- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-19861
IMPERIAL CREDIT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
California 95-4054791
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
23550 Hawthorne Boulevard, Building 1, Suite 110, Torrance, California 90505
(Address of principal executive offices) (Zip Code)
(310) 373-1704
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, no par value NASDAQ National Market System
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based upon the closing sales price of its Common Stock on March 30,
2001 on the NASDAQ National Market was approximately $30,090,338.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [_]
The number of shares of Common Stock outstanding as of March 30, 2001:
32,096,361
DOCUMENTS INCORPORATED BY REFERENCE (not applicable)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
IMPERIAL CREDIT INDUSTRIES, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. BUSINESS...................................................... 3
ITEM 2. PROPERTIES.................................................... 40
ITEM 3. LEGAL PROCEEDINGS............................................. 40
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 42
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED 43
SHAREHOLDER MATTERS...........................................
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.......................... 45
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 46
AND RESULTS OF OPERATIONS.....................................
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 88
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 88
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 155
AND FINANCIAL DISCLOSURE......................................
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 155
ITEM 11. EXECUTIVE COMPENSATION........................................ 156
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 162
MANAGEMENT....................................................
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 164
PART IV
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-
ITEM 14. K............................................................. 168
Forward-Looking Statements
Certain statements contained herein are "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1955, Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended. These forward-looking statements may be
identified by reference to a future period(s) or by the use of forward-looking
terminology, such as "may", "will", "intend", "should", "expect",
"anticipate", "estimate", or "continue" or the negatives thereof or other
comparable terminology. The Company's actual results could differ materially
from those anticipated in such forward-looking statements due to a variety of
factors. These factors include but are not limited to, the demand for our
products; competitive factors in the businesses in which we compete; adverse
changes in the securities markets; inflation and changes in the interest rate
environment that reduce margins or the fair value of financial instruments;
changes in national, regional or local business conditions or economic
environments; government fiscal and monetary policies; legislative or
regulatory changes that affect our business; factors inherent to the valuation
and pricing of commercial and real estate loans; other factors generally
understood to affect the value of commercial and real estate loans; and the
other risks detailed in the Company's 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 the Company with the SEC.
2
We wish to caution readers not to place undue reliance on any such forward-
looking statements, which speak only as of the date made. We do not undertake,
and specifically disclaim any obligation, to update any forward-looking
statements to reflect occurrences or unanticipated events or circumstances
after the date of such statements.
ITEM 1. BUSINESS
General
Imperial Credit Industries, Inc. ("ICII"or the "Company") primarily
conducts its business activities through its commercial banking subsidiary,
Southern Pacific Bank ("SPB"). SPB was undercapitalized at December 31, 2000.
See Item 1. Business--Regulation and Note 4 of Notes to Consolidated Financial
Statements. Our core business is commercial lending to corporate borrowers
that include lines of credit, term loans, leases, as well as real estate loans
on commercial properties.
Business Strategy
For an explanation of our current business strategy, see Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General."
The Company's operations are divided into several operating segments
segregated by product line. See "Imperial Credit Industries, Inc., Notes to
Consolidated Financial Statements", Note 2--Operating Activities for a
description of each of our business segments.
We group our core business segments into four broad categories.
Business Finance Lending
Coast Business Credit
Imperial Warehouse Finance, Inc.
Loan Participation and Investment Group
The Lewis Horwitz Organization
Imperial Business Credit, Inc.
Multifamily and Commercial Mortgage Lending
Income Property Lending Division
Asset Management Activities
Imperial Credit Asset Management, Inc.
Imperial Credit Commercial Asset Management Corporation
Investment Banking and Brokerage Services
Imperial Capital Group, LLC
We also segregate certain business segments as:
Other Core Operations
Equity Interests, and
De-emphasized/Discontinued/Exited Businesses
3
Business Finance Lending
Coast Business Credit
General
Coast Business Credit ("CBC") is the asset-based and cash stream lending
division of our principal subsidiary, SPB, that makes revolving lines of
credit and term loans available to growth companies in equipment leasing,
aircraft transportation, manufacturing, distribution, technology, service,
telecommunications and retail industries. CBC is headquartered in Los Angeles,
California, and conducts its lending throughout the United States. In addition
to the Los Angeles office, CBC has 16 loan production and satellite offices
located in the following cities at December 31, 2000:
Atlanta Chicago Minneapolis San Francisco
Baltimore* Cleveland New York City Santa Clara
Boston Irvine Phoenix* Seattle*
Charlotte* Kansas City* Portland* Stamford*
- --------
* Satellite office
CBC's Loan Portfolio
CBC's principal business is asset-based and cash stream lending to middle
market businesses with annual revenues ranging from approximately $10 million
to $100 million. Typically, revolving lines of credit are secured by accounts
receivable and inventory. Term loans are usually secured by real property,
equipment or other fixed assets. CBC's primary niche is the high-technology
sector, which includes businesses involved in computer hardware and software,
telecommunications, internet services, industrial automation and office
equipment. These customers provide CBC with opportunities for long-term
relationships in industries with above average growth prospects.
Over the past two years CBC diversified its originations from traditional
asset-based loans to include cash stream loans, aircraft financing, term
loans, and participations purchased. SPB has recently decided to refocus the
majority of CBC's future originations in the traditional asset-based and cash
stream lending area. Most of CBC's asset-based and cash stream loans are
originated on a formula basis. CBC typically advances up to 80% of eligible
accounts receivable, 25-75% of inventory value (raw material and finished
goods), a maximum of 80% of the liquidation value of equipment and 70% of the
FMV of real estate. The only exceptions to these general rules occur when
there is a recurring cash stream with a diversified base of customers and/or
subscribers which lends itself to a collections multiple limited by an
earnings before interest, taxes, depreciation, and amortization ("EBITDA")
multiplier of two to four and 80% of the appraised value of the subscriber
base or licenses outstanding.
CBC intends to put less emphasis on telecommunications and transportation
(including Aircraft and Aviation lending) in 2001, and as a result, expects
CBC's portfolio to become more diversified. CBC's lending to technology and
software companies, semiconductor companies, electronic equipment
manufacturers, computer peripheral manufacturers, and wireless device
companies will be focused in its traditional asset-based lending product. CBC
expects to focus more effort on business services, distribution, retail,
consumer products, rental equipment, vending, and general manufacturing during
2001.
4
Set forth below is a table showing CBC's outstanding loan and commitment
balances by industry at December 31, 2000 and 1999:
At December 31, 2000 At December 31, 1999
------------------------------------- -------------------------------------
Outstanding % of Commitment % of Outstanding % of Commitment % of
Balance Total Balance Total Balance Total Balance Total
----------- ------ ---------- ------ ----------- ------ ---------- ------
(Dollars in thousands)
Aircraft and related
loans.................. $131,351 17.45% $ 179,099 12.89% $ 60,760 8.12% $ 84,150 6.05%
Public utilities........ 99,321 13.19 215,535 15.51 154,905 20.71 287,230 20.63
Equipment leasing....... 75,616 10.04 98,800 7.11 43,341 5.79 82,900 5.96
Transportion equipment.. 45,080 5.99 67,915 4.89 22,075 2.95 26,250 1.89
Wholesale trade--durable
goods.................. 43,436 5.77 75,800 5.45 57,075 7.63 100,600 7.23
Electronic and
electrical equipment
manufacturing.......... 33,007 4.38 73,500 5.29 44,045 5.89 94,793 6.81
Paper products,
printing, publishing... 31,050 4.12 65,000 4.68 -- -- -- --
Retail stores........... 27,468 3.65 39,775 2.86 44,861 6.00 85,500 6.14
Primary metals.......... 20,691 2.75 34,903 2.51 -- -- -- --
Mining.................. 20,332 2.70 25,000 1.80 -- -- -- --
Health services......... 20,004 2.66 25,000 1.80 16,665 2.23 20,000 1.44
Fabricated metal
products............... 18,878 2.51 29,900 2.15 36,357 4.86 48,000 3.45
Industrial & commercial
equipment.............. 18,456 2.45 70,868 5.10 23,133 3.09 54,867 3.94
Rubber, plastics,
leather, stone, clay
glass.................. 18,157 2.41 34,850 2.51 -- -- -- --
Computer software....... 16,480 2.19 43,925 3.16 31,318 4.19 44,000 3.16
Management services..... 15,084 2.00 30,000 2.16 16,110 2.15 41,500 2.98
Computer systems
design................. 10,835 1.44 30,000 2.16 22,131 2.96 43,000 3.09
Wholesale trade--
nondurable goods....... 7,276 0.97 14,000 1.01 18,559 2.48 42,000 3.02
Food product
manufacturing.......... 6,136 0.82 20,000 1.44 20,326 2.72 42,500 3.05
Other................... 94,225 12.51 215,867 15.52 136,461 18.23 294,678 21.16
-------- ------ ---------- ------ -------- ------ ---------- ------
Total................. $752,883 100.00% $1,389,737 100.00% $748,122 100.00% $1,391,968 100.00%
======== ====== ========== ====== ======== ====== ========== ======
Set forth below is a summary of CBC's loan portfolio at December 31, 2000,
1999 and 1998:
At December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
(Dollars in thousands)
Commitments............................ $1,389,737 $1,391,968 $1,050,426
Outstanding loans...................... 752,883 748,122 633,299
Outstanding loans to technology
companies (1)......................... 250,273 293,521 208,800
Outstanding unfunded commitments....... 636,854 643,846 417,127
Average outstanding balance per
customer.............................. 4,903 4,310 3,700
Average commitment per customer........ 9,020 8,019 6,137
Weighted average yield................. 11.82% 13.17% 13.09%
- --------
(1) Technology companies primarily include long distance resellers, paging
companies, semiconductor manufacturers, software developers, wireless
communications companies, and computer business services.
Loan Products and Originations
CBC's loans typically have maturities of one to three years, providing
borrowers with greater flexibility to manage their borrowing needs. These
loans have a renewal provision for an additional extension year at the end
5
of the contract term and annual renewals thereafter unless terminated by
either party (usually requiring 90 days written notice prior to the end of the
term). Loans are categorized based on the type of collateral securing the
loan.
Accounts Receivable Loans. These loans are revolving lines of credit that
are secured by accounts receivable from their customers. Each borrower's
customers normally make their payments to a blocked account, lockbox or
directly to CBC. CBC deposits the payments daily and applies the funds to the
borrower's loan balances. CBC typically lends up to 80% of the principal
balance of accounts receivable that meet its eligibility requirements.
However, advance rates vary depending on the borrower's dilution,
concentrations, and historical performance with CBC. CBC's internal auditors
conduct quarterly examinations of the collateral and financial condition of
each borrower.
Inventory Loans. These loans are typically revolving lines of credit
secured by eligible inventory that is restricted to raw materials and finished
goods. Inventory loans are generally made in conjunction with accounts
receivable loans to qualifying borrowers. Borrowers are required to provide
CBC with monthly inventory designations and these reports are compared to each
borrower's financial statements for accuracy. CBC typically advances loan
proceeds in amounts ranging from 25% to 75% of the eligible inventory value,
with the percentage advanced determined based on the characteristics of the
inventory and the expected orderly liquidation of the inventory based on an
appraisal by a qualified appraisal firm with experience in that industry.
Term Loans. CBC also originates term loans secured by real property,
equipment or other fixed assets. These loans typically have three-to-five year
amortization periods, but are due and payable upon termination of the master
loan and security agreement. A small percentage of term loans are stand-alone
and do not include a revolving facility. These loans are usually related to
larger equipment financing arrangements, such as large aircraft.
Participation Loans. Participation loans consist of both term loans and
revolving lines of credit which CBC and other lenders (banks or other asset-
based lenders) jointly lend to borrowers under one loan agreement.
Cash Stream Loans. CBC also originates loans based on a multiple of
recurring cash streams. Such loans are typically made to companies that
generate a consistent stream of recurring collections. These companies include
internet service providers, alarm companies, furniture rental companies, and
other companies where regular, consistent payments are made for providing a
particular product or service. Cash stream loans are generally limited to no
more than four times the borrowers EBITDA. CBC also obtains an independent
appraisal of the customer base providing the cash stream to determine the
underlying value of the relationships generating the future cash streams. Cash
stream loans are also subject to lending limits relative to the appraised
value of the borrower's customer base, enterprise value, or subscriber base.
Set forth below is a table showing the principal amount of CBC's
outstanding loans and the percentage of CBC's portfolio of each loan type at
December 31, 2000, 1999 and 1998:
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
Outstanding % of Outstanding % of Outstanding % of
Balance Total Balance Total Balance Total
----------- ----- ----------- ----- ----------- -----
(Dollars in thousands)
Accounts receivable/cash
stream loans........... $383.5 50.9% $411.2 55.0% $520.4 82.2%
Inventory loans......... 42.8 5.7 61.4 8.2 94.5 14.9
Term loans.............. 196.1 26.0 162.9 21.8 N/A N/A
Participation loans
purchased.............. 174.2 23.1 152.2 20.3 50.0 7.9
Participation loans
sold................... (43.7) (5.7) (39.6) (5.3) (31.6) (5.0)
------ ----- ------ ----- ------ -----
Total................. $752.9 100.0% $748.1 100.0% $633.3 100.0%
====== ===== ====== ===== ====== =====
6
Underwriting
Before a credit line proposal letter is approved and a line of credit is
established, CBC conducts a due diligence review of the prospective client
that includes all or part of the following:
. An audit of the company's records which include verification of its
accounts receivable and inventory, along with reviews of its financial
statements, management information systems, accounts payable and
reporting capability
. Independent appraisals of inventory, equipment or real estate
. Background checks on the principals and investors of the company
. Extensive research on the prospective client, its industry, suppliers,
competitors and products
. Detailed analysis of the prospective client's audited or reviewed
financial statements including ratio analysis, trend analysis, comparison
to budget projections, interim results and multi-year analysis
. Uniform Commercial Code searches and filings, and
. Legal documentation review by outside attorneys.
For high technology borrowers, particular emphasis is placed on
understanding the underlying value of the technology itself, including the
value of the borrower's intangible assets. When necessary, filings at the
patent and trademark office are made on copyrights, patents, trade names or
other intangibles. Outside experts are sometimes consulted to assess the
viability and value of intangibles.
The underwriting process begins after a proposal letter is issued. At that
time, CBC requires the prospective borrower to provide a deposit for the due
diligence and audit. If the prospective borrower is providing inventory,
equipment or real estate as collateral for the loan, then CBC will order
appraisals for the various types of collateral. CBC's auditing staff conducts
an audit generally consisting of a due diligence review of the prospective
borrower's accounting and financial records, including a statistical review of
accounts receivable and charge off history. CBC auditors then submit their
reports and work papers to CBC's credit committee along with the other due
diligence being conducted by the underwriting department and appraisals by an
outside appraisal firm.
When CBC decides to approve a credit line, an appropriate credit limit is
established under the revolving credit line. CBC analyzes the prospective
borrower's customer base to assure compliance with CBC's policies. These
policies generally limit CBC's overall exposure to borrowers, especially with
respect to privately held or non-investment grade borrowers. When deemed
necessary for credit approval, CBC may obtain guarantees or other types of
security from a client or its affiliates and may also obtain subordination and
intercreditor agreements from the borrower's other lenders. Although CBC's
underwriting guidelines specify a review of the factors described above, CBC
does not rely on a rigid scoring system to approve prospective borrowers.
Decisions to enter into a relationship with a prospective client are made on a
case-by-case basis.
Credit Monitoring and Controls
Each CBC credit is assigned to an individual account executive who monitors
each borrower's credit, collateral and advances. CBC account executives
monitor borrowers' accounts receivable using three reports. The first is an
accounts receivable aging analysis report prepared monthly by the loan
processor and reviewed by the account executive. This report includes details
pertaining to account concentrations and aging trends. The second is an
accounts receivable activity summary prepared weekly by the loan processor and
reviewed by the account executive, summarizing borrowings, repayments and
pledged collateral. The third is a daily report prepared by the borrower and
reviewed by the account executive to determine credit availability for a
particular day. If liquidation is required for a borrower to repay an
outstanding loan, then CBC attempts to effect a consensual possession of the
collateral property and joint collection of accounts receivable. In certain
instances, court action may be required to ensure collection of receivables
and to obtain possession of pledged assets.
7
CBC monitors cash stream loans in five ways. The first way is monitoring of
the recurring monthly collections deposited into a lock box that is swept
daily. At the end of each month the borrowings are adjusted upward or downward
based on the amount of recurring collections received in the prior month (and
usually adjusted for a 3-12 month moving average). The second loan limit that
is monitored is a covenant which creates an event of default if collections in
a given month fall below approximately 20% of the projected collections of the
prior period's collections. Another monitoring tool is the EBITDA covenant
that restricts the amount of debt that can be borrowed on the basis of a cap
on Debt/EBITDA. As EBITDA increases or decreases in a given time frame, the
amount of allowable CBC debt also may be limited or increased. The Debt /
EBITDA covenant is also usually based on a 3-12 month moving average and
usually provides a cap at approximately two to four times EBITDA.
The fourth metric that is used to monitor cash stream loans is the
requirement for the borrower periodically to re-appraise the subscriber base
or revenue stream that underlies the recurring collections. CBC's loans
generally require the loan amount not to exceed 80% of the appraised value of
the revenue stream from the subscriber base or rental contracts or monthly
fees calculated on the basis of an orderly liquidation value. Finally, the
fifth method for monitoring cash stream loans is maintaining up-to-the-minute
data about comparable sales of other companies, subscribers, or routes that
are similar to those of our borrowers. Current comparable sales data allows
CBC to value its borrowers' assets on an ongoing basis.
Pricing and Funding
CBC typically charges its customers prime plus 1% to 3% (exclusive of loan
fees) on the outstanding balance of their loans depending upon the credit
quality of the borrower. In addition, CBC attempts to be flexible in the
structuring of its revolving credit lines and to provide prompt service in
order to gain an advantage over its competitors. When competing against more
traditional lenders, CBC competes less on price and more on flexibility and
speed of funding. CBC strives to fund its initial loan advance within four to
five weeks of receiving the required information and completing its due
diligence review. CBC also charges fees for prepayments, letter of credit
facilities, loan originations and renewals, and may charge other special fees.
Asset Quality
The amounts of non-performing assets attributable to CBC's business at
December 31, 2000, 1999 and 1998 were $31.8 million, $22.2 million and $1.1
million, respectively. The amount of net charge-offs relating to CBC's loans
for 2000, 1999 and 1998 were $88.9 million, $17.4 million and $67,000,
respectively. The increase in CBC's non-accrual loans and charge-offs for the
year ended December 31, 2000 resulted from a problem asset work-out strategy
deployed by CBC's previous management, compounded by a slowing economy. During
the course of the previous two years, CBC's management made the decision to
advance unsecured funds to problem borrowers in an attempt to rehabilitate the
borrower. This strategy resulted in significant unsecured overadvances to
CBC's borrowers. The increases in charge-offs and provision for loan losses
related to these credits combined with an economic slowdown in the technology
and telecommunications industries have been a significant cause of CBC's
recent poor financial performance. Additionally, the deterioration of
collateral value and the beginning of a general economic turndown in the
telecommunications and technology sectors have resulted in increased non-
performing assets and charge-offs.
See Item 7. "Management's Discussion and Analysis--Asset Quality," for more
information about CBC's non-performing assets and non-accrual loans.
SPB has made significant changes to CBC's operating structure, credit
underwriting, and credit administration functions to ensure the CBC loan
portfolio is more stringently managed.
The additional changes to CBC's underwriting, credit administration, and
workout strategies include:
. All new credits must include the approval of SPB's chief credit officer,
. CBC's over-advance approval authority has been terminated,
. All covenant waivers or amendments require the approval of SPB's Chief
Credit Officer,
8
. All customer covenant violations must be reported to SPB's Chief Credit
Officer within 24 hours of discovery,
. A new risk monitoring system for CBC has been introduced based on a
review of several risk-rating factors,
. Quarterly meetings will take place between field audit, portfolio
administration, and SPB's Risk Management Department to review all CBC
accounts,
. Customer risk ratings will be updated regularly,
. Under new management from SPB, CBC has been more proactive in identifying
potential problem credits,
. Industry papers will be prepared and updated annually for all syndicated
national credit categories with $100 million or above of credit exposure,
and
. Credit guidelines will be reviewed semi-annually for technology and
telecommunications--based lending, which together account for a
significant portion of CBC's loan portfolio.
Marketing
CBC obtains business through referrals from:
. banks .existing borrowers .investment banks
. venture capitalists .other finance companies .mezzanine funds
. accounting firms .independent brokers
. management consultants .other affiliates of our company
CBC's marketing officers call on CBC's referral sources to identify and
receive introductions to potential clients. CBC also identifies potential
clients from database searches. CBC's marketing efforts also include in-house
telemarketing, magazine and newspaper advertising, attendance at and
sponsorship of seminars and trade shows, banner ads and internet advertising.
CBC pays its marketing personnel competitive base salaries and commissions
based on funded transactions. Commissions can be a significant portion of the
total compensation paid to CBC's marketing personnel. CBC believes that this
will motivate and reward the creation of new business and the retention of
existing business. CBC's marketing personnel do not have credit decision
authority.
Imperial Warehouse Finance, Inc.
General
Imperial Warehouse Finance, Inc. ("IWF") is a wholly owned subsidiary of
SPB which provides nationwide short-term repurchase lines of credit to
mortgage lenders ("Sellers"), who are in search of a reliable Warehouse
Lender. IWF's repurchase lines of credit provide Sellers with the ability to
do same day closings and sell such residential mortgage loans in the secondary
market.
IWF's Loan Portfolio
IWF has entered into a participation agreement with SPB pursuant to which
SPB funds 100% of IWF's warehouse loans to Sellers.
IWF generates revenues by charging an interest rate based on Prime plus a
percentage, along with a transaction fee for each loan purchased.
9
The following table sets forth certain information regarding IWF's
warehouse lines at December 31, 2000, 1999 and 1998:
At December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Commitments.................................... $154,855 $300,415 $401,500
Outstanding warehouse lines.................... 50,639 78,068 181,001
Outstanding unfunded commitments............... 104,216 222,347 220,499
Average outstanding balance per customer....... 1,160 940 1,602
Average commitment per customer................ 3,520 3,617 3,554
Weighted average yield......................... 9.72% 8.28% 9.94%
IWF's outstanding balances to customers by geographic location were as
follows at December 31, 2000, 1999 and 1998:
At December 31,
------------------------------------------------------
2000 1999 1998
----------------- ----------------- ------------------
% of % of % of
Loans in Loans in Loans in
Amount Portfolio Amount Portfolio Amount Portfolio
------- --------- ------- --------- -------- ---------
(Dollars in thousands)
New York............. $ 4,774 9.35% $24,720 31.66% $ 41,177 22.75%
Maryland............. 8,790 17.22 22,188 28.42 26,865 14.84
California........... 22,978 45.03 6,140 7.86 241 0.13
Michigan............. 89 0.17 4,780 6.12 40,854 22.57
Florida.............. 8,641 16.93 3,369 4.32 25,844 14.28
New Jersey........... 217 0.43 2,915 3.73 14,700 8.12
Indiana.............. -- -- 128 0.16 10,757 5.94
Other................ 5,150 10.87 13,828 17.73 20,563 11.37
------- ------ ------- ------ -------- ------
Total.............. $50,639 100.00% $78,068 100.00% $181,001 100.00%
======= ====== ======= ====== ======== ======
As a result of the relocation in the fourth quarter of 1999, none of the
employees of IWF made the move from New Jersey to California. We believe that
as a result of the personal contacts that IWF's former employees had with the
existing client base, a substantial number of customers have paid off their
warehouse lines and moved their relationships to the new employers of our
former IWF employees. However, several positive changes have transpired during
the fourth quarter of 2000 which will reflect on IWF's production and
performance in 2001. In the fourth quarter of 2000, we changed the management
team of IWF, who has restructured the company's contractual documentation,
underwriting guidelines, sellers requirements and daily operational
procedures, with the intent of minimizing its risk exposure. IWF has
terminated several business relationships that were unable to comply with the
new requirements. Since the change in management, IWF has added $38.6 million
in new commitments and $16.3 million in new outstanding balances through
December 31, 2000 from new business relationships under more stringent
underwriting guidelines.
Loan Products and Originations
Under our new Master Repurchase Agreement, IWF purchases first and/or
second trust deed mortgage loans secured by real estate properties from
approved Sellers that are later sold to the approved secondary marketing
investors.
Underwriting
During the fourth quarter of 2000, we implemented changes to our
underwriting policies. In general, these new policies require Sellers to
maintain a higher company net worth. We have also implemented margin accounts,
which are held by SPB and managed by IWF for any possible purchase
deficiencies. The new policy
10
includes Seller's performance reviews, which are conducted on a quarterly
basis to ensure continuing business relationships. Purchased loans are
underwritten in accordance with both IWF's and SPB's policies and procedures.
Several changes have been made to IWF's application and approval process that
requires detailed information on the prospective applicant. After evaluating
the application and independently verifying the applicant's credit history,
business relationships, investor approvals, licensing status (among other
critical credit verification), the application is submitted to SPB's loan
committee for final disposition. After final approval, IWF personnel will
conduct an on-site visit with the approved Seller to confirm the information
provided in the application. IWF will confirm Seller's organizational
structure, operational personnel, type of business conducted, along with a
walk through on their operational procedures from processing through credit
file shipment to the investor.
All mortgage loans purchased by IWF on behalf of the approved Seller are
secured by 1-4 family real estate properties. Upon the release of funds to
close a real estate transaction, IWF holds all rights and interest to the
mortgage loan. The repurchase line may also be secured by a personal guaranty
executed by the principals of the mortgage company. Typically the loans are to
be repurchased from IWF within 60 days of its initial purchase date.
Credit Monitoring and Controls
IWF has implemented daily purchase operational procedures with the intent
of minimizing its risk exposure and ensure the quality of the purchased
mortgage loans. IWF has also implemented quarterly reviews on all active
Sellers to ensure that the Seller is maintaining its contractual obligations
with IWF and to establish and maintain long term profitable business
relationships. IWF has implemented the following changes:
. Approved Sellers are required to execute a Master Repurchase Agreement,
Sellers Warranties Agreement and UCC filings, as well as having IWF
recorded as a loss payee on their Errors and Omissions Insurance and
Fidelity Bond.
. All margin accounts (to cover margin deficits) are held with IWF's parent
company, Southern Pacific Bank, and monitored by IWF.
. Sellers are required to provide evidence of underwriting approvals from
either internal underwriters if the Seller has been approved for
delegated underwriting by the ultimate purchaser of the mortgage loan, or
from the ultimate investor in the mortgage loan, prior to each purchase
transaction.
. Repurchase wires are received directly from an approved third party
investor.
. Detailed status of the outstanding loans are required if a loan has not
been repurchased after its permissible period.
Pricing and Funding
IWF typically charges its Sellers Prime minus 0.50% to Prime plus 2% for
each loan purchased, along with transaction fees ranging from $50 to $120 per
transaction.
Asset Quality
The amount of non-performing assets attributable to IWF's business at
December 31, 2000, 1999 and 1998 were $9.4 million, $7.8 million, and $4.1
million, respectively. The amount of net charge-offs relating to IWF's loans
during the year ended December 31, 2000 was $16.4 million. IWF experienced
$1.6 million and $0 in charge-offs for the years ended December 31, 1999 and
1998. The increases in NPL's and charge-offs during 2000 was the result of
fraud and from enforcing stricter underwriting and collection policies on
IWF's customers.
See Item 7. "Management's Discussion and Analysis--Asset Quality," for more
information about IWF's non-performing assets and non-accrual loans.
11
Marketing
IWF expects to continue developing its business relationships nationwide.
IWF markets its business by attending industry tradeshows, advertising in such
publications as the Mortgage Banker, the National Mortgage Professional and
the National Mortgage News and by direct mail.
Loan Participation and Investment Group
General
SPB formed the Loan Participation and Investment Group ("LPIG") in
September 1995 to invest in and purchase senior secured debt of other
companies (referred to as a "participation") offered by commercial banks in
the secondary market. We stopped originating new commitments for LPIG during
1998 as we believe that the capital that is currently being deployed at SPB to
support LPIG's business could be better utilized in our other core businesses.
As such, we anticipate that the current outstanding balance of LPIG's loans
will decrease over time as this portfolio runs-off. The principal types of
loans acquired by LPIG are senior-secured bank loans, in the form of revolving
lines of credit and long-term loans or letters of credit. As a part of its
business, LPIG invested in loan participations through both on and off balance
sheet financing arrangements. The on balance sheet investments are funded by
the FDIC insured deposits of SPB, while LPIG's off balance sheet financing is
primarily conducted through a trust and total return swap instrument.
During the year ended December 31, 1999, we entered into total rate of
return swap contracts for investment purposes with various investment bank
counter parties, the provisions of which entitle our company to receive the
total return on various nationally syndicated bank loans and pay for a
floating payment of one month LIBOR plus a spread. These contracts are off
balance sheet instruments, and are managed by SPB's LPIG division. As of
December 31, 2000 and 1999, we were party to total rate of return swap
contracts with a total notional amount of syndicated bank loans of $65.2
million and $83.6 million, respectively, under which we were obligated to pay
one month LIBOR plus a weighted average spread of 0.88%. The weighted average
remaining life of these contracts was 51.2 months and 60.0 months at December
31, 2000 and 1999. For the years ended December 31, 2000 and 1999, we
recognized $2.7 million and $2.9 million in interest income on these total
return swaps and ($3.8) million and $197,000 in net mark-to-market gains or
(losses), respectively. The cash flows from these swaps are generated by
investments in nationally syndicated bank loans which have experienced high
default rates in the year ended December 31, 2000. Additionally, credits in
the swaps are subject to market price risk, and as such could result in
significant gains or losses to our company.
LPIG's On Balance Sheet Loan Portfolio
The following table sets forth certain information regarding LPIG's
commitments and outstanding balances at December 31, 2000, 1999 and 1998 as
follows:
At December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Commitments................................... $289,110 $459,533 $523,300
Loans outstanding............................. 123,471 216,961 222,100
Average outstanding balance per loan.......... 4,410 6,027 4,936
Average commitment per loan................... 10,325 12,765 11,929
Weighted average yield........................ 7.84% 7.55% 8.21%
Underwriting/Credit Monitoring and Controls
By purchasing loan participations, LPIG built its loan portfolio without
loan origination costs or ongoing loan servicing costs and with minimal
administrative costs. LPIG attempted to minimize the risk of investing in loan
participations by performing a comprehensive analysis of a borrower's
creditworthiness including analysis of operating performance, cash flow,
capital structure, collateral, customers, suppliers, industry and competition.
Loans are monitored on at least a quarterly basis for performance against
projections and compliance with loan covenants.
12
Set forth below is a table showing LPIG's outstanding loan and commitment
balances by industry at December 31, 2000 and 1999:
At December 31, 2000 At December 31, 1999
------------------------------------- -------------------------------------
Outstanding % of Commitment % of Outstanding % of Commitment % of
Balance Total Balance Total Balance Total Balance Total
----------- ------ ---------- ------ ----------- ------ ---------- ------
(Dollars in thousands)
Manufacturing........... $ 3,682 2.98% $ 24,647 8.53% $ 26,469 12.20% $ 63,189 13.75%
Television
broadcasting........... 14,044 11.37 33,790 11.69 13,773 6.35 44,483 9.68
Entertainment........... 11,477 9.30 11,641 4.03 36,332 16.74 43,453 9.46
Packaging............... 11,212 9.08 19,394 6.71 19,432 8.96 31,545 6.86
Hotels.................. 10,134 8.21 26,407 9.13 18,135 8.36 28,774 6.26
Automobile rentals...... -- -- 15,000 5.19 -- -- 25,000 5.44
Telecommunications...... 22,688 18.38 25,000 8.65 20,238 9.33 25,000 5.44
Mining.................. -- -- 16,000 5.53 7,000 3.23 23,000 5.00
Food processing......... 5,857 4.74 10,000 3.46 11,216 5.17 18,697 4.07
Waste disposal
services............... 4,452 3.61 10,245 3.54 8,433 3.89 18,643 4.06
Party goods
distribution........... 5,166 4.18 14,886 5.15 3,780 1.74 14,940 3.25
Office products......... 8,809 7.13 10,627 3.68 6,624 3.05 14,725 3.20
Defense................. 3,098 2.51 13,388 4.63 4,131 1.90 14,421 3.14
Air carrier............. -- -- -- -- 9,106 4.20 13,400 2.92
Park management......... 3,324 2.69 6,278 2.17 7,636 3.52 13,091 2.85
Rail transportation..... 10,100 8.18 10,100 3.49 12,360 5.70 12,600 2.74
Chemicals............... 634 .51 10,557 3.65 -- -- 10,557 2.30
Healthcare.............. 6,600 5.35 6,750 2.33 9,687 4.46 9,835 2.14
Automobile parts........ 643 .52 9,000 3.11 -- -- 9,000 1.96
Electronics............. 1,551 1.26 7,143 2.47 -- -- 7,143 1.55
Equipment rentals....... -- -- -- -- -- -- 6,750 1.47
Garment................. -- -- 5,400 1.87 -- -- 5,400 1.18
Paper................... -- -- -- -- 2,323 1.07 3,030 0.66
Ecological.............. -- -- 2,857 .99 286 0.13 2,857 0.62
-------- ------ -------- ------ -------- ------ -------- ------
Total.................. $123,471 100.00% $289,110 100.00% $216,961 100.00% $459,533 100.00%
======== ====== ======== ====== ======== ====== ======== ======
Pricing and Funding
LPIG loans are typically priced based on the 1, 2 and 3 month LIBOR rate
plus a spread on the outstanding balance of loans.
Asset Quality
At December 31, 2000, 1999, and 1998, LPIG had non-performing assets of
$26.2 million, $0 and $0, respectively. During the years ended December 31,
2000, 1999 and 1998, LPIG experienced $32.3 million, $3.9 million and $0 in
net loan charge-offs, respectively.
See Item 7. "Management's Discussion and Analysis--Asset Quality," for more
information about LPIG's non-performing assets and non-accrual loans.
Lewis Horwitz Organization ("LHO")
General
We acquired LHO in October 1999. See "Management's Discussion and
Analysis--The Lewis Horwitz Organization" for more information regarding the
acquisition.
LHO is an internationally recognized commercial finance lender engaged in
providing financing for independent motion picture and television production.
Typically, LHO lends to independent producers of film and television on a
senior secured basis, basing its credit decisions on the creditworthiness and
reputation of distributors and sales agents who have contracted to distribute
the films.
13
Loan Products and Originations
LHO provides loans (with a typical term of 12 to 18 months) and letters of
credit for the production of motion pictures and television shows or series
that have a predictable market worldwide, and therefore, a predictable level
of revenue arising from licensing of the distribution rights throughout the
world. LHO also provides various types of credit facilities to creditworthy
companies in the film and television industry. LHO is a widely-recognized
leader in film financing with over 30 years of experience. LHO's lending
officers have a combined total of over 100 years in financing experience. LHO
believes it has a competitive advantage due to its extensive worldwide
contacts among sales agents, distributors and independent producers in an
industry where name recognition and personal contacts are crucial to success.
LHO's experience has allowed it to rapidly adapt to changing industry
standards in order to maintain its competitive position.
LHO lends to independent producers of film and television, many of which
are located in California. LHO, however, has borrowing clients based all over
the world. Independent producers tend to be those producers that do not have
major studio distribution outlets for their product. Large film and television
studios generally maintain their own distribution outlets and finance their
projects with internally generated financing. In addition to funding
production loans against a number of distribution contracts, LHO has pioneered
a conservative valuation of selected unsold rights to cover a portion of the
production budget (gap).
LHO's Loan Portfolio
The following table sets forth certain information regarding LHO's
commitments and outstanding balances at December 31, 2000 and 1999 as follows:
At December 31,
-----------------
2000 1999
-------- -------
(Dollars in
thousands)
Commitments............................................... $101,350 $23,132
Outstanding loans......................................... 83,688 15,824
Outstanding unfunded commitments.......................... 17,662 7,308
Average outstanding balance per loan...................... 1,391 1,582
Average outstanding commitment per loan................... 1,469 731
Weighted average production gap per loan.................. 10.40% 17.97%
Underwriting
LHO's lending officers review the quality of the distributors and their
contracts, the budget, the schedule of advances, and valuation of all
distribution rights when considering a new lending opportunity. After closing,
each requested advance is approved by the lending officer and the bonding
company on a weekly basis to ensure that LHO is not advancing ahead of an
agreed-upon cash flow schedule. The assigned lending officer also periodically
speaks with the producer, bonding company and sales agent regarding the
progress of the film. LHO's lending officers perform extensive follow-up on
every loan to ensure that any unsold distribution rights are sold (i.e.,
distribution contracts are generated by the sales agent) prior to and after
the delivery of the film or television production. Generally, a lending
officer will speak to the sales agent at least monthly regarding the agent's
progress on sales of distribution rights. The loan documentation grants LHO
the right to impose certain penalties on the borrower and exercise certain
other rights, including replacing the sales agent, if sales are not
consummated within the appropriate time. Loans are repaid principally from
revenue received from distribution contracts. In many instances, the
distribution contracts provide for multiple payments payable at certain
milestones (such as execution of contract, commencement of principal
photography or completion of principal photography). The maturity date of the
loan is generally six to nine months after completion of the production in
order to permit all payments from distributors to be received within the
maturity of the loan. Delivery of the completed production is made to the
various distributors only upon or after their minimum guarantees have been
paid in full.
14
Pricing and Funding
LHO typically charges its customers an interest rate ranging from the Prime
Rate to Prime plus 2.00% (exclusive of loan fees) on the outstanding balance
of their loans. Loan fees typically range from, 1.00% to 2.50% with an
additional fee up to 7.0% depending on the level of gap.
Asset Quality
The amount of non-performing assets attributable to the LHO division at
December 31, 2000 and 1999 were $8.0 million and $8.2 million, respectively.
All but one of these assets were acquired as part of the LHO acquisition, and
were on non-accrual status at the time of their purchase. The balance of these
non-performing assets represents the estimated value of a film library
consisting of 34 films. Subsequent to December 31, 2000, we purchased an
additional 14 non-performing loans/assets with an estimated value of $4.9
million in satisfaction of the LHO purchase agreement. These purchases
completed our obligation under the LHO acquisition agreement in full.
See Item 7. "Management's Discussion and Analysis--Asset Quality," for more
information about LHO's non-performing assets and non-accrual loans.
Imperial Business Credit, Inc.
General
Imperial Business Credit, Inc. ("IBC") is a wholly owned subsidiary located
in San Diego, California. IBC ceased originating new business in April, 2000.
At that time IBC sold its origination office in Atlanta and closed the Denver
origination office. IBC is continuing as a lease portfolio servicing entity by
servicing its existing portfolio and a new portfolio originated by an
affiliated division of SPB.
Servicing Activities
IBC provides lease portfolio servicing activities for SPB. IBC and SPB are
parties to a master servicing agreement that enumerates the responsibilities
and obligations of IBC in servicing the leases originated by SPB. In general,
SPB originates leases that are funded by SPB and IBC is contracted as the
servicer. The servicer duties include; generation of invoices, tax compliance,
cash application, accounting, reporting and collection activity. In exchange
for services performed, IBC receives a fee of 0.40% per annum based on the
gross receivables of the lease portfolio being serviced for SPBC and 1.15% for
the leases previously funded through IBC's securitization facility,
respectively. In addition, IBC is generally entitled to receive all late fees
and other miscellaneous fees related to the entire serviced portfolio.
IBC's Lease Portfolio
The focus of IBC's lease activities had historically been equipment lease
financing to small and medium-sized businesses. During the first quarter of
2000, defaults on leases originated through IBC's broker and small-ticket
lease programs continued at a high level. It was determined that IBC could not
make the returns necessary to continue in business as an originator of new
leases and the origination offices were closed or sold.
Generally, IBC funded the origination or acquisition of its leases through
its short term warehouse credit facilities with third party lenders and SPB
and subsequently sold its receivables in the private asset securities market
through its securitization program (the "1997-2 Trust"). The following table
sets forth the lease activity for IBC for the years ended December 31, 2000,
1999 and 1998:
At December 31,
-------------------------
2000 1999 1998
------- -------- --------
(In thousands)
Leases funded..................................... $30,933 $125,202 $114,318
Lease securitizations............................. 43,598 132,359 117,724
Leases serviced for others........................ 170,823 243,463 242,624
15
Lease Finance Operations
Through June 2000, IBC specialized in originating, acquiring, selling,
securitizing and servicing non-cancelable, full-payout equipment leases for
small and medium-sized business in various industries throughout the United
States. Subsequent to this date, IBC's efforts have been focused solely on the
servicing of its leases funded through the securitization facility, and
servicing leases on behalf of SPB. IBC had historically focused on small-
ticket leases with contract amounts between $5,000 and $75,000. IBC derived
its earnings from gains recognized on the securitization or sale of leases,
from the spread on portfolios held for investment and loans held for sale
during the warehouse period and from servicing and related ancillary fees on
its servicing portfolio. In each securitization, IBC received advances based
on a percentage which is less than the aggregate present value of cash flows
from an undifferentiated pool of leases, effectively over collateralizing
lease-backed notes or certificates. Over the life of the lease pool
securitized, IBC is eligible to receive the excess cash flow resulting from
the difference between the lease payments received and the payment of (i)
principal and interest to investors in lease-backed notes or certificates and
(ii) backup servicing and trustee fees and other securitization expenses.
As a result of the recent credit downgrades on our Senior Notes by Moody's
and Standard and Poor's ratings services, IBC is in technical default of the
terms of the 1997-2 Trust. As such, the insurer of the Class A certificates
may cause the 1997-2 Trust to go into "Turbo" amortization. Under Turbo
amortization, virtually all cash flows generated in the 1997-2 Trust would be
used to pay off the outstanding balance of the Class A certificates, while the
Class B and C Certificates, a majority of which are owned by IBC, would
receive virtually no cash flows for principal and interest payments until the
Class A certificates have been paid in full. IBC received a waiver of this
technical default in March 2001. The waiver will be renewed monthly by the
insurer, at its option. There can be no assurance given that the insurer will
continue to grant the monthly waiver to IBC. If the waiver were not to be
granted, IBC's monthly cash flow would decrease by approximately $1.0 million
per month, and cash flow to our parent company would decrease by approximately
$500,000 per month. The outstanding balances of the securities and retained
interests in the 1997-2 Trust owned by IBC were $9.0 million and $4.2 million,
at December 31, 2000, respectively.
Lease Products and Originations
IBC historically emphasized full payout leases with terms of 24 to 60
months. Generally, these leases were categorized as direct finance leases.
IBC used a standard, non-cancelable, full-payment finance lease. The
substantial majority of the leases originated by IBC provided that the lessee
may purchase the equipment for $1.00 at the expiration of the lease, with the
remainder of the leases calling for either a mandatory 10% of original cost
price buy-out or an optional fair market value buy-out.
The following table sets forth IBC's lease originations by equipment type
for the periods presented:
Year Ended December 31, 2000 Year Ended December 31, 1999 Year Ended December 31, 1998
---------------------------------- ---------------------------------- ----------------------------------
Number of Principal Number of Principal Number of Principal
Leases Amount % of Total Leases Amount % of Total Leases Amount % of Total
Originated Originated Originations Originated Originated Originations Originated Originated Originations
---------- ---------- ------------ ---------- ---------- ------------ ---------- ---------- ------------
(Dollars in thousands)
Computers........ 232 $ 5,350 17.3% 910 $ 19,016 15.2% 1,130 $ 22,990 20.1%
Automotive....... 344 3,929 12.7 1,465 16,092 12.9 1,574 17,474 15.3
Furniture and
fixtures........ 161 3,460 11.2 778 16,778 13.4 522 12,232 10.7
Heavy equipment.. 149 3,247 10.5 549 12,829 10.2 524 10,775 9.4
Restaurant....... 213 3,401 11.0 770 11,762 9.4 864 10,074 8.8
Manufacturing/Machine
work............ 100 2,917 9.4 323 8,226 6.6 178 5,174 4.5
Health/Sports
equipment....... 27 1,143 3.7 104 3,131 2.5 117 3,719 3.3
Print/Typeset
equipment....... 11 461 1.5 89 2,403 1.9 107 2,337 2.0
Dry
cleaning/Washing.. 11 314 1.0 32 875 0.7 34 1,235 1.1
Clothing
manufacture..... 10 327 1.1 41 1,533 1.2 10 520 0.5
Radio and
television
production
equipment 241 2,224 7.2 896 7,756 6.2 527 7,277 6.4
Other............ 195 4,160 13.4 1,234 24,801 19.8 1,092 20,511 17.9
----- ------- ----- ----- -------- ----- ----- -------- -----
Total........... 1,694 $30,933 100.0% 7,191 $125,202 100.0% 6,679 $114,318 100.0%
===== ======= ===== ===== ======== ===== ===== ======== =====
16
Underwriting
While IBC originated leases, it screened its origination sources by
checking personal references and financial and credit information. Broker and
certain vendor originators were compensated by IBC on a commission basis.
Origination sources generally retained liability for leases only insofar as
there was any fraud or misrepresentation in the applications or documentation,
unless a special recourse obligation was negotiated with the originator.
Upon receipt of an application, IBC began an investigation of the
creditworthiness of the applicant. IBC credit underwriting procedures were
based upon the use of, among other things, pre-screened broker referrals,
standardized lease application documents, credit investigations, and in
certain transactions, tax returns, financial statements and other relevant
credit information concerning the lessee. IBC focused on the time the business
has been owned and operated, type of business and the applicant's credit
requirements.
Once a lease had been approved, a standardized lease agreement and other
documents were prepared. Lease approvals were applicable for 90 days and with
quoted rates for 60 days. When the equipment was shipped and installed, IBC
verified that the lessee had received and accepted the equipment before paying
the vendor's invoice.
Credit Monitoring and Controls
IBC services all leases that it originated or purchased. IBC's servicing
activities, with respect to both leases retained by IBC or leases securitized
or sold to third parties, consist of:
. collecting, accounting for and posting all payments received
. responding to lessee inquiries
. taking all necessary action to maintain the security interest granted in
the leased equipment
. investigating delinquencies and taking appropriate action
. communicating with the lessee to obtain timely payments
. repossessing and reselling the collateral when necessary and
. generally monitoring each lease
IBC believes that its ability to monitor lessee performance and collect
payments is primarily a function of its collection and support systems. IBC's
collections policy is designed to identify payment problems early to permit
IBC to quickly address delinquencies and, when necessary, to act to preserve
equity in the equipment leased. Collection procedures are intended to commence
immediately upon payments becoming 11 days past due.
Pricing
IBC typically charged its customers a fixed rate of 10.5% to 17.0% on the
original equipment cost financed.
Asset Quality
On balance sheet non-performing assets attributable to IBC's leasing
operations at December 31, 2000 and 1999 were $9,000 and $720,000,
respectively.
See Item 7. "Management's Discussion and Analysis--Asset Quality," for more
information about IBC's non-performing assets and non-accrual loans.
17
The following table sets forth the amount and delinquency status for IBC's
lease servicing portfolio at December 31, 2000, 1999 and 1998.
At December 31,
-----------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
Amount % of Total Amount % of Total Amount % of Total
-------- ---------- -------- ---------- -------- ----------
(Dollars in thousands)
Current......... $164,434 96.3% $235,884 96.9% $233,535 96.3%
30-60 days...... 2,502 1.5 2,925 1.2 3,534 1.5
60-90 days...... 1,438 0.8 1,508 0.6 2,037 0.8
90+ days........ 2,449 1.4 3,146 1.3 3,519 1.4
-------- ----- -------- ----- -------- -----
Total......... $170,823 100.0% $243,463 100.0% $242,625 100.0%
======== ===== ======== ===== ======== =====
Multifamily and Commercial Mortgage Lending
We conduct our commercial mortgage lending operations through the Income
Property Lending Division of SPB.
Income Property Lending Division
General
The Income Property Lending Division ("IPL") of SPB was formed in February
1994. As of December 31, 2000, IPL had six loan origination offices in
California, Utah, Illinois and Florida.
Loan Portfolio
The focus of IPL's lending activities is the small loan market for 5+ unit
multifamily apartments and commercial buildings.
The following table sets forth the loan activity for IPL for the years
ended December 31, 2000, 1999 and 1998:
At December 31,
--------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
Loans funded..................................... $235,890 $339,666 $366,074
Average loan size................................ 447 442 394
Whole loan sales................................. 141,926 283,674 304,169
Gross loans outstanding.......................... 364,176 254,140 145,456
Loans serviced for others........................ -- 25,110 759,247
Loan Products and Originations
IPL generally seeks to make 70% of its loans secured by apartment buildings
and 30% of its loans secured by commercial properties. Most of IPL's business
is generated through in-house loan representatives who market the loans
directly to mortgage brokers and borrowers. IPL also uses direct mailing,
referrals from brokers and real estate developers. Most of IPL's loans have
been secured by properties in California. Margins vary over the 6-month LIBOR
index ranging from 2.15% to 4.0% depending on product type, property location
and credit history of the borrower. IPL's loan programs include 30-year
adjustable rate loans tied to the 6-month LIBOR and Bank of America prime
indexes. IPL also originates fixed rate loans which accounted for
approximately 20% and 42% of IPL's loan production in 2000 and 1999. During
2000 and 1999, 65% and 50.3% of IPL's total loan originations were secured by
property located in California. IPL sells the majority of its loan production
to third parties.
18
Substantially all of IPL's loans contain prepayment restrictions. Such
restrictions may prohibit prepayments in whole or in part during a specified
period of time and/or require the payment of a prepayment fee. Such prepayment
restrictions can, but do not necessarily, provide a deterrent to prepayments.
IPL may from time to time originate loans with a balloon payment due at
maturity. The ability of a borrower to pay such amount will normally depend on
its ability to fully refinance the loan or sell the related property at a
price sufficient to make the required loan payments.
Underwriting
IPL generally uses underwriting criteria that generally require a maximum
loan-to-value ratio of 80% and minimum debt coverage ratio of 1.2x on all
loans. Loan originations not following this criteria may be funded based on
other mitigating factors such as down payment size, strength of borrower, etc.
With respect to apartment loans, IPL uses standard government agency
documentation and approved independent appraisers. IPL's underwriting is
intended to assess the economic value of the mortgaged property and the
financial capabilities, credit standing and managerial ability of the
borrower. Appraisals and field inspections, performed by SPB approved
appraisers and certified inspectors, and title insurance are required for each
loan. With respect to the loans secured by commercial properties, IPL's
policies typically require that usage comply with local zoning and use
ordinances and the use of the commercial space is compatible with the property
and neighborhood. The property must have a stable occupancy history, be
located in a good market and have adequate parking. IPL reviews the state of
repairs of the property, whether there are any unacceptable covenants, if the
property is built to code, and any environmental hazards. IPL also looks at
the borrower's financial statements to determine the borrower's equity in the
property. IPL analyzes whether the borrower will be able to meet all of the
mortgaged property's loan obligations and if the borrower holds other property
and how those other properties are performing. IPL also looks at the
borrower's other income as a possible source of repayment for the loan.
Pricing
IPL establishes loan pricing at least once each week based on prevailing
interest rates and general market conditions. The standard pricing is based on
factors such as the anticipated price IPL would receive upon sale or
securitization of the loan, the anticipated interest spread realized during
the period of accumulating loans, the targeted profit margin and the
anticipated costs associated with sale or securitization.
Credit Monitoring and Controls
SPB services all loans held for investment or available for sale. These
servicing activities consist of:
. collecting, accounting for and posting . communicating with the borrowers to
all obtain timely payments,
payments received,
. responding to inquires, . repossessing and reselling the
collateral when necessary, and
. investigating delinquencies and taking . generally monitoring each loan.
appropriate action,
Asset Quality
Non-performing assets attributable to IPL's operations at December 31, 2000
and 1999 were $1.7 million and $459,000, respectively.
See Item 7. "Management's Discussion and Analysis--Asset Quality," for more
information about IPL's non-performing assets and non-accrual loans.
19
Asset Management Activities
We conduct advisory and asset management services through our wholly owned
subsidiary Imperial Credit Asset Management, Inc. Through October 22, 1999, we
also conducted asset management services through Imperial Credit Commercial
Asset Management Corp.
Imperial Credit Asset Management, Inc.
Imperial Credit Asset Management, Inc. ("ICAM") was formed in April 1998.
ICAM manages Pacifica Partners I L.P., and Cambria Investment Partnership I,
L.P. Pacifica Partners I is a $500 million collateralized loan obligation fund
we launched in August 1998. Pacifica Partners I's assets consist of
approximately $400 million in nationally syndicated bank loans and
approximately $100 million in high yield bonds. We have invested net cash of
$51.3 million through a total return swap in the subordinated and equity
interests of Pacifica Partners I at December 31, 2000. The recoverability of
this asset is dependent upon the future cash flows from Pacifica Partners I.
These cash flows come from investments in nationally syndicated bank loans and
high yield bonds which have experienced high default rates in the year ended
December 31, 2000. Pacifica Partners I's actual cash flows from August 1998
through December 31, 2000 have been greater than originally projected. The
average yield from all of the assets in Pacifica Partners I was 9.33% in 2000
and 8.52% in 1999. Additionally, we received net management fees of
approximately 60 basis points on total assets under management. For the year
ended December 31, 2000 and 1999, ICAM earned net management fees before
expenses of $3.1 million and $3.1 million, respectively, from managing
Pacifica Partners I.
At December 31, 2000 and 1999, we had also invested $6.0 million and $10.0
million, respectively, in Cambria which is a hedge fund that invests in
syndicated bank loans. During the third quarter of 2000, we decided to
liquidate the assets in Cambria. At December 31, 2000 and 1999, Cambria had
total assets under management of approximately $58.3 million and $134.9
million, respectively. The return on our investment was 8.00% for the year
ended December 31, 2000 and 14.0% for the year ended December 31, 1999. ICAM
earns fees equal to one percent of assets under management plus a 20%
incentive fee for positive returns for each calendar year. For the years ended
December 31, 2000 and 1999, ICAM earned management fees of $159,000 and
$833,000 from managing Cambria.
Imperial Credit Commercial Asset Management Corp.
Imperial Credit Commercial Asset Management Corp. ("ICCAMC") was formed in
1997. See "Item 13. Certain Relationships and Certain Transactions--
Relationships with ICCMIC--ICCMIC Management Agreement". ICCMIC was a publicly
traded corporation which elected to be taxed as a real estate investment trust
that invested primarily in performing multifamily and commercial real estate
loans, direct investments in real estate and commercial mortgage-backed
securities.
In October 1997, ICCMIC completed its initial public offering and sold
approximately 34.5 million shares of common stock at $15.00 per share
resulting in net proceeds of approximately $481.2 million. We purchased
2,970,000 shares of ICCMIC common stock in the offering and an additional
100,000 shares in December 1997 for a total of $43.0 million. During 1998, we
wrote down our investment in ICCMIC common stock by $13.0 million to $9.75 per
share due to an other than temporary decline in the value of ICCMIC's common
stock. In 1999, we sold 500,000 shares of ICCMIC common stock at $10.88 per
common share, generating net proceeds of $5.4 million, resulting in a gain on
sale of securities totaling $562,000. As of December 31, 1999, we owned 9.0%
of the common stock of ICCMIC. ICCAMC, a wholly-owned subsidiary, managed the
day to day operations of ICCMIC through October 22, 1999. For the year ended
December 31, 1999, 1998 and from the period of initial public offering through
December 31, 1997, ICCAMC earned $5.9 million, $6.3 million and $940,000,
respectively, in gross management fees from ICCMIC. In addition, we received
cash dividends of $3.1 million, $3.6 million and $399,000 during the years
ended December 31, 1999, 1998 and from the period of initial public offering
through December 31, 1997, respectively.
On March 28, 2000, we acquired all of the outstanding shares of ICCMIC
(consisting of 25,930,000 shares not already owned by us and certain of our
affiliates and subsidiaries) for a cash purchase price of $11.575 per share.
See "Liquidity and Capital Resources--The ICCMIC Acquisition," for further
details.
20
Investment Banking and Brokerage
Imperial Capital Group, LLC
Imperial Capital Group, LLC ("ICG") formed in July 1997 was a majority
owned subsidiary through the fourth quarter of 2000. During the fourth quarter
of 2000, we sold a portion of our ICG holdings to ICG and to certain members
of ICG's management. The Company currently owns 38.5% of ICG as compared to
63.2% prior to the sale. As a result of the sale, beginning with the fourth
quarter of 2000, we will report future ICG results of operations as equity in
the operations of ICG. ICG together with its subsidiaries, Imperial Capital,
LLC and Imperial Asset Management, LLC, offer individual and institutional
investors financial products and services. Imperial Capital, LLC, is a
registered broker/dealer with the United States Securities and Exchange
Commission and is a member of the National Association of Securities Dealers,
Inc. It provides investment opportunities and research to individual and
institutional investors, raises private and public capital for middle market
companies, and trades debt, equity and asset backed securities. Imperial Asset
Management, LLC, is an investment advisor registered with the United States
Securities and Exchange Commission, and provides investment management
services to high net worth individuals and institutional clients. ICG raised
total debt and equity proceeds of $184.5 million through September 30, 2000
and $137.3 million in the year ended December 31, 1999 for its corporate
clients through private placement offerings. Through the nine months ended
September 30, 2000 (the period in which we consolidated the operations of ICG)
ICG generated $30.0 million in investment banking and brokerage fee revenues
and $27.2 million and $18.5 million in the years ended December 31, 1999 and
1998, respectively. Through the nine months ended September 30, 2000 (the
period in which we consolidated the operations of ICG) ICG generated $4.0
million in net income and net income of $2.5 million and a net loss of ($3.9)
million in the years ended December 31, 1999 and 1998, respectively.
ICG has been engaged by our company to provide investment banking services
in connection with our recapitalization transaction. Under the terms of the
engagement, ICG may earn fees of up to $5.6 million upon the successful
completion of the recapitalization transaction. ICG has entered into a
separate agreement with our company that requires the prepayment of $2.6
million of principal amount of subordinated debt owed to our company by ICG
upon the payment of the fees earned as a result of the recapitalization
transaction. See Item 7. "Management's Discussion and Analysis--Results of
Operations--Recapitalization Transaction" for more information.
Other Core Operations
Imperial Credit Lender Services, Inc.
In July 1998, ICII acquired the assets of Imperial Credit Lender Services,
Inc. ("ICLS") formerly Statewide Documentation, Inc., for a purchase price of
$5.0 million worth of ICII common stock. ICLS initially began its operations
in 1981. Its primary business is providing loan documentation preparation and
loan closing services nationwide. Additionally, ICLS provides national notary
and recording services.
For the year ended December 31, 2000, 1999 and the period from our
acquisition in July of 1998 through December 31, 1998, ICLS earned loan
closing fees of $1.4 million, $1.4 million and $845,000, respectively. ICLS's
net losses were $4.8 million, $694,000 and $135,000 for the years ended
December 31, 2000, 1999 and the period from our acquisition in July 1998
through December 31, 1998, respectively.
The loss of $4.8 million in 2000 is attributable to the $4.1 million write-
off of goodwill during the third quarter of 2000. In February of 2001, the
Company disposed of ICLS for its remaining net book value.
Total Return Swaps
As a part of the Pacifica Partners I LP collateralized loan obligation
("CLO") fund we launched in August 1998, we delivered subordinate bonds of
approximately $51.3 million into a total rate of return swap with the Canadian
Imperial Bank of Commerce ("CIBC"). The provisions of the swap currently
entitle us to receive the total return on the subordinate bonds delivered and
pay CIBC a floating payment of LIBOR plus a weighted average spread of 0.75%.
Prior to October, 2000 the provisions of the swap entitled us to receive the
total return on the subordinate bonds delivered and pay CIBC a floating
payment of LIBOR plus a weighted
21
average spread of 1.36%. We posted cash collateral of $51.3 million at
December 31, 2000 and $25.9 million at December 31, 1999 to CIBC as collateral
for the swap. These amounts are classified as Trading Securities on the
consolidated balance sheet at December 31, 2000 and 1999. The assets in the
swaps are subject to market price risk, and as such, sales of assets in the
swaps could result in significant gains or losses to our company.
Non Core Business Lines
We also operate "non-core" businesses, which consist of businesses that
we've decided to de-emphasize or exit. We call these businesses Equity
Interests and De-emphasized/Discontinued/Exited Businesses. Our exit from
these non-core businesses will allow our management to focus on our core
business lines.
Equity Interests
At December 31, 2000 and 1999, we had no equity interests in publicly
traded entities. During the years ended December 31, 1998 and 1997, we held
equity interests in three publicly traded entities, Franchise Mortgage
Acceptance Company ("FMC"), Impac Mortgage Holdings, Inc. ("IMH") and Southern
Pacific Funding Corporation ("SPFC"). During the fourth quarter of 2000, the
Company reduced its ownership percentage in ICG from 63.2% to 38.5% through
the sale of a part of its equity interest to ICG and certain management
members of ICG. As a result, we began to consider ICG as an Equity Interest
beginning in the fourth quarter of 2000. The income from ICG is accounted for
by the equity method of accounting beginning with the fourth quarter of 2000.
FMC
FMC was a publicly traded company through November 1, 1999 that originated
and serviced loans and equipment leases to small businesses. We sponsored
FMC's initial public offering in November 1997. As part of the initial public
offering of FMC, we recorded a total gain on sale of FMC common stock of $92.1
million in 1997. Our investment in FMC contributed $30.0 million, $3.2 million
and $41.8 million to our revenues in 1999, 1998 and 1997, respectively. During
the fourth quarter of 1999, FMC was acquired by Bay View Capital Corporation
("BVC") and we sold our 38.3% common stock ownership interest resulting in a
pre-tax gain on sale of $30.1 million for the year ended December 31, 1999. As
of December 31, 1999 and 1998, we owned none and 11,023,492 shares or 38.3% of
the outstanding common stock of FMC, respectively. For the year ended December
31, 1998, our investment in FMC was reflected on our consolidated balance
sheet as "Equity Interest in Franchise Mortgage Acceptance Company" and was
accounted for pursuant to the equity method of accounting until the third
quarter of 1999. During the third quarter we determined that we did not have
the ability to exercise significant influence over FMC and, therefore, we
changed to the cost method of accounting for this investment.
IMH
IMH is a publicly traded real estate investment trust (AMEX symbol: IMH).
We sponsored IMH as a publicly traded company in November 1995 and our
subsidiary, Imperial Credit Advisors, Inc., acted as its manager until
December 31, 1997. Pursuant to a Termination Agreement entered into in
December 1997, related to the Management Agreement between Imperial Credit
Advisors, Inc. and IMH, we received 2,009,310 shares of IMH common stock and
certain securitization-related assets, and, in exchange, we canceled a note
receivable from IMH's subsidiary, Impac Funding. During 1998, we wrote down
our investment in IMH common stock by $24.5 million to $5.00 per share due to
an other than temporary decline in the value of IMH's common stock. During the
years ended December 31, 1999 and 1998, we sold 1,887,110 shares and 122,200
shares of IMH stock, resulting in a gain of $929,000 and a loss of $185,000
respectively. We received cash dividends of $157,000 and $2.9 million for the
years ended December 31, 1999 and 1998. At December 31, 1999, we did not own
any shares of IMH common stock.
SPFC
SPFC was a publicly traded sub-prime mortgage banking company which
originated, purchased and sold high yielding, single family sub-prime mortgage
loans. We sponsored SPFC as a public company in June 1996 and sold a portion
of our holdings raising $64.6 million. At December 31, 1999, we did not own
any shares of
22
SPFC common stock. As of December 31, 1998, we owned 9,742,500 shares of SPFC
common stock, representing 47.0% of the outstanding common stock. Our
investment in SPFC contributed none, $12.7 million and $25.9 million to our
revenues in 1999, 1998 and 1997, respectively. In October 1998, SPFC
petitioned for Chapter 11 bankruptcy protection under Federal bankruptcy law.
In 1998, as a result of SPFC's bankruptcy filing, we wrote-off our entire
equity interest and other assets totaling $82.6 million. Our stockholdings in
SPFC were reflected on our consolidated balance sheet as "Equity Interest in
SPFC" and, until SPFC's bankruptcy filing and termination of new business
activities, were accounted for pursuant to the equity method of accounting.
ICG
During the fourth quarter of 2000, we sold a portion of our ICG holdings to
ICG and to certain members of ICG's management. The Company currently owns
38.5% of ICG as compared to 63.2% prior to the sale. As a result of the sale,
we will no longer consolidate the operations of ICG. Beginning with the fourth
quarter of 2000, we consider ICG to be an Equity Interest and will report
future ICG results of operations as equity in the operations of ICG. ICG
together with its subsidiaries, Imperial Capital, LLC and Imperial Asset
Management, LLC, offer individual and institutional investors financial
products and services. Imperial Capital, LLC, is a registered broker/dealer
with the United States Securities and Exchange Commission and is a member of
the National Association of Securities Dealers, Inc. It provides investment
opportunities and research to individual and institutional investors, raises
private and public capital for middle market companies, and trades debt,
equity and asset backed securities. Imperial Asset Management, LLC, is an
investment advisor registered with the United States Securities and Exchange
Commission, and provides investment management services to high net worth
individuals and institutional clients. For the nine months ended September 30,
2000, ICG raised total debt and equity proceeds of $184.5 million and $137.3
million in 1999 for its corporate clients through private placement offerings.
During the three months ended December 31, 2000 (the period in which we began
to account for our investment in ICG as an Equity Interest) ICG generated
$479,000 in equity in the net income of ICG.
Discontinued/De-emphasized Operations/Exited Businesses
De-emphasized/Discontinued/Exited Businesses--represents those business
units we decided to either de-emphasize, discontinue, or exit. We decided to
de-emphasize, discontinue or exit these business lines because they were not
meeting our expectations for a variety of reasons. These reasons included:
significant credit losses, insufficient loan production volumes, inadequate
gross profit margins, and risks associated with international lending
operations. We include the following significant operations in Exited
Businesses: Auto Marketing Network, Inc., the Auto Lending, the Alternative
Residential Mortgage, and the Consumer Loan Divisions of SPB, and Credito
Imperial Argentina ("CIA"), our residential loan production business in
Argentina.
Auto Marketing Network, Inc.
During the third quarter of 1998, we discontinued the operations of Auto
Marketing Network, Inc ("AMN"). AMN financed the purchase of new and used
automobiles primarily to sub-prime borrowers on a nationwide basis. Since the
acquisition of AMN in March 1997, it had recorded losses and experienced
significant increases in non-performing assets, loan charge-offs and loan loss
provisions.
Losses from AMN's discontinued operations, net of taxes were as follows:
Disposition
For the For the Period from Period from
Year Ended Year Ended August 1, 1998 to January 1, 1998
December 31, 2000 December 31, 1999 December 31, 1998 to July 31, 1998
----------------- ----------------- ----------------- ----------------
(In thousands)
Loss from discontinued
operations............. $5,218 $899 $ -- $3,232
Loss on disposal of
AMN.................... -- -- 11,276 --
------ ---- ------- ------
Net loss from
discontinued
operations............. $5,218 $899 $11,276 $3,232
====== ==== ======= ======
23
For the year ended December 31, 2000, AMN incurred additional operating
losses from discontinued operations of $5.2 million, net of income taxes,
primarily related to the establishment of a $3.5 million deferred tax asset
valuation allowance, loan loss provisions of $1.1 million, $574,000 in mark-
to-market write downs on securities and professional fee expenses of $756,000.
For the year ended December 31, 1999, AMN incurred additional operating losses
from discontinued operations of $899,000, net of income taxes, primarily
related to legal expenses and mark-to-market adjustments on AMN securities. In
1998 we recorded a loss on disposal of AMN totaling $11.3 million including
charges (net of taxes) of $5.6 million for securities valuation, $1.2 million
for disposition of furniture and equipment and other assets, $5.6 million for
estimated future servicing obligations to a third party servicer, $1.3 million
in liquidation allowances for non-accrual loans and repossessed autos,
$2.1 million in severance costs, occupancy and general and administrative
expenses. These charges were partially offset by the estimated net interest
income on loans and securities for the next year (disposition period) of
$4.5 million. The remaining assets of AMN are subject to mark-to-market
adjustments based on prepayment, credit loss, and interest rate fluctuations.
AMN may incur additional write downs in future periods if the performance of
the remaining securities at AMN do not meet our current projections.
Additionally, AMN could be subject to increased expenses as a result of
litigation costs in connection with the Steadfast Insurance Company v. Auto
Marketing Network Inc. and Imperial Credit Industries, Inc. case. (See Item
3.--"Legal Proceedings.")
At December 31, 2000 and 1999, AMN had no outstanding warehouse lines of
credit. The net assets of AMN's discontinued operations were as follows:
At December 31,
---------------
2000 1999
------- -------
(In thousands)
Loans....................................................... $ 2,310 $ 5,207
Securities.................................................. -- 8,685
Retained interests in securitization........................ 14,002 12,436
Income taxes receivable..................................... -- 8,971
Other net assets............................................ 1,318 2,193
------- -------
$17,630 $37,492
======= =======
Consumer Credit Division
Consumer Credit Division ("CCD"), a division of SPB, closed its operations
in December 1998. The costs of closing this division were immaterial. We
decided that the returns generated by CCD were not meeting our profitability
expectations, and that the time necessary to improve profitability did not
justify further investment. CCD was formed in early 1994 to offer loans
primarily to finance home improvements and consumer goods. Home improvement
loans ranged from $5,000 to $350,000 and the loans were typically secured by a
junior lien. CCD also purchased unsecured installment sales contracts to
finance certain home improvements.
Total CCD loans outstanding were $7.1 million at December 31, 2000, $18.7
million at December 31, 1999 and $30.5 million at December 31, 1998. We sold
$7.5 million, $11.7 million and $14.6 million of these loans in 2000, 1999 and
1998, respectively. At December 31, 2000, 1999 and 1998 we held $5.8 million,
$14.1 million and $29.4 million of these loans for sale. At December 31, 2000,
1999 and 1998, CCD had $686,000, $633,000, and $253,000 in non-accrual loans,
respectively.
Auto Lending Division
The Auto Lending Division ("ALD"), a division of SPB, closed its operations
in February 1999 due to significant losses on non-performing assets in 1998.
We made the decision to close the operations of ALD in the fourth quarter of
1998. ALD offered loans primarily to finance automobile purchases by sub-prime
borrowers. ALD also purchased automobile loans from other independent loan
originators. The costs of closing this division were immaterial. During the
years ended December 31, 2000, 1999, and 1998, we incurred additional losses
on the existing auto loan portfolio and wrote-down the value of the portfolio
by $0, $24.3 million, and $21.5 million,
24
respectively. At December 31, 2000 and 1999, we held $2.3 million and $6.0
million of ALD loans. During the years ended December 31, 2000, 1999 and 1998,
we sold $0, $45.3 million and $71.6 million of ALD's loans, respectively. The
amount of non-performing assets attributable to ALD at December 31, 2000 and
1999 were $0 and $245,000, respectively.
Imperial Credit Worldwide, Ltd.
Imperial Credit Worldwide ("ICW") closed its operations in October 1998.
ICW was the holding company for our international finance activities and was
the majority owner of Credito Imperial Argentina ("CIA"), our former mortgage
banking company conducting residential mortgage business in Argentina. Due to
the decline in the Latin American financial markets, CIA ceased originating
loans for its portfolio in October 1998. In May 1999, we sold the remaining
balance of CIA's net mortgage loan portfolio totaling $22.8 million, for a
loss of $112,000. Total CIA loans held for sale at December 31, 1999 and 1998
were $0 and $30.0 million, respectively. These loans were carried on our
company's books at their estimated fair value of $22.8 million at December 31,
1998.
Loans and Leases Held for Investment
The following table sets forth certain information regarding our loans and
leases held for investment. Substantially all of our company's loans and
leases held for investment are held by Southern Pacific Bank and are funded by
FDIC insured deposits:
At December 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(In thousands)
Loans secured by real
estate:
One to four family...... $ 72,502 $ 93,914 $ 125,616 $ 205,788 $ 375,476
Multifamily............. 42,695 35,249 56,229 17,261 2,527
Commercial.............. 14,025 14,022 25,677 13,202 11,011
---------- ---------- ---------- ---------- ----------
129,222 143,185 207,522 236,251 389,014
Leases.................. 10,431 1,125 1,048 7,745 99,717
Consumer and auto
loans.................. 3,480 7,072 26,511 147,603 34,248
Franchise loans......... 8,797 18,277 50,520 62,219 115,910
Asset-based and cash
stream loans........... 752,883 748,122 633,299 484,828 288,528
Loan participations..... 123,471 216,961 222,106 196,420 160,672
Mortgage warehouse
lines.................. 50,639 78,068 181,001 122,488 --
Film and television
production loans....... 83,688 15,824 -- -- --
Commercial loans........ 18,223 48,853 34,509 35,861 13,260
---------- ---------- ---------- ---------- ----------
1,180,834 1,277,487 1,356,516 1,293,415 1,101,349
Loans in process........ 11,860 (5,472) (5,636) (7,081) --
Unamortized premium
(discount)............. 1,341 1,389 3,109 2,211 (6,336)
Deferred loan fees...... (7,916) (8,492) (9,014) (9,104) (6,415)
---------- ---------- ---------- ---------- ----------
1,186,119 1,264,912 1,344,975 1,279,441 1,088,598
Allowance for loan and
lease losses........... (63,625) (31,841) (24,880) (26,954) (19,999)
---------- ---------- ---------- ---------- ----------
Total................. $1,122,494 $1,233,071 $1,320,095 $1,252,487 $1,068,599
========== ========== ========== ========== ==========
25
Our loans and leases held for investment are primarily:
. asset-based and cash stream loans to middle market companies mainly in
California,
. syndicated commercial loan participations,
. first and second lien mortgages secured by residential and income
producing real property mainly in California,
. warehouse loans to residential mortgage loan brokers, and
. television and motion picture production loans to independent producers.
Although we continue to diversify our portfolio, a substantial portion of
our debtors' ability to honor their contracts is dependent upon the economy of
California. A decline in California real estate values may adversely affect
certain underlying loan collateral. SPB's single largest loan was $23.5
million at December 31, 2000 and $27.4 million at December 31, 1999. SPB's ten
largest loans and outstanding commitments aggregated $177.4 million and
$225.5 million at December 31, 2000, respectively. See "Item 1. Business" for
more information on SPB's average loan size by division. Also see Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Asset Quality" for more information about non-performing assets,
non-accrual loans, and our allowance for loan and lease losses.
Funding
Our liquidity requirements are met primarily by SPB. Business operations
conducted through divisions of SPB are primarily financed through deposits,
our capital contributions, and Federal Home Loan Bank borrowings.
Southern Pacific Bank Deposits
SPB is an FDIC insured industrial bank which is regulated by the California
Department of Financial Institutions and the FDIC. See "--Regulation" for a
more detailed description of regulations governing SPB.
At December 31, 2000 and 1999, SPB had total deposits of approximately $1.6
billion and $1.6 billion, respectively (amounts in both years exclude our
deposits maintained with SPB). SPB solicits both individual and institutional
depositors for new accounts through print advertisements and computerized
referral networks. SPB currently maintains two deposit gathering facilities in
Southern California. At these facilities, tellers provide banking services to
customers such as accepting deposits and making withdrawals. However,
customers are not offered check writing services or comparable demand deposit
accounts. Generally, certificates of deposit are offered for terms of one
month-36 months. See "--Regulation--Industrial Bank Operations--Limitations on
Types of Deposits" for a description of limitations on types of deposits that
SPB, as an industrial bank, can accept.
The following table sets forth the distribution of SPB's deposit accounts
(prior to eliminating inter-company transactions) and the weighted average
nominal interest rates on each category of deposits:
At December 31,
--------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
% of Interest % of Interest % of Interest
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
---------- -------- -------- ---------- -------- -------- ---------- -------- --------
(Dollars in thousands)
Savings accounts........ $ 56,150 3.4% 4.94% $ 66,415 4.1% 4.79% $ 57,249 3.3% 4.27%
Money market accounts... 25,020 1.5 5.74 -- -- -- -- -- --
Time deposits of less
than $100,000.......... 1,147,201 70.0 6.66 1,235,468 76.0 5.82 1,199,825 69.9 5.61
Time deposits of
$100,000 and over...... 409,712 25.1 6.79 324,271 19.9 5.49 459,614 26.8 5.62
---------- ----- ---- ---------- ----- ---- ---------- ----- ----
Total.................. $1,638,083 100.0% 6.62% $1,626,154 100.0% 5.71% $1,716,688 100.0% 5.57%
========== ===== ==== ========== ===== ==== ========== ===== ====
26
The following table sets forth the dollar amount of deposits by time
remaining to maturity:
At December 31
-----------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
% of % of % of
Amount Deposits Amount Deposits Amount Deposits
---------- -------- ---------- -------- ---------- --------
(Dollars in thousands)
Three months or less.... $ 501,051 30.6% $ 461,128 28.3% $ 552,077 32.2%
Over three months
through six months..... 402,033 24.5 353,999 21.8 452,782 26.4
Over six months through
twelve months.......... 597,254 36.5 583,338 35.9 478,000 27.8
Over twelve months...... 137,745 8.4 227,689 14.0 233,829 13.6
---------- ----- ---------- ----- ---------- -----
Total.................. $1,638,083 100.0% $1,626,154 100.0% $1,716,688 100.0%
========== ===== ========== ===== ========== =====
The following table sets forth the time certificates $100,000 and over by
time remaining to maturity:
At December 31
-----------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
% of % of % of
Amount Deposits Amount Deposits Amount Deposits
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Three months or less.... $ 81,194 19.8% $ 95,964 29.6% $129,479 28.1%
Over three months
through six months..... 129,850 31.7 75,403 23.2 148,832 32.4
Over six months through
twelve months.......... 166,818 40.7 103,129 31.8 114,803 25.0
Over twelve months...... 31,850 7.8 49,847 15.4 66,500 14.5
-------- ----- -------- ----- -------- -----
Total.................. $409,712 100.0% $324,343 100.0% $459,614 100.0%
======== ===== ======== ===== ======== =====
Interest expense associated with certificates of deposit of $100,000 and
over was approximately $28.1 million for the year ended December 31, 2000,
$18.2 million for the year ended December 31, 1999 and $24.2 million for the
year ended December 31, 1998.
SPB has historically increased its deposits as necessary so that deposits
together with its cash, liquid assets, Federal Home Loan Bank ("FHLB")
borrowings and warehouse borrowings, have been sufficient to provide funds for
all of SPB's lending activities. At December 31, 2000, there were $65.0
million in outstanding FHLB borrowings.
Repurchase and Warehouse Facilities
We use repurchase facilities and warehouse lines of credit in order to fund
certain loan and lease originations and purchases. As of December 31, 2000, we
had the following warehouse lines, reverse repurchase facilities and notes
payable:
Interest Index (basis
Rate Commitment Outstanding points) Expiration Date
-------- ---------- ----------- -------------- -----------------
(Dollars in thousands)
Lehman Brothers (Corona Film
Finance Fund)(1).................. 6.60% $39,044 $39,044 Fixed rate January 5, 2001
Imperial Bank (ICII)(2)............ 10.00 10,000 10,000 Prime plus 100 June 18, 2001
Cap Mark Services (ICCMIC)......... 8.50 10,508 10,508 Fixed rate December 11, 2027
Orix Real Estate Capital (ICCMIC).. 7.37 23,346 23,346 Fixed rate January 2, 2013
Other notes payable (ICII)......... 8.00 -- 1,220 Fixed rate None
------- -------
$82,898 $84,118
======= =======
- --------
(1) The borrowings from Lehman Brothers were repaid on January 5, 2001.
(2) The borrowings from Imperial Bank were repaid on February 23, 2001.
27
Securitization Transactions and Loan Sales
Securitizations of Assets
As a fundamental part of our business and financing strategy prior to 1998,
we sold a significant amount of our loans and leases through securitization,
except for loans held for investment by SPB. Securitizations were performed
historically by our prior divisions and subsidiaries: FMC, SPFC and AMN. We
have, however, de-emphasized the use of securitizations as part of our
refocused business strategy. During 2000, 1999 and 1998, IBC was the only
subsidiary that sold assets through securitizations. During 2000, IBC ceased
originating new equipment leases.
In a securitization, the cash flows of the underlying receivables, such as
loans and leases, are apportioned to bonds having various credit ratings,
yields and maturities. These bonds, which are collateralized by the underlying
loans and leases, are sold to investors at market prices. In most cases, we
retained the servicing of the loans and leases; servicing is the process of
collecting the payments from the borrowers and remitting the required payments
to the investors. We are paid a fee for such servicing, which is earned
monthly and collected from the remittances on the assets securitized.
When we sell loans and leases in a securitization, we recognize a gain to
the extent that the selling price in cash exceeds the carrying value of the
loans and leases sold based on the estimated relative fair values of the loans
and leases sold, any assets we obtain and any liabilities we incur in the
securitization. When we securitize loans and leases, we generally retain an
interest in the securitized assets which may be one or more of the bonds,
servicing assets and/or call options created through the securitization. The
liabilities we incur when we securitize loans and leases include, generally,
recourse obligations, put options and servicing liabilities. The retained
interest in a securitization represents, generally, a credit enhancement for
the investors in that this interest is either subordinated to the other bonds
sold or represents an over collateralization amount. In either case, as holder
of the retained interest, we incur the risk of loss and prepayment on the
underlying loans and leases and will be last to receive the cash flows
apportioned to such retained interests.
At the time of the securitization, the retained interest and servicing
assets are recorded at their fair values. Because an active market does not
typically exist for these types of assets, we generally estimate their fair
values by discounting cash flows we expect to receive. In discounting the cash
flows, we make estimates of loan prepayments, loan defaults and loan losses.
These estimates are based on actual historical prepayments in our servicing
portfolios tempered by our expectation of how future changes in interest rates
will impact prepayments, and actual default and loss rates we have experienced
for the types of loans and leases sold. The discount rate we use is the rate
determined by us to be the rate used by other market participants under
similar circumstances.
We evaluate the carrying value of the retained interests and servicing
assets on a quarterly basis by re-estimating their fair values using updated
assumptions for prepayments, default and loss rates, and discount rate. When
the estimated fair value of these assets is less than their carrying value, we
take a loss for the deficiency by writing down the carrying value of the
asset. Based on our comparison of the carrying values of these assets to their
estimated fair values, we realized a loss of $5.4 million, $15.0 million and
$4.4 million during 2000, 1999 and 1998, respectively. Similar losses could
occur in the future and may have a material adverse effect on our net income.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations".
At December 31, 2000 and 1999, our consolidated balance sheets include the
following interest-only securities, subordinated bonds, servicing assets, and
retained interests:
December 31,
---------------
Retained Interest and Servicing Assets 2000 1999
-------------------------------------- ------- -------
(In thousands)
Interest only securities included with trading securities... $10,019 $11,978
Subordinated bonds.......................................... 20,973 12,201
Servicing rights............................................ 600 802
Retained interest in loan and lease securitizations......... 6,330 10,220
For further information, see notes 1, 6 and 10 of Notes to Consolidated
Financial Statements.
28
During 2000, 1999 and 1998, we only securitized leases originated by IBC.
For the years ended December 31, 2000, 1999 and 1998, we securitized loans and
leases totaling $43.6 million, $132.4 million and $117.7 million,
respectively. We sold $141.7 million and $283.7 million of loans in 2000 and
1999, respectively through whole loan sale transactions. Most of the loans
sold through whole loan sales were originated by IPL.
Competition
The businesses in which we operate are highly competitive. We face
significant competition from companies that may be substantially larger and
have more capital than we do. These competitors include:
. other commercial finance lenders .savings and loan associations
. commercial banks .other thrift and loan companies
. credit unions .money market mutual funds
. securities firms
Competition can take many forms, including convenience in obtaining a loan
or lease, customer service, marketing and distribution channels and interest
rates and fees charged to borrowers.
Regulation
During 2000, SPB entered into regulatory orders with the FDIC and the DFI
in response to credit losses and losses from operations. Such orders specify
certain actions and regulatory capital targets with which the Bank must
comply. At December 31, 2000, the Bank was considered "undercapitalized" by
the banking regulators. Banks so categorized are subject to certain
restrictions, including prohibitions on the payment of dividends, restrictions
on compensation, and increased supervisory monitoring, among other things.
Other restrictions may be imposed by the regulators including requirements to
raise additional capital, sell assets or sell the entire bank. On March 30,
2001, the Company contributed to the Bank $21.2 million in cash in the form of
new equity capital and converted $22.0 million of subordinated debt into
perpetual preferred stock of the Bank. Such capital infusions, in addition to
Bank earnings subsequent to December 31, 2000, restored the Bank's capital to
amounts above the "adequately capitalized" regulatory minimums cited in
banking regulations. Management believes that the Bank will not meet any of
the required target capital ratios required by the regulatory orders during
2001. At this time, the financial impact, if any, of regulatory actions that
may result from the failure of the Bank to meet minimum capital requirements
of the Orders cannot be determined. Each regulatory agency has available
various remedies, including enforcement actions and sanctions. Among other
sanctions, if the Bank is unable to meet its regulatory capital requirements,
or is determined to have other serious regulatory or supervisory problems, the
FDIC and/or the DFI could place the Bank in conservatorship or receivership.
The accompanying financial statements do not include any adjustments that
might result from the outcome of this uncertainty. For further information,
see Note 4 of Notes to Consolidated Financial Statements.
We are subject to extensive Federal and State regulation in the United
States. Among other things, regulations affect our:
. warehouse lending business,
. maximum interest rates, finance and other charges,
. loan origination and credit activities,
. disclosure to customers,
. terms of secured transactions,
. collection, repossession and claims handling procedures,
. multiple qualification and licensing requirements for doing business in
various jurisdictions, and
. other trade practices.
29
Our affiliate ICG's operating companies are registered as a broker-dealer
with the Securities and Exchange Commission ("SEC") and state securities
regulatory agencies, and with the SEC as an investment advisor. We are also a
member of the National Association of Securities Dealers.
Banks and their subsidiaries and affiliates are extensively regulated under
both federal and state law. The following is not intended to be a complete
description of the statutes and regulations applicable to Southern Pacific
Bank's business. The description of statutory and regulatory provisions is
qualified in its entirety by reference to the particular statute or
regulation. A number of changes to laws and regulations affecting SPB have
occurred in the past several years and can be expected to occur in the future.
The nature, timing and impact of new and amended laws and regulations cannot
be accurately predicted.
ICII and its non-bank subsidiaries are affiliates of SPB within the meaning
of the Federal Reserve Act. Under the Federal Reserve Act, there are certain
restrictions on loans by SPB to ICII and to its non-bank affiliates and all
such affiliates in the aggregate, on investments by SPB in any affiliate's
securities and on SPB taking any affiliate's securities as collateral for
loans to any borrower. SPB is subject to certain restrictions with respect to
engaging in the issue, flotation, underwriting, public sale or distribution of
certain types of securities. We are also prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit or lease or
sale of any property or the furnishing of services.
SPB is supervised by California's Department of Financial Institutions
("DFI"), and is a member of the Federal Deposit Insurance Corporation
("FDIC"). It is subject to the provisions of the Federal Deposit Insurance Act
and to regular examinations by the DFI and the FDIC. SPB is not a member of
the Federal Reserve System ("Fed"), although it is subject to reserve
requirements of the Fed. There are various requirements and restrictions under
the laws of the State of California and of the United States affecting SPB in
its operations, and these laws and extensive administrative regulations cover
many aspects of SPB's business such as investments, branching, municipal
securities and other activities, including restrictions on the nature and
amount of loans which may be made.
As SPB's primary regulator, the DFI has broad supervisory and enforcement
authority over SPB and its subsidiaries. The DFI may impose penalties for and
seek correction of violations of laws or regulations or unsafe or unsound
practices by: (1) assessing monetary penalties; (2) issuing cease and desist
or removal and prohibition orders against a company, its directors, officers
or employees and other persons; (3) initiating injunctive actions; or (4)
taking possession of the business and property of an industrial bank. Certain
provisions of the California Financial Code provide for the institution of
civil or criminal actions against industrial banks and their officers,
directors, employees and affiliates for violations of the law and related
regulations.
SPB's investment certificates (also referred to as "deposits") are insured
by the Bank Insurance Fund of the FDIC to the full extent permissible by law.
As an insurer of deposits, the FDIC issues regulations, conducts examinations,
requires the filing of reports and generally regulates the operations of
institutions to which it provides deposit insurance, including SPB. Either
notice to or approval by the FDIC and the DFI is required before any merger,
consolidation or change in control, or the establishment, relocation or
closing of a branch office of SPB. However, only the DFI's approval is
required to establish a loan production office limited to the solicitation of
loans.
Among other things, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") provided authority for special assessments and required
the FDIC to develop a general risk-based assessment system. The amount of FDIC
assessments paid by insured depository institutions is based on their relative
risk as measured by regulatory capital ratios and certain other factors. Under
this system, in establishing the insurance premium assessment for each bank,
the FDIC takes into consideration the probability that the Bank Insurance Fund
("BIF") will incur a loss with respect to the bank, and charges a bank with
perceived higher inherent risks a higher insurance premium. The FDIC will also
consider the different categories and concentrations of assets and liabilities
of the institution, the likely amount of any such loss, the revenue needs of
the BIF, and any other factors the FDIC deems relevant.
30
Capital
FDIC regulations contain risk-based capital adequacy standards applicable
to financial institutions like SPB whose deposits are insured by the FDIC.
These guidelines provide a measure of capital adequacy and are intended to
reflect the degree of risk associated with both on and off balance sheet
items, including residential loans sold with recourse, legally binding loan
commitments and standby letters of credit. Unlike SPB, ICII, because it is not
directly regulated by any bank regulatory agency, is not subject to any
minimum capital requirements. See "--Holding Company Regulations."
A financial institution's risk-based capital ratio is calculated by
dividing its qualifying capital by its risk-weighted assets. Risk-based
capital ratios are determined by allocating assets and specified off-balance
sheet items to four risk-weighted categories ranging from 0% to 100%, with
higher levels of capital being required for the categories perceived as
representing greater risk. Financial institutions generally are expected to
meet a minimum ratio of qualifying total capital to risk-weighted assets of
8%, of which at least 50% of qualifying total capital must be in the form of
core capital (Tier 1), which includes common stock, noncumulative perpetual
preferred stock, minority interests in equity capital accounts of combined
subsidiaries and mortgage servicing rights and a percentage of purchased
credit card relationships, subject to certain amount limitations.
Supplementary capital (Tier 2) consists of the allowance for loan and lease
losses up to 1.25% of risk-weighted assets, cumulative preferred stock,
intermediate-term preferred stock, hybrid capital instruments and term
subordinated debt. The risk-based capital standards were amended in September
1998 so that up to 45 percent of the pre-tax net unrealized holding gains on
certain available-for-sale equity securities could be included in the Tier 2
capital calculation. The maximum amount of Tier 2 capital that may be
recognized for risk-based capital purposes is limited to 100% of Tier 1
capital (after any deductions for disallowed intangibles).
The aggregate amount of term subordinated debt and intermediate term
preferred stock that may be treated as Tier 2 capital is limited to 50% of
Tier 1 capital. Certain other limitations and restrictions apply as well. At
December 31, 2000 and 1999, the Tier 2 capital of SPB consisted of a portion
of its allowance for loan losses and $42.0 million in term subordinated
indebtedness.
The FDIC has adopted a 3% minimum leverage ratio that is intended to
supplement risk-based capital requirements and to ensure that all financial
institutions, even those that invest predominantly in low risk assets,
continue to maintain a minimum level of core capital. A financial
institution's minimum leverage ratio is determined by dividing its Tier 1
capital by its quarterly average total assets, less intangibles not includable
in Tier 1 capital.
The FDIC rules provide that a minimum leverage ratio of 3% is required for
institutions that have been determined to be in the highest category used by
regulators to rate financial institutions. All other organizations are
required to maintain leverage ratios of at least 100 to 200 basis points above
the 3% minimum.
Prior to the enactment of the Budget Act, FDIC assessments for interest
payments on bond obligations issued by the Financing Corporation ("FICO") were
solely paid by SAIF member institutions. Under the Budget Act, both BIF and
SAIF members now share in the cost of the FICO bond interest payments.
Beginning January 1, 1997 and continuing through December 31, 1999, partial
sharing occurred. During this initial period, SAIF member institutions paid
0.0630% of domestic deposits while BIF member institutions, such as SPB, paid
0.0126% of domestic deposits. Full pro rata sharing of the FICO bond interest
payments took effect on January 1, 2000.
FDICIA also requires each insured depository institution to prepare annual
financial statements in accordance with generally accepted accounting
principles which must be audited by an independent public accountant. Each
institution must also prepare a management report stating management's
responsibility for preparing the institution's annual financial statements,
for complying with designated safety and soundness laws and regulations and
for other related matters. In addition, the report must contain an assessment
by management of the effectiveness of internal controls and procedures over
financial and regulatory reporting and of the institution's compliance with
designated laws and regulations. The institution's independent public
accountant must examine, attest to, and report separately on, assertions of
management concerning internal controls and procedures. SPB is complying with
these requirements.
31
FDICIA requires the establishment of minimum acceptable operational and
managerial standards, and standards for asset quality, earnings, and valuation
of publicly traded shares for depository institutions and their holding
companies. The operational standards must cover internal controls, loan
documentation, credit underwriting, interest rate exposure, asset growth and
employee compensation.
The Federal bank regulatory agencies have adopted final regulations which
require institutions to adopt written real estate lending policies that, among
other things, must be consistent with guidelines adopted by the agencies.
Among the guidelines adopted are maximum loan-to-value ratios for land loans
(65%), development loans (75%), construction loans (80- 85%), loans on owner
occupied 1-4 family property, including home equity loans (no limit, but loans
at or above 90% require private mortgage insurance), and loans on other
improved property (85%). The guidelines permit institutions to make loans in
excess of the supervisory loan-to-value limits if such loans are supported by
other credit factors, but the aggregate of such nonconforming loans should not
exceed the institution's risk-based capital, and the aggregate of non-
conforming loans secured by real estate other than 1-4 family property should
not exceed 30% of risk-based capital.
In 1995, Federal bank regulatory agencies determined that the allowance for
loan losses established pursuant to Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," ("SFAS
No. 114") should be characterized as a general allowance (created against
unidentified losses) rather than a specific allowance (created against
identified losses). As a general allowance, the SFAS No. 114 allowance is
includable in Tier 2 capital, subject to existing regulatory capital
limitations.
SPB is subject to the Community Reinvestment Act of 1977 as amended
("CRA"). CRA requires SPB to ascertain and meet the credit needs of the
communities it serves, including low and moderate income neighborhoods SPB's
compliance with CRA is monitored by the FDIC, which assigns SPB a publicly
available CRA rating. An assessment of CRA compliance is required by the FDIC
in connection with applications for approval of certain activities, such as
mergers with or acquisitions of other banks. In April 1995, the Federal
regulatory agencies issued a comprehensive revision to the rules governing CRA
compliance. In assigning a CRA rating to a bank, the new regulations place
greater emphasis on measurements of performance in the areas of lending
(specifically, the bank's home mortgage, small business, small farm and
community development loans), investment (the bank's community development
investments) and service (the bank's community development services), although
examiners are still given a degree of flexibility in taking into account
unique characteristics and needs of the bank's community and its capacity and
constraints in meeting such needs. The new regulations also require increased
collection and reporting of data regarding certain kinds of loans. Although
the new regulations became generally effective on July 1, 1995, various
provisions have different effective dates, and the new CRA evaluation criteria
went into effect for examinations beginning on July 1, 1997. Although
management cannot project the impact of the substantial changes in the new
rules on the Bank's CRA rating, it will continue to take steps to comply with
the requirements in all respects. The most recent examination under the
current regulations found the Bank to be rated Satisfactory.
Capital Adequacy Guidelines
Risk-adjusted capital guidelines, issued by bank regulatory authorities,
assign risk weighting to assets and off-balance sheet items and place
increased emphasis on common equity. The guidelines currently require a
minimum Tier I capital ratio of 4% and a total risk weighted capital ratio of
8% in order for an institution to be classified as adequately capitalized.
Institutions which maintain a Tier I ratio of 6% and total capital ratio of
10% are defined as well capitalized. Tier I capital basically consists of
common shareholders' equity and non-cumulative perpetual preferred stock and
minority interest in consolidated subsidiaries minus intangible assets. At
December 31, 2000, SPB was undercapitalized with Tier 1 leverage and total
risk-weighted ratios of 3.46% and 6.59%, respectively. Banks such as SPB
categorized as "undercapitalized" or worse are subject to certain
restrictions, including the requirement to file a capital plan with the
primary federal regulator, prohibitions on the payment of dividends and
management fees, restrictions on executive compensation, and increased
supervisory monitoring, among other things. Other restrictions may be imposed
on the bank either by its primary regulator or by the FDIC, including
requirements to raise additional capital, sell assets, or sell the entire
bank. Once a bank becomes "critically undercapitalized" it must generally be
placed in receivership or conservatorship within 90 days.
32
SPB, in December 2000, consented to the issuance by the FDIC of an order
(the "FDIC Order") to cease and desist from what the FDIC alleges to be
certain unsafe and unsound practices relating to SPB's operations. SPB also
has consented to the DFI's similar, though not identical, order (the "DFI
Order" and together with the FDIC Order, the "Orders"). SPB has not admitted
or denied the claimed basis of the FDIC or DFI for the Orders, but intends to
comply fully with their respective requirements.
The Orders set forth certain requirements with which SPB must comply,
including the following:
. SPB is required to have and maintain qualified management, including a
chief executive officer and other persons experienced in lending,
collection and improving asset quality and earnings. Further, during the
effectiveness of the Orders, SPB must obtain the prior approval of the
FDIC and DFI to the appointment of any new director or senior executive
officer for SPB, and the DFI has the right to determine whether present
members of SPB's management are acceptable.
. Under the FDIC Order, SPB must increase its equity capital by $19 million
by March 31, 2001, and by an additional $20 million in stages through
December 31, 2001. SPB must also attain a total risk based capital ratio
of 10.50% and a Tier 1 capital ratio of 8.00% by March 31, 2001 and must
increase those ratios, in stages through December 31, 2001, to 12.00% and
9.00%, respectively. Under the DFI Order, SPB is required by March 31,
2001 to increase its adjusted tangible shareholder's equity by $29
million and by an additional $15 million by June 30, 2001. Also, by March
31, 2001, SPB must attain an adjusted tangible shareholder's equity of at
least 7.00% of its adjusted tangible total assets, and must increase this
ratio by 0.50% each quarter to 8.50% at December 31, 2001. The DFI Order
limits the maximum amount of SPB's deferred tax assets that may be
included in the adjusted tangible shareholder's equity calculation to the
lesser of (x) the amount of deferred tax assets that are dependent upon
future taxable income expected to be realized within one year or (y) 10%
of adjusted tangible shareholder's equity existing before any disallowed
deferred tax assets. SPB was not in compliance with this requirement at
March 31, 2001.
. The required increases in capital may be accomplished through capital
contributions by ICII to SPB, the sale of common stock or noncumulative
perpetual preferred stock of SPB, the exchange of Bank debt held by ICII
for such preferred stock, or any other means acceptable to the FDIC and
the DFI. SPB must adopt and implement a capital plan acceptable to the
FDIC and the DFI to achieve and maintain these capital requirements.
. Within 10 days of the effective dates of the Orders, SPB must eliminate
all assets that were classified as "Loss" and one-half of the assets that
were classified "Doubtful" as of March 31, 2000, or as of June 26, 2000
under the FDIC Order, and reduce by March 31, 2001 its assets that were
classified as "Substandard" or "Doubtful", as of June 26, 2000, to not
more than $90 million. All assets classified loss and portions of other
assets are writen-off when deemed uncollectible by management.
Additionally, all assets classified as loss and the loss portion of our
doubtful assests were written-off prior to December 31, 2000. SPB has
already satisfied the requirements of March 31, 2001 by charging off or
collecting certain of those assets. SPB also must reduce by June 30, 2001
and September 30, 2001 its assets that were classified "Substandard" or
"Doubtful", as of June 26, 2000, to not more than $70,000,000 and
$50,000,000, respectively.
. Under the FDIC Order, SPB may not extend additional credit to any
borrower that has a loan or other credit from SPB that has been charged
off or classified "Loss" or "Doubtful", in whole or part, and is
uncollected. With certain exceptions, SPB is restricted from extending
additional credit to any borrower with a Bank loan or other credit that
has been charged off or classified "Substandard", in whole or part, and
is uncollected.
. SPB must revise, adopt and implement policies acceptable to the FDIC and
the DFI regarding its lending and loan review procedures, transactions
with insiders and affiliates, and its requirements for reporting lending
practices and other strategies to SPB's chief executive officer. SPB's
Board must also review the adequacy of SPB's allowances for loan and
lease losses and adopt a policy for regularly determining the adequacy of
such allowances.
33
. SPB must develop and adopt a detailed business plan acceptable to the
FDIC and the DFI to control overhead and other expenses and restore SPB
to a sound condition.
. SPB must provide quarterly progress reports to the FDIC and DFI regarding
its actions to comply with the Orders.
. SPB may not pay any cash dividends, make any other shareholder
distributions or pay bonuses to its executive officers without the prior
approval of its regulators, nor may it engage in any new lines of
business without the prior approval of the FDIC and the DFI.
SPB and ICII already have taken a number of actions that were intended to
enable SPB to comply with the requirements of the Orders. However, these
actions did not succeed in enabling SPB to comply with all such requirements
at March 31, 2001 and SPB's ability to comply may be subject to events outside
the control of SPB and ICII, such as capital market trends and general
economic conditions. The actions undertaken include:
. ICII exchanged $9.0 million of SPB's subordinated debt and contributed
$5.0 million in cash in exchange for 50,000 shares of SPB's Series A
noncumulative perpetual preferred stock. Also, on March 30, 2001, ICII
exchanged an additional $22.0 million of SPB's subordinated debt and
contributed $14.0 million in cash in exchange for 36,000 shares of SPB's
Series B noncumulative perpetual preferred stock and also on that date
made a capital contribution of $7.2 million in cash to SPB.
. ICII and SPB have developed a capital plan intended to achieve the FDIC
and DFI capital requirements by selling certain non-core assets of SPB
and ICII, reducing the assets of SPB, exchanging additional Bank
subordinated debt held by ICII for noncumulative perpetual preferred
stock of SPB, and the making by ICII of additional capital contributions
to SPB. Part of this capital plan includes the transactions contemplated
in the Master Recapitalization Agreement described below in
"Recapitalization Transaction" that describes the recapitalization
transactions and status to date.
. SPB has made changes in its management to address the requirements of the
Orders and contemplates further changes as required. These changes
included: (1) the resignation of several Bank executive officers,
including its president and chief executive officer, chief credit
officer, risk management department head, and the executive management of
CBC, (ii) the assumption by SPB's chairman of the duties as president of
SPB and (iii) the addition of various new personnel to positions with
SPB, including an experienced chief credit officer, who has a major
commercial banking background, and a head of the Risk Management
Department of SPB, who was an FDIC examiner, and other appointments of
personnel to handle credit administration and risk management functions.
Also, CBC has been more fully integrated into SPB's management reporting
structure and several individual managers within CBC have been assigned
increased responsibility.
. SPB has adopted and implemented new policies and procedures in its
lending, credit administration and lending review areas.
. SPB has developed detailed business plans which address marketing, asset
diversification, credit administration, management oversight, non-accrual
and classified assets and operating efficiencies among other items.
ICII and SPB are in the process of revising their capital plan that was
submitted to the FDIC and the DFI. Such capital plan has not yet been approved
by the FDIC and the DFI. The plan indicates that the Bank will not meet any of
the above cited capital ratio targets at the indicated dates. However, the
preliminary revised plan indicates that SPB's capital ratios at December 31,
2001, will qualify it to be categorized as "Well Capitalized" at that time. At
this time, the financial impact, if any, of regulatory actions that may result
from the failure of SPB to meet the minimum capital requirements of the orders
cannot be determined. Although such capital infusions and conversions caused
the Bank's capital ratios to be above those required by statute to be
considered "adequately capitalized," the Bank does not meet the capital ratio
targets specified by the Orders. An additional approximately $41 million would
have had to be contributed to cause the Bank to meet the capital ratio targets
specified by the Orders at March 31, 2001. The accompanying financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
34
Achievement of the capital plan depends on future events and circumstances,
the outcome of which cannot be assured. Nevertheless, management believes, at
this time, that SPB will meet all the provisions of the preliminary revised
capital plan and that SPB will qualify to be classified as "Well Capitalized"
at December 31, 2001. The preliminary revised capital plan includes the
following elements determined by management to be necessary to meet the
regulatory capital requirements cited above:
. Cash capital contributions by ICII;
. Conversion of Bank subordinated debt owned by ICII into preferred stock;
. Restoration of a portion of SPB's deferred tax asset as allowed by
regulations;
. Reductions in problem assets and related loan loss provisions; and
. Return to profitable operations.
On March 30, 2001, SPB's parent company, ICII contributed $21.2 million in
cash, all of which was in the form of Tier 1 capital. Additionally, ICII
converted $22.0 million of SPB's subordinated debt into non cumulative
perpetual preferred stock of SPB. These capital infusions and conversions, in
addition to earnings at SPB subsequent to December 31, 2000, restored SPB's
capital to amounts above the "adequately capitalized" minimums of 4% and 8%,
respectively, as defined by banking regulations.
Transactions With Affiliates
Under California and Federal law, loans to and obligations of directors and
executive officers and their related companies must be on terms and under
conditions that are substantially the same, or at least as favorable to SPB,
as those prevailing at the time for comparable transactions with or involving
other nonaffiliated companies. In addition, SPB is prohibited from engaging in
"covered transactions" with an affiliate if the aggregate amount of such
transactions with any one affiliate would exceed 10% of SPB's capital stock
and surplus, or in the case of all affiliates, if the aggregate amount of such
transactions exceeds 20% of SPB's capital stock and surplus. "Covered
transactions" include loans or extensions of credit to an affiliate, a
purchase of or investment in securities issued by an affiliate, a purchase of
assets from an affiliate (subject to certain exemptions), the acceptance of
securities issued by an affiliate as collateral security for a loan or
extension of credit to any person or company, or the issuance of a guarantee,
acceptance, or letter of credit on behalf of an affiliate. For certain
"covered transactions," collateral requirements in specified amounts will be
applicable. SPB also is prohibited from purchasing low-quality assets from its
affiliates, except under limited circumstances. SPB engages in certain
transactions which involve its affiliates, including our company and our other
subsidiaries. As such, many of the transactions between ICII, our affiliates
and SPB are subject to Federal and state affiliate transaction regulations.
Further, under Federal law, a transaction by SPB with any person shall be
deemed to be a transaction with an affiliate to the extent that the proceeds
of the transaction are used for the benefit of, or transferred to that
affiliate.
The term "affiliate" excludes any company (other than a bank), that is a
subsidiary of SPB, unless the Federal authorities have determined by
regulation or order not to exclude such subsidiary. Absent such determination,
transactions conducted between SPB and its non-bank subsidiaries would not be
subject to the amount limitations and collateral requirements under Federal
law. This exemption, however, is unavailable for transactions between a bank
and a subsidiary that engages in activities not permissible for the parent
depository institution.
Prompt Corrective Action
The FDIC regulations contain a prompt corrective action rule which was
adopted in response to requirements under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). FDICIA requires the Federal
banking regulators to take "prompt corrective action" with respect to banks
that do not meet minimum capital requirements. The FDIC's rules provide that
an institution is "well capitalized" if its risk-based capital ratio is 10% or
greater; its Tier 1 risk-based capital ratio is 6% or greater; its leverage
ratio is 5% or
35
greater; and the institution is not subject to a capital directive of a
federal bank regulatory agency. A bank is "adequately capitalized" if its
risk-based capital ratio is 8% or greater; its Tier 1 risk-based capital ratio
is 4% or greater; and its leverage ratio is 4% or greater (3% or greater for
the highest rated institutions).
An institution is considered "undercapitalized" if its risk-based capital
ratio is less than 8%; its Tier 1 risk-based capital ratio is less than 4%, or
its leverage ratio is 4% or less (less than 3% for the highest rated
institutions). An institution is "significantly undercapitalized" if its risk-
based capital ratio is less than 6%; its Tier 1 risk-based capital ratio is
less than 3%; or its leverage ratio is less than 3%. A bank is deemed to be
"critically undercapitalized" if its ratio of tangible equity (Tier 1 capital)
to total assets is equal to or less than 2%. An institution may be deemed to
be in a capitalization category that is lower than is indicated by its actual
capital position if it engages in unsafe or unsound banking practices.
Undercapitalized institutions are required to submit a capital restoration
plan for improving capital. In order to be accepted, such plan must include a
financial guaranty from the institution's holding company that the institution
will return to capital compliance. If such a guarantee were deemed to be a
commitment to maintain capital under the Federal Bankruptcy Code, a claim for
a subsequent breach of the obligations under such guarantee in a bankruptcy
proceeding involving the holding company would be entitled to a priority over
third party general unsecured creditors of the holding company.
Undercapitalized institutions: are prohibited from making capital
distributions or paying management fees to controlling persons; may be subject
to growth limitations; are restricted from ongoing acquisitions, branching and
entering into new lines of business; and are limited in the appointment of
additional directors or senior executive officers. Finally, the institution's
regulatory agency has discretion to impose certain of the restrictions
generally applicable to significantly undercapitalized institutions.
In the event an institution is deemed to be significantly undercapitalized,
it may be required to: sell stock; merge or be acquired; restrict transactions
with affiliates; restrict interest rates paid; divest a subsidiary; or dismiss
specified directors or officers. If the institution is a bank holding company,
it may be prohibited from making any capital distributions without prior
approval of the Federal Reserve Board and may be required to divest its
subsidiaries. Our parent company is not a bank holding company.
A critically undercapitalized institution is generally prohibited from
making payments on subordinated debt and may not, without the approval of its
principal bank supervisory agency, enter into a material transaction other
than in the ordinary course of business; engage in any covered transaction; or
pay excessive compensation or bonuses. Critically undercapitalized
institutions are subject to appointment of a receiver or conservator.
Effectively, the FDIC would have general enforcement powers over SPB and our
company in the event that SPB were deemed undercapitalized.
SPB's Capital Ratios. The following tables indicate SPB's capital ratios
under (1) the FDIC risk-based capital requirements, and (2) the FDIC minimum
leverage ratio at December 31, 2000 and 1999.
At December 31,
----------------------------------------------------------------------------------------------
2000 1999
---------------------------------------------- ----------------------------------------------
Well Well
Minimum Capitalized Minimum Capitalized
Actual Requirement Requirement Actual Requirement Requirement
-------------- -------------- -------------- -------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(Dollars in thousands)
Risk-based Capital...... $121,833 6.59% $147,997 8.00% $184,997 10.00% $219,278 10.67% $164,445 8.00% $205,557 10.00%
Risk-based Tier 1
Capital................ 65,497 3.54 73,999 4.00 110,998 6.00 160,018 7.78 82,223 4.00 123,334 6.00
FDIC Leverage Ratio..... 65,497 3.46 75,789 4.00 94,736 5.00 160,018 8.94 71,610 4.00 89,512 5.00
SPB was undercapitalized at December 31, 2000. Management has taken action
to improve the capital ratios. At March 31, 2001, SPB met the requirements for
"adequately capitalized", however, this was not sufficient to meet the
requirements of the regulatory orders. See Item 7. "Managements Discussion and
Analysis--Agreements Entered Into With Southern Pacific Bank's Regulators and
Recapitalization Transaction" and Note 4 of Notes to Consolidated Financial
Statements.
36
Lending Laws
We are required to comply with the Equal Credit Opportunity Act of 1974, as
amended ("ECOA"), which prohibits creditors from discriminating against
applicants on the basis of race, color, religion, sex, age or marital status.
ECOA also prohibits creditors from discriminating based on the fact that all
or part of the applicant's income derives from a public assistance program or
the fact that the applicant has in good faith exercised any right under the
Consumer Credit Protection Act. Regulation B under ECOA restricts us from
obtaining certain types of information from loan applicants. It also requires
certain disclosures regarding consumer rights and requires us to advise
applicants of the reasons for any credit denial. If the applicant is denied
credit or the rate or charge for loans increases as a result of information
obtained from a consumer credit agency, another statute, the Fair Credit
Reporting Act of 1970 ("FCRA") requires us to supply the applicant with the
name and address of the reporting agency. In addition, FCRA also imposes other
reporting and disclosure requirements on creditors. We are also subject to the
Real Estate Settlement Procedures Act of 1974, as amended, and are required to
file an annual report with the Department of Housing and Urban Development
under the Home Mortgage Disclosure Act. In addition, we are subject to various
other Federal and state laws, rules and regulations governing, among other
things, the licensing of, and procedures which must be followed by, mortgage
lenders and servicers, and disclosures which must be made to consumers. We may
incur civil and criminal liability if we fail to comply with the requirements.
Environmental Liability
We may foreclose on properties securing loans that are in default in the
course of our business. There is a risk that hazardous or toxic substances or
petroleum constituents could be on such properties. In such event, we could be
held responsible for the cost of cleaning up or removing such waste depending
upon our activities, and such cost could exceed the value of the underlying
properties. Under the laws of certain states, contaminated property may be
subject to a lien on the property to assure payment for cleanup costs. In
several states, this lien has priority over the lien of an existing mortgage
or owner's interest. In addition, under the laws of some states and under the
Federal Comprehensive Environmental Response, Compensation, and Liability Act
of 1980 ("CERCLA"), we may become liable for cleanup of a property and
adjacent properties that are contaminated by releases from the mortgaged
property if we engage in certain activities.
In 1996, CERCLA was amended to eliminate lender liability under CERCLA in
certain circumstances, including foreclosure if the lender resells the
property at the earliest practicable, commercially reasonable time on
commercially reasonable terms. In addition, CERCLA was changed to provide more
guidance to lenders about the nature of activities that would and would not
give rise to liability under CERCLA. These amendments do not apply to state
environmental laws. Also, foreclosure and our other activities on contaminated
property may subject us to state tort liability.
Gramm-Leach-Bliley Act of 1999
On November 12, 1999, the federal Gramm-Leach-Bliley Act ("GLB") was
enacted. The GLB, which is a major piece of financial reform legislation,
repealed sections of the federal Glass-Steagall Act generally prohibiting
affiliations and management interlocks between banking organizations and
securities firms, and added new substantive provisions to the Bank Holding
Company Act ("BHCA"). Specifically, the GLB created a new entity, the
"financial holding company" ("FHC"), which is authorized to engage in
activities which are "financial" in nature and "incidental" to financial
activities. Insured banks such as SPB have new authority under GLB, subject to
certain limitations, to engage in various activities of a "financial" nature.
GLB also makes major changes to the federal regulation of a bank's
securities activities, and contains provisions governing (i) the insurance
activities of FHCs and the regulation of these activities, (ii) the privacy of
customer information, (iii) the structure of and access to the Federal Home
Loan Bank system, (iv) modifications of the Community Reinvestment Act, and
(v) other changes to banking laws. Major provisions of GLB took effect
starting March 11, 2000.
Our Company is not currently subject to the Bank Holding Company Act, and
therefore this new law is not expected to have a material effect on the nature
and scope of our current operations. While the future impact of
37
GLB on our Company's and SPB's operations cannot be predicted at this time,
GLB may allow our Company, through SPB and otherwise, authority to engage in
new activities of a banking and financial nature. In addition, the new law may
increase the ability of other financial services providers to compete with us
by permitting certain firms (such as securities firms and insurance companies)
for the first time to establish or acquire banks, and allowing banking firms
to enter into new lines of financial business.
The customer privacy requirements of the GLB, which are expected to be
effective in 2001, will require SPB, as well as any of our other affiliates
which are engaged in a financial business with retail customers, to disclose
to these customers, when they establish the customer relationship and at least
annually thereafter, their privacy policies and practices for disclosing and
protecting customer financial information. In addition, a financial
institution will not be able to share with a nonaffiliated third party any
nonpublic personal information of its customers and consumers unless that
financial institution provides advance notice of its information-sharing
policies to these persons, and will be obliged to permit a customer or
consumer to "opt out" of the financial institution's ability to share
nonpublic customer information with nonaffiliated third parties.
Several Federal regulatory agencies have proposed regulations implementing
the privacy provisions of the GLB. Generally, these proposals (i) outline the
type and content of notice initially required to customers and consumers of
the institution's privacy policies and practices, (ii) limit the right to
disclose nonpublic personal information to nonaffiliated third parties, and
(iii) describe the form and method of providing information-sharing "opt out"
notices to consumers and customers. When these regulations become final, SPB,
as well as our Company's affiliates which are "financial institutions"
(generally meaning any of our affiliates which engages in a retail financial
business), will be required to comply with these requirements.
At this time, the specific impact of GLB's new privacy and other regulatory
requirements on our operations cannot be precisely determined. It is possible,
however, that GLB will result in some increases in our federal regulatory and
compliance costs and responsibilities as these new privacy and regulatory
changes become effective. Further, the new law gives states authority to
regulate, among other things, the insurance, privacy and information-sharing
activities of financial organizations, and changes in state regulatory
requirements may also have an impact on our compliance costs and
responsibilities.
Future Laws
Each of our businesses is highly regulated, and the applicable laws, rules
and regulations are subject to change. There are currently proposed various
laws, rules and regulations which, if adopted, could affect our operations. We
cannot assure you that these proposed laws, rules and regulations, or other
such laws, rules or regulations will not be adopted in the future. If adopted,
they could make compliance more difficult or expensive, restrict our ability
to originate, broker, purchase or sell loans, further limit or restrict the
amount of commissions, interest and other charges we earn on loans we
originate, broker, purchase or sell, or otherwise adversely affect our
business or prospects.
Depositor Preference
The Federal Deposit Insurance Act provides that, in the event of the
"liquidation or other resolution" of an insured depository institution, the
claims of depositors of the institution (including claims of the FDIC as
subrogee of insured depositors) and certain claims for administrative expenses
of the FDIC as a receiver will have priority over other general unsecured
claims against the institution. If an insured depository institution fails,
insured and uninsured depositors, along with the FDIC, will have priority in
payment ahead of unsecured, non-deposit creditors, including the institution's
parent holding company.
Limitations on Types of Deposits
To maintain the exemption from the BHCA, SPB currently offers investment
certificates in the form of passbook accounts, money market deposit accounts
and certificates of deposit. SPB does not offer nor is it authorized by
California law to offer demand deposit accounts.
38
Insurance Premiums
In September 1996, Congress passed the Economic Growth and Regulatory
Paperwork Reduction Act of 1996 ("the Budget Act") which provided that, among
other things, Savings Association Insurance Fund ("SAIF") members and BIF
members would have the same risk-based deposit insurance assessment schedule
with respect to FDIC deposit insurance premiums, effective January 1, 1997,
whereas previously, FDIC insurance premiums were based on the level of
reserves in the BIF and the SAIF. The assessment schedule proposed by the FDIC
ranges from 0.00% to 0.27% of deposits annually and is based upon the capital
position and a supervisory evaluation of each institution. As of January 1,
1997, assessments were set at the following percentages of deposits:
Group Group Group
A B C
----- ----- -----
Well capitalized....................................... 0.00% 0.03% 0.17%
Adequately capitalized................................. 0.03% 0.10% 0.24%
Undercapitalized....................................... 0.10% 0.24% 0.27%
SPB has been assigned the assessment risk classification of Group B. As a
result, SPB's FDIC insurance premium for the quarterly period ending March 31,
2001 is 0.10% of deposits annually, or approximately $408,000 per quarter.
SPB's deposit insurance premium for the year ended December 31, 2000 was
approximately $254,000. SPB's insurance premium has increased from 0.03%
annually in 2000 to 0.10% annually starting in the first quarter of 2001.
Recent Legislation
The California Industrial Loan Law governed the activities of SPB until
September 30, 2000. On that date, all California-chartered industrial banks,
(except for those that act as premium finance agencies and that provide
insurance premium financing) including SPB, became subject to the statutes and
regulations of the California Revised Banking Law applicable to commercial
banks. The notable exception remains the prohibition against offering demand
deposits.
Holding Company Regulations
ICII is exempt from regulation as a bank holding company because SPB is not
considered a "bank" under the BHCA. The Competitive Equality Banking Act of
1987 ("CEBA") subjected certain previously unregulated companies to regulation
as bank holding companies by expanding the definition of the term "bank" in
the BHCA. Notwithstanding, the FDIC does view the source of strength doctrine
applicable to bank holding companies to be relevant to the continued capital
strength of non-member state banks such as SPB. SPB may cease to fall within
those exceptions if it engages in certain operational practices, notably
accepting demand deposit accounts. SPB currently has no plans to engage in any
operational practice that would cause it to fall outside of one or more of the
exceptions to the term "bank" as defined by CEBA. Under CEBA, we are treated
as if we are a bank holding company for the limited purposes of applying
certain restrictions, such as those on loans to insiders, transactions with
affiliates and anti-tying provisions.
Limitations on Acquisitions of Voting Stock of the Company
Any person who wishes to acquire 10% or more of the capital stock or
capital of a California industrial bank or 10% or more of the voting capital
stock or other securities giving control over management of its parent company
must obtain the prior written approval of the DFI. Similarly, the Federal
Change in Bank Control Act of 1978 requires any person or company that obtains
"control" of an insured depository institution to notify the appropriate
Federal banking agency, which would be the FDIC in the case of SPB, 60 days
prior to the proposed acquisition. If the FDIC has not issued a notice
disapproving the proposed acquisition within that time period (including a
possible 120-day extension), the person may retain its interest in such
institution. Any person acquiring 10% or more of the common stock of our
Company is subject to these requirements. For purposes of the statute,
"control" is defined as the power, directly or indirectly, to direct the
management or policies of an
39
insured depository institution or to vote 25% or more of any class of voting
securities of an insured depository institution. However, there is a
rebuttable presumption that any person acquiring 10% or more of any class of
voting securities of said institution is presumed to have "control." In such
cases, such person must file an application for approval with the FDIC or
rebut the presumption.
Employees
As of December 31, 2000, we had 428 employees on a full-time equivalent
("FTE") basis, as follows:
Southern Pacific Bank.................................................. 331
Imperial Business Credit, Inc.......................................... 54
Imperial Credit Industries, Inc........................................ 26
Imperial Credit Lender Services, Inc................................... 11
Imperial Credit Asset Management Inc................................... 5
ICII Ventures, Inc..................................................... 1
---
Total................................................................ 428
===
We believe that our relations with these employees are satisfactory. We are
not a party to any collective bargaining agreement.
ITEM 2. PROPERTIES
Our executive offices occupy approximately 24,063 square feet of space in
Torrance, California at a current monthly rental of approximately $34,000.
SPB's executive offices occupy approximately 28,749 square feet of space in
Torrance, California at a current monthly rental of $38,900. In February 2000,
we moved SPB's executive offices from Los Angeles to Torrance, California.
Not including SPB, we currently lease offices in Beverly Hills, San Diego,
Santa Ana Heights and Irvine, California, as well as in Denver, Colorado. SPB
and its divisions operate in California through branches and loan production
offices and in other states through loan production offices and
representatives.
ITEM 3. LEGAL PROCEEDINGS
Our company 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 United States 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 allege 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. 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 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. Subsequently,
agreement was reached on October 10, 2000 to settle all remaining claims
against our company, under Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Section 15 of the Securities Act of 1933, for a cash payment
by our company of $3 million and issuance of warrants to purchase three
million shares of ICII common stock, at an exercise price of $3 per share, to
members of the class. The warrants, which expire in seven years, will be
freely tradable. On February 21, 2001, the Court approved all of the
settlements and dismissed the action with prejudice.
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 United States District
Court for the Central District of California. This action, purportedly filed
on behalf of a class of persons who
40
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. On February 9, 2001, the Court
granted plaintiffs leave to file a third amended complaint, in which
plaintiffs added a new defendant, KPMG LLP, our company's independent auditor.
On March 6, 2001, defendants answered the third amended complaint and asserted
a number of affirmative defenses.
Our company is a defendant in Steadfast Insurance Company v. Auto Marketing
Network Inc. and Imperial Credit Industries, Inc. ("ICII"), 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. 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 for
defaulted loans. The Court has pending a motion for partial summary judgment,
filed by the plaintiff, and a motion for summary judgment filed by ICII on its
counterclaim against Steadfast. Steadfast also has counter-moved for summary
judgment on ICII's counterclaim, and the parties have filed motions seeking
the exclusion of each other's expert witnesses. The Court cancelled a March
12, 2001 hearing on all pending motions and has not rescheduled or indicated
when a written order could be expected.
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. On October 17, 2000, the Court stayed all proceedings and
certified for interlocutory appeal to the Ninth Circuit Court of Appeals its
order denying defendants' motion to dismiss. On January 12, 2001, the Ninth
Circuit Court of Appeal denied defendants' petition for permission to appeal.
On March 26, 2001, the District Court struck plaintiff's motion for class
certification and ordered plaintiff to take further action to give proper
notice to potential class members.
Our company and two of our directors, among others, are defendants in an
adversary proceeding filed by the liquidating trustee of the Southern Pacific
Funding Corp. liquidating trust on October 5, 2000, in the U.S. Bankruptcy
Court for the District of Oregon, In re Southern Pacific Funding Corp. Case
No. 398- 37613-elp 11, Beck v. Imperial Credit Industries, Inc., et al, Adv.
Proc. No. 00-03337-elp. The trustee seeks to recover damages in excess of
$238.5 million for losses alleged to have been incurred by SPFC in connection
with its sub-prime lending and securitization program during the years 1995-
1998. The trustee alleges that the losses
41
were caused by defendants' breaches of fiduciary duties and negligence. In
addition, the trustee seeks equitable re-characterization of certain ICII
claims against the SPFC bankruptcy estate and also asserts a right of setoff
against all defendants' various claims against the bankruptcy estate for the
wrongs alleged in the breach of fiduciary duties and negligence claims. The
Company and its two directors moved to dismiss the adversary proceedings for
lack of subject matter jurisdiction and failure to state a claim. These
motions were heard by the Bankruptcy Court on December 20, 2000. By orders
entered January 18, 2001, the Bankruptcy Court denied the motion to dismiss
for lack of subject matter jurisdiction but granted, with leave to amend, the
motion to dismiss for failure to state a claim. The trustee has until April
18, 2001 to file an amended complaint.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
42
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock has been quoted on the NASDAQ National Market under the
symbol "ICII" since May 18, 1992. The following table sets forth the high and
low closing sales prices for our common stock as reported by the NASDAQ
National Market.
2000 High Low 1999 High Low
---- ---- --- ---- ---- ---
First Quarter $6.06 $4.19 First Quarter $9.94 $7.06
Second Quarter 4.56 3.31 Second Quarter 9.44 6.94
Third Quarter 4.78 1.50 Third Quarter 6.97 4.31
Fourth Quarter 1.50 0.41 Fourth Quarter 6.50 4.00
At March 30, 2001, the closing sales price of our common stock as reported
by the NASDAQ National Market was $0.9375. At March 30, 2001, there were
approximately 90 shareholders of record.
We were informed by Nasdaq in a letter dated January 18, 2001 that our
Common Stock may be delisted from the Nasdaq National Market in that it had
failed to maintain a minimum bid price of $1.00 over the prior 30 consecutive
trading days as required by NASD Rule 4450(a)(5) (the "Nasdaq Rule") unless
the Company meets the requirements for continued listing under the Nasdaq Rule
within ninety (90) days of the date of such letter, or April 18, 2001.
We have not paid cash dividends on our common stock and we do not
anticipate paying cash dividends on our common stock in the foreseeable
future. We intend to retain earnings for use in our operations and the
expansion of our business. The indentures for our 9 7/8% Senior Notes and our
Resettable Rate Debentures restrict our payment of cash dividends. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources". SPB is subject to certain
regulatory restrictions on the payment of dividends. See "Item 7. Business--
Management's Discussion and Analysis--Limitations on Dividends".
We have undertaken the repurchase of our common stock under several
authorized share repurchase programs. During 1998, 1999, and 2000 we
repurchased 2,485,684, 3,682,536 and 1,122,300 shares of common stock at an
average cost per share of $9.65, $8.00, and $3.62 in each year, respectively.
Since beginning share repurchases, we have repurchased a total of 7,315,520
shares of common stock at an average price of $7.92 per share. All of our
repurchases effected under our stock repurchase programs were effected in
compliance with Rule 10b-18 under the Securities Exchange Act of 1934.
On May 14, 1999, we entered into an agreement with our former parent
Imperial Bank, a subsidiary of Imperial Bancorp. On May 17, 1999, we
repurchased 10% or 3,682,536 shares of our outstanding common stock for $8.00
per share or $29.5 million. The repurchase from Imperial Bank was financed
through the private issuance of $30.0 million of Series B 11.50% Mandatorily
Redeemable Cumulative Preferred Stock to a group of independent investors.
Preferred Share Purchase Rights. On October 12, 1998, we distributed
preferred share purchase rights as a dividend to our shareholders of record at
the rate of one right for each outstanding share of our common stock. The
rights are attached to our common stock and will only be exercisable and trade
separately if a person or group acquires or announces the intent to acquire
15% or more of our common stock (25% or more for any person or group holding
15% or more of our common stock on October 12, 1998). Each right will entitle
shareholders to buy one-hundredth of a share of a new series of junior
participating preferred stock at an exercise price of $40. If our company is
acquired in a merger or other transaction after a person has acquired 15% or
more of our outstanding common stock (25% or more for any person or group
holding 15% or more of our common stock on October 12, 1998), each right will
entitle the shareholder to purchase, at the right's then-current exercise
price, a number of the acquiring company's common shares having a market value
of twice such price.
43
The acquiring person would not be entitled to exercise these rights. In
addition, if a person or group acquires 15% or more of our company's common
stock, each right will entitle the shareholder (other than the acquiring
person) to purchase, at the right's then-current exercise price, a number of
shares of our company's common stock having a market value of twice such
price. Following the acquisition by a person of 15% or more of our common
stock and before an acquisition of 50% or more of our common stock, our board
of directors may exchange the rights (other than the rights owned by such
person) at an exchange ratio of one share of common stock per right. Before a
person or group acquires beneficial ownership of 15% (or 25% as applicable) or
more of our common stock, the rights are redeemable for $.0001 per right at
the option of our board of directors. The rights will expire on October 2,
2008 unless redeemed prior to that date. Our board is also authorized to
reduce the ownership thresholds referred to above to not less than 10%. The
rights are intended to enable all of our shareholders to realize the long-term
value of their investment in our company.
44
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following schedules set forth selected consolidated financial data as of
or for each of the years in the five-year period ended December 31, 2000. Such
selected consolidated financial data should be read in conjunction with the
consolidated financial statements and notes thereto and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
Years Ended December 31,
--------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- --------- -------- --------
(In thousands, except per share data)
Income Statement Data:
Interest Income:
Interest on loans and
leases.................... $ 194,213 $178,229 $ 200,827 $176,146 $188,242
Interest on investments.... 28,213 25,841 28,965 24,776 10,807
Interest on other finance
activities................ 2,399 3,368 6,048 2,678 8,422
--------- -------- --------- -------- --------
Total interest income.... 224,825 207,438 235,840 203,600 207,471
Interest expense........... 140,213 121,607 123,106 118,213 135,036
--------- -------- --------- -------- --------
Net interest income...... 84,612 85,831 112,734 85,387 72,435
Provision for loan and
lease losses.............. 180,975 35,340 15,450 20,975 9,773
--------- -------- --------- -------- --------
Net interest (expense)
income after provision
for loan and lease
losses.................. (96,363) 50,491 97,284 64,412 62,662
Fee and other income (loss):
(Loss) gain on sale of
loans and leases.......... (771) 6,480 14,888 69,737 88,156
Asset management fees...... 3,239 10,054 7,591 5,810 3,347
Investment banking and
brokerage fees............ 21,057 27,198 18,463 7,702 --
Loan servicing income...... 5,993 6,885 11,983 9,474 1,680
Gain (loss) on sale of
securities................ 12,988 32,742 (592) 112,185 82,690
Equity in net income of
ICG....................... 479 -- -- -- --
Equity in net income of
SPFC...................... -- -- 12,739 25,869 --
Equity in net (loss)
income of FMC............. -- (53) 3,235 (3,050) --
Mark to market on
securities and loans held
for sale.................. (12,810) (28,641) (42,388) (341) --
Loss on impairment of
securities................ -- -- (120,138) -- --
Gain on termination of
REIT advisory agreement... -- -- -- 19,046 --
Gain on sale of servicing
rights.................... -- -- -- -- 7,591
Rental income.............. 8,183 -- -- -- --
Other income............... 12,278 13,894 13,118 4,060 10,807
--------- -------- --------- -------- --------
Total fee and other
income (loss)........... 50,636 68,559 (81,101) 250,492 194,271
--------- -------- --------- -------- --------
Expenses:
Personnel expense.......... 50,097 60,341 61,636 51,609 48,355
Other expenses............. 52,940 66,259 59,200 63,252 50,694
Merger costs............... 9,397 -- -- -- --
--------- -------- --------- -------- --------
Total expenses........... 112,434 126,600 120,836 114,861 99,049
--------- -------- --------- -------- --------
(Loss) income from
continuing operations
before income taxes,
minority interest and
extraordinary item ....... (158,161) (7,550) (104,653) 200,043 157,884
Income taxes................ 2,356 (3,074) (44,064) 74,267 69,874
Minority interest in income
(loss) of consolidated
subsidiaries............... 1,125 1,474 (1,464) 10,513 12,026
--------- -------- --------- -------- --------
(Loss) income from
continuing operations
before extraordinary
item...................... (161,642) (5,950) (59,125) 115,263 75,984
Operating loss from
discontinued operations of
AMN, net of income taxes... (5,218) (899) (3,232) (25,347) --
Loss on disposal of AMN, net
of income taxes............ -- -- (11,276) -- --
--------- -------- --------- -------- --------
(Loss) income before
extraordinary item........ (166,860) (6,849) (73,633) 89,916 75,984
Extraordinary item--gain
(loss) on early
extinguishment of debt, net
of income taxes............ 3,534 4,021 -- (3,995) --
--------- -------- --------- -------- --------
Net (loss) income.......... $(163,326) $ (2,828) $ (73,633) $ 85,921 $ 75,984
========= ======== ========= ======== ========
Comprehensive (loss)
income.................... $(165,024) $ 974 $ (76,745) $ 82,837 $ 77,783
========= ======== ========= ======== ========
Basic (loss) income per
share:
(Loss) income from
continuing operations..... $ (4.96) $ (0.17) $ (1.55) $ 2.99 $ 2.11
Loss from discontinued
operations, net of income
taxes..................... (0.16) (0.02) (0.08) (0.66) --
Loss on disposal of AMN,
net of income taxes....... -- -- (0.30) -- --
Extraordinary item--gain
(loss) on early
extinguishment of debt, net
of income taxes............ 0.11 0.11 -- (0.10) --
--------- -------- --------- -------- --------
Net (loss) income per
common share.............. $ (5.01) $ (0.08) $ (1.93) $ 2.23 $ 2.11
========= ======== ========= ======== ========
Diluted (loss) income per
share:
(Loss) income from
continuing operations..... $ (4.96) $ (0.17) $ (1.55) $ 2.82 $ 1.95
Loss from discontinued
operations, net of income
taxes..................... (0.16) (0.02) (0.08) (0.62) --
Loss on disposal of AMN,
net of income taxes....... -- -- (0.30) -- --
Extraordinary item--gain
(loss) on early
extinguishment of debt, net
of income taxes............ 0.11 0.11 -- (0.10) --
--------- -------- --------- -------- --------
Net (loss) income per
common share.............. $ (5.01) $ (0.08) $ (1.93) $ 2.10 $ 1.95
========= ======== ========= ======== ========
Weighted average diluted
shares outstanding......... 32,573 34,517 38,228 40,855 38,975
45
At or for the Year Ended December 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Cash Flow Data:
Net cash (used in)
provided by operating
activities............. $ (32,250) $ 151,622 $ (37,135) $ 18,563 $ (31,135)
Net cash provided by
(used in) by investing
activities............. 21,682 (202,863) (174,982) (320,627) 244,177
Net cash provided by
(used in) financing
activities............. 7,608 (212,633) 464,510 273,196 (177,961)
---------- ---------- ---------- ---------- ----------
Net (decrease)
increase in cash.... $ (2,960) $ (263,874) $ 252,393 $ (28,868) $ 35,081
========== ========== ========== ========== ==========
SPB Regulatory Capital
Ratios:
California leverage
limitation(1).......... 4.98 % 10.45 % 10.45 % 13.20 % 13.50 %
Risk-based--Tier 1...... 3.54 % 7.78 % 8.42 % 8.75 % 9.71 %
Risk-based--Total....... 6.59 % 10.67 % 11.12 % 12.25 % 10.87 %
FDIC Leverage Ratio..... 3.46 % 8.94 % 8.62 % 8.30 % 9.35 %
Asset Quality Ratios:
Non-performing assets as
a percentage of total
assets................. 4.11 % 2.84 % 2.06 % 4.31 % 2.64 %
Allowance for loan and
lease losses as a
percentage of non-
performing loans....... 81.02 % 62.18 % 65.11 % 53.87 % 38.94 %
Net charge-offs as a
percentage of average
total loans and leases
held for
investment(2).......... 12.00 % 1.79 % 1.92 % 2.72 % 0.94 %
Selected Ratios:
Ratio of earnings to
fixed charges.......... (0.1x) 0.9x 0.2x 2.7x 2.2x
Pre-tax interest
coverage ratio......... (5.6x) 0.8x N/A 8.1x 17.4x
Ratio of indebtedness to
total
capitalization(3)...... 84.8 % 54.6 % 55.4 % 47.2 % 40.5 %
At December 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(In thousands)
Balance Sheet Data:
Cash.................... $ 30,938 $ 33,898 $ 297,772 $ 45,379 $ 74,247
Interest-bearing
deposits............... 183,193 248,182 1,415 103,738 3,369
Securities.............. 227,734 242,139 235,423 227,468 84,296
Loans and leases held
for sale............... 386,469 289,398 319,061 153,469 940,096
Loans and leases held
for investment, net.... 1,122,494 1,223,071 1,320,095 1,252,487 1,068,599
Retained interests in
loan and lease
securitizations........ 6,330 10,220 27,011 22,895 159,707
Total assets............ 2,127,577 2,201,615 2,417,183 2,094,389 2,470,639
Deposits................ 1,632,704 1,614,758 1,714,252 1,156,022 1,069,184
Borrowings from FHLB.... 65,000 -- 20,000 45,000 140,500
Company obligated
mandatorily redeemable
preferred securities of
subsidiary trust
holding solely
debentures of the
company ("ROPES")...... 42,885 61,750 70,000 70,000 --
Other borrowings........ 84,118 74,309 102,270 144,841 694,352
Senior and convertible
subordinated notes..... 176,757 185,185 219,858 219,813 163,209
Total liabilities....... 2,088,135 1,996,235 2,183,662 1,770,456 2,231,131
Shareholders' equity.... 39,442 205,380 233,521 323,933 239,508
- --------
(1) Ratio of (i) SPB's total shareholder equity to (ii) total deposits.
(2) Excluding charge-offs at AMN, the ratio of charge-offs to average loans
held for investment was 11.78% in 2000, 1.73% in 1999, 0.59% in 1998 and
1.16% in 1997.
(3) Ratio of (i) non-funding indebtedness to (ii) non-funding indebtedness
plus total shareholders' equity.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Organization
We are a diversified commercial and real estate lending and financial
services holding company that was incorporated in 1991 in the State of
California. Our headquarters are located in Torrance, California. Our business
46
activities are conducted through three wholly owned subsidiaries: Southern
Pacific Bank ("SPB") (SPB was considered undercapitalized at December 31, 2000
and has entered into regulatory orders with the DFI and FDIC. See Item 1.
Business--Regulation and Note 4 of Notes to Consolidated Financial
Statements), Imperial Business Credit Inc. ("IBC"), and Imperial Credit Asset
Management, Inc. ("ICAM"). Prior to November 1, 1999, we held a significant
equity interest in a publicly traded company--Franchise Mortgage Acceptance
Company ("FMC"). Through March 28, 2000, our company owned a 9% equity
interest in a commercial REIT, Imperial Credit Commercial Mortgage Investment
Corp. ("ICCMIC"). Through October 22, 1999, a wholly owned subsidiary of ours,
Imperial Credit Commercial Asset Management Corp. ("ICCAMC"), managed the
assets and operations of ICCMIC (See--"Liquidity and Capital Resources--The
ICCMIC Acquisition"). On March 28, 2000 we acquired all of the outstanding
common stock of ICCMIC that we did not already own. Our parent company, our
subsidiaries, and our affiliates offer a wide variety of deposit and
commercial loan products, asset management services, and investment banking
and brokerage services. Our core businesses originate loans and leases funded
primarily by FDIC insured deposits. Our business strategy currently
emphasizes:
. the recapitalization of SPB in an effort to meet the requirements of
regulatory orders,
. the reduction of classified assets (assets classified as substandard,
doubtful and loss),
. the improvement of credit underwriting and credit risk management,
. the continued diversification of SPB's loan portfolios,
. investing in and managing businesses in high margin niche segments of the
financial services industry.
Overview of Consolidated Operations
Financial Position
At December 31, 2000, our total assets were $2.1 billion as compared to
$2.2 billion at December 31, 1999. Our total net loans remained unchanged at
$1.5 billion at December 31, 2000 and December 31, 1999. Our outstanding
assets and loans did not increase over the prior year due to a lack of
profitability at SPB which reduced capital levels necessary to support growth.
On a consolidated basis, our cash and interest bearing deposits decreased
to $214.1 million at December 31, 2000 as compared to $282.1 million at
December 31, 1999. At our parent company, cash and interest bearing deposits
decreased to $15.9 million at December 31, 2000 as compared to $46.2 million
at December 31, 1999. Liquidity at our holding company was reduced primarily
due to the additional investment of $44.0 million of capital into SPB, the
repurchase of $27.3 million of outstanding long term debt, and
legal/professional and legal settlement costs of $6.0 million.
Our deposits at SPB remained relatively unchanged at $1.6 billion at
December 31, 2000 and December 31, 1999. Our long term debt decreased to
$219.6 million at December 31, 2000 as compared to $246.9 million at December
31, 1999 due to our repurchase of $27.3 million of our Senior Notes and
company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely debentures of the company ("ROPES").
Our retained interests in loan and lease securitizations were $6.3 million
at December 31, 2000 as compared to $10.2 million at December 31, 1999.
Approximately $4.2 million of the retained interest balance at December 31,
2000 were related to the lease securitizations at IBC. The decrease in
retained interests primarily resulted from a $4.7 million write-down, coupled
with cash collections and sales of retained interests totaling $1.3 million.
Retained interests increased by $2.4 million as a result of the accretion of
discount in 2000.
At December 31, 2000 our shareholders' equity decreased to $39.4 million as
compared to $205.4 million at December 31, 1999. The decrease in shareholders'
equity was primarily the result of provisions for loan losses, mark to market
charges on loans and securities held for sale, lawsuit settlement costs, and
ICCMIC merger related costs. Additionally, as a result of the losses sustained
by our company, management reassessed the Company's ability to realize its
$87.0 million of gross deferred tax assets. As a result of management's
47
reassessment, shareholders' equity was negatively impacted by $63.3 million as
a result of establishing a deferred tax asset valuation allowance. Our book
value per share and tangible book value per share decreased to $1.23 and $1.37
at December 31, 2000 as compared to $6.19 and $5.50 at December 31, 1999,
respectively.
Consolidated Results of Operations
During 2000, our operating results included the following significant items
or events:
. A provision for loan and lease losses totaling $181.0 million due to
increased non accrual loans and charge-offs, primarily at our Coast
Business Credit ("CBC") and Loan Participation and Investment Group
("LPIG") divisions.
. Total mark-to-market charges of $12.8 million primarily effecting IBC's
retained interests, and LPIG loans financed through total return swaps.
. The establishment of a $63.3 million deferred tax asset valuation
allowance as a result of our company's continuing operating losses. For
further information see Note 22 of Notes to Consolidated Financial
Statements.
. Legal settlement costs of $6.9 million, primarily arising from the
settlement of the Southern Pacific Funding Corporation ("SPFC")
Securities Litigation.
. A gain on sale of Auction Finance Group ("AFG") totaling $12.4 million
resulting from the sale of our minority interest in AFG.
. The completion of the ICCMIC transaction on March 28, 2000. The Company
incurred severance costs of $9.4 million and generated $29.3 million in
negative goodwill.
. The write off of ICLS's remaining balance of goodwill totaling $4.1
million.
The net loss for the year ended December 31, 2000 was $163.3 million or
$5.01 diluted net loss per share including an operating loss from discontinued
operations of $5.2 million or $0.16 diluted net loss per share and an
extraordinary gain on the early extinguishment of debt of $3.5 million or
$0.11 diluted net income per share. The operating results for the year ended
December 31, 2000 were primarily impacted by high levels of loan charge-offs
and non-performing loans resulting in an increased provision for loan and
lease losses of $181.0 million. The Company has increased its allowance for
loan and lease losses to $63.6 million or 81.02% of non-accrual loans at
December 31, 2000 as compared to $31.8 million or 62.18% of non-accrual loans
at December 31, 1999. For the year ended December 31, 1999, the Company
reported a net loss of $2.8 million or $0.08 diluted net loss per share
including an operating loss from discontinued operations of $899,000 or $0.02
diluted net loss per share and an extraordinary gain on the early retirement
of debt of $4.0 million or $0.11 diluted net income per share.
Net Interest Income
For the year ended December 31, 2000, interest income increased to $224.8
million as compared to $207.4 million for the same period last year. Interest
income increased primarily as a result of increases in the average balance of
outstanding loans, primarily at the CBC and Income Property Lending Division
("IPL") lending divisions. The average yield on loans at SPB decreased to
11.18% during the year ended December 31, 2000 as compared to 11.33% in the
same period last year. The decrease in yields primarily resulted from an
increase in average outstanding non-accrual loans and the related foregone
interest income of approximately $87.8 million and $9.0 million for the year
ended December 31, 2000 as compared to approximately $57.5 million and $4.4
million for the prior year, respectively. The Company's total loans and leases
held for sale and investment, net of allowance for loan and lease losses
remained unchanged at $1.5 billion at December 31, 2000 and December 31, 1999.
Interest expense was $140.2 million for the year ended December 31, 2000 as
compared to $121.6 million for the same period last year. The increase in
interest expense primarily resulted from an increase in both the
48
cost and the average outstanding balance of the Federal Deposit Insurance
Corporation insured deposits of SPB. SPB's average outstanding deposits
increased to $1.7 billion during 2000 as compared to $1.6 billion in the prior
year. The average cost of deposits based on daily averages at SPB increased to
6.64% during the year ended December 31, 2000 as compared to 5.71% in the
prior year. The increase in the average cost of deposits at SPB primarily
occurred as a result of a general increase in interest rates during 2000.
Interest on other borrowings also increased as a result of the ICCMIC
acquisition. Average outstanding debt at ICCMIC totaled $57.1 million during
2000. The interest expense on ICCMIC's debt was $3.5 million for the year
ended December 31, 2000. There were no comparable borrowings from ICCMIC in
the year ended December 31, 1999. The increases in interest on deposits and
other borrowings were partially offset by a decrease in interest on long-term
debt which decreased 21.0% to $24.1 million for the year ended December 31,
2000 as compared to $30.5 million for the prior year. The decrease in interest
on long-term debt resulted from the repurchase of long-term debt during the
previous twelve months.
For the year ended December 31, 2000, net interest income before provisions
for loan and lease losses remained relatively unchanged at $84.6 million as
compared to $85.8 million for the prior year. Net interest income before
provisions for loan and lease losses decreased for the quarter and year ended
December 31, 2000 primarily as a result of increased deposit costs coupled
with lower yields on our loan portfolio.
Fee and Other Income
Fee and other income decreased $17.9 million to $50.6 million in 2000 as
compared to $68.6 million in the prior year.
Gain (loss) on sale of loans decreased $7.3 million to a loss of ($771,000)
for 2000 as compared to a gain of $6.5 million in the prior year. Gain on sale
of loans decreased primarily as a result of a lower principal balance of IPL
loans sold in 2000 as compared to the prior year, in addition to decreased
lease securitizations from IBC due to the cessation of lease originations
during 2000, and losses from the sale of problem nationally syndicated
participation loans. For the year ended December 31, 2000, the Company sold
$141.8 million of IPL loans, $75.2 million of nationally syndicated
participation loans, and $7.5 million of consumer loans generating gains
(losses) of $2.0 million, ($2.7) million, and $0, respectively. For the year
ended December 31, 1999, the Company sold $283.7 million of IPL loans, $53.8
million of loan participations and securitized $133.7 million of equipment
leases, generating gains (losses) of $3.9 million, ($285,000) and $4.5
million, respectively.
Asset management fees decreased $6.8 million to $3.2 million in 2000 as
compared to $10.1 million in the prior year. Asset management fees decreased
primarily 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 $542.8 million at December 31, 2000 as
compared to $1.3 billion at December 31, 1999. The decrease was primarily due
to our acquisition of ICCMIC in the first quarter of 2000. At December 31,
2000, there were no ICCMIC assets under management as compared to $664.9
million at December 31, 1999.
During the fourth quarter of 2000, the Company reduced its ownership
percentage in Imperial Capital Group ("ICG") from 63.2% to 38.5% through the
sale of a part of its equity interest directly to ICG and certain management
members of ICG. The Company generated gross proceeds from the sale of $2.7
million, and received $885,000 in cash and $1.8 million in the form of a
short-term note. The Company's investment in and income from ICG is accounted
for by the equity method of accounting beginning with the quarter ended
December 31, 2000. For the three months ended December 31, 2000, the equity in
net income of ICG was $479,000.
Gain on sale of securities decreased $19.8 million to $13.0 million in 2000
as compared to $32.7 million in the prior year. During 2000 we sold our
minority interest in AFG, resulting in a gain of $12.4 million. During 1999,
the merger between Franchise Mortgage Acceptance Company ("FMC") and Bay View
Financial was completed. We received $27.7 million in cash and 4.4 million
shares of Bay View common stock from the sale and exchange of our 38.3%
interest in FMC. We sold the shares of the Bay View common stock we received
from the merger during 1999. As a result of these transactions, we recorded a
pre-tax gain from both transactions of $30.1 million in 1999.
49
Rental income increased to $8.2 million in 2000. We reported no rental
income during 1999. Rental income increased solely as a result of the ICCMIC
acquisition in the first quarter of 2000. Rental income is produced from the
income producing commercial real properties owned at ICCMIC.
For the year ended December 31, 2000, mark-to-market losses were $12.8
million. The net mark-to-market losses for the year ended December 31, 2000
primarily related to a $5.0 million write-down of IBC's retained interests in
lease securitizations and a $3.9 million write-down of LPIG's swap, and $3.9
million related to other trading securities. For the year ended December 31,
1999, mark-to-market losses were $28.6 million. The net mark-to-market losses
for the year ended December 31, 1999 primarily relate to the write-down of
sub-prime auto loans and the write-down of IBC's retained interests in lease
securitizations.
Noninterest Expenses
Total noninterest expenses during the year ended December 31, 2000
decreased to $103.0 million as compared to $126.6 million for the prior year.
The decrease in expenses primarily resulted from decreases in personnel
expense, amortization of servicing rights, amortization of goodwill, and
general and administrative expenses in addition to the deconsolidation of ICG.
These decreases were partially offset by increases in lawsuit settlements and
real property expenses. Prior to the reduction of the Company's equity
interest in ICG to below 50% ownership, ICG was accounted for as a
consolidated subsidiary. As such, the total expenses of ICG are included in
the Company's results of operations in the prior year and through the nine
months ended September 30, 2000. Beginning with the deconsolidation of ICG in
the fourth quarter of 2000, ICG's expenses are not consolidated with the
Company's other operations, making some comparisons to prior periods not
meaningful. Assuming ICG was accounted for under the equity method, during the
year ended December 31, 2000 total noninterest expenses decreased 17.1% to
$84.9 million as compared to $102.4 million for the prior year. The decrease
in expenses primarily resulted from decreased personnel, amortization of
servicing rights, legal and professional, amortization of goodwill, and
general and administrative expenses. The reductions in noninterest expenses
above were partially offset by increases in lawsuit settlement costs and real
property expenses.
Assuming ICG was accounted for under the equity method, during the year
ended December 31, 2000, personnel expenses decreased to $35.3 million as
compared to $40.9 million in the prior year. The decrease was primarily the
result of reduced Full Time Equivalent Employees ("FTE") and reduced bonus
expense at SPB and ICII. At December 31, 2000, the Company had 428 FTE as
compared to 537 FTE (excluding ICG) at December 31, 1999. The Company's FTE
count is based on the total number of hours worked in a period of time by
employees, temporary employees and independent contractors divided by the
number of hours a full time employee would work in the period based on a 40
hour work week.
Assuming ICG was accounted for under the equity method, during the year
ended December 31, 2000, general and administrative expenses were $17.8
million as compared to $21.1 million in prior year. General and administrative
expenses decreased in both periods as a result of the Company's efforts to cut
costs and increase operational efficiency.
During the year ended December 31, 2000, lawsuit settlements were $6.9
million as compared to $371,000 in the prior year. Lawsuit settlements
increased for the year ended December 31, 2000 as compared to the prior year
as a result of an agreement reached by the Company with the plaintiffs to
settle the securities class action litigation identified as 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. ICII has paid $3.0
million to the plaintiffs' settlement fund and agreed to issue warrants to
purchase three million shares of ICII Common Stock with an exercise price of
$3.00 per share. The warrants have a term of seven years from the date of
issuance. The Common Stock to be issued upon the exercise of the warrants will
be registered and freely tradable and have the same rights as ICII's existing
Common Stock. The warrants have change of control, typical anti-dilution and
adjustment features. The settlement of this litigation resulted in charges
totaling approximately $7.0 million during the year ended December 31, 2000.
50
During the year ended December 31, 2000, amortization of goodwill, net was
$1.4 million as compared to $14.5 million in the prior year. Amortization of
goodwill, net decreased as the Company wrote off $12.3 million of IBC's
remaining goodwill in the fourth quarter of 1999. In the third quarter of
2000, the Company wrote off the remaining $4.1 million balance of goodwill
related to Imperial Credit Lender Services, Inc. ("ICLS"), our loan
documentation and signing business. In February 2001, we sold the assets of
ICLS for its remaining net book value. We do not anticipate any gain or loss
from the sale of ICLS. Additionally, amortization of goodwill decreased as a
result of the amortization of negative goodwill associated with the ICCMIC
acquisition in the first quarter of 2000. The amortization of negative
goodwill at ICCMIC reduced amortization of goodwill, net by $5.4 million
during 2000. There was no comparable amortization of negative goodwill during
1999.
Real property expenses began to be incurred by our company as a result of
the ICCMIC acquisition in the first quarter of 2000. These costs solely relate
to the income producing properties owned at ICCMIC. Real property expenses
totaled $4.2 million for the year ended December 31, 2000. There were no real
property expenses incurred in 1999.
Non-accrual Loans
Our non-accrual loans and leases increased to $78.5 million at December 31,
2000 as compared to $51.3 million at December 31, 1999. The increase in non-
accrual loans occurred primarily in the CBC and LPIG portfolios. The increase
in CBC's non-accrual loans and charge-offs for the year ended December 31,
2000 was the result of prior management's asset work out strategy which
resulted in lending additional funds to problem borrowers in an attempt to
rehabilitate the borrower. This strategy resulted in significant unsecured
overadvances to CBC's borrowers. Additionally, CBC's customers have been
negatively impacted by the economic slowdown in the technology and
telecommunications industries. All unsecured loans related to non-performing
credits have been charged off as of December 31, 2000. The increase in LPIG's
non-accrual loans and charge-offs for the year ended December 31, 2000
resulted from a general increase in defaults of nationally syndicated loans.
See Item 7. "Management's Discussion and Analysis--Asset Quality," for more
information about non-performing assets and non-accrual loans.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses was $63.6 million or 5.39% of total
loans held for investment at December 31, 2000 as compared to $31.8 million or
2.50% at December 31, 1999, respectively. The ratio of the allowance for loan
and lease losses to non-accrual loans and leases ("coverage ratio") increased
to 81.02% at December 31, 2000 as compared to 62.18% at December 31, 1999.
For the year ended December 31, 2000, the provision for loan and lease
losses was $181.0 million as compared to $35.3 million for the same period
last year. The higher provision for loan and lease losses is primarily related
to management's decision to aggressively work out or dispose of increased
levels of non-accrual and potential problem loans, particularly in the CBC and
LPIG loan portfolios. See "Managements Discussion and Analysis--Asset
Quality," for more information about the allowance for loan and lease losses
and the provision for loan and lease losses.
Agreements Entered Into with Southern Pacific Bank's Regulators
As a result of a joint examination by the Federal Deposit Insurance
Corporation ("FDIC") and the California Department of Financial Institutions
("DFI"), SPB entered into regulatory orders with the FDIC and with the DFI.
The orders contain several requirements including but not limited to,
increasing SPB's capital and regulatory defined capital ratios, dividend
restrictions, classified asset limitations, lending policy restrictions and
procedures, and other such restrictions. Management believes the Company has
responded to all of the directives addressed in the orders including the
recent additions of new credit and risk management personnel, the partial
recapitalization of SPB and the reduction of SPB's classified assets. At
December 31, 2000, the Bank was considered "undercapitalized" by the banking
regulators. Banks so categorized are subject to certain restrictions,
including prohibitions on the payment of dividends, restrictions on
compensation, and increased supervisory
51
monitoring, among other things. Other restrictions may be imposed by the
regulators including requirements to raise additional capital, sell assets or
sell the entire bank. On March 30, 2001, the Company contributed to the Bank
$21.2 million in cash in the form of new equity capital and converted $22.0
million of subordinated debt into perpetual preferred stock of the Bank. Such
capital infusions, in addition to Bank earnings subsequent to December 31,
2000, restored the Bank's capital to amounts above the "adequately
capitalized" regulatory minimums cited in banking regulations. Management
believes that the Bank will not meet any of the required target capital ratios
required by the Orders during 2001. At this time, the financial impact, if
any, of regulatory actions that may result from the failure of the Bank to
meet minimum capital requirements of the Orders cannot be determined. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty. We have been in discussions with
the FDIC and the DFI with regard to our current and projected noncompliance
with the regulatory orders and are in the process of completing an amended
capital plan for 2001 to address our noncompliance. (See "Item 1. Business--
Regulation--General" and Note 4 of Notes to Consolidated Financial Statements)
Recapitalization Transaction
On March 30, 2001 we completed the issuance of $16.2 million of Senior
Secured Debt. The notes bear an interest rate of 12% and mature on April 30,
2002. The issuance of the Senior Secured Debt is the first step in a
recapitalization plan first announced by our company in February 2001.
Subsequent to the completed Senior Secured Debt offering, we will offer pro
rata a package of the following securities in exchange (the "Debt Exchange")
for our three currently outstanding series of debt securities (the "Old
Notes"): (i) 12% Senior Secured Notes due 2005 (the "Exchange Notes"), (ii) up
to 2.0 million shares of our Common Stock, no par value and (iii) warrants to
purchase up to an additional 7.0 million shares of Common Stock at an exercise
price of $2.15 per share. Concurrently with consummation of the Debt Exchange,
we will issue up to 7.04 million shares of Common Stock to the holders of a
majority in interest of our Old Notes who executed the recapitalization
agreement. We further intend to issue and sell at least $10.0 million
principal amount of 12% Convertible Subordinated Notes due 2005 to accredited
investors in a private placement. The Convertible Subordinated Notes will be
convertible into Common Stock of the Company at $1.25 per share.
The holders of Old Notes will be offered Exchange Notes as follows: (i) the
holders of our 10.25% Remarketed Par Securities due 2002 will be offered to
convert into Exchange Notes at $0.80 per dollar of face amount of such Old
Notes, (ii) the holders of our 9.875% Senior Notes due 2007 will be offered to
convert into Exchange Notes at $0.65 per dollar of face amount of such Old
Notes, and (iii) the holders of our 9.75% Senior Notes due 2004 will be
offered to convert into Exchange Notes at $0.50 per dollar of face amount of
such Old Notes. A majority-in-interest of the 10.25% Remarketed Par Securities
due 2002 and our 9.875% Senior Notes due 2007 have agreed to participate in
the Debt Exchange, and to strip the Old Notes of all currently existing
financial covenants. Supplemental indentures eliminating all covenants related
to the Old Notes have been executed.
Subject to the occurrence of certain conditions (including the closing of
the Debt Exchange and the issuance of Convertible Subordinated Notes), all of
the Senior Secured Debt will be automatically exchanged into (i) $18.2 million
principal amount of Exchange Notes, (ii) 249,052 shares of Common Stock, and
(iii) warrants to purchase up to an additional 781,681 shares of Common Stock
at an exercise price of $2.15 per share. Each of the Senior Secured Debt
purchasers will further have the right during the period following the Debt
Exchange and ending March 31, 2002 to elect to exchange all or a portion of
their Exchange Notes and related shares of Common Stock and Debt Exchange
Warrants into $18.2 million principal amount of Convertible Subordinated
Notes. The Convertible Subordinated Notes will have a 12% coupon and will be
convertible into Common Stock at $1.25 per share.
The Senior Secured Debt Holders will be entitled to receive additional
amounts of Exchange Notes in connection with the sale of such notes by March
31, 2002 (and for a period of 60 days thereafter) if, with respect to
specified types of sales, the average trading price of the Exchange Notes
during the 30-day period ending on the last day of the month preceding the
month in which such sale occurs is less than a price of 89 or, for other
specified types of sales, if their net proceeds from such sales, are less than
89% of the principal amount of the
52
Exchange Notes that are sold. In any such event, each of such holders will be
entitled to receive from us, pro rata in accordance with the respective
aggregate principal amounts of such Exchange Notes held by such holder,
additional principal amounts of Exchange Notes as will generate net proceeds
equal to the difference, expressed as a dollar amount, between (i) 89% of the
aggregate principal amount of the Exchange Notes sold by such holder and,
depending on the types of sales, either the sum of (a) the average trading
value of such Exchange Notes and (b) the net proceeds, if any, resulting from
the required concurrent actions as defined in the recapitalization agreement
or the sum of (x) the net proceeds from such sale of Exchange Notes and (y)
the net proceeds, if any, resulting from the required concurrent actions;
provided, that in either event, the maximum principal amount of additional
Exchange Notes so issuable to all such holders in the aggregate will be
limited to $5.0 million. If additional Exchange Notes are required to be
issued, 2.0 million shares of Common Stock that would otherwise be issued to
the holders of a majority interest in our Old Notes will be reduced by 800
shares for each $1,000 in principal amount of additional Exchange Notes
required to be so issued.
Sales of Exchange Notes made above the 89% of principal amount threshold by
a holder would be taken into account in determining the amount of Exchange
Notes, if any, issuable to such holder for sales below the 89% threshold. In
addition, if the average trading price of the Exchange Notes during the 30 day
period ending March 31, 2002 is less than 70, the Senior Secured Debt Holders
will be issued the maximum principal amount of additional Exchange Notes
without being obligated to sell any of their Exchange Notes.
Upon successful completion of the proposed offering ICII will receive gross
proceeds of approximately $26 million of new capital, most of which will be
invested in Tier I capital of SPB. We believe that this new capital will
assist our company in its attempt to increase capital levels at SPB in order
to meet regulatory requirements. However, the funds raised as a result of
issuing the Senior Secured Debt and the Convertible Subordinated Notes will
not provide sufficient capital by themselves to meet the requirements of SPB
under its regulatory orders, and as such, we expect to raise additional
capital or reduce the size of SPB in order to meet the capital requirements of
the regulatory orders. Furthermore, the future exercise of warrants issued in
connection with the Debt Exchange is expected to provide approximately an
additional $15.0 million of capital for our company at the time of their
exercise approximately three years from the date of issuance of the Exchange
Notes.
There can be no assurance that the proposed offering can be completed or
that sufficient amounts of capital combined with asset reductions can be
achieved such that the Bank might comply with its regulatory order
requirements.
Business Lines
We manage our business by evaluating the results of operations from each of
our business units. Our core businesses include:
. Coast Business Credit ("CBC")--an asset-based lending business;
. Imperial Warehouse Finance, Inc. ("IWF")--a residential loan warehouse
line business;
. Loan Participation and Investment Group ("LPIG")--a division of SPB
investing in nationally syndicated bank loans;
. The Lewis Horwitz Organization ("LHO")--a film and television production
lending business;
. Imperial Business Credit, Inc. ("IBC")--an equipment lease servicing
business;
. Income Property Lending Division ("IPL")--a multifamily origination and
commercial mortgage banking business;
. Imperial Capital Group, LLC ("ICG")--an investment banking and brokerage
business;
. Asset Management Activities ("AMA")--an investment fund management
business;
. Other Core Operations ("OCO")--our holding company investments and
support functions, our loan documentation service operations, and the
administrative and servicing operations of Southern Pacific Bank.
53
We also operated other businesses in 2000, 1999 and 1998 that we consider
our "non-core" businesses. These are businesses that we have made the decision
to de-emphasize during 1999 and 1998. We group these businesses into the
following categories:
. Equity Interests--Franchise mortgage lending, sub prime residential
mortgage banking business, and beginning in the fourth quarter of 2000,
investment banking and brokerage;
. De-emphasized/Discontinued/Exited Businesses--Consumer lending, auto
lending, residential mortgage lending, foreign mortgage lending
businesses, and third party mortgage servicing operations.
Our exit from these non-core businesses has allowed our management to focus
on our core business lines that have historically proven to be our most
profitable businesses. Following is a summary of these businesses results of
operations in 2000 as compared to 1999.
CORE BUSINESS LINES
The following table reflects average loans and leases outstanding and the
average yields earned on our core business units for 2000 and 1999:
Average Loans and
Leases Average
Outstanding Yield
----------------- ------------
Business Line 2000 1999 2000 1999
------------- -------- -------- ----- -----
(Dollars in thousands)
CBC.......................................... $806,987 $658,764 13.03% 13.17%
IWF.......................................... 69,667 130,075 7.72 8.28
LPIG......................................... 182,917 240,621 7.97 7.55
LHO.......................................... 59,241 6,056 12.65 14.77
IBC.......................................... 3,059 10,700 12.99 12.54
IPL.......................................... 358,520 226,548 9.47 8.85
Our largest subsidiary is SPB, a $1.8 billion industrial bank, which
operates five of our core businesses: CBC, IPL, LPIG, IWF, and LHO. The FDIC
insured deposits of SPB are the primary source of funding for each of these
businesses.
Coast Business Credit
CBC's net loss for 2000 was $72.1 million as compared to net income of $7.9
million for 1999. The decrease in CBC's net income for 2000 was primarily
attributable to an increase in the provision for loan losses, partially offset
by an increase in net interest income. CBC's net income for 2000 includes a
provision for loan losses of $113.5 million as compared to $24.7 million for
the previous year.
CBC's provision for loan losses increased sharply due to an increase in
CBC's non-accrual loans and charge-offs for the year ended December 31, 2000.
Management believes that CBC's non-accrual loans and charge-offs increased due
to a failed problem asset work out strategy deployed by CBC's previous
management. During the course of the previous two years, CBC's management made
the decision to advance funds to problem borrowers in an attempt to
rehabilitate the borrower. This strategy resulted in significant unsecured
overadvances to CBC's borrowers. The increases in charge-offs and provision
for loan losses related to these credits, and the economic slowdown in the
technology and telecommunications industries have been a significant cause of
CBC's recent poor financial performance. Additionally, the deterioration of
collateral values and the beginning of a general economic downturn in the
telecommunications and technology sectors have negatively impacted CBC's loan
portfolio. We believe that CBC will continue to record relatively higher
levels of provisions for loan losses due to higher levels of non-performing
loans and an economic downturn as long as CBC's non-accrual loans remain at
elevated amounts. See Item 1. "Business--Coast Business Credit" for a
discussion of the actions taken by SPB to mitigate these types of charge offs
in the future.
54
CBC increased its average loans outstanding in 2000 to $807.0 million as
compared to $658.8 million for the previous year. As a result of the increase
in CBC's average loans outstanding, CBC's net interest income increased to
$60.3 million for 2000 as compared to $54.0 million for the previous year. The
yield on CBC's loans decreased to 13.03% for 2000 as compared to 13.17% for
the previous year. The decrease in yield was primarily attributable to an
increase in the average outstanding balance of non-accrual loans during 2000
as compared to 1999.
CBC earned other income totaling $9.7 million in 2000 as compared to $8.2
million for the previous year. Other income for 2000 includes a $1.1 million
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 in the second quarter of 2000.
The remaining balance of other income primarily consists of audit and other
fees charged by CBC to its customers.
CBC's total expenses were $27.8 million for 2000 as compared to $24.3
million for the prior year. Total expenses increased in 2000 as compared to
the prior year primarily due to increased legal costs related to loan
collections activity as well as to higher personnel, data processing, FDIC
insurance premiums, and general and administrative expenses associated with
CBC's loan portfolio growth. Legal and professional fees increased
$1.1 million to $1.6 million as compared to $526,000, and general and
administrative expenses increased $1.8 million to $4.0 million as compared to
$2.2 million in 2000 and 1999, respectively.
CBC's FTE decreased to 134 at December 31, 2000 as compared to 135 at
December 31, 1999.
At December 31, 2000, CBC's non-accrual loans were $31.8 million as
compared $22.2 million at December 31, 1999. At December 31, 2000, no CBC
loans were 90 days delinquent and accruing interest. CBC incurred net charge-
offs of $88.9 million for 2000 as compared to $17.4 million for the prior
year. CBC's non-accrual loans are generally collateralized by accounts
receivable, inventory, real estate, and other tangible assets. See
"Consolidated Results of Operations--Provision for Loan and Lease Losses."
Imperial Warehouse Finance, Inc.
In October 2000, we hired a new President of IWF. The new President has 15
years of mortgage banking experience including retail, wholesale, bulk
acquisitions and warehouse lending. As a result, IWF has obtained
several new customer relationships and is enjoying increased success in
maintaining higher average outstanding balances of repurchase lines. Beginning
in the fourth quarter of 2000, IWF management implemented new underwriting
guidelines and operational procedures that have increased IWF operating
efficiency while lowering the overall level of risk associated with this line
of business. See Item 1. "Business--Imperial Warehouse Finance, Inc.," for a
description of the changes made at IWF to improve underwriting.
IWF's net loss for 2000 was $17.7 million as compared to net income of $1.1
million for 1999. IWF's net loss increased in 2000 as compared 1999 as a
result of a significant increase in the provision for loan losses. The
provision for loan losses increased to $18.9 million for 2000 as compared to
$1.2 million for 1999 primarily as a result of increased charge-offs related
to fraud losses.
Net interest income before the provision for loan losses was $800,000 for
2000 as compared to $4.1 million for 1999. The decrease in IWF's net interest
income is related to a decrease in the average outstanding balance of loans
and an increase in non-accrual loans. IWF's average loans outstanding and
average yields for 2000 decreased to $69.7 million and 7.72% as compared to
$130.1 million and 8.28% for 1999. The decrease in IWF's loan yields, were
primarily due to an increase in IWF's non-accrual loans.
IWF earned other income consisting primarily of loan fees charged to its
customers of $309,000 for 2000 as compared to $1.5 million for 1999. Other
income decreased in 2000 as compared to the prior year due to decreased loan
funding transactions.
IWF's total expenses increased to $4.4 million for 2000 as compared to $2.6
million for 1999. Total expenses increased as compared to the prior year
primarily due to higher personnel and legal and professional
55
expenses. The increase in personnel expenses was primarily associated with
IWF's relocation to Torrance, California from its former headquarters in
Voorhees, New Jersey, and the subsequent hiring of new management and
personnel to run the operations of IWF. The increase in professional and legal
expenses was primarily associated with increased legal costs which occurred as
a result of increased collection efforts by IWF of its non-performing loans.
IWF's FTE decreased to 7 FTE at December 31, 2000 as compared to 12 FTE at
December 31, 1999.
At December 31, 2000, IWF's non-accrual loans increased to $9.4 million as
compared to $7.8 million at December 31, 1999. IWF incurred net charge-offs of
non-accrual loans of $16.4 million for 2000 and $1.6 million for 1999. IWF's
non-performing loans are collateralized by mortgage loans on single family
residences and other real estate.
During 2000, IWF advanced approximately $9.5 million to Island Mortgage
Network ("Island") under its mortgage loan warehouse program. 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 was 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,
which the court recently approved. During 2000, we charged off $7.5 million of
the Island warehouse advance. We are seeking recovery of our losses by all
means possible, including legal action and insurance claims. At December 31,
2000, the outstanding loan balance related to Island's was $1.6 million. This
balance reflects single family residences in which IWF has perfected first
deeds of trust and is currently receiving payments from mortgagors. In
addition to the Island fraud, IWF incurred one other significant fraud-related
loss in 2000 for $3.0 million.
Loan Participation and Investment Group
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 better utilized in our other core 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 net loss was $35.1 million for 2000 as compared to net income of
$1.2 million for the prior year. The increase in LPIG's net loss was primarily
the result of an increased provision for loan losses. LPIG's net revenues
include a provision for loan losses of $39.3 million for 2000 as compared to
$7.0 million in the prior year. LPIG's provision for loan losses increased
primarily due to increased defaults on nationally syndicated credits during
2000 as compared to 1999.
LPIG's average loans outstanding decreased to $182.9 million for 2000 as
compared to $240.6 million in the prior year. As a result of the decrease in
LPIG's average loans outstanding and increase in non-accrual loans, LPIG's net
interest income decreased to $5.6 million for 2000 as compared to $8.4 million
for the prior year. The yield on LPIG's loans for 2000 increased to 7.97% as
compared to 7.55% in the prior year. The yield on LPIG's loans increased as a
result of the general increase in Libor rates, partially offset by increases
outstanding average balances of non-accrual loans throughout 2000.
LPIG's other income totaled ($6.6) million for 2000 as compared to $2.0
million in the prior year. The decrease in other income was primarily the
result of increased mark-to-market losses on nationally syndicated bank loans
funded through total return swaps and losses on sales of potential problem
LPIG loans. During 2000, LPIG's mark-to-market losses were $3.9 million as
compared to mark-to-market gains of $268,000 in the prior year. During 2000,
LPIG's losses on sales of problem loans were $2.7 million as compared to
losses on sales of $277,000 in the prior year. Defaults on nationally
syndicated credits have increased during the course of 2000. These increased
defaults have negatively impacted LPIG's on balance sheet loan portfolio
through increasing non-accrual loans, and LPIG's off-balance sheet loans
funded through total return swaps through negative mark to market charges.
56
LPIG's total expenses were relatively unchanged at $1.6 million for 2000 as
compared to $1.4 million for 1999. Total expenses increased primarily due to
higher occupancy and general and administrative expenses.
LPIG's FTE was unchanged with 4 FTE at December 31, 2000 and 1999.
The Lewis Horwitz Organization
LHO was acquired on October 1, 1999. The acquisition was accounted for as a
purchase, resulting in goodwill of $17.3 million. As part of the acquisition,
we acquired all right, title and interest in $98.2 million of motion picture
and television production loans. We also acquired other assets totaling
$362,000 and assumed liabilities of $1.2 million in connection with the
acquisition. The purchase price of the loans was equal to the gross carrying
value of the loans on the books and records of Imperial Bank, except the
purchase price of the first $20 million in non-performing assets were
allocated a discount of $3.6 million. Under the terms of the acquisition, we
received all interest and fees on the $98.2 million of LHO originated loans
and paid Imperial Bank Prime minus 2.50% through December 31, 2000. We also
agreed to immediately purchase all loans that either were or become classified
as non-accrual, when an interest or principal payment is 90 days or more past
due. In February 2001, we completed the acquisition of all performing loans
and non-performing LHO assets from Imperial Bank. From the acquisition of LHO
on October 1, 1999 through December 31, 2000, we acquired gross non-performing
assets of $23.6 million. In the first quarter of 2001, we acquired gross non-
performing assets of $4.4 million.
LHO's net income was $104,000 for 2000 as compared to $4,000 for the three
month period from October 1, 1999 to December 31, 1999. LHO's net revenues for
2000 include a provision for loan losses of $558,000 as compared to $351,000
for the three month period from October 1, 1999 to December 31, 1999.
LHO's average loans outstanding and average yield for 2000 were $59.2
million and 12.65%. LHO's average loans outstanding and average yields for the
three month period from October 1, 1999 to December 31, 1999 were $6.1 million
and 14.77%, respectively.
As a result of the increase in average loans outstanding, and the
completion of an entire year of operations in 2000, LHO's net interest income
increased to $5.1 million as compared to $992,000 for the three month period
from October 1, 1999 to December 31, 1999.
LHO's total expenses were $4.0 million for 2000 as compared to $761,000 for
the three month period from October 1, 1999 to December 31, 1999. LHO's
expenses increased as a result of completing a full year of operations in
2000, as compared to only 3 months of operations in 1999.
LHO had 16 FTE at December 31, 2000 as compared to 12 FTE at December 31,
1999.
At December 31, 2000, LHO's non-accrual loans were $246,000. LHO had no
non-accrual loans at December 31, 1999. At December 31, 2000, LHO's other
repossessed assets were $7.8 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 on October 1, 1999. LHO's non-accrual loans and other repossessed
assets are supported by the existing and estimated value of all future
distribution rights of the underlying film or television production. All of
LHO's other repossessed assets were acquired from Imperial Bank under the
terms of the LHO purchase agreement, and are carried at their estimated
realizable values.
Imperial Business Credit, Inc.
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. IBC's current operations primarily consist of
servicing its remaining small ticket leases and the new originations of SPB's
middle market leasing group.
IBC's net loss was $5.7 million for 2000 as compared to a net loss of $13.3
million for the prior year. IBC's net loss decreased as compared to the prior
year primarily due to decreased amortization of goodwill and a reduction in
mark to market charges on retained interests in lease securitizations.
57
IBC originated $30.9 million of leases for 2000 as compared to $125.2
million in the prior year. IBC securitized $43.6 million of leases for 2000
generating gain on sale revenue of $563,000 or 1.3% of the principal balance
securitized. For 1999, IBC securitized leases of $132.4 million, generating
gain on sale revenue of $4.5 million or 3.4% of the principal balance
securitized.
IBC's average leases outstanding and average yield for 2000 were $3.1
million and 12.99%. IBC's average leases outstanding and average yields for
the prior year were $10.7 million and 12.54%.
Despite the decrease in on-balance sheet average loans outstanding, IBC's
net interest income increased to $2.3 million for 2000 as compared to $1.1
million in the prior year. The increase is primarily due to increased interest
on other financing activities at IBC. Interest on other financing activities
results from the accretion of discounts on IBC's retained interests in lease
securitizations. Additionally, net interest income increased at IBC due to a
decrease in borrowings from our parent company, and a corresponding reduction
in interest expense.
IBC also generated other income (loss), including lease servicing fees from
leases sold into its securitization facility and mark-to-market charges on
trading securities and retained interests in lease securitizations of
$1.6 million for 2000 as compared to ($1.4) million in the prior year. Lease
servicing fees totaled $4.6 million for 2000 as compared to $4.5 million in
the prior year. The mark to market charges on retained interests in lease
securitizations of $5.0 million for 2000 and $11.9 million for the prior year
were primarily the result of increased lease defaults.IBC's total expenses
were $8.1 million for 2000 as compared to $22.2 million for the prior year.
Total expenses decreased as compared to the prior year primarily due to
reduced amortization of goodwill and reduced personnel and operating expenses.
During the prior year, IBC wrote off $11.3 million of goodwill and as a
result, IBC incurred no amortization of goodwill expense in 2000. Personnel
and operating expenses decreased 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.
(See Item 1.--"Business--Imperial Business Credit" for information
regarding defaults under IBC's securitization facility)
IBC's FTE decreased to 55 FTE at December 31, 2000 as compared to 94 FTE at
December 31, 1999.
Income Property Lending Division
IPL's net income was $1.6 million for 2000 as compared to $2.0 million for
the prior year.
IPL originated $235.9 million of loans for 2000 as compared to $339.7
million for the prior year. During 2000, IPL sold $141.7 million of loans
generating gains on sale of $2.0 million, or 1.4% of the principal balance of
loans sold. During 1999, IPL sold $283.7 million of loans generating gains on
sale of $2.0 million, or 0.7% of the principal balance of loans sold. Gain on
sale of loans as a percentage IPL's loans sold increased for 2000 as compared
to the prior year due to increased interest margins and an increase in demand
for small balance income property loans in the secondary market. The volume of
loans sold decreased as a result of retaining for portfolio a higher level of
multifamily real estate loans originated by IPL during 2000. During 2000, the
provision for loan losses at IPL increased to $2.2 million as compared to
$142,000 in the prior year. The increase primarily relates to an increase in
the balance of multifamily and commercial loans held for investment.
IPL's net interest income was $12.1 million for 2000 as compared to $9.2
million for the prior year. The increase was primarily the result of an
increased average balance of outstanding loans and increased average yield.
IPL's average outstanding loan balance for 2000 increased to $358.5 million as
compared to $226.5 million in the prior year. The increase in IPL's loan
yields to 9.47% for 2000 as compared to 8.85% for the prior year was primarily
due to an overall increase in LIBOR interest rates over the preceding twelve
months.
IPL's other revenues were $2.5 million for 2000 as compared to $3.0 million
for the prior year.
IPL's total expenses were $8.3 million for 2000 as compared to $8.7 million
for 1999. Total expenses decreased for 2000 as compared to the prior year
primarily due to lower personnel, telephone and other
58
communications costs, and lower general and administrative expenses relating
to decreased personnel and loan origination volumes. FTE decreased to 41 FTE
at December 31, 2000 as compared to 69 FTE at December 31, 1999.
IPL's non-accrual loans were $1.7 million or 0.05% of its outstanding loan
portfolio at December 31, 2000, as compared to $237,000 or 0.09% of its
outstanding loan portfolio at December 31, 1999.
Imperial Capital Group, LLC
During the fourth quarter of 2000, we reduced our ownership in ICG from
63.2% to 38.5% through the sale of a part of our equity interest directly to
ICG and to certain management members of ICG. As such, the income from ICG is
accounted for by the equity method of accounting beginning with the quarter
ended December 31, 2000. For the three months ended December 31, 2000, the
equity in net income of ICG was $479,000 and is reported in our segment data
under "Equity Interests." The results and data presented here reflect the
consolidated operations of ICG through September 30, 2000 as compared to the
year ended December 31, 1999, the periods in which ICG's operations were
consolidated with the rest of our businesses.
ICG's pre tax income increased to $2.8 million for the nine months ended
September 30, 2000 as compared to $2.5 million for the prior year.
The increase in pre-tax income for the nine months ended September 30, 2000
as compared to the prior year primarily resulted from increased fees received
for successful corporate finance transactions completed by ICG through private
placements as well as increased trading gains, partially offset by decreased
trading commission revenues. For the nine months ended September 30, 2000, ICG
raised $184.5 million of total debt and equity proceeds for their customers as
compared to $128.0 million for the prior year.
ICG's total expenses were $18.2 million for the nine months ended September
30, 2000 as compared to $17.4 million for prior year. Total expenses increased
for the nine months ended September 30, 2000 as compared to the prior year
primarily due to increased personnel, and general and administrative expenses
resulting from increased corporate finance transactions.
ICG's FTE decreased to 73 FTE at September 30, 2000 compared to 79 FTE at
December 31, 1999.
Asset Management Activities
AMA's net loss was $7.0 million for 2000 as compared to a net loss $3,000
for the prior year. AMA's net loss increased primarily as a result of $9.4
million of merger costs associated with the ICCMIC acquisition, 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 and management fees decreased to $542.8
million and $3.2 million for 2000 as compared to $1.3 billion and $10.1
million for the prior year, respectively. The decrease was primarily due to
our acquisition of ICCMIC in the first quarter of 2000. At December 31, 2000,
there were no ICCMIC assets under management as compared to $664.9 million at
December 31, 1999. At December 31, 2000, our assets under management were
$484.5 million at Pacifica Partners I L.P. ("Pacifica") and $58.3 million at
the Cambria Investment Partnership I, L.P. ("Cambria"). At December 31, 1999,
our assets under management were $467.1 million at Pacifica and $134.9 million
at Cambria.
Total expenses, excluding merger costs of $9.4 million, from AMA activities
were $3.1 million for 2000 as compared to $9.8 million for 1999. 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. Total AMA FTE decreased to 7 FTE at December 31, 2000 as compared
to 13 FTE at December 31, 1999.
59
Other Core Operations
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.
For 2000, the net loss of OCO was $27.1 million, as compared to net income
of $146,000 for the prior year. The net loss for 2000 includes a $3.5 million
net gain from the early extinguishment of debt, as compared to a $4.0 million
net gain from the early extinguishment of debt in 1999.
The net loss for 2000 increased primarily as a result of increased expenses
in addition to the establishment of a deferred tax asset valuation allowance.
Total expenses of OCO were $14.9 million for 2000 as compared to $8.2 million
for the prior year. The increase in expenses for 2000 as compared to the same
periods in the prior year primarily resulted from increased legal and
professional fees and litigation settlements. OCO's total expenses for 2000
includes legal settlement costs of $6.1 million.
OCO's income tax expense for 2000 totaled $11.8 million in connection with
the establishment of the deferred tax asset valuation allowance in the fourth
quarter of 2000. There were no comparable expenses of this nature in the prior
year.
OCO's FTE decreased to 45 FTE at December 31, 2000 as compared to 53 FTE at
December 31, 1999.
OTHER BUSINESS LINES
We also operate other businesses, which, except for ICG, 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 companies.
During the fourth quarter of 2000, we reduced our ownership in ICG from
63.2% to 38.5% through the sale of a part of our equity interest directly
to ICG and to certain management members of ICG. As such, the income from
ICG is accounted for by the equity method of accounting beginning with
the quarter ended December 31, 2000.
. De-emphasized/Discontinued/Exited Businesses--represents our business
units we decided to either de-emphasize, discontinue, or exit.
Our exit from these non-core businesses will allow our management to focus
on our core business lines.
Equity Interest in ICG
ICG is accounted for by the equity method of accounting beginning with the
quarter ended December 31, 2000. For 2000, our Equity Interests generated net
revenues of $479,000, exclusively from ICG, and net income of $878,000 as
compared to net revenues of $31.2 million and a net loss of $18.5 million for
1999.
Equity Interest and Gain on sale of FMC
During 1999, equity in the net loss of FMC was $53,000. On November 1,
1999, the merger between FMC and Bay View was completed. We received $27.7
million in cash and 4.4 million shares of Bay View common stock from the sale
and exchange of our 38.3% interest in FMC. On November 5, 1999, we announced
the sale of 4,342,451 shares of the Bay View common stock we received from the
FMC/Bay View merger. As a result of these transactions, we received
approximately $86.3 million in total cash proceeds and we recorded a pre-tax
gain from both transactions of $30.1 million.
60
Equity Interest in SPFC
On October 1, 1998, SPFC petitioned for Chapter 11 bankruptcy protection
under Federal bankruptcy laws in the U.S. Bankruptcy Court for the District of
Oregon. As a result of SPFC declaring Chapter 11 bankruptcy and the
corresponding decline in its common stock to below one dollar per share, and
subsequent de-listing from the New York Stock Exchange, we wrote-off our total
investment in and loan to SPFC. During 1999 and 1998 equity in the net income
of SPFC was $0 and $12.7 million, respectively.
De-emphasized/Discontinued/Exited Businesses
The Exited Businesses net loss from operations was $1.3 million for 2000 as
compared to a net loss of $18.5 million for 1999. The decrease in net loss for
2000 as compared to 1999 primarily resulted from reduced mark-to-market
charges, and income from assets purchased in the ICCMIC acquisition, which
were acquired on March 28, 2000. The Exited Businesses incurred negative mark-
to-market charges of $657,000 in 2000 compared to $28.3 million in 1999.
Total expenses at our Exited Businesses decreased to $12.7 million for 2000
as compared to $24.6 million for 1999. The decrease in total expenses was
primarily due to the wind-down of non-core businesses.
Our non-core loans decreased to $95.1 million at December 31, 2000 as
compared to $143.9 million at December 31, 1999. The remaining non-core
portfolios primarily consist of lower risk single family mortgage loans.
The following table reflects the ending outstanding balances of the loans
from our Exited Businesses:
Loans and Leases
Outstanding at
December 31,
----------------
Exited Business Line 2000 1999
-------------------- ------- --------
(In thousands)
Auto Lending Division of SPB................................ $ 2,283 $ 5,991
Consumer Lending Division of SPB............................ 6,366 15,639
Single family loans......................................... 77,686 104,008
Franchise loans............................................. 8,797 18,277
------- --------
Total loans and leases from exited businesses............. $95,132 $143,915
======= ========
The above table does not include net outstanding loans from the
discontinued operations of AMN which were $2.0 million and $5.2 million at
December 31, 2000 and 1999, respectively.
During 2000 we sold $7.5 million of consumer loans from our exited business
loan portfolio. Our sub-prime auto loan balances were reduced to $2.3 million
at December 31, 2000 as compared to $6.0 million at December 31, 1999. At
December 31, 2000, the remaining sub-prime auto loans are carried at 32.0% of
the outstanding contractual balance.
During 1999 we sold 1,887,110 shares of Impac Mortgage Holdings, Inc.
("IMH") stock resulting in a gain of $929,000. At December 31, 1999, we did
not own any shares of IMH common stock.
FTE at our Exited Businesses decreased to 3 FTE at December 31, 2000 as
compared to 5 FTE at December 31, 1999.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
We reported a net loss for the year ended December 31, 1999 of $2.8 million
or $0.08 diluted net loss per share as compared to a net loss of $73.6 million
or $1.93 diluted net loss per share for the prior year.
61
The loss for 1999 included an extraordinary gain on the early
extinguishment of debt of $4.0 million or $0.11 diluted net income per share
and operating losses relating to the discontinued operations of AMN of
$899,000 or $0.02 diluted net loss per share, respectively. The net loss for
the same period last year included operating losses of $3.2 million or $0.08
diluted net loss per share relating to the discontinued operations of AMN and
a loss on the disposal of AMN of $11.3 million or $0.30 diluted net loss per
share.
During 1999, our operating results included the following items:
. A gain on sale of Franchise Mortgage Acceptance Company ("FMC") totaling
$30.1 million resulting from the sale of our 38.3% interest in FMC.
. The write-off of IBC's remaining balance of goodwill totaling $11.3
million.
. The write-down of retained interests in lease securitizations at IBC
totaling $11.9 million. The write downs for 1999 were primarily the
result of increased lease defaults in the last quarter of 1999.
. The write-down of auto loans at SPB totaling $24.8 million. An increase
in delinquencies and non-accrual loans were the primary cause of the
decline in the value of SPB's held for sale auto loan portfolio.
. The acceleration of SPB's originated servicing rights amortization of
$4.3 million due to SPB's exit from its third party loan servicing
operations.
Consolidated Net Revenue
Our total net revenue increased to $119.1 million for 1999 as compared to
$16.2 million for the prior year. The increase in net revenue was primarily
due to the sale of our 38.3% equity ownership in FMC for a pre-tax
gain of $30.1 million, an increase in investment banking and brokerage fees,
and lower impairment and mark-to-market write-downs of loans and securities.
These items were partially offset by lower net interest income and an
increased provision loan and lease losses.
Our total net interest income decreased to $85.8 million for 1999 as
compared to $112.7 million for 1998. The decrease in net interest income was
primarily due to a decrease in the average yield on earning assets. The
decrease in yield primarily relates to the sale and run-off of non-core loans
which were $143.9 million at December 31, 1999 as compared to $371.5 million
at December 31, 1998. Non-core loans included higher yielding, higher risk
loans such as sub-prime auto loans. Additionally, the higher level of non
performing loans had a negative impact on net interest income in 1999 as
compared to 1998. Interest expense on long term debt increased to $30.5
million for the year ended December 31, 1999 as compared to $30.3 million for
the prior year primarily due to the issuance of $30.0 million of Series B
Mandatorily Redeemable Cumulative Preferred Stock, partially offset by lower
average balances of Senior Notes and ROPES. During the third and fourth
quarters of 1999 we repurchased $34.8 million and $8.3 million of Senior Notes
and ROPES resulting in an extraordinary net gain of $5.2 million on the early
extinguishment of debt. Additionally, we retired the Series B Mandatorily
Redeemable Cumulative Preferred Stock in the fourth quarter of 1999 resulting
in an extraordinary net loss of $1.2 million on the early extinguishment of
debt. Due to the above factors, our net interest margin decreased to 4.52% for
1999 as compared to 5.86% for 1998.
Our gain on sale of loans and leases decreased to $6.5 million for the year
ended December 31, 1999 as compared to $14.9 million for the same period last
year primarily due to lower gains on whole loan sales of multifamily real
estate loans originated by IPL. During 1999 we continued our plan to sell
loans from our exited and non-core businesses. During 1999, we sold $45.3
million of auto loans, $33.4 million of single family loans, $11.7 million of
consumer loans, and the remaining Argentine mortgage loan portfolio of $22.8
million, generating a net gain on sale of $321,000.
Asset management fees increased to $10.1 million for 1999 as compared to
$7.6 million for 1998. The increase was primarily due to increased average
outstanding assets under management at ICCMIC and Pacifica Partners I.
62
Investment banking and brokerage fees increased to $27.2 million for 1999
as compared to $18.5 million for 1998. The increased income from ICG primarily
resulted from increased trading gains, partially offset by lower commission
revenues. ICG raised total proceeds for their clients through corporate
finance transactions of $137.3 million during the year ended December 31, 1999
as compared to $190.0 million during the prior year.
Loan servicing income decreased to $6.9 million for 1999 as compared to
$12.0 million for 1998 primarily due to our exit from the third party
multifamily and commercial mortgage loan servicing businesses.
Net mark-to-market losses of loans and securities held for sale were $28.6
million for 1999 as compared to $42.4 million in 1998. The mark-to-market
adjustments for 1999 were primarily related to SPB's sub-prime auto loan
portfolio and IBC's retained interest on lease securitizations. The mark-to-
market losses for 1998 primarily related to our Argentinean residential
mortgage, sub prime auto loan, and consumer loan portfolios.
Our equity in the net loss of FMC for 1999 was $53,000 as compared to
income of $3.2 million for the prior year. We accounted for our equity
interest in FMC using the equity method from January 1, 1999 through June 30,
1999. From July 1, 1999 through the sale of FMC's stock we accounted for our
equity interest using the cost method. Our equity interest in FMC was sold
during the fourth quarter of 1999. See "Item 7. Management's Discussion and
Analysis--Equity Interests--Equity Interest and Gain on Sale of FMC."
Consolidated Total Expenses
Our total expenses increased to $126.6 million for 1999 as compared to $120.8
million for 1998. The increase was primarily related to increased goodwill
amortization expense as a result of the write-off of $11.3 million of goodwill
at IBC, and increased amortization of loan servicing rights as a result of
SPB's exit from third party loan servicing. Our personnel expense decreased to
$60.3 million for 1999 as compared to $61.6 million for 1998. During 1999, we
reduced our full time equivalent ("FTE") employees by 11.6% to 581 at December
31, 1999 from 657 at December 31, 1998.
Our amortization of servicing rights was $4.2 million for 1999 as compared
to $1.5 million for 1998. The increase for 1999 as compared to 1998 was
primarily due to accelerated amortization of servicing rights on our non-core
multifamily and commercial real estate loan servicing operations at SPB due to
the release of the servicing rights to a third party in connection with our
exit from this non-core business.
IBC's unamortized balance of goodwill totaling $11.3 million was written
off during the fourth quarter of 1999. The write-off of IBC's goodwill was
based on our estimate of future operations and cash flows. Based on our
estimate, we determined that IBC's goodwill was not recoverable from
continuing IBC's existing lines of business. Our amortization of goodwill was
$14.5 million for 1999 as compared to $2.7 million for 1998.
Our professional, occupancy, telephone and other communications, and
general and administrative expenses decreased to $46.1 million for 1999 as
compared to $51.2 million for 1998. The overall decrease was primarily due to
the exit from non-core businesses and our related focus on increasing
operating efficiencies at our core business operations.
We have diversified our business lines to include investment products and
asset management services in order to reduce our dependency on commercial
lending. We operate as a diversified commercial lending, financial services
and investment banking and brokerage holding company.
We manage our business by looking at the results of operations from each of
our business units. Our core businesses include:
. Coast Business Credit ("CBC")--an asset-based lending business;
. Imperial Warehouse Finance, Inc. ("IWF")--a residential loan warehouse
line business;
. Loan Participation and Investment Group ("LPIG")--a division of SPB
investing in nationally syndicated bank loans;
63
. The Lewis Horwitz Organization ("LHO")--a film and television production
lending business;
. Imperial Business Credit, Inc. ("IBC")--an equipment leasing business;
. Income Property Lending Division ("IPL")--a multifamily origination and
commercial mortgage banking business;
. Imperial Capital Group, LLC ("ICG")--an investment banking and brokerage
business;
. Asset Management Activities ("AMA")--an investment fund management
business;
. Other Core Operations ("OCO")--our holding company investments and
support functions, our loan documentation service operations, and the
administrative and servicing operations of Southern Pacific Bank.
We also operated some other businesses in 1999 and 1998 that we consider
our "non-core" businesses. These are businesses that we have made the decision
to de-emphasize during 1999 and 1998. We group these businesses into the
following categories:
. Equity Interests--Franchise mortgage lending, sub prime residential
mortgage banking business;
. De-emphasized/Discontinued/Exited Businesses--Consumer lending, auto
lending, residential lending, foreign mortgage lending businesses, and
third party mortgage servicing operations.
Our exit from these non-core businesses has allowed our management to focus
on our core business lines that have proven to be our most profitable
businesses. Following is a summary of these businesses' results of operations
in 1999 as compared to 1998.
CORE BUSINESS LINES
The following table reflects average loans and leases outstanding and the
average yields earned on our core business units for 1999 and 1998:
Average Loans and
Leases Average
Outstanding Yield
----------------- ------------
Business Line 1999 1998 1999 1998
------------- -------- -------- ----- -----
(Dollars in thousands)
CBC.......................................... $658,764 $592,600 13.17% 13.09%
IWF.......................................... 130,075 164,300 8.28 9.94
LPIG......................................... 240,621 240,100 7.55 8.21
LHO.......................................... 6,056 -- 14.77 --
IBC.......................................... 10,700 11,300 12.54 13.60
IPL.......................................... 226,548 96,400 8.85 10.16
Our largest subsidiary is SPB, a $1.8 billion industrial bank, which
operates as of January 1, 2000, five of our core businesses: CBC, IPL, LPIG,
IWF-formerly known as PrinCap Mortgage Warehouse, Inc., and LHO. The FDIC
insured deposits of SPB are the primary source of funding for each of these
businesses.
Coast Business Credit
CBC's net income for 1999 was $9.7 million as compared to $12.4 million for
1998. CBC's net revenues include a provision for loan losses of $21.8 million
for 1999 as compared to $3.5 million for 1998.
CBC increased its average loans outstanding for 1999 to $658.8 million as
compared to $592.6 million for 1998. Fundings of new commitments at CBC were
$511.0 million for 1999 as compared to $447.7 million for 1998.
64
As a result of the increase in CBC's average loans outstanding, CBC's net
interest income increased $11.4 million to $54.0 million for 1999 from $42.6
million for 1998. The average yield on CBC's loans for 1999 increased to
13.17% as compared to 13.09% for the prior year primarily as a result of an
increase in the prime rate and loan prepayment fees.
CBC also earned other income primarily consisting of gain on sale of stock
acquired through the exercise of warrants and loan administration and audit
fees charged to its customers. CBC earned other income totaling $8.2 million
in 1999 as compared $3.8 million in 1998.
CBC's total expenses were $24.3 million for 1999 as compared to $21.2
million for 1998. Total expenses increased for 1999 as compared to the prior
year primarily due to higher occupancy and telephone and other communications
expenses associated with CBC's continued geographic expansion into several
major metropolitan areas of the United States. These increases in expenses
were partially offset by lower administrative expenses resulting from CBC's
efforts to increase operating efficiencies. Additionally, personnel expense
decreased for 1999 as compared to 1998 due to decreased bonus expense
resulting from decreased profitability. CBC's FTE increased to 135 FTE at
December 31, 1999 as compared to 122 FTE at December 31, 1998.
At December 31, 1999, CBC's non-accrual loans were $22.2 million as
compared to $1.1 million at December 31, 1998. At December 31, 1999, one CBC
loan totaling $2.7 million was 90 days delinquent and accruing interest as
compared to none for the same period last year. As of February 28, 2000 there
was no change in the accrual status of this loan, and it was in the process of
collection. CBC incurred net charge-offs of non-accrual loans of $17.4 million
for 1999 as compared to $67,000 for 1998. Non-performing loans at CBC are
collateralized by accounts receivable and inventory. The increase in CBC's
non-accrual loans, loan loss provision, and charge-offs resulted from a
general decline in the quality of CBC's loan portfolio.
Imperial Warehouse Finance, Inc.
IWF's net income for 1999 was $1.1 million as compared to $3.2 million for
1998.
IWF's net revenues includes a provision for loan losses of $1.2 million for
1999 and $704,000 for 1998. The increased loan loss provision for 1999 is
primarily related to the increase in the balance of non-accrual loans.
Net interest income was $4.1 million for 1999 as compared to $6.9 million
for 1998. The decrease in IWF's net interest income is related to a decrease
in the average outstanding balance of loans outstanding and an increase in
non-accrual loans. IWF's average loans outstanding and average yields for 1999
decreased to $130.1 million and 8.28% as compared to $164.3 million and 9.94%
for 1998. The decrease in IWF's loan yields, were primarily due to an increase
in IWF's non-accrual loans.
During 1999, we made the decision to relocate the IWF's operations from New
Jersey to Torrance, California. As a result of the relocation, none of the
employees of IWF made the move from New Jersey to California. We believe that
as a result of the personal contacts that IWF's former employees had with the
existing client base a substantial number of customers have paid off their
warehouse lines with us and moved their relationships to the new employers of
our former IWF employees. Additionally, during the fourth quarter of 1999, we
implemented stricter underwriting guidelines and changed our marketing focus
to the Western United States. We believe these factors are the primary cause
of the overall decrease in the average outstanding balance of IWF's warehouse
lines. Recently, we retained a new director of marketing which has resulted in
an increase in applications for new warehouse lines.
IWF earned other income consisting primarily of loan fees charged to its
customers of $1.5 million for 1999 as compared to $2.3 million for 1998.
IWF's total expenses decreased to $2.6 million for 1999 as compared to $3.0
million for 1998. Total expenses decreased for 1999 as compared to 1998
primarily due to lower personnel, general and administrative, telephone and
other communications expenses resulting from our focus on increasing operating
efficiencies. IWF's FTE decreased to 12 FTE at December 31, 1999 as compared
to 14 FTE at December 31, 1998.
65
At December 31, 1999, IWF's non-accrual loans increased to $7.8 million as
compared to $4.1 million at December 31, 1998. We believe that as a result of
our new underwriting policies and stricter collection policies, IWF's non-
performing assets will increase in the short term. IWF incurred net charge-
offs of non-accrual loans of $1.6 million for 1999 and $0 for 1998. IWF's non-
performing loans are collateralized by mortgage loans on single family
residences.
Loan Participation and Investment Group
LPIG's net income was $1.2 million for 1999 as compared to $3.8 million for
1998. LPIG's net income decreased in 1999 as compared 1998 as a result of a
significant increase in the provision for loan losses during 1999. LPIG's net
revenues include a provision for loan losses of $7.0 million for 1999 and a
net recovery of $391,000 for 1998. The provision for loan losses increased in
1999 as compared to 1998 as a result of increased charge-offs related to one
single loan participation. At December 31, 1999 and 1998, LPIG had no loans
classified as non-performing loans.
LPIG's net interest income was $8.4 million for 1999 as compared to $8.3
million for 1998. The decrease in LPIG's loan yields to 7.55% for 1999 as
compared to 8.21% for 1998 was primarily due to an increase in LPIG's average
outstanding non-accrual loans. LPIG's average outstanding loans for 1999 and
1998 were approximately $240 million.
For 1999 LPIG earned other income, which consisted primarily of loan fees
and mark-to-market losses on securities of $2.0 million as compared to
$166,000 for 1998. The decrease in loan fees resulted from reduced funding of
new LPIG loan commitments.
LPIG's total expenses were $1.4 million for 1999 as compared to $2.3
million for 1998. Total expenses decreased for 1999 as compared to 1998
primarily due to lower personnel, commission, telephone and other
communications, and lower general and administrative expenses relating to our
focus on increasing operating efficiencies. LPIG had 4 FTE at December 31,
1999 and December 31, 1998.
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, IWF's, IPL's and LHO's
businesses. As such, we anticipate that the current outstanding balance of
LPIG's loans will decrease over time as this portfolio runs-off. We do expect
to expand our investments in LPIG-type loan products through off-balance sheet
financing instruments such as total rate of return swaps.
The Lewis Horwitz Organization
On October 1, 1999, we purchased from Imperial Bank substantially all of
the assets and assumed certain liabilities of The Lewis Horwitz Organization
("LHO"). The acquisition was accounted for as a purchase, and the purchase
price of $7.0 million was allocated to the net assets acquired based on their
fair values resulting in goodwill of $12.0 million.
As part of the acquisition, we acquired all right, title and interest in
$98.2 million of motion picture and television production loans. The purchase
price of the loans is equal to the gross carrying value of the loans on the
books and records of Imperial Bank, except the purchase price of the first $20
million in non-accrual loans were allocated a discount of $3.6 million. Under
the terms of the acquisition, we receive all contractually due interest and
fees on the $98.2 million of LHO originated loans and pay Imperial Bank Prime
minus 2.50%. We have agreed to immediately purchase all loans that either are
currently or become classified as non-accrual, when an interest or principal
payment is 90 days or more past due. Imperial Bank has agreed to finance 50%
of all non-accrual purchases at the Prime rate + 1.00%. As of December 31,
1999, we acquired non-accrual loans with a fair market value of $8.2 million.
We have also agreed to purchase a minimum of $50 million of the above
referenced loans, inclusive of all non-accrual loans purchased, on or before
March 31, 2000. Additionally, we have agreed to purchase any remaining above
referenced loans on or before December 31, 2000.
66
We also acquired other assets totaling $362,000 and assumed liabilities of
$1.2 million in connection with the acquisition.
LHO was acquired by our company in October of 1999 and did not have any
comparable net revenues, net income, or expenses in 1998. LHO's net income for
1999 was $4,000. LHO's net revenues include a provision for loan losses of
$351,000.
LHO's net income for 1999 are for the period from the date of acquisition
(October 1, 1999) through December 31, 1999. Since October 1, 1999, LHO has
originated $23.2 million of new film and television production commitments.
LHO's average loans outstanding for 1999 were $6.1 million.
From October 1, 1999 to December 31, 1999, LHO reported net interest income
of $992,000. The average yield on LHO's loans from October 1, 1999 to December
31, 1999 was 14.77%.
LHO also earned other income primarily consisting of loan fees totaling
$127,000 for the period from October 1, 1999 to December 31, 1999.
LHO's total expenses were $761,000 from October 1, 1999 to December 31,
1999. LHO had 12 FTE at December 31, 1999.
At December 31, 1999, LHO's non-accrual loans were $246,000. LHO did not
incur any charge-offs of non-accrual loans from October 1, 1999 to December
31, 1999. Non-performing loans at LHO are collateralized by the distribution
rights of the film or television production. All of LHO's non-accrual loans
were acquired from Imperial Bank under the terms of the LHO purchase
agreement.
Imperial Business Credit, Inc.
IBC's net loss increased to $13.3 million in 1999 as compared to a net loss
of $960,000 for 1998. IBC's net loss increased for 1999 as compared to 1998
primarily due to the write-off of the remaining unamortized balance of
goodwill and larger negative mark-to-market adjustments on retained interests
in lease securitizations.
IBC's unamortized balance of goodwill totaling $11.3 million was written
off during the fourth quarter of 1999. The write-off of IBC's goodwill was
based on our estimate of future operations and cash flows. Based on our
estimate, we determined that IBC's goodwill was not recoverable from
continuing IBC's existing lines of business.
During the quarter ended December 31, 1999, defaults on leases originated
through IBC's broker and small-ticket lease programs increased significantly.
The increase in defaults caused us to reassess and increase the projected
level of lease losses related to IBC's securitized leases. The reassessment
resulted in a $11.9 million write-down of the carrying balance of retained
interest in lease securitizations at IBC for 1999 as compared to a $2.3
million write-down for 1998. As a result of the reassessment of the level of
expected losses from IBC's small ticket and broker originated business, we
decided to significantly curtail IBC's lease originations from brokers. We
closed IBC's broker business in its San Diego and Irvine offices, and
discontinued relationships with over 200 brokers in IBC's Denver office. We
intend to heavily weight IBC's future lease originations to middle market
leasing and vendor leasing programs.
IBC originated $125.2 million of leases for 1999, as compared to $114.3
million for 1998. IBC securitized $132.4 million of leases for 1999 generating
gain on sale revenue of $4.5 million, or 3.4% of the principal balance
securitized. For 1998, IBC securitized leases of $117.7 million, generating
gain on sale revenue of $4.1 million, or 3.5% of the principal balance
securitized. As a result of curtailing certain small ticket and broker
business and increased loss assumptions in securitized leases, IBC expects
lower originations and revenue in the near term.
Currently, all of IBC's leases are initially funded with a warehouse line
of credit from SPB, and then permanently funded through a revolving
securitization facility. IBC's net interest income decreased to $1.1 million
for 1999 as compared to $3.6 million for 1998 primarily due to an increase in
borrowing costs and a decrease in the average balance and yield on outstanding
leases held for sale.
67
IBC also earned other income from servicing leases sold into its
securitization facility of $4.5 million for 1999 as compared to $4.7 million
for 1998. IBC earned other income of $1.5 million for 1999 as compared to
$972,000 for 1998.
IBC's total expenses were $22.2 million for 1999 as compared to $11.3
million for 1998. Total expenses increased for 1999 as compared to 1998
primarily due to the $11.3 million write-down of goodwill. IBC's FTE decreased
to 94 FTE at December 31, 1999 compared to 99 FTE at December 31, 1998.
At December 31, 1999, IBC's non-accruing leases were $77,000 as compared to
$669,000 at December 31, 1998.
Income Property Lending Division
IPL's net income decreased to $2.0 million for 1999 as compared to net
income of $3.3 million for 1998. The decrease in net income for 1999 as
compared to the prior year primarily resulted from lower gain on sale of loans
partially offset by increased interest income earned on higher average
outstanding balances of income property loans.
IPL originated $339.7 million of loans in 1999 as compared to $366.1
million of loans in 1998. During 1999, IPL sold $283.7 million of its loans
generating a gain on sale of $2.0 million, or 0.7% of the principal balance of
loans sold. During 1998, IPL sold $304.2 million of its loans, generating a
gain on sale of $8.8 million, or 2.9% of the principal balance of loans sold.
Gain on sale of loan revenues as a percentage of IPL's loans sold decreased
for 1999 as compared to 1998 due to decreased interest margins and a decrease
in demand for small balance income property loans in the secondary market.
IPL's net interest income for 1999 increased to $9.2 million as compared to
$6.7 million for 1998. The increase was primarily the result of an increased
average balance of outstanding loans. IPL's average outstanding loan balance
increased to $226.5 million for 1999 as compared to $96.4 million for 1998.
The increase was primarily the result of our strategy to retain for portfolio
a higher level of multifamily real estate loans originated by IPL. The
decrease in IPL's average loan yields to 8.85% in 1999 as compared to 10.16%
in 1998, was primarily due to increased competition and reduced interest
margins among income property loan originators.
IPL's total expenses were $8.7 million for 1999 as compared to $11.7
million for 1998. Total expenses decreased for 1999 as compared to 1998
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. FTE
decreased to 69 FTE at December 31, 1999 compared to 70 FTE at December 31,
1998.
IPL's non-accrual loans were $237,000 or 0.09% of its outstanding loan
portfolio at December 31, 1999, as compared to $992,000 or 0.68% of its
outstanding loan portfolio at December 31, 1998.
Imperial Capital Group, LLC
ICG's pre-tax income increased to $2.5 million for 1999 as compared to a
pre-tax loss of $3.9 million for 1998. ICG's net revenue primarily consists of
investment banking and brokerage fees. The increase in pre-tax income for 1999
primarily resulted from increased trading gains and 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. ICG raised total debt and equity proceeds of $137.3 million in
1999 and $190.0 million in 1998 for its corporate clients through private
placement offerings.
ICG's total expenses were $24.2 million for 1999 as compared to $22.3
million for 1998. Total expenses increased for 1999 as compared to 1998
primarily due to higher personnel, commission, telephone and other
communications, and general and administrative expenses resulting from higher
revenues received. ICG's FTE decreased to 79 FTE at December 31, 1999 compared
to 93 FTE at December 31, 1998.
68
Asset Management Activities
AMA's net income (loss) were ($3,000) for 1999 as compared to $1.8 million
for 1998. The average balance of assets under management increased to $1.3
billion for 1999 as compared to $1.1 billion for 1998. Through October 22,
1999, we managed a commercial mortgage and equity REIT (See--"Liquidity and
Capital Resources--The ICCMIC Acquisition"), and for all of 1999, we managed a
collateralized loan obligation fund, and two leveraged bank debt hedge funds.
Total expenses from AMA activities were $9.8 million for 1999 as compared
to $3.8 million for 1998. Total expenses increased for the period as compared
to the same period last year due to increased management activities as a
result of growth in the balance of assets under management in 1999 as compared
to 1998. Total AMA FTE decreased to 13 FTE at December 31, 1999 compared to 20
FTE at December 31, 1998.
Other Core Operations
For 1999, the net loss of OCO was $962,000, as compared to a net loss of
$31.4 million for 1998. The net loss for 1999 includes a $4.0 million net gain
from the early extinguishment of debt. The significant negative net revenues
and net income for 1998 were primarily the result of impairment and mark-to-
market charges relating to our investments in ICCMIC and IMH, and loan and
leases held for sale. OCO includes but is not limited to interest and dividend
income from parent company loans, equity investments, interest expense on our
long-term debt, mark-to-market charges on the securities we invested in at our
holding company, and the costs of our support functions. We provide support to
our subsidiaries through executive management oversight and advice,
accounting, audit, operations, legal services, merger and acquisitions advice,
human resources administration, insurance programs, office services, premises
administration, and management information systems support.
For 1999 and 1998, OCO earned interest and dividend income of $20.0 million
and $30.1 million and incurred interest expense of $30.8 million and $30.4
million, respectively.
During 1999 the net revenues of other core operations includes a gain on
sale of securities totaling $562,000 from the sale of 500,000 shares of ICCMIC
common stock. At December 31, 1999, we owned 9.0% of ICCMIC's outstanding
common stock and 100% of the company that managed ICCMIC's assets through
October 22, 1999. (See--"Liquidity and Capital Resources--The ICCMIC
Acquisition").
Total expenses of OCO were $10.8 million for 1999 as compared to $12.5
million for the prior year. Total expenses of OCO for 1998 included a
provision for loan repurchases on former mortgage banking operations of $4.8
million; no such provision was needed in 1999. In addition, total expenses
decreased for 1999 as compared to 1998 primarily due to lower personnel,
telephone and other communications, and lower general and administrative
expenses relating to reductions in personnel expense, partially offset by
higher professional fees. OCO's FTE decreased to 53 FTE at December 31, 1999
as compared to 71 FTE at December 31, 1998.
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 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;
69
. De-emphasized/Discontinued/Exited Businesses--represents our business
units we decided to either de-emphasize, discontinue, or exit. We decided
to de-emphasize, discontinue or exit these business lines because they
were not meeting our expectations for a variety of reasons. These reasons
included: significant credit losses, insufficient loan production
volumes, inadequate gross profit margins, and risks associated with
international lending operations. We include the following significant
operations in Exited Businesses: Auto Lending, Alternative Residential
Mortgage, and Consumer Loan Divisions of SPB, and Credito Imperial
Argentina ("CIA"), our residential loan production business in Argentina.
Exited Businesses also includes our former mortgage banking operations,
certain problem loan or securities portfolios, SPB's income property
servicing operations, and any loan portfolios at SPB from businesses
which are no longer originating new loans. Exited Businesses' principal
sources of net revenue are interest earned on mortgage and consumer loans
and mark to market valuations on loan portfolios. Exited Businesses'
principal expenses are interest expense allocations incurred from
deposits and inter-company borrowings, and general and administrative
expenses.
Our exit from these non-core businesses will allow our management to focus
on our core business lines that have proven to be our most profitable
businesses.
Equity Interests
In 1999, our Equity Interests included our percentage ownership of the net
income of FMC, as compared to 1998, which included FMC and Southern Pacific
Funding Corporation ("SPFC"). For 1999, our Equity Interests generated net
income of $18.5 million as compared to a net loss of ($38.2) million for 1998.
The significant net loss for 1998 was primarily the result of impairment
charges on our equity investment in SPFC.
Equity Interest and Gain on sale of FMC
During 1999 and 1998, equity in the net (loss) income of FMC was $(53,000)
and $3.2 million, respectively. On November 1, 1999, the merger between FMC
and Bay View was completed. We received $27.7 million in cash and 4.4 million
shares of Bay View common stock from the sale and exchange of our 38.3%
interest in FMC. On November 5, 1999, we announced the sale of 4,342,451
shares of the Bay View common stock we received from the FMC/Bay View merger.
As a result of these transactions, we received approximately $86.3 million in
total cash proceeds and we recorded a pre-tax gain from both transactions of
$30.1 million.
Equity Interest in SPFC
On October 1, 1998, SPFC petitioned for Chapter 11 bankruptcy protection
under Federal bankruptcy laws in the U.S. Bankruptcy Court for the District of
Oregon. As a result of SPFC declaring Chapter 11 bankruptcy and the
corresponding decline in its common stock to below one dollar per share, and
subsequent de-listing from the New York Stock Exchange, we wrote-off our total
investment in and loan to SPFC. During 1999 and 1998 equity in the net income
of SPFC was $0 and $12.7 million, respectively.
De-emphasized/Discontinued/Exited Businesses
The Exited Businesses' loss from operations was $18.5 million for 1999 as
compared to $11.8 million for 1998. The Exited Businesses net revenue
decreased for 1999 as compared to 1998 primarily as a result of a decline in
net interest income, partially offset by a lower provision for loan losses.
The Exited Businesses incurred negative mark-to-market charges of $28.3
million in 1999 and $31.6 million in 1998.
Total expenses at our Exited Businesses decreased to $21.6 million for 1999
as compared to $32.8 million for 1998. The decrease in total expenses was
primarily due to the closure of non-core businesses.
Our non-core loans decreased to $143.9 million at December 31, 1999 as
compared to $371.5 million at December 31, 1998. The remaining non-core
portfolios primarily consist of lower risk single family mortgage loans of
$104.0 million, franchise loans of $18.3 million, and consumer loans of $15.6
million.
70
The following table reflects the ending outstanding balances of the loans
from our Exited Businesses:
Loans and Leases
Outstanding at
December 31,
-----------------
Exited Business Line 1999 1998
-------------------- -------- --------
(In thousands)
Auto Lending Division of SPB............................... $ 5,991 $ 94,225
Alternative Residential Mortgage Division of SPB........... 6,884 34,280
Consumer Lending Division of SPB........................... 15,639 42,565
Credito Imperial Argentina................................. -- 22,772
Single family loans........................................ 97,124 127,125
Franchise loans............................................ 18,277 50,520
-------- --------
Total loans and leases from exited businesses............ $143,915 $371,487
======== ========
The above table does not include net outstanding loans from the
discontinued operations of AMN which were $5.2 million and $15.2 million at
December 31, 1999 and 1998, respectively.
During 1999 we continued to sell loans from our exited businesses. We sold
$45.3 million of auto loans, $33.4 million of single family loans, $11.7
million of consumer loans, and the remaining Argentine mortgage loan portfolio
of $22.4 million, generating an aggregate net gain on sale of $321,000.
Additionally, we reduced our sub-prime auto loan balances to $6.0 million at
December 31, 1999 as compared to $94.2 million at December 31, 1998. At
December 31, 1999, the remaining sub-prime auto loans are carried at 32.0% of
the outstanding contractual balance.
During 1999 we sold 1,887,110 shares of Impac Mortgage Holdings, Inc.
("IMH") stock resulting in a gain of $929,000. At December 31, 1999, we did
not own any shares of IMH common stock.
FTE at our Exited Businesses decreased to 5 FTE at December 31, 1999 as
compared to 100 FTE at December 31, 1998.
Liquidity and Capital Resources
General
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 Law and FDIC regulations, which
impose legal limitations on the payment of dividends. Under the Regulatory
Orders, the Bank is prohibited from paying cash dividends on its Common Stock
without the prior approval of the DFI and the FDIC. Because cash dividends
reduce the regulatory capital of the Bank, and because of the restrictions
contained in the Regulatory Orders, it is unlikely that the Bank will pay cash
dividends to us on our Common Stock in the near future and there is no
assurance that the Bank will ever resume paying cash dividends to us. The
continued prohibition against the Bank paying to us, unless approved in
advance by the DFI and FDIC, cash dividends would adversely affect our ability
to make required payments of interest and principal on our indebtedness. Our
ability to make scheduled payments of the principal of, or to pay the interest
on, our indebtedness will depend upon the ability of the Bank to obtain
regulatory approvals necessary to permit it to pay us dividends on our Bank
Common Stock and Bank Preferred Stock, as well as upon on our future
performance and that of the Bank which, to a substantial extent, are subject
to general economic, financial, competitive, legislative, regulatory and other
factors beyond our control. The ability of the Bank to comply with the
Regulatory Orders also will impact its operations. Management believes that,
based on current levels of operations, cash flows from operations and
available borrowings, and assuming that the Bank is able to obtain the
necessary regulatory approvals to pay us dividends, we will be able to fund
our liquidity and capital expenditure requirements for the foreseeable future,
including scheduled payments of interest and principal on our indebtedness.
71
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.
At December 31, 2000 we held $15.9 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.
At December 31, 2000, ICII's total long term debt was approximately $219.6
million and its total shareholders' equity was approximately $39.4 million. At
December 31, 2000, ICII's parent company and its non-bank subsidiaries had
available cash and cash equivalents of $18.4 million. Although management
believes that ICII has sufficient sources of liquidity to service existing
indebtedness through December 31, 2001, its ability to continue to make
scheduled payments of principal and interest on its indebtedness will depend
upon the ability of the Bank to obtain regulatory approvals necessary to pay
dividends on our Bank stock, as well as upon ICII's future performance and
that of the Bank which are subject to general economic, financial,
competitive, legislative, regulatory and other factors. In addition to cash
and cash equivalents at December 31, 2001, ICII and its non-bank subsidiaries
had approximately $148.2 million of other net assets, primarily consisting of
investments in trading securities, loans, and real property which could be
liquidated in order to service ICII's existing indebtedness. The amount of net
proceeds and the related gain of loss on sale from such liquidations, are
dependent on the interest rate environment, the credit quality of the asset
sold, general economic conditions, and other factors affecting the financial
markets at the time of such sales, if any. There can be no assurance that the
Bank will be able to obtain the regulatory approvals necessary to permit
payment of dividends or that our business and that of the Bank will generate
sufficient cash flow from operations or that future borrowings will be
available in an amount sufficient to enable us to service ICII's indebtedness.
(See Item 7.--"Management's Discussion and Analysis--Agreements with
Regulators").
The current amount of cash and interest bearing deposits held at our parent
company is significantly less than the $219.6 million of outstanding Senior
Notes and ROPES at December 31, 2000. The ability of our parent company to
repay these obligations in accordance with their stated maturities is
dependent on the cash flows generated by our parent company and other
guarantor subsidiaries, in addition to future dividend payments from SPB to
our parent company. SPB is unable to pay dividends at the present time. The
cash flows generated from operations of the holding company and guarantor
subsidiaries could service the interest payments on Senior Notes and ROPES
through December 2001. We have entered into agreements with the majority
holders of our Senior Notes and ROPES to exchange these securities for new
notes under a master recapitalization plan. See Item 7. "Management's
Discussion and Analysis--Recapitalization Transaction," for more information
about the terms of the exchange offer. The completion of the master
recapitalization is expected to improve our ability to service future debt
obligations along with improving the capital levels of SPB. The decrease in
cash since December 31, 1999 was primarily attributed to investments in SPB,
debt repurchases, common stock repurchases and interest payments on long term
debt.
On March 30, 2001, ICII exchanged $22.0 million of SPB's subordinated debt
and contributed $14.0 million in cash in exchange for 36,000 shares of SPB's
Series B noncumulative perpetual preferred and also made a common equity
contribution of $7.2 million in cash to the Bank. Although such capital
contributions resulted in the Bank's capital ratios being above that required
by statute to be considered "adequately capitalized", the Bank does not meet
the capital ratio targets specified by the Orders. An additional approximately
$41 million would have had to be contributed to cause the Bank to meet the
capital ratio targets specified by the Orders at March 31, 2001.
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, and (v)
over collateralization reserve account requirements and servicing advances in
connection with loans and leases pooled and sold.
We have historically 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. As a result of our company's recent financial performance,
and based on guidance from
72
Moody's and Standard and Poor's ratings services, we do not believe that the
capital markets are currently efficient sources of funding capital. As such,
we believe that our current sources of liquidity are limited to the deposits
of SPB and FHLB advances to SPB. There can be no assurance that we will regain
efficient 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 FDIC insured deposits and, if necessary, through borrowings under
lines of credit from the FHLB. At December 31, 2000 and 1999, SPB had total
FHLB lines available equal to $137.2 million and $35.7 million, respectively.
The outstanding balance of FHLB advances was $65.0 million and $0 at December
31, 2000 and 1999, respectively. These borrowings must be fully collateralized
by qualifying mortgage loans and may be in the form of overnight funds or term
borrowings at SPB's option. The FHLB advances are secured by certain real
estate loans with a carrying value of $172.9 million and $56.5 million at
December 31, 2000 and 1999, respectively.
The highest balance of FHLB advances outstanding during the year ended
December 31, 2000 was $65.0 million, with an average outstanding balance of
$23.3 million.
SPB's deposit portfolio, which consists primarily of certificate accounts
remained relatively unchanged at $1.6 billion at December 31, 2000 and at
December 31, 1999.
SPB has been able to acquire new deposits through its local marketing
strategies as well as domestic money markets. Under its regulatory orders, SPB
may raise brokered deposits of no more than $92.3 million so long as SPB
remains "Adequately Capitalized" as defined by banking regulations. As of
December 31, 2000, SPB's outstanding balance of brokered deposits was $50.0
million. SPB maintains liquidity in the form of cash and interest-bearing
deposits with financial institutions. SPB tracks on a daily basis all new loan
applications by office and, based on historical closing statistics, estimates
expected fundings. Cash management systems at SPB allow SPB to anticipate both
funding and sales and adjust deposit levels and short-term investments against
the demands of SPB's lending activities.
In addition to warehouse lines of credit and SPB borrowings, we have also
accessed the capital markets to fund our operations.
2000 Activity
Our operating activities used cash of $32.3 million in 2000. The majority
of this cash was used for the origination and acquisition of loans held for
sale, net of sales and collections. We generated $23.4 million and $10.8
million from the sale and collections of real property and trading securities,
respectively, at ICCMIC. Other operating cash was generated by the interest
income from our loan and investment portfolios after paying interest expense
on our deposits, borrowings, and long term debt.
Our investing activities provided $21.7 million of cash in 2000. The most
significant source of cash from our investing activities was a net redemption
of $65.4 million of short-term interest bearing deposits. We received net cash
proceeds of $11.5 million from the ICCMIC acquisition in March 2000. We also
received proceeds of $21.6 million from the sale of AFG in June 2000 from the
sale of our investment in preferred and common stock of AFG. Additionally, we
used $16.6 million for net purchases of securities available for sale.
Originations of loans held for investment, net of collections, resulted in net
cash used of $64.8 million.
Our financing activities provided $7.6 million of cash in 2000. We raised a
net $17.9 million in deposits at SPB. During 2000, SPB borrowed $95.0 million
from the FHLB and repaid $30.0 million in advances. We reduced other
borrowings by $50.8 million. We used $4.1 million in cash to repurchase 1.1
million shares of our outstanding common stock for an average price of $3.62
under a share repurchase program approved in April 2000. Additionally, we also
used $21.6 million of cash through financing activities to repurchase
$27.3 million of our long term debt. The repurchase generated an extraordinary
gain on the early extinguishment of debt of $3.5 million, net of income taxes.
73
1999 Activity
Our operating activities produced cash of $151.6 million in 1999. The
majority of this cash was generated by the interest income from our loan and
investment portfolios after paying interest expense on our deposits,
borrowings, and long term debt.
Our investing activities used $202.9 million of cash in 1999. The most
significant use of cash in our investing activities was a $246.8 million
investment of available liquidity into short term interest bearing deposits.
At December 31, 1999 our interest bearing deposits totaled $248.2 million. We
also used cash to make net purchases of $21.9 million of securities available
for sale. The most significant item of cash generation in our investing
activities was from the proceeds we received on sales of stock we held in
other publicly traded companies. In 1999, we received total proceeds from
these sales of $100.6 million. These proceeds were primarily generated from
the sales of our holdings in FMC and IMH. In 1999, we received cash and 4.4
million shares of Bay View common stock from the sale and exchange of our
38.3% interest in FMC. On November 5, 1999, we announced the sale of the Bay
View common stock we received from the FMC/Bay View merger. As a result of
these transactions, we received approximately $86.3 million in total cash
proceeds. Also in 1999, we sold 1.9 million shares of our common stock
investment in IMH generating net proceeds of $10.4 million. Additionally, in
the second quarter of 1999, we sold 500,000 shares of common stock investment
in ICCMIC, generating net proceeds of $5.4 million.
Our financing activities used $212.6 million of cash in 1999. We used $99.5
million to repay deposits at SPB, $20.0 million to repay borrowings by SPB
from the FHLB, and $28.0 million to repay other borrowings. On May 14, 1999,
we entered into an agreement with our former parent Imperial Bank, a
subsidiary of Imperial
Bancorp (NYSE:IMP) to repurchase 10% or 3.7 million shares of our outstanding
common stock for $8.00 per share for a total use of cash of $29.5 million. The
repurchase from Imperial Bank was financed through the private issuance of
$30.0 million of Series B 11.50% Mandatorily Redeemable Cumulative Preferred
Stock to a group of independent investors. In November 1999, we repurchased
and retired the $30.0 million of the Mandatorily Redeemable Cumulative
Preferred Stock. The issuance and subsequent repurchase and retirement used a
net $1.4 million of cash during 1999. We also used $34.1 million of cash
through our financing activities to repurchase $43.1 million of our long term
debt. The repurchase generated an extraordinary gain on the early
extinguishment of debt of $4.0 million, net of income taxes.
1998 Activity
Our operating activities used $37.1 million of cash in 1998. The majority
of this cash was used in the operations of our discontinued businesses.
Our investing activities used $175.0 million of cash in 1998. The most
significant use of cash in our investing activities was a $276.6 million net
investment in loans held for investment. The most dramatic increase in loans
occurred in the portfolio of asset-based and cash stream loans generated by
CBC, which increased $148.5 million in 1998. The most significant source of
cash from our investing activities was the liquidation of interest bearing
deposits of $102.3 million.
Our financing activities generated $464.5 million of cash in 1998. The most
significant source of cash from financing activities was the receipt of $555.3
million in increased net deposits at SPB. Our financing activities used $25.0
million to repay net borrowings from the FHLB and $42.6 million to repay other
borrowings. Through our financing activities, we also repurchased 2.5 million
shares of our outstanding common stock for $9.78 per share for a total use of
cash of $24.3 million.
Imperial Business Credit, Inc.
Prior to ceasing lease originations, IBC primarily funded its lease
originations through a permanent revolving securitization facility. The
securitization facility utilizes a trust structure and has a five-year
revolving period, which expires in November 2002, and a three and one-half
year amortization period.
74
The IBC Lease Receivables Trust 1997-2 ("1997-2 Trust") was created
pursuant to a pooling and servicing agreement among IBC, as originator, IBC
Funding Corp. ("IFC"), IBC's wholly-owned special purpose subsidiary, as
seller, and Norwest Bank Minnesota, as trustee and back-up servicer. IBC sells
its lease originations to IFC under a sale and contribution agreement ("IBC
Agreement"), which simultaneously assigns its rights in the leases to the
Trust in exchange for trust certificates. The Class A certificates are sold to
Triple-A One Funding Corp., a special purpose corporation administered by
Capital Markets Assurance Corporation ("CAPMAC"), which issues commercial
paper to fund its acquisitions. As of December 31, 2000 and 1999, there was
approximately $141.1 million and $218.6 million, respectively, of Class A
Certificates outstanding.
As a result of our recent credit downgrades by Moody's and Standard and
Poor's ratings services, IBC is in technical default of the terms of the 1997-
2 Trust. As such, the insurer of the Class A certificates may cause the 1997-2
Trust to go into "Turbo" amortization. Under Turbo amortization, virtually all
cash flows generated in the 1997-2 Trust would be used to pay down the
outstanding balance of the Class A certificates, while the Class B and C
Certificates, a majority of which are owned by IBC, would receive virtually no
cash flows for principal and interest payments until the Class A Certificates
are paid off in full. IBC received a waiver of this technical default in March
2001. The waiver is renewable monthly by the insurer, at its option. There can
be no assurance given that the insurer will continue to grant the monthly
waiver to IBC. If the waiver were not to be granted, IBC's monthly cash flow
would decrease by approximately $1.0 million per month, and cash flow to our
parent company would decrease by approximately $500,000 per month.
IFC assigned all receivables acquired pursuant to the IBC Agreement to the
1997-2 Trust. The transactions were accounted for as sales for reporting
purposes under generally accepted accounting principles ("GAAP") and as
financings for tax purposes. IFC assigned all its rights, title and interest
in the leases, together with a security interest in the underlying leased
equipment, which ownership and security interests have been perfected under
the Uniform Commercial Code. Payments of the purchase price are made directly
from payments by lessees on the lease receivables.
Multifamily and Commercial Mortgage Lending
During the years ended December 31, 2000 and 1999, SPB did not securitize
IPL multifamily and commercial mortgage loans. However, during the years ended
December 31, 2000 and 1999, IPL sold for cash $141.7 million and $283.7
million of loans, respectively.
The ICCMIC Acquisition
On March 28, 2000, we completed the acquisition of ICCMIC. We paid ICCMIC's
stockholders (other than the 2,570,000 owned by ICII) approximately $11.57 per
share in cash. The total purchase price paid by the company was approximately
$300.1 million. The Company's 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
acquisition, the Company incurred total severance and incentive costs of $9.4
million. The merger was accounted for as a purchase and resulted in the
generation of negative goodwill of $29.2 million. The negative goodwill
generated by the acquisition is not subject to income taxes and increased the
Company's tangible book value by $0.74 per share at December 31, 2000. The
company is accreting the negative goodwill into income over five years, which
is expected to result in annual net income of approximately $5.6 million, or
$0.18 per share. At December 31, 1999 ICCMIC had total assets of $664.9
million, and total liabilities of $269.3 million.
Inflation
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of our operations. Unlike industrial companies, nearly all of the assets
and liabilities of our company are monetary in nature.
75
As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Inflation
affects the Company primarily through its effect on interest rates, since
interest rates normally increase during periods of high inflation and decrease
during periods of low inflation.
Asset Quality
We maintain an allowance for loan and lease losses ("ALLL") to provide for
losses inherent in our loan and lease portfolios. The adequacy of our ALLL is
evaluated quarterly by management and submitted to the Board of Directors of
SPB for their review and approval. The key component to our evaluation is our
internal asset review process.
The initial responsibility for risk rating loans is our portfolio division
managers. The initial risk ratings are presented and discussed at monthly
Problem Asset Committee meetings. Our Problem Asset Committee includes the
Chief Credit Officer, Risk Management Officer, Portfolio Management Officer,
and the Chief Financial Officer. This committee is generally responsible for
the risk rating of assets and changes to the allocated allowances. Our Credit
Review Department conducts independent reviews of the various portfolios to
verify risk rating grades, allocated allowances, and the overall quality of
our assets. The Risk Management Department has final authority over all risk
ratings and preparing the quarterly ALLL adequacy analysis. The Risk
Management Department then reports their results related to the adequacy of
the allowance for loan and lease losses and other factors, and our adherence
to the policies and procedures related to all aspects of credit administration
to senior management and the SPB Board of Directors.
We adhere to an internal asset review system and loss allowance methodology
designed to provide for timely recognition of problem assets and an adequate
ALLL to cover credit losses. Our asset monitoring process
includes the use of asset classifications to segregate the assets into seven
risk categories. We use the various asset classifications as a means of
measuring risk for determining the valuation allowance at a point in time.
Loans with risk ratings 1-3 are related to performing credits and are assigned
general allowance loss factors. Loans graded 4-7 are considered watch,
substandard, doubtful, and loss assets. "Classified assets" for regulatory
purposes include substandard, doubtful, and loss assets, and are assigned
allocated allowances based on impairment analysis.
In accordance with SFAS No.'s 114/118, it is our policy to provide a
valuation allowance when it is probable that the value of a loan is impaired
and where the loss can be reasonably estimated. To comply with this policy,
the Problem Asset Committee discusses all problem credits (Grades 4-7) at
monthly meetings. The Risk Management Department determines the appropriate
valuation allowance and/or write-down necessary to comply with SFAS No.'s
114/118. An appropriate analysis; which may include a review of the borrower's
current operating statements, current and past performance, the borrower's
ability to repay, and discounted cash flow analysis; is performed to determine
the valuation allowance. On credits that are collateral dependent, the loans
are written-down to the estimated fair value of the collateral, less selling
costs.
We utilize the asset classifications from our internal asset review process
in the following manner to determine the appropriate ALLL level:
Allocated allowances relate to loans and leases with defined deficiencies
or weaknesses (i.e., assets classified watch, substandard, doubtful or loss).
We calculate the allocated allowance on an ongoing basis, by credit
classification for each major portfolio type.
Allowance levels for portfolios comprised of non-homogenous loans are
calculated using an exposure method. Individual loans graded 4 to 6 are
reviewed for repayment ability and loss exposure. An allowance allocation is
subsequently generated for that individual loan. The general portfolio
allowance level is calculated based on the aggregation of individual loan
allowance allocations with an overall allowance for Pass loans. The percentage
used on loans graded 1-3 is based on loss history and management's analyses of
industry concentrations and changes in credit administration. This exposure
method is used on CBC, LPIG, IWF and loans in other portfolios (primarily
IPLD) that are over $250,000 and sixty days or more delinquent.
76
The remaining portfolios are homogenous, and therefore, allowance levels
are based on loss histories and management's impression of future industry
trends. Loans are segregated by delinquency and allowances are allocated based
on the following: Current loans receive an allowance based on overall loss
histories and management's concerns regarding changes in the industries.
Delinquent loans receive an allowance based on the loss history of loans that
have previously fallen into those delinquency categories.
Unallocated allowances are more subjective and are reviewed quarterly to
take consideration of errors and economic trends that are not necessarily
captured in determining the general and allocated allowances.
The FDIC and the DFI have the authority to require us to change our asset
classifications. If the change results in an asset being classified in whole
or in part as loss, that amount must be charged off. Regulatory guidelines set
forth quantitative benchmarks as a starting point for the determination of
appropriate levels of allowances. The regulators direct their examiners to
rely on management's estimates of adequate general allowances if the Bank's
process for determining adequate allowances is deemed to be sound.
For the year ended December 31, 2000, the provision for loan and lease
losses was $181.0 million as compared to $35.3 million for the prior year. The
increase primarily relates to 1) CBC which increased its provision for loan
losses to $113.5 million for 2000 from $24.7 million in the prior year, 2)
LPIG which increased its provision for loan losses to $39.3 million for 2000
from $7.0 million in the prior year and 3) IWF which increased its provision
for loan losses to $18.9 million for 2000 as compared to $1.2 million for the
prior year.
For the year ended December 31, 2000, CBC's provision for loan and lease
losses increased over the prior year as a result of a $71.5 million increase
in net charge-offs to $88.9 million, a $100.7 million increase in loans
classified as substandard and doubtful to $140.6 million at December 31, 2000
as compared to December 31, 1999, resulting in a $24.9 million increase in the
allocated allowance and an $812,000 increase in the general allowance.
The increase in charge-offs primarily relates to a higher level of losses
due to increased unsecured advances, increased balances of unsecured cash
stream loans, increased defaults on nationally syndicated credits, and a
significant economic slowdown in the telecommunications and technology
sectors. See page 5 of the Company's Annual Report on Form 10-K for a
breakdown of CBC's loans by industry group.
The increase in CBC's allocated allowance and the general allowance results
from the factors above, along with the increase in the amount of loans
classified as substandard and doubtful during 2000 as compared to 1999.
The increase in LPIG's provision for loan losses over the prior year
primarily relates to a $28.4 million increase in net charge-offs to $32.3
million, a $12.1million increase in substandard and doubtful loans to
$21.8 million, resulting in a $4.4 million increase in allocated allowances to
$7.6 million and a $2.1 million increase in the general allowance.
The increase in LPIG's charge-offs for the year ended December 31, 2000
primarily relates to six borrowers which defaulted during 2000. One customer
accounted for approximately $11.6 million of the total charge offs during
2000. Loans classified as substandard and doubtful represent two borrowers
which are currently in reorganization. The increase in the allocated allowance
and general allowance results from an increase in substandard and doubtful
loans combined with higher loss factors for 2000 as compared to the prior
year. We increased our allocated allowance and general allowances as a result
of the increasing defaults in nationally syndicated credits and an increase in
the severity of loss.
For the year ended December 31, 2000, the increase in IWF's provision for
loan losses over the prior year primarily relates to a $14.8 million increase
in net charge-offs to $16.4 million. The increase primarily relates to
approximately $11.0 million in fraud related losses. The remaining increase in
the provision for loan losses results from management's decision to accelerate
the disposition of problem assets.
77
The following table summarizes certain information regarding our allowance
for loan and lease losses, charge-off activity by division and losses on OREO:
Years Ended December 31,
------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- -------- -------
(In thousands)
Beginning balance as of
January 1,.................. $ 31,841 $ 24,880 $ 26,954 $ 19,999 $13,729
Provision for loan and lease
losses...................... 180,975 35,340 15,450 20,975 9,773
Business acquisition and bulk
loan purchases.............. 534 1,846 -- 578 4,500
Sale of leases............... -- -- -- (900) --
Deconsolidation of ICIFC..... -- -- -- (687) --
--------- -------- -------- -------- -------
213,350 62,066 42,404 39,965 28,002
--------- -------- -------- -------- -------
Loans and Leases charged
off--Core Business Lines:
Multifamily and commercial
loans....................... (353) (857) (918) (3,021) (1,560)
Asset-based and cash stream
loans....................... (89,732) (17,530) (112) (295) --
Loan Participations.......... (32,267) (3,882) -- -- --
Mortgage warehouse lines..... (17,050) (1,625) -- -- --
Entertainment loans.......... (1,939) -- -- -- --
Commercial and industrial
loans....................... (810) -- -- -- --
Leases....................... (399) (2,217) (1,496) (4,860) (3,318)
Autolend..................... (950) -- -- -- --
--------- -------- -------- -------- -------
(143,500) (26,111) (2,526) (8,176) (4,878)
--------- -------- -------- -------- -------
Loans charged off--Non-Core
Business:
Franchise loans.............. (3,106) -- -- -- --
Single family residential.... (5,560) (2,960) (4,661) (2,164) (2,485)
Consumer loans............... (580) (2,611) (15,487) (3,933) (963)
--------- -------- -------- -------- -------
(9,246) (5,571) (20,148) (6,097) (3,448)
--------- -------- -------- -------- -------
Total Charge-offs............ (152,746) (31,682) (22,674) (14,273) (8,326)
--------- -------- -------- -------- -------
Recoveries on loans and
leases previously charged
off--Core Business:
Multifamily and commercial
loans....................... 115 55 142 29 --
Asset-based and cash stream
loans....................... 831 163 45 -- --
Loan participations.......... 16 -- -- -- --
Mortgage warehouse lines..... 639 -- -- -- --
Leases....................... 222 1,086 1,721 900 176
--------- -------- -------- -------- -------
1,823 1,304 1,908 929 176
--------- -------- -------- -------- -------
Net charge-offs--Core
Business Lines.............. (141,677) (24,807) (618) (7,247) (4,702)
--------- -------- -------- -------- -------
Recoveries on loans
previously charged off--Non-
Core Business:
Franchise loans.............. 35 -- -- -- --
Single family residential.... 98 3 2,401 30 --
Consumer..................... 1,065 150 841 303 147
--------- -------- -------- -------- -------
1,198 153 3,242 333 147
--------- -------- -------- -------- -------
Total recoveries............. 3,021 1,457 5,150 1,262 323
--------- -------- -------- -------- -------
Net charge-offs--Non-core
business lines.............. (8,048) (5,418) (16,906) (5,764) (3,301)
--------- -------- -------- -------- -------
Total net-charge-offs........ (149,725) (30,225) (17,524) (13,011) (8,003)
--------- -------- -------- -------- -------
Balance as of December 31,... 63,625 31,841 24,880 26,954 19,999
Loan loss allowance at AMN as
of December 31,............. -- 30 857 11,093 --
--------- -------- -------- -------- -------
Total loan loss allowance.... $ 63,625 $ 31,871 $ 25,737 $ 38,047 $19,999
========= ======== ======== ======== =======
OREO losses:
OREO writedowns (recovery)
and expenses.............. $ 771 $ 617 $ (1,498) $ 2,074 $ 4,171
Loss on sale of OREO....... 615 769 597 4,453 2,843
--------- -------- -------- -------- -------
Total OREO losses
(gains).................. $ 1,386 $ 1,386 $ (901) $ 6,527 $ 7,014
========= ======== ======== ======== =======
78
The allocation of the Company's allowance for loan and lease losses and the
percentage of loans and leases by loan type to total gross loans and leases
held for investment as of December 31, 2000 and 1999 is as follows:
2000 1999
-------------------------- --------------------------
Percentage of Percentage of
Loans and Leases Loans and Leases
to Total Gross to Total Gross
Loans and Leases Loans and Leases
Allocated Held for Allocated Held for
Allowance Investment Allowance Investment
--------- ---------------- --------- ----------------
Loans secured by real
estate:
One to four family.... $ 1,287 6.1% $ 4,034 7.3%
Multifamily........... 2,252 3.6 228 2.7
Commercial............ 193 1.2 282 1.1
------- ----- ------- -----
3,732 10.9 4,544 11.1
Leases.................. 97 0.9 126 0.1
Consumer and auto
loans.................. 85 0.3 812 0.6
Franchise loans......... 582 0.7 307 1.4
Asset-based and cash
stream loans........... 39,757 63.9 15,018 58.2
Other commercial loans.. 14,557 23.3 9,498 28.6
------- ----- ------- -----
55,078 89.1 25,761 88.9
Unallocated............. 4,815 -- 1,536 --
------- ----- ------- -----
$63,625 100.0% $31,841 100.0%
======= ===== ======= =====
Although the above table allocates the allowance for loan and lease losses
by loan types, the total allowance is available to absorb losses on all loans
and leases.
The ratio of the allowance for loan and lease losses to total loans held
for investment was 5.36%, 2.50%, and 1.85% at December 31, 2000, 1999, and
1998, respectively. The ratio of the allowance for loan losses to non-accrual
loans was 81.02% at December 31, 2000 as compared to 62.18% at December 31,
1999 and 65.11% at December 31, 1999. We evaluate expected losses on non-
accrual loans on a loan-by-loan basis and we believe that the allowance is
adequate to cover both expected losses on non-accrual loans and inherent
losses in the remainder of our loans and leases held for investment portfolio.
The percentage of the allowance for loan and lease losses to non-accrual loans
does not remain constant due to the changing nature of our loan portfolio. We
analyze the collateral for each non-performing loan to determine our potential
loss exposure, and in conjunction with other factors, this loss exposure
contributes to the overall assessment of the adequacy of the allowance for
loan and lease losses. On an ongoing basis, we monitor the loan portfolio and
evaluate the adequacy of the allowance for loan and lease losses.
79
The following table sets forth the amount of non-performing assets
attributable to our core lending activities and our Exited Businesses.
2000 1999 1998 1997
---------------------- ---------------------- ---------------------- ----------------------
Core Core Core Core
Lending Exited Lending Exited Lending Exited Lending Exited
Activities Businesses Activities Businesses Activities Businesses Activities Businesses
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Non-accrual
loans:
IPL............. $ 1,650 $ -- $ 237 $ -- $ 992 $ -- $ 497 $ --
IWF............. 9,404 -- 7,757 -- 4,141 -- -- --
CBC............. 31,795 -- 22,173 -- 1,117 -- -- --
IBC............. 7 -- 77 -- 669 -- 981 --
Film and
television
production
loans........... 246 -- -- -- -- -- -- --
LPIG............ 26,206 -- -- -- -- -- -- --
One to four
family.......... -- 3,564 -- 16,926 -- 18,576 -- 34,447
Consumer loans.. -- 85 -- 633 -- 253 -- 250
Auto loans...... -- 716 -- 1,803 -- 5,476 -- 28,057
Other
commercial...... -- 4,856 656 996 -- 8,305 192 6,207
---------- ------- ---------- -------- ---------- -------- ---------- --------
Total non-
accrual loans... 69,308 9,221 30,900 20,358 6,919 32,610 1,670 68,961
---------- ------- ---------- -------- ---------- -------- ---------- --------
OREO:
Acquired film
and television
assets.......... 7,752 -- 8,161 -- -- -- -- --
IPL............. -- -- 222 -- 197 -- 465 --
One to four
family.......... -- 816 -- 3,220 -- 7,180 -- 8,326
Other
commercial...... -- 188 -- 771 -- 1,307 -- 2,114
---------- ------- ---------- -------- ---------- -------- ---------- --------
Total OREO...... 7,752 1,004 8,383 3,991 197 8,487 465 10,440
---------- ------- ---------- -------- ---------- -------- ---------- --------
Loans with
modified terms:
One to four
family.......... -- -- -- -- -- -- -- --
Other
commercial...... -- -- -- -- -- -- -- --
---------- ------- ---------- -------- ---------- -------- ---------- --------
Total OREO...... -- -- -- -- -- -- -- --
---------- ------- ---------- -------- ---------- -------- ---------- --------
Repossessed
property:
IBC............. 2 -- 643 -- 702 -- 4,437 --
Auto Lending.... -- 82 -- 127 -- 5,169 -- 4,563
---------- ------- ---------- -------- ---------- -------- ---------- --------
Total
repossessed
property........ 2 82 643 127 702 5,169 4,437 4,563
---------- ------- ---------- -------- ---------- -------- ---------- --------
Total NPA's..... $ 77,062 $10,307 $ 39,926 $ 24,476 $ 7,818 $ 46,266 $ 6,572 $ 83,964
========== ======= ========== ======== ========== ======== ========== ========
Total loans,
OREO and
repossessed
property........ $1,479,924 $96,218 $1,431,996 $148,033 $1,310,283 $384,487 $1,023,007 $443,782
Total NPA's as a
percentage of
loans, OREO and
repossessed
property........ 5.21% 10.71% 2.79% 16.53% 0.60% 12.03% 0.64% 18.92%
1996
----------------------
Core
Lending Exited
Activities Businesses
---------- -----------
Non-accrual
loans:
IPL............. $ -- $ --
IWF............. -- --
CBC............. -- --
IBC............. -- --
Film and
television
production
loans........... -- --
LPIG............ -- --
One to four
family.......... -- 44,639
Consumer loans.. -- --
Auto loans...... -- 152
Other
commercial...... -- 5,318
---------- -----------
Total non-
accrual loans... -- 50,109
---------- -----------
OREO:
Acquired film
and television
assets.......... -- --
IPL............. -- --
One to four
family.......... -- 10,147
Other
commercial...... -- 2,067
---------- -----------
Total OREO...... -- 12,214
---------- -----------
Loans with
modified terms:
One to four
family.......... -- 800
Other
commercial...... -- 456
---------- -----------
Total OREO...... -- 1,256
---------- -----------
Repossessed
property:
IBC............. -- --
Auto Lending.... -- --
---------- -----------
Total
repossessed
property........ -- --
---------- -----------
Total NPA's..... $ -- $ 63,579
========== ===========
Total loans,
OREO and
repossessed
property........ $953,809 $1,099,850
Total NPA's as a
percentage of
loans, OREO and
repossessed
property........ N/A 5.78%
Excludes non-accrual loans held for sale which we carried at the lower of
cost or market, includes non-accrual loans and non-performing assets from the
discontinued operations of AMN. Our policy is to place all loans 90 days or
more past due on non-accrual unless the loan is in the process of collection.
80
The following table sets forth the amounts of and changes in non-performing
assets attributable to our core lending activities:
Other
CBC LPIG IWF IPLD LHO IBC Core Total
-------- -------- -------- ------- ------- ---- ------- ---------
December 31, 1999....... $ 22,173 $ -- $ 7,757 $ 237 $ -- $ 77 $ 656 $ 30,900
New non-accrual loans... 108,657 62,394 21,089 10,152 660 8 1,778 204,738
Gross charge-offs....... (89,732) (32,267) (17,050) (353) (1,939) -- (2,159) (143,500)
Reinstatements and
paydowns .............. (9,303) (3,921) (2,392) (8,386) 1,525 (78) (275) (22,830)
-------- -------- -------- ------- ------- ---- ------- ---------
December 31, 2000....... $ 31,795 $ 26,206 $ 9,404 $ 1,650 $ 246 $ 7 $ -- $ 69,308
======== ======== ======== ======= ======= ==== ======= =========
Number of non-accrual
loans at December 31,
2000 .................. 11 5 9 12 1 1 -- 39
Principal balance of
smallest non-accrual
loan .................. $ 487 $ 176 $ 52 $ 33 $ 246 $ 7 $ -- $ 7
Principal balance of
largest non-accrual
loan................... $ 9,541 $ 11,301 $ 1,551 $ 432 $ 246 $ 7 $ -- $ 11,301
Asset/Liability Management and Market Risk
General
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or re-price within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or re-pricing within a specific time period and the
amount of interest-bearing liabilities maturing or re-pricing within that time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of falling interest rates, the net earnings of an institution with a
positive gap theoretically may be adversely affected due to its interest-
earning assets re-pricing to a greater extent than its interest-bearing
liabilities. Conversely, during a period of rising interest rates,
theoretically, the net earnings of an institution with a positive gap position
may increase as it is able to invest in higher yielding interest-earning
assets at a more rapid rate than its interest-bearing liabilities re-price. In
addition, a positive gap may not protect an institution with a large portfolio
of ARM's from increases in interest rates for extended time periods as such
instruments generally have periodic and lifetime interest rate caps. Our ARM's
are predominantly tied to LIBOR. Interest rates and the resulting cost of
funds increases in a rapidly increasing rate environment could exceed the cap
levels on these loan products and negatively impact net interest income.
We manage portfolio interest rate risk through the marketing and funding of
adjustable rate loans, which generally re-price at least semi-annually and are
generally indexed to Prime or LIBOR. As a result of this strategy, at December
31, 2000, our total interest-earning assets maturing or re-pricing within one
year exceeded our total interest-bearing liabilities maturing or re-pricing in
the same time by $287.6 million, representing a positive cumulative gap ratio
of 119.0%. We closely monitor our interest rate risk as such risk relates to
operational strategies. Our cumulative gap position is at a level satisfactory
to management. However, there can be no assurances that we will maintain a
positive gap position or that our strategies will not result in a negative gap
position in the future. The level of the movement of interest rates, up or
down, is an uncertainty and could have a negative impact on the earnings of
our company. During the first quarter of 2001, the Federal Reserve lowered
interest rates a total of 150bp from year-end levels. Given our gap position
at December 31, 2000, this decrease in rates will have a negative impact on
our earnings for the year ending December 31, 2001. We believe that our
deposit portfolio should reprice in sufficient volumes by the end of the
second quarter of 2001 to absorb the majority of the negative impact of this
interest rate decrease.
81
Total Rate of Return Swaps
The Company has total rate of return swap contracts for investment purposes
with various counter parties, the provisions of which entitle our company to
receive the total return on various commercial loans in exchange for a
floating payment of one month LIBOR plus a spread. These contracts are off
balance sheet instruments.
As of December 31, 2000, 1999 and 1998, we were party to the LPIG total
return swap with a total notional amount outstanding of $65.2 million, $83.6
million and $280.4 million, under which our company was obligated to pay one
month LIBOR plus a weighted average spread of 0.88%. The weighted average
remaining life of these contracts was 51.2 months, 60.0 months and 31.2 months
as of December 31, 2000, 1999 and 1998. For the years ended December 31, 2000,
1999 and 1998, our company recognized income of $2.7 million, $2.9 million and
$5.4 million on our total return swaps, respectively. For the years ended
December 31, 2000, 1999 and 1998, our company recognized mark to market gains
(losses) of ($3.8) million, $197,000 and $171,000 on the LPIG swaps,
respectively.
As a part of the Pacifica Partners I LP collateralized loan obligation
("CLO") fund launched by the Company in August 1998, the Company delivered
subordinate bonds of approximately $51.3 million into a total rate of return
swap with the Canadian Imperial Bank of Commerce ("CIBC"). The provisions of
the swap entitle the Company to receive the total return on the subordinate
bonds delivered and pay a floating payment of LIBOR plus a weighted average
spread of 0.75% beginning in October 2000, and 1.36% from August 1998 to
September 2000. The Company delivered cash and various equity securities to
CIBC as collateral for the swap. At December 31, 2000 and 1999, $59.1 million
and $38.1 million was outstanding and classified as Trading Securities on our
consolidated balance sheet.
Risk Management and Market Sensitive Instruments
Loans and securities funded through total return swaps are subject to
market price risk. As such, the Company could incur significant gains or
losses from the sale of loans and securities funded through total return swaps
depending on the secondary market for the assets in the swaps, interest rate
spreads, credit quality, and other factors. The notional amount of assets
funded through total return swaps and subject to these risks totaled $538.4
million and $545.5 million at December 31, 2000 and 1999, resepctively.
Interest rate risk is managed within a tight duration band, and credit risk
is managed by maintaining diversified sector exposure within the securities
and loan portfolios. In connection with our investment and risk management
objectives, we also use financial instruments whose market value is at least
partially determined by, among other things, levels of or changes in domestic
interest rates (short-term or long-term), prepayment rates, equity markets or
credit ratings/spreads.
Using financial modeling and other techniques, we regularly evaluate the
appropriateness of investments relative to management-approved investment
guidelines and the business objective of the portfolios. We operate within
these investment guidelines by maintaining a mix of loans and investments that
diversifies our assets.
The following discussion about our risk management activities includes
"forward-looking statements" that involve risk and uncertainties. Set forth
below are management's projections of hypothetical net losses in fair value of
shareholders' equity of our market sensitive financial instruments if certain
assumed changes in market rates and prices were to occur (sensitivity
analysis). While we believe that the assumed market rate changes are
reasonably possible in the near term, actual results may differ, particularly
as a result of any management actions that would be taken to mitigate such
hypothetical losses in fair value of shareholders' equity. Based on our
overall exposure to interest rate risk and equity price risk, we believe that
these changes in market rates and prices would not materially affect the
consolidated near-term financial position, results of operations or cash flows
of our company.
The Company measures and manages its exposure to interest rate risk by
modeling net interest income simulations, the market value of portfolio
equity, and by gap analysis. Net interest income simulations are used by our
company to identify the direction and impact of interest rate risk exposure
over the next 12 to 24 month
82
timeframe. Present value of equity calculations are used to estimate the
theoretical price sensitivity of shareholder equity to changes in interest
rates and the related impact on the Company's assets and liabilities. Gap
analysis provides insight into mismatches of asset and liability repricing
characteristics.
Net Interest Income Simulation: The Company's net interest margin is
affected by the level of interest rates, the shape of the yield curve and the
characteristics of the Company's interest earning assets and interest bearing
liabilities. The yield curve depicts market interest rates as a function of
maturity. The Company's portfolio of rate sensitive commercial and real estate
loans are funded by a deposit base that typically reprices over a 6 to 12
month time frame. As a result, the Company is generally asset sensitive; net
interest margin increases when interest rates are increasing and decreases
when interest rates are declining. The Company uses a simulation model to
estimate the severity of this risk and to develop strategies to mitigate the
risk. The model considers probable balance sheet and off-balance sheet
strategies and volumes under different interest rate scenarios over the course
of 12 and 24-month periods. Model assumptions are updated periodically and are
reviewed by management. Guidelines are set by management and approved by the
Bank's Board to further limit exposure and to take advantage of movements in
rates.
Assuming an immediate increase of 200 basis points in interest rates the
net hypothetical increase over the next 12 months in net interest income
related to financial and derivative instruments is estimated to be
$8.1 million (after income taxes) or 20.57% of total shareholders' equity at
December 31, 2000. We believe that an interest rate shift of this magnitude
represents a moderately advantageous scenario. Assuming an immediate decrease
of 200 basis points in interest rates the net hypothetical decrease over the
next 12 months in net interest income related to financial and derivative
instruments is estimated to be ($6.8) million (after income taxes) or 17.35%
of total shareholders' equity at December 31, 2000. We believe that an
interest rate shift of this magnitude represents a moderately adverse
scenario. We did not prepare net interest income simulations at December 31,
1999.
Market Value of Portfolio Equity: The market value of portfolio equity
("MVPE") model is used to evaluate the vulnerability of the market value of
shareholders' equity to changes in interest rates. The MVPE model calculates
the expected cash flows of all of the Company's interest earning assets and
interest bearing liabilities under various interest rate scenarios. The
present value of these cash flows is calculated by discounting them using
estimated market interest rates for that scenario. The difference between the
present value of interest earning assets and the present value of interest
bearing liabilities is the MVPE. MVPE will vary depending on the timing of
expected cash flow, the level of interest rates, prepayment assumptions and
the shape of the yield curve. The assumptions governing these relationships
are the same as those used in the net interest income simulation. They are
updated periodically and are reviewed by management.
Assuming immediate increases of 100 and 200 basis points in interest rates
the net hypothetical increase in the market value of our company's interest
earning assets and interest bearing liabilities and the corresponding change
in the value of shareholders' equity related to financial and derivative
instruments is estimated to be $3.6 million and $14.1 million (after income
taxes) or 9.01% and 35.82% of total shareholders' equity, respectively at
December 31, 2000. We believe that an interest rate shift of between 100 basis
points and 200 basis points represents a moderately advantageous scenario.
Assuming immediate decreases of 100 and 200 basis points in interest rates the
net hypothetical decrease in the market value of our company's interest
earning assets and interest bearing liabilities and the corresponding change
in the value of shareholders' equity related to financial and derivative
instruments is estimated to be ($16.0) million and ($18.1) million (after
income taxes) or 40.49% and 45.86% of total shareholders' equity, respectively
at December 31, 2000. We believe that an interest rate shift of 100 basis
points to 200 basis points represents a moderately adverse scenario.
Assuming immediate increases of 100 and 200 basis points in interest rates
the net hypothetical increase in the market value of our company's interest
earning assets and interest bearing liabilities and the corresponding change
in the value of shareholders' equity related to financial and derivative
instruments is estimated to be $9.0 million and $17.7 million (after income
taxes) or 4.38% and 8.61% of total shareholders' equity, respectively at
December 31, 1999. We believe that an interest rate shift of this magnitude
represents a moderately advantageous scenario. Assuming immediate decreases of
100 and 200 basis points in interest rates
83
the net hypothetical decrease in the market value of our company's interest
earning assets and interest bearing liabilities and the corresponding change
in the value of shareholders' equity related to financial and derivative
instruments is estimated to be ($9.4) million and ($19.0) million (after
income taxes) or 4.55% and 9.27% of total shareholders' equity, respectively
at December 31, 1999. We believe that an interest rate shift of this magnitude
represents a moderately adverse scenario.
Gap Analysis: The gap analysis is based on the contractual cash flows of
all asset and liability balances on the Company's books. The contractual
maturity of these assets and liabilities may differ substantially from their
expected maturity. For example, savings accounts are subject to immediate
withdrawal. Also, certain loans are subject to prepayment. The gap analysis
reflects the contractual cash flows adjusted for anticipated prepayment
assumptions. It may be used to identify periods in which there is a
substantial mismatch between assets and liabilities.
Certain shortcomings are inherent in the sensitivity analysis presented
herein. For example, although certain assets and liabilities may have similar
maturities or periods to re-pricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM's, have features which
restrict changes in interest rates on a short term basis and over the life of
the asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those
reflected in analysis above. Finally, the ability of many borrowers to service
their ARM's may decrease in the event of an interest rate increase.
The effect of interest rate risk on potential near-term net income, cash
flow and fair value was determined based on commonly used models. The models
project the impact of interest rate changes on a wide range of factors,
including duration, prepayment, put options and call options. Fair value was
estimated based on the net present value of cash flows or duration estimates,
using a representative set of likely future interest rate scenarios.
84
Re-pricing/Maturity of Interest-Earning Assets and Interest-Bearing
Liabilities
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2000, which we
anticipate to re-price or mature in each of the future time periods shown. The
amount of assets and liabilities shown which re-price or mature during a
particular period were determined in accordance with the earlier of term to
re-pricing or the contractual terms of the asset or liability.
More than
More than More than More than 3 Years Non-
3 Months 3 Months to 6 Months 1 Year to to 5 More than Interest
or Less 6 Months to 1 Year 3 Years Years 5 Years Bearing Total
---------- ----------- --------- --------- --------- --------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Cash................... $ -- $ -- $ -- $ -- $ -- $ -- $ 30,938 $ 30,938
Interest earning
deposits.............. 183,193 -- -- -- -- -- -- 183,193
Trading securities..... 164,050 -- -- -- -- -- -- 164,050
Securities available
for sale.............. 54,468 660 1,187 3,373 1,894 2,102 -- 63,684
FHLB stock............. 4,148 -- -- -- -- -- -- 4,148
Loans, net of unearned
discount and deferred
loan fees(1)........... 1,124,966 158,309 108,790 55,362 48,682 76,479 -- 1,572,588
---------- --------- --------- --------- -------- --------- -------- ----------
Total interest-bearing
assets................ 1,530,825 158,969 109,977 58,735 50,576 78,581 30,938 2,018,601
Less:
Allowance for loan
losses................ -- -- -- -- -- -- (63,625) (63,625)
---------- --------- --------- --------- -------- --------- -------- ----------
Net interest-earning
assets................ 1,530,825 158,969 109,977 58,735 50,576 78,581 (32,687) 1,954,976
Non-interest-earning
assets................ -- -- -- -- -- -- 172,601 172,601
---------- --------- --------- --------- -------- --------- -------- ----------
Total assets........... $1,530,825 $ 158,969 $ 109,977 $ 58,735 $ 50,576 $ 78,581 $139,914 $2,127,577
========== ========= ========= ========= ======== ========= ======== ==========
Interest-bearing
liabilities:
Deposits............... $ 351,833 $ 416,428 $ 636,830 $ 225,996 $ 1,617 $ -- $ -- $1,632,704
FHLB borrowings........ 65,000 -- -- -- -- -- -- 65,000
Other borrowings....... 42,118 -- -- -- -- 42,000 -- 84,118
Senior Notes........... -- -- -- -- 10,818 165,939 -- 176,757
ROPES.................. -- -- -- 42,885 -- -- -- 42,885
---------- --------- --------- --------- -------- --------- -------- ----------
Total interest-bearing
liabilities........... $ 458,951 $ 416,428 $ 636,830 $ 268,881 $ 12,435 $ 207,939 $ -- 2,001,464
Non-interest bearing
liabilities........... -- -- -- -- -- -- 86,671 86,671
Shareholders' equity... -- -- -- -- -- -- 39,442 39,442
---------- --------- --------- --------- -------- --------- -------- ----------
Total liabilities and
shareholders' equity
...................... $ 458,951 $ 416,428 $ 636,830 $ 268,881 $ 12,435 $ 207,939 $126,113 $2,127,577
========== ========= ========= ========= ======== ========= ======== ==========
Interest rate
sensitivity gap(2).... 1,071,874 (257,459) (526,853) (210,146) 38,141 (129,358) (32,687) (46,488)
Cumulative interest
sensitivity gap....... $1,071,874 $ 814,415 $ 287,562 $ 77,416 $115,557 $ (13,801) $(46,488)
Cumulative interest
sensitivity gap as a %
of total assets ...... 50.38% 38.28% 13.52% 3.64% 5.43% (0.65)%
Cumulative net interest
earning assets as a
percentage of
cumulative interest-
bearing liabilities... 333.55% 193.04% 119.02% 104.35% 106.44% 99.31% 97.68%
- -------
(1) For purposes of the gap analysis, unearned discount and deferred fees are
pro rated for loans receivable.
(2) Interest sensitivity gap represents the difference between net interest-
earning assets and interest-bearing liabilities.
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to re-pricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as ARM's, have
features which restrict changes in interest rates on a short term basis and
over the life of the asset. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate
significantly from those reflected in the table. Finally, the ability of many
borrowers to service their ARM's may decrease in the event of an interest rate
increase.
85
Average Balance Sheet
The following tables set forth certain information relating to our company
for 2000, 1999 and 1998. The yields and costs are derived by dividing income
or expense by the average balance of assets or liabilities, respectively, for
the periods shown except where noted otherwise. Average balances are derived
from average month-end balances. Management does not believe that the use of
average monthly balances instead of average daily balances has caused any
material differences in the information presented. The average balance of
loans receivable includes loans on which we have discontinued accruing
interest. The yields and costs include fees which are considered adjustments
to yields.
Year Ended December 31,
-----------------------------------------------------------------------------------
2000 1999 1998
--------------------------- --------------------------- ---------------------------
Yield/ Yield/ Yield/
Average Average Average Average Average Average
Balance Interest Cost Balance Interest Cost Balance Interest Cost
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
ASSETS:
-------
Interest-earning assets:
Investments and
interest-earning
deposits.............. $ 351,032 27,847 7.93% $ 295,197 $25,520 8.65% $ 242,246 $ 28,674 11.84%
FHLB stock............. 4,964 366 7.37 6,166 321 5.21 5,031 291 5.78
Loans held for sale
and investment,
net(1)................ 1,642,193 194,213 11.83 1,572,668 178,229 11.33 1,643,147 200,827 12.22
Retained interest and
capitalized excess
servicing fees
receivable............ 11,010 2,399 21.79 24,926 3,368 13.51 31,956 6,048 18.93
---------- -------- ----- ---------- ------- ----- ---------- -------- ------
Total interest-
earning assets...... 2,009,199 224,825 11.19 1,898,957 207,438 10.92 1,922,380 235,840 12.27
---------- -------- ----- ---------- ------- ----- ---------- -------- ------
Non interest-earning
assets................. 243,752 268,728 361,593
Total assets......... $2,252,951 $2,167,685 $2,283,973
========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
----------------------
Interest-bearing
liabilities:
Deposits............... $1,698,566 $107,779 6.35% $1,579,605 $86,582 5.48% $1,512,057 $ 87,030 5.76%
Borrowings from FHLB... 23,462 1,492 6.36 7,590 630 8.30 24,451 1,631 6.67
Other borrowings....... 59,772 6,872 11.50 69,306 3,920 5.66 69,844 4,150 5.94
Senior Notes........... 178,620 18,267 10.23 207,706 21,540 10.37 219,837 22,392 10.19
Company obligated
mandatorily
redeemable preferred
securities of
subsidiary trust
holding solely
debentures of the
company............... 51,582 5,803 11.25 66,192 7,390 11.16 70,000 7,903 11.29
Preferred Stock Series
B..................... -- -- -- 11,539 1,545 13.39 -- -- --
---------- -------- ----- ---------- ------- ----- ---------- -------- ------
Total interest-bearing
liabilities........... 2,012,002 140,213 6.97 1,941,938 121,607 6.26 1,896,189 123,106 6.49
---------- -------- ----- ---------- ------- ----- ---------- -------- ------
Non interest-bearing
liabilities............ 75,838 11,461 95,122
Shareholders' equity.... 165,111 214,286 292,662
---------- ---------- ----------
Total liabilities and
shareholders'
equity................ $2,252,951 $2,167,685 $2,283,973
========== ========== ==========
Net interest rate
spread................. $ 84,612 4.22% $85,831 4.66% $112,734 5.78%
======== ===== ======= ===== ======== ======
Net interest margin..... 4.21% 4.52% 5.86%
Ratio of interest-
earning assets to
interest-bearing
liabilities............ 99.86% 97.79% 101.38%
- -------
(1) Net of deferred income and the allowance for loan losses, includes
nonaccrual loans.
86
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest
income also depends upon the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them,
respectively.
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our net interest income and interest expense during
the periods indicated. Information is provided in each category with respect
to (i) changes attributable to changes in volume (changes in volume multiplied
by prior rate), (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume), (iii) changes in interest due to both rate and
volume and (iv) the net change.
Year Ended December 31,
-----------------------------------------------------------------------------
2000 Over 1999 1999 Over 1998
------------------------------------ ---------------------------------------
Volume Rate Rate/Volume Total Volume Rate Rate/Volume Total
------ ------- ----------- ------- ------- -------- ----------- --------
(In thousands)
Increase/(decrease) in:
Investments and
interest-bearing
deposits............. $4,830 $(2,125) $ (378) $ 2,327 $ 6,269 $ (7,728) $(1,695) $ (3,154)
FHLB stock............ (63) 133 (25) 45 66 (29) (7) 30
Loans held for sale
and investment, net.. 7,877 7,863 244 15,984 (8,613) (14,624) 639 (22,598)
Retained interest and
capitalized excess
servicing fees
receivable........... (1,880) 2,064 (1,153) (969) (1,331) (1,732) 383 (2,680)
------ ------- ------- ------- ------- -------- ------- --------
Total interest
income............. 10,764 7,935 (1,312) 17,387 (3,609) (24,113) (680) (28,402)
------ ------- ------- ------- ------- -------- ------- --------
Deposits.............. 6,519 13,743 935 21,197 3,891 (4,234) (105) (448)
FHLB borrowings....... 1,317 (147) (308) 862 (1,125) 399 (275) (1,001)
Other borrowings...... (540) 4,047 (555) 2,952 (32) (196) (2) (230)
Senior Notes.......... (3,016) (291) 34 (3,273) (1,236) 396 (12) (852)
ROPES................. (1,630) 60 (17) (1,587) (430) (91) 8 (513)
Mandatorily redeemable
cumulative preferred
stock................ (1,545) -- -- (1,545) -- -- 1,545 1,545
------ ------- ------- ------- ------- -------- ------- --------
Total interest
expense............ 1,105 17,412 89 18,606 1,068 (3,726) 1,159 (1,499)
------ ------- ------- ------- ------- -------- ------- --------
Change in net interest
income................. $9,659 $(9,477) $(1,401) $(1,219) $(4,677) $(20,387) $(1,839) $(26,903)
====== ======= ======= ======= ======= ======== ======= ========
Recent Accounting Pronouncements
The Company is affected by recent accounting pronouncements. For a
description of these standards and the effect, if any, adoption has had or
will have on the Company's consolidated financial statements, see "Note 3 of
Notes to Consolidated Financial Statements."
87
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7--"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset/Liability Management and Market Risk."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.............................................. 89
Consolidated Balance Sheets............................................... 90
Consolidated Statements of Operations and Comprehensive Income (Loss)..... 91
Consolidated Statements of Changes in Shareholders' Equity................ 93
Consolidated Statements of Cash Flows..................................... 94
Notes to Consolidated Financial Statements................................ 96
All supplemental schedules are omitted as inapplicable or because the
required information is included in the consolidated financial statements or
notes thereto.
88
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Imperial Credit Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Imperial
Credit Industries, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of operations and comprehensive income
(loss), changes in shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 2000. These consolidated financial
statements are the responsibility of Imperial Credit Industries, Inc. and
subsidiaries' management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Imperial
Credit Industries, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Los Angeles, California
March 30, 2001
89
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
----------------------
2000 1999
---------- ----------
ASSETS
------
Cash................................................... $ 30,938 $ 33,898
Interest bearing deposits.............................. 183,193 248,182
Investment in Federal Home Loan Bank stock............. 4,148 6,960
Securities held for trading, at market (including
securities pledged to creditors with the right to sell
or re-pledge of $39.4 million and $67.0 million,
respectively)......................................... 164,050 160,805
Securities available for sale, at market............... 63,684 74,374
Loans and leases held for sale, net.................... 386,469 289,398
Loans and leases held for investment, net of unearned
income and deferred loan fees......................... 1,186,119 1,264,912
Less: allowance for loan and lease losses............ (63,625) (31,841)
---------- ----------
Loans and leases held for investment, net.............. 1,122,494 1,233,071
Real property.......................................... 53,198 --
Retained interest in loan and lease securitizations.... 6,330 10,220
Accrued interest receivable............................ 15,744 8,272
Premises and equipment, net............................ 10,433 13,576
Real estate and other assets owned, net................ 8,778 13,055
Goodwill............................................... 32,330 34,961
Other assets........................................... 28,158 37,351
Net assets of discontinued operations.................. 17,630 37,492
---------- ----------
Total assets......................................... $2,127,577 $2,201,615
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits............................................... $1,632,704 $1,614,758
Borrowings from Federal Home Loan Bank................. 65,000 --
Other borrowings....................................... 84,118 74,309
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
debentures of the company ("ROPES' "92)............... 42,885 61,750
Senior Notes........................................... 176,757 185,185
Accrued interest payable............................... 18,992 18,811
Accrued income taxes payable........................... 20,522 16,101
Minority interest in consolidated subsidiaries......... 1,116 2,684
Goodwill............................................... 23,797 --
Other liabilities...................................... 22,244 22,637
---------- ----------
Total liabilities.................................... 2,088,135 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; 32,096,361 and 33,198,661 shares issued and
outstanding at December 31, 2000 and 1999,
respectively.......................................... 97,668 97,220
(Accumulated deficit) retained earnings................ (64,889) 98,437
Shares held in deferred executive compensation plan.... 5,745 7,107
Accumulated other comprehensive income--unrealized gain
on securities available for sale, net................. 918 2,616
---------- ----------
Total shareholders' equity........................... 39,442 205,380
---------- ----------
Total liabilities and shareholders' equity........... $2,127,577 $2,201,615
========== ==========
See accompanying notes to consolidated financial statements.
90
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(Dollars in thousands, except per share data)
Years Ended December 31,
------------------------------
2000 1999 1998
--------- -------- ---------
Interest Income:
Interest on loans and leases.................. $ 194,213 $178,229 $ 200,827
Interest on investments....................... 28,213 25,841 28,965
Interest on other finance activities.......... 2,399 3,368 6,048
--------- -------- ---------
Total interest income....................... 224,825 207,438 235,840
Interest Expense:
Interest on deposits.......................... 107,779 86,582 87,030
Interest on other borrowings.................. 8,364 4,550 5,781
Interest on long term debt.................... 24,070 30,475 30,295
--------- -------- ---------
Total interest expense...................... 140,213 121,607 123,106
--------- -------- ---------
Net interest income......................... 84,612 85,831 112,734
Provision for loan and lease losses........... 180,975 35,340 15,450
--------- -------- ---------
Net interest (expense) income after
provision for loan and lease losses........ (96,363) 50,491 97,284
--------- -------- ---------
Fee and other income:
Gain on sale of loans and leases.............. (771) 6,480 14,888
Asset management fees......................... 3,239 10,054 7,591
Investment banking and brokerage fees......... 21,057 27,198 18,463
Loan servicing income......................... 5,993 6,885 11,983
Gain (loss) on sale of securities............. 12,988 32,742 (592)
Equity in net income of Southern Pacific
Funding Corporation.......................... -- -- 12,739
Equity in net (loss) income of Franchise
Mortgage Acceptance Company.................. -- (53) 3,235
Equity in net income of Imperial Capital
Group........................................ 479 -- --
Rental income................................. 8,183 -- --
Mark to market on securities and loans held
for sale..................................... (12,810) (28,641) (42,388)
Loss on impairment of equity securities....... -- -- (120,138)
Other income.................................. 12,278 13,894 13,118
--------- -------- ---------
Total fee and other income (loss)........... 50,636 68,559 (81,101)
--------- -------- ---------
Noninterest expenses:
Personnel expense............................. 43,679 50,034 52,003
Commission expense............................ 6,418 10,307 9,633
Amortization of servicing rights.............. 529 4,223 1,486
Occupancy expense............................. 5,446 5,658 5,750
Net expenses (income) of other real estate
owned........................................ 1,386 1,386 (901)
Legal and professional services............... 8,829 9,894 10,917
Lawsuit settlements (recoveries).............. 6,942 371 (69)
Telephone and other communications............ 2,900 3,768 3,692
Amortization of goodwill...................... 1,431 14,506 2,686
Provision for loss on repurchase of former
mortgage banking loans....................... -- -- 4,750
Real property expense......................... 4,192 -- --
General and administrative expense............ 21,285 26,453 30,889
--------- -------- ---------
Noninterest expense........................... 103,037 126,600 120,836
Merger costs.................................. 9,397 -- --
--------- -------- ---------
Total noninterest expense................... 112,434 126,600 120,836
Loss from continuing operations before income
taxes, minority interest and extraordinary
item......................................... (158,161) (7,550) (104,653)
Income taxes.................................. 2,356 (3,074) (44,064)
Minority interest in income (loss) of
consolidated subsidiaries.................... 1,125 1,474 (1,464)
--------- -------- ---------
Loss from continuing operations before
extraordinary item........................... (161,642) (5,950) (59,125)
Operating loss from discontinued operations
of AMN (net of $4.2 million, $557,000 and
$2.1 million of income taxes in 2000, 1999
and 1998, respectively)...................... (5,218) (899) (3,232)
Loss on disposal of AMN including provision
of $3.7 million for operating losses during
phase-out period (net of $6.6 million of
income taxes)................................ -- -- (11,276)
--------- -------- ---------
Loss before extraordinary item................ (166,860) (6,849) (73,633)
Extraordinary item--gain on early
extinguishment of debt, net of income
taxes........................................ 3,534 4,021 --
--------- -------- ---------
Net loss.................................... $(163,326) $ (2,828) $ (73,633)
--------- -------- ---------
Other comprehensive (loss) income:
Unrealized (losses) gains on securities
available for sale........................... (3,147) 7,890 (5,333)
Reclassification adjustment for losses
(gains) included in noninterest income....... 320 (1,492) (53)
Income taxes.................................. (1,129) 2,596 (2,274)
--------- -------- ---------
Other comprehensive (loss) income........... (1,698) 3,802 (3,112)
--------- -------- ---------
Comprehensive (loss) income................. $(165,024) $ 974 $ (76,745)
========= ======== =========
See accompanying notes to consolidated financial statements.
91
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)--(Continued)
(Dollars in thousands, except per share data)
Years Ended
December 31,
----------------------
2000 1999 1998
------ ------ ------
Basic loss per share:
Loss from continuing operations before extraordinary
item................................................ $(4.96) $(0.17) $(1.55)
Loss from discontinued operations, net of income
taxes............................................... (0.16) (0.02) (0.08)
Loss on disposal of AMN, net of income taxes......... -- -- (0.30)
Extraordinary item--gain on early extinguishment of
debt, net of income taxes........................... 0.11 0.11 --
------ ------ ------
Net basic loss per common share...................... $(5.01) $(0.08) $(1.93)
====== ====== ======
Diluted loss per share:
Loss from continuing operations before extraordinary
item................................................ $(4.96) $(0.17) $(1.55)
Loss from discontinued operations, net of income
taxes............................................... (0.16) (0.02) (0.08)
Loss on disposal of AMN, net of income taxes......... -- -- (0.30)
Extraordinary item--gain on early extinguishment of
debt, net of income taxes........................... 0.11 0.11 --
------ ------ ------
Net diluted loss per common share.................... $(5.01) $(0.08) $(1.93)
====== ====== ======
See accompanying notes to consolidated financial statements.
92
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Retained Shares Accumulated
Common Earnings Held in Other Total
Shares Common (Accumulated DEC Comprehensive Shareholders'
Outstanding Stock Deficit) Plan Income (Loss) Equity
----------- -------- ------------ ------- ------------- -------------
(In thousands)
Balance, December 31,
1997................... 38,791 $147,109 $ 174,898 $ -- $ 1,926 $ 323,933
Exercise of stock
options................ 244 1,037 -- -- -- 1,037
Stock held in deferred
compensation plan...... -- (3,833) -- 3,833 -- --
Issuance of common stock
forImperial Credit
Lender Services, Inc.
acquisition............ 236 5,000 -- -- -- 5,000
Unrealized depreciation
onsecurities available
for sale, net.......... -- -- -- -- (3,112) (3,112)
Tax benefit from
exercise of stock
options................ -- 4,601 -- -- -- 4,601
Repurchase and
retirement of stock and
warrants............... (2,485) (24,305) -- -- -- (24,305)
Net loss, 1998.......... -- -- (73,633) -- -- (73,633)
------ -------- --------- ------- ------- ---------
Balance, December 31,
1998................... 36,786 $129,609 $ 101,265 $ 3,833 $(1,186) $ 233,521
Exercise of stock
options................ 95 249 -- -- -- 249
Stock held in deferred
compensation plan...... -- (3,274) -- 3,274 -- --
Unrealized gain on
securities available
for sale, net.......... -- -- -- -- 3,802 3,802
Tax benefit from
exercise of stock
options................ -- 96 -- -- -- 96
Repurchase and
retirement of stock and
warrants............... (3,682) (29,460) -- -- -- (29,460)
Net loss, 1999.......... -- -- (2,828) -- -- (2,828)
------ -------- --------- ------- ------- ---------
Balance, December 31,
1999................... 33,199 $ 97,220 $ 98,437 $ 7,107 $ 2,616 $ 205,380
Exercise of stock
options................ 20 43 -- -- -- 43
Stock held in deferred
compensation plan...... -- 1,362 -- (1,362) -- --
Unrealized loss on
securities available
for sale, net.......... -- -- -- -- (1,698) (1,698)
Tax benefit from
exercise of stock
options................ -- 23 -- -- -- 23
Issuance of warrants in
legal settlement....... -- 3,082 -- -- -- 3,082
Repurchase and
retirement of stock.... (1,123) (4,062) -- -- -- (4,062)
Net loss, 2000.......... -- -- (163,326) -- -- (163,326)
------ -------- --------- ------- ------- ---------
Balance, December 31,
2000................... 32,096 $ 97,668 $ (64,889) $ 5,745 $ 918 $ 39,442
====== ======== ========= ======= ======= =========
See accompanying notes to consolidated financial statements.
93
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
(In thousands)
Cash flows from operating activities:
Loss from continuing operations............. $(161,642) $ (5,950) $ (59,125)
Adjustments to reconcile loss from
continuing operations to net cash provided
by (used in) operating activities:
Cash used in discontinued operations...... -- (2,513) (1,824)
Provision for loan and lease losses....... 180,975 35,340 15,450
Loss on impairment of equity securities... -- -- 120,138
Mark to market on securities and loans
held for sale............................ 12,810 28,641 42,388
Provision for loss on repurchase of former
mortgage banking loans................... -- -- 4,750
Depreciation.............................. 4,749 4,394 3,714
Amortization of goodwill.................. 1,431 14,506 2,686
Amortization of servicing rights.......... 529 4,223 1,486
Accretion of discount..................... (5,765) (3,368) (6,048)
Loss (gain) on sale of loans and leases... 771 (6,480) (14,888)
(Gain) loss on sale of securities......... (12,988) (32,742) 592
Equity in net earnings of SPFC............ -- -- (12,739)
Equity in net loss (income) of FMC........ -- 53 (3,235)
Equity in net income of ICG............... (479) -- --
Loss on sale of OREO...................... 131 769 597
Writedowns (recovery) on other real estate
owned.................................... 943 287 (2,075)
Provision (benefit) for deferred income
taxes.................................... 3,690 38,408 (55,540)
Originations of loans held for sale....... (310,792) (466,000) (660,000)
Sales and collections on loans held for
sale..................................... 228,002 540,672 673,426
Sales and collections of real property.... 23,404 -- --
Purchase of trading securities............ (97,387) (71,997) (146,187)
Sales and collections of trading
securities............................... 81,951 100,469 113,819
Net change in retained interest........... 4,520 -- --
Issuance of warrants...................... 3,082 -- --
Other, net................................ 9,815 (27,090) (54,520)
--------- --------- ---------
Net cash (used in) provided by operating
activities................................... (32,250) 151,622 (37,135)
--------- --------- ---------
Cash flows from investing activities:
Net decrease (increase) in interest bearing
deposits................................... 65,447 (246,767) 102,323
Proceeds from sale of other real estate
owned...................................... 6,616 10,351 13,743
Purchase of securities available for sale... (50,000) (26,757) (17,551)
Sales and collections of securities
available for sale......................... 33,386 4,875 8,818
Net change in loans held for investment..... (64,845) (27,241) (276,629)
Purchases of premises and equipment......... (3,298) (7,767) (7,833)
Proceeds from sale of securities............ 22,495 100,558 867
Net cash received in ICCMIC acquisition..... 11,524 -- --
Purchases of Federal Home Loan Bank stock... -- (1,983) --
Redemption of stock in Federal Home Loan
Bank....................................... 3,179 -- 1,280
Cash utilized for acquisitions.............. (2,822) (8,132) --
--------- --------- ---------
Net cash provided by (used in) investing
activities................................... 21,682 (202,863) (174,982)
--------- --------- ---------
(Continued)
94
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Years Ended December 31,
-----------------------------
2000 1999 1998
-------- --------- --------
(In thousands)
Cash flows from financing activities:
Net increase (decrease) in deposits........... $ 17,946 $ (99,494) $555,306
Advances from Federal Home Loan Bank.......... 95,000 30,000 44,500
Repayments of advances from Federal Home Loan
Bank......................................... (30,000) (50,000) (69,500)
Net decrease in other borrowings.............. (50,830) (27,961) (42,571)
Proceeds from issuance of mandatorily
redeemable cumulative preferred stock........ -- 30,000 --
Repurchase and retirement of mandatorily
redeemable cumulative preferred stock........ -- (31,353) --
Repurchase of Company obligated mandatorily
redeemable preferred securities of subsidiary
trust holding solely debentures of the
company ("ROPES")............................ (15,060) (6,628) --
Repurchase and retirement of common stock and
warrants..................................... (4,062) (29,460) (24,305)
Repurchase of Senior Notes.................... (6,498) (27,453) --
Net change in minority interest............... 1,069 (533) 43
Proceeds from exercise of stock options....... 43 249 1,037
-------- --------- --------
Net cash provided by (used in) financing
activities..................................... 7,608 (212,633) 464,510
-------- --------- --------
Net change in cash.............................. (2,960) (263,874) 252,393
Cash at beginning of year....................... 33,898 297,772 45,379
-------- --------- --------
Cash at end of year............................. $ 30,938 $ 33,898 $297,772
======== ========= ========
See accompanying notes to consolidated financial statements.
95
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000, 1999 and 1998
1. Organization
Imperial Credit Industries, Inc., is a diversified commercial lending,
financial services, and investment banking 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" or
the "Bank"), Imperial Business Credit Inc. ("IBC"), Imperial Credit Lender
Services, Inc. ("ICLS") formerly Statewide Documentation, Inc., and Imperial
Credit Asset Management, Inc. ("ICAM"). We own approximately 38.5% of Imperial
Capital Group, LLC ("ICG"), which had been a majority-owned consolidated
subsidiary up until the end of third quarter 2000. Prior to November 1, 1999,
we held a significant equity interest in a publicly traded company--Franchise
Mortgage Acceptance Company ("FMC") (See "Franchise Mortgage Acceptance
Company"). During 2000, we acquired 100% of the common stock of Imperial
Credit Commercial Mortgage Investment Corp. ("ICCMIC"). Through October 22,
1999, a wholly owned subsidiary of ours, Imperial Credit Commercial Asset
Management Corp. ("ICCAMC"), managed the assets and operations of ICCMIC. All
material inter-company balances and transactions with consolidated
subsidiaries have been eliminated.
2. Operating Activities
General Business Activities
In 1995, the Company began to diversify away from the conforming
residential mortgage lending business, the Company's traditional focus, and
into other select lending businesses. The Company expanded several existing
businesses and commenced several new businesses, including commercial mortgage
banking, business lending and consumer lending. The Company's loans and leases
by operating segments consist primarily of the following: commercial mortgage
loans, income producing property loans and business lending--equipment
leasing, asset-based and cash stream lending, film and television production
loans, and participations in syndicated commercial loans. The Company solicits
loans and leases from brokers on a wholesale and portfolio basis and
originates loans directly with borrowers. The majority of the Company's loans
and leases are funded by FDIC insured deposits at SPB.
Coast Business Credit
Coast Business Credit ("CBC"), a division of SPB, was acquired from Coast
Federal Bank in 1995. CBC is the asset-based and cash stream lending division
of our principal subsidiary SPB, that makes revolving lines of credit and term
loans available to growth companies in manufacturing, distribution,
technology, service, telecommunications and retail industries. CBC is
headquartered in Los Angeles, California, and conducts its lending throughout
the United States. At December 31, 2000 CBC had total commitments of $1.4
billion and gross loans outstanding of $752.9 million, respectively. At
December 31, 1999 CBC had total commitments of $1.4 billion and gross loans
outstanding of $748.1 million, respectively.
Imperial Warehouse Finance, Inc.
In October 1997, the Company's wholly-owned subsidiary, SPB, acquired
substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and
PrinCap Mortgage Backed, L.P. (collectively, "PrinCap") and contributed such
assets to a subsidiary. The acquisition was accounted for as a purchase, and
the purchase price of $123.7 million was allocated to the net assets acquired
based on their fair value resulting in goodwill of $6.8 million. In 1999,
PrinCap changed its name to Imperial Warehouse Finance, Inc. ("IWF"). IWF's
primary provides nationwide short-term repurchase lines of credit to Mortgage
Lenders ("Sellers"), who are in search of a reliable Warehouse Lender. IWF's
repurchase lines of credit provide Sellers with the ability to do same day
closings and sell such residential mortgage loans in the secondary market.
96
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000 IWF had total commitments and gross loans outstanding
of $154.9 million and $50.6 million, respectively. At December 31, 1999 IWF
had total commitments and gross loans outstanding of $300.4 million and $78.1
million, respectively.
Loan Participation and Investment Group
The Loan Participation and Investment Group ("LPIG") was formed by SPB in
September 1995. This Group invested in and purchased senior secured debt of
other companies (referred to as a "participations") in the secondary market.
We stopped originating any new commitments for LPIG in the third quarter of
1999 since we believe that the capital that is currently being deployed at SPB
to support LPIG's business could be more profitably used in other core
businesses. As such, we anticipate that the current outstanding balance of
LPIG's loans will decrease over time as this portfolio runs-off. At December
31, 2000, LPIG had total commitments and gross outstanding loans of $289.1
million and $123.5 million, respectively, as compared to $459.5 million and
$217.0 million, respectively at December 31, 1999.
The Lewis Horwitz Organization
On October 1, 1999, we purchased from Imperial Bank substantially all of
the assets and assumed certain liabilities of The Lewis Horwitz Organization
("LHO"). The acquisition was accounted for as a purchase, and the purchase
price of $31.5 million was allocated to the net assets acquired based on their
fair values resulting in goodwill of $17.3 million.
LHO lends to independent producers of film and television, many of which
are located in California. LHO, however, has borrowing clients based all over
the world. Independent producers tend to be those producers that do not have
major studio distribution outlets for their product. Large film and television
studios generally maintain their own distribution outlets and finance their
projects with internally generated financing. In addition to funding
production loans against a number of distribution contracts, LHO has pioneered
a conservative valuation of selected unsold rights to cover a portion of the
production budget (gap). At December 31, 2000, LHO had total commitments and
gross outstanding loans of $101.4 million and $83.7 million, respectively, as
compared to $23.1 million and $15.8 million, respectively at December 31,
1999.
Imperial Business Credit, Inc.
Imperial Business Credit, Inc. ("IBC") is a wholly owned subsidiary located
in San Diego, California. The focus of IBC's lease activities had historically
been equipment lease financing to small and medium-sized businesses. During
the first quarter of 2000, defaults on leases originated through IBC's broker
and small-ticket lease programs continued at a high level. It was determined
that IBC could not make the returns necessary to continue in business as an
originator of new leases and the origination offices were closed or sold.
IBC is continuing as a lease portfolio servicing entity by servicing its
existing portfolio and a new portfolio originated by Southern Pacific
BanCapital ("SPBC"), an affiliated company. IBC, SPB and SPBC are parties to a
master servicing agreement that enumerates the responsibilities and
obligations of IBC in servicing the leases originated by SPBC. In general,
SPBC originates leases that are funded by SPB and IBC is contracted as the
servicer. The servicer duties include: generation of invoices, tax compliance,
cash application, accounting, reporting and collection activity. In exchange
for services performed, IBC receives a fee of 0.40% per annum based on the
gross receivables of the lease portfolio being serviced for SPBC and 1.15% per
annum for the leases previously funded through IBC's securitization facility.
In addition, IBC is generally entitled to receive all late fees and other
miscellaneous fees related to the entire serviced portfolio.
IBC's lease originations were $30.9 million and $125.2 million, and it
securitized and sold $43.6 million and $132.4 million during the years ended
December 31, 2000, and 1999, respectively. At December 31, 2000 and 1999, IBC
serviced a total of $170.8 million and $243.5 million of leases, respectively.
97
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Property Lending Division
The Income Property Lending Division ("IPL") of SPB was formed in February
1994 to expand our apartment and commercial property lending business. As of
December 31, 2000, it had 6 loan origination offices in California, Illinois,
Utah and Florida. At December 31, 2000 and 1999, IPL's gross loans outstanding
were $364.2 million and $254.1 million, respectively. For the year ended
December 31, 2000 and 1999, IPL originated $235.9 million and $339.7 million
of loans, respectively.
Imperial Credit Lender Services, Inc.
In July 1998, ICII acquired the assets of Imperial Credit Lender Services,
Inc. ("ICLS") formerly Statewide Documentation, Inc., for a purchase price of
$5.0 million worth of ICII common stock. ICLS initially began its operations
in 1981. Its primary business is providing loan documentation preparation and
loan closing services nationwide. Additionally, ICLS provides national notary
and recording services. During 2000, we wrote off $4.1 million of goodwill
attributable to ICLS, and in February of 2001, the Company disposed of ICLS
for its remaining net book value.
Imperial Credit Asset Management, Inc.
Imperial Credit Asset Management, Inc. ("ICAM") was formed in April 1998.
ICAM manages Pacifica Partners I L.P., Cambria Investment Partnership I, L.P.,
and Catalina Investment Partnership I, L.P. Pacifica Partners I is a
collateralized loan obligation fund the Company launched in August 1998.
Pacifica Partners I's assets consist of nationally syndicated bank loans and
high yield bonds. Cambria is a hedge fund that invests in syndicated bank
loans.
Imperial Credit Commercial Asset Management Corp.
In October 1997, Imperial Credit Commercial Mortgage Investment Corp.
("ICCMIC") completed its initial public offering and sold approximately 34.5
million shares of common stock at $15.00 per share resulting in net proceeds
of approximately $481.2 million. The Company purchased 2,970,000 shares of
ICCMIC common stock in the offering and an additional 100,000 shares in
December 1997 for a total of $43.0 million. In 1999, we sold 500,000 shares of
ICCMIC common stock at $10.88 per common share, generating net proceeds of
$5.4 million, resulting in a gain on sale of securities totaling $562,000. As
of December 31, 1999, the Company owned 9.0% of the common stock of ICCMIC.
ICCAMC, a wholly-owned subsidiary, managed the day to day operations ICCMIC
through October 22, 1999, an investment trust which invested primarily in
performing multifamily and commercial real estate loans and mortgage-backed
securities. For the year ended December 31, 1999, ICCAMC earned $5.9 million
and $6.3 million, respectively, in gross management fees from ICCMIC. In
addition, the Company has received cash dividends of $3.1 million and $3.6
million during the years ended December 31, 1999 and 1998, respectively.
During the third quarter of 1998 the market value of the Company's equity
holdings in ICCMIC declined substantially to $9.75 per common share as
compared to the Company's book value of $13.98 per common share. In the third
quarter of 1998, we recorded an impairment charge of $13.0 million due to the
other-than-temporary decline in the value of our ICCMIC stock.
On March 28, 2000, we completed the acquisition of ICCMIC. We paid ICCMIC's
stockholders (other than the 2,570,000 shares already owned by ICII)
approximately $11.57 per share in cash. The total purchase price paid by the
company was approximately $300.1 million. The Company's 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 acquisition, the Company incurred total
severance and incentive costs of approximately $9.4 million. We acquired gross
assets at ICCMIC of $443.7 million and assumed liabilities of $69.6 million.
The merger was accounted for as a purchase and resulted in the generation of
negative goodwill of $29.2 million.
98
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The negative goodwill generated by the acquisition is not subject to income
taxes and increased the Company's tangible book value by $0.74 per share at
December 31, 2000. The company is accreting the negative goodwill into income
over five years.
Imperial Capital Group, LLC
In 1996, the Company acquired a 1% interest in Dabney/Resnick/Imperial LLC
("DRI"), an investment banking firm located in Beverly Hills, California and
purchased a warrant to acquire an additional 48% ownership. During the fourth
quarter of 1997, the Company formed a new subsidiary, ICG, which includes a
registered broker/dealer and an asset management company offering individual
and corporate investors a wide range of financial products and services.
During the year ended December 31, 2000 and 1999, ICG raised $337.6 million
and $137.3 million for corporate clients through private placement debt and
equity offerings generating investment banking and brokerage fees of $30.0
million and $27.2 million, respectively. During the fourth quarter of 2000,
the Company reduced its ownership percentage in ICG from 63.2% to 38.5%
through the sale of a part of its equity interest directly to ICG and to
certain management members of ICG. The Company generated gross proceeds from
the sale of $2.7 million, and received $885,000 in cash and $1.8 million in
the form of a short-term note. The Company's investment in and income from ICG
is accounted for by the equity method of accounting beginning with the quarter
ended December 31, 2000.
Franchise Mortgage Acceptance Company
On March 11, 1999, FMC and Bay View Capital Corporation ("Bay View")
announced that they had executed a definitive merger agreement providing for
the merger of FMC with Bay View. This agreement included selling our 38.3%
ownership in FMC to Bay View. In accordance with the terms of the definitive
agreement, Bay View acquired all of the common stock of FMC. Each share of FMC
common stock was converted into, at the election of the holder, either $9.80
in cash, or .5444 shares of Bay View's common stock. On November 1, 1999, the
merger between FMC and Bay View was completed. We received $27.7 million in
cash and 4.4 million shares of Bay View common stock from the sale and
exchange of our 38.3% interest in FMC. On November 5, 1999, we announced the
sale of 4,342,451 shares of our Bay View common stock. As a result of these
transactions, we received approximately $86.3 million in total cash proceeds
and recorded a gain on sale of $30.1 million.
Southern Pacific Funding Corporation
In 1996, a substantial portion of the Company's operations were conducted
through its sub-prime residential lending subsidiary, Southern Pacific Funding
Corporation ("SPFC"). In June 1996, SPFC completed an initial public offering
of its common stock pursuant to which ICII was a selling shareholder.
On October 1, 1998, SPFC petitioned for Chapter 11 bankruptcy protection
under the Federal bankruptcy laws in the U.S. Bankruptcy Court for the
District of Oregon. As a result of SPFC declaring Chapter 11 bankruptcy and
the resultant decline in its common stock to below one dollar per share, the
Company wrote-off its total investment in and loan to SPFC. The write-off was
$82.6 million for the year ended December 31, 1998.
3. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. In
preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent liabilities as of the dates of the
balance sheets and revenues and expenses for the periods presented.
Significant balance sheet items which could be materially affected by such
estimates
99
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
include: the allowance for loan and lease losses, securities held for sale or
available for sale, the deferred tax asset and the carrying value of the
Company's trading securities, securitization related assets and loans held for
sale. Actual results could differ significantly from management's estimates.
Prior years' consolidated financial statements have been reclassified to
conform to the 2000 presentation. The deconsolidation of ICG in the
fourth quarter of 2000 affects the comparability of financial statements
between periods.
Investment Securities
The Company classifies investment securities as trading or available for
sale. Securities held for trading are reported at fair value with unrealized
gains and losses included in operations, and securities available for sale are
reported at fair value with unrealized gains and losses, net of related income
taxes, included as a separate component of shareholders' equity in accumulated
other comprehensive income.
Realized gains and losses on investment securities are included in income
and are derived using the specific identification method for determining the
cost of securities sold.
Premiums and discounts are amortized over the life of the securities by use
of the interest method. When a decline in value of a security is judged to be
other than temporary, it is written down to fair value by a charge to
earnings.
Loans and Leases Held for Sale
Loans and leases held for sale are carried at the lower of aggregate cost
or market, which is based on sale commitments, discounted cash flow analysis
or prices for similar products. Loans and leases which are ineligible for
sale, generally those 90 days past due, are transferred to loans held for
investment at the lower of cost or market on the date of transfer.
Loans and Leases Held for Investment
Loans and leases held for investment are recorded at the contractual
amounts owed by borrowers adjusted for unamortized discounts, premiums,
unearned income, undisbursed funds, deferred loan fees and the allowance for
loan and lease losses. Interest income is recorded on the accrual basis in
accordance with the terms of receivables, except that interest accruals are
discontinued when the payment of principal or interest is 90 or more days past
due or when repayment of principal and interest in full is doubtful. In
general, payments received on non-accrual loans are applied to the principal
outstanding until the loan is restored to accrual status.
A loan is impaired when it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The measurement of impairment may be based on (i) the present value
of the expected future cash flows of the impaired loan discounted at the
loan's original effective interest rate, (ii) the observable market price of
the impaired loan or (iii) the fair value of the collateral. If the recorded
investment of the loan exceeds the measure of impairment, a valuation
allowance is recorded in the amount of the excess. For all loans secured by
real estate, the Company measures impairment by utilizing the fair value of
the collateral; for other loans, discounted cash flows are used to measure
impairment. The Company's income recognition policies for impaired loans are
consistent with those on non-accrual loans. All loans designated as impaired
are either placed on non-accrual status or are designated as restructured.
Payments received on impaired loans are applied to the principal outstanding
until the loan is returned to accrual status.
On an ongoing basis, management monitors the loan and lease portfolio and
evaluates the adequacy of the allowance for loan and lease losses. In
determining the adequacy of the allowance for loan and lease losses,
management considers such factors as historical loss experience, underlying
collateral values, known problem loans, evaluations made by bank regulatory
authorities, assessment of economic conditions and other appropriate data to
identify the risks in the loan and lease portfolio. The amount of the
allowance for loan and lease losses is
100
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
based on estimates and ultimate losses may vary from current estimates. Loans
deemed by management to be uncollectible are charged to the allowance for loan
and lease losses. Recoveries on loans previously charged off are credited to
the allowance for loan losses. Provisions for loan and lease losses are
charged to expense and credited to the allowance for loan and lease losses in
amounts that satisfy regulatory requirements and are deemed appropriate by
management based upon its evaluation of the known and inherent risks in the
portfolio.
Management believes that the allowance for loan and lease losses is
adequate. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the SPB allowance for
loan losses. Such agencies may require SPB to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
Servicing Assets
Servicing assets are recorded when the Company sells or securitizes loans
or leases and retains the servicing rights. The total cost of the mortgage
loans is allocated to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. Purchased
servicing rights represent the cost of acquiring the rights. Servicing rights
are amortized in proportion to, and over the period of, estimated future net
servicing income.
The Company assesses the servicing rights portfolio for impairment based on
the fair value of those rights with any impairment recognized through a
valuation allowance. In order to determine the fair value of the loan
servicing assets, the company uses market prices under comparable servicing
sales contracts, when available. Alternatively, it uses a valuation model that
calculates the present value of future cash flows. Assumptions used in the
valuation model include market discount rates, estimated default rates and
estimated prepayment speeds. Prepayment speeds and default estimates are based
on the actual prepayment and default histories of the underlying loan or lease
pool.
Retained Interest in Loan and Lease Securitizations
Securitization interests retained by the Company as a result of
securitization transactions are held as either available for sale or trading.
The Company may create retained interests in loan and lease securitizations as
a result of the sale of loans and leases into securitization trusts. Loan and
lease securitizations have specific credit enhancement requirements in the
form of over collateralization which must be met before the Company receives
cash flows due. As the securitized assets generate excess cash flows, they are
initially used to pay down the balance of the pass-through certificates until
such time as the ratio of securitized assets to pass-through certificates
reaches the over collateralization requirement specified in each
securitization.
This over collateralization amount is carried on the balance sheet as
retained interest in loan and lease securitizations. After the over
collateralization requirement and the other requirements specified in the
pooling and servicing agreement have been met, the Company begins to receive
the cash flows from any subordinated bonds or residual interests retained on a
monthly basis. Retained interest in loan and lease securitizations is
classified as a trading asset. To the extent that the future performance
results are less than the Company's initial performance estimates, the
Company's retained interest in loan and lease securitizations will be written
down through a charge to operations. Accretion of income under the interest
method on retained interest in securitizations is included in the caption
"Interest on other finance activities" in the accompanying consolidated
statements of operations and comprehensive income (loss). In determining the
estimated fair values of the retained interest in loan and lease
securitizations, the Company estimates the cash flows received by the Company
after being released by the respective trust and discounts such cash flows at
interest rates determined by management to be rates market participants would
use in similar circumstances.
101
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loan and Lease Sales and Related Gain or Loss
Loans and leases are sold through either securitizations with servicing
retained by the Company or whole loan sales. Securitizations typically require
credit enhancements in the form of cash reserves or over collateralization
that are reflected as retained interest in loan and lease securitizations on
the consolidated balance sheet. Sales are recognized when the transaction
settles, the risks and rewards of ownership are determined to have been passed
to the purchaser and consideration, other than beneficial interests in the
assets sold, is received.
Gain is recognized to the extent that the selling prices exceed the
carrying value of the loans sold based on the estimated relative fair values
of the assets transferred, assets obtained and liabilities incurred. The
assets obtained in a sale include, generally, retained interest in loan and
lease securitizations, loan servicing assets, and call options. Liabilities
incurred in a sale include, generally, recourse obligations, put options, and
servicing liabilities. In the securitizations completed to date, the Company
retained call options giving it the right to repurchase loans sold when the
outstanding amount of such loans is 1% to 10% or less of the original amount
sold, depending on the terms of the related securitization. As these call
options are equivalent to a cleanup call, the Company has ascribed no value to
them. The securitizations completed to date had no put option features.
Loan Origination Fees
Origination fees received on loans held for sale, net of direct costs
related to the origination of the loans, are deferred until the time of sale
and are included in the computation of the gain or loss on the sale of the
related loans. Commitment fee income is deferred until each loan is funded and
sold, and recorded as a part of the gain on sale of the loan in the same
percentage as such loan is to the total commitment. Any remaining deferred
commitment fee income is recognized at expiration of the commitment. When
exercise of such commitment is deemed remote, the fee is recognized over the
remaining commitment period.
Origination fees on loans held for investment, net of direct costs related
to the origination of the loans, are deferred and amortized over the
contractual lives of the related loans using the interest method. When a loan
is classified as a non-accrual loan, the related net deferred origination fees
are no longer accreted to income.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation on premises and equipment is recorded using the
straight-line method over the estimated useful lives of individual assets (3
to 7 years). Leasehold improvements are amortized over the terms of their
related leases or the estimated useful lives of improvements, whichever is
shorter.
Interest Bearing Deposits
Interest bearing deposits consist of time certificates, investment in
federal funds and money market accounts. Amounts are carried at cost which
approximates market value.
Real Estate and Other Assets Owned
Foreclosed real estate is transferred from the loan portfolio at the lower
of the carrying value of the loan or net fair value of the property less
estimated selling costs and is classified as other real estate owned ("OREO").
The excess carrying value, if any, of the loan over the estimated fair value
of the collateral based on appraisal or broker opinion of value less estimated
selling costs is charged to the allowance for loan losses. Any subsequent
impairments in value are recognized through a valuation allowance. Gains and
losses from sales of OREO, provisions for losses on OREO, and net operating
expenses of OREO are recorded in operations and included in the caption "net
expenses of other real estate owned" in the accompanying consolidated
statements of operations and comprehensive income (loss).
102
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company files a combined California franchise tax return and a
consolidated Federal income tax return with all of its operating subsidiaries
except ICG. The Company accounts for income taxes using the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Goodwill
Goodwill is amortized on a straight-line basis over its estimated useful
life of 15 years. Negative goodwill is amortized over 5 years. Goodwill is
reviewed for possible impairment when events or changed circumstances may
affect the underlying basis of the asset. Impairment is measured by
discounting operating income of the related entity at an appropriate discount
rate. Impairment charges of $11.3 million in 1999 and $4.1 million in 2000
related to goodwill at IBC and ICLS, respectively are classified as
amortization of goodwill. At December 31, 2000 and 1999, Goodwill is presented
net of accumulated amortization of $23.3 million and $21.9 million,
respectively.
Debt Issue Costs
Capitalized debt issue costs are included in Other Assets and are amortized
to interest expense over the life of the related debt using the interest
method.
Total Rate of Return Swaps
During 2000, 1999 and 1998, we entered into total rate of return swap
contracts for investment purposes with various counter parties, the provisions
of which entitle our company to receive the total return on various commercial
loans in exchange for a floating payment of one month LIBOR plus a spread.
These contracts are off balance sheet instruments. The deposits on these
instruments along with the mark-to-market balances are classified as trading
securities and are carried at estimated fair value.
As of December 31, 2000, 1999 and 1998, we were party to total rate of
return swap contracts with a total notional amount of $65.2 million, $83.6
million and $280.4 million, respectively, under which our company was
obligated to pay one month LIBOR plus a weighted average spread of 0.88%. The
weighted average remaining life of these contracts was 51.2 months, 60.0
months and 31.2 months as of December 31, 2000, 1999 and 1998. For the years
ended December 31, 2000 and 1999, we recognized $2.7 million and $2.9 million
in interest income on these total return swaps and ($3.8) million and $197,000
in net mark-to-market gains or (losses), respectively. The cash flows from
these swaps are generated by investments in nationally syndicated bank loans
which globally have experienced high default rates in the year ended December
31, 2000. However, during the year ended December 31, 2000, there were no
defaults of loans held by the Trust. Additionally, credits in the swaps are
subject to market price risk, and as such could result in significant gains or
losses to our company. The mark to market losses primarily relate to the
depressed secondary market for nationally syndicated loans resulting in
decreased market prices for these loans.
We invested in the subordinated and equity interests of Pacifica Partners I
through a total return swap. The provisions of the swap entitle the Company to
receive the total return on the subordinate bonds delivered and pay a floating
payment of LIBOR plus a weighted average spread of 0.075% as of December 31,
2000. The recoverability of this asset is dependent upon the future cash flows
from Pacifica Partners I. These cash flows come from investments in nationally
syndicated bank loans and high yield bonds which have experienced high
103
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
default rates in the year ended December 31, 2000. During 2000, the cash flows
received by the Company increased to $5.1 million from $3.4 million. This
increase primarily relates to increasing interest rate spreads on the loans
partially offset by an increase in defaults. At December 31, 2000 and 1999,
$59.1 million and $38.2 million was outstanding and classified as Trading
Securities on the consolidated balance sheet.
The Company's cash collateral held by the counter parties is included in
trading securities. Net income or expense on these contracts is included in
interest income, and the contracts are carried at their estimated fair values.
Equity Investments
Equity investments are carried under the equity method of accounting.
Accordingly, the Company records as a part of its earnings its ownership
percentage of the equity investment's net income. Dividends received from such
subsidiaries, if any, are credited to the investment balance and not recorded
as earnings.
The Company records gains from the sale of stock in subsidiaries carried
under the equity method based on the difference between the Company's equity
ownership after the sale and such equity ownership prior to the sale, using
the Company's respective ownership percentages. Deferred income tax
liabilities on such gains are accrued at the time such gains are recognized.
During the third quarter of 1999, the Company determined that we did not
have the ability to exercise significant influence over FMC, and therefore, we
changed to the cost method of accounting for this investment.
Stock Based Compensation
As permitted by SFAS No. 123, "Accounting for Stock Based Compensation",
the Company accounts for stock based employee compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. The Company provides the pro forma
and plan disclosures as set forth in SFAS 123.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances, excluding those resulting from investments by and distributions
to owners. Comprehensive income generally includes net income, foreign
currency items, minimum pension liability adjustments, and unrealized gains
and losses on investments in certain debt and equity investments (i.e.,
securities available for sale).
Loss Per Share
Loss per share for 2000, 1999 and 1998 was calculated using the weighted
average number of shares outstanding for the respective year end periods. The
following table reconciles the number of shares used in the computations of
basic and diluted loss per share for the years ended December 31:
2000 1999 1998
---------- ---------- ----------
Weighted-average common shares outstanding
during the year used to compute basic and
diluted loss per share................... 32,573,119 34,517,165 38,228,325
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
104
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and for hedging activities. This statement is 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", which amends
SFAS No. 133. This statement is expected to primarily impact the Company's
investments in total return swaps. See Footnote 3. "Summary of Significant
Accounting Policies--Total Rate of Return Swaps." On January 1, 2001, the
Company implemented this statement without a material impact on the Company.
In September 2000, the FASB issued SFAS no. 140, "Accounting for transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS
140). SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," establishes accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of financial-components approach that focuses on control. SFAS No.
140 requires a debtor to (a) reclassify financial assets pledged as collateral
and report those assets in its statement of financial condition separately
from those assets not so encumbered if the secured party has the right by
contract or custom to sell or repledge the collateral and (b) disclose assets
pledged as collateral that have been reclassified and separately reported in
the statement of financial condition. This statement is effective for
recognition and reclassification of collateral and for disclosures relating to
securitizations and collateral for fiscal years ending after December 15,
2000. Disclosures about securitizations and collateral accepted need not be
reported for periods on or before December 15, 2000, for which financial
statements are presented for comparative purposes. Adoption is not expected to
have a material impact on the Company.
4. Bank Regulatory Matters
Southern Pacific Bank (the "Bank") is subject to federal and state
regulation and periodic examinations by the DFI and the FDIC. The Bank's
ability to pay dividends is subject to prior approval of the FDIC and the DFI,
as more fully explained below.
California Regulations
The Bank is subject to the general limitations on the payment of dividends
applicable to corporations under the California Corporations Code. The
California Financial Code authorizes the Commissioner of the DFI to set
capital requirements for industrial banks. Failure to meet minimum capital
requirements of the DFI can lead to certain restrictions similar to those
described below, including imposition of a receivership or conservatorship.
FDIC Regulations
The Bank also is subject to capital requirements set by the FDIC. Failure
to meet minimum capital requirements can initiate certain mandatory--and
possibly additional discretionary--actions by the FDIC that, if undertaken,
could have a direct material effect on the Bank's consolidated financial
statements. Under risk-based capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the FDIC with respect to components, risk
weightings and other factors. Quantitative measures established by regulation
to ensure capital adequacy require the Bank to maintain minimum amounts and
ratios, set forth in the table below, of total risk-based capital, risk-based
tier-1 capital to risk-weighted assets and risk-based tier-1 capital to
average assets.
The prompt corrective action regulations of the FDIC define specific
capital categories based on a bank's capital ratios. The capital categories,
in declining order, are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." Banks such as SPB categorized as "undercapitalized" or
worse are subject to certain restrictions, including the requirement to file a
capital plan with the primary federal regulator, prohibitions on the payment
of dividends and management fees,
105
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
restrictions on executive compensation, and increased supervisory monitoring,
among other things. Other restrictions may be imposed on the bank either by
its primary regulator or by the FDIC, including requirements to raise
additional capital, sell assets, or sell the entire bank. Once a bank becomes
"critically undercapitalized" it must generally be placed in receivership or
conservatorship within 90 days.
To be considered "adequately capitalized," a bank must generally have a
leverage ratio of at least 4%, a Tier 1 risk-based capital ratio of at least
4%, and a total risk-based capital ratio of at least 8%. An institution is
deemed to be "critically undercapitalized" if it has a tangible equity ratio
of 2% or less.
At December 31, 2000, the Bank was "undercapitalized" according to the
FDIC's regulatory framework. The following table sets forth the capital
categories and the Bank's ratios as of December 31, 2000:
Risk-based Capital Risk-based
Capital Category Ratio Tier I Capital Ratio FDIC Leverage Ratio
---------------- --------------------- -------------------- --------------------
Well capitalized........ (greater than or =)10% (greater than or =)6% (greater than or =)5%
Adequately capitalized.. (greater than or =)8% (greater than or =)4% (greater than or =)4%
Undercapitalized........ < 8% < 4% < 4%
Significantly
undercapitalized....... < 6% < 3% < 3%
--------------------- -------------------- --------------------
Southern Pacific Bank,
at December 31, 2000... 6.59% 3.54% 3.46%
===================== ==================== ====================
The Bank's actual capital amounts and ratios are summarized as follows:
At December 31, 2000
-------------------------------------------------
Adequately
Capitalized Well Capitalized
Actual requirement requirement
-------------- -------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- --------- -------
(Dollars in thousands)
Risk-based Capital....... $121,833 6.59% $149,474 8.00% $ 186,842 10.00%
Risk-based Tier 1
Capital................. $ 65,497 3.54% $ 74,737 4.00% $ 112,105 6.00%
FDIC Leverage Ratio...... $ 65,497 3.46% $ 75,802 4.00% $ 94,752 5.00%
At December 31, 1999
-------------------------------------------------
Adequately
Capitalized Well Capitalized
Actual requirement requirement
-------------- -------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- --------- -------
Risk-based Capital....... $219,278 10.67% $164,445 8.00% $ 205,557 10.00%
Risk-based Tier 1
Capital................. $160,018 7.78% $ 82,223 4.00% $ 123,334 6.00%
FDIC Leverage Ratio...... $160,018 8.94% $ 71,610 4.00% $ 89,512 5.00%
Regulatory Actions
The Bank, in December 2000, consented to the issuance by the FDIC of an
order (the "FDIC Order") to cease and desist from what the FDIC alleges to be
certain unsafe and unsound practices relating to the Bank's operations. The
Bank also has consented to the DFI's similar, though not identical, order (the
"DFI Order" and together with the FDIC Order, the "Orders"). The Bank has not
admitted or denied the claimed basis of the FDIC or DFI for the Orders, but
intends to comply fully with their respective requirements.
106
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Orders set forth certain requirements with which the Bank must comply,
including the following:
. The Bank is required to have and maintain qualified management, including
a chief executive officer and other persons experienced in lending,
collection and improving asset quality and earnings. Further, during the
effectiveness of the Orders the Bank must obtain the prior approval of
the FDIC and DFI to the appointment of any new director or senior
executive officer for the Bank, and the DFI has the right to determine
whether present members of the Bank's management are acceptable.
. Under the FDIC Order, the Bank must increase its equity capital by $19
million by March 31, 2001, and by an additional $20 million in stages
through December 31, 2001. The Bank must also attain a total risk based
capital ratio of 10.50% and a Tier 1 capital ratio of 8.00% by March 31,
2001 and must increase those ratios, in stages through December 31, 2001,
to 12.00% and 9.00%, respectively. Under the DFI Order, the Bank is
required by March 31, 2001 to increase its adjusted tangible
shareholder's equity by $29 million and by an additional $15 million
through June 30, 2001. Also, by March 31, 2001, the Bank must attain an
adjusted tangible shareholder's equity of at least 7.00% of its adjusted
tangible total assets, and must increase this ratio by 0.50% each quarter
to 8.50% at December 31, 2001. The DFI Order would limit the maximum
amount of the Bank's deferred tax assets that may be included in the
adjusted tangible shareholder's equity calculation to the lesser of (x)
the amount of deferred tax assets that are dependent upon future taxable
income expected to be received within one year or (y) 10% of adjusted
tangible shareholder's equity existing before any disallowed deferred tax
assets. The Bank was not in compliance with this requirement at March 31,
2001.
. The required increases in capital may be accomplished through capital
contributions by ICII to the Bank, the sale of common stock or
noncumulative perpetual preferred stock of the Bank, the exchange of Bank
debt held by ICII for such preferred stock, or any other means acceptable
to the FDIC and the DFI. The Bank must adopt and implement a capital plan
acceptable to the FDIC and the DFI to achieve and maintain these capital
requirements.
. Within 10 days of the effective dates of the Orders, the Bank must
eliminate all assets that were classified as "Loss" and one-half the
assets classified "Doubtful" as of March 31, 2000, or as of June 26, 2000
under the FDIC Order, and reduce by March 31, 2001 its assets that were
classified as "Substandard" or "Doubtful", as of June 26, 2000 to not
more than $90 million. The Bank has already satisfied the requirements of
March 31, 2001 by charging off or collecting certain of those assets. The
Bank also must reduce by June 30, 2001 and September 30, 2001 its assets
that were classified "Substandard" or "Doubtful" as of June 26, 2000 to
not more than $70,000,000 and $50,000,000, respectively.
. Under the FDIC Order, the Bank may not extend additional credit to any
borrower that has a loan or other credit from the Bank that has been
charged off or classified "Loss" or "Doubtful", in whole or part, and is
uncollected. With certain exceptions, the Bank is restricted from
extending additional credit to any borrower with a Bank loan or other
credit that has been charged off or classified "Substandard", in whole or
part, and is uncollected.
. The Bank must revise, adopt and implement policies acceptable to the FDIC
and the DFI regarding its lending and loan review procedures,
transactions with insiders and affiliates, and its requirements for
reporting lending practices and other strategies to the Bank's chief
executive officer. The Bank's Board must also review the adequacy of the
Bank's allowances for loan and lease losses and adopt a policy for
regularly determining the adequacy of such allowances.
. The Bank must develop and adopt a detailed business plan acceptable to
the FDIC and the DFI to control overhead and other expenses and restore
the Bank to a sound condition.
. The Bank must provide quarterly progress reports to the FDIC and DFI
regarding its actions to comply with the Orders.
107
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. The Bank may not pay any cash dividends, make any other shareholder
distributions or pay bonuses to its executive officers without the prior
approval of its regulators, nor may it engage in any new lines of
business without the prior approval of the FDIC and the DFI.
The Bank and ICII already have taken a number of actions that are intended
to enable the Bank to comply with the requirements of the Orders. However,
these actions may not succeed in enabling the Bank to comply with such
requirements and the Bank's ability to comply may be subject to events outside
the control of the Bank and ICII, such as capital market trends and general
economic conditions. The actions undertaken include:
. ICII exchanged $9.0 million of SPB's subordinated debt and contributed
$5.0 million in cash in exchange for 50,000 shares of the Bank's Series A
noncumulative perpetual preferred stock.
. ICII and the Bank have developed a capital plan intended to achieve the
FDIC and DFI capital requirements by selling certain non-core assets of
the Bank and ICII, reducing the assets of the Bank, exchanging additional
Bank subordinated debt held by ICII for noncumulative perpetual preferred
stock of the Bank, and the making by ICII of additional capital
contributions to the Bank.
. In order to assist SPB in meeting the requirements of the Orders with the
FDIC and the DFI, ICII has retained financial advisors to evaluate
capital raising alternatives that may be available to ICII and the Bank,
and to assist in the implementation of the Bank's capital plan.
. The Bank has made changes in its management to address the requirements
of the Orders and contemplates further changes as required, including the
employment of additional experienced credit administration personnel.
. The Bank has adopted and implemented new policies and procedures in its
lending, credit administration and lending review areas.
. The Bank has developed detailed business plans which address marketing,
asset diversification, credit administration, management oversight, non-
accrual and classified assets and operating efficiencies among other
items.
ICII and the Bank are in the process of revising their capital plan that
was submitted to the FDIC and the DFI. Such capital plan has not yet been
approved by the FDIC and the DFI. The plan indicates that the Bank will not
meet any of the above cited capital ratio targets at the indicated dates.
However, the preliminary revised plan does indicate that the Bank's capital
ratios at December 31, 2001, will qualify it to be categorized as "well
capitalized" at that time. At this time, the financial impact, if any, of
regulatory actions that may result from the failure of the Bank to meet the
minimum capital requirements of the orders cannot be determined. Although such
capital infusions and conversions caused the Bank's capital ratios to be above
those required by statute to be considered "adequately capitalized," the Bank
does not meet the capital ratio targets specified by the Orders. An additional
approximately $41 million would have had to be contributed to cause the Bank
to meet the capital ratio targets specified by the Orders at March 31, 2001.
The accompanying financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Achievement of the capital plan depends on future events and circumstances,
the outcome of which cannot be assured. Nevertheless, management believes, at
this time, that the Bank will meet all the provisions of the preliminary
revised capital plan and that the Bank will qualify to be classified as "well
capitalized" at December 31, 2001. The preliminary revised capital plan
includes the following elements determined by management to be necessary to
meet the regulatory capital requirements cited above:
. Cash capital contributions by ICII;
. Conversion of Bank subordinated debt owned by ICII into preferred stock;
. Restoration of a portion of the Bank's deferred tax asset as allowed by
regulations;
108
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. Reductions in problem assets and related loan loss provisions; and
. Return to profitable operations.
On March 30, 2001, SPB's parent company ICII contributed $21.2 million in
cash, all of which was in the form of Tier 1 capital. Additionally, ICII
converted $22.0 million of SPB's subordinated debt into non cumulative
perpetual preferred stock of SPB. These capital infusions and conversions, in
addition to earnings at SPB subsequent to December 31, 2000 (unaudited),
restored SPB's capital to amounts above the "adequately capitalized" minimums
of 4% and 8%, respectively, as defined by banking regulations. Each regulatory
agency has available various remedies, including enforcement actions and
sanctions. Among other sanctions, if the Bank is unable to meet its regulatory
capital requirements, or is determined to have other serious regulatory or
supervisory problems, the FDIC and/or the DFI could place the Bank in
conservatorship or receivership.
5. Investment in FHLB Stock
As a member of the FHLB system, the Company's wholly owned subsidiary, SPB,
is required to maintain an investment in the capital stock of the FHLB in an
amount at least equal to the greater of either 1% of residential mortgage
assets or 5% of outstanding borrowings (advances). FHLB stock and loans are
pledged to secure FHLB advances. The Bank was in compliance with this
requirement with an investment in FHLB stock at December 31, 2000 and 1999 of
$4.1 million and $7.0 million, respectively. FHLB stock is recorded at
historical cost.
6. Trading Securities
The following table provides a summary of trading securities as of December
31, 2000 and 1999:
2000 1999
-------- --------
(In thousands)
U.S. Treasury Securities.................................. $ 39,438 $ 66,997
FLRT 1996-A interest-only securities...................... 3,971 6,349
SPTL 1997 C-1 interest-only securities.................... 4,457 3,351
SPTL 1996 C-1 subordinate bonds........................... 11,995 --
SPTL 1996 C-1 interest-only securities.................... 1,591 2,279
IBC 1997-2 B-1 and C-1 securities......................... 8,978 12,201
Mortgage-backed securities................................ 489 2,214
Investment in total return swap--Pacifica Partners I LP... 59,129 38,151
Collateral for total return swap--syndicated loans........ 33,667 18,750
Other..................................................... 335 10,513
-------- --------
$164,050 $160,805
======== ========
Gross unrealized gains and losses on trading securities included in income
were $3.8 million and ($12.9) million; $14.6 million and $1.9 million; and $0
and $13.6 million for the years ended December 31, 2000, 1999 and 1998
respectively. The Company also recorded write-downs of retained interests of
$1.8 million, $15.0 million and $4.4 million during the years ended December
31, 2000, 1999 and 1998, respectively.
During the first quarter of 2001, the Company sold one of the FLRT 1996-A
securities, all of the SPTL 1996 C-1 subordinate bonds, and all of the SPTL
1996 C-1 interest-only securities at prices approximating book value.
109
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Securities Available for Sale
The following table provides a summary of securities available for sale
with a comparison of amortized cost and fair values as of December 31, 2000
and 1999:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2000 Cost Gains Losses Value
----------------- --------- ---------- ---------- -------
(In thousands)
Cambria Investment Partnership
leveraged bank debt.............. $ 5,507 $ 862 $ -- $ 6,369
On Stage Entertainment common
stock............................ 715 730 -- 1,445
On Stage Entertainment warrants... 200 122 -- 322
Avalon total return fund.......... 362 -- -- 362
GNMA II MBS....................... 1,561 5 -- 1,566
FNMA MBS.......................... 5,945 -- (69) 5,876
GNMA I MBS........................ 4,317 -- (31) 4,286
GNMA REMIC MBS.................... 42,160 -- (102) 42,058
Other............................. 1,400 -- -- 1,400
------- ------ ------- -------
$62,167 $1,719 $ (202) $63,684
======= ====== ======= =======
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
----------------- --------- ---------- ---------- -------
(In thousands)
ICCMIC common stock............... $25,058 $4,176 $ -- $29,234
Cambria Investment Partnership
leveraged bank debt.............. 10,000 1,581 -- 11,581
Preferred Stock--Auction Finance
Group............................ 6,500 -- -- 6,500
Avalon total return fund.......... 2,164 -- (834) 1,330
Residential mortgage-backed
securities....................... 13,407 83 (662) 12,828
IBC 1997-2 Class A-2 securities... 12,000 -- -- 12,000
Other............................. 901 -- -- 901
------- ------ ------- -------
$70,030 $5,840 $(1,496) $74,374
======= ====== ======= =======
Gross realized gains and (losses) on the sale of available for sale
securities were $507,000 and ($827,000) $100,000 and ($1.6) million and $0 and
($592,000) for the years ended December 31, 2000, 1999 and 1998, respectively.
8. Loans and Leases Held for Sale
Loans and leases held for sale, at the lower of cost or market, consisted
of the following at December 31, 2000 and 1999:
2000 1999
-------- --------
(In thousands)
Loans secured by real estate:
One to four family...................................... $ 5,184 $ 10,095
Multifamily and commercial.............................. 376,116 252,944
-------- --------
381,300 263,039
Installment loans......................................... 5,169 14,058
Leases.................................................... -- 12,301
-------- --------
$386,469 $289,398
======== ========
110
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000 and 1999, loans held for sale were net of a $512,000
and $500,000 lower of cost or market valuation allowance, respectively. Non-
accrual loans are presented in the table above at the lower of cost or market
value.
9. Loans and Leases Held for Investment, net
Loans and leases held for investment consisted of the following at December
31, 2000 and 1999:
2000 1999
---------- ----------
(In thousands)
Loans secured by real estate:
One to four family................................. $ 72,502 $ 93,914
Multifamily........................................ 42,695 35,249
Commercial......................................... 14,025 14,022
---------- ----------
129,222 143,185
Leases............................................... 10,431 1,125
Consumer and auto loans.............................. 3,480 7,072
Franchise loans...................................... 8,797 18,277
Asset-based and cash stream loans.................... 752,883 748,122
Loan participations.................................. 123,471 216,961
Mortgage warehouse lines............................. 50,639 78,068
Film and television productions loans................ 83,688 15,824
Commercial loans..................................... 18,223 48,853
---------- ----------
1,180,834 1,277,487
Loans in process..................................... 11,860 (5,472)
Unamortized premium.................................. 1,341 1,389
Deferred loan fees................................... (7,916) (8,492)
---------- ----------
1,186,119 1,264,912
Allowance for loan and lease losses.................. (63,625) (31,841)
---------- ----------
$1,122,494 $1,233,071
========== ==========
The Company's loans and leases held for investment are primarily comprised
of first and second lien mortgages secured by residential and income producing
real property in California, leases secured by equipment, Asset-based and cash
stream loans to middle market companies mainly in California participations in
nationally syndicated commercial loans in addition to entertainment loans. As
a result, the loan portfolio has a high concentration in the same geographic
region. Although the Company has a diversified portfolio, a substantial
portion of its debtors' ability to honor their contracts is dependent upon the
economy of California. The Company's film and television production loans may
carry inherent currency risks to the degree that underlying distribution
contracts are denominated in foreign currency. The Company may enter into
foreign currency hedge contracts to minimize these risks. At December 31,
2000, the Company did not have any loans secured by distribution rights
denominated in a foreign currency.
111
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Activity in the allowance for loan and lease losses was as follows:
For the Years Ended
December 31,
-----------------------------
2000 1999 1998
--------- -------- --------
(Dollars in thousands)
Beginning balance as of January 1.............. $ 31,841 $ 24,880 $ 26,954
Provision for loan and lease losses............ 180,975 35,340 15,450
Business acquisitions.......................... 534 1,846 --
--------- -------- --------
213,350 62,066 42,404
--------- -------- --------
Loans and Leases charged off--Core Business
Lines:
Multifamily and commercial loans............... (353) (857) (918)
Asset-based and cash stream loans.............. (89,732) (17,530) (112)
Loan participations............................ (32,267) (3,882) --
Mortgage warehouse lines....................... (17,050) (1,625) --
Entertainment loans............................ (1,939) -- --
Commercial and industrial loans................ (810) -- --
Leases......................................... (399) (2,217) (1,496)
Autolend....................................... (950) -- --
--------- -------- --------
(143,500) (26,111) (2,526)
--------- -------- --------
Loans charged off--Non-Core Business:
Franchise loans................................ (3,106) -- --
Single family residential...................... (5,560) (2,960) (4,661)
Consumer loans................................. (580) (2,611) (15,487)
--------- -------- --------
(9,246) (5,571) (20,148)
--------- -------- --------
Total Charge-offs.............................. (152,746) (31,682) (22,674)
--------- -------- --------
Recoveries on loans and leases previously
charged off--Core Business:
Multifamily and commercial loans............... 115 55 142
Asset-based and cash stream loans.............. 831 163 45
Loan participations............................ 16 -- --
Mortgage warehouse lines....................... 639 -- --
Leases......................................... 222 1,086 1,721
--------- -------- --------
1,823 1,304 1,908
--------- -------- --------
Net charge-offs--Core Business Lines........... (141,677) (24,807) (618)
--------- -------- --------
Recoveries on loans previously charged off--
Non-Core Business:
Franchise loans................................ 35 -- --
Single family residential...................... 98 3 2,401
Consumer....................................... 1,065 150 841
--------- -------- --------
1,198 153 3,242
--------- -------- --------
Total recoveries............................... 3,021 1,457 5,150
--------- -------- --------
Net charge-offs--Non-core business lines....... (8,048) (5,418) (16,906)
--------- -------- --------
Total net charge-offs.......................... (149,725) (30,225) (17,524)
--------- -------- --------
Balance as of December 31...................... 63,625 31,841 24,880
Allowance for loan and lease losses at AMN as
of December 31................................ -- 30 857
--------- -------- --------
$ 63,625 $ 31,871 $ 25,737
========= ======== ========
112
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 2000, 1999 and 1998, non-accrual and impaired loans
totaled $78.5 million, $59.4 million, and $39.5 million, respectively.
Interest income foregone on non-accrual loans was $9.0 million, $4.4 million,
and $2.2 million, for the years ended December 31, 2000, 1999 and 1998,
respectively.
At December 31, 2000 and 1999, impaired loans and the related allowance for
loan and lease losses were as follows:
2000 1999
------------------------------ -----------------------------
Specific Specific
Allowance Allowance
Recorded for Carrying Recorded for Carrying
Investment Losses Value Investment Losses Value
---------- --------- -------- ---------- --------- --------
(In thousands)
Continuing operations... $77,813 $(30,169) $47,644 $57,823 $(5,278) $52,545
Discontinued operations
of AMN................. 716 -- 716 1,596 -- 1,596
------- -------- ------- ------- ------- -------
Total impaired loans.. $78,529 $(30,169) $48,360 $59,419 $(5,278) $54,141
======= ======== ======= ======= ======= =======
Impaired loans averaged $87.4 million, $57.5 million and $27.3 million
during 2000, 1999 and 1998, respectively.
10. Retained Interests
The changes in retained interests in loan and lease securitizations are as
follows:
Year Ended
December 31,
-----------------
2000 1999
------- --------
(In thousands)
Beginning Balance....................................... $10,220 $ 27,011
Retained interest received in loan and lease
securitizations........................................ 3,688 4,036
Cash distributions received from trust.................. (2,730) (8,993)
Sales of retained interest.............................. (1,790) (1,797)
Accretion............................................... 1,611 5,009
Mark to market adjustments.............................. (4,669) (15,046)
------- --------
Ending balance.......................................... $ 6,330 $ 10,220
======= ========
Key economic assumptions used in measuring the fair value of retained
interest at the date of securitization are as follows:
Year Ended
December 31,
--------------
2000 1999
------ -------
(In
thousands)
Prepayment speed (annual rate)................................. 5.0% 4%-8%
Weighted-average life (in years)............................... 3.8 3.8
Expected gross credit losses (annual).......................... 9.0% 5%-8%
Retained interest discounted at (per annum).................... 15% 15%
113
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Key economic assumptions used in measuring retained interest are as follow:
Year Ended December 31,
-----------------------
2000 1999
----------- -----------
(In thousands)
Prepayment speed (annual rate)....................... 5.0%-35.0% 4.0%-40.0%
Weighted-average life (in years)..................... 2.4-4.2 2.8-6.8
Expected gross credit losses (annual)................ 1.0%-13.0% 0.05%-9.0%
Retained interest discounted at (per annum).......... 15.0%-28.0% 15.0%-28.0%
At December 31, 2000, the sensitivity of the current fair value of retained
interest to immediate 10 percent and 20 percent adverse changes to assumptions
are as follows:
Balance sheet carrying value of retained interest................... $ 6,330
Prepayment speed assumptions
Impact on fair value of 10% adverse change.......................... (132)
Impact on fair value of 20% adverse change.......................... (269)
Expected credit losses
Impact on fair value of 10% adverse change.......................... (941)
Impact on fair value of 20% adverse change.......................... (1,868)
Residual cash flows discount rate
Impact on fair value of 10% adverse change.......................... (265)
Impact on fair value of 20% adverse change.......................... (514)
The sensitivities noted above are hypothetical and should be used with
caution. As the figures indicate, changes in fair value based on a 10 percent
variation in assumptions generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not
be linear. Also, in this table, the effect of a variation in a particular
assumption on the fair value of the retained interest is calculated without
changing any other assumptions; in reality, changes in one factor may result
in changes in another which might magnify or counteract the sensitivities.
The following table presents retained interest by securitization,
delinquencies and current period net credit loss for the year ended December
31, 2000 (in thousands):
Net Delinquent Credit losses
Principal receivables over net of
Securitized portfolio securitized outstanding 90 days recoveries
--------------------- ----------- ----------- ---------- -------------
IBC 1997-2................ $520,983 $160,316 $2,442 $10,731
Prudential 1994-6......... 45,501 4,281 655 449
-------- -------- ------ -------
Total securitized
portfolio................ $566,484 $164,597 $3,097 $11,180
======== ======== ====== =======
114
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Servicing Rights
Changes in servicing rights were as follows:
Year Ended
December 31,
-----------------------
2000 1999 1998
----- ------- -------
(In thousands)
Beginning Balance.................................. $ 802 $ 4,329 $ 4,731
Additions.......................................... 327 1,061 1,084
Sales of servicing rights.......................... -- (365) --
Amortization....................................... (529) (4,223) (1,486)
----- ------- -------
Ending balance..................................... $ 600 $ 802 $ 4,329
===== ======= =======
The balance of servicing rights is recorded in other assets on the
consolidated balance sheet. The servicing portfolio associated with servicing
rights at December 31, 2000 and 1999 was $103.0 million and $106.0 million,
respectively.
12. Premises and Equipment, net
Premises and equipment consisted of the following at December 31, 2000 and
1999:
2000 1999
-------- --------
(In thousands)
Premises and equipment................................... $ 16,202 $ 18,146
Leasehold improvements................................... 5,296 5,863
-------- --------
21,498 24,009
Less accumulated depreciation and amortization........... (11,065) (10,433)
-------- --------
$ 10,433 $ 13,576
======== ========
13. Discontinued Operations
Auto Marketing Network ("AMN")
As of July 31, 1998 (measurement date), management determined to cease
operations at Auto Marketing Network, Inc. Accordingly, a disposal plan was
formulated, whereby daily operations of AMN were terminated in two months.
Losses from AMN's discontinued operations, net of tax, were as follows:
Disposition Period from
Year Ended Year Ended Period from January 1, 1998
December 31, December 31, August 1, 1998 to to July 31,
2000 1999 December 31, 1998 1998
------------ ------------ ----------------- ---------------
(In thousands)
Loss from discontinued
operations............. $5,218 $899 $ -- $3,232
Loss on disposal of
AMN.................... -- -- 11,276 --
------ ---- ------- ------
Net loss from
discontinued
operations............. $5,218 $899 $11,276 $3,232
====== ==== ======= ======
For 2000, AMN incurred losses of $5.2 million primarily as a result of
valuation reserves for income taxes, legal expenses and mark-to-market
adjustments on AMN securities. During 1999, AMN incurred additional
115
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
operating losses of $899,000, net of income taxes, primarily related to legal
expenses and mark-to-market adjustments on AMN securities. The loss on
disposal of AMN in 1998 included charges (net of taxes) for the following
items: $5.6 million for securities and retained interest valuation, $1.2
million for the disposition of furniture and equipment, $5.6 million for
estimated future servicing obligations to a third party servicer, $1.3 million
in liquidation allowances for non-accrual loans and repossessed autos, $2.1
million in severance pay, occupancy and general and administrative expenses.
The charges in 1998 were partially offset by the estimated net interest income
on loans and securities for the next year (disposition period) of $4.5
million.
The net assets of AMN's discontinued operations were as follows:
At December 31,
---------------
2000 1999
------- -------
(In thousands)
Loans held for sale......................................... $ 2,310 $ 5,207
Securities held for sale.................................... -- 8,685
Retained interests.......................................... 14,002 12,436
Income tax asset............................................ -- 8,971
Other net assets............................................ 1,318 2,193
------- -------
$17,630 $37,492
======= =======
Total non-accrual AMN loans were $716,000 and $1.6 million as of December
31, 2000 and 1999, respectively.
14. Business Segments
Business segment financial information is reported on the basis that is
used internally by management in making decisions related to resource
allocation and segment performance. The company's reportable segments are
operated and managed as strategic business units and are organized based on
products and services. Business units operated at different locations are
aggregated for reporting purposes when their products and services are
similar. The Company's operations are divided into eleven business segments as
follows:
1. Coast Business Credit 6. Income Property Lending Division
2. Imperial Warehouse Finance, Inc. (formerly 7. Asset Management Activities
PrinCap Mortgage Warehouse, Inc.) 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, Inc. 11. De-emphasized/Discontinued/Exited Businesses
For a description of our business segments, see Footnote 2. "Operating
Activities."
116
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following represents the operating results and selected financial data
by major business segments for 2000,1999 and 1998:
At or for the Year Ended December 31, 2000
---------------------------------------------------------------------------------------
Loan
Imperial Participation Imperial Income Imperial
Coast Warehouse and The Lewis Business Property Asset Capital
Business Finance, Investment Horwitz Credit, Lending Management Group, Other Core Equity
Credit Inc. Group Organization Inc. Division Activities LLC Operations Interests
-------- --------- ------------- ------------ -------- -------- ---------- -------- ---------- ---------
(Dollars in thousands)
Total loans,
net............. $707,488 $ 61,935 $112,197 $81,284 $ 89 $374,423 $ 30 $ -- $ 62,515 $--
Total assets.... 851,337 92,480 169,092 120,480 29,954 440,893 477 -- 333,833 --
Total deposits.. 743,666 85,602 158,428 94,515 -- 386,339 -- -- 6,592 --
Interest
income.......... 113,937 6,105 18,589 11,843 2,819 37,639 1 85 13,960 --
Interest
expense......... 53,619 5,306 13,011 6,736 512 25,524 -- 424 24,543 --
Provision for
loan and lease
losses.......... 113,533 18,920 39,291 558 80 2,209 -- -- 263 --
External
revenue......... (43,515) (17,878) (40,293) 4,705 3,865 12,406 3,243 20,927 (789) 479
Inter-company
revenue......... -- -- -- -- 20 -- -- -- 343 --
Inter-company
expense......... -- -- -- -- -- -- 235 -- -- --
Mark to market
on securities
and loans held
for sale........ (801) (70) (3,960) (92) (5,037) (422) -- -- (1,771) --
Equity in net
income of ICG... -- -- -- -- -- -- -- -- -- 479
Total revenue... (43,515) (17,878) (40,293) 4,705 3,885 12,406 3,008 20,927 (446) 479
Depreciation.... 2,111 445 112 135 199 493 479 251 712 --
Amortization of
goodwill........ 1,113 453 -- 924 -- -- -- 71 -- --
Amortization of
servicing
rights.......... -- -- -- -- 529 -- -- -- -- --
Income taxes.... 745 (4,586) (6,824) 645 1,517 2,480 (2,510) -- 11,787 (399)
Net income
(loss) from
continuing
operations...... $(72,094) $(17,706) $(35,070) $ 104 $(5,727) $ 1,582 $(6,994) $2,775 $(27,089) $878
De-
emphasized/
Discontinued/
Exited
Businesses Eliminations Consolidated
------------- ------------ ------------
Total loans,
net............. $151,002 $ (42,000) $1,508,963
Total assets.... 261,607 (172,576) 2,127,577
Total deposits.. 157,562 -- 1,632,704
Interest
income.......... 26,156 (6,309) 224,825
Interest
expense......... 16,847 (6,309) 140,213
Provision for
loan and lease
losses.......... 6,121 -- 180,975
External
revenue......... 11,123 -- (45,727)
Inter-company
revenue......... -- -- 363
Inter-company
expense......... 128 -- 363
Mark to market
on securities
and loans held
for sale........ (657) -- (12,810)
Equity in net
income of ICG... -- -- 479
Total revenue... 10,995 -- (45,727)
Depreciation.... 508 -- 5,445
Amortization of
goodwill........ (1,130) -- 1,431
Amortization of
servicing
rights.......... -- -- 529
Income taxes.... (499) -- 2,356
Net income
(loss) from
continuing
operations...... $ (1,298) $ (1,003) $ (161,642)
117
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At or for the Year Ended December 31, 1999
---------------------------------------------------------------------------------------
Loan
Imperial Participation Imperial Income Imperial
Coast Warehouse and The Lewis Business Property Asset Capital
Business Finance, Investment Horwitz Credit, Lending Management Group, Other Core Equity
Credit Inc. Group Organization Inc. Division Activities LLC Operations Interests
-------- --------- ------------- ------------ -------- -------- ---------- -------- ---------- ---------
(In thousands)
Total loans,
net............. $726,066 $ 78,396 $211,292 $13,034 $ 12,649 $252,492 $ -- $ -- $ 49,778 $ --
Total assets.... 876,219 105,680 272,444 36,103 28,440 299,842 (832) 14,245 568,370 --
Total deposits.. 767,242 93,255 238,025 15,881 -- 273,449 -- -- (11,341) --
Interest
income.......... 92,318 11,976 22,547 2,278 4,162 22,625 7 (82) 19,837 --
Interest
expense......... 38,308 7,883 14,188 1,286 1,814 13,419 -- 437 30,829 --
Provision
(recovery) for
loan and lease
losses ......... 24,724 1,190 6,982 351 (350) 142 -- -- -- --
External
revenue......... 37,479 4,421 3,409 768 1,322 12,026 10,011 26,729 2,866 30,038
Inter-company
revenue ........ -- -- -- -- -- -- -- -- 288 --
Inter-company
expense ........ -- -- -- -- 1,284 -- 262 -- -- --
Mark to market
on securities
and loans held
for sale ....... 189 43 268 -- (11,901) 62 (38) -- 11,016 --
Equity in net
loss of FMC .... -- -- -- -- -- -- -- -- -- (53)
Total revenue... 37,479 4,421 3,409 768 37 12,026 9,748 26,729 3,155 30,038
Depreciation.... 1,579 84 80 7 263 304 300 452 595 --
Amortization of
goodwill ....... 1,113 453 -- 200 12,279 -- -- 87 -- --
Amortization of
servicing rights
................ -- -- -- -- 259 -- -- -- -- --
Income taxes.... 5,289 718 815 3 (8,858) 1,326 (2) 628 (1,661) 12,015
Net income
(loss) from
continuing
operations...... $ 7,933 $ 1,078 $ 1,222 $ 4 $(13,286) $ 1,990 $ (3) $ 942 $ (3,874) $18,023
At or for
the Year Ended
December 31, 1999
-----------------
De-
emphasized/
Discontinued/
Exited
Businesses Eliminations Consolidated
----------------- ------------ ------------
Total loans,
net............. $227,768 $ (49,006) $1,522,469
Total assets.... 320,209 (319,105) 2,201,615
Total deposits.. 238,247 -- 1,614,758
Interest
income.......... 39,068 (7,298) 207,438
Interest
expense......... 18,215 (4,772) 121,607
Provision
(recovery) for
loan and lease
losses ......... 2,301 -- 35,340
External
revenue......... (7,492) (2,527) 119,050
Inter-company
revenue ........ 1,258 -- 1,546
Inter-company
expense ........ -- -- 1,546
Mark to market
on securities
and loans held
for sale ....... (28,280) -- (28,641)
Equity in net
loss of FMC .... -- -- (53)
Total revenue... (6,233) (2,527) 119,050
Depreciation.... 730 -- 4,394
Amortization of
goodwill ....... 374 -- 14,506
Amortization of
servicing rights
................ 3,964 -- 4,223
Income taxes.... (12,336) (1,011) (3,074)
Net income
(loss) from
continuing
operations...... $(18,457) $ (1,522) $ (5,950)
118
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At or for the Year Ended December 31, 1998
-----------------------------------------------------------------------------------------
Loan De-
Imperial Participation Imperial Income Imperial emphasized/
Coast Warehouse And Business Property Asset Capital Discontinued/
Business Finance, Investment Credit, Lending Management Group, Other Core Equity Exited
Credit Inc. Group Inc. Division Activities LLC Operations Interests Businesses
-------- --------- ------------- -------- -------- ---------- -------- ---------- --------- -------------
(In thousands)
Total loans,
net............. $623,748 $179,284 $221,030 $7,413 $144,573 $ -- $ -- $ 47,907 $ 1,162 $455,339
Total assets.... 628,636 186,257 241,854 44,899 146,250 3,831 6,774 331,578 60,098 813,931
Total deposits.. 674,956 196,410 222,009 -- 162,939 -- -- (2,403) -- 460,341
Interest
income.......... 76,916 16,747 21,569 5,823 13,336 19 (185) 28,295 83 77,650
Interest
expense......... 34,299 9,817 13,249 1,353 6,659 -- 124 30,395 -- 31,623
Provision
(recovery) for
loan and lease
losses.......... 3,523 704 (391) 1,300 (345) -- -- -- -- 10,659
External
revenue......... 42,869 8,533 8,877 10,538 17,471 7,143 18,411 (43,991) (66,496) 12,998
Inter-company
revenue......... -- -- -- -- -- -- -- 1,770 -- --
Inter-company
expense......... -- -- -- 910 -- 121 -- -- -- 739
Mark to market
on securities
and loans held
for sale........ (904) (263) (2,104) (2,305) (178) -- -- (4,993) -- (31,641)
Loss on
impairment of
equity
securities...... -- -- -- -- -- -- -- (37,538) (82,600) --
Equity in net
income of SPFC.. -- -- -- -- -- -- -- -- 12,739 --
Equity in net
income of FMC... -- -- -- -- -- -- -- -- 3,235 --
Total revenue... 42,869 8,533 8,877 9,628 17,471 7,022 18,411 (42,221) (66,496) 12,259
Depreciation.... 779 99 96 141 299 33 473 1,157 -- 637
Amortization of
goodwill........ 1,113 453 -- 950 -- -- 36 134 -- --
Amortization of
servicing
rights.......... -- -- -- -- -- (365) -- -- -- 1,851
Income taxes.... 9,267 2,352 2,819 (716) 2,476 1,360 (1,012) (23,372) (28,449) (8,789)
Net income
(loss) from
continuing
operations...... $ 12,435 $ 3,157 $ 3,783 $ (960) $ 3,323 $1,825 $(1,358) $(31,368) $(38,169) $(11,793)
Eliminations Consolidated
------------ ------------
Total loans,
net............. $(41,300) $1,639,156
Total assets.... (46,925) 2,417,183
Total deposits.. -- 1,714,252
Interest
income.......... (4,413) 235,840
Interest
expense......... (4,413) 123,106
Provision
(recovery) for
loan and lease
losses.......... -- 15,450
External
revenue......... (170) 16,183
Inter-company
revenue......... -- 1,770
Inter-company
expense......... -- 1,770
Mark to market
on securities
and loans held
for sale........ -- (42,388)
Loss on
impairment of
equity
securities...... -- (120,138)
Equity in net
income of SPFC.. -- 12,739
Equity in net
income of FMC... -- 3,235
Total revenue... (170) 16,183
Depreciation.... -- 3,714
Amortization of
goodwill........ -- 2,686
Amortization of
servicing
rights.......... -- 1,486
Income taxes.... -- (44,064)
Net income
(loss) from
continuing
operations...... $ -- (59,125)
119
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Deposits
Certificates of deposits of $100,000 and over totaled approximately $409.7
million, $324.3 million and $459.6 million at December 31, 2000, 1999 and
1998, respectively. Interest expense associated with certificates of deposit
of $100,000 and over was approximately $28.1 million, $18.2 million, and $24.2
million, for the years ended December 31, 2000, 1999, and 1998, respectively.
SPB's customer deposit account balances are summarized as follows:
At December 31,
--------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
% of Average % of Average % of Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
---------- -------- -------- ---------- -------- -------- ---------- -------- --------
(Dollars in thousands)
Savings accounts........ $ 56,150 3.4% 4.94% $ 66,415 4.1% 4.79% $ 57,249 3.3% 4.27%
Money market accounts... 25,020 1.5 5.74 -- -- -- -- -- --
Time certificates less
than $100,000.......... 1,147,201 70.0 6.66 1,235,468 76.0 5.82 1,199,825 69.9 5.61
Time certificates
$100,000 and greater... 409,712 25.1 6.79 324,271 19.9 5.49 459,614 26.8 5.62
---------- ----- ---- ---------- ----- ---- ---------- ----- ----
Time certificates..... 1,556,913 95.1 6.68 1,559,739 95.9 5.75 1,659,439 96.7 5.61
---------- ----- ---- ---------- ----- ---- ---------- ----- ----
Total................. $1,638,083 100.0% 6.62% $1,626,154 100.0% 5.71% $1,716,688 100.0% 5.57%
========== ===== ==== ========== ===== ==== ========== ===== ====
The following table sets forth the dollar amounts of time deposits as of
December 31, 2000 maturing in the periods indicated:
Over Three Over Six
Three Months Months through Months through More than
or Less Six Months Twelve Months Twelve months Total
------------ -------------- -------------- ------------- ----------
(In thousands)
Contractual interest
rate:
0.000%-5.0%............. $ -- $ 4 $ -- $ -- $ 4
5.001%-5.5%............. 17,843 4,459 5,995 3,654 31,951
5.501%-6.0%............. 37,242 15,633 31,403 1,058 85,336
6.001%-6.5%............. 137,857 22,264 70,006 33,927 264,054
Over 6.5%............... 228,742 359,673 488,047 99,106 1,175,568
-------- -------- -------- -------- ----------
Total................. $421,684 $402,033 $595,451 $137,745 $1,556,913
======== ======== ======== ======== ==========
16. Borrowings from Federal Home Loan Bank
SPB is approved as a member of the Federal Home Loan Bank ("FHLB") to
borrow up to a maximum of 10% of the assets of SPB. These borrowings must be
fully collateralized by qualifying mortgage loans and may be in the form of
overnight funds or term borrowings up to one year at SPB's option. The FHLB
advances are secured by the investment in stock of the FHLB and certain real
estate mortgage loans with a carrying value of $172.9 million, $56.5 million
and $49.9 million at December 31, 2000, 1999 and 1998, respectively. The bank
had additional borrowings available from FHLB in the amount of $72.2 million,
$35.8 million and approximately $14.9 million at December 31, 2000, 1999 and
1998, respectively.
120
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000, 1999 and 1998, FHLB borrowings are summarized as
follows:
2000 1999 1998
------- ------- -------
(Dollars in thousands)
Balance at year end............................... $65,000 $ -- $20,000
Maximum outstanding at any month end.............. 65,000 30,000 45,000
Average balance during the year................... 23,462 7,603 24,451
Weighted average rate during the year............. 6.42% 8.30% 6.67%
Weighted average rate at year end................. 6.73% N/A 5.93%
The advances from FHLB at December 31, 2000 are short term fixed and
variable rate borrowings and are due to mature on or before December 31, 2001.
Interest expense on borrowings from the FHLB was $1.5 million, $631,000, and
$1.6 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
17. Other Borrowings
Other borrowings primarily consist of repurchase facilities and mortgage
loans to fund the Company's and its subsidiaries' lending activities and real
property. At December 31, 2000, approximately $39.4 million in securities were
pledged as collateral for the borrowings from Lehman Brothers. The Imperial
Bank, Cap Mark Services, and Orix Real Estate Capital loans outstanding at
December 31, 2000 are secured by real property. ICII and its subsidiaries
other borrowings consist of the following at December 31, 2000 and 1999:
Interest Index
December 31, 2000 Rate Commitment Outstanding (basis points) Expiration Date
----------------- -------- ---------- ----------- -------------- ------------------
(Dollars in thousands)
Lehman Brothers (Corona
Film Finance Fund)..... 6.60% $39,044 $39,044 Fixed rate January 5, 2001
Imperial Bank (ICII).... 10.00% 10,000 10,000 Prime plus 100 June 18, 2001
Cap Mark Services
(ICCMIC)............... 8.50 10,508 10,508 Fixed rate December 11, 2027
Orix Real Estate Capital
(ICCMIC)............... 7.37 23,346 23,346 Fixed rate January 2, 2013
Other notes payable
(ICII)................. 8.00 -- 1,220 Fixed rate None
------- -------
$82,898 $84,118
======= =======
Interest Index
December 31, 1999 Rate Commitment Outstanding (basis points) Expiration Date
----------------- -------- ---------- ----------- -------------- ------------------
(Dollars in thousands)
Lehman Brothers (Corona
Film Finance Fund)..... 5.50% $66,398 $66,398 Fixed rate January 13, 2000
Imperial Bank (ICII).... 9.25 6,691 6,691 Prime plus 100 September 29, 2000
Other notes payable
(ICII)................. 8.00 -- 1,220 Fixed rate None
------- -------
$73,089 $74,309
======= =======
Interest expense on other borrowings was $6.9 million, $4.0 million, and
$4.2 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
18. Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures of the company ("ROPES")
During the second quarter of 1997, Imperial Credit Capital Trust I
("ICCTI"), a wholly-owned subsidiary of the Company organized for the sole
purpose of issuing trust securities, issued $70.0 million of 10.25%
121
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely debentures of the company ("ROPES") due June 14, 2002 at
par. The ROPES are secured by resettable rate debentures which are general
unsecured obligations of the Company, are and can be redeemed at par upon
their maturity or remarketed as 30 year capital instruments at the Company's
option. Under current tax law, the interest payments on these securities are
tax-deductible. The proceeds from the offering were used for capital
contributions to subsidiaries, strategic acquisitions, investments and general
corporate purposes. During 2000, the Company repurchased and extinguished
$18.9 million of ROPES debt resulting in an extraordinary gain of $2.4
million, net of income taxes. During 1999, the Company repurchased and
extinguished $8.3 million of ROPES debt resulting in an extraordinary gain of
$921,000, net of income taxes. At December 31, 2000 and 1999, the Company had
ROPES debt of $42.9 million and $61.8 million, respectively. Interest expense
on the ROPES was $5.3 million, $7.4 million and $7.8 million for the years
ended December 31, 2000, 1999 and 1998.
The Trust Indenture for the ROPES includes provisions which limit the
ability of the Company to incur additional indebtedness or issue certain stock
of the Company, to make certain investments, engage in certain transactions
with affiliates, create restrictions on the ability of subsidiaries to pay
dividends or certain other distributions, create liens and encumbrances, or
allow its subsidiaries to issue certain classes of stock. As of December 31,
2000 and 1999, the Company was in compliance with the debt covenants related
to the ROPES.
See Footnote 34. "Subsequent Events," for a description of the
recapitalization agreement entered into during the first quarter of 2001.
19. Senior Notes
December 31, 2000
-----------------------------
Face Unamortized Carrying
Value Discount Value
-------- ----------- --------
(In thousands)
9.75% Senior Notes due 2004................... $ 10,932 $(114) $ 10,818
9.875% Senior Notes due 2007.................. 165,939 -- 165,939
-------- ----- --------
$176,871 $(114) $176,757
======== ===== ========
December 31, 1999
-----------------------------
Face Unamortized Carrying
Value Discount Value
-------- ----------- --------
(In thousands)
9.75% Senior Notes due 2004................... $ 13,074 $(171) $ 12,903
9.875% Senior Notes due 2007.................. 172,282 -- 172,282
-------- ----- --------
$185,356 $(171) $185,185
======== ===== ========
During the first quarter of 1997, the Company successfully completed a
$200.0 million offering of 9.875% Senior Notes due 2007 (the "9.875% Senior
Notes"). A portion of the proceeds from the offering was used to repurchase
$69.8 million of the outstanding 9.75% Senior Notes due 2004 (the "9.75%
Senior Notes") on which the Company recorded an extraordinary after-tax loss
of $4.0 million. The remaining proceeds were used to make capital
contributions to subsidiaries, strategic acquisitions, investments, and for
general corporate purposes. The effective interest rate on the tendered notes
was approximately 10.8% after the amortization of original issue discount and
capitalized debt issue costs. The effective interest rate on the new notes is
approximately 10.4% after the amortization of capitalized debt issue costs.
The 9.875% Senior Notes may be redeemed after January 15, 2002 at the
option of the Company until maturity at a declining premium, plus accrued
interest. The 9.875% Senior Notes are general unsecured obligations of the
Company ranking pari passu with all senior indebtedness of the Company, but
are effectively
122
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
subordinated to the liabilities of SPB. The Indenture for the 9.875% Senior
Notes includes provisions which limit the ability of the Company to incur
additional indebtedness or issue certain stock of the Company, to make certain
investments, engage in certain transactions with affiliates, create
restrictions on the ability of subsidiaries to pay dividends or certain other
distributions, create liens and encumbrances, or allow its subsidiaries to
issue certain classes of stock. As of December 31, 2000, the Company was in
compliance with the debt covenants related to the 9.875% Senior Notes.
In January 1994, the Company issued $90.0 million of 9.75% Senior Notes due
2004. At December 31, 2000, and 1999, $10.9 million and $13.1 million of the
9.75% Senior Notes were outstanding. The 9.75% Senior Notes may be redeemed
after January 15, 1999 at the option of the Company until maturity at a
declining premium, plus accrued interest. The 9.75% Senior Notes are unsecured
and rank pari passu with all other senior unsecured indebtedness of the
Company, but are effectively subordinated to the deposits of SPB.
During 2000, the Company repurchased and extinguished $6.3 million of
9.875% Senior Notes due 2007 and $2.1 million of 9.75% Senior Notes due 2004
resulting in a extraordinary gain of $1.1 million, net of income taxes. During
1999, the Company repurchased and extinguished $27.7 million of 9.875% Senior
Notes due 2007 and $7.1 million of 9.75% Senior Notes due 2004 resulting in a
extraordinary gain of $4.2 million, net of income taxes. Total interest
expense on the Senior Notes for the years ended December 31, 2000, 1999 and
1998 was $18.2 million, $21.5 million and $22.5 million, respectively.
See Footnote 34. "Subsequent Events," for a description of the
recapitalization agreement entered into during the first quarter of 2001.
20. The ICCMIC Acquisition
On March 28, 2000, we completed the acquisition of ICCMIC. We paid ICCMIC's
stockholders (other than ICII) approximately $11.57 per share in cash. The
total purchase price paid by the company was approximately $300.1 million. The
Company's 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 acquisition, the Company
incurred total severance and incentive costs of $9.4 million. The merger was
accounted for as a purchase and resulted in the generation of negative
goodwill of $29.2 million. The negative goodwill generated by the acquisition
is not subject to income taxes and increased the Company's tangible book value
by $0.74 per share at December 31, 2000. The company is accreting the negative
goodwill into income over five years, which is the anticipated life of the
assets acquired. At December 31, 1999 ICCMIC had total assets of $664.9
million, and total liabilities of $269.3 million.
The following table reflects the activity in ICCMIC goodwill for the year
ended December 31, 2000 (in thousands):
Beginning negative goodwill........................................ $ 40,143
Purchase accounting adjustments.................................... (10,910)
Accretion.......................................................... (5,436)
--------
Ending negative goodwill......................................... $ 23,797
--------
123
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Proforma total revenues, net (loss) income and diluted net (loss) income
per share are as follows, assuming the merger consummated at the beginning of
each period:
For the Year Ended
December 31,
-------------------
2000 1999
--------- --------
(In thousands,
except per share
data)
Total revenues.......................................... $ (37,202) $185,375
Net (loss) income....................................... $(152,590) $ 18,009
Diluted (loss) income per share......................... $ (4.68) $ 0.52
21. Preferred and Common Stock
The Company has authorized 8,000,000 shares of Preferred Stock. The Board
has the authority to issue the preferred stock in one or more series, and to
fix the designations, rights, preferences, privileges, qualifications and
restrictions, including dividend rights, conversion rights, voting rights,
rights and terms of redemption, liquidation preferences and sinking fund
terms, any or all of which may be greater than the rights of the Common Stock.
On May 14, 1999, the Company entered into an agreement with its former
parent Imperial Bank, a subsidiary of Imperial Bancorp (NYSE:IMP). On May 17,
1999, the Company repurchased 10% or 3,682,536 shares of its outstanding
common stock for $8.00 per share or $29.5 million. The repurchase from
Imperial Bank was financed through the private issuance of $30.0 million
Series B 11.50% Mandatorily Redeemable Cumulative Preferred Stock to a group
of independent investors. During the fourth quarter of 1999, the Company
repurchased and extinguished the $30.0 million Series B 11.50% Mandatorily
Redeemable Cumulative Preferred Stock, incurring an extraordinary loss of $1.1
million, net of income taxes. Interest expense from date of issuance to date
of extinguishment was $1.5 million.
We have undertaken the repurchase of our common stock under several share
repurchase programs. During 1998, 1999, and 2000 we repurchased 2,485,684,
3,682,536 and 1,122,300 shares of common stock at an average cost per share of
$9.65, $8.00, and $3.62 in each year, respectively. Since beginning share
repurchases, we have repurchased a total of 7,315,520 shares of common stock
at an average price of $7.92 per share. All of our repurchases effected under
our stock repurchase programs were effected in compliance with Rule 10b-18
under the Securities Exchange Act of 1934.
On October 12, 1998, the Company distributed preferred share purchase
rights as a dividend to its shareholders of record at the rate of one right
for each outstanding share of its common stock. The rights are attached to the
Company's common stock and will only be exercisable and trade separately if a
person or group acquires or announces the intent to acquire 15% or more of the
Company's common stock (25% or more for any person or group currently holding
15% or more of the Company's common stock). Each right will entitle
shareholders to buy one-hundredth of a share of a new series of junior
participating preferred stock at an exercise price of $40.
If the Company is acquired in a merger or other transaction after a person
has acquired 15 percent or more of the Company's outstanding common stock (25%
or more for any person or group currently holding 15% or more of the Company's
common stock), each right will entitle the shareholder to purchase, at the
right's then-current exercise price, a number of the acquiring company's
common shares having a market value of twice such price. The acquiring person
would not be entitled to exercise these rights. In addition, if a person or
group acquires 15% or more of the Company's common stock, each right will
entitle the shareholder (other than the acquiring person) to purchase, at the
right's then-current exercise price, a number of shares of the Company's
common stock having a market value of twice such price. Following the
acquisition by a person of 15% or more
124
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the Company's common stock and before an acquisition of 50 percent or more
of the Company's common stock, the Company's board of directors may exchange
the rights (other than the rights owned by such person) at an exchange ratio
of one share of common stock per right. Before a person or group acquires
beneficial ownership of 15 percent (or 25% as applicable) or more of the
Company's common stock, the rights are redeemable for $.0001 per right at the
option of the Company's board of directors. The rights will expire on October
2, 2008 unless redeemed prior to that date. The Company's board is also
authorized to reduce the ownership thresholds referred to above to not less
than 10%. The rights are intended to enable all of the Company's shareholders
to realize the long-term value of their investment in the Company.
22. Income Taxes
Income taxes (tax benefit) are included in the accompanying consolidated
statements of operations and comprehensive income as follows:
Year Ended December 31,
------------------------
2000 1999 1998
------ ------- --------
(In thousands)
Income taxes from:
Continuing operations............................ $2,356 $(3,074) $(44,064)
Discontinued operations.......................... 4,159 (557) (8,675)
Extraordinary item............................... 2,356 3,446 --
------ ------- --------
Total.......................................... $8,871 $ (185) $(52,739)
====== ======= ========
The Company's income taxes from continuing operations for the years ended
December 31, 2000, 1999 and 1998 were as follows:
Year Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
Current:
Federal..................................... $ (165) $(32,162) $ 6,140
State....................................... (39) (11,868) 2,019
-------- -------- --------
Total current taxes....................... (204) (44,030) 8,159
-------- -------- --------
Deferred:
Federal..................................... (44,197) 27,979 (39,701)
State....................................... (15,405) 10,429 (15,839)
Change in valuation reserve................. 63,292 -- --
-------- -------- --------
Total deferred taxes...................... 3,690 38,408 (55,540)
-------- -------- --------
Taxes credited to shareholders' equity........ (1,130) 2,548 3,317
-------- -------- --------
Taxes on income from continuing operations.... $ 2,356 $ (3,074) $(44,064)
======== ======== ========
The Company had current income taxes payable from continuing operations of
approximately $0.7 million at December 31, 2000, and current income taxes
receivable of $0 at December 31, 1999. Included in Southern Pacific Bank's
2000 current receivable was $4.5 million due from the Internal Revenue Service
for the 1999 tax year. Included in the net assets of discontinued operations
were income taxes receivable of $0 and $9.0 million at December 31, 2000 and
1999, respectively.
The Company had federal net operating loss carryforwards of $22.5 million
that expire in 2019 and $111.8 million that expire in 2020.
125
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Due to recurring losses, management established a deferred tax asset
valuation allowance of $63.3 million during the fourth quarter. The
recognition of a net deferred tax asset is dependent upon a "more likely than
not" expectation of the realization of the deferred tax asset, based upon the
analysis of the available evidence. A valuation allowance is required to
sufficiently reduce the deferred tax asset to the amount that is expected to
be realized through future realization of profits on a "more likely than not"
basis. The analysis of available evidence is performed each quarter utilizing
the "more likely than not" criteria to determine the amount, if any, of the
deferred tax asset to be realized. Adjustments to the valuation allowance are
made accordingly. There can be no assurance that the Company will recognize
additional portions of the deferred tax asset in future periods of that
additional valuation allowances may not be recorded in the future periods.
126
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes arise from differences in the timing of recognition of
income and expense for tax and financial reporting purposes. The following
table shows the primary components of the Company's net deferred tax liability
at December 31, 2000 and 1999.
2000 1999
-------- --------
(In thousands)
Deferred tax assets:
REMIC Income......................................... $ 4,348 $ 7,433
Allowances for loan and lease losses................. 24,076 1,706
Mark to market on securities and loans held for
sale................................................ 1,753 --
Leases............................................... 1,205 1,258
State taxes.......................................... -- 1,970
Executive stock options.............................. 419 419
Unrealized loss on securities available for sale..... 653 1,862
Basis differences in fixed assets.................... 242 --
Deferred compensation................................ 2,122 1,718
Other financing activities........................... 204 --
NOL carry forward.................................... 52,020 7,073
Other................................................ -- 945
-------- --------
Total deferred tax assets before valuation
allowance......................................... 87,042 24,384
Valuation allowance.................................. (63,292) --
-------- --------
Total.............................................. 23,750 24,384
-------- --------
Deferred tax liabilities:
Sales/investments in equity securities............... (38,277) (33,935)
Servicing rights..................................... (627) (835)
Mark to market on securities and loans held for
sale................................................ -- (2,891)
Deferred loan fees................................... (1,390) (1,390)
State taxes.......................................... (789) --
Basis difference in fixed assets..................... (96) (284)
Other................................................ (1,371) --
FHLB stock dividends................................. (1,027) (1,186)
-------- --------
Total.............................................. (43,577) (40,521)
-------- --------
Net deferred tax liability............................. $(19,827) $(16,137)
======== ========
A reconciliation of the statutory Federal corporate income tax rate of 35%
to the effective income tax rate on income or loss from continuing operations
is as follows:
Year Ended
December 31,
-------------------
2000 1999 1998
----- ---- ----
Statutory U.S. federal income tax rate............... 35.0 % 35.0 % 35.0 %
Increase (reduction) in rate resulting from:
State income taxes, net of Federal benefit......... 5.0 5.0 8.9
Preferred stock dividends classified as interest
expense........................................... -- (6.8) --
Deferred tax asset valuation allowance............. (40.3) -- --
Other, net......................................... (1.2) 0.9 (1.2)
----- ---- ----
Effective income tax rate............................ (1.5)% 34.1 % 42.7 %
===== ==== ====
127
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Our federal income tax returns for 1996 through 1999 are currently being
audited by the Internal Revenue Service and our California tax returns for
1995 and 1996 are being audited by the California Franchise Tax Board. We
believe that we have recorded sufficient reserves for accounting purposes to
cover any proposed deficiencies that may occur. The California auditors have
proposed to include with our income that of two of our former affiliates,
which would increase our total tax by approximately $2 million, of which
approximately $1.5 million is expected to be assessed to one of such former
affiliates. We intend to protest our portion of any such assessment.
23. Supplemental Disclosure of Cash Flow Information
The following information supplements the statements of cash flows:
Year Ended December 31,
---------------------------
2000 1999 1998
-------- -------- --------
(In thousands)
Cash paid (received) during the period for:
Interest........................................ $140,032 $128,217 $119,169
Income taxes.................................... (4,123) 817 5,884
Significant non-cash activities:
Loans transferred from held for investment to
held for sale.................................. 18,524 63,829 197,518
Loans transferred to OREO or repossessed
assets......................................... 5,571 11,834 10,046
Loans to facilitate the sale of OREO............ -- -- 1,011
Retained interest in loan and lease
securitizations capitalized.................... 3,688 4,036 7,182
Change in unrealized gain (loss) on securities
available for sale............................. (1,698) 3,802 (3,112)
Issuance of warrants............................ 3,082 -- --
Purchase of Imperial Credit Lender Services, Inc.:
Assets acquired, including goodwill of $5,000... -- -- 5,050
Liabilities assumed............................. -- -- 50
Common stock issued............................. -- -- 5,000
Purchase of Lewis Horwitz Organization:
Assets acquired, including goodwill of $5.3
million and $12.0 million for 2000 and 1999,
respectively 7,676 19,380 --
Liabilities assumed............................. 4,854 11,248 --
Cash paid....................................... 2,822 8,132 --
Deconsolidation of Imperial Capital Group, LLC
Decrease in trading securities.................. 11,839 -- --
Decrease in goodwill............................ 1,063 -- --
Decrease in other assets........................ 2,150 -- --
Decrease in other liabilities................... 4,910 -- --
Purchase of Imperial Credit Commercial Mortgage
Investment Corp:
Assets acquired................................. 98,274 -- --
Net cash received............................... 11,524 -- --
Liabilities assumed, including negative
goodwill....................................... 109,798 -- --
24. Employee Benefit Plans
Profit Sharing and 401(k) Plan
Under the Company's 401(k) plan, employees may elect to enroll on the first
of any month, provided that they have been employed for at least six months.
Employees may contribute up to 14% of their salaries. The Company will match
50% of the first 4% of employee contributions. The Company recorded 401(k)
matching expense of $284,000, $334,000, and $457,000, for the years ended
December 31, 2000, 1999 and 1998, respectively.
128
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Any additional Company contribution may be made at the discretion of the
Company. Should a discretionary contribution be made, the contribution would
first be allocated to those employees deferring salaries in excess of 4%. The
matching contribution would be 50% of any deferral in excess of 4% up to a
maximum deferral of 8%.
Should discretionary contribution funds remain following the allocation
outlined above, any remaining Company matching funds would be allocated as a
50% match of employee contributions on the first 4% of the employee's
deferrals. No discretionary contributions were charged to operations for the
years ended December 31, 2000, 1999 and 1998. Company matching contributions
are made as of December 31st each year.
A total of 2,292,632 shares of the Company's Common Stock has been reserved
for issuance under the Company's 1992 Incentive Stock Option and Nonstatutory
Stock Option Plan (the "1992 Stock Option Plan"), which expires by its own
terms in 2002. A total of 525,366 and 734,268 stock options were outstanding
at December 31, 2000 and 1999, respectively.
The 1992 Stock Option Plan provides for the grant of "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and nonqualified stock options
("NQSOs") to employees, officers, directors and consultants of the Company.
Incentive stock options may be granted only to employees. The 1992 Stock
Option Plan is administered by the Board of Directors or a committee appointed
by the Board, which determines the terms of options granted, including the
exercise price, the number of shares subject to the option, and the option's
exercisability.
The exercise price of all options granted under the 1992 Stock Option Plan
must be at least equal to the fair market value of such shares on the date of
grant. The maximum term of options granted under the 1992 Stock Option Plan is
10 years.
With respect to any participant who owns stock representing more than 10%
of the voting rights of the Company's outstanding capital stock, the exercise
price of any option must be at least equal to 110% of the fair market value on
the date of grant.
1996 Stock Option Plan
A total of 3,000,000 shares of the Company's Common Stock has been reserved
for issuance under the Company's 1996 Stock Option, Deferred Stock and
Restricted Stock Plan (the "1996 Stock Option Plan") which provides for the
grant of ISOs that meet the requirements of Section 422 of the Code, NQSOs and
awards consisting of deferred stock, restricted stock, stock appreciation
rights and limited stock appreciation rights ("Awards"). The 1996 Stock Option
Plan is administered by a committee of directors appointed by the Board of
Directors (the "Committee"). ISOs may be granted to the officers and key
employees of the Company or any of its subsidiaries. A total of 2,971,562 and
2,635,580 stock options were outstanding at December 31, 2000 and 1999,
respectively.
The exercise price for any option granted under the 1996 Stock Option Plan
may not be less than 100% (110% in the case of ISOs granted to an employee who
is deemed to own in excess of 10% of the outstanding Common Stock) of the fair
market value of the shares of Common Stock at the time the option is granted.
The purpose of the 1996 Stock Option Plan is to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to those whose job performance affects
the Company. The effective date of the 1996 Stock Option Plan was June 21,
1996.
If an option granted under the 1996 Stock Option Plan expires or
terminates, or an Award is forfeited, the shares subject to any unexercised
portion of such option or Award will again become available for the issuance
of further options or Awards under the 1996 Stock Option Plan. Unless
previously terminated by the Board of Directors, no options or Awards may be
granted under the 1996 Stock Option Plan after June 21, 2006.
129
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options granted under the 1996 Stock Option Plan will become exercisable
upon the terms of the grant made by the Committee. Awards will be subject to
the terms and restrictions of the Award made by the Committee. The Committee
has discretionary authority to select participants from among eligible persons
and to determine at the time an option or Award is granted and in the case of
options, whether it is intended to be an ISO or a NQSO.
Under current law, ISOs may not be granted to any individual who is not
also an officer or employee of the Company or any subsidiary. Each option must
terminate no more than 10 years from the date it is granted (or five years in
the case of ISOs granted to an employee who is deemed to own in excess of 10%
of the combined voting power of the Company's outstanding Common Stock).
Options may be granted on terms providing for exercise in whole or in part at
any time or times during their respective terms, or only in specified
percentages at stated time periods or intervals during the term of the option,
as determined by the Committee. The exercise price of any option granted under
the 1996 Stock Option Plan is payable in full (i) in cash, (ii) by surrender
of shares of the Company's Common Stock already owned by the option holder
having a market value equal to the aggregate exercise price of all shares to
be purchased including, in the case of the exercise of NQSOs, restricted stock
subject to an Award under the 1996 Stock Option Plan, (iii) by cancellation of
indebtedness owed by the Company to the option holder, or (iv) by any
combination of the foregoing.
The Board of Directors may from time to time revise or amend the 1996 Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding options or Award without such participant's consent or may,
without shareholder approval, increase the number of shares subject to the
1996 Stock Option Plan or decrease the exercise price of a stock option to
less than 100% of fair market value on the date of grant (with the exception
of adjustments resulting from changes in capitalization), materially modify
the class of participants eligible to receive options or Awards under the 1996
Stock Option Plan, materially increase the benefits accruing to participants
under the 1996 Stock Option Plan or extend the maximum option term under the
1996 Stock Option Plan.
A summary of changes in outstanding stock options under the 1992 and 1996
Stock Option Plans follows:
Year Ended December 31,
--------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
(In thousands, except per share data)
Options outstanding,
January 1.............. 3,370 $ 9.72 2,806 $10.62 2,536 $11.41
Options granted......... 907 2.16 969 6.84 1,093 11.52
Options exercised....... (20) 2.09 (96) 2.80 (177) 5.26
Options canceled........ (760) 9.09 (309) 11.12 (646) 16.70
----- ------ ----- ------ ----- ------
Options outstanding,
December 31............ 3,497 7.94 3,370 9.72 2,806 10.62
===== ====== ===== ====== ===== ======
Options Exercisable..... 1,407 10.65 1,279 10.25 911 9.20
The range of exercise price for outstanding and exercisable options at
December 31, 2000 were $1.00 to $18.63, and $2.09 to $18.63, respectively.
There were 381,843 options available for future grants at December 31,
2000.
130
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Effective January 1, 1996, the Company adopted the disclosure requirements
of SFAS 123, and continued to measure its employee stock-based compensation
arrangements under the provisions of APB 25. Accordingly, no compensation
expense has been recognized for the stock option plans. Had compensation
expense for the Company's stock option plans been determined based on the fair
value at the grant date for awards after 1994 consistent with the provisions
of SFAS 123, the Company's net loss and loss per share would have increased to
the pro forma amounts indicated below:
Year Ended December 31,
----------------------------
2000 1999 1998
--------- ------- --------
(In thousands, except per
share data)
Net loss:
As reported.................................. $(163,326) $(2,828) $(73,633)
Pro forma.................................... (164,717) (4,935) (74,996)
Basic loss per share:
As reported.................................. $ (5.01) $ (0.08) $ (1.93)
Pro forma.................................... (5.13) (0.14) (1.96)
Diluted loss per share:
As reported.................................. $ (5.01) $ (0.08) $ (1.93)
Pro forma.................................... (5.13) (0.14) (1.96)
The effects of applying SFAS 123 for disclosing compensation cost may not
be representative of the effects on reported net loss for future years.
The weighted average fair value at date of grant of options granted during
2000, 1999 and 1998 was $1.61, $3.85, and $4.79 per option, respectively. The
fair value of options at the date of grant was estimated using the Black-
Scholes model with the following weighted average assumptions:
Year Ended
December 31,
--------------------
2000 1999 1998
------ ----- -----
Expected life (years)................................. 5.02 5.01 5.11
Interest rate......................................... 4.98% 6.34% 4.54%
Volatility............................................ 133.03 66.86 66.81
Dividend yield........................................ 0.00% 0.00% 0.00%
Deferred Executive Compensation Plans
Effective July 1, 1998, the Company adopted our Deferred Executive
Compensation Plan (the "DEC Plan 1") and the Deferred Executive Compensation
Plan 2 (the "DEC Plan 2", and together with the DEC Plan 1, the "DEC Plans").
The DEC Plans are each administered by a committee appointed by the board of
directors. Any employee who has an annual base salary of at least $100,000 or
who had an annual base salary of at least $100,000 in the prior year and
directors may elect to participate in the DEC Plans. A participant's annual
base salary includes all cash compensation excluding bonuses, commissions,
employee benefits, stock options, relocation expenses, incentive payments,
non-monetary awards, automobile and other allowances. Participants in the DEC
Plans may defer up to 50% of their annual base salary and commissions and/or
up to 100% of their annual bonus payments. Benefits accrued under the DEC
Plans will be paid to all participants, other than participants who have
voluntarily resigned their positions, in the form of a lifetime annuity issued
by a life insurance company. DEC Plan benefits accrue through retirement so
long as the participant remains employed by our company. Participants who
voluntarily resign prior to retirement will be paid all of their vested
benefits under the DEC Plans. If the Company terminates the DEC Plans, the
Company may elect to pay participants in a lump sum, or in a lifetime annuity.
131
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred compensation contributed to DEC Plan 1 is invested in the
Company's common stock. In 1999 the Company matched contributions to the DEC
Plan 1, to be paid in our common stock, on a dollar-for-dollar basis up to
$50,000 per participant. The Company ceased matching contributions in 2000.
The Company also reserves the right to make discretionary matches, to be paid
in its common stock, in any year. Matching contributions vest 50% a year,
commencing one year from the date of the matching contribution. Matching
contributions vest completely if a participating employee retires, becomes
permanently disabled, or dies.
Deferred compensation contributed to DEC Plan 2 may be invested in certain
mutual and money market funds. The Company will not make matching
contributions to the DEC Plan 2. All DEC Plan 2 contributions are completely
vested immediately. The Company incurred $1.1 million and $1.5 million in
expense for matching contributions to DEC Plan 1 during the years ended
December 31, 2000 and 1999, respectively. DEC Plan 1 owned a total of 826,509
and 852,072 shares of ICII common stock at December 31, 2000 and 1999.
25. Executive Compensation
Employment Agreements
On January 1, 1997, the Company entered into a five-year employment
contracts with H. Wayne Snavely, Chairman of the Board, President and Chief
Executive Officer, which provide for minimum annual aggregate compensation of
$450,000, subject to adjustment for inflation, plus an annual bonus approved
by the Company's Board of the Directors based on the attainment of performance
objectives, including the Company's return on equity, income per share and
increase in the price of the Company's common stock.
Termination Agreements
In January 1999, we entered into individual termination agreements with our
Chief Executive Officer, Chief Financial Officer and General Counsel. The
agreements provide for severance payments to these senior executives in the
event of a change in control of the Company (as defined in the agreements) and
their voluntary departures at the end of one year or the termination of any
one of these senior executives within three years of the change in control for
any reason. The senior executives will receive a lump sum payment of three
times their respective base salaries and their highest bonus earned in any of
the last three fiscal years preceding the change in control and a percentage
of their respective bonuses for the year in which the change of control
occurs. The recapitalization transactions to be completed pursuant to the
Master Recapitalization Agreement described in their proxy statement will
constitute a change in control under the foregoing definition.
In addition, we will continue to provide these senior executives with
medical, dental, life insurance, disability and accidental death and
dismemberment benefits until the third anniversary of the termination unless
the executive becomes employed by another employer, in which case these
coverages will be secondary to those provided by the new employer. All
deferred compensation in respect of each senior executive will also become
fully vested and we will pay in cash all such deferred compensation and any
unpaid portion of the executive's bonus. Any amounts payable to an executive
will include additional amounts to cover certain taxes resulting from those
payments. However, in Mr. Snavely's case any benefits or payments provided
under his termination agreement will be reduced by any benefits or payments he
receives under his employment agreement as a result of his termination.
Stock Options
On January 1, 1992, options were granted to three senior officers of the
Company to purchase a total of 2,292,628 shares, adjusted for stock dividends
and splits, of the Company's Common Stock. The exercise price of these options
is $0.89 per share of common stock for one-half of the options, with the other
half exercisable at $1.40 per share. These options became exercisable in
September 1995 (vesting was accelerated from
132
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
January 1, 1997). These options expire on December 1, 2001 and are not covered
by the Company's 1992 or 1996 Stock Option Plans. Compensation expense
relating to these options was recorded in the Company's consolidated financial
statements over a four year period which ended December 31, 1995 for an amount
representing the difference between the exercise price of the options and the
market price of the Company's stock at the grant date. The aggregate amount of
compensation expense recognized on these stock options since their grant date
was $2.2 million.
26. Interest Rate Swaps
The Company may enter into interest rate cap, floor, and swap transactions
to manage its exposure to fluctuations in interest rates and market movements
in securities values. These instruments involve, to varying degrees, elements
of credit and interest rate risk. The contract or notional amounts do not
represent exposure to credit loss. Risk originates from the inability of
counter parties to meet the terms of the contracts and from market movements
in securities values and interest rates. The Company controls the credit risk
of its interest rate cap, floor and swap agreements through credit approvals,
limits and monitoring procedures.
The Company has total rate of return swap contracts for investment purposes
with various counter parties, the provisions of which entitle our company to
receive the total return on various commercial loans in exchange for a
floating payment of one month LIBOR plus a spread. These contracts are off
balance sheet instruments.
As of December 31, 2000, 1999 and 1998, the Bank was party to total rate of
return swap contracts with a total notional amount of $65.2 million, $83.6
million and $280.4 million, under which our company was obligated to pay one
month LIBOR plus a weighted average spread of 0.88%. The weighted average
remaining life of these contracts was 51.2 months, 60.0 months and 31.2 months
as of December 31, 2000, 1999 and 1998. For the years ended December 31, 2000,
1999 and 1998, our company received gross cash flows of $5.7 million, $9.9
million and $3.5 million on our total return swaps, respectively. Additionally
during these same periods the company paid cash totaling $5.3 million, $8.3
million, and $2.9 million to the swap counter party. For the years ended
December 31, 2000, 1999 and 1998, our company recognized mark to market gains
(losses) of ($3.8) million, $197,000 and $171,000 million on our total return
swaps, respectively. At December 31, 2000 and 1999, $33.7 million and $18.8
million was outstanding and classified as Trading Securities on the
consolidated balance sheet.
As a part of the Pacifica Partners I LP collateralized loan obligation
("CLO") fund launched by the Company in August 1998, the Company delivered
subordinate bonds of approximately $51.3 million into a total rate of return
swap with the Canadian Imperial Bank of Commerce ("CIBC"). The provisions of
the swap entitle the Company to receive the total return on the subordinate
bonds delivered and pay a floating payment of LIBOR plus a weighted average
spread of .075% at December 31, 2000. For the years ended December 31, 2000,
1999, and 1998, gross cash flows received on the total return swaps were $9.1
million, $6.8 million, and $567,000, respectively, and gross cash flows paid
to the counter party were $4.0 million, $3.4 million, $882,000, respectively.
The Company delivered cash and various equity securities to CIBC as collateral
for the swap. At December 31, 2000 and 1999, $59.1 million and $38.2 million
was outstanding and classified as Trading Securities on the consolidated
balance sheet.
Since all of the outstanding off balance-sheet derivatives are classified
as Trading Securities and carried at fair value, the impact of adopting FAS
133 was not material to the Company.
27. Commitments and Contingencies
Loan Servicing
As of December 31, 2000 and 1999 the Company was servicing loans and leases
for others, directly and through sub-servicing arrangements, totaling
approximately $103.0 million and $106.0 million, respectively.
133
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Related fiduciary funds held in trust for investors in non-interest bearing
accounts totaled $0 and $520,000 at December 31, 2000 and 1999, respectively.
These funds are segregated in special bank accounts and are held as deposits
at SPB. The Company is a guarantor of certain performances and lease servicing
by IBC. The Company is a guarantor for AMN's performance with regards to the
Auto Trust 1997-A securitization.
Sales of Loans and Servicing Rights
In the ordinary course of business, the Company is exposed to liability
under representations and warranties made to purchasers and insurers of leases
and mortgage loans and the purchasers of servicing rights. Under certain
circumstances, the Company is required to repurchase mortgage loans if there
has been a breach of representations or warranties. At December 31, 2000 and
1999, the related repurchase liability totaled $0 and $638,000.
During the years ended December 31, 2000 and 1999, respectively, the
Company retained servicing rights on $0 and $25.1 million of mortgage loans
sold through traditional secondary market channels and $0 and $132.4 million
on loans and leases sold through securitizations. Additionally, during the
year ended December 31, 2000 and 1999, respectively, the Company released
servicing rights to the purchasers on $0 and $258.5 million of mortgage loans
sold.
Loan Commitments
As of December 31, 2000 and 1999, the Company had unfunded open loan
commitments amounting to $851.5 million and $1.1 billion, respectively, to
fund loans. There is no exposure to credit loss in this type of commitment
until the loans are funded. Interest rate risk is mitigated by the use of
variable rate loan contracts.
Lease Commitments
Minimum rental commitments under all non-cancelable operating leases net of
aggregate sublease payments of $4.1 million at December 31, 2000 were as
follows:
(In thousands)
--------------
2001.......................................................... $ 3,562
2002.......................................................... 2,887
2003.......................................................... 2,546
2004.......................................................... 2,528
2005.......................................................... 1,488
Thereafter.................................................... 4,830
-------
Total....................................................... $17,841
=======
Rent expense excluding AMN discontinued operations for the years ended
December 31, 2000, 1999 and 1998 was $4.8 million, $5.2 million, and $5.3
million, respectively.
Waiver of Default on IBC Securitization Facilities
As a result of the recent credit downgrades of the Company's Senior Notes
by Moody's and Standard and Poor's ratings services, IBC is in technical
default of the terms of the 1997-2 Trust. As such, the insurer of the Class A
certificates may cause the 1997-2 Trust to go into "Turbo" amortization. Under
Turbo amortization, virtually all cash flows generated in the 1997-2 Trust
would be used to pay down the outstanding balance of the Class A certificates,
while the Class B and C Certificates, a majority of which are owned by IBC,
would receive virtually no cash flows for principal and interest payments
until the Class A certificates have been paid in full.
134
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
IBC received a waiver of this technical default in March 2001. The waiver will
be renewed monthly by the insurer, at its option. There can be no assurance
given that the insurer will continue to grant the monthly waiver to IBC. If
the waiver were not to be granted, IBC's monthly cash flow would decrease by
approximately $1.0 million per month, and cash flow to our parent company
would decrease by approximately $500,000 per month.
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 United States 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 allege 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. 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 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. Subsequently,
agreement was reached on October 10, 2000 to settle all remaining claims
against our company, under Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Section 15 of the Securities Act of 1933, for a cash payment
by our company of $3 million and issuance of warrants to purchase three
million shares of ICII common stock, at an exercise price of $3 per share, to
members of the class. The warrants, which expire in seven years, will be
freely tradable. The warrants were valued using the Black-Scholes option
pricing model and have an estimated value of $1.03 per warrant. The issuance
of the warrants resulted in a charge to operations, and a credit to
shareholders' equity of $3.1 million. The settlement, which was subject to
court approval, was set for hearing by the Court on February 21, 2001. On
February 21, 2001, the Court approved all of the settlements and dismissed the
action with prejudice.
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 United States 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. On February 9, 2001, the Court granted
plaintiffs leave to file a third amended complaint, in which plaintiffs added
a new defendant KPMG LLP, our company's independent auditor. On March 6, 2001,
defendants answered the third amended complaint and asserted a number of
affirmative defenses.
Our company is a defendant in Steadfast Insurance Company v. Auto Marketing
Network Inc. and Imperial Credit Industries, Inc. ("ICII"), 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
135
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. 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 for defaulted loans. The Court has
pending a motion for partial summary judgment, filed by the plaintiff, and a
motion for summary judgment filed by ICII on its counterclaim against
Steadfast. Steadfast also has counter-moved for summary judgement on ICII's
counterclaim, and the parties have filed motions seeking the exclusion of each
other's expert witnesses. The court cancelled a March 12, 2001 hearing on all
pending motions and has not rescheduled or indicated when a written order
could be expected.
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. On October 17, 2000, the Court stayed all proceedings and
certified for interlocutory appeal to the Ninth Circuit Court of Appeals its
order denying defendants' motion to dismiss. On January 12, 2001, the Ninth
Circuit Court of Appeal denied defendants' petition for permission to appeal.
On March 26, 2001, the District Court struck plaintiffs motion for class
certification and ordered plaintiff to take further action to give proper
notice to potential class members.
Our company and two of our directors, among others, are defendants in an
adversary proceeding filed by the liquidating trustee of the Southern Pacific
Funding Corp. liquidating trust on October 5, 2000, in the U.S. Bankruptcy
Court for the District of Oregon, In re Southern Pacific Funding Corp. Case
No. 398-37613-elp 11, Beck v. Imperial Credit Industries, Inc., et al, Adv.
Proc. No. 00-03337-elp. The trustee seeks to recover damages in excess of
$238.5 million for losses alleged to have been incurred by SPFC in connection
with its sub-prime lending and securitization program during the years 1995-
1998. The trustee alleges that the losses were caused by defendants' breaches
of fiduciary duties and negligence. In addition, the trustee seeks equitable
re-characterization of certain ICII claims against the SPFC bankruptcy estate
and also asserts a right of setoff against all defendants' various claims
against the bankruptcy estate for the wrongs alleged in the breach of
fiduciary duties and negligence claims. The Company and its two directors
moved to dismiss the adversary proceedings for lack of subject matter
jurisdiction and failure to state a claim. These motions were heard by the
Bankruptcy Court on December 20, 2000. By orders entered January 18, 2001, the
Bankruptcy Court denied the motion to dismiss for lack of subject matter
jurisdiction but granted, with leave to amend, the motion to dismiss for
failure to state a claim. The trustee has until April 18, 2001 to file an
amended complaint.
We intend to vigorously defend all of the above lawsuits. Management does
not anticipate any material financial impact related to pending litigation on
the Company's financial condition and results of operations.
136
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
28. Fair Value of Financial Instruments
Financial instruments include securities, loans receivable, deposits and
borrowings, and various off-balance sheet items. Because no market exists for
a portion of the Company's loans held for investment and securitization
related assets, fair value estimates are based on judgments regarding credit
risk, investor expectation of future economic conditions, normal cost of
administration and other risk characteristics, including interest rate and
prepayment risk. These estimates are subjective in nature and involve
uncertainties and matters of judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates. In
addition, the fair value estimates presented do not include the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments. The following methods and assumptions
were used by the Company in estimating its fair value disclosures for
financial instruments:
Financial Assets
The carrying values of cash, interest bearing deposits, FHLB stock, and
accrued interest receivable are considered to approximate fair value. The
carrying values of securities held for trading and available for sale
approximate fair value. Such market value is determined by reference to quoted
market prices. When quoted market prices are not available, fair value is
estimated by reference to market values for similar securities or by
discounting cash flows at an appropriate risk rate. The fair value of loans
and leases held for sale is based on sale commitments, discounted cash flow
analysis or prices for similar products. The fair value of loans held for
investment is estimated using a combination of techniques, including
discounting estimated future cash flows and quoted market prices for similar
instruments, taking into consideration the varying degrees of credit risk.
Financial Liabilities
The carrying amounts of deposits due on demand and accrued interest payable
is considered to approximate fair value. For fixed maturity deposits, fair
value is estimated by discounting estimated future cash flows using currently
offered rates for deposits of similar maturities. The fair value of debt is
based on rates currently available to the Company for debt with similar terms
and remaining maturities.
Off-Balance Sheet Financial Instruments
The fair value of lending commitments is estimated using the fees currently
charged to enter into similar agreements; such estimated fair value is not
material. The fair value of interest rate swaps, forward treasury contracts,
and interest rate futures to the extent used by the company is based on quoted
market prices. Total rate of return swaps are carried in securities held for
trading at their fair value.
137
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The estimated fair values of the Company's financial instruments at
December 31, 2000 and 1999 are as follows:
2000 1999
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(In thousands)
Assets:
Cash............................. $ 30,938 $ 30,938 $ 33,898 $ 33,898
Interest bearing deposits........ 183,193 183,193 248,182 248,182
Investment in Federal Home Loan
Bank stock...................... 4,148 4,148 6,960 6,960
Securities held for trading...... 164,050 164,050 160,805 160,805
Securities available for sale.... 63,684 63,684 74,374 74,374
Loans and leases held for sale... 386,469 396,865 289,398 289,638
Loans and leases held for
investment, net................. 1,122,494 1,122,642 1,223,071 1,222,338
Retained interest in loan and
lease securitizations........... 6,330 6,330 10,220 10,220
Accrued interest receivable...... 15,744 15,744 8,272 8,272
Liabilities:
Deposits......................... $1,632,704 $1,636,622 $1,614,758 $1,613,143
Borrowings from Federal Home Loan
Bank............................ 65,000 65,000 -- --
Other borrowings................. 84,118 84,118 74,309 74,309
Company obligated mandatorily
redeemable preferred securities
of subsidiary trust holding
solely debentures of the company
("ROPES')....................... 42,885 24,445 61,750 47,717
Senior notes..................... 176,757 74,022 185,185 144,444
Accrued interest payable......... 18,992 18,992 18,811 18,811
138
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
29. Summary of Quarterly Financial Information (unaudited)
Three Months Ended
--------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
(In thousands, except per share data)
2000
Interest income................. $ 53,360 $ 60,999 $ 57,429 $ 53,037
Net interest income(1).......... 21,107 25,591 20,284 17,630
Other income(2)................. 10,463 27,479 7,655 5,039
Provision for loan and lease
losses......................... 24,019 63,156 27,500 66,300
Other expenses(3)............... 25,466 23,899 33,450 20,222
Merger expenses................. 9,397 -- -- --
Net loss........................ (15,923) (18,779) (23,998) (104,626)
Comprehensive loss.............. (17,881) (18,995) (24,185) (103,963)
Loss per share:
Basic......................... $ (0.48) $ (0.58) $ (0.75) $ (3.26)
Diluted....................... $ (0.48) $ (0.58) $ (0.75) $ (3.26)
1999
Interest income................. $ 56,564 $ 48,749 $ 49,478 $ 52,648
Net interest income............. 25,251 20,368 19,082 21,130
Other income(4)................. 17,813 (11,438) 19,297 42,887
Provision for loan and lease
losses......................... 2,200 22,255 3,675 7,210
Other expenses.................. 30,788 29,906 25,233 40,673
Net income (loss)............... 6,762 (25,901) 8,243 8,068
Comprehensive income (loss)..... 7,904 (24,018) 8,595 8,493
Income (loss) per share:
Basic......................... $ 0.18 $ (0.74) $ 0.25 $ 0.24
Diluted....................... $ 0.18 $ (0.74) $ 0.25 $ 0.24
- --------
(1) Interest income increased in the quarter ended June 30, 2000 as a result of
an increase in the prime rate of interest and an increase in the
outstanding balance of loans
(2) Other income includes gain on sale of securities.
(3) Other expenses includes litigation settlement costs.
(4) Other income includes negative mark-to-market and loss on impairment
charges.
139
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
30. Selected Financial Information of Subsidiaries and Equity Investment
The following represents summarized financial information with respect to
the operations of SPB, a significant wholly-owned subsidiary of ICII.
Year Ended December 31,
----------------------------------
Southern Pacific Bank 2000 1999 1998
- --------------------- ---------- ---------- ----------
(In thousands)
Total assets................................ $1,844,185 $1,846,992 $1,976,055
Deposits.................................... 1,638,083 1,626,153 1,716,688
Borrowings from Federal Home Loan Bank...... 65,000 -- 20,000
Subordinated debt........................... 42,000 35,000 35,000
Shareholder's equity........................ 81,555 169,962 179,022
Interest income............................. 204,647 183,052 197,325
Interest expense............................ 115,345 92,162 95,647
Other noninterest income (expense).......... 5,054 (10,033) 2,738
Noninterest expense......................... 50,664 57,202 63,548
Provision for loan and lease losses......... 168,755 31,930 12,500
(Loss) income before taxes.................. (125,063) (8,275) 28,368
Net (loss) income........................... (117,636) (4,969) 16,393
Comprehensive (loss) income................. (117,407) (5,316) 16,393
31. Condensed Consolidating Financial Information
The following represents condensed consolidating financial information as
of December 31, 2000 and December 31, 1999, and for the years ended December
31, 2000, 1999 and 1998, with respect to the financial position, results of
operations and cash flows of the Company and its wholly-owned and majority-
owned subsidiaries. On January 17, 1997, the Company sold $200 million of
9.875% Senior Notes due 2007. As of December 31, 2000, the 9.875% Senior Notes
are guaranteed by five of the Company's wholly-owned subsidiaries, IBC, ICAI,
ICCAMC, Imperial Credit Worldwide ("ICW") and AMN (the "Guarantor
Subsidiaries"). As of December 31, 2000, the non-guarantor subsidiaries are
SPB, ICG and ICCTI. FMC was a guarantor subsidiary through September 30, 1997.
Each of the guarantees is full and unconditional and joint and several. The
summarized consolidated financial information is presented in lieu of separate
financial statements and other related disclosures of the wholly-owned
subsidiary guarantors as management has determined that such information is
not material to investors. None of the subsidiary guarantors is restricted
from making distributions to the Company.
140
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 2000
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
ASSETS
------
Cash.................... $ 2,975 $ 4,128 $ 29,214 $ (5,379) $ 30,938
Interest bearing
deposits............... 12,965 -- 170,228 -- 183,193
Investments in Federal
Home Loan Bank stock... -- -- 4,148 -- 4,148
Securities available for
sale and trading....... 40,378 52,449 148,907 (14,000) 227,734
Loans held for sale..... 885 -- 385,584 -- 386,469
Loans held for
investment, net........ 51,888 1,984 1,110,622 (42,000) 1,122,494
Real property........... -- 53,198 -- -- 53,198
Retained interest in
loan and lease
securitizations........ -- 6,330 -- -- 6,330
Investment in
subsidiaries........... 116,576 -- -- (116,576) --
Goodwill................ 16,154 -- 16,176 -- 32,330
Other assets............ 20,029 15,198 32,378 (4,492) 63,113
Net assets of
discontinued
operations............. 29,753 (12,123) -- -- 17,630
-------- -------- ---------- --------- ----------
Total assets.......... $291,603 $121,164 $1,897,257 $(182,447) $2,127,577
======== ======== ========== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
Deposits................ $ -- $ -- $1,638,083 $ (5,379) $1,632,704
Borrowings from FHLB.... -- -- 65,000 -- 65,000
Other borrowings........ 1,220 43,854 81,044 (42,000) 84,118
ROPES................... 44,211 -- (1,326) -- 42,885
Senior notes............ 176,757 -- -- -- 176,757
Minority interest in
consolidated
subsidiaries........... -- 3 -- 1,113 1,116
Goodwill................ -- 23,797 -- -- 23,797
Other liabilities....... 29,973 21,082 15,196 (4,493) 61,758
-------- -------- ---------- --------- ----------
Total liabilities..... 252,161 88,736 1,797,997 (50,759) 2,088,135
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- 1,009 14,000 (15,009) --
Common stock............ 97,668 107,565 122,792 (230,357) 97,668
(Accumulated deficit)
retained earnings...... (64,889) (82,402) (37,414) 119,816 (64,889)
Shares held in deferred
executive compensation
plan................... 5,745 5,745 -- (5,745) 5,745
Accumulated other
comprehensive income
(loss)................. 918 511 (118) (393) 918
-------- -------- ---------- --------- ----------
Total shareholders'
equity............... 39,442 32,428 99,260 (131,688) 39,442
-------- -------- ---------- --------- ----------
Total liabilities and
shareholders'
equity............... $291,603 $121,164 $1,897,257 $(182,447) $2,127,577
======== ======== ========== ========= ==========
141
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 2000
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
Interest income......... $ 17,565 $ 8,837 $ 204,732 $ (6,309) $ 224,825
Interest expense........ 26,885 4,048 115,589 (6,309) 140,213
--------- -------- --------- -------- ---------
Net interest (expense)
income................. (9,320) 4,789 89,143 -- 84,612
Provision for loan and
lease losses........... 167 12,053 168,755 -- 180,975
--------- -------- --------- -------- ---------
Net interest expense
after provision for
loan and lease
losses............... (9,487) (7,264) (79,612) -- (96,363)
--------- -------- --------- -------- ---------
Gain (loss) on sale of
loans and leases....... -- 563 (1,334) -- (771)
Asset management fees... -- 3,239 -- -- 3,239
Investment banking and
brokerage fees......... -- -- 21,057 -- 21,057
Loan servicing income... (160) 4,583 1,570 -- 5,993
Gain on sale of equity
securities............. 11,871 -- 1,117 -- 12,988
Equity in net income of
ICG.................... 479 -- -- -- 479
Rental income........... -- 8,183 -- -- 8,183
Mark to market on
securities and loans
held for sale.......... (1,721) (5,058) (6,031) -- (12,810)
Other income............ (432) 2,810 9,900 -- 12,278
--------- -------- --------- -------- ---------
Total fee and other
income............... 10,037 14,320 26,279 -- 50,636
--------- -------- --------- -------- ---------
Personnel expense....... 3,198 7,640 39,259 -- 50,097
Amortization of
servicing rights....... -- 529 -- -- 529
Occupancy expense....... 313 709 4,424 -- 5,446
Net expenses of other
real estate owned...... 169 858 359 -- 1,386
Professional services... 9,040 2,394 4,337 -- 15,771
Amortization of
goodwill, net.......... 924 (1,130) 1,637 -- 1,431
General, administrative
and other expense...... 2,180 7,388 18,809 -- 28,377
--------- -------- --------- -------- ---------
Total expenses........ 15,824 18,388 68,825 -- 103,037
--------- -------- --------- -------- ---------
Merger expenses......... -- 9,397 -- -- 9,397
Loss from continuing
operations before
income taxes, minority
interest, deferred
inter-company expense
and extraordinary
item................... (15,274) (20,729) (122,158) -- (158,161)
Income taxes............ 12,725 (2,708) (7,661) -- 2,356
Minority interest in
income (loss) of
consolidated
subsidiaries........... -- 130 (9) 1,004 1,125
--------- -------- --------- -------- ---------
Loss from continuing
operations before
equity in undistributed
income of
subsidiaries........... (27,999) (18,151) (114,488) (1,004) (161,642)
Equity in undistributed
(loss) income of
subsidiaries........... (138,861) -- -- 138,861 --
--------- -------- --------- -------- ---------
(Loss) income from
continuing operations.. (166,860) (18,151) (114,488) 137,857 (161,642)
Loss from discontinued
operations............. -- (5,218) -- -- (5,218)
--------- -------- --------- -------- ---------
(Loss) income before
extraordinary item..... (166,860) (23,369) (114,488) 137,857 (166,860)
Extraordinary item--gain
on early extinguishment
of debt, net of income
taxes.................. 3,534 -- -- -- 3,534
--------- -------- --------- -------- ---------
Net (loss) income
available for common
shares................. $(163,326) $(23,369) $(114,488) $137,857 $(163,326)
========= ======== ========= ======== =========
142
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31, 2000
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
Net cash (used in)
provided by operating
activities............. $(119,081) $ 10,672 $(41,687) $ 117,846 $(32,250)
--------- -------- -------- --------- --------
Cash flows from
investing activities:
Net change in interest
bearing deposits..... 22,084 1,116 42,247 -- 65,447
Sales and collections
of securities
available for sale... 10,180 939 19,768 2,499 33,386
Purchase of securities
available for sale... -- -- (50,000) -- (50,000)
Net change in loans
held for investment.. 10,189 6,441 (85,588) 4,113 (64,845)
Proceeds from sale of
securities........... 22,495 -- -- -- 22,495
Net cash received in
ICCMIC acquisition... -- 11,524 -- -- 11,524
Investment in SPB
subordinated debt.... (24,000) -- -- 24,000 --
Investment in SPB
noncumulative
perpetual preferred
stock................ (5,000) -- 5,000 -- --
Net change in
investment in
subsidiaries......... 123,446 -- -- (123,446) --
Other, net............ (3,130) 1,294 5,511 -- 3,675
--------- -------- -------- --------- --------
Net cash provided by
(used in) investing
activities............. 156,264 21,314 (63,062) (92,834) 21,682
--------- -------- -------- --------- --------
Cash flows from
financing activities:
Net change in
deposits............. -- (2,050) 11,929 8,067 17,946
Advances from Federal
Home Loan Bank....... -- -- 95,000 -- 95,000
Repayments of advances
from Federal Home
Loan Bank............ -- -- (30,000) -- (30,000)
Net change in other
borrowings........... (6,691) (25,241) 7,290 (26,188) (50,830)
Repurchase of Senior
Notes................ (6,498) -- -- -- (6,498)
Repurchase of ROPES... (15,060) -- -- -- (15,060)
Repurchase of common
stock................ (4,062) -- -- -- (4,062)
Proceeds from exercise
of stock options..... 43 -- -- -- 43
Capital contribution.. (15,000) -- 15,000 -- --
Other, net............ 1,950 (1,949) (108) 1,176 1,069
--------- -------- -------- --------- --------
Net cash used in
financing activities... (45,318) (29,240) 99,111 (16,945) 7,608
--------- -------- -------- --------- --------
Net change in cash.... (8,135) 2,746 (5,638) 8,067 (2,960)
Cash at beginning of
period............... 11,110 1,382 34,852 (13,446) 33,898
--------- -------- -------- --------- --------
Cash at end of
period............... $ 2,975 $ 4,128 $ 29,214 $ (5,379) $ 30,938
========= ======== ======== ========= ========
143
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 1999
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
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 (51,617) 1,233,071
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 12,488 27,300 6,236 72,254
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
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 4,341 126 -- 57,549
-------- -------- ---------- --------- ----------
Total liabilities....... 310,196 12,684 1,729,758 (56,403) 1,996,235
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock........... -- 14,150 -- (14,150) --
Common stock.............. 97,220 120,551 110,977 (231,528) 97,220
Retained earnings
(accumulated deficit).... 98,437 (64,641) 80,295 (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 79,673 190,925 (270,598) 205,380
-------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity... $515,576 $ 92,357 $1,920,683 $(327,001) $2,201,615
======== ======== ========== ========= ==========
144
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1999
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
Interest income......... $ 21,521 $ 9,639 $183,576 $(7,298) $207,438
Interest expense........ 32,184 1,595 92,599 (4,771) 121,607
-------- -------- -------- ------- --------
Net interest (expense)
income................. (10,663) 8,044 90,977 (2,527) 85,831
Provision for loan and
lease losses........... 210 3,200 31,930 -- 35,340
-------- -------- -------- ------- --------
Net interest (expense)
income after
provision for loan
and lease losses..... (10,873) 4,844 59,047 (2,527) 50,491
-------- -------- -------- ------- --------
Gain on sale of loans
and leases............. 20 4,398 2,062 -- 6,480
Asset management fees... -- 10,054 -- -- 10,054
Investment banking and
brokerage fees......... -- -- 27,198 -- 27,198
Loan servicing income... 59 4,397 2,429 -- 6,885
Gain (loss) on sale of
equity securities...... 31,434 (298) 1,606 -- 32,742
Equity in net loss of
FMC.................... (53) -- -- -- (53)
Mark to market on
securities and loans
held for sale.......... 11,314 (15,022) (24,933) -- (28,641)
Dividends received from
subsidiaries........... 6,564 -- -- (6,564) --
Other income............ 1,965 3,169 8,760 -- 13,894
-------- -------- -------- ------- --------
Total fee and other
income............... 51,303 6,698 17,122 (6,564) 68,559
-------- -------- -------- ------- --------
Personnel expense....... 3,133 14,574 42,634 -- 60,341
Amortization of
servicing rights....... -- 259 3,964 -- 4,223
Occupancy expense....... 784 911 3,963 -- 5,658
Net (income) expenses of
other real estate
owned.................. (23) 717 692 -- 1,386
Professional services... 2,770 2,725 4,770 -- 10,265
Amortization of
goodwill............... 200 12,653 1,653 -- 14,506
General, administrative
and other expense...... 2,454 4,048 23,719 -- 30,221
-------- -------- -------- ------- --------
Total expenses........ 9,318 35,887 81,395 -- 126,600
-------- -------- -------- ------- --------
Income (loss) from
continuing operations
before income taxes,
minority interest,
deferred inter-company
expense and
extraordinary item..... 31,112 (24,345) (5,226) (9,091) (7,550)
Income taxes............ 10,020 (9,789) (3,305) -- (3,074)
Minority interest in
income (loss) of
consolidated
subsidiaries........... 421 (46) 572 527 1,474
-------- -------- -------- ------- --------
Income (loss) from
continuing operations
before equity in
undistributed income of
subsidiaries........... 20,671 (14,510) (2,493) (9,618) (5,950)
Equity in undistributed
(loss) income of
subsidiaries........... (27,520) -- -- 27,520 --
-------- -------- -------- ------- --------
(Loss) income from
continuing operations.. (6,849) (14,510) (2,493) 17,902 (5,950)
Loss from discontinued
operations............. -- (899) -- -- (899)
-------- -------- -------- ------- --------
(Loss) income before
extraordinary item..... (6,849) (15,409) (2,493) 17,902 (6,849)
Extraordinary item--gain
on early extinguishment
of debt, net of income
taxes.................. 4,021 -- -- -- 4,021
-------- -------- -------- ------- --------
Net (loss) income....... (2,828) (15,409) (2,493) 17,902 (2,828)
Preferred stock
dividends.............. -- 2,527 -- (2,527) --
-------- -------- -------- ------- --------
Net (loss) income
available for common
shares................. $ (2,828) $(17,936) $ (2,493) $20,429 $ (2,828)
======== ======== ======== ======= ========
145
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31, 1999
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
Net cash provided by
operating activities... $ 19,031 $ 4,385 $ 96,793 $ 31,413 $ 151,622
-------- -------- --------- -------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits..... (32,768) 423 (214,422) -- (246,767)
Sale of securities
available for sale... 4,875 -- -- -- 4,875
Purchase of securities
available for sale... (4,050) -- (26,757) 4,050 (26,757)
Net change loans held
for investment....... (11,984) (12,868) (1,524) (865) (27,241)
Proceeds of sale of
OREO................. 1,216 4,907 4,228 -- 10,351
Proceeds of sales of
securities........... 91,709 8,849 -- -- 100,558
Purchases of premises
and equipment........ (1,246) (612) (5,909) -- (7,767)
Purchase of FHLB
stock................ -- -- (1,983) -- (1,983)
Cash utilized for
acquisitions......... (8,132) -- -- -- (8,132)
Net change in
investment in
subsidiaries......... 21,839 -- -- (21,839) --
-------- -------- --------- -------- ---------
Net cash provided by
(used in) investing
activities............. 61,459 699 (246,367) (18,654) (202,863)
-------- -------- --------- -------- ---------
Cash flows from
financing activities:
Net change in
deposits............. -- -- (87,611) (11,883) (99,494)
Advances from Federal
Home Loan Bank....... -- -- 30,000 -- 30,000
Repayments of advances
from Federal Home
Loan Bank............ -- -- (50,000) -- (50,000)
Proceeds from issuance
of mandatorily
redeemable cumulative
preferred stock...... 30,000 -- -- -- 30,000
Repurchase of
mandatorily
redeemable cumulative
preferred stock...... (31,353) -- -- -- (31,353)
Net change in other
borrowings........... (12,570) (4,591) (294) (10,506) (27,961)
Repurchase of Senior
Notes................ (27,453) -- -- -- (27,453)
Repurchase of ROPES... (6,628) -- -- -- (6,628)
Capital contributions
from ICII............ (2,681) 2,555 126 -- --
Dividends paid to
ICII................. 6,561 (2,485) (4,076) -- --
Proceeds from exercise
of stock options..... 249 -- -- -- 249
Net change in minority
interest............. 731 94 22 (1,380) (533)
Repurchase and
retirement of stock.. (29,460) -- -- -- (29,460)
-------- -------- --------- -------- ---------
Net cash used in
financing activities... (72,604) (4,427) (111,833) (23,769) (212,633)
-------- -------- --------- -------- ---------
Net change in cash.... 7,886 657 (261,407) (11,010) (263,874)
Cash at beginning of
period............... 3,224 725 296,259 (2,436) 297,772
-------- -------- --------- -------- ---------
Cash at end of
period............... $ 11,110 $ 1,382 $ 34,852 $(13,446) $ 33,898
======== ======== ========= ======== =========
146
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 1998
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
ASSETS
------
Cash.................... $ 3,224 $ 725 $ 296,259 $ (2,436) $ 297,772
Interest bearing
deposits............... 2,281 423 (1,289) -- 1,415
Investments in Federal
Home Loan Bank stock... -- -- 4,657 -- 4,657
Securities available for
sale and trading....... 118,623 8,421 113,723 (10,000) 230,767
Loans held for sale..... 1,698 33,160 284,203 -- 319,061
Loans held for
investment, net........ 45,029 7,467 1,302,599 (35,000) 1,320,095
Servicing rights........ -- 365 3,964 -- 4,329
Retained interest in
loan and lease
securitizations........ -- 27,011 -- -- 27,011
Investment in FMC....... 56,334 -- -- -- 56,334
Investment in
subsidiaries........... 276,863 -- -- (276,863) --
Goodwill................ -- 16,959 20,539 -- 37,498
Other assets............ 32,247 12,200 28,910 (1,925) 71,432
Net assets of
discontinued
operations............. 43,624 3,188 -- -- 46,812
-------- -------- ---------- --------- ----------
Total assets........ $579,923 $109,919 $2,053,565 $(326,224) $2,417,183
======== ======== ========== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
---------------------
Deposits................ $ -- $ -- $1,716,689 $ (2,437) $1,714,252
Borrowings from FHLB.... -- -- 20,000 -- 20,000
Other borrowings........ 20,481 15,097 103,617 (36,925) 102,270
ROPES................... 72,165 (2,165) -- -- 70,000
Senior notes............ 219,858 -- -- -- 219,858
Minority interest in
consolidated
subsidiaries........... (628) 2,109 133 1,603 3,217
Other liabilities....... 34,526 7,253 12,286 -- 54,065
-------- -------- ---------- --------- ----------
Total liabilities... 346,402 22,294 1,852,725 (37,759) 2,183,662
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock....... -- 12,000 -- (12,000) --
Common stock.......... 129,609 135,279 114,258 (249,537) 129,609
Retained earnings
(accumulated
deficit)............. 101,265 (63,487) 86,582 (23,095) 101,265
Shares held in
deferred executive
compensation plan.... 3,833 3,833 -- (3,833) 3,833
Accumulated other
comprehensive loss... (1,186) -- -- -- (1,186)
-------- -------- ---------- --------- ----------
Total shareholders'
equity............. 233,521 87,625 200,840 (288,465) 233,521
-------- -------- ---------- --------- ----------
Total liabilities
and shareholders'
equity............. $579,923 $109,919 $2,053,565 $(326,224) $2,417,183
======== ======== ========== ========= ==========
147
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1998
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
Interest income......... $ 30,082 $ 12,962 $197,209 $ (4,413) $ 235,840
Interest expense........ 30,617 1,131 95,771 (4,413) 123,106
--------- -------- -------- -------- ---------
Net interest (expense)
income................. (535) 11,831 101,438 -- 112,734
Provision for loan and
lease losses........... -- 2,950 12,500 -- 15,450
--------- -------- -------- -------- ---------
Net interest (expense)
income after
provision for loan
and lease losses..... (535) 8,881 88,938 -- 97,284
--------- -------- -------- -------- ---------
Gain on sale of loans
and leases............. 46 4,790 10,052 -- 14,888
Asset management fees... -- 7,591 -- -- 7,591
Investment banking and
brokerage fees......... -- -- 18,633 (170) 18,463
Loan servicing (expense)
income................. (434) 4,907 7,510 -- 11,983
Loss on sale of equity
securities............. (179) (50) (363) -- (592)
Equity in net income of
SPFC................... 12,739 -- -- -- 12,739
Equity in net income of
FMC.................... 3,235 -- -- -- 3,235
Mark to market on
securities and loans
held for sale.......... (4,993) (11,604) (25,791) -- (42,388)
Loss on impairment of
equity securities...... (120,138) -- -- -- (120,138)
Dividends received from
subsidiaries........... 25,410 -- -- (25,410) --
Other income............ 362 1,292 11,464 -- 13,118
--------- -------- -------- -------- ---------
Total other (loss)
income.............. (83,952) 6,926 21,505 (25,580) (81,101)
--------- -------- -------- -------- ---------
Personnel expense....... 4,415 9,715 47,506 -- 61,636
Amortization of
servicing rights....... -- (365) 1,851 -- 1,486
Occupancy expense....... 1,267 942 3,541 -- 5,750
Net (income) expenses of
other real estate
owned.................. (548) 459 (812) -- (901)
Professional services... 2,897 2,773 5,348 (170) 10,848
Amortization of
goodwill............... -- 1,084 1,602 -- 2,686
Provision for loss on
loan repurchase........ 4,750 -- -- -- 4,750
General, administrative
and other expense...... 3,493 4,121 26,967 -- 34,581
--------- -------- -------- -------- ---------
Total expenses....... 16,274 18,729 86,003 (170) 120,836
--------- -------- -------- -------- ---------
(Loss) income from
continuing operations
before income taxes,
minority interest,
deferred inter- company
expense and
extraordinary item..... (100,761) (2,922) 24,440 (25,410) (104,653)
Income taxes............ (55,061) (981) 11,978 -- (44,064)
Minority interest in
(loss) income of
consolidated
subsidiaries........... (1,552) 88 22 (22) (1,464)
--------- -------- -------- -------- ---------
(Loss) income from
continuing operations
before equity in
undistributed income of
subsidiaries........... (44,148) (2,029) 12,440 (25,388) (59,125)
Equity in undistributed
(loss) income of
subsidiaries........... (29,485) -- -- 29,485 --
--------- -------- -------- -------- ---------
(Loss) income from
continuing operations.. (73,633) (2,029) 12,440 4,097 (59,125)
Loss from discontinued
operations............. -- (3,232) -- -- (3,232)
Loss on disposal of
AMN.................... -- (11,276) -- -- (11,276)
--------- -------- -------- -------- ---------
Net (loss) income....... $ (73,633) $(16,537) $ 12,440 $ 4,097 $ (73,633)
========= ======== ======== ======== =========
148
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31, 1998
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
Net cash (used in)
provided by operating
activities............. $(50,644) $(27,150) $ 39,006 $ 1,653 $ (37,135)
-------- -------- --------- -------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits..... 29,109 726 72,488 -- 102,323
Purchase of securities
available for sale... (16,651) (900) -- -- (17,551)
Sale of securities
available for sale... -- 8,818 -- -- 8,818
Net change loans held
for investment....... 10,884 15,738 (303,251) -- (276,629)
Proceeds of sale of
OREO................. 2,558 9,360 1,825 -- 13,743
Proceeds of sales of
IMH stock............ 867 -- -- -- 867
Purchases of premises
and equipment........ (1,721) (671) (5,441) -- (7,833)
Redemption of FHLB
stock................ -- -- 1,280 -- 1,280
Net change in
investment in
subsidiaries......... 4,591 -- -- (4,591) --
-------- -------- --------- -------- ---------
Net cash provided by
(used in) investing
activities............. 29,637 33,071 (233,099) (4,591) (174,982)
-------- -------- --------- -------- ---------
Cash flows from
financing activities:
Net change in
deposits............. -- -- 523,924 31,382 555,306
Advances from Federal
Home Loan Bank....... -- -- 44,500 -- 44,500
Repayments of advances
from Federal Home
Loan Bank............ -- -- (69,500) -- (69,500)
Net change in other
borrowings........... 19,261 (15,153) (47,911) 1,232 (42,571)
Capital contributions
from ICII............ (4,332) 4,332 -- -- --
Dividends paid to
ICII................. 20,915 (16,915) (4,000) -- --
Proceeds from exercise
of stock options..... 1,037 -- -- -- 1,037
Net change in minority
interest............. (1,574) (111) 22 1,706 43
Repurchase and
retirement of stock.. (24,305) -- -- -- (24,305)
-------- -------- --------- -------- ---------
Net cash provided by
(used in) financing
activities............. 11,002 (27,847) 447,035 34,320 464,510
-------- -------- --------- -------- ---------
Net change in cash.... (10,005) (21,926) 252,942 31,382 252,393
Cash at beginning of
period............... 13,229 22,651 43,317 (33,818) 45,379
-------- -------- --------- -------- ---------
Cash at end of
period............... $ 3,224 $ 725 $ 296,259 $ (2,436) $ 297,772
======== ======== ========= ======== =========
149
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
32. Imperial Credit Industries, Inc. (Parent Company Only)
CONDENSED BALANCE SHEETS
December 31,
------------------
2000 1999
-------- --------
(In thousands)
ASSETS
------
Cash............................................ $ 2,975 $ 11,110
Interest bearing deposits....................... 12,965 35,049
Securities available for sale................... 22,130 41,365
Trading securities.............................. 18,248 33,462
Loans held for sale............................. 885 1,441
Loans held for investment, net.................. 51,888 55,721
Premises and equipment, net..................... 1,327 1,846
Other real estate owned, net.................... -- 187
Investment in subsidiaries...................... 116,576 255,024
Accrued interest on loans....................... 2,728 2,135
Goodwill........................................ 16,154 11,778
Other assets.................................... 15,974 22,062
Net assets of discontinued operations........... 29,753 44,396
-------- --------
Total assets................................ $291,603 $515,576
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Other borrowings................................ $ 1,220 $ 7,911
Company obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely debentures of the company
("ROPES")...................................... 44,211 63,915
Senior Notes.................................... 176,757 185,185
Minority interest in consolidated subsidiaries.. 103
Other liabilities............................... 29,973 53,082
-------- --------
Total liabilities........................... 252,161 310,196
-------- --------
Shareholders' equity:
Common stock, no par value, authorized
80,000,000 shares; 32,096,361 and 33,198,661
shares issued and outstanding at December 31,
2000 and 1999, respectively.................. 97,668 97,220
(Accumulated deficit) retained earnings....... (64,889) 98,437
Shares held in deferred executive compensation
plan......................................... 5,745 7,107
Accumulated other comprehensive income--
unrealized gain (loss) on securities
available for sale, net...................... 918 2,616
-------- --------
Total shareholders' equity.................. 39,442 205,380
-------- --------
Total liabilities and shareholders' equity.. $291,603 $515,576
======== ========
150
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Years Ended December 31,
------------------------------
2000 1999 1998
--------- -------- ---------
(In thousands)
Interest income................................ $ 17,565 $ 21,521 $ 30,082
Interest expense............................... 26,885 32,184 30,617
--------- -------- ---------
Net interest (expense) income................ (9,320) (10,663) (535)
Provision for loan and lease losses............ 167 210 --
--------- -------- ---------
Net interest expense after provision for loan
and lease losses.............................. (9,487) (10,873) (535)
Gain (loss) on sale of loans................... -- 20 46
Loan servicing income (expense)................ (160) 59 (434)
Loss on impairment of securities............... -- -- (120,138)
Gain (loss) on sale of securities.............. 11,871 31,434 (179)
Mark to market on securities................... (1,721) 11,314 (4,993)
Dividends received from subsidiaries........... -- 6,564 25,410
Equity in net income of SPFC................... -- -- 12,739
Equity in net (loss) income of FMC............. -- (53) 3,235
Equity in net income of ICG.................... 479 -- --
Other income (loss)............................ (432) 1,965 362
--------- -------- ---------
Total other income (loss).................... 10,037 51,303 (83,952)
--------- -------- ---------
Personnel expense.............................. 3,198 3,133 4,415
Occupancy expense.............................. 313 784 1,267
Other expense.................................. 12,313 5,401 10,592
--------- -------- ---------
Total expenses............................... 15,824 9,318 16,274
--------- -------- ---------
Income (loss) before income taxes, minority
interest, deferred inter- company items and
extraordinary item............................ (15,274) 31,112 (100,761)
Income taxes................................... 12,725 10,020 (55,061)
--------- -------- ---------
Income (loss) before minority interest,
deferred inter-company items and extraordinary
item.......................................... (27,999) 21,092 (45,700)
Minority interest in income (loss) of
consolidated subsidiaries..................... -- 421 (1,552)
--------- -------- ---------
Income (loss) before extraordinary item........ (27,999) 20,671 (44,148)
Extraordinary item--income on extinguishment of
debt, net of income taxes..................... 3,534 4,021 --
--------- -------- ---------
Income (loss) before equity in undistributed
income of subsidiaries........................ (24,465) 24,692 (44,148)
Equity in undistributed (loss) income of
subsidiaries, net of income taxes(1).......... (138,861) (27,520) (29,485)
--------- -------- ---------
Net loss..................................... $(163,326) $ (2,828) $ (73,633)
========= ======== =========
- --------
(1) Includes net loss from discontinued operations of $5.2 million, $899,000
and $14.5 million for 2000, 1999 and 1998, respectively.
151
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------
2000 1999 1998
--------- -------- --------
(In thousands)
Net cash (used in) provided by operating
activities..................................... $(119,081) $ 19,031 $(50,644)
--------- -------- --------
Cash flows from investing activities:
Net change in interest bearing deposits....... 22,084 (32,768) 29,109
Proceeds from sale of other real estate
owned........................................ -- 1,216 2,558
Purchase of securities available for sale..... -- (4,050) (16,651)
Sale and collections of securities available
for sale..................................... 10,180 4,875 --
Proceeds from sale of securities.............. 22,495 91,709 867
Net change in loans held for investment....... 10,189 (11,984) 10,884
Net change in investment in subsidiaries...... 123,446 21,839 4,591
Investment in SPB subordinated debt........... (24,000) -- --
Investment in SPB noncumulative perpetual
preferred stock.............................. (5,000) -- --
Cash utilized for acquisitions................ (2,822) (8,132) --
Other......................................... (308) (1,246) (1,721)
--------- -------- --------
Net cash provided by investing activities....... 156,264 61,459 29,637
--------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of mandatorily
redeemable cumulative preferred stock........ -- 30,000 --
Repurchase and extinguishment of mandatorily
redeemable cumulative preferred stock........ -- (31,353) --
Repurchase and extinguishment of ROPES........ (15,060) (6,628) --
Repurchase and extinguishment of Senior
Notes........................................ (6,498) (27,453) --
Repurchase and retirement of common stock and
warrants..................................... (4,062) (29,460) (24,305)
Capital contributions to consolidated
subsidiaries................................. (15,000) (2,681) (4,332)
Dividends and return of capital received from
consolidated subsidiaries.................... -- 6,561 20,915
Proceeds from exercise of stock options....... 43 249 1,037
Net change in other borrowings................ (6,691) (12,570) 19,261
Net change in minority interest............... -- 731 (1,574)
Other......................................... 1,950 -- --
--------- -------- --------
Net cash (used in) provided by financing
activities..................................... (45,318) (72,604) 11,002
--------- -------- --------
Net change in cash.............................. (8,135) 7,886 (10,005)
Cash at beginning of year....................... 11,110 3,224 13,229
--------- -------- --------
Cash at end of year............................. $ 2,975 $ 11,110 $ 3,224
========= ======== ========
152
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Disclosure of Cash Flow Information
The following information supplements the condensed statements of cash
flows:
December 31,
------------------------
2000 1999 1998
------- ------- -------
(In thousands)
Cash paid (received) during the period for:
Interest....................................... $27,400 $33,911 $28,892
Income taxes................................... (4,123) 817 5,884
Significant non-cash activities:
Loans transferred to OREO...................... 114 1,082 2,798
Change in unrealized gain on securities
available for sale, net....................... 1,698 3,802 (3,112)
Assets contributed to SPB...................... -- -- 9,547
Issuance of warrants........................... 3,082 -- --
33. Issuance of Warrants to Purchase Common Stock
In October 2000, we reached an agreement with the plaintiffs to settle the
securities class action litigation identified as 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. As a part of the settlement,
ICII agreed to issue warrants to purchase three million shares of ICII Common
Stock with an exercise price of $3.00 per share. The warrants have a term of
seven years from their issuance date. The Common Stock to be issued upon the
exercise of the warrants will be registered and freely tradable and have the
same rights as ICII's existing Common Stock. The warrants will have change of
control and typical anti-dilution and adjustment features. The warrants were
valued using the Black-Scholes option pricing model and have an estimated
value of $1.03 per warrant. The issuance of the warrants resulted in a charge
to operations, and a credit to shareholders' equity of $3.1 million.
34. Subsequent Events
Recapitalization Transaction
On March 30, 2001 we completed the issuance of $16.2 million of Senior
Secured Debt. The notes bear an interest rate of 12% and mature on April 30,
2002. The issuance of the Senior Secured Debt is the first step in a
recapitalization plan first announced by our company in February 2001.
Subsequent to the completed Senior Secured Debt offering, we will offer pro
rata a package of the following securities in exchange (the "Debt Exchange")
for our three currently outstanding series of debt securities (the "Old
Notes"): (i) 12% Senior Secured Notes due 2005 (the "Exchange Notes"), (ii) up
to 2.0 million shares of our Common Stock, no par value and (iii) warrants to
purchase up to an additional 7.0 million shares of Common Stock at an exercise
price of $2.15 per share. Concurrently with consummation of the Debt Exchange,
we will issue up to 7.04 million shares of Common Stock to the holders of a
majority in interest of our Old Notes who executed the recapitalization
agreement. We further intend to issue and sell at least $10.0 million
principal amount of 12% Convertible Subordinated Notes due 2005 to accredited
investors in a private placement. The Convertible Subordinated Notes will be
convertible into Common Stock of the Company at $1.25 per share.
The holders of Old Notes will be offered Exchange Notes as follows: (i) the
holders of our 10.25% Remarketed Par Securities due 2002 will be offered to
convert into Exchange Notes at $0.80 per dollar of face amount of such Old
Notes, (ii) the holders of our 9.875% Senior Notes due 2007 will be offered to
convert into Exchange Notes at $0.65 per dollar of face amount of such Old
Notes, and (iii) the holders of our 9.75% Senior Notes due 2004 will be
offered to convert into Exchange Notes at $0.50 per dollar of face amount of
such Old Notes. A majority-in-interest of the 10.25% Remarketed Par Securities
due 2002 and our 9.875% Senior Notes due 2007 have agreed to participate in
the Debt Exchange, and to strip the Old Notes of all currently existing
financial covenants. Supplemental indentures eliminating all covenants related
to the Old Notes have been executed.
153
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subject to the occurrence of certain conditions (including the closing of
the Debt Exchange and the issuance of Convertible Subordinated Notes), all of
the Senior Secured Debt will be automatically exchanged into (i) $18.2 million
principal amount of Exchange Notes, (ii) 249,052 shares of Common Stock, and
(iii) warrants to purchase up to an additional 781,681 shares of Common Stock
at an exercise price of $2.155 per share. Each of the Senior Secured Debt
purchasers will further have the right during the period following the Debt
Exchange and ending March 31, 2002 to elect to exchange all or a portion of
their Exchange Notes and related shares of Common Stock and Debt Exchange
Warrants into $18.2 million principal amount of Convertible Subordinated
Notes. The Convertible Subordinated Notes will have a 12% coupon and will be
convertible into Common Stock at $1.25 per share.
The Senior Secured Debt Holders will be entitled to receive additional
amounts of Exchange Notes in connection with the sale of such notes by March
31, 2002 (and for a period of 60 days thereafter) if, with respect to
specified types of sales, the average trading price of the Exchange Notes
during the 30-day period ending on the last day of the month preceding the
month in which such sale occurs is less than a price of 89 or, for other
specified types of sales, if their net proceeds from such sales, are less than
89% of the principal amount of the Exchange Notes that are sold. In any such
event, each of such holders will be entitled to receive from us, pro rata in
accordance with the respective aggregate principal amounts of such Exchange
Notes held by such holder, additional principal amounts of Exchange Notes as
will generate net proceeds equal to the difference, expressed as a dollar
amount, between (i) 89% of the aggregate principal amount of the Exchange
Notes sold by such holder and, depending on the types of sales, either the sum
of (a) the average trading value of such Exchange Notes and (b) the net
proceeds, if any, resulting from the required concurrent actions as defined in
the recapitalization agreement or the sum of (x) the net proceeds from such
sale of Exchange Notes and (y) the net proceeds, if any, resulting from the
required concurrent actions; provided, that in either event, the maximum
principal amount of additional Exchange Notes so issuable to all such holders
in the aggregate will be limited to $5.0 million. If additional Exchange Notes
are required to be issued, 2.0 million shares of Common Stock that would
otherwise be issued to the holders of a majority interest in our Old Notes
will be reduced by 800 shares for each $1,000 in principal amount of
additional Exchange Notes required to be so issued.
Sales of Exchange Notes made above the 89% of principal amount threshold by
a holder would be taken into account in determining the amount of Exchange
Notes, if any, issuable to such holder for sales below the 89% threshold. In
addition, if the average trading price of the Exchange Notes during the 30 day
period ending March 31, 2002 is less than 70, the Senior Secured Debt Holders
will be issued the maximum principal amount of additional Exchange Notes
without being obligated to sell any of their Exchange Notes.
Upon successful completion of the proposed offering ICII will receive gross
proceeds of approximately $26 million of new capital, most of which will be
invested in Tier I capital of SPB. We believe that this new capital will
assist our company in its attempt to increase capital levels at SPB in order
to meet regulatory requirements. However, the funds raised as a result of
issuing the Senior Secured Debt and the Convertible Subordinated Notes will
not provide sufficient capital by themselves to meet the requirements of SPB
under its regulatory orders, and as such, we expect to raise additional
capital or reduce the size of SPB in order to meet the capital requirements of
the regulatory orders. Furthermore, the future exercise of warrants issued in
connection with the Debt Exchange is expected to provide an additional
approximately $15.0 million of capital for our company at the time of their
exercise approximately three years from the date of issuance of the Exchange
Notes.
There can be no assurance that the proposed offering can be completed or
that sufficient amounts of capital combined with asset reductions can be
achieved such that the Bank might comply with its regulatory order
requirements.
154
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
Name Age Position with Company
---- --- ---------------------
H. Wayne Snavely(1)(4).. 59 Chairman of the Board, President and Chief Executive Officer
Brad S. Plantiko(1)(4).. 45 Executive Vice President, Chief Financial Officer and Director
Irwin L. Gubman(1)...... 58 General Counsel and Secretary
Paul B. Lasiter(4)...... 34 Senior Vice President and Controller
Stephen J. Shugerman.... 53 Director
Robert S.
Muehlenbeck(2)......... 53 Director
Perry A. Lerner(2)(3)... 57 Director
James P. Staes(3)....... 62 Director
- --------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
(4) Member of Asset & Liability Committee.
H. Wayne Snavely has been our Chairman of the Board and Chief Executive
Officer since December 1991 and President since February 1996. Mr. Snavely
served as a director of Imperial Bank from 1975 to 1983 and from 1993 to
January 1998. He serves on the Board of Visitors of the Graduate School of
Business Management at Pepperdine University. Mr. Snavely is Chairman of the
Board of ICCMIC.
Brad S. Plantiko has been Executive Vice President and Chief Financial
Officer of the Company since July 1998. From October 1980 to July 1998, Mr.
Plantiko was with KPMG Peat Marwick, LLP, where he was partner in-charge of
its finance company services for the western United States. Mr. Plantiko has
more than 18 years of experience serving banks, thrifts, mortgage banks and
finance companies. He serves on the Board of Visitors of the Graduate School
of Business Management at Pepperdine University. Mr. Plantiko is a member of
the American Institute of Certified Public Accountants.
Irwin L. Gubman has been our General Counsel and Secretary since October
1996. From February 1992 to September 1996, Mr. Gubman was a Partner at
Coudert Brothers serving in various capacities including syndicated lending,
structured finance, and regulatory matters. From December 1970 to September
1991, Mr. Gubman served in various capacities at Bank of America, most
recently as Senior Vice President and Associate General Counsel.
Paul B. Lasiter has been our Senior Vice President and Controller since
November 1992. From June 1988 to November 1992, Mr. Lasiter was a Supervising
Senior Accountant for KPMG Peat Marwick, LLP, specializing in the financial
institutions industry. Mr. Lasiter is a Certified Public Accountant.
Stephen J. Shugerman has been a Director since December 1991. From June
1987 until December 1998, Mr. Shugerman was President of SPB. Mr. Shugerman
has been Vice-Chairman of SPB since December 1998. From June 1985 to May 1987,
Mr. Shugerman was President of ATI Thrift & Loan Association, a privately
owned thrift and loan association, and, from 1979 to 1985, he was Senior Vice
President of Imperial Thrift and Loan Association, a former subsidiary of
Imperial Bank. Mr. Shugerman has recently served as President of the
California Association of Thrift & Loan Companies.
155
Robert S. Muehlenbeck has been a Director since December 1991. Mr.
Muehlenbeck retired in 1998 as an Executive Vice President of Imperial Bank
with primary responsibility for corporate finance and mergers and
acquisitions. In addition, he also served as President of Imperial Ventures,
Inc., Imperial Bank's venture capital small business investment company and
President of Imperial Credit Corp., an investment and mezzanine lending
entity. Mr. Muehlenbeck was formerly the President of Seaborg, Incorporated
and has been involved in commercial and residential real estate development
and finance activities.
Perry A. Lerner has been a Director since May 1992. He has been a principal
in the investment firm of Crown Capital Group, Inc., since 1996. Mr. Lerner
was with the law firm of O'Melveny & Myers from 1982 to 1997, having been a
partner with the firm from 1984 to 1996. Mr. Lerner was an Attorney-Advisor of
the International Tax Counsel of the United States Treasury Department from
1973 to 1976. Mr. Lerner is a Director of Boss Holdings Inc., a specialty
consumer products company.
James P. Staes has been a Director since December 1999. Mr. Staes, a
commercial banker and retired Navy Captain, served as President and CEO of
Home Bank in Signal Hill, California from 1982 to 1996 and Vice Chairman of
California United Bank from 1996 to 1997. Mr. Staes is a past President of the
California Bankers Association and Southern California Community Bankers
Association. Mr. Staes also served as a director of the Western Independent
Bankers Association and as a member of the Conference of State Bank
Supervisors.
Our directors hold office until the next annual meeting of shareholders and
until their successors are elected and qualified, or until their earlier
resignation or removal. All officers are appointed by and serve at the
discretion of our Board of Directors, subject to employment agreements, where
applicable.
With the exception of Mr. Snavely and Mr. Shugerman, in their capacities as
Chairman and Director of Southern Pacific Funding Corporation, respectively,
no directors or executive officers were involved in any petitions under the
Federal bankruptcy laws during the past five years.
ITEM 11. EXECUTIVE COMPENSATION
The members of our board of directors who are not employees of our company
receive cash compensation of $7,500 per quarter and $500 for each board of
directors meeting attended and for each committee meeting attended which is
not on the same day as another board meeting. In addition, these non-employee
directors receive options to purchase 10,000 shares of our common stock which
vest on the one year anniversary of the date of grant and become first
exercisable one year from the date of the grant at a price equal to the fair
market value of the common stock on the date of the grant, and which expire on
the tenth anniversary of the date of the grant.
156
The following table provides information concerning the cash and non-cash
compensation earned and received by our Chief Executive Officer and our four
highly compensated executive officers (the "Named Executive Officers"), other
than our Chief Executive Officer, whose salary and bonus during the fiscal
year ended December 31, 2000 exceeded $100,000:
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
------------------------ Awards
Name and Principal Fiscal Other Annual Options
Position Year Salary Bonus Compensation Granted
------------------ ------ -------- -------- ------------ ------------
H. Wayne Snavely........ 2000 $500,000 $500,000(7) $24,767(1) --
President, Chief
Executive Officer and 1999 500,000 500,000 76,558(1) 150,000(2)
Chairman 1998 502,114 -- 78,640(1) --
Brad S. Plantiko........ 2000 $335,571 $300,000(7) $14,151(3) --
Executive Vice
President and Chief
Financial 1999 175,000 225,471 63,828(3) 100,000(2)
Officer 1998 77,403 99,519 55,815(3) 84,000(2)
Irwin L. Gubman......... 2000 $250,000 $300,000(7) $15,851(4) --
General Counsel and
Secretary 1999 210,385 100,000 64,703(4) 100,000(2)
1998 201,532 125,000 18,557(4) 26,800(2)
John C. Getzelman....... 2000 $205,573 $ -- $13,469(5) --
President, Southern
Pacific Bank 1999 196,285 100,000 16,614(5) 50,000(2)
1998 15,385 -- 923(5) 50,000(2)
Scott B. Sampson........ 2000 $300,000 $ -- $10,700(6) --
President, the Coast
Business Credit
division 1999 300,000 391,000 10,228(6) --
Of Southern Pacific
Bank 1998 227,302 471,404 13,517(6) 67,000(2)
- --------
(1) In 2000, 1999 and 1998, consists of a car allowance paid by our company of
$18,000, $18,000 and $18,000, respectively, and aggregate contributions
paid by our company of $6,767, $58,558 and $60,640, respectively, under
employee benefit plans.
(2) See "--Stock Option Plans" for details regarding the terms of such
options.
(3) In 2000 and 1999, consists of a car allowance paid by our company of
$9,000 and $9,000, respectively, and aggregate contributions paid by our
company of $5,151 and $54,828, respectively, under employee benefit plans.
(4) In 2000, 1999 and 1998 consists of a car allowance paid by our company of
$9,000, $9,000 and $8,307, respectively, and aggregate contributions paid
by our company of $6,851, $55,703 and $10,250, respectively, under
employee benefit plans.
(5) In 2000 and 1999, consists of a car allowance paid by our company of
$8,308 and $12,000, respectively, and aggregate contributions paid by our
company of $5,162 and $4,614, respectively, under employee benefit plans.
(6) In 2000, 1999 and 1998, consists of a car allowance paid by our company of
$6,000, $6,000 and $6,000, respectively, and aggregate contributions paid
by our company of $4,700, $4,228 and $7,517, respectively, under employee
benefit plans.
(7) In 2000, consists of amounts paid primarily in connection with the
successful completion of the ICCMIC acquisition.
157
Option Grants, Exercises and Year End Values
Potential Realized
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
2000 Percentage Exercise Option Term
Options of Total Price Expiration -------------------
Name Granted Grants Per Option Date 5% 10%
- ---- ------- ---------- ---------- ---------- --------- ---------
H. Wayne Snavely.. -- --% $ -- -- $ -- $ --
Brad S. Plantiko.. -- -- -- -- -- --
Irwin L. Gubman... -- -- -- -- -- --
John C.
Getzelman........ -- -- -- -- -- --
Scott B. Sampson.. -- -- -- -- -- --
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Number of
Number of Unexercised Senior
Unexercised Management Options
Options at FY- at
End Under the FY-End Under the Value of all Unexercised
Shares Option Plan Option Plan In-the-Money Options at
Acquired on Value Exercisable/ Exercisable/ December 31, 1999
Name Exercise Realized Unexercisable(1) Unexercisable(2) Exercisable/Unexercisable(3)
---- ----------- -------- ---------------- ------------------ ----------------------------
H. Wayne Snavely........ -- -- 340,000/210,000 917,052/-- $--/$--
Brad S. Plantiko........ -- -- 43,600/140,400 --/-- --/ --
Irwin L. Gubman......... -- -- 86,720/140,080 --/-- --/ --
John C. Getzelman....... -- -- --/-- --/-- --/ --
Scott B. Sampson........ -- -- 26,800/-- --/-- --/ --
- --------
(1) For a description of the terms of such options, see "--Stock Option
Plans."
(2) For a description of the terms of such options, see "--Senior Management
Stock Options."
(3) Based on a price per share of $0.47, which was the price of a share of our
common stock as quoted on the NASDAQ National Market at the close of
business on December 31, 2000.
Employment Agreements
As of January 1, 1997, Mr. Snavely entered into a five-year employment
agreement at an annual base salary of $450,000, subject to adjustment, plus an
annual bonus based on attainment of performance objectives, including our
company's return on equity, earnings per share and increase in the price of
our company's common stock. Mr. Snavely's total cash compensation may not
exceed $1.5 million annually.
Pursuant to the employment agreement with Mr. Snavely, he is entitled to
receive compensation following his termination, as follows: (1) with cause:
base salary shall be paid through the date on which termination occurs, or (2)
without cause (or for "good reason" as defined in the employment agreement),
base salary shall be paid through the date of termination together with the
pro-rata portion of any cash bonus award the employee would be entitled to
receive at year end and a severance amount equal to base salary reduced by the
employee's projected primary social security benefit. The severance amount
shall be further reduced if the executive becomes employed by another company
or becomes an independent contractor of another company and shall be
eliminated entirely if such other company is determined by our board of
directors to compete with our company.
Compensation Committee Interlocks and Insider Participation
Our company's Compensation Committee consists of Messrs. Muehlenbeck and
Lerner. Mr. Muehlenbeck retired in 1998 as an Executive Vice President of
Imperial Bank. Mr. Lerner is the Manager of Corona Film Finance Fund (in which
ICII is an investor).
158
Termination Protection Agreements
In January 1999, we entered into termination protection agreements with
Messrs. Snavely, Gubman and Plantiko. The agreements provide for severance
payments to those senior executives in the event of a change in control of our
company and a subsequent termination of any one of these senior executives
within three years of a change in control for any reason. The senior
executives will receive a lump sum payment of three times their respective
base salaries and their highest bonus earned in any of the last three fiscal
years preceding the change in control and a percentage of their respective
bonuses for the year in which the change of control occurs.
In addition, we will continue to provide these senior executives with
medical, dental, life insurance, disability and accidental death and
dismemberment benefits until the third anniversary of the termination unless
the executive becomes employed by another employer, in which case these
coverages will be secondary to those provided by the new employer. All
deferred compensation in respect of each senior executive will also become
fully vested and we will pay such executive in cash all deferred compensation
and any unpaid portion of the executive's bonus. Any amounts payable to an
executive will include additional amounts to cover certain taxes resulting
from those payments.
A change in control for purposes of the termination protection agreements
includes the following events: (1) any person or persons become the beneficial
owner of at least 40% of our outstanding common stock other than by the
acquisition of such common stock directly from our company, or (2) any merger
or other business combination, liquidation or sale of substantially all of our
assets where our shareholders and any trustee or fiduciary of our employee
benefit plans own less than 60% of the surviving corporation, or (3) within
any 24 month period, the persons who were directors immediately before the
beginning of such period cease to constitute at least a majority of our board,
or the board of any successor corporation.
The change in the composition of the Company's Board of Directors as a
result of the recapitalization transaction will trigger the Executive's rights
to be covered under the termination protection agreement for the following 36
months, including receipt of all benefits if terminated during that period
without cause or by the Executive for "good reason" as defined in their
agreements. In addition, the Executive may terminate employment for any reason
during the 13th month following a change in control, and the Executive would
be entitled to receive all benefits under the agreement. No agreement has been
negotiated with any of these Executives to waive any provision of his
termination protection agreement.
Senior Management Stock Options
Effective January 1992, members of senior management received ten year
options to purchase shares of our company's common stock. Such options are not
covered by our option plans described below. The exercise price of these
options is $0.89 per share for one-half of the options, with the other half
exercisable at $1.40 per share. These options are currently exercisable. H.
Wayne Snavely, Joseph R. Tomkinson, and Stephen J. Shugerman were granted
917,053, 917,053 and 458,526 of such options, respectively.
In April 1996, Mr. Tomkinson sold 750,000 shares of our common stock he
acquired under the option agreement described above. In November 1996, Mr.
Shugerman sold 300,000 shares of our common stock he acquired under the option
agreement described above.
We recognize compensation expense with respect to the senior management
stock options because they were granted at less than the estimated market
value of our common stock. The total compensation expense was $2.2 million,
all of which was recognized as of December 31, 1997.
Stock Option Plans
1992 Stock Option Plan
A total of 2,292,632 shares of our Common Stock has been reserved for
issuance under our 1992 Incentive Stock Option and Nonstatutory Stock Option
Plan (the "1992 Stock Option Plan"), which expires by its own terms in 2002. A
total of 525,366 options were outstanding at December 31, 2000.
159
The 1992 Stock Option Plan provides for the grant of "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and nonqualified stock options
("NQSOs") to employees, officers, directors and consultants. ISOs may be
granted only to employees. The 1992 Stock Option Plan is administered by our
board of directors or a committee appointed by our board, which determines the
terms of options granted, including the exercise price, the number of shares
subject to the option, and the option's exercisability. The exercise price of
all options granted under the 1992 Stock Option Plan must be at least equal to
the fair market value of such shares on the date of grant. The maximum term of
options granted under the 1992 Stock Option Plan is 10 years. With respect to
any participant who owns stock representing more than 10% of the voting rights
of our outstanding capital stock, the exercise price of any option must be at
least equal to 110% of the fair market value on the date of grant.
1996 Stock Option Plan
In 1996, we adopted our 1996 Stock Option, Deferred Stock and Restricted
Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of
ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards
consisting of deferred stock, restricted stock, stock appreciation rights and
limited stock appreciation rights ("Awards").
The 1996 Stock Option Plan is administered by a committee of directors
appointed by the board of directors (the "Committee"). ISOs may be granted to
the officers and key employees of the Company or any of its subsidiaries. The
exercise price for any option granted under the 1996 Stock Option Plan may not
be less than 100% (110% in the case of ISOs granted to an employee who is
deemed to own in excess of 10% of our outstanding common stock) of the fair
market value of the shares of common stock at the time the option is granted.
The purpose of the 1996 Stock Option Plan is to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to those whose job performance affects
our company. The effective date of the 1996 Stock Option Plan was June 21,
1996. A total of 3,000,000 shares of our common stock is reserved for issuance
under the 1996 Stock Option Plan and a total of 2,971,562 options were
outstanding at December 31, 2000.
If an option granted under the 1996 Stock Option Plan expires or
terminates, or an Award is forfeited, the shares subject to any unexercised
portion of such option or Award will again become available for the issuance
of further options or Awards under the 1996 Stock Option Plan. Unless
previously terminated by our board of directors, no options or Awards may be
granted under the 1996 Stock Option Plan after June 21, 2006.
Options granted under the 1996 Stock Option Plan will become exercisable
upon the terms of the grant made by the Committee. Awards will be subject to
the terms and restrictions of the Award made by the Committee. The Committee
has discretionary authority to select participants from among eligible persons
and to determine at the time an option or Award is granted and in the case of
options, whether it is intended to be an ISO or a NQSO. Under current law,
ISOs may not be granted to any individual who is not also an officer or
employee of our company or any subsidiary.
Each option must terminate no more than 10 years from the date it is
granted (or five years in the case of ISOs granted to an employee who is
deemed to own in excess of 10% of the combined voting power of our outstanding
common stock). Options may be granted on terms providing for exercise in whole
or in part at any time or times during their respective terms, or only in
specified percentages at stated time periods or intervals during the term of
the option, as determined by the Committee.
The exercise price of any option granted under the 1996 Stock Option Plan
is payable in full: (1) in cash (2) by surrender of shares of the Company's
Common Stock already owned by the option holder having a market value equal to
the aggregate exercise price of all shares to be purchased including, in the
case of the exercise of NQSOs, restricted stock subject to an Award under the
1996 Stock Option Plan, (3) by cancellation of indebtedness owed by the
Company to the option holder, or (4) by any combination of the foregoing.
Our board of directors may from time to time revise or amend the 1996 Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant
160
under any outstanding options or Award without such participant's consent or
may, without shareholder approval, increase the number of shares subject to
the 1996 Stock Option Plan or decrease the exercise price of a stock option to
less than 100% of fair market value on the date of grant (with the exception
of adjustments resulting from changes in capitalization), materially modify
the class of participants eligible to receive options or Awards under the 1996
Stock Option Plan, materially increase the benefits accruing to participants
under the 1996 Stock Option Plan or extend the maximum option term under the
1996 Stock Option Plan.
Profit Sharing and 401(k) Plan
On July 1, 1993, we terminated participation in Imperial Bancorp's 401(k)
and profit sharing plans, and we established our own 401(k) plan. On September
30, 1993, Imperial Bancorp transferred all plan assets to our company. Under
our 401(k) plan, employees may elect to enroll on the first of any month,
provided that they have been employed for at least six months. Employees may
contribute up to 14% of their salaries. We will match 50% of the first 4% of
employee contributions. We recorded 401(k) matching expense of $273,000,
$334,000 and $457,000, for the years ended December 31, 2000, 1999, and 1998,
respectively.
We may make an additional contribution at our discretion. If we made a
discretionary contribution, the contribution would first be allocated to those
employees deferring salaries in excess of 4%. The matching contribution would
be 50% of any deferral in excess of 4% up to a maximum deferral of 8%. If
discretionary contribution funds remain following the allocation outlined
above, then any remaining company discretionary contributions would be
allocated as a 50% match of employee contributions, on the first 4% of the
employee's deferrals. There were no discretionary contributions charged to
operations in 2000, 1999, or 1998. We make matching contributions as of
December 31st each year.
Deferred Executive Compensation Plans
Effective July 1, 1998, we adopted our Deferred Executive Compensation Plan
(the "DEC Plan 1") and our Deferred Executive Compensation Plan 2 (the "DEC
Plan 2", and together with the DEC Plan 1, the "DEC Plans"). The DEC Plans are
each administered by a committee appointed by our board of directors. Any of
our employees who have an annual base salary of at least $100,000 or who had
an annual base salary of at least $100,000 in the prior year and our directors
may elect to participate in the DEC Plans. A participant's annual base salary
includes all cash compensation excluding bonuses, commissions, employee
benefits, stock options, relocation expenses, incentive payments, non-monetary
awards, automobile and other allowances. Participants in the DEC Plans may
defer up to 50% of their annual base salary and commissions and/or up to 100%
of their annual bonus payments. Benefits accrued under the DEC Plans will be
paid to all participants, other than participants who have voluntarily
resigned their positions, in the form of a lifetime annuity issued by a life
insurance company. DEC Plan benefits accrue through retirement so long as the
participant remains employed by our company. Participants who voluntarily
resign prior to retirement will be paid all of their vested benefits under the
DEC Plans. If we terminate the DEC Plans, we may elect to pay participants in
a lump sum, or in a lifetime annuity.
Deferred compensation contributed to DEC Plan 1 will be invested in our
common stock. In 1998 and 1999, we matched contributions to the DEC Plan 1, to
be paid in our common stock, on a formula basis up to $50,000 per participant
provided minimum returns or equity have been met. The Company has elected not
to match contributions in FYE 2000. We also reserve the right to make
discretionary matches, to be paid in our common stock, in any year. Matching
contributions will vest 50% a year, commencing one year from the date of the
matching contributions. Matching contributions will vest completely if a
participating employee retires, becomes permanently disabled, or dies.
Deferred compensation contributed to DEC Plan 2 may be invested in certain
mutual and money market funds. We will not make matching contributions to the
DEC Plan 2. All DEC Plan 2 contributions are completely vested immediately.
161
Limitations on Directors' Liabilities and Indemnification
Our company and our subsidiaries' Articles of Incorporation and Bylaws
provide for indemnification of our officers and directors to the full extent
permitted by law. The General Corporation Law of the State of California
permits a corporation to limit, under certain circumstances, a director's
liability for monetary damages in actions brought by or in the right of the
corporation. Our company's and our subsidiaries' Articles of Incorporation
also provide for the elimination of the liability of directors for monetary
damages to the full extent permitted by law.
We also entered into agreements to indemnify our directors and officers in
addition to the indemnification provided for in the Articles of Incorporation
and Bylaws. These agreements, among other things, indemnify our directors and
officers for certain expenses (including attorneys' fees), judgments, fines,
and settlement amounts incurred in any action or proceeding, including any
action by or in the right of our company, on account of services as our
director or officer, as a director or officer of any of our subsidiaries, or
as a director or officer of any other enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and officers.
We have directors' and officers' liability insurance in the amount of $30.0
million. At present, there is no pending litigation or proceeding involving a
director, officer or employee of the Company as to which indemnification is
sought, nor are we aware of any threatened litigation or proceeding that may
result in claims for indemnification, except as set forth in Item 3. Legal
Proceedings.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Company's Common Stock as of
January 31, 2001, by (I) each director of the Company, (ii) the Chief
Executive Officer and the four most highly compensated executive officers
whose salary exceeded $100,000 for the year ended December 31, 2000, (iii)
each person who is known to the Company to own beneficially more than 5% of
the Common Stock, and (iv) all directors and executive officers of the Company
as a group. Unless otherwise indicated, the Company believes that the
beneficial owners of the Common Stock listed below have sole investment and
voting power with respect to such shares, subject to community property laws
where applicable.
Number of Shares % of Total
Beneficial Owner(1) Beneficially Owned Outstanding(2)
- ------------------- ------------------ --------------
Wallace R. Weitz & Company(3)............... 7,410,400 21.6%
Waveland Partners LP(4)..................... 3,160,232 9.2
Dimensional Fund Advisors(5)................ 2,793,060 8.1
H. Wayne Snavely(6)......................... 2,088,235 6.1
Stephen J. Shugerman(7)..................... 383,634 *
Perry A. Lerner(8).......................... 183,145 *
Robert S. Muehlenbeck(9).................... 158,242 *
James P. Staes(10).......................... 23,500 *
Paul B. Lasiter(11)......................... 162,103 *
Irwin L. Gubman(12)......................... 294,228 *
Brad S. Plantiko(13)........................ 183,365 *
Dave Hourigan(14)........................... 68,932 *
All Directors and Officers as a Group (9
persons)(15)............................... 3,545,384 10.3%
- --------
* Less than 1%.
(1) Each of such persons may be reached through our company at 23550
Hawthorne Boulevard, Building One, Suite 110, Torrance, California 90505,
telephone (310) 373-1704.
(2) Percentage ownership is based on 32,096,361 shares of common stock
outstanding as of January 31, 2001.
(3) Based upon a Schedule 13G filed with the Company reflecting beneficial
ownership as of December 31, 2000. The shares are owned by various
investment advisory clients of Wallace R. Weitz & Co., which is deemed a
beneficial owner of the shares only by virtue of the direct or indirect
investment and/or voting discretion they possess pursuant to the
provisions of investment advisory agreements with such clients.
162
(4) Based upon a Schedule 13G filed with the Company reflecting beneficial
ownership as of December 31, 2000.
(5) Based upon a Schedule 13G filed with the Company reflecting beneficial
ownership as of December 31, 2000.
(6) Includes 1,367,052 shares subject to stock options exercisable within 60
days of January 31, 2001.
(7) Includes 284,524 shares subject to stock options exercisable within 60
days of January 31, 2001.
(8) Includes 146,422 shares subject to stock options exercisable within 60
days of January 31, 2001.
(9) Includes 90,022 shares subject to stock options exercisable within 60 days
of January 31, 2001.
(10) Includes 10,000 shares subject to stock options exercisable within 60 days
of January 31, 2001.
(11) Includes 50,000 shares subject to stock options exercisable within 60 days
of January 31, 2001.
(12) Includes 136,720 shares subject to stock options exercisable within 60
days of January 31, 2001.
(13) Includes 93,600 shares subject to stock options exercisable within 60 days
of January 31, 2001.
163
ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS
Relationships with ICG
During the fourth quarter of 2000, we sold a portion of our ICG holdings to
ICG and to certain members of ICG's management. The Company currently owns
38.5% of ICG as compared to 63.2% prior to the sale. As a result of the sale,
we will no longer consolidate the operations of ICG. Beginning with the fourth
quarter of 2000, we consider ICG to be an Equity Interest and will report
future ICG results of operations as equity in the operations of ICG.
ICG has been engaged by our company to provide investment banking services
in connection with our recapitalization transaction. Under the terms of the
engagement, ICG may earn fees of up to $5.6 million upon the successful
completion of the recapitalization transaction. ICG has entered into a
separate agreement with our company that requires the prepayment of $2.6
million of principal amount of subordinated debt owed to our company by ICG
upon the payment of the fees earned as a result of the recapitalization
transaction. See Item 7. "Management's Discussion and Analysis--Results of
Operations--Recapitalization Transaction" for more information.
Sale of Holdings by former Principal Shareholder and Outstanding Line of
Credit
On May 14, 1999, we entered into an agreement with our former parent
Imperial Bank, a subsidiary of Imperial Bancorp (NYSE:IMP). On May 17, 1999,
we repurchased 10% or 3,682,536 shares of our outstanding common stock for
$8.00 per share or $29.5 million. At December 31, 1999, Imperial Bank owns no
shares of ICII common stock.
In October 1999, we purchased the Lewis Horwitz Organization and certain
loan portfolios from Imperial Bancorp. As part of the transaction, a line of
credit was established with Imperial Bank in order to fund the acquisition. As
of December 31, 1999, the outstanding balance for the line of credit was $6.7
million.
Relationships with IMH
In December 1997, we negotiated a termination of the management agreement
between ICAI and IMH (the "Termination Agreement"). We received consideration
pursuant to the Termination Agreement comprised of 2,009,310 shares of IMH
common stock and certain securitization-related assets. Additionally, we
agreed to cancel our note receivable from ICIFC, the origination unit of IMH,
in the amount of $29.1 million. We recorded the IMH common stock and the
securitization related assets at their estimated fair values of approximately
$35.0 million and $13.1 million, respectively, for a total of $48.1 million.
This amount, when netted with the $29.1 million cancellation of the ICIFC note
receivable resulted in the gain on termination of the management agreement of
approximately $19.0 million.
Pursuant to the IMH Registration Rights Agreement IMH agreed to file one or
more registration statements under the Securities Act in the future for shares
of IMH held by ICAI pursuant to the Termination Agreement, subject to certain
conditions. Pursuant to the IMH Registration Rights Agreement, IMH will use
its reasonable efforts to cause such registration statements to be kept
continuously effective for the public sale from time to time of the shares of
IMH held by ICAI pursuant to the Termination Agreement. ICAI contributed the
shares to ICII. During the years ended December 31, 1999, 1998 and 1997, we
sold 1,887,110 shares, 122,200 shares and 374,538 shares of IMH stock. At
December 31, 1999, we owned no shares of IMH common stock.
Relationships with ICCMIC
ICCMIC Management Agreement
On October 20, 1997, ICCMIC entered into a management agreement (the
"ICCMIC Management Agreement") with Imperial Credit Commercial Asset
Management Corporation ("ICCAMC"), a wholly-owned subsidiary of ICII, for an
initial term expiring on October 20, 1999. Mr. Snavely is the Chairman of
ICCMIC's board of directors. On July 23, 1999, we announced the signing of a
definitive merger agreement by which a
164
wholly owned subsidiary of ours would acquire all of the outstanding shares of
ICCMIC (consisting of the 25,930,000 shares not already owned by us and
certain of our affiliates and subsidiaries) for a cash purchase price of
$11.50 per share. (See--Item 8, "Notes to Consolidated Financial Statements--
Note 2) for further information).
Fees under the management agreement were payable in arrears. ICCAMC's base
and incentive fees and reimbursable costs and expenses are calculated by
ICCAMC within 45 days after the end of each quarter, and such calculation
promptly delivered to ICCMIC. ICCMIC is obligated to pay such fees, costs and
expenses within 60 days after the end of each fiscal quarter. ICCMIC paid
ICCAMC $5.9 million, $6.3 million and $940,000 in fees related to the ICCMIC
Management Agreement during the years ended December 31, 1999, 1998 and 1997.
Other Items
In November 1999, ICCMIC purchased from SPB approximately $25 million in
principal amount of mortgage loans at a price of par plus accrued interest and
with the right to resell those loans to SPB at par plus accrued interest on or
after February 28, 2000 or earlier upon the termination of the merger
agreement. During 1999, SPB repurchased from ICCMIC certain multifamily and
commercial real estate loans with an aggregate principal balance of $47.3
million. ICCMIC is presently negotiating with ICII to resolve certain claims
that ICCMIC may have against SPB, ICII or both in connection with the
repurchased loans and other loans that ICCMIC previously purchased from SPB.
ICII has informed ICCMIC that it believes ICCMIC's claims, which aggregate to
approximately $1.4 million, are largely without merit.
Mortgage Loan and Other Asset Purchases
In 1998, ICCMIC purchased a pool of multifamily and commercial mortgage
loans from SPB and from the Company for an aggregate purchase price of
approximately $190.0 million plus interest.
Equity Investment
As of December 31, 1999, we own 9.0% of the outstanding common stock of
ICCMIC. ICCMIC invests primarily in performing multifamily and commercial
loans and in mortgage backed securities.
Other Matters
In October 1997, we loaned H. Wayne Snavely, our Chairman and Chief
Executive Officer, $1,999,998 for the purpose of assisting him to purchase
ICCMIC common stock. The loan was evidenced by a promissory note maturing June
14, 2002, secured by a deed of trust and stock of ICCMIC held by such
individual. The note bears interest at an annual rate of 10.4% and was payable
in semi-annual installments commencing June 15, 1998. At January 31, 2000, the
remaining balance was $288,182, for Mr. Snavely. Mr. Snavely paid off this
loan during the year ended December 31, 2000. This loan was made in our
ordinary course of business, on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and did not involve more than normal risk of
collectibility or present other unfavorable features.
In December 1999, we loaned H. Wayne Snavely, Brad S. Plantiko, Irwin L.
Gubman, Paul B. Lasiter, and John C. Getzelman each $61,050 in connection with
their purchase of $81,400 of Imperial Credit Asset Resolution, Inc. ("ICARI"),
Preferred Stock. ICARI is a 100% owned consolidated subsidiary of our parent
company, ICII. Each loan is evidenced by a promissory note maturing on
December 22, 2019, and is secured by the Preferred Stock of ICARI purchased by
each of the above named executive officers. Each note bears interest at an
annual rate of 10.4% and is payable in semi-annual installments commencing
June 15, 2000. Mr. Getzelman paid this loan in full during the year ended
December 31, 2000. At March 30, 2001, the outstanding balance of each note was
$61,050 for each of the above named executive officers, except Mr. Getzelman.
Each of these loans was made in our ordinary course of business, on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons,
and did not involve more than normal risk of collectibility or present other
unfavorable features.
165
In October 2000, we loaned Paul B. Lasiter $30,025 in connection with their
purchase of $40,700 ICARI, Preferred Stock. This loan is evidenced by a
promissory note maturing on December 22, 2019, and is secured by the Preferred
Stock of ICARI purchased by Mr. Lasiter. The note bears interest at an annual
rate of 10.4% and is payable in semi-annual installments commencing December
15, 2000. At March 30, 2001, the outstanding balance of this note was $30,025.
This loan was made in our ordinary course of business, on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons, and did not involve
more than normal risk of collectibility or present other unfavorable features.
166
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Imperial Credit Industries, Inc.
/s/ H. Wayne Snavely
By: _________________________________
H. Wayne Snavely
Chairman of the Board, President
and Chief Executive Officer
Date: March 30, 2001
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints H. Wayne Snavely and Irwin L. Gubman and each
of them, his true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution for him and in his name, place and stead, in
any and all capacities to sign any and all amendments to this Annual Report on
Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection wherewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each said attorneys-in fact and agents or any of them or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Signature Title Date
--------- ----- ----
/s/ H. Wayne Snavely Chairman of the Board, March 30, 2001
____________________________________ President and Chief
(H. Wayne Snavely) Executive Officer and
Director (Principal
Executive Officer)
/s/ Brad S. Plantiko Executive Vice President, March 30, 2001
____________________________________ Chief Financial Officer,
(Brad S. Plantiko) and Director (Principal
Financial Officer and
Principal Accounting
Officer)
/s/ Stephen J. Shugerman Director March 30, 2001
____________________________________
(Stephen J. Shugerman)
/s/ Robert S. Muehlenbeck Director March 30, 2001
____________________________________
(Robert S. Muehlenbeck)
/s/ Perry A. Lerner Director March 30, 2001
____________________________________
(Perry A. Lerner)
/s/ James P. Staes Director March 30, 2001
____________________________________
(James P. Staes)
167
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8K
(a) Exhibits are listed in the table below.
Exhibit
Number Description of Exhibit
------- ----------------------
3.1(S) Articles of Incorporation, as amended of Registrant.
3.2(S) Bylaws of Registrant.
4.1(S) Form of Common Stock Certificate.
4.2# Indenture relating to 9 7/8% Senior Notes, dated as of January 23,
1997, with forms of 9 7/8% Senior Notes.
4.3+ Certificate of Trust of Imperial Credit Capital Trust I.
4.4+ Amended and Restated Declaration of Trust of Imperial Credit Capital
Trust I, with form of Remarketed Redeemable Par Securities, dated
June 9, 1997.
4.5+ Indenture relating to the Resettable Rate Debentures, dated as of
June 9, 1997, with forms of Resettable Rate Debentures.
4.6+ Remarketing Agreement, by and among, the Registrant, the Trust and
Lehman Brothers, Inc., dated as of June 9, 1997.
4.7+ Guarantee Agreement by the Registrant, for the benefit of the Holders
of Remarketed Redeemable Par Securities, Series B.
10.1(S) Form of Indemnification Agreement for directors and officers.
10.2(S) 1992 Incentive Stock Option Plan and Nonstatutory Stock Option Plan
and form of Stock Option Agreement thereunder.
10.3* 1996 Stock Option, Deferred Stock and Restricted Stock Plan effective
as of June 21, 1996.
10.4(S) Senior Management Stock Option Agreement dated effective as of
January 1, 1992 by and Between Registrant and H. Wayne Snavely.
10.5** Senior Management Stock Option Agreement dated effective as of
January 1, 1992 by and Between Registrant and Joseph R. Tomkinson.
10.6** Senior Management Stock Option Agreement dated effective as of
January 1, 1992 by and Between Registrant and Stephen J. Shugerman.
10.7** Amendment No. 1 to Senior Management Stock Option Agreement by and
between Registrant and H. Wayne Snavely, effective as of January 1,
1992.
10.8** Amendment No. 1 to Senior Management Stock Option Agreement by and
between Registrant and Joseph R. Tomkinson, effective as of January
1, 1992.
10.9** Amendment No. 1 to Senior Management Stock Option Agreement by and
between Registrant and Stephen J. Shugerman, effective as of January
1, 1992.
10.10** Amendment No. 2 to Senior Management Stock Option by and between
Registrant and H. Wayne Snavely, effective as of September 30, 1995.
10.11** Amendment No. 2 to Senior Management Stock Option by and between
Registrant and Joseph R. Tomkinson, effective as of September 30,
1995.
10.12** Amendment No. 2 to Senior Management Stock Option by and between
Registrant and Stephen J. Shugerman, effective as of September 30,
1995.
10.13*** Employment agreement dated as of January 1, 1997 by and between
Registrant and H. Wayne Snavely.
10.15*** Employment agreement dated as of January 1, 1997 by and between
Registrant and Stephen J. Shugerman.
168
Exhibit
Number Description of Exhibit
------- ----------------------
10.16*** Registration Rights Agreement dated as of August 26, 1997, by and
among Registrant, FLRT, Inc., and Franchise Mortgage Acceptance
Company.
10.17+ Agreement for Purchase and Sale of Real Estate Loans between Southern
Pacific Bank and Imperial Credit Commercial Mortgage Investment
Corp., dated as of October 1, 1997.
10.18+ Agreement for Purchase and Sale of Mortgage-Backed Securities between
Southern Pacific Bank and Imperial Credit Commercial Mortgage
Investment Corp., dated as of October 22, 1997.
10.19+ Agreement for Purchase of Mortgage-Backed Securities between
Registrant and Imperial Credit Commercial Mortgage Investment Corp.,
dated as of October 22, 1997.
10.20*** Registration Rights Agreement dated as of December 29, 1997, by and
between ICAI and IMH.
10.21*** Termination Agreement dated as of December 19, 1997, by and between
ICAI and IMH.
10.22*** Promissory Note Secured by Stock Pledge and Deed of Trust dated as of
October 21, 1997, Between Registrant and H. Wayne Snavely.
10.24## Deferral of Executive Compensation Plan effective July 1, 1998.
10.25## Deferral of Executive Compensation Plan, Plan I, effective January 1,
1999.
10.26## Deferral of Executive Compensation Plan, Plan II, Effective January
1, 1999.
10.28## Termination Protection Agreement, effective as of January 27, 1999,
by and between Registrant and H. Wayne Snavely.
10.29## Termination Protection Agreement, effective as of January 27, 1999,
by and between Registrant and Irwin L. Gubman.
10.30## Termination Protection Agreement, effective as of January 27, 1999,
by and between Registrant and Brad S. Plantiko.
10.31*** Employment Agreement dated as of September 18, 1995, by and between
Registrant and Scott B. Sampson.
10.32## Amendment to Employment Agreement by and between Registrant and Scott
B. Sampson, Effective as of September 1, 1998.
10.33### Asset Purchase Agreement by and between Registrant and Imperial Bank,
dated as of October 1, 1999.
10.34### Servicing Agreement between Registrant and Imperial Bank, effective
as of October 1, 1999.
10.35### Assignment and Assumption Agreement, dated as of October 1, 1999,
between Imperial Bank and Registrant.
10.36### Services Agreement between Registrant and Southern Pacific Bank,
effective October 1, 1999.
10.37### Severance Agreement between The Lewis Horwitz Organization and
Imperial Bank, effective September 30, 1999.
10.38### General Assignment and Assumption of Loan between Imperial Bank and
Registrant, dated October 1, 1999.
10.39### Form of Endorsement to Note between Imperial Bank and the Registrant,
dated October 1, 1999.
10.40### Employment Severance Agreement, Settlement Agreement and General
Release, effective September 1, 1999, between Registrant and Stephen
J. Shugerman.
10.41### Employment Severance Agreement, Settlement Agreement and General
Release, effective September 30, 1999, between Registrant and Kevin
E. Villani.
10.42 Amended Termination Protection Agreement, effective January 27, 1999,
by and between Registrant and H. Wayne Snavely which supercedes
exhibit 10.28##.
10.43 Amended Termination Protection Agreement, effective January 27, 1999,
by and between Registrant and Irwin L. Gubman which supercedes
exhibit 10.29##.
169
Exhibit
Number Description of Exhibit
------- ----------------------
10.44 Amended Termination Protection Agreement, effective January 27, 1999,
by and between Registrant and Brad S. Plantlike which supercedes
exhibit 10.30.##
11 Statement Regarding Computation of Earnings Per Share.####
20.1.1 Master Recapitalization Agreement, dated March 29, 2001.####
20.1.2 Exchange Note Registration Rights, dated March 29, 2001.####
20.1.3 Form of Senior Note Secured, dated March 29, 2001.####
20.1.4 Collateral Agency and Security Agreement, date March 29, 2001.####
21 Subsidiaries of Registrant.####
23.1.1 Consent of KPMG LLP.
24 Power of Attorney (included on signature page of Form 10-K).
- --------
(S) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-45606) and Amendments No. 1, 2 and 3 filed with the
SEC on February 10, 1992, April 20, 1992, May 7, 1992 and May 18, 1992,
respectively.
+ Incorporated by reference to Registrant's Registration Statement on Form
S-4 (Registration No. 333-30809) filed on July 3, 1997.
# Incorporated by reference to Registrant's Registration Statement on Form
S-4 (Registration No. 333-22141) filed with the SEC on February 19, 1997.
* Incorporated by reference to Registrant's Registration Statement on Form
S-8 (Registration No. 333-13805) filed October 9, 1996.
** Incorporated by reference to Registrant's Registration Statement on Form
S-8 (Registration No. 333-15149) filed October 31, 1996.
*** Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997.
+ Incorporated by reference to Imperial Credit Commercial Mortgage
Investment Corp.'s Form 10-Q for the quarter ended September 30, 1997.
## Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998.
### Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1999.
#### Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 2000.
(b)Report on Form 8-K
The Registrant filed the following Report on Form 8-K during the three
months ended December 31, 2000; on December 28, 2000, the Registrant filed a
press release announcing the consenting to the issuance by the FDIC of an
order (the "FDIC Order") to cease and desist from what the FDIC alleges to be
certain unsafe and unsound practices relating to the Bank's operations.
170