of securities......................................... 13,533 786 12,931 1,265
Equity in net loss of Franchise Mortgage Acceptance Company........ -- (2,013) -- (53)
Mark to market on securities and loans held for sale............... (1,961) (21,881) (3,734) (25,255)
Rental income...................................................... 2,591 -- 2,711 --
Other income....................................................... 4,127 782 7,081 5,297
-------- -------- -------- --------
Total fee and other income (loss).................................. 27,894 (11,438) 38,768 6,373
-------- -------- -------- --------
Noninterest Expenses:
Personnel expense.................................................. 12,336 11,578 24,255 24,675
Commission expense................................................. 1,393 2,623 4,146 5,589
Amortization of servicing rights................................... 142 1,307 278 4,038
Occupancy expense.................................................. 1,548 1,388 2,898 2,699
Net expense of other real estate owned............................. 469 760 1,025 898
Professional services.............................................. 1,547 3,599 3,142 5,927
Telephone and other communications................................. 779 948 1,650 1,932
Real property expense.............................................. 1,463 -- 1,481 --
Amortization of goodwill, net...................................... (1,290) 753 (659) 1,552
General and administrative expense................................. 5,511 6,950 11,150 13,383
-------- -------- -------- --------
Noninterest expenses........................................... 23,898 29,906 49,366 60,693
Acquisition costs.................................................. -- -- 9,397 --
-------- -------- -------- --------
Total expenses..................................................... 23,898 29,906 58,763 60,693
-------- -------- -------- --------
Loss from continuing operations before income taxes,
minority interest and extraordinary item........................ (33,985) (43,231) (61,297) (33,156)
Income taxes....................................................... (14,579) (17,177) (25,414) (13,984)
Minority interest in income (loss) of consolidated subsidiaries.... 519 (153) 912 (33)
-------- -------- -------- --------
Loss before extraordinary item..................................... (19,925) (25,901) (36,795) (19,139)
Extraordinary item - Gain on early extinguishment of debt, net of
income taxes..................................................... 1,146 -- 2,093 --
-------- -------- -------- --------
Net loss....................................................... $(18,779) $(25,901) $(34,702) $(19,139)
======== ======== ======== ========
Comprehensive income (loss):
Other comprehensive (loss) income, net............................. (216) 1,883 (2,174) 3,024
-------- -------- -------- --------
Comprehensive loss................................................. $(18,995) $(24,018) $(36,876) $(16,115)
======== ======== ======== ========
Basic loss per share:
Loss from continuing operations..................................... $(0.61) $(0.74) $(1.11) $(0.53)
Extraordinary item - Gain on early extinguishment of debt,
net of income taxes.............................................. 0.03 -- 0.06 --
-------- -------- -------- --------
Net loss per common share........................................... $(0.58) $(0.74) $(1.05) $(0.53)
======== ======== ======== ========
Diluted loss per share:
Loss from continuing operations..................................... $(0.61) $(0.74) $(1.11) $(0.53)
Extraordinary item-Gain on early extinguishment of debt,
net of income taxes.............................................. 0.03 -- 0.06 --
-------- -------- -------- --------
Net loss per common share........................................... $(0.58) $(0.74) $(1.05) $(0.53)
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
2000 1999
--------- ---------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Loss before extraordinary item.................................................................... $ (36,795) $ (19,139)
Adjustments to reconcile loss before extraordinary item from continuing operations to net cash
(used in) provided by operating activities:
Cash provided by (used in) discontinued operations............................................ 170 (8,460)
Provision for loan and lease losses........................................................... 87,175 24,455
Mark to market on securities and loans held for sale.......................................... 3,734 25,255
Depreciation.................................................................................. 661 2,241
Amortization of goodwill...................................................................... (659) 1,552
Amortization of servicing rights.............................................................. 278 4,038
Accretion of discount......................................................................... (2,802) (2,545)
Gain on sale of loans and leases.............................................................. (353) (3,761)
Gains on sale of securities................................................................... (515) (1,265)
Gain on sale of AFG........................................................................... (12,416) --
Equity in net loss of FMC..................................................................... -- 53
Loss on sale of OREO.......................................................................... -- 534
Writedowns on OREO............................................................................ 915 275
Originations of loans held for sale........................................................... (202,392) (212,700)
Sales and collections on loans held for sale.................................................. 104,259 238,694
Sales and collections on real property........................................................ 515 --
Purchase of trading securities................................................................ (44,081) (5,044)
Sale of trading securities.................................................................... 7,356 95,299
Net change in accrued interest receivable..................................................... (9,545) 1,414
Net change in retained interest in loan and lease securitizations............................. 2,231 (3,127)
Other, net.................................................................................... (16,191) 6,571
--------- ---------
Net cash (used in) provided by operating activities............................................... (118,455) 144,340
--------- ---------
Cash flows from investing activities:
Net decrease (increase) in interest bearing deposits.......................................... 145,250 (53,267)
Purchases of securities available for sale.................................................... (51,953) (13,222)
Sale of securities available for sale......................................................... 20,910 4,875
Proceeds from sale of Impac Mortgage Holdings stock........................................... -- 7,686
Proceeds from sale of ICCMIC stock............................................................ -- 5,437
Net cash received from ICCMIC acquisition..................................................... 11,524 --
Proceeds from sale of AFG stock............................................................... 21,610 --
Purchase of stock in Federal Home Loan Bank................................................... -- (1,983)
Redemption of stock in Federal Home Loan Bank................................................. 3,179 --
(Increase) decrease in loans held for investment.............................................. (165,006) 58,263
Proceeds from sale of other real estate owned................................................. 4,451 5,767
Purchase of other real estate owned........................................................... (287) --
Purchases of premises and equipment........................................................... (2,083) (2,824)
--------- ---------
Net cash (used in) provided by investing activities............................................... (12,405) 10,732
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits........................................................... 211,749 (304,758)
Advances from Federal Home Loan Bank.......................................................... 30,000 30,000
Repayments of advances from Federal Home Loan Bank............................................ -- (20,000)
Net change in other borrowings................................................................ 763 (101,050)
Proceeds from issuance of mandatorily redeemable cumulative preferred stock................... -- 30,000
Repurchase and retirement of ROPES............................................................ (12,000) --
Repurchase and retirement of senior notes..................................................... (6,371) --
Repurchase and retirement of common stock..................................................... (3,092) (29,460)
Net change in minority interest............................................................... 923 (136)
Proceeds from exercise of stock options....................................................... 43 110
Other, net.................................................................................... (304) --
--------- ---------
Net cash provided by (used in) financing activities............................................... 221,711 (395,294)
--------- ---------
Net change in cash................................................................................ 90,851 (240,222)
Cash at beginning of period....................................................................... 33,898 297,772
--------- ---------
Cash at end of period............................................................................. $ 124,749 $ 57,550
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Shares held Unrealized
in deferred gain (loss) on
Number of executive securities Total
Shares Common Retained compensation available Shareholders'
Outstanding Stock earnings plan for sale, net equity
----------- -------- --------- ------------ -------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999.................... 33,199 $97,220 $ 98,437 $7,107 $ 2,616 $205,380
Exercise of stock options..................... 20 43 -- -- -- 43
Retirement of stock........................... (897) (3,092) -- -- -- (3,092)
Stock held for deferred
executive compensation plan........... -- 64 -- (64) -- --
Tax benefit from exercise of stock
options............................... -- 22 -- -- -- 22
Decrease in unrealized gain on
securities available for sale, net.... -- -- -- -- (2,174) (2,174)
Net loss for the six months ended
June 30, 2000......................... -- -- (34,702) -- -- (34,702)
------ ------- -------- ------ ------- --------
Balance, June 30, 2000........................ 32,322 $94,257 $ 63,735 $7,043 $ 442 $165,477
====== ======= ======== ====== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization
Imperial Credit Industries, Inc., is a diversified commercial lending,
financial services, and investment banking holding company that was incorporated
in 1991 in the State of California. The consolidated financial statements
include Imperial Credit Industries, Inc. (''ICII''), and its wholly or majority
owned consolidated subsidiaries (collectively, the ''Company''). The wholly
owned subsidiaries include but are not limited to Southern Pacific Bank
(''SPB''), Imperial Business Credit Inc. (''IBC''), and Imperial Credit Lender
Services, Inc. ("ICLS"). Imperial Capital Group, LLC (''ICG'') is a majority
owned consolidated subsidiary which is approximately 63% owned by our Company
and approximately 37% owned by ICG's management. In addition to the wholly owned
consolidated subsidiaries listed above, on March 28, 2000, we acquired all of
the outstanding common shares of Imperial Credit Commercial Mortgage Investment
Corp. ("ICCMIC") making it a consolidated subsidiary of ICII. Prior to the
acquisition date we owned 9.0% of ICCMIC's outstanding common shares. All
material inter-company balances and transactions with consolidated subsidiaries
have been eliminated.
2. Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the quarter and the six months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. The accompanying consolidated financial statements should be
read in conjunction with the consolidated financial statements and related notes
included in our Annual Report on Form 10-K for the year ended December 31, 1999.
In preparing the consolidated financial statements, we are required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets and revenues and expenses for
the periods presented. Actual results could differ significantly from those
estimates. Prior year's consolidated financial statements have been reclassified
to conform to the 2000 presentation.
3. Net Loss Per Share Information
The following table reconciles the number of shares used in the
computations of basic and diluted loss per share for the quarter and six months
ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
For the For the Six Month
Quarter ended June 30, Period ended June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted-average common shares outstanding used to compute
basic loss per share........................................... 32,883,562 35,004,334 33,047,705 35,905,949
Assumed common shares issued on exercise of stock
Options........................................................ -- -- -- --
---------- ---------- ---------- ----------
Number of common shares used to compute diluted
loss per share................................................. 32,883,562 35,004,334 33,047,705 35,905,949
========== ========== ========== ==========
</TABLE>
6
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No.133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). This Statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. This Statement was originally scheduled to be effective for fiscal
years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No.137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No.133" (SFAS), which extended the effective
date to fiscal years beginning after June 30, 2000. In June 2000, the FASB also
issued SFAS No.138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities", which amends SFAS No. 133. The Company uses interest rate
swaps to manage interest rate exposure, which are accounted for as hedging
activities. Management does not believe that the implementation will have a
significant impact on the Corporation's financial position, net income or net
comprehensive income.
5. Discontinued Operations
As of July 31, 1998, management decided to cease operations at Auto
Marketing Network, Inc. ("AMN"). Accordingly, a disposal plan was formulated,
whereby the daily operations of AMN were terminated over a two-month period. For
the quarter and six months ended June 30, 2000 and for the same periods last
year, AMN did not incur additional operating losses.
The net assets of AMN's discontinued operations were as follows:
At June 30, At December 31,
2000 1999
---- ----
(In thousands)
Loans, net $ 2,883 $ 5,207
Securities held for sale 9,175 8,685
Retained interest in loan
securitizations 13,456 12,436
Income taxes receivable 9,209 8,971
Other assets 2,597 2,193
------- -------
Total AMN net assets $37,320 $37,492
======= =======
Total non-accrual AMN loans were $1.5 million at June 30, 2000 as compared
to $1.6 million at December 31, 1999. AMN ceased originating loans during the
third quarter of 1998.
6. Loan and Lease Commitments
At June 30, 2000, our consolidated lending commitments for CBC, LPIG, LHO
and IWF were as follows:
Commitment Funded Unfunded
Type of Lending Commitment Amount Amount Commitment
------------------------- ------ ------ ----------
(In thousands)
Loan and line commitments $2,188,487 $1,143,420 $1,045,067
Standby letters of credit 24,538 -- 24,538
Commercial letters of credit 876 -- 876
---------- ---------- ----------
$2,213,901 $1,143,420 $1,070,481
========== ========== ==========
7
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Loans and Leases Held for Sale
Loans and leases held for sale consisted of the following:
At June 30, At December 31,
2000 1999
---- ----
(In thousands)
Loans secured by real estate:
One-to-four family................. $ 7,397 $ 10,095
Multi-family and commercial........ 375,202 252,944
-------- --------
382,599 263,039
Installment loans...................... 6,236 14,058
Leases................................. 3,154 12,301
-------- --------
$391,989 $289,398
======== ========
The lower of cost or market reserve for loans held for sale was $512,000 at
June 30, 2000 as compared to $500,000 at December 31, 1999.
8. Repurchase of Long Term Debt
During the quarter and six months ended June 30, 2000, we repurchased $2.1
million and $8.3 million of our Senior Notes and $12.2 million and $13.4 million
of our Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Debentures of the Company ("ROPES"),
respectively. The repurchases resulted in extraordinary gains on the early
extinguishment of debt of $1.1 million or $0.03 per share and $2.1 million or
$0.07 per share for the quarter and six months ended June 30, 2000,
respectively. During 1999 and through the quarter ended June 30, 2000, we have
repurchased a total of $43.1 million of Senior Notes, $21.7 million of ROPES and
$30.0 million of Preferred Stock.
9. Deferred Executive Compensation Plan
On July 1, 1998 we established a deferred executive compensation plan.
During the six months ended June 30, 2000, our management and directors made
investments of $1.1 million with the plan's trustee who acquired 244,670 shares
of ICII common stock at an average price of $4.39 per share. From the plan's
inception through June 30, 2000, our management and directors made net
investments of $7.0 million with the plan's trustee who made net acquisitions of
928,933 shares of ICII common stock at an average price of $7.58 per share. All
shares acquired by the plan's trustee are acquired for the benefit of our
company's participating management and directors.
10. Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC") Transaction
On March 28, 2000 we completed the acquisition of ICCMIC. We paid ICCMIC's
stockholders (other than ICII) approximately $11.575 per share in cash. The
total purchase price paid by our company was approximately $300.1 million. Our
basis in shares of ICCMIC common stock owned prior to the merger was $25.1
million. The total cost basis of $325.2 million, combined with other estimated
costs of the acquisition of $19.7 million, bring the total purchase price to
$344.9 million. In addition to the costs of the acquisition, we incurred total
severance and incentive costs of approximately $9.4 million. The merger was
accounted for as a purchase, and resulted in the generation of negative goodwill
of $40.1 million. Subsequent to the acquisition, the fair values of the assets
acquired in the ICCMIC acquisition were adjusted, resulting in a $2.3 million
reduction of negative goodwill. The negative goodwill generated by the
acquisition is not subject to income taxes, and increased our tangible book
value by $1.11 per share at June 30, 2000. We will accrete the negative goodwill
into income over five years, at an annual rate of approximately $7.5 million, or
$0.22 per share.
8
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Proforma total (expenses) revenues, net loss and net loss per share are as
follows, assuming the merger consummated at the beginning of each period:
For the six months ended June 30,
(In thousands, except per share data)
-------------------------------------
2000 1999
------------ --------------
Total (expenses) revenues ($1,220) $65,524
Net loss (33,063) (5,055)
Diluted loss per share ($1.00) ($0.14)
11. Repurchase of Common Stock
On April 25, 2000, our Board of Directors authorized the repurchase of up
to 5% of its outstanding common stock, or a total of 1,660,933 shares. As of
July 31, 2000 we have repurchased 1,122,300 shares of our common stock at an
average cost of $3.60 per common share under this authorization. Whether any
further repurchases will be made, and the timing and number of shares so
purchased, will depend on the availability of shares at acceptable price levels,
existing market conditions and business needs.
9
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. 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. Our 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. Our operations are
divided into eleven business segments as follows:
1. Coast Business Credit 7. Asset Management Activities
2. Imperial Warehouse Finance 8. Imperial Capital Group, LLC
3. Loan Participation and Investment Group 9. Other Core Operations
4. The Lewis Horwitz Organization 10. Equity Interests
5. Imperial Business Credit 11. De-emphasized/Discontinued/
6. Income Property Lending Division Exited Business
The following is a summary of our results of operations by business line
for the three and six months ended June 30, 2000 as compared to June 30, 1999.
<TABLE>
<CAPTION>
At or for the three months ended June 30,
(In thousands)
Net Revenue
(Expense)
External Net From Other
Revenue Operating Units Net Income (Loss) Total Assets
------- --------------- ----------------- ------------
Business Line 2000 1999 2000 1999 2000 1999 2000 1999
------------- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Coast Business Credit $(11,320) $ (130) $ -- $ -- $(11,223) $ (3,353) $ 987,345 $ 663,984
Imperial Warehouse Finance (6,268) (392) -- -- (4,342) (628) 79,598 153,756
Loan Participation and
Investment Group (13,029) 889 -- -- (8,013) 41 233,989 249,319
The Lewis Horwitz
Organization 574 -- -- -- (277) -- 105,897 --
Imperial Business Credit 1,344 3,446 (7) (322) (484) 434 36,453 46,051
Income Property Lending
Division 3,543 2,229 -- -- 872 (18) 435,379 199,465
Asset Management Activities 918 2,774 (71) (70) 25 362 7,343 4,381
Imperial Capital Group, LLC 7,058 5,507 -- -- 518 (285) 18,805 6,843
Other Core Operations 7,427 (3,251) 393 (190) 5,270 (3,194) 437,605 521,445
Equity Interests 79 (1,188) -- -- 6 (945) 3,441 59,494
De-emphasized/Discontinued
Exited Businesses (413) (23,423) (315) 582 (1,577) (18,519) 362,198 426,699
Eliminations -- 214 -- -- 446 204 (304,557) (326,820)
-------- -------- ------ ----- -------- -------- ---------- ----------
Total $(10,087) $(13,325) $ -- $ -- $(18,779) $(25,901) $2,403,496 $2,004,617
======== ======== ====== ===== ======== ======== ========== ==========
</TABLE>
10
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At or for the six months ended June 30,
(In thousands)
<TABLE>
<CAPTION>
Net Revenue
(Expense)
External Net From Other
Revenue Operating Units Net Income (Loss) Total Assets
------ --------------- ----------------- ------------
Business Line 2000 1999 2000 1999 2000 1999 2000 1999
------------- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Coast Business Credit $ (7,132) $ 11,130 $ -- $ -- $ (12,591) $ 932 $ 987,345 $ 663,984
Imperial Warehouse Finance (8,785) 1,045 -- -- (6,433) (52) 79,598 153,756
Loan Participation and
Investment Group (21,253) 3,901 -- -- (13,175) 1,865 233,989 249,319
The Lewis Horwitz
Organization 1,512 -- -- -- (348) -- 105,897 --
Imperial Business Credit 36,453
Division 3,891 4,402 (14) (570) (499) (904) 46,051
Income Property Lending 6,407 6,571 -- -- 1,385 1,285 435,379 199,465
Asset Management Activities 1,783 5,599 (140) (125) 40 251 7,343 4,381
Imperial Capital Group, LLC 14,587 11,596 -- -- 902 (140) 18,805 6,843
Other Core Operations 3,246 (4,155) 318 619 2,396 (4,898) 437,605 521,445
Equity Interests 256 1,163 -- -- 82 570 3,441 59,494
De-emphasized/Discontinued
Exited Businesses 2,954 (13,500) (164) 76 (6,461) (17,962) 362,198 426,699
Eliminations -- (215) -- -- -- (86) (304,557) (326,820)
-------- -------- ------- ------- --------- -------- ---------- ----------
Total $ (2,534) $ 27,537 $ -- $ -- $ (34,702) $(19,139) $2,403,496 $2,004,617
======== ======== ======= ======= ========= ======== ========== ==========
</TABLE>
Our parent company had provided outstanding inter-company subordinated debt
to SPB of $45.0 million and ICG of $4.8 million at June 30, 2000. All inter-
company receivables and payables including corresponding interest income and
expense are eliminated in consolidation. Additionally, our investments in
subsidiaries and inter-company management fees are included in eliminations.
The net income (loss) for each business line includes inter-company allocations
for administrative expenses including human resources, legal, accounting and
insurance.
11
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. Consolidating Financial Information
The following represents condensed consolidating financial information at
June 30, 2000 and December 31, 1999, and for the six months ended June 30, 2000
and 1999, with respect to the financial position, results of operations and cash
flows of our company and our wholly-owned and majority-owned subsidiaries. On
January 17, 1997, we sold $200.0 million of 9.875% Senior Notes due 2007 and on
June 9, 1997, we sold $70.0 million of 10.25% ROPES, of which $165.9 million and
$48.3 million are outstanding as of June 30, 2000, respectively. As of June 30,
2000, the 9.875% Senior Notes and the ROPES are guaranteed by six of our wholly
owned subsidiaries, IBC, ICAI, ICAM, ICLS, ICCMIC, and AMN (the "Guarantor
Subsidiaries"). As of June 30, 2000, the non-guarantor subsidiaries are SPB,
ICG and Imperial Credit Capital Trust I ("ICCTI"). Each of the guarantees is
full and unconditional and joint and several. The summarized consolidated
financial information below is presented in lieu of separate financial
statements and other related disclosures of the wholly-owned subsidiary
guarantors as we have determined that such information is not material to
investors. None of the subsidiary guarantors is restricted from making
distributions to our parent company.
CONSOLIDATING CONDENSED BALANCE SHEET
JUNE 30, 2000
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------- ------------- ------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
------
Cash....................................................... $ 1,176 $ 2,578 $ 122,710 $ (1,715) $ 124,749
Interest bearing deposits.................................. 25,522 1 78,526 -- 104,049
Investment in Federal Home Loan Bank stock................. -- -- 3,980 -- 3,980
Trading and available for sale securities.................. 58,682 39,185 133,294 -- 231,161
Loans and leases held for sale............................. 891 10,704 380,394 -- 391,989
Loans and leases held for investment, net.................. 64,924 17,415 1,287,074 (47,569) 1,321,844
Real property.............................................. -- 77,876 -- -- 77,876
Servicing rights........................................... -- 847 -- -- 847
Retained interest in loan and lease securitizations........ -- 12,099 -- -- 12,099
Investment in subsidiaries................................. 233,064 -- -- (233,064) --
Goodwill................................................... 12,920 4,158 18,046 -- 35,124
Other assets............................................... 16,340 19,307 66,680 (39,869) 62,458
Net assets of discontinued operations...................... 44,225 (6,905) -- -- 37,320
-------- -------- ---------- --------- ----------
Total assets......................................... $457,744 $177,265 $2,090,704 $(322,217) $2,403,496
======== ======== ========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits................................................... $ -- $ 18 $1,828,204 $ (1,715) $1,826,507
Borrowings from FHLB....................................... -- -- 30,000 -- 30,000
Other borrowings........................................... 9,343 62,539 45,000 (47,569) 69,313
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures
of the company ("ROPES").................................. 49,799 -- (1,494) -- 48,305
Senior Notes............................................... 176,945 -- -- -- 176,945
Minority interest in consolidated subsidiaries............. 103 4 -- 3,500 3,607
Goodwill................................................... -- 35,757 -- -- 35,757
Other liabilities.......................................... 56,077 6,643 24,735 (39,870) 47,585
-------- -------- ---------- --------- ----------
Total liabilities.................................... 292,267 104,961 1,926,445 (85,654) 2,238,019
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock............................................ -- 1,009 -- (1,009) --
Common stock............................................... 94,257 136,132 112,689 (248,821) 94,257
Retained earnings (deficit)................................ 63,735 (71,880) 51,910 19,970 63,735
Shares held in executive deferred compensation plan........ 7,043 7,043 -- (7,043) 7,043
Accumulated other comprehensive income (loss).............. 442 -- (340) 340 442
-------- -------- ---------- --------- ----------
Total shareholders' equity........................... 165,477 72,304 164,259 (236,563) 165,477
-------- -------- ---------- --------- ----------
Total liabilities and shareholders' equity........... $457,744 $177,265 $2,090,704 $(322,217) $2,403,496
======== ======== ========== ========= ==========
</TABLE>
12
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------- ------------- ------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
------
Cash.................................................... $ 11,110 $ 1,382 $ 34,852 $ (13,446) $ 33,898
Interest bearing deposits............................... 35,049 -- 213,133 -- 248,182
Investments in Federal Home Loan Bank stock............. -- -- 6,960 -- 6,960
Securities available for sale and trading............... 74,827 41,460 132,042 (13,150) 235,179
Loans held for sale..................................... 1,441 12,300 275,657 -- 289,398
Loans held for investment, net.......................... 55,721 17,105 1,211,862 (43,456) 1,241,232
Servicing rights........................................ -- 802 -- -- 802
Retained interest in loan and lease securitizations..... -- 10,220 -- -- 10,220
Investment in subsidiaries.............................. 255,024 -- -- (255,024) --
Goodwill................................................ 11,778 4,306 18,877 -- 34,961
Other assets............................................ 26,230 11,686 27,300 (1,925) 63,291
Net assets of discontinued operations................... 44,396 (6,904) -- -- 37,492
-------- -------- ---------- --------- ----------
Total assets.......................................... $515,576 $ 92,357 $1,920,683 $(327,001) $2,201,615
======== ======== ========== ========= ==========
LIABILITIES AND
---------------
SHAREHOLDERS' EQUITY
--------------------
Deposits................................................ $ -- $ 2,050 $1,626,154 $ (13,446) $1,614,758
Other borrowings........................................ 7,911 8,456 103,323 (45,381) 74,309
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
debentures of the company ("ROPES").................... 63,915 -- (2,165) -- 61,750
Senior notes............................................ 185,185 -- -- -- 185,185
Minority interest in consolidated subsidiaries.......... 103 2 155 2,424 2,684
Other liabilities....................................... 53,082 4,340 127 -- 57,549
-------- -------- ---------- --------- ----------
Total liabilities..................................... 310,196 14,848 1,727,594 (56,403) 1,996,235
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......................................... -- 14,150 -- (14,150) --
Common stock............................................ 97,220 118,386 113,142 (231,528) 97,220
Retained earnings (deficit)............................. 98,437 (64,640) 80,294 (15,654) 98,437
Shares held in deferred executive compensation plan..... 7,107 7,107 -- (7,107) 7,107
Accumulated other comprehensive income (loss)........... 2,616 2,506 (347) (2,159) 2,616
-------- -------- ---------- --------- ----------
Total shareholders' equity............................ 205,380 77,509 193,089 (270,598) 205,380
-------- -------- ---------- --------- ----------
Total liabilities and shareholders' equity............ $515,576 $ 92,357 $1,920,683 $(327,001) $2,201,615
======== ======== ========== ========= ==========
</TABLE>
13
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income........................................... $ 9,816 $ 5,199 $101,318 $ (2,799) $113,534
Interest expense.......................................... 14,281 1,705 54,474 (2,799) 67,661
-------- -------- -------- ------------ --------
Net interest (expense) income............................. (4,465) 3,494 46,844 -- 45,873
Provision for loan and lease losses....................... 1,000 7,065 79,110 -- 87,175
-------- -------- -------- ------------ --------
Net interest (expense) after provision for
loan and lease losses............................... (5,465) (3,571) (32,266) -- (41,302)
-------- -------- -------- ------------ --------
Gain on sale of loans and leases.......................... -- 481 (128) -- 353
Asset management fees..................................... -- 1,639 -- -- 1,639
Investment banking and brokerage fees..................... -- -- 14,808 -- 14,808
Loan servicing (expense) income........................... (69) 2,379 669 -- 2,979
Gain on sale of securities................................ 11,814 -- 1,117 -- 12,931
Mark to market on securities and loans held for sale...... (1,826) (627) (1,281) -- (3,734)
Rental income............................................. -- 2,711 -- -- 2,711
Other (loss) income....................................... (93) 1,460 5,714 -- 7,081
-------- -------- -------- ------------ --------
Total fee and other income........................... 9,826 8,043 20,899 -- 38,768
-------- -------- -------- ------------ --------
Personnel and commission expense.......................... 2,125 4,278 21,998 -- 28,401
Amortization of servicing rights.......................... -- 278 -- -- 278
Occupancy expense......................................... 250 383 2,265 -- 2,898
Net expense of other real estate owned.................... 183 678 164 -- 1,025
Professional services..................................... 604 1,188 1,350 -- 3,142
Telephone and other communications........................ 49 182 1,419 -- 1,650
Amortization of goodwill, net............................. 425 (1,914) 830 -- (659)
General and administrative (income) expense............... (4) 3,271 9,364 -- 12,631
-------- -------- -------- ------------ --------
Noninterest expenses................................. 3,632 8,344 37,390 -- 49,366
Acquisition costs......................................... -- 9,397 -- -- 9,397
-------- -------- -------- ------------ --------
Total noninterest expenses........................... 3,632 17,741 37,390 -- 58,763
-------- -------- -------- ------------ --------
Income (loss) before income taxes, minority interest,
and equity in undistributed income of subsidiaries...... 729 (13,269) (48,757) -- (61,297)
Income taxes.............................................. 1,383 (6,094) (20,703) -- (25,414)
Minority interest in income (loss) of Consolidated
subsidiaries............................................ -- 65 (9) 856 912
Extraordinary item-gain on early extinguishment of debt,
net of income taxes..................................... 2,093 -- -- -- 2,093
Equity in undistributed (loss) income of consolidated
subsidiaries............................................ (36,141) -- -- 36,141 --
-------- -------- -------- ------------ --------
Net (loss) income.................................... $(34,702) $ (7,240) $(28,045) $ 35,285 $(34,702)
======== ======== ======== ============ ========
</TABLE>
14
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
---- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income............................................. $ 9,469 $ 6,088 $ 91,900 $ (2,144) $ 105,313
Interest expense............................................ 15,282 1,018 45,538 (2,144) 59,694
--------- -------- --------- -------- ---------
Net interest (expense) income............................... (5,813) 5,070 46,362 -- 45,619
Provision for loan and lease losses......................... 250 375 23,830 -- 24,455
--------- -------- --------- -------- ---------
Net interest (expense) income after provision for
loan and lease losses................................... (6,063) 4,695 22,532 -- 21,164
--------- -------- --------- -------- ---------
Gain on sale of loans and leases............................ 19 2,106 1,636 -- 3,761
Asset management fees....................................... -- 6,009 -- -- 6,009
Investment banking and brokerage fees....................... -- -- 11,910 -- 11,910
Loan servicing (expense) income............................. (57) 1,868 1,628 -- 3,439
Gain (loss) on sale of securities........................... 1,343 137 -- (215) 1,265
Equity in net loss of FMC................................... (53) -- -- -- (53)
Mark to market on securities and loans held for sale........ 87 (1,942) (23,400) -- (25,255)
Dividends received from subsidiaries........................ 2,007 -- -- (2,007) --
Other income................................................ 1,230 989 3,078 -- 5,297
--------- -------- --------- -------- ---------
Total fee and other income (loss)....................... 4,576 9,167 (5,148) (2,222) 6,373
--------- -------- --------- -------- ---------
Personnel and commission expense............................ 2,161 7,259 20,844 -- 30,264
Amortization of servicing rights............................ -- 74 3,964 -- 4,038
Occupancy expense........................................... 303 456 1,940 -- 2,699
Net (income) expense of other real estate owned............. (27) 653 272 -- 898
Professional services....................................... 2,024 1,263 2,640 -- 5,927
Telephone and other communications.......................... 61 333 1,538 -- 1,932
Amortization of goodwill.................................... -- 727 825 -- 1,552
General and administrative (income) expense................. (209) 2,233 11,359 -- 13,383
--------- -------- --------- -------- ---------
Noninterest expenses.................................... 4,313 12,998 43,382 -- 60,693
--------- -------- --------- -------- ---------
(Loss) income before income taxes, minority interest, and
equity in undistributed income of subsidiaries............ (5,800) 864 (25,998) (2,222) (33,156)
Income taxes................................................ (3,929) 274 (10,242) (87) (13,984)
Minority interest in income (loss) of
consolidated subsidiaries................................. 81 50 (18) (146) (33)
--------- -------- --------- -------- ---------
(Loss) income before equity in undistributed
income of subsidiaries.................................... (1,952) 540 (15,738) (1,989) (19,139)
Equity in undistributed (loss) income of consolidated
subsidiaries.............................................. (17,187) -- -- 17,187 --
--------- -------- --------- -------- ---------
Net (loss) income....................................... $ (19,139) $ 540 $ (15,738) $ 15,198 $ (19,139)
========= ======== ========= ======== =========
</TABLE>
15
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000
<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......... $ (28,932) $ (5,395) $ (100,616) $ 16,488 $ (118,455)
--------- -------- ---------- --------- ----------
Cash flows from investing activities:
Net decrease in interest bearing deposits............... 9,527 1,116 134,607 -- 145,250
Purchase of securities available for sale............... (1,953) -- (50,000) -- (51,953)
Sale of securities available for sale................... -- 939 17,472 2,499 20,910
Net cash received from ICCMIC acquisition............... -- 11,524 -- -- 11,524
Net change in loans held for investment................. (11,770) 1,632 (158,981) 4,113 (165,006)
Proceeds from sale of AFG stock......................... 21,610 -- -- -- 21,610
Net change in investment in subsidiaries................ 21,613 -- -- (21,613) --
Other, net.............................................. (415) 316 5,359 -- 5,260
--------- -------- ---------- --------- ----------
Net cash provided by (used in) investing activities......... 38,612 15,527 (51,543) (15,001) (12,405)
--------- -------- ---------- --------- ----------
Cash flows from financing activities:
Net (decrease) increase in deposits..................... -- (2,032) 202,050 11,731 211,749
Advances from FHLB...................................... -- -- 30,000 -- 30,000
Net change in other borrowings......................... 1,432 (6,556) 8,075 (2,188) 763
Repurchase and retirement of Senior Notes............... (6,371) -- -- -- (6,371)
Repurchase and retirement of company obligated
mandatorily redeemable preferred securities of
subsidiary trust holding solelydebentures of the
company ("ROPES")..................................... (12,000) -- -- -- (12,000)
Capital contributions................................... 350 (350) 47 (47)
Other, net.............................................. (3,025) 2 (155) 748 (2,430)
--------- -------- ---------- --------- ----------
Net cash (used in) provided by financing activities......... (19,614) (8,936) 240,017 10,244 221,711
--------- -------- ---------- --------- ----------
Net change in cash...................................... (9,934) 1,196 87,858 11,731 90,851
Cash at beginning of period............................. 11,110 1,382 34,852 (13,446) 33,898
--------- -------- ---------- --------- ----------
Cash at end of period................................... $ 1,176 $ 2,578 $ 122,710 $ (1,715) $ 124,749
========= ======== ========== ========= ==========
</TABLE>
16
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Non
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating activities.... $ 61,713 $(16,977) $ 94,929 $ 4,675 $ 144,340
-------- -------- --------- -------- ---------
Cash flows from investing activities:
Net (increase) decrease in interest bearing
deposits........................................ (9,473) 423 (44,700) 483 (53,267)
Sales of securities available for sale............ 4,875 -- -- -- 4,875
Purchase of securities available for sale......... (1,000) -- (13,222) 1,000 (13,222)
Proceeds from sale of IMH stock................... -- 7,686 -- -- 7,686
Proceeds from sale of ICCMIC stock................ -- 5,437 -- -- 5,437
Net change in loans held for investment........... (9,679) 3,962 63,591 389 58,263
Net change in investment in subsidiaries.......... (2,031) -- -- 2,031 --
Other, net........................................ (484) 3,673 (1,866) (363) 960
-------- -------- --------- -------- ---------
Net cash (used in) provided by investing activities..... (17,792) 21,181 3,803 3,540 10,732
-------- -------- --------- -------- ---------
Cash flows from financing activities:
Net (decrease) increase in deposits............... -- -- (305,765) 1,007 (304,758)
Repayments of advances from Federal Home
Loan Bank........................................ -- -- (20,000) -- (20,000)
Advances from the Federal Home Loan Bank.......... -- -- 30,000 -- 30,000
Net change in other borrowings.................... (19,261) (7,065) (66,692) (8,032) (101,050)
Proceeds from issuance of Preferred Stock......... 30,000 -- -- -- 30,000
Repurchase and retirement of common stock......... (29,460) -- -- -- (29,460)
Other, net........................................ 2,654 1,291 (3,787) (184) (26)
-------- -------- --------- -------- ---------
Net cash used in financing activities................... (16,067) (5,774) (366,244) (7,209) (395,294)
-------- -------- --------- -------- ---------
Net change in cash................................ 27,854 (1,570) (267,512) 1,006 (240,222)
Cash at beginning of period....................... 3,224 725 296,259 (2,436) 297,772
-------- -------- --------- -------- ---------
Cash at end of period............................. $ 31,078 $ (845) $ 28,747 $ (1,430) $ 57,550
======== ======== ========= ======== =========
</TABLE>
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
We are a diversified commercial lending, financial services, and investment
banking holding company that was incorporated in 1991 in the State of
California. Our headquarters are located in Torrance, California. Our business
activities are primarily conducted through the following wholly owned
subsidiaries: Southern Pacific Bank ("SPB"), Imperial Business Credit Inc.
("IBC"), and Imperial Credit Lender Services, Inc. ("ICLS"). Imperial Capital
Group, LLC ("ICG") is a majority owned consolidated subsidiary which is
approximately 63% owned by us and approximately 37% owned by ICG's management.
In addition to the wholly-owned consolidated subsidiaries listed above, on March
28, 2000, we acquired all of the outstanding common shares of Imperial Credit
Commercial Mortgage Investment Corp. ("ICCMIC") making it a consolidated
subsidiary of our company. Prior to the acquisition date we owned 9% of ICCMIC's
outstanding common shares. Our parent company, and our subsidiaries and
affiliates offer a wide variety of deposit and commercial loan products, asset
management, investment banking and brokerage, and loan documentation and closing
services. Our core businesses originate loans and leases funded primarily by
FDIC insured deposits.
Overview of Consolidated Operations
At June 30, 2000, our total assets were $2.4 billion as compared to $2.2
billion at December 31, 1999. Our total net loans increased $183.2 million to
$1.7 billion at June 30, 2000 as compared to $1.5 billion at December 31, 1999.
The loan originations from Income Property Lending Division ("IPL") were $61.6
million, loan originations from our entertainment lending division at SPB, the
Lewis Horwitz Organization ("LHO"), were $37.3 million, and lease originations
from IBC were $7.1 million for the quarter ended June 30, 2000 as compared to
$56.1 million, none, and $30.2 million for the same period last year. Fundings
of new commitments at Coast Business Credit ("CBC") were $96.0 million for the
quarter ended June 30, 2000 as compared to $29.4 million for the same period
last year. Originations at IPL, LHO, IBC, and fundings of new commitments at CBC
for the six months ended June 30, 2000 were $127.5 million, $48.0 million, $31.0
million, and $176.7 million, respectively.
Our borrowings and long term debt decreased by $26.7 million for the six
months ended June 30, 2000 as compared to December 31, 1999 due to the
repurchase of $21.7 million of our Senior Notes and ROPES and a net decrease in
other borrowings of $5.0 million. Our deposits at SPB increased $211.7 million
or 13.1% during the six months ended June 30, 2000, which provided the liquidity
for the growth in our loan portfolios.
Our non-performing assets and non-accrual loans and leases increased to $105.5
million and $101.1 million at June 30, 2000 from $64.4 million and $59.4 million
at December 31, 1999, respectively. The increase in non-performing assets and
non-accrual loans occurred primarily in the CBC, Loan Participation and
Investment Group ("LPIG") and Imperial Warehouse Finance ("IWF") portfolios. At
June 30, 2000, the allowance for loan and lease losses was $50.1 million as
compared to $31.8 million at December 31, 1999. The ratio of the allowance for
loan and lease losses to total loans held for investment increased to 3.65% at
June 30, 2000 as compared to 2.50% at December 31, 1999. The ratio of the
allowance for loan and lease losses to non-accrual loans and leases decreased to
49.61% at June 30, 2000 as compared to 53.64% at December 31, 1999. Excluding
the non-accrual loans acquired in connection with the LHO acquisition, the
coverage ratio decreased to 55.21% at June 30, 2000 as compared to 62.12% at
December 31, 1999.
18
<PAGE>
Consolidated Results of Operations
We reported a net loss for the quarter ended June 30, 2000 of $18.8 million or
$0.58 diluted net loss per share including an extraordinary gain on the early
extinguishment of debt of $1.1 million or $0.03 diluted net income per share.
For the same period last year, we reported a net loss of $25.9 million or $0.74
diluted net loss per share. The net loss for the six months ended June 30, 2000
was $34.7 million or $1.05 diluted net loss per share including an extraordinary
gain on the early extinguishment of debt of $2.1 million or $0.06 diluted net
income per share. For the same period last year, we reported a net loss of $19.1
million or $0.53 diluted net loss per share.
The results of operations for six months ended June 30, 2000 include $9.4
million of severance and other costs related to the Imperial Credit Commercial
Mortgage Investment Corp. ("ICCMIC") acquisition. Excluding these costs, the net
loss for the six months ended June 30, 2000 was $29.1 million or $0.88 diluted
net loss per share.
The operating results for the quarter and six months ended June 30, 2000
include $12.4 million, or $0.23 diluted net income per share from the sale of
our interest in the Auction Finance Group.
The net loss for the quarter and six months ended June 30, 2000, was primarily
due to increased provision for loan and lease losses related to the increase in
non-performing loans and net charge-offs in the CBC, LPIG and IWF portfolios.
The increase in provision for loan and lease losses was partially offset by an
increase in net interest income, gains on sale of securities, and investment
banking and brokerage revenues as well as reduced noninterest expenses.
Net Interest Income
During the quarter ended June 30, 2000, our interest income increased 24.3% to
$60.6 million as compared to $48.7 million for the same period last year. For
the six months ended June 30, 2000, interest income increased 7.8% to $113.5
million as compared to $105.3 million for the same period last year. Interest
income increased primarily as a result of increases in the base rate and in
average loans outstanding at CBC and LHO, partially offset by an increase in
non-accrual loans. The average yield on loans at SPB increased to 11.59% during
the quarter ended June 30, 2000 as compared to 10.60% in the same period last
year. Our total net outstanding loans increased to $1.7 billion at June 30, 2000
as compared to $1.5 billion at June 30, 1999.
Interest expense was $35.4 million for the quarter ended June 30, 2000 as
compared to $28.4 million for the same period last year. The increase in
interest expense primarily resulted from an increase in the average outstanding
balance of the FDIC insured deposits of SPB. SPB's deposits increased to $1.8
billion at June 30, 2000 as compared to $1.4 billion at June 30, 1999. The
average cost of deposits at SPB increased to 6.16% during the quarter ended June
30, 2000 as compared to 5.41% in the same period last year. The increase in the
average cost of deposits at SPB primarily occurred as a result of general
increases in the interest rate environment during the year. Interest on other
borrowings also increased as a result of the ICCMIC acquisition, which was
completed on March 28, 2000. As a result of the acquisition, we assumed $60.6
million of mortgage loan debt secured by $78.4 million of income producing
commercial property. The interest expense on the mortgage loan debt was $796,000
as compared to net rental income on the commercial property of $1.1 million for
the three months ended June 30, 2000. The increases in deposit and other
interest expense were partially offset by a decrease in interest on long term
debt. The decrease in interest on long term debt resulted from the repurchase of
$64.8 million of long term debt during the previous twelve months. Interest
expense for the six months ended June 30, 2000, increased to $67.7 million as
compared to $59.7 million for the same period last year for the reasons
discussed above.
Net interest income for the quarter ended June 30, 2000 increased 23.6% to
$25.2 million as compared to $20.4 million for the same period last year. Net
interest income increased for the quarter ended June 30, 2000 as a result of the
growth in our loan portfolios, partially offset by increased deposit and other
borrowing costs. For the six months ended June 30, 2000, net interest income
remained relatively unchanged at $45.9 million as compared to $45.6 million for
the same period last year.
19
<PAGE>
Provision for Loan and Lease Losses
The provision for loan and lease losses for the quarter ended June 30, 2000
was $63.2 million as compared to $22.3 million for the same period last year.
The provision for loan and lease losses for the six months ended June 30, 2000
was $87.2 million as compared to $24.5 million for the same period last year.
The higher provision for loan and lease losses as compared to the same periods
last year primarily resulted from the preliminary results of SPB's annual joint
examination by the California Department of Financial Institutions and the
Federal Deposit Insurance Corporation. The implementation of regulatory guidance
related to the liquidation values of intangible assets and future viability of
certain CBC customers has resulted in an increase in non-accrual loans and net
charge-offs. Additionally, the higher provision for loan and lease losses was
impacted by increases in non-performing loans and net charge-offs at LPIG and
IWF. Increases in non-performing loans and net charge-offs at LPIG relate to an
increase in non-performing nationally syndicated bank debt loans.
Fee and Other Income
Our gain on sale of loans and leases decreased to $220,000 for the quarter
ended June 30, 2000 as compared to $801,000 for the same period last year. The
decrease was primarily due to the retention of a higher percentage of
multifamily real estate loans originated by IPL in our loan portfolio.
Asset management fees decreased to $777,000 for the quarter ended June 30,
2000 as compared to $3.0 million for the same period last year. Asset management
fees decreased to $1.6 million for the six months ended June 30, 2000 as
compared to $6.0 million for the same period last year. The decrease in both
periods was primarily due to the termination of the ICCMIC asset management
agreement and decreased average outstanding assets under management.
Gain on sale of securities increased to $13.5 million for the quarter ended
June 30, 2000 as compared to $786,000 for the same period last year. Gain on
sale of securities increased to $12.9 million for the six months ended June 30,
2000 as compared to $1.3 million for the same period last year. The increase in
both periods was primarily attributable to the sale of our minority interest in
the Auction Finance Group ("AFG"), a majority owner of the Canadian Auto Auction
Group ("CAAG"). The sale resulted in gross pre-tax cash proceeds to ICII of
approximately $23.3 million, and a pre-tax gain on sale of securities totaling
$12.4 million. Gain on sale of securities for the quarter ended June 30, 2000
also includes a $1.1 million gain on sale of securities from the exercise of
warrants in the equity securities of a borrower and the subsequent sale of its
stock. CBC obtains warrants from its customers in the ordinary course of its
asset-based lending business.
For the quarter ended June 30, 2000 investment banking and brokerage fees at
Imperial Capital Group ("ICG") increased 27.6% to $7.2 million from $5.6 million
for the same period last year. For the six months ended June 30, 2000,
investment banking and brokerage fees increased 24.3% to $14.8 million as
compared to $11.9 million for the same period last year. The increase in
investment banking and brokerage revenues for the quarter and six months ended
June 30, 2000 primarily resulted from the receipt of investment banking fees
related to the AFG transaction. ICG acted as the investment banker for AFG and
received gross compensation of approximately $4.0 million from the sale of AFG
and CAAG.
For the quarter ended June 30, 2000, net mark-to-market losses on loans and
securities held for sale were $2.0 million as compared to mark-to-market losses
of $21.9 million for the same period last year. For the six months ended June
30, 2000, net mark-to-market losses on loans and securities held for sale were
$3.7 million as compared to mark-to-market losses of $25.3 million for the same
period last year. The mark-to-market losses for the quarter and six months ended
June 30, 2000 were primarily related to a $1.2 million decline in the value of
our investment in Pacifica Partners I, L.P., and a $1.0 million decline in the
value of the retained interests in lease securitizations at IBC. We wrote down
these investments as a result of increased interest spreads, decreased estimated
cash flows, and increased loss assumptions. In addition to the write-downs of
these securities, we recognized a $420,000 mark-to-market loss on the value of
$73.4 million of syndicated bank loans funded through total return swaps, and a
$612,000 mark-to-market gain on trading securities. The mark-to-market
adjustments in the quarter ended June 30, 1999 were primarily related to write-
downs in sub-prime auto loans at SPB of $21.7 million.
The quarter and six months ended June 30, 2000 include $2.6 million and $2.7
million of rental income from the real property obtained as a result of our
acquisition of ICCMIC on March 28, 2000, respectively. There was no rental
income in the same periods last year.
20
<PAGE>
Fee and other income for the prior year quarter ended June 30, 1999 includes
$2.0 million of equity in the net loss of Franchise Mortgage Acceptance Company
("FMC") as a result of our former equity interest in FMC, which was sold in the
fourth quarter of 1999. There was no equity pick up from FMC in the quarter
ended June 30, 2000.
Noninterest Expense
Total noninterest expenses during the quarter ended June 30, 2000 decreased
20.1% to $23.9 million as compared to $29.9 million for the same period last
year. Total noninterest expenses during the six months ended June 30, 2000
decreased 18.7% to $49.4 million as compared to $60.7 million for the same
period last year. During the quarter ended June 30, 2000, professional fees
decreased 57.0% to $1.5 million as compared to $3.6 million for the same period
last year. Professional fees decreased 47.0% to $3.1 million for the six months
ended June 30, 2000 as compared to $5.9 million for the same period last year.
The decrease in professional fees was attributed to lower consulting and
litigation-related expenses. The decrease in expenses for the quarter and six
months ended June 30, 2000 as compared to the same periods last year primarily
resulted from the streamlining of operations and closure of non-core businesses.
Our total personnel expense decreased $472,000 to $13.7 million for the
quarter ended June 30, 2000 as compared to $14.2 million for the same period
last year. The decrease in personnel expense was primarily related to our exit
from non-core businesses and the related reduction of our full time equivalent
("FTE") employees to 566 at June 30, 2000 from 584 at June 30, 1999.
Our amortization of servicing rights was $142,000 for the quarter ended June
30, 2000 as compared to $1.3 million for the same period last year. The decrease
was primarily due to our decision to exit the third party multifamily and
commercial mortgage loan servicing operations.
Our telephone and other communications, and general and administrative
expenses decreased 20.4% to $6.3 million for the quarter ended June 30, 2000 as
compared to $7.9 million for the same period last year. The overall decrease was
primarily attributable to the exit from non-core businesses and our related
focus on increasing operating efficiencies at our core business operations.
CORE BUSINESS LINES
The following table reflects average loans and leases outstanding and the
average yields earned on our core business units for the quarter and six months
ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
For the quarter ended June 30, For the six month period ended June 30,
------------------------------ ---------------------------------------
(Dollars in thousands) (Dollars in thousands)
Average Loans and Leases Average Loans and Leases
Outstanding Average Yield Outstanding Average Yield
----------- ------------- ----------- -------------
Business Line 2000 1999 2000 1999 2000 1999 2000 1999
------------- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CBC $850,755 $620,933 14.04% 13.36% $794,505 $616,441 13.47% 13.57%
IWF 77,615 138,166 9.80 7.98% 79,371 146,079 7.53 8.11%
LPIG 191,394 239,612 7.55 7.79% 205,233 234,562 7.61 7.82%
LHO 60,088 -- 12.03 -- 39,281 -- 12.62 --
IBC 1,808 8,850 13.01 11.40% 2,969 8,635 10.00 11.00%
IPL 341,191 202,970 9.50 8.80% 314,917 189,674 9.41 8.75%
</TABLE>
Five of our core businesses are conducted though our largest subsidiary SPB.
SPB is a $2.1 billion industrial bank that includes: CBC, an asset-based lender;
IWF, which provides warehouse loans to third party residential mortgage loan
originators; LPIG, an investor in syndicated bank loan participations; LHO, a
commercial finance lender that provides financing for independent motion picture
and television production; and IPL, a multifamily and commercial real estate
lending business. The FDIC insured deposits of SPB primarily fund each of these
businesses.
Coast Business Credit
CBC's net revenues were ($11.3) million for the quarter and ($7.1) million for
the six months ended June 30, 2000 as compared to ($130,000) and $11.1 million
for the same periods last year, respectively. CBC's net loss was $11.2 million
for the quarter and $12.6 million for the six months ended June 30, 2000 as
compared to a net loss of $3.4 million and net income of $932,000 for the same
periods last year, respectively.
21
<PAGE>
The decrease in CBC's net revenues and net income for the quarter and six
months ended June 30, 2000 was primarily attributable to an increase in the
provision for loan losses, partially offset by an increase in net interest
income. Net revenues include a provision for loan losses of $33.4 million for
the quarter and $45.3 million for the six months ended June 30, 2000 as compared
to $14.7 million and $18.3 million for the same periods last year, respectively.
See "Consolidated Results of Operations - Provision for Loan and Lease Losses."
CBC increased its average outstanding loan balance for the quarter and six
months ended June 30, 2000 to $850.8 million and $794.5 million as compared to
$620.9 million and $616.4 million for the same periods last year, respectively.
As a result of the increase in CBC's average loans outstanding, CBC's net
interest income increased $4.8 million to $17.9 million during the quarter ended
June 30, 2000 from $13.0 million for the same period last year. Net interest
income increased to $32.1 million during the six months ended June 30, 2000 from
$25.9 million for the same period last year. The yield on CBC's loans for the
quarter ended June 30, 2000 increased to 14.04% as compared to 13.36% for the
same period last year primarily resulting from an increase in the prime rate and
increased loan fees. The yield on CBC's loans for the six months ended June 30,
2000 decreased to 13.47% as compared to 13.57% for the same period last year
primarily resulting from decreased loan prepayment fees and an increase in CBC's
non-accrual loans.
CBC earned other income totaling $4.3 million during the quarter ended June
30, 2000 as compared to $1.6 million for the same period last year. CBC earned
other income totaling $6.0 million during the six months ended June 30, 2000 as
compared to $3.6 million for the same period last year. Other income for the
quarter and six months ended June 30, 2000 includes $1.1 million in gain on sale
of securities. CBC recorded the $1.1 million gain on sale of securities from the
exercise of warrants in the equity securities of a borrower and the subsequent
sale of its stock. CBC obtains warrants from its customers in the ordinary
course of its asset-based lending business. The remaining balance of other
income primarily consists of audit and other fees charged by CBC to its
customers.
CBC's total expenses were $7.4 million for the quarter ended June 30, 2000 as
compared to $4.8 million for the same period last year. CBC's total expenses
were $13.9 million for the six months ended June 30, 2000 as compared to $9.8
million for the same period last year. Total expenses increased for the quarter
and six months ended June 30, 2000 as compared to the same period last year
primarily due to higher personnel, occupancy and telephone and other
communications, and general and administrative expenses associated with CBC's
loan portfolio growth and geographic expansion into several major metropolitan
areas of the United States.
Fundings of new commitments at CBC were $96.0 million for the quarter ended
June 30, 2000 as compared to $29.4 million for the same period last year. For
the six months ended June 30, 2000, CBC's fundings of new commitments were
$176.7 million as compared to $113.5 million for the same period last year.
At June 30, 2000, CBC's non-accrual loans were $40.3 million as compared $22.2
million at December 31, 1999. At June 30, 2000, no CBC loans were 90 days
delinquent and accruing interest. CBC incurred net charge-offs of $41.9 million
for the quarter ended June 30, 2000 as compared to $4.6 million for the prior
quarter ended March 31, 2000 and $13.0 million for the same period last year.
For the six months ended June 30, 2000, net charge-offs were $46.4 million as
compared to $13.7 million during the same period last year. Non-performing loans
at CBC are collateralized by accounts receivable, inventory and other assets
including FF&E and real estate. See "Consolidated Results of Operations -
Provision for Loan and Lease Losses."
CBC's FTE increased to 152 FTE at June 30, 2000 as compared to 135 FTE at June
30, 1999.
Imperial Warehouse Finance
Imperial Warehouse Finance's, ("IWF") net revenues were ($6.3) million for the
quarter and ($8.8) million for the six months ended June 30, 2000 as compared to
($392,000) and $1.0 million for the same periods last year, respectively. IWF's
net loss was $4.3 million for the quarter and $6.4 million for the six months
ended June 30, 2000 as compared to a net loss of $628,000 and a net loss of
$52,000 for the same periods last year, respectively.
The increase in IWF's negative revenues and net loss for the quarter and six
months ended June 30, 2000 was primarily associated with the increased provision
for loan losses coupled with a decrease in net interest income. Net revenues and
net income were negatively affected by an increased provision for loan losses of
$7.1 million for the quarter and $9.4 million for the six months ended June 30,
2000 as compared to $1.9 million and $2.0 million for the same periods last
year, respectively. The increase in the provision for loan losses resulted from
a higher level of net charge-offs and increased non-accrual loans at June 30,
2000 as compared to the same period last year.
22
<PAGE>
The decrease in IWF's net revenues and net income for the quarter and six
months ended June 30, 2000 was also attributable to the decrease in IWF's
average outstanding loan balance and corresponding net interest income. IWF's
average loans outstanding for the quarter and six months ended June 30, 2000
decreased to $77.6 million and $79.4 million as compared to $138.2 million and
$146.1 million for the same periods last year, respectively.
As a result of the decrease in IWF's average loans outstanding, IWF's net
interest income decreased $330,000 to $722,000 during the quarter ended June 30,
2000 from $1.1 million for the same period last year. Net interest income
decreased to $461,000 during the six months ended June 30, 2000 from $2.1
million for the same period last year. The yield on IWF's loans for the quarter
ended June 30, 2000 increased to 9.80% as compared to 7.98% for the same period
last year. The yield on IWF's loans for the six months ended June 30, 1999
decreased to 7.53% as compared to 8.11% for the same period last year. The
increase in yield during the quarter ended June 30, 2000 was primarily due to an
increase in the prime rate of interest over the preceding twelve months. The
decrease in yield during the six months ended June 2000 was primarily due to an
increase in the balance of non-accrual loans as a percentage of IWF's total
outstanding loans.
IWF earned other income totaling $107,000 during the quarter and $187,000 for
the six months ended June 30, 2000 as compared to $493,000 and $969,000 for the
same periods last year, respectively. IWF's other income primarily consists of
loan transaction fees.
IWF's total expenses were $969,000 for the quarter ended June 30, 2000 as
compared to $552,000 for the same period last year. IWF's total expenses were
$1.9 million for the six months ended June 30, 2000 as compared to $1.1 million
for the same period last year. Total expenses increased for the quarter and six
months ended June 30, 2000 as compared to the same periods last year primarily
due to higher personnel, occupancy and telephone and other communications, and
general and administrative expenses associated with IWF's relocation to
Torrance, California from its former headquarters in Voorhees, New Jersey.
Fundings of commitments at IWF were $24.0 million for the quarter ended June
30, 2000 as compared to $5.0 million for the same period last year. For the six
months ended June 30, 2000, IWF's fundings of commitments were $58.8 million as
compared to $25.0 million for the same period last year.
At June 30, 2000, IWF's non-accrual loans were $13.7 million as compared to
$7.8 million at December 31, 1999. At June 30, 2000, no IWF loans were 90 days
delinquent and accruing interest. IWF incurred net charge-offs of $5.1 million
for the quarter ended June 30, 2000 as compared $715,000 for the same period
last year. For the six months ended June 30, 2000, net charge-offs were $6.5
million as compared to $715,000 during the same period last year.
During the quarter ended June 30, 2000, we charged off $4.4 million as a
result of alleged fraud relating to one IWF customer. As of the end of June, IWF
had advanced approximately $9.5 million to Island Mortgage Network ("Island")
under its mortgage loan warehouse program. Subsequent to advancing funds in late
June on several individual mortgage loans originated by Island, IWF was unable
to obtain valid collateral relating to approximately $4.4 million of the total
advance on this warehouse line. IWF became aware on June 30, 2000 that New York
state banking regulators suspended Island's license. Island is a subsidiary of
AppOnline.com. AppOnline.com is reported to have had an estimated $150 million
in open mortgage loans on June 30 when New York state banking regulators
suspended the license of its lending arm, Island. On July 19, 2000,
AppOnline.com Inc. filed for Chapter 11 bankruptcy protection. We, along with
other lenders, moved for appointment of a trustee, who was appointed recently.
We are seeking recovery by all means possible, including legal action and
insurance claims.
IWF's FTE increased to 17 FTE at June 30, 2000 as compared to 16 FTE at June
30, 1999.
Loan Participation and Investment Group
LPIG's net revenues were ($13.0) million for the quarter and ($21.3) million
for the six months ended June 30, 2000 as compared to $889,000 and $3.9 million
for the same periods last year, respectively. LPIG's net loss was $8.0 million
for the quarter and $13.2 million for the six months ended June 30, 2000 as
compared to net income of $41,000 and $1.9 million for the same periods last
year, respectively.
23
<PAGE>
The decrease in LPIG's net revenues and increase in net loss for the quarter
ended June 30, 2000 was primarily associated with an increased provision for
loan losses. The decrease in LPIG's net revenues and net income for the six
months ended June 30, 2000 was primarily associated with the increased provision
for loan losses, partially offset by an increase in net interest income. Net
revenues include a provision for loan losses of $14.6 million for the quarter
and $23.8 million for the six months ended June 30, 2000 as compared to $2.2
million and $2.2 million for the same periods last year, respectively. See
"Consolidated Results of Operations - Provision for Loan and Lease Losses."
LPIG's average loans outstanding decreased for the quarter and six months
ended June 30, 2000 to $191.4 million and $205.2 million as compared to $239.6
million and $234.6 million for the same periods last year, respectively.
As a result of the decrease in LPIG's average loans outstanding and increase
in non-accrual loans, LPIG's net interest income decreased $924,000 to $1.5
million during the quarter ended June 30, 2000 from $2.4 million for the same
period last year. Net interest income decreased to $3.0 million during the six
months ended June 30, 2000 from $4.3 million for the same period last year. The
yield on LPIG's loans for the quarter ended June 30, 2000 decreased to 7.55% as
compared to 7.79% for the same period last year. The yield on LPIG's loans for
the six months ended June 30, 2000 decreased to 7.61% as compared to 7.82% for
the same period last year. The decrease in both periods primarily resulted from
an increase in non-accrual loans and decreased loan fees.
LPIG earned other income totaling $56,000 during the quarter ended June 30,
2000 as compared to $698,000 for the same period last year. LPIG incurred a net
other loss totaling $495,000 during the six months ended June 30, 2000 as
compared to other income of $1.8 million for the same period last year. The
decrease in other income for both periods was the result of increased mark-to-
market losses on nationally syndicated bank loans funded through total return
swaps and reduced fee income.
LPIG's total expenses were $326,000 for the quarter ended June 30, 2000 as
compared to $354,000 for the same period last year. LPIG's total expenses were
$706,000 for the six months ended June 30, 2000 as compared to $680,000 for the
same period last year. Total expenses increased for the six months ended June
30, 2000 as compared to the same period last year primarily due to increased
occupancy and professional services expenses.
Fundings of existing commitments at LPIG were $22.3 million for the quarter
ended June 30, 2000 as compared to $50.1 million for the same period last year.
For the six months ended June 30, 2000, LPIG's fundings of existing commitments
were $54.6 million as compared to $99.4 million for the same period last year.
LPIG's non-accrual loans were $18.8 million at June 30, 2000. There were no
non-accrual LPIG loans at December 31, 1999. At June 30, 2000, no LPIG loans
were 90 days delinquent and accruing interest. LPIG incurred $14.1 million of
net charge-offs for the quarter ended June 30, 2000 as compared to none for the
same period last year. For the six months ended June 30, 2000, net charge-offs
were $14.4 million as compared to none during the same period last year. The
increase in LPIG's non-accrual loans and net charge-offs was attributable to an
increase in non-performing syndicated bank debt participations. See
"Consolidated Results of Operations - Provision for Loan and Lease Losses."
We are not originating any new commitments for LPIG at this time since 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, LHO's, IWF's, and IPL's
businesses. As such, we anticipate that the current outstanding balance of
LPIG's loans will decrease over time as this portfolio runs-off.
LPIG's FTE was unchanged with 4 FTE at June 30, 2000 and June 30, 1999.
The Lewis Horwitz Organization
LHO was acquired by our company in October of 1999 and did not have any
comparable net revenues, net income, or expenses for prior periods. LHO's net
revenues were $574,000 for the quarter and $1.5 million for the six months ended
June 30, 2000. LHO's net loss was $277,000 for the quarter and $348,000 for the
six months ended June 30, 2000. Net revenues include a provision for loan
losses of $655,000 for the quarter and $871,000 for the six months ended June
30, 2000.
LHO's net interest income was $1.2 million for the quarter and $2.3 million
for the six months ended June 30, 2000. LHO's average loans outstanding and
average yields for the quarter ended June 30, 2000 were $60.1 million and
12.03%. LHO's average loans outstanding and average yields for the six months
ended June 30, 2000 were $39.3 million and 12.62%.
24
<PAGE>
LHO's total expenses were $1.0 million for the quarter and $2.1 million for
the six months ended June 30, 2000.
Fundings of commitments at LHO were $37.3 million for the quarter and $48.0
million for the six months ended June 30, 2000.
At June 30, 2000, LHO's non-accrual loans were $10.3 million as compared to
$8.2 million at December 31, 1999. LHO has not incurred any charge-offs of non-
accrual loans since the acquisition in October of 1999. Non-performing loans at
LHO are supported by the existing and estimated value of all future distribution
rights of the film or television production, and are carried at their estimated
realizable values. All of LHO's non-accrual loans were acquired from Imperial
Bank under the terms of the LHO purchase agreement.
LHO had 16 FTE at June 30, 2000.
Imperial Business Credit
During the second quarter of 2000, we decided to cease originations of all
small ticket leases by IBC. During April 2000, we sold or closed IBC's
remaining origination offices. Going forward, IBC's operations will primarily
consist of servicing its remaining small ticket leases and the middle market
leases originated and funded by the deposits of SPB.
IBC's net revenues were $1.3 million for the quarter and $3.9 million for the
six months ended June 30, 2000 as compared to $3.1 million and $3.8 million for
the same periods last year, respectively. IBC incurred a net loss of $484,000
for the quarter and a net loss of $499,000 for the six months ended June 30,
2000 as compared to net income of $434,000 and a net loss of $904,000 for the
same periods last year, respectively. IBC's net revenues decreased and net loss
increased for the quarter ended June 30, 2000 as compared to same periods last
year primarily due to reduced gain on sale revenues as a result of the cessation
of small ticket lease originations, and ongoing mark-to-market losses on IBC's
retained interest in lease securitizations. IBC's net revenues were relatively
unchanged for the six months ended June 30, 2000 as compared to same period last
year, while IBC's net loss decreased from the prior year due to reduced expenses
as a result of the closure of IBC's lease origination offices.
IBC originated $7.1 million and $31.0 million of leases for the quarter and
six months ended June 30, 2000, as compared to $30.2 million and $60.1 million
for the same periods last year, respectively. IBC securitized leases of $15.4
million and $43.6 million during the quarter and six months ended June 30, 2000,
generating gain on sale revenue of $220,000 and $481,000, or 1.4% and 1.1% of
the principal balance securitized, respectively. For the quarter and six months
ended June 30, 1999, IBC securitized leases of $31.2 million and $66.7 million,
generating gain on sale revenue of $1.1 million and $2.7 million, or 3.6% and
4.0% of the principal balance securitized.
IBC's net interest income increased to $647,000 during the quarter ended June
30, 2000 as compared to $429,000 for the same period last year. IBC's net
interest income increased to $1.2 million during the six months ended June 30,
2000 as compared to $798,000 for the same period last year. The increase in
both periods was primarily due to a decrease in borrowings from ICII, partially
offset by a decrease in the average outstanding balance of leases held for sale.
IBC also earned other income, including primarily lease servicing fees from
leases sold into its securitization facility and mark to market charges on its
retained interest in lease securitizations of $690,000 for the quarter and $2.7
million for the six months ended June 30, 2000, as compared to $2.7 million and
$3.0 million for the same periods last year, respectively.
IBC's total expenses were $2.1 million for the quarter and $4.7 million for
the six months ended June 30, 2000 as compared to $2.7 million and $5.4 million
for the same periods last year, respectively. Total expenses decreased for the
quarter and six months ended June 30, 2000 as compared to the same periods last
year primarily due to reduced personnel expenses as a result of ceasing
originations of all small ticket leases in the second quarter of 2000 and
closing all of IBC's lease origination offices.
At June 30, 2000, IBC's non-accruing leases were $49,000 as compared to
$77,000 at December 31, 1999.
IBC's FTE decreased to 52 FTE at June 30, 2000 compared to 98 FTE at June 30,
1999.
25
<PAGE>
Income Property Lending Division
IPL's net revenues were $3.5 million for the quarter and $6.4 million for the
six months ended June 30, 2000 as compared to $2.2 million and $6.6 million for
the same periods last year, respectively. Net income was $872,000 for the
quarter and $1.4 million for the six months ended June 30, 2000 as compared to a
net loss of $18,000 and net income of $1.3 million for the same periods last
year, respectively. The increase in revenues and net income for the quarter
ended June 30, 2000 as compared to the same period last year primarily resulted
from increased net interest income and no loss on sale of loans. IPL's net
revenues and net income were relatively unchanged for the six months ended June
30, 2000 as compared to the same period last year.
IPL originated $61.6 million of loans for the quarter ended June 30, 2000 as
compared to $56.1 million of loans for the same period last year. During the
quarter ended June 30, 2000, IPL sold $2.1 million of its loans, generating a
gain on sale of zero. IPL sold $59.8 million of its loans for the quarter ended
June 30, 1999, generating a gain on sale of $1.3 million, or 2.1% of the
principal balance of loans sold. IPL originated $127.5 million of loans for the
six months ended June 30, 2000 as compared to $151.5 million of loans for the
same period last year. IPL sold $36.9 million and $153.0 million of its loans
during the six months ended June 30, 2000 and 1999, generating a gain on sale of
$271,000 or .07% and $3.8 million or 2.0% of the principal balance of loans
sold, respectively.
Gain on sale of loan revenues as a percentage IPL's loans sold decreased for
the six months ended June 30, 2000 as compared to the same periods last year due
to decreased interest margins and a decrease in demand for small balance income
property loans in the secondary market. The volume of loans sold in both
periods decreased as a result of our strategy to retain for portfolio a higher
level of multifamily real estate loans originated by IPL.
IPL's net interest income was $3.2 million for the quarter and $5.7 million
for the six months ended June 30, 2000, as compared to $2.2 million and $4.6
million for the same periods last year, respectively. The increase in both
periods was primarily the result of an increased average balance of outstanding
loans. IPL's average outstanding loan balance for the quarter and six months
ended June 30, 2000, increased to $341.2 million and $314.9 million as compared
to $203.0 million and $189.7 million for the same periods last year,
respectively. The increase in both periods was primarily the result of our
strategy to retain for portfolio a higher level of multifamily real estate loans
originated by IPL. The increase in IPL's loan yields to 9.50% and 9.41% for the
quarter and six months ended June 30, 2000 as compared to 8.80% and 8.75% for
the same periods last year, respectively, was primarily due to an overall
increase in LIBOR interest rates over the preceding twelve months.
IPL earned total other revenues of $347,000 for the quarter and $773,000 for
the six months ended June 30, 2000 as compared to $10,000 and $1.9 million for
the same periods last year, respectively. The significant reduction in both
periods was a result of decreased gain on sale of loans.
IPL's total expenses were $2.1 million for the quarter and $4.1 million for
the six months ended June 30, 2000 as compared to $2.1 million and $4.5 million
for the same periods last year, respectively. Total expenses decreased for the
six months ended June 30, 2000 as compared to the same period last year
primarily due to lower personnel, telephone and other communications, and lower
general and administrative expenses relating to our focus on increasing
operating efficiencies, partially offset by higher professional fees.
At June 30, 2000, IPL's non-accrual loans were $2.0 million or 0.5% of its
outstanding loan portfolio, as compared to $237,000 or 0.09% of its outstanding
loan portfolio at December 31, 1999.
FTE decreased to 65 FTE at June 30, 2000 compared to 74 FTE at June 30, 1999.
26
<PAGE>
Asset Management Activities ("AMA")
AMA's net revenues were $847,000 for the quarter and $1.6 million for the six
months ended June 30, 2000 as compared to $2.7 million and $5.5 million for the
same periods last year, respectively. AMA's net income was $25,000 for the
quarter and $40,000 for the six months ended June 30, 2000 as compared to
$362,000 and $251,000 for the same periods last year, respectively. AMA's net
revenues decreased primarily as a result of lower asset management fees due to
the termination of the ICCMIC asset management agreement and decreased average
outstanding other assets under management. The balance of assets under
management decreased to $675.8 million at June 30, 2000 as compared to $1.3
billion at June 30, 1999. The decrease was primarily due to our acquisition of
ICCMIC in the first quarter of 2000. At June 30, 2000, there were no ICCMIC
assets under management as compared to $700.0 million at June 30, 1999. (See
Footnote 10 - "Imperial Credit Commercial Mortgage Investment Corp.
Transaction"). At June 30, 2000, our assets under management were $487.0 million
at Pacifica Partners I L.P. ("Pacifica") and $188.9 million at the Cambria
Investment Partnership I, L.P. ("Cambria"). At June 30, 1999, our assets under
management were $459.0 million at Pacifica and $114.7 million at Cambria.
Total expenses from AMA activities were $804,000 for the quarter and $1.6
million for the six months ended June 30, 2000 as compared to $2.1 million and
$5.0 million for the same periods last year, respectively. The decrease in
total expenses was primarily due to a decrease in personnel expenses at Imperial
Credit Commercial Asset Management Corp. ("ICCAMC"), our wholly owned
subsidiary, related to the termination of the ICCMIC asset management agreement.
Employees and the related personnel expenses at ICCAMC were transferred to
ICCMIC to manage the REIT operations once the asset management agreement was
terminated.
Total AMA FTE decreased to 6 FTE at June 30, 2000 compared to 28 FTE at June
30, 1999.
Imperial Capital Group
ICG's net revenues increased to $7.1 million for the quarter and $14.6 million
for the six months ended June 30, 2000 as compared to $5.5 million $11.6 million
for the same periods last year, respectively. ICG's pre tax income increased
to $1.4 million for the quarter and $2.4 million for the six months ended June
30, 2000 as compared to a pre tax loss of $600,000 and a pre tax loss of
$261,000 for the same periods last year, respectively.
ICG's net revenue primarily consists of investment banking and brokerage fees.
The increase in net revenue and pre-tax income for the quarter and six months
ended June 30, 2000 primarily resulted from increased fees received for
successful corporate finance transactions completed by ICG through private
placements and a lower level of negative mark-to-market adjustments on trading
securities. For the six months ended June 30, 2000, ICG raised $184.5 million
of total debt and equity proceeds for their customers as compared to $0 for the
six months ended June 30, 1999.
ICG's total expenses were $5.7 million for the quarter and $12.2 million for
the six months ended June 30, 2000 as compared to $6.1 million and $11.9 million
for the same periods last year, respectively. Total expenses decreased for the
quarter ended June 30, 2000 as compared to the same period last year primarily
due to lower personnel, commission, telephone and other communications, and
general and administrative expenses resulting from our focus on increasing
operating efficiencies. Total expenses increased for the six months ended June
30, 2000 primarily due to increased commission expense on corporate finance
transactions.
ICG's FTE decreased to 80 FTE at June 30, 2000 compared to 84 FTE at June 30,
1999.
Other Core Operations ("OCO")
OCO provides support to our subsidiaries through executive management
oversight and advice, accounting, audit, operations, legal services, merger and
acquisitions advice, human resources administration, insurance programs, office
services, premises administration, and management information systems support.
OCO also includes but is not limited to interest and dividend income from parent
company loans, interest expense on our long-term debt, mark-to-market charges on
the securities we invested in at our holding company, and extraordinary items.
The net revenues of OCO were $7.8 million for the quarter and $3.6 million for
the six months ended June 30, 2000, as compared to ($3.4) million and ($3.5)
million for the same periods last year, respectively. The net income of OCO was
$5.3 million for the quarter and $2.4 million for the six months ended June 30,
2000, as compared to a net loss of $3.2 million and $4.9 million for the same
periods last year, respectively. Net income for the quarter ended June 30, 2000
includes a $1.1 million extraordinary gain from the early extinguishment of
debt. Net revenues include a $1.0 million provision for loan losses for the
quarter and six months ended June 30, 2000.
27
<PAGE>
OCO incurred net interest expense of $2.8 million for the quarter and $5.9
million for the six months ended June 30, 2000, as compared to $3.6 million and
$5.8 million for the same periods last year, respectively. The net interest
expense is primarily the result of OCO's outstanding long term debt which
decreased to $225.3 million at June 30, 2000 as compared to $319.9 million at
June 30, 1999.
The other income of OCO was $11.6 million for the quarter and $10.5 million
for the six months ended June 30, 2000, as compared to $207,000 and $2.3 million
for the same periods last year, respectively. Other income increased in both
periods primarily as a result of the sale of our minority interest in the
Auction Finance Group ("AFG"), a majority owner of the Canadian Auto Auction
Group ("CAAG"). The sale resulted in gross pre-tax cash proceeds to ICII of
approximately $23.3 million, and a pre-tax gain on sale of securities totaling
$12.4 million, which is included in OCO's other income.
Total expenses of OCO were $2.3 million for the quarter and $4.0 million for
the six months ended June 30, 2000 as compared to $2.8 million and $5.3 million
for the same periods last year, respectively. Total expenses decreased for the
quarter and six months ended June 30, 2000 as compared to the same periods last
year primarily due to lower personnel, telephone and other communications, and
lower general and administrative expenses relating to our focus on increasing
operating efficiencies.
OCO's FTE decreased to 49 FTE at June 30, 2000 as compared to 56 FTE at June
30, 1999.
NON-CORE BUSINESS LINES
We also operate "non-core" businesses, which consist of businesses that we've
decided to de-emphasize. We group these businesses into the following
categories:
Equity Interests--represents our equity investments in other publicly traded
companies. Effective July 1, 1999, we began accounting for our equity investment
in Franchise Mortgage Acceptance Company ("FMC") under the cost method of
accounting. Prior to July 1, 1999, we accounted for our investment in FMC under
the equity method of accounting. From January 1, through October 31, 1999, we
owned an equity interest of 38.3% in FMC. We changed our method of accounting
for FMC since we determined that we did not have the ability to exercise
significant influence over FMC, and the quarterly results of FMC were not made
available to our company. In November 1999 we sold substantially all of our
shares of the Bay View Capital Corporation ("Bay View") common stock we received
in the FMC/Bay View merger resulting in a gain of approximately $30.1 million.
This segment's source of revenue includes our common stock ownership percentage
in the equity interests' reported net income or loss in addition to our gains on
sales of the equity interests' stock.
De-emphasized/Discontinued/Exited Businesses--represents our business units we
decided to either de-emphasize, discontinue, or exit. We decided to de-
emphasize, discontinue or exit these business lines because they were not
meeting our expectations. 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. Exited Businesses' principal sources of net revenue
are interest earned on mortgage and consumer loans and mark-to-market valuations
on loan portfolios. Exited Businesses' principal expenses are the merger and
other operational costs incurred as a result of the ICCMIC acquisition, interest
expense allocations incurred from deposits and inter-company borrowings, and
general and administrative expenses.
Equity Interests
For the quarter ended June 30, 1999, Equity Interests primarily included our
portion of the net income or loss of FMC. During the fourth quarter of 1999 we
sold our investment in FMC. For the quarter ended June 30, 2000, Equity
Interests generated net revenues of $79,000 as compared to a loss of $1.2
million for the same period last year. Equity Interests reported net income of
$6,000 for the quarter ended June 30, 2000 as compared to a net loss of $945,000
for the same period last year. For the six months ended June 30, 2000, Equity
Interests generated net revenues of $256,000 as compared to $1.2 million for the
same period last year. Equity Interests reported net income of $82,000 for the
six months ended June 30, 2000 as compared to a net income of $570,000 for the
same period last year.
28
<PAGE>
Exited Businesses
Net revenues of the Exited Businesses were ($728,000) for the quarter and $2.8
million for the six months ended June 30, 2000, as compared to ($22.8) million
and ($13.4) million in the same periods last year, respectively. The net loss
of the Exited Businesses was $1.6 million for the quarter and $6.5 million for
the six months ended June 30, 2000, as compared to net losses of $18.5 million
and $18.0 million in the same periods last year, respectively. The increase in
revenues and the decrease in net loss was primarily the result of significantly
reduced mark-to-market charges, and the acquisition of ICCMIC on March 28, 2000.
Total expenses of the Exited Businesses were $1.8 million for the quarter and
$4.1 million for the six months ended June 30, 2000, as compared to $8.2 million
and $16.8 million in the same periods last year, respectively. The decrease in
both periods was primarily due to the closure of non-core businesses.
The following table reflects the ending outstanding balances of the loans from
our Exited Businesses:
<TABLE>
<CAPTION>
Loans and Leases
Outstanding at June 30,
----------------------
(In thousands)
Exited Business Line 2000 1999
-------------------- -------- --------
<S> <C> <C>
Auto Lending Division of SPB $ 3,789 $ 39,522
Consumer Lending Division of SPB 7,560 18,840
Alternative Residential Mortgage Division of SPB 6,185 11,747
Other exited loan portfolios 101,544 140,374
-------- --------
Total loans and leases from exited businesses $119,078 $210,483
======== ========
</TABLE>
The above table does not include net outstanding loans from the discontinued
operations of AMN which were $2.9 million and $9.5 million at June 30, 2000 and
1999, respectively.
For the quarter ended June 30, 1999, we sold $5.0 million of single-family
loans and $3.4 million of auto loans generating a net loss on sale of $154,000.
For the six months ended June 30, 2000, we sold $7.5 million of consumer loans
generating a net gain of $272,000. For the six months ended June 30, 1999, we
sold $28.4 million of single-family loans and $14.4 million of auto loans
generating a net loss on sale of $1.1 million.
At June 30, 2000, the outstanding balance of SPB's sub-prime auto loan
portfolio was $3.8 million as compared to $39.5 million at June 30, 1999. There
were no write-downs of SPB's auto loan portfolio for the quarter ended June 30,
2000 as compared to $21.7 million for the quarter ended June 30, 1999.
FTE from our Exited Businesses decreased to 6 FTE at June 30, 2000 as compared
to 21 FTE at June 30, 1999.
FUNDING
Our liquidity requirements are met primarily by SPB deposits and to a much
lesser extent warehouse lines and loan securitizations or sales. Business
operations conducted through the divisions of SPB are primarily financed through
Federal Deposit Insurance Corporation ("FDIC") insured deposits, Federal Home
Loan Bank borrowings, and capital contributions from our parent company.
Southern Pacific Bank Deposits
SPB is an FDIC insured industrial bank that is regulated by the California
Department of Financial Institutions and the FDIC. See "--Regulatory Matters"
for a more detailed description of regulations governing SPB.
At June 30, 2000 and December 31, 1999, SPB had total deposits of
approximately $1.8 billion and $1.6 billion, respectively. SPB solicits both
individual and institutional depositors for new accounts through print
advertisements and computerized referral networks. SPB currently maintains two
deposit gathering facilities in Southern California. At these facilities,
tellers provide banking services to customers such as accepting deposits and
making withdrawals. Generally, SPB's certificates of deposit are offered for
terms of one to 12 months. The average rate on SPB's deposits was 6.16% during
the quarter ended June 30, 2000 as compared to 5.41% during the same period last
year.
29
<PAGE>
SPB has historically increased its deposits as necessary so that deposits
together with its cash, securities, liquid assets, and Federal Home Loan Bank
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 SPB to acquire new deposits at levels consistent with
management's financial targets.
As an additional source of funds, SPB was approved in 1991 to become a member
of the Federal Home Loan Bank of San Francisco. Currently, SPB is approved for
borrowings from the Federal Home Loan Bank pursuant to a secured line of credit
that is automatically adjusted subject to applicable regulations and available
pledged collateral. At June 30, 2000, there were $30.0 million of outstanding
FHLB advances to SPB.
Securitization Transactions and Loan Sales
During the quarter ended June 30, 2000, we sold $2.1 million of income
property loans and securitized $15.4 million of equipment leases, generating
gains of $0 and $220,000, respectively. During the quarter ended June 30, 1999,
we sold $59.8 million of income property loans, $3.3 million of loan
participations, and securitized $30.3 million of equipment leases generating
gains (losses) of $1.3 million, ($19,000) and $1.3 million, respectively.
During the six months ended June 30, 2000, we sold $36.9 million of income
property loans, $51.4 million of loan participations, $7.5 million of consumer
loans and securitized $43.6 million of equipment leases, generating gains
(losses) of $271,000, ($458,000), ($400,000) and $481,000, respectively. During
the six months ended June 30, 1999, we sold $153.0 million of income property
loans, $21.8 million of loan participations, and securitized $60.5 million of
equipment leases generating gains (losses) of $3.1 million, ($154,000) and $2.2
million, respectively.
30
<PAGE>
ASSET QUALITY
Allowance for Loan and Lease Losses
At June 30, 2000, the allowance for loan and lease losses was $50.1 million as
compared to $31.8 million at December 31, 1999. The ratio of the allowance for
loan and lease losses to total loans held for investment increased to 3.65% at
June 30, 2000 as compared to 2.50% at December 31, 1999 and 2.48% at June 30,
1999. The ratio of the allowance for loan and lease losses to non-accrual loans
and leases ("coverage ratio") increased to 49.61% at June 30, 2000 as compared
to 48.35% at June 30, 1999. Excluding the non-accrual loans acquired in
connection with the LHO acquisition, the coverage ratio increased to 55.21% at
June 30, 2000.
For the six months ended June 30, 2000, the provision for loan and lease
losses was $87.2 million as compared to $24.5 million for the same period last
year. The increase was a result of higher levels of net charge-offs and an
increase in non-accrual loans.
See "Consolidated Results of Operations - Provision for Loan and Lease
Losses."
31
<PAGE>
Activity in our allowance for loan and lease losses was as follows:
<TABLE>
<CAPTION>
For the six months ended June 30,
2000 1999
---- ----
(Dollars in thousands)
<S> <C> <C>
Beginning balance as of January 1, 2000 and 1999.............................. $ 31,841 $ 24,880
Provision for loan and lease losses........................................... 87,175 24,455
Business acquisition.......................................................... 639 --
-------- --------
119,655 49,335
-------- --------
Loans and Leases charged off--Core Business Lines:
Multifamily and commercial real estate........................................ (32) --
Asset based loans............................................................. (46,449) (13,862)
Mortgage warehouse lines...................................................... (6,514) (715)
Loan Participations........................................................... (14,377) --
Leases........................................................................ (265) (1,238)
Commercial and industrial loans............................................... (27) (150)
Autolend...................................................................... (902) (184)
-------- --------
(68,566) (16,149)
-------- --------
Loans charged off--Non-Core Business Lines:
Single family residential..................................................... (1,811) (1,915)
Consumer loans................................................................ (359) (372)
Franchise loans............................................................... (94) --
Auto loans.................................................................... -- (328)
-------- --------
(2,264) (2,615)
-------- --------
Total Charge-offs............................................................. (70,830) (18,764)
-------- --------
Recoveries on loans and leases previously charged off --Core Business Lines:
Asset based loans............................................................. -- 163
Leases........................................................................ 211 541
-------- --------
211 704
-------- --------
Net charge-offs--Core Business Lines.......................................... (68,355) (15,445)
-------- --------
Recoveries on loans previously charged off --Non-Core Business Lines:
Single family residential..................................................... 115 3
Consumer...................................................................... 68 26
Franchise loans............................................................... 34 --
Auto loans.................................................................... 889 43
-------- --------
1,106 72
-------- --------
Total recoveries.............................................................. 1,317 776
-------- --------
Net charge-offs--Non-core business lines...................................... (1,158) (2,543)
-------- --------
Total net-charge-offs......................................................... (69,513) (17,988)
-------- --------
Balance as of June 30, 2000 and 1999.......................................... 50,142 31,347
Allowance for loan losses at AMN as of June 30, 2000 and 1999................. 13 105
-------- --------
Total allowance for loan and lease losses..................................... $ 50,155 $ 31,452
======== ========
Total allowance for loan and lease losses to non accrual loans and leases..... 49.61% 48.35%
</TABLE>
Non-Performing Assets ("NPA") and Non-Accrual Loans and Leases
Our NPA's consist of non-accruing loans, OREO and repossessed property.
NPA's and non-accrual loans increased to $105.5 million and $101.1 million at
June 30, 2000 as compared to $64.4 million and $59.4 million at December 31,
1999, respectively. The increase in NPA's was primarily related to the CBC,
LPIG and IWF loan portfolios partially offset by a decrease in non-core non-
accrual loans.
32
<PAGE>
Total NPA's as a percentage of loans, OREO and repossessed assets were 5.94%
at June 30, 2000, as compared to 4.08% at December 31, 1999. The increase in
NPA's and total NPA's as a percentage of loans, OREO and repossessed assets from
December 31, 1999 to June 30, 2000 was primarily attributable to increases in
non-accrual loans at CBC, LPIG and IWF. The non-performing loans at LPIG are
senior secured facilities. In general, accounts receivable, inventory, fixed
assets, real estate, and intangibles collateralize the non-performing loans at
CBC. The non-performing loans at IWF are generally collateralized by residential
mortgage loans.
The following table sets forth the amount of non-performing assets
attributable to our core lending activities and our Exited Businesses.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------------------- --------------------------
Core Lending Exited Core Lending Exited
Activities Businesses Activities Businesses
----------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Non-accrual loans:
IPL................................................ $ 1,964 $ -- $ 237 $ --
IWF................................................ 13,700 -- 7,757 --
CBC................................................ 40,340 -- 22,173 --
IBC................................................ 49 -- 77 --
Film and television production loans............... 10,258 -- 8,161 --
LPIG............................................... 18,755 -- -- --
One to four family................................. -- 14,154 -- 16,926
Consumer loans..................................... -- 355 -- 633
Auto loans......................................... -- 451 -- 1,803
Other commercial................................... -- 1,071 656 996
---------- -------- ---------- --------
Total non-accrual loans............................ 85,066 16,031 39,061 20,358
---------- -------- ---------- --------
OREO:
IPL................................................ -- -- 222 --
IWF................................................ 1,331 -- -- --
One to four family................................. -- 1,485 -- 3,220
Other commercial................................... -- 1,216 -- 771
---------- -------- ---------- --------
Total OREO......................................... 1,331 2,701 222 3,991
---------- -------- ---------- --------
Repossessed property:
IBC................................................ 307 -- 643 --
Auto Lending....................................... -- 72 -- 127
---------- -------- ---------- --------
Total repossessed property......................... 307 72 643 127
---------- -------- ---------- --------
Total NPA's........................................ $ 86,704 $ 18,804 $ 39,926 $ 24,476
========== ======== ========== ========
Total loans, OREO and repossessed property......... $1,653,191 $121,851 $1,431,996 $148,033
Total NPA's as a percentage of loans, OREO
and repossessed property........................ 5.24% 15.43% 2.79% 16.53%
</TABLE>
The table presented above excludes non-accrual loans held for sale, which we
carry at the lower of cost or market.
On an ongoing basis, we monitor our loan portfolios and evaluate the adequacy
of the allowance for loan and lease losses. In determining the adequacy of the
allowance for loan and lease losses, we consider such factors as historical loan
loss experience, underlying collateral values, evaluations made by bank
regulatory authorities, assessment of economic conditions and other appropriate
data to identify the risks in the loan portfolio.
Loans deemed by us to be 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 deemed appropriate by us based
upon our evaluation of the known and inherent risks in the loan portfolio. Based
on current trends in non-performing assets, higher levels of provision for loan
and lease losses and the related allowance for loan and lease losses may be
necessary in future periods. See "Consolidated Results of Operations - Provision
for Loan and Lease Losses."
33
<PAGE>
Loans and leases held for investment consisted of the following at June 30, 2000
and December 31, 1999:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Loans secured by real estate:
One-to-four family................................. $ 86,260 $ 93,914
Multi-family....................................... 49,816 35,249
Commercial......................................... 52,680 14,022
----------- ------------
188,756 143,185
Leases............................................. 746 1,125
Consumer and auto loans............................ 5,113 7,072
Franchise loans.................................... 14,072 18,277
Asset based loans.................................. 844,685 748,122
Loan participations................................ 172,860 216,961
Mortgage warehouse lines........................... 52,058 78,068
Film and television production loans............... 86,075 23,985
Commercial loans................................... 14,277 48,853
----------- ------------
Total.......................................... 1,378,642 1,285,648
Loans in process................................... 903 (5,472)
Unamortized premium................................ 1,245 1,389
Deferred loan fees................................. (8,804) (8,492)
----------- ------------
Total net loans and leases..................... 1,371,986 1,273,073
Allowance for loan and lease losses................ (50,142) (31,841)
----------- ------------
Total......................................... $ 1,321,844 $ 1,241,232
=========== ============
Allowance for loan and lease losses
to net loans and leases........................... 3.65% 2.50%
</TABLE>
Our loans held for investment are primarily comprised of asset based loans
to middle market companies mainly in California, participations in commercial
loan syndications, first and second lien mortgages secured by income producing
and residential real property in California, and mortgage warehouse lines
secured by newly originated residential mortgage loans.
RECENT DEVELOPMENT
Additional Repurchases of Common Stock
Subsequent to June 30, 2000 and as of July 31, 2000, we repurchased 225,300
shares of our common stock at an average cost of $4.30 per common share.
REGULATORY MATTERS
SPB's Capital Ratios
The following table presents SPB's actual capital ratios and the
corresponding minimum adequate and well capitalized capital ratio requirements
under the (i) FDIC Risk-based Capital and Tier 1 Capital regulations and (ii)
the FDIC Leverage ratio regulation as of June 30, 2000.
<TABLE>
<CAPTION>
Minimum "Adequate" Minimum "Well -Capitalized"
Actual Requirement Requirement
------ ----------- -----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Risk-based Capital........................ $202,127 9.31% $173,779 8.00% $217,223 10.00%
Risk-based Tier 1 Capital................. 129,769 5.97 86,889 4.00 130,334 6.00
FDIC Leverage Ratio....................... 129,769 6.51 79,794 4.00 99,742 5.00
</TABLE>
34
<PAGE>
On August 18, 2000, SPB's parent company contributed $14.0 million of Tier
II capital to SPB, which, in addition to earnings at SPB subsequent to June 30,
2000, restored SPB's capital to amounts above the "well-capitalized" minimums of
6% and 10%, respectively, as defined by banking regulations.
LIQUIDITY AND CAPITAL RESOURCES
We generate liquidity at our holding company from a variety of sources,
including interest income from loans and investments, income tax payments
received from our subsidiaries, dividends from subsidiary earnings, and sales of
non-core assets and investments. An industrial bank such as SPB may declare
dividends only in accordance with California Industrial Banking Law and FDIC
regulations, which impose legal limitations on the payment of dividends. Our
holding company's primary cash requirements include income tax payments and
interest payments on outstanding debt obligations. We also use available cash to
make loans to our operating companies and investments in subsidiaries and asset
management vehicles. At June 30, 2000 we held $26.7 million of cash and interest
bearing deposits at our holding company as compared to $46.2 million of cash and
interest bearing deposits at December 31, 1999. The decrease in cash since
December 31, 1999 was primarily attributed to debt repurchase, common stock
repurchase and interest payments on long term debt.
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) collateral pertaining to total return swaps
and our investment in Pacifica.
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 known liquidity
requirements in the future on both a short and long term basis. However, 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 June 30, 2000 and December 31, 1999, SPB had maximum FHLB
borrowings available equal to $63.1 million and $35.7 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.
There were $30.0 million of outstanding FHLB advances at June 30, 2000. The
FHLB advances are secured by certain real estate loans with a carrying value of
$101.8 million at June 30, 2000. There were no FHLB advances outstanding at
December 31, 1999.
For the six months ended June 30, 2000, SPB's deposit portfolio, which
consists primarily of certificates of deposit, increased $211.7 million to $1.8
billion from $1.6 billion at December 31, 1999.
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.
Item 3. Qualitative and Quantitative Disclosures about Market Risk
----------------------------------------------------------
There have been no material changes to the quantitative and qualitative
disclosures about market risk included in our annual report on Form 10-K for the
year ended December 31, 1999.
35
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Our company is a defendant in a consolidated federal securities class
action, In re Southern Pacific Funding Corporation Securities Litigation, Lead
Case No. CV98-1239-MA, in the U.S. District Court for the District of Oregon.
This action was initially filed in October 1998. Plaintiffs allege that SPFC
failed to properly mark down the value of its residual interests, failed to
properly reflect increased levels of prepayments and actual prepayment and
default rates on its loans and made false and misleading public statements
concerning its financial condition. Plaintiffs alleged claims against our
company and two of our directors (and others) under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Sections 11 and 15 of the Securities Act
of 1933. Following a number of motions to dismiss, defendants answered and
alleged affirmative defenses to the second consolidated complaint on June 22,
1999. On July 21, 1999, the Court certified a class of persons who purchased the
securities of SPFC during the period October 7, 1997 through October 1, 1998. On
December 8, 1999, the Court set a pretrial conference for October 31, 2000 and
trial for November 6, 2000. On January 13, 2000, defendants answered the Fourth
Amended Complaint and asserted a number of affirmative defenses. On July 24,
2000, we filed motions for summary judgment as to all claims. On July 31, 2000,
all parties in the case (other than our company) reached a tentative settlement
of the action. That settlement, which does not require payment of any
consideration by our company, is subject to court approval. The claims remaining
against our company are under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Section 15 of the Securities Act of 1933.
Our company and three of our directors are defendants in a consolidated
federal securities class action, In re Imperial Credit Industries, Inc.
Securities Litigation. Case No. 98-8842 SVW, in the District Court for the
Central District of California. This action, purportedly filed on behalf of a
class of persons who purchased our company's securities during the period
January 29, 1998 through October 1, 1998, was originally filed in November 1998.
Plaintiffs allege that defendants made false and misleading statements and
omitted to reveal the truth concerning the value of Imperial Credit Industries,
Inc.'s investments in SPFC, resulting in an artificial inflation of the price of
our securities. On defendants' motions, the Court dismissed, with leave to
amend, plaintiffs' original complaint and their consolidated amended class
action complaint. On February 22, 2000, the Court denied defendants' motion to
dismiss plaintiffs' second amended consolidated class action complaint. On March
9, 2000, defendants answered the second amended consolidated class action
complaint and asserted a number of affirmative defenses. On March 21, 2000,
plaintiffs moved for class certification. On August 7, 2000, the Court granted
plaintiffs' motion for class certification. The Court has set the pretrial
conference for April 30, 2001 and trial for May 8, 2001.
We are a defendant in Steadfast Insurance Company v. Auto Marketing Network
Inc. and Imperial Credit Industries, Inc., filed on August 12, 1997 in the
Northern District of Illinois, Case No. 97-C-5696. The plaintiff is seeking
damages in the amount of $27 million allegedly resulting from the fraudulent
inducement to enter into, and the subsequent breach of, a motor vehicle
collateral enhancement insurance policy. In May 1998, we filed a counterclaim
against the plaintiff for $54 million in damages based on the allegation that
the underlying claim was filed in bad faith. In January 1999, the Court entered
a preliminary injunction which enjoined us from transferring assets of Auto
Marketing Network, Inc., in amounts that would cause the total assets of Auto
Marketing Network to be less than $20 million in value. The injunction has since
been removed and the parties are presently engaged in pretrial discovery. We
moved to dismiss ICII from the lawsuit and, on April 17, 2000, the Court granted
ICII's motion in part and found that ICII is not liable for any of Steadfast's
losses arising from payments to Auto Marketing Network for defaulted loans. The
Court has pending a motion for partial summary judgment, filed by the plaintiff.
ICCMIC and its former directors are defendants in a putative class action
lawsuit filed on July 22, 1999 by Riviera-Enid, a Florida limited partnership,
in Los Angeles Superior Court, Case No. BC213902. The complaint alleges that the
proposed merger between a subsidiary of ours and ICCMIC constitutes a breach of
fiduciary duty by the defendants in that, allegedly, the merger price is unfair
to stockholders, the merger price is less than the liquidation value of ICCMIC's
assets and the termination fee for the management contract is excessive.
The complaint also alleges that certain of the directors have conflicts of
interest because of their affiliation with us and that the merger will benefit
us at the expense of ICCMIC's other stockholders. The complaint seeks
certification of a class of all stockholders of ICCMIC whose stock will be
acquired in connection with the merger and seeks injunctive relief that would,
if granted, prevent the completion of the proposed merger. The complaint also
seeks damages in an unspecified amount and other relief. On October 8, 1999, we
filed a demurrer to plaintiff's complaint, which was set to be heard by the
Court on November 22, 1999. On November 1, 1999, plaintiff served an amended
class action complaint alleging the same claims but adding details from ICCMIC's
preliminary proxy statement filed with the SEC. All defendants filed demurrers
to the amended complaint, and on February 4, 2000, the Court granted ICII's
demurrer and
36
<PAGE>
dismissed the action against ICII with prejudice and without leave to amend. The
Court also dismissed the action against the individual ICII defendants with
prejudice and without leave to amend with respect to their capacities as
directors of ICII (although not as to their capacities as directors of ICCMIC).
On February 14, 2000, the individual defendants answered the first amended
complaint and asserted a number of affirmative defenses. On March 28, 2000, the
merger closed without plaintiffs either seeking or obtaining injunctive relief
against the merger. The Court has not certified a class, nor has plaintiff filed
a motion for class certification. On July 21, 2000, ICCMIC and other defendants
moved for summary judgment. That motion is set for hearing on September 13,
2000.
ICCMIC and three of its directors, one of whom is a director and one a
former director of ICII, are defendants in a putative class action lawsuit filed
on March 17, 2000, by John Huston in the United States District Court for the
Central District of California, Case No. CV00-02751 ABC. The complaint alleges
that ICCMIC's prospectus issued in connection with its initial public offering
in October 1997 contained material omissions and misrepresentations concerning
(1) the expenses to be incurred by ICCMIC, (2) ICCMIC's ability to reduce the
base management fee paid to ICCMIC's management company, (3) the management
agreement termination fee payable to ICCMIC's management company in the event
that ICCMIC terminated the management agreement, and (4) certain conflicts of
interest. The complaint alleges a claim under Section 11 of the Securities Act
of 1933 and seeks the certification of a class of shareholders of ICCMIC who
purchased shares of ICCMIC at any time between October 22, 1997 and October 21,
1999. On April 4, 2000, defendants moved to dismiss the complaint pursuant to
Rule 12(b)(6) of the Federal Rules of Civil Procedure. On June 9, 2000, the
Court issued an order denying defendants' motion to dismiss. On June 23, 2000,
defendants answered the complaint and asserted a number of affirmative defenses.
On July 31, 2000, plaintiff moved for class certification. Pursuant to a
stipulation between the parties, the motion for class certification is set for
hearing on September 11, 2000.
We believe that the material allegations of the above complaints are
without merit and intend to vigorously defend all of the above lawsuits.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The 2000 Annual Meeting of Shareholders was held on June 28, 2000.
PROPOSAL 1. Election of Board of Directors to serve for the ensuing year
FOR WITHHELD
--- --------
H.Wayne Snavely 29,628,583 116,767
Brad S. Plantiko 29,628,583 116,767
Stephen J. Shugerman 29,628,583 116,767
Perry Lerner 29,628,583 116,767
Robert Muehlenbeck 29,628,583 116,767
James P. Staes 29,628,583 116,767
PROPOSAL 2. To consider and act upon a proposal to ratify the appointment of
KPMG LLP as our independent accountants for the year ending
December 31, 2000.
FOR AGAINST ABSTAIN
--- ------- -------
29,595,647 145,230 4,473
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
The registrant filed the following report on Form 8-K dated April 13,
2000:
On March 28, 2000, we announced the consummation of our acquisition of
Imperial Credit Commercial Mortgage Investment Corp.
37
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
Imperial Credit Industries, Inc.
Date: August 18, 2000 By: /s/ Brad S. Plantiko
---------------- --------------------------
Brad S. Plantiko
Executive Vice President - Chief Financial Officer
</TABLE>
38
