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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
-------------------------------------------------
Commission File number: 0-19861
IMPERIAL CREDIT INDUSTRIES, INC.
CALIFORNIA 95-4054791
---------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
23550 Hawthorne Boulevard, Building 1, Suite 110
Torrance, California 90505
(310) 373-1704
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(b) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest possible date:
Class Shares Outstanding at November 16, 2001
----- ---------------------------------------
Common Stock, no par value 42,180,798
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IMPERIAL CREDIT INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements Page
-------------------- ----
Consolidated Balance Sheets - September 30, 2001 and December 31, 2000...................... 3
Consolidated Statements of Operations and Comprehensive Loss - Three and
Nine Months Ended September 30, 2001 and 2000............................................... 4
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2001 and 2000....... 5
Consolidated Statement of Changes in Shareholders' (Deficit) Equity-Nine Months
Ended September 30, 2001.................................................................... 7
Notes to Consolidated Financial Statements.................................................. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 17
-------------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 36
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PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings........................................................................... 36
Item 2. Changes in Securities....................................................................... 37
Item 3. Defaults Upon Senior Securities............................................................. 37
Item 4. Submission of Matters to a Vote of Security Holders......................................... 37
Item 5. Other Information........................................................................... 37
Item 6. Exhibits and Reports on Form 8-K............................................................ 37
Signatures.................................................................................. 38
Forward Looking Statements
Certain statements contained herein are "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 27
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements may be
identified by reference to a future period(s) or by the use of forward-looking
terminology, such as "may," "will," "intend," "should," "expect," "anticipate,"
"estimate" or "continue" or the negatives thereof or other comparable
terminology. Our actual results could differ materially from those anticipated
in such forward-looking statements due to a variety of factors. These factors
include but are not limited to: the demand for our products; competitive factors
in the businesses in which we compete; adverse changes in the securities
markets; inflation and changes in the interest rate environment that reduce
margins or the fair value of financial instruments; changes in national,
regional or local business conditions or economic environments; government
fiscal and monetary policies; legislative or regulatory changes that affect our
business; factors inherent in the valuation and pricing of commercial loans;
other factors generally understood to affect the value of commercial loans and
commercial real estate; and the other risks detailed in our Form 8-K dated May
9, 2001 as filed with the Securities and Exchange Commission (the "SEC");
periodic reports on Forms 10-Q, 8-K and 10-K and any amendments with respect
thereto filed with the SEC; and other filings made by our company with the SEC.
2
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
September 30, December 31,
2001 2000
---- ----
ASSETS
Cash............................................................................................ $ 79,499 $ 30,938
Interest bearing deposits....................................................................... 17,110 183,193
Investment in Federal Home Loan Bank stock...................................................... 4,400 4,148
Securities held for trading, at market.......................................................... 70,899 164,050
Securities available for sale, at market........................................................ 71,980 63,684
Loans and leases held for sale, net............................................................. 171,526 386,469
Loans and leases held for investment, net of unearned income and deferred loan fees............. 1,200,168 1,186,119
Less: allowance for loan and lease losses.................................................... (61,407) (63,625)
---------- ----------
Loans held for investment, net.................................................................. 1,138,761 1,122,494
Real property................................................................................... 35,533 53,840
Retained interest in loan and lease securitizations............................................. -- 6,330
Accrued interest receivable..................................................................... 10,769 15,744
Premises and equipment, net..................................................................... 8,184 9,791
Other real estate owned and other repossessed assets, net....................................... 12,987 8,778
Goodwill........................................................................................ 30,274 32,330
Other assets.................................................................................... 25,188 28,158
Net assets of discontinued operations........................................................... 9,211 17,630
---------- ----------
Total assets............................................................................. $1,686,321 $2,127,577
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits........................................................................................ $1,359,496 $1,632,704
Borrowings from Federal Home Loan Bank.......................................................... 10,000 65,000
Senior secured notes............................................................................ 16,200 --
Exchange notes.................................................................................. 171,578 --
Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures of the company ("ROPES").......................... 1,040 42,885
Senior notes.................................................................................... 28,990 176,757
Senior convertible notes........................................................................ 10,000 --
Other borrowings................................................................................ 24,384 84,118
Accrued interest payable........................................................................ 10,902 18,992
Accrued income taxes payable.................................................................... 29,955 20,522
Minority interest in consolidated subsidiaries.................................................. 1,141 1,116
Goodwill........................................................................................ 19,340 23,797
Other liabilities............................................................................... 14,124 22,244
---------- ----------
Total liabilities........................................................................ 1,697,150 2,088,135
---------- ----------
Shareholders' (deficit) equity:
Preferred stock, 8,000,000 shares authorized; none issued or outstanding........................ -- --
Common stock, no par value. Authorized 80,000,000 shares; 42,180,798 and 32,096,361 shares
issued and outstanding at September 30, 2001 and December 31, 2000, respectively........... 113,122 97,668
Accumulated deficit............................................................................. (128,906) (64,889)
Shares held in deferred executive compensation plan............................................. 4,675 5,745
Accumulated other comprehensive income-unrealized gain on securities available for sale, net.... 280 918
---------- ----------
Total shareholders' (deficit) equity......................................................... (10,829) 39,442
---------- ----------
Total liabilities and shareholders' (deficit) equity......................................... $1,686,321 $2,127,577
========== ==========
See accompanying notes to consolidated financial statements
3
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Dollars in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Interest Income:
Interest on loans and leases............................................................. $ 35,664 $ 49,471 $118,829 $147,476
Interest on investments.................................................................. 2,340 7,378 10,749 22,494
Interest on other finance activities..................................................... 128 580 597 1,818
-------- -------- -------- --------
Total interest income................................................................... 38,132 57,429 130,175 171,788
-------- -------- -------- --------
Interest Expense:
Interest on deposits..................................................................... 20,521 28,708 71,712 80,051
Interest on other borrowings............................................................. 1,097 2,561 3,776 6,484
Interest on long term debt............................................................... 4,223 5,876 16,435 18,271
-------- -------- -------- --------
Total interest expense.................................................................. 25,841 37,145 91,923 104,806
-------- -------- -------- --------
Net interest income..................................................................... 12,291 20,284 38,252 66,982
Provision for loan and lease losses...................................................... 14,910 27,500 46,235 114,675
-------- -------- -------- --------
Net interest expense after provision for loan and lease losses.......................... (2,619) (7,216) (7,983) (47,693)
Fee and Other Income:
Gain (loss) on sale of loans and leases.................................................. 366 (2,264) 862 (1,911)
Asset management fees.................................................................... 782 821 2,276 2,459
Investment banking and brokerage fees.................................................... -- 6,249 -- 21,057
Loan servicing income.................................................................... 1,040 1,506 4,193 4,485
Gain on sale of securities............................................................... 108 161 3,255 13,092
Equity in net income of Imperial Capital Group........................................... -- -- 912 --
Loss on impairment of securities......................................................... -- -- (1,206) --
Mark-to-market losses on securities and loans held for sale, net......................... (8,295) (4,289) (12,433) (8,022)
Rental income............................................................................ 1,765 2,875 5,393 5,588
Other income............................................................................. 1,903 2,596 6,495 8,849
-------- -------- -------- --------
Total fee and other income.............................................................. (2,331) 7,655 9,747 45,597
-------- -------- -------- --------
Noninterest Expenses:
Personnel expense........................................................................ 8,403 9,756 22,194 34,010
Commission expense....................................................................... 613 1,820 1,555 5,966
Amortization of servicing rights......................................................... 79 132 279 410
Occupancy expense........................................................................ 1,071 1,328 3,171 4,226
Net expenses of other real estate owned.................................................. 194 227 352 1,252
Legal and professional services.......................................................... 1,808 2,373 5,440 5,628
Legal settlements........................................................................ 233 7,005 604 6,892
Collection costs......................................................................... 1,584 287 4,663 1,115
FDIC insurance premiums.................................................................. 1,085 269 2,107 796
Telephone and other communications....................................................... 329 819 1,032 2,469
Real property expense.................................................................... 459 1,566 1,908 3,047
Amortization of goodwill, net............................................................ (696) 2,918 (2,115) 2,259
General and administrative expense....................................................... 3,639 4,950 11,046 14,745
-------- -------- -------- --------
Noninterest expenses.................................................................... 18,801 33,450 52,236 82,815
Acquisition costs........................................................................ -- -- -- 9,397
-------- -------- -------- --------
Total expenses.......................................................................... 18,801 33,450 52,236 92,212
-------- -------- -------- --------
Loss from continuing operations before income taxes,
minority interest and extraordinary item................................................ (23,751) (33,011) (50,472) (94,308)
Income taxes............................................................................. -- (9,986) 10,021 (35,400)
Minority interest in income of consolidated subsidiaries................................. 32 180 97 1,092
-------- -------- -------- --------
Loss from continuing operations before extraordinary item................................ (23,783) (23,205) (60,590) (60,000)
Operating losses from discontinued operations of AMN, net of income taxes................ (724) (1,105) (1,885) (1,105)
-------- -------- -------- --------
Loss before extraordinary item........................................................... (24,507) (24,310) (62,475) (61,105)
Extraordinary item--gain (loss) on early extinguishment of debt, net of income taxes..... -- 312 (1,542) 2,405
-------- -------- -------- --------
Net loss................................................................................ $(24,507) $(23,998) $(64,017) $(58,700)
======== ======== ======== ========
Comprehensive income (loss):
Other comprehensive income (loss), net................................................... 79 (187) (638) (2,361)
-------- -------- -------- --------
Comprehensive loss...................................................................... $(24,428) $(24,185) $(64,655) $(61,061)
======== ======== ======== ========
Basic loss per share:
Loss from continuing operations.......................................................... $ (0.57) $ (0.73) $ (1.71) $ (1.83)
Operating loss from discontinued operations, net of income taxes......................... (0.02) (0.03) (0.05) (0.03)
Extraordinary items--gain (loss) on early extinguishment of debt, net of income taxes.... -- 0.01 (0.05) 0.07
-------- -------- -------- --------
Net loss per common share............................................................... $ (0.59) $ (0.75) $ (1.81) $ (1.79)
======== ======== ======== ========
Diluted loss per share:
Loss from continuing operations.......................................................... $ (0.57) $ (0.73) $ (1.71) $ (1.83)
Operating loss from discontinued operations, net of income taxes......................... (0.02) (0.03) (0.05) (0.03)
Extraordinary item--gain (loss) on early extinguishment of debt, net of income taxes....... -- 0.01 (0.05) 0.07
-------- -------- -------- --------
Net loss per common share................................................................ $ (0.59) $ (0.75) $ (1.81) $ (1.79)
======== ======== ======== ========
See accompanying notes to consolidated financial statements
4
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
2001 2000
---- ----
(In thousands)
Cash flows from operating activities:
Loss from continuing operations before extraordinary item.............................................. $ (60,590) $ (60,000)
Adjustments to reconcile net loss from continuing operations before extraordinary item to net cash
provided by (used in) operating activities:
Provision for loan and lease losses................................................................... 46,235 114,675
Mark-to-market on trading securities and loans held for sale, net..................................... 12,433 8,022
Depreciation.......................................................................................... 4,352 2,606
Amortization of goodwill.............................................................................. (2,115) 2,259
Amortization of servicing rights...................................................................... 279 410
Accretion of discount................................................................................. 360 (5,467)
(Gain) loss on sale of loans and leases............................................................... (862) 1,911
Equity in net income of ICG........................................................................... (912) --
Loss on impairment of securities...................................................................... 1,206 --
Gain on sale of securities............................................................................ (3,255) (13,092)
Loss on sale of OREO.................................................................................. 159 (12)
Writedowns of OREO.................................................................................... 145 943
Originations of loans held for sale................................................................... (165,699) (258,601)
Sales and collections on loans held for sale.......................................................... 205,253 142,023
Purchase of trading securities........................................................................ -- (45,546)
Sales and collections of trading securities........................................................... 70,735 11,228
Sales and collections of real property................................................................ 24,635 7,427
Purchases of real property............................................................................ (8,705) --
Net change in retained interest in loan and lease securitizations..................................... 1,322 3,323
Provision for deferred income taxes................................................................... 10,021 --
Net change in accrued interest receivable............................................................. 4,975 (8,700)
Other, net............................................................................................ (7,401) (17,435)
--------- ---------
Net cash provided by (used in) operating activities.................................................... 132,571 (114,026)
--------- ---------
Cash flows from investing activities:
Net decrease in interest bearing deposits............................................................. 166,083 152,554
Purchases of securities available for sale............................................................ (5,289) (51,953)
Proceeds from sale of securities available for sale................................................... 20,666 44,695
Net change in loans held for investment............................................................... 109,542 (129,392)
Net cash received from ICCMIC acquisition............................................................. -- 11,524
Redemption of stock in Federal Home Loan Bank......................................................... -- 3,179
Proceeds from sale of other real estate owned......................................................... 4,272 5,953
Purchase of other real estate owned and repossessed assets............................................ (5,664) --
Purchases of premises and equipment................................................................... (1,903) (2,181)
--------- ---------
Net cash provided by investing activities.............................................................. 287,707 34,379
--------- ---------
Cash flows from financing activities:
Net (decrease) increase in deposits................................................................... (273,208) 84,552
Advances from Federal Home Loan Bank.................................................................. 135,000 50,000
Repayments of advances from Federal Home Loan Bank.................................................... (190,000) --
Net change in other borrowings........................................................................ (59,734) 10,293
Repurchase of Senior Notes............................................................................ -- (6,419)
Repurchase of company obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely debentures of the company ("ROPES").............................. -- (12,823)
Issuance of Senior secured notes...................................................................... 16,200 --
Repurchase and retirement of common stock............................................................. -- (4,062)
Net change in minority interest....................................................................... 25 1,095
Proceeds from exercise of stock options............................................................... -- 43
Issuance of warrants.................................................................................. -- 3,080
Other, net............................................................................................ -- (303)
--------- ---------
Net cash (used in) provided by financing activities.................................................... (371,717) 125,456
--------- ---------
Net change in cash..................................................................................... 48,561 45,809
Cash at beginning of period............................................................................ 30,938 33,898
--------- ---------
Cash at end of period.................................................................................. $ 79,499 $ 79,707
========= =========
(continued)
IMPERIAL CREDIT INDUSTRIES, INC.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited)
Nine Months Ended
September 30,
2001 2001
---- ----
(In thousands)
Significant non-cash activities:
Reduction of ICG note receivable in non-cash exchange of repurchase of ROPES................................ $ 1,210 $ --
Increase in Exchange Notes from Debt Exchange............................................................... 171,111 --
Decrease in ROPES and Senior Notes from Debt Exchange....................................................... (189,618) --
Exchange of securities for Secured convertible notes........................................................ 10,000 --
Loans transferred from held for sale to held for investment, net............................................ 176,126 --
Reclassification of trading securities to securities available for sale..................................... 25,999 --
Reduction of debt in exchange for investment banking fees................................................... 4,000 --
Issuance of stock and warrants in Debt Exchange............................................................. 12,155 --
Stock option activity....................................................................................... 982 --
See accompanying notes to consolidated financial statements
6
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' (DEFICIT) EQUITY
(In thousands)
(unaudited)
Shares held in
Deferred Total
Number of Executive Accumulated Other Shareholders'
shares Common (Accumulated Compensation Comprehensive (Deficit)
outstanding Stock Deficit) Plan Income Equity
----------- ----- -------- ---- ------ ------
Balance, December 31, 2000............................. 32,096 $ 97,668 $ (64,889) $ 5,745 $ 918 $ 39,442
Stock and warrants issued in Debt Exchange............. 8,785 12,155 -- -- -- 12,155
Other stock issuance................................... 1,300 1,247 -- -- -- 1,247
Stock option activity.................................. -- 982 -- -- -- 982
Stock held in deferred executive compensation plan..... -- 1,070 -- (1,070) -- --
Unrealized loss on securities available for
sale, net............................................. -- -- -- -- (638) (638)
Net loss for the nine-months ended September 30, 2001.. -- -- (64,017) -- -- (64,017)
------ -------- --------- ------- ----- ---------
Balance, September 30, 2001............................ 42,181 $113,122 $(128,906) $ 4,675 $ 280 ($10,829)
====== ======== ========= ======= ===== =========
See accompanying notes to consolidated financial statements
7
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the quarter and nine
months ended September 30, 2001 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2001. The accompanying
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in our Annual
Report on Form 10-K/A for the year ended December 31, 2000. All material inter-
company balances and transactions with consolidated subsidiaries have been
eliminated. The deconsolidation of Imperial Capital Group ("ICG") in the fourth
quarter of 2000 affects the comparability of financial statements for the
periods presented.
In preparing the consolidated financial statements, we are required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets and revenues and expenses for
the periods presented. Actual results could differ significantly from those
estimates. Prior year's consolidated financial statements have been
reclassified to conform to the 2001 presentation.
2. Loss Per Share Information
The following table reconciles the number of shares used in the computations
of basic and diluted loss per share for the three and nine months ended
September 30, 2001 and 2000:
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Weighted-average common shares outstanding used to compute
basic and diluted loss per share.................................. 41,742,755 32,111,022 35,443,693 32,733,198
At September 30, 2001, securities that could potentially dilute basic EPS
including 6.3 million options and 9.1 million warrants and the conversion of
convertible debt into 8.0 million shares of common stock were not included in
the computation of basic EPS because to do so would have been antidilutive for
the periods presented.
3. Recent Accounting Pronouncements
In July 2001, the FASB issued Statement No. 141, "Business Combinations"
(Statement 141), and Statement No. 142, "Goodwill and Other Intangible Assets"
(Statement 142). Statement 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. Statement
141 also specifies the criteria that intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. Statement 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 will also require that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of".
The Company is required to adopt the provisions of Statement 141
immediately, and Statement 142 effective January 1, 2002. Furthermore, any
goodwill and any intangible asset determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate pre-Statement 142 accounting literature.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of
Statement 142.
8
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. The Company will then have up to six months from
the date of adoption to determine the fair value of each reporting unit and
compare it to the reporting unit's carrying amount. To the extent a reporting
unit's carrying amount exceeds its fair value, an indication exists that the
reporting unit's goodwill may be impaired and the Company must perform the
second step of the transitional impairment test. In the second step, the
Company must compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of it assets
(recognized and unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with Statement 141, to its carrying amount, both
of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the Company's statement
of operations.
Any unamortized negative goodwill existing at the date Statement 142 is
adopted must be written off as the cumulative effect of a change in accounting
principle.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $29.6 million, and unamortized negative goodwill in
the amount of $18.0 million, all of which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to goodwill
was ($2.1) million and $1.4 million for the nine months ended September 30, 2001
and the year ended December 31, 2000, respectively. Because of the extensive
effort needed to comply with adopting Statements 141 and 142, it is not
practicable to reasonably estimate the impact of adopting these Statements on
the Company's financial statements at the date of this report, including whether
any transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if reasonable estimate of fair value can be made. The associated asset
retirement costs would be capitalized as part of the carrying amount of the
long-lived asset and depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement. The provisions of SFAS No.
143 are effective for fiscal years beginning after June 15, 2002. Management has
not yet determined the impact, if any, of adoption of SFAS No. 143.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." For long-lived assets to be held
and used, SFAS No. 144 retains the requirements of SFAS No. 121 to (a) recognize
an impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows and (b) measure an impairment loss
as the difference between the carrying amount and fair value. Further, SFAS No.
144 eliminates the requirement to allocate goodwill to long-lived assets to be
tested for impairment, describes a probability-weighted cash flow estimation
approach to deal with situations in which alternative courses of action to
recover the carrying amount of a long-lived asset are under consideration or a
range is estimated for the amount of possible future cash flows, and establishes
a "primary-asset" approach to determine the cash flow estimation period. For
long-lived assets to be disposed of other than by sale (e.g., assets abandoned,
exchanged or distributed to owners in a spinoff), SFAS No. 144 requires that
such assets be considered held and used until disposed of. Further, an
impairment loss should be recognized at the date an asset is exchanged for a
similar productive asset or distributed to owners in a spinoff if the carrying
amount exceeds its fair value. For long-lived assets to be disposed of by sale,
SFAS No. 144 retains the requirement of
9
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
SFAS No. 121 to measure a long-lived asset classified as held for sale at the
lower of its carrying amount or fair value less cost to sell and to cease
depreciation. Discontinued operations would no longer be measured on a net
realizable value basis, and future operating losses would no longer be
recognized before they occur. SFAS No. 144 broadens the presentation of
discontinued operations to include a component of an entity, establishes
criteria to determine when a long-lived asset is held for sale, prohibits
retroactive reclassification of the asset as held for sale at the balance sheet
date if the criteria are met after the balance sheet date but before issuance of
the financial statements, and provides accounting guidance for the
reclassification of an asset from "held for sale" to "held and used." The
provisions of SFAS No. 144 are effective for fiscal years beginning after
December 15, 2001. Management has not yet determined the impact, if any, of
adoption of SFAS No. 144.
4. Trading Securities
The following table provides a summary of trading securities as of
September 30, 2001 and December 31, 2000:
September 30, December 31,
2001 2000
---- ----
(In thousands)
U.S. Treasury Securities......................................................... $ -- $ 39,438
Interest-only securities......................................................... 2,836 10,019
Subordinate bonds (1)............................................................ -- 20,973
Investment in total return swap--Pacifica Partners I LP (2)...................... 32,156 59,129
Investment in total return swap--syndicated loans................................ 31,505 33,667
Other............................................................................ 4,402 824
------- --------
Total trading securities.................................................... $70,899 $164,050
======= ========
(1) $6.0 million transferred to securities available for sale during the
quarter ended September 30, 2001.
(2) $20.0 million transferred to securities available for sale during the
quarter ended September 30, 2001.
5. Loan and Lease Commitments
At September 30, 2001, our consolidated lending commitments for Coast
Business Credit ("CBC"), the Loan Participation and Investment Group ("LPIG"),
the Lewis Horwitz Organization ("LHO"), and Imperial Warehouse Finance, ("IWF")
were as follows:
Commitment Funded Unfunded
Type of Lending Commitment Amount Amount Commitment
- -------------------------- ------ ----- ----------
(In thousands)
Loan and line commitments....................................... $1,436,295 $897,547 $538,748
Standby letters of credits...................................... 66,439 30,648 35,791
Commercial letters of credits................................... 680 680 --
---------- -------- --------
Total commitments............................................ $1,503,414 $928,875 $574,539
========== ======== ========
10
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. Loans and Leases Held for Sale
Loans and leases held for sale consisted of the following:
September 30, December 31,
2001 2000
---- ----
(In thousands)
Loans secured by real estate:
One-to-four family......................................................... $ 2,618 $ 5,184
Multifamily and commercial................................................. 166,076 376,116
-------- --------
168,694 381,300
Installment loans.......................................................... 2,832 5,169
-------- --------
Total loans and leases held for sale.................................. $171,526 $386,469
======== ========
During the quarter ended September 30, 2001, the Company transferred $184.0
million of loans classified as held for sale to held for investment based upon
management's determination that these loans would not be sold. The lower of cost
or market reserve for loans held for sale was $637,000 and $512,000 at September
30, 2001 and December 31, 2000, respectively.
7. Senior Secured Notes and Recapitalization Plan
The Company successfully completed an exchange offer for its outstanding
senior notes (the "Debt Exchange"). As of the close of the exchange offer on
June 28, 2001, $39,995,000 of the total outstanding $41,035,000 of Remarketed
Redeemable Par Securities, Series B of the Imperial Credit Capital Trust I, due
in June 2002, $144,352,000 of the total of $165,939,000 of 9.875% Series B
Senior Notes due January, 2007 and $3,468,000 of the total outstanding
$10,932,000 of 9.75% Senior Notes due January 2004, were validly tendered. The
Debt Exchange reduced the principal balance of the Company's senior debt by a
total of $60,323,000 and completes the second phase of a three phase financial
restructuring at ICII. As part of the Debt Exchange, the Company issued
8,784,437 shares of common stock and 6,105,544 warrants to acquire shares of
common stock at an exercise price of $2.15 per share on June 28, 2001. The third
phase of the restructuring includes the issuance of up to $20.0 million of
secured convertible notes. The majority of the proceeds of the convertible note
issuance will be invested as additional capital into Southern Pacific Bank ("SPB
or Bank"). As of September 30, 2001, $10.0 million of new convertible notes have
been issued by the Company. The convertible notes are convertible into common
stock of the Company at $1.25 per share.
As a result of the significant discount on the Company's notes tendered in
the exchange offer, the Company accounted for the Debt Exchange in accordance
with Statement of Financial Accounting Standards No. 15 "Accounting by Debtors
and Creditors for Troubled Debt Restructurings" ("Statement No. 15"). Under
Statement No. 15, the Company recorded the fair value of equity issued and
established a total liability relating to the notes issued in the Debt Exchange
(the "Exchange Notes") equal to the aggregate principal amount of the Exchange
Notes plus all interest payable over the term of the Exchange Notes less the
discount on the exchange offer, while the carrying values of the notes tendered
in the exchange have been removed. As such, the Company established a total
liability related to Exchange Notes of $171.1 million representing the principal
balance of the Exchange Notes of $127.5 million, plus accrued interest over the
life of the Exchange Notes of $61.1 million, and less a discount on the Debt
Exchange of $17.5 million. Under Statement 15, the Company will not record
interest expense in future periods for the cash interest required to be paid to
the Exchange Note holders. All future cash interest payments on the Exchange
Notes will reduce the $61.1 million accrued liability referred to above. The
Company will recognize interest expense related to the amortization of the
discount on the Debt Exchange of approximately $5.0 million annually.
11
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The detail of debt is as follows:
At September 30, At December 31,
2001 2000
---- ----
(In thousands)
Face amount of 10.25% company obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely debentures
of the Company ("ROPES") due June 2002..................................... $ 1,040 $ 42,885
Face amount of 12% Senior Secured Notes due June 2002...................... 16,200 --
Face amount of 12% Secured Convertible Notes due July 2005................. 10,000 --
Face amount of 12% Exchange Notes due June 2005............................ 127,479 --
Face amount of 9 3/4% Senior Notes due January 2004........................ 7,464 10,932
Face amount of 9 7/8% Senior Notes due January 2007........................ 21,587 165,939
-------- --------
Total face amount outstanding............................................ 183,770 219,756
-------- --------
Accrued interest on Exchange Notes due June 2005........................... 61,147 --
Discount on Exchange Notes due June 2005................................... (17,049) --
Discount on 9 3/4% Senior Notes due January 2004........................... (61) (114)
-------- --------
Total debt outstanding................................................... $227,807 $219,642
======== ========
8. Extraordinary Item
During the nine months ended September 30, 2001, we repurchased $1.9
million of our Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust Holding Solely Debentures of the Company ("ROPES"). We
completed this repurchase through a non-cash exchange of a note receivable from
ICG. The repurchase resulted in an extraordinary gain on the early
extinguishment of debt of $618,000 or $0.02 diluted net income per share for the
nine months ended September 30, 2001. Also during the nine months ended
September 30, 2001, we completed the Debt Exchange discussed in Note 7 above,
which resulted in an extraordinary loss on the early extinguishment of debt of
$2.2 million or $0.07 diluted net loss per share.
9. Income Taxes
During the quarter and nine months ended September 30, 2001, we recorded
income tax expense of $0 and $10.0 million. Due to recurring losses, the
Company has established a deferred tax asset valuation allowance of $73.3
million at September 30, 2001. The future 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.
Such available evidence may include the Company reporting operating profits in
future periods, among other items. There can be no assurance that the Company
will recognize any of its deferred tax asset in future periods. The valuation
allowance at September 30, 2001 covers all of the Company's gross deferred tax
assets after allowable offsets of certain deferred tax liabilities.
12
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10. Business Segments
Business segment financial information is reported on the basis that is used
internally by management in making decisions related to resource allocation and
segment performance. Our reportable segments are operated and managed as
strategic business units and are organized based on products and services.
Business units operated at different locations are aggregated for reporting
purposes when their products and services are similar. Our operations are
divided into nine business segments as follows:
1. Coast Business Credit 6. Income Property Lending Division
2. Imperial Warehouse Finance 7. Asset Management Activities
3. Loan Participation and Investment Group 8. Other Core Operations
4. The Lewis Horwitz Organization 9. De-emphasized/Discontinued/ Exited Business
5. Imperial Business Credit
The following is a summary of our results of operations and total assets by
business line for the three and nine months ended September 30, 2001 as compared
to the same periods at or ending September 30, 2000 in thousands:
At or for the Three Months Ended September 30,
----------------------------------------------
Net Revenue Income (Loss) from
External Net From Other Continuing Operations
(In thousands) Revenue Operating Units Before Extraordinary Items Total Assets
- -------------- ------- --------------- -------------------------- ------------
Business Line 2001 2000 2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ---- ---- ----
Coast Business Credit $ 711 $ 4,162 $ -- $ -- $ (6,399) $ (1,380) $ 642,075 $ 957,739
Imperial Warehouse Finance(1) 630 (5,945) -- -- (881) (4,900) 133,241 60,976
Loan Participation and
Investment Group (4,840) (6,905) -- -- (5,124) (5,402) 106,978 197,553
The Lewis Horwitz Organization 1,387 1,928 -- -- 175 480 146,152 108,610
Imperial Business Credit (3,351) (345) 65 -- (4,489) (1,160) 24,987 30,655
Income Property Lending
Division 2,138 3,556 -- -- (578) 1,287 387,527 459,180
Asset Management Activities 783 819 (35) (61) 180 160 (123) 7,304
Other Core Operations (5,164) (322) 70 214 (9,156) (9,240) 299,072 177,457
De-emphasized/Discontinued
/Exited Businesses 3,784 (2,848) (100) (153) 3,515 (2,842) 149,077 335,176
Equity Investments (1,064) -- -- -- (1,064) -- -- --
Imperial Capital Group -- 6,339 -- -- -- 225 -- 16,933
Eliminations 38 -- -- -- 38 (433) (202,665) (87,829)
------- ------- ----- ----- -------- -------- ---------- ----------
Total $(4,948) $ 439 $ -- $ -- $(23,783) $(23,205) $1,686,321 $2,263,754
======= ======= ===== ===== ======== ======== ========== ==========
At or for the Nine months Ended September 30,
---------------------------------------------
Net Revenue Income (Loss) from
External Net From Other Continuing Operations
(In thousands) Revenue Operating Units Before Extraordinary Items Total Assets
- -------------- ------- --------------- -------------------------- ------------
Business Line 2001 2000 2001 2000 2001 2000 2001 2000
-------- -------- ----- ----- -------- -------- ---------- ----------
Coast Business Credit $ (2,928) $ (8,636) $ -- $ -- $(24,050) $(17,144) $ 642,075 $ 957,739
Imperial Warehouse Finance (1) 160 (14,730) -- -- (3,934) (11,242) 133,241 60,976
Loan Participation and
Investment Group (6,336) (28,158) -- -- (7,225) (18,390) 106,978 197,553
The Lewis Horwitz Organization 3,945 3,440 -- -- 355 137 146,152 108,611
Imperial Business Credit (393) 3,532 184 (14) (4,328) (1,660) 24,987 30,655
Income Property Lending
Division 10,137 9,963 -- -- 3,027 2,653 387,527 459,180
Asset Management Activities 2,274 2,462 (95) (201) 248 117 (123) 7,304
Other Core Operations (13,252) 2,761 589 583 (30,961) (8,958) 299,072 177,456
De-emphasized/Discontinued
/Exited Businesses 8,232 6,344 (678) (368) 6,353 (6,194) 149,077 335,176
Imperial Capital Group -- 20,926 -- -- -- 1,114 -- 16,933
Eliminations (76) -- -- -- (75) (433) (202,665) (87,829)
-------- -------- ----- ----- -------- -------- ---------- ----------
Total $ 1,763 $ (2,096) $ -- $ -- $(60,590) $(60,000) $1,686,321 $2,263,754
======== ======== ===== ===== ======== ======== ========== ==========
(1) Excluding IWF's results of operations related to its prior management,
including the items listed below, the operations of IWF attributable to its
new management were as follows: Net interest income of $488,000 and $1.6
million, total revenues of $612,000 and $2.3 million, total expenses of
$761,000 and $2.0 million, and net income of $149,000 and $217,000 for the
quarter and nine months ended September 30, 2001, respectively. The above
listed segment results include the following items related to IWF's assets
originated prior to the implementation of new management's operating
guidelines including : Net interest income (expense) of $37,000 and
($252,000), a provision for loan and lease losses of $22,000 and $1.9
million, and collection costs of $9,000 and $40,000 for the quarter and
nine months ended September 30, 2001, respectively.
13
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
ICII has investments in the subordinated debt and preferred stock of SPB
totaling $20.0 million and $50.0 million at September 30, 2001, respectively.
All inter-company receivables and payables including corresponding interest
income and expense are eliminated in consolidation. Additionally, ICII's
investments in subsidiaries and inter-company management fees are included in
eliminations. The net income (loss) from continuing operations before
extraordinary item for each business line includes inter-company allocations for
administrative expenses including human resources, legal, accounting and
insurance.
11. Regulatory Orders and ICII Liquidity
SPB is subject to the regulatory requirements of the Department of Financial
Institutions (the "DFI") under California law and the regulations of the Federal
Deposit Insurance Corporation (the "FDIC"). The regulatory capital requirements
of the DFI and the FDIC are discussed in greater detail in ("Item 1. Business-
Regulations") in our Annual Report on Form 10-K/A for the year ended December
31, 2000. As a result of the joint examination of SPB by the FDIC and the DFI as
of June 26, 2000 (the "2000 Examination"), SPB consented to the issuance of
regulatory orders (the "Regulatory Orders") by the DFI and the FDIC. The
Regulatory Orders contain several requirements, including requirements that
SPB's regulatory capital and capital ratios be increased by specified amounts
within specified time periods, prohibitions on payments of Bank dividends
without regulatory approval, classified asset reductions, lending policy
restrictions and procedures, and other operational restrictions. Management
believes that SPB is substantially in compliance with the Regulatory Orders
except for achieving the required regulatory capital ratios.
We have adopted a recapitalization plan to assist SPB in complying with the
Regulatory Orders of the DFI and the FDIC to increase the capital of SPB. As
part of our recapitalization plan, we entered into a Master Recapitalization
Agreement, dated as of March 29, 2001 (the "Recapitalization Agreement"), with
holders (the "Signatory Debtholders") of a majority in interest of our 10.25%
Remarketed Redeemable Par Securities, Series B (the "ROPES") and our 9.875%
Senior Notes due 2007 (the "Old Senior Notes"), and other investors who agreed
to purchase $16.2 million of our 12% Senior Secured Notes due April 30, 2002
(the "Senior Secured Debt"). The Recapitalization Agreement provided for the
restructuring of our outstanding senior indebtedness and the issuance by us of
new equity and debt securities through the recapitalization transactions
described in Note 7 of Notes to Consolidated Financial Statements.
Although we believe that the recapitalization transactions provided the
basis for enabling us to supply SPB a portion of the amounts and types of
additional regulatory capital it needs to comply with the Regulatory Orders,
such transactions would not by themselves enable SPB to meet such requirements
nor were all of the recapitalization transactions completed by September 30,
2001. Approximately $42.0 million of additional Tier I capital was needed to
meet the capital requirements set forth in the Regulatory Orders that were
required to be met by September 30, 2001. Further, additional capital
contributions are required during 2001 in order to meet the increasing capital
levels required under the Regulatory Orders.
During August 2001, we submitted an updated capital plan to the FDIC and the
DFI that indicates how the Bank proposes to achieve compliance with the capital
requirements set forth in the Regulatory Orders by December 31, 2001. Under
this updated capital plan, the Bank plans to reduce the total amount of its
outstanding assets and we will seek to obtain additional capital to infuse into
the Bank or the Bank may raise its own additional capital directly. The updated
capital plan forecast an approximate $269.4 million reduction in the Bank's
assets by December 31, 2001 as compared to June 30, 2001 levels. The asset
reductions forecast under the updated capital plan are expected to be
accomplished primarily through increased sales of the Bank's income property and
other loans held for sale. The Bank does not anticipate any write-downs of its
income property and other loans held for sale as a result of executing the loan
sales forecast in the updated capital plan. Loans classified as held for sale
are carried on the Bank's books at the lower of their cost or market value. The
remaining forecast asset reductions are expected to occur as a result of loan
repayments, coupled with anticipated reduced levels of loan funding activity
through December 31, 2001.
In addition to the forecasted level of asset reductions, the Bank's updated
capital plan includes the infusion of approximately $26.5 million of additional
capital. We will seek to raise this capital through various capital raising
alternatives, which may include one or more of the following: the issuance of
additional debt securities, the issuance of additional shares of our common
stock, and the issuance of additional shares of the Bank's Series B Preferred
Stock or, subject to regulatory approval, the issuance of shares of new series
of noncumulative perpetual preferred stock of the Bank constituting Tier I
capital. Also under the updated capital plan, it is forecast that we will
contribute approximately $15.0 million in new capital to the Bank in the six
months ended December 31,
14
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2001. During the third quarter we contributed $4.0 million in new capital to the
Bank. We will seek to obtain the remaining $11.0 million through the liquidation
of some of our holding company assets. These assets may consist of investments
in trading securities, available for sale securities, loans, and real property.
Any actual amount of net proceeds and the related gain or loss on sale from such
liquidations are dependent on the interest rate environment, the credit quality
of any assets sold, general economic conditions, and other factors affecting the
financial markets at the time of those sales. There is no assurance that the
forecast asset reductions will be achieved, that we will be able to raise the
additional $26.5 million in capital or further obtain the remaining $11.0
million by liquidating our holding company assets, or that this amended capital
plan, even if approved by the Bank's regulators and fully implemented, will be
successful in complying with the Regulatory Orders.
ICII Liquidity
At September 30, 2001, the total principal amount of ICII's total long-term
debt, ROPES, and Senior Secured Notes was approximately $183.8 million and its
total shareholders' deficit was approximately ($10.8) million. At September 30,
2001, ICII and its non-bank subsidiaries had available cash and cash equivalents
of $10.8 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 SPB to obtain regulatory approvals
necessary to pay dividends on our Bank stock, as well as upon ICII's future
performance and that of SPB which are subject to general economic, financial,
competitive, legislative, regulatory and other factors. In addition to cash and
cash equivalents at September 30, 2001, ICII and its non-bank subsidiaries had
approximately $109.8 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 or 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 SPB
will be able to obtain the regulatory approvals necessary to permit payment of
dividends or that our business and that of SPB 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.
15
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
12. Deconsolidation of ICG
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. The Company sold its
entire remaining interest in ICG during the quarter ended June 30, 2001. The
income from ICG is accounted for by the equity method of accounting beginning
with the quarter ended December 31, 2000. For the three and nine months ended
September 30, 2001, the equity in net income of ICG was $0 and $912,000,
respectively. As a result of the deconsolidation of ICG, certain components of
the Company's third quarter results of operations are not comparable to the same
period of the prior year. Therefore, the following proforma statements of
operations present the Company's results of operations as if ICG had been
accounted for as an equity investment for all periods presented.
CONSOLIDATED PROFORMA STATEMENTS OF OPERATIONS - ICG UNDER THE EQUITY METHOD
(In thousands - unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
Interest Income:
Interest on loans and leases............................................................ $ 35,664 $ 49,591 $118,829 $147,855
Interest on investments................................................................. 2,340 7,190 10,749 22,031
Interest on other finance activities.................................................... 128 580 597 1,818
-------- -------- -------- --------
Total interest income................................................................ 38,132 57,361 130,175 171,704
-------- -------- -------- --------
Interest Expense:
Interest on deposits.................................................................... 20,521 28,707 71,712 80,051
Interest on other borrowings............................................................ 1,097 2,375 3,776 6,060
Interest on long term debt.............................................................. 4,223 5,876 16,435 18,271
-------- -------- -------- --------
Total interest expense............................................................... 25,841 36,958 91,923 104,382
-------- -------- -------- --------
Net interest income.................................................................. 12,291 20,403 38,252 67,322
Provision for loan and lease losses..................................................... 14,910 27,500 46,235 114,675
-------- -------- -------- --------
Net interest expense after provision for loan and lease losses....................... (2,619) (7,097) (7,983) (47,353)
-------- -------- -------- --------
Fee and Other Income:
Gain (loss) on sale of loans and leases................................................. 366 (2,264) 862 (1,911)
Asset management fees................................................................... 782 821 2,276 2,459
Loan servicing income................................................................... 1,040 1,506 4,193 4,485
Gain on sale of securities.............................................................. 108 161 3,255 13,092
Equity in net income of Imperial Capital Group.......................................... -- 268 912 1,772
Loss on impairment of securities........................................................ -- -- (1,206) --
Mark-to-market losses on securities and loans held for sale, net........................ (8,295) (4,289) (12,433) (8,022)
Rental income........................................................................... 1,765 2,875 5,393 5,588
Other income............................................................................ 1,903 2,387 6,495 8,640
-------- -------- -------- --------
Total fee and other income........................................................... (2,331) 1,465 9,747 26,103
-------- -------- -------- --------
Noninterest Expenses:
Personnel expense....................................................................... 8,403 7,287 22,194 25,638
Commission expense...................................................................... 613 475 1,555 1,809
Amortization of servicing rights........................................................ 79 132 279 410
Occupancy expense....................................................................... 1,071 1,134 3,171 3,611
Net expenses of other real estate owned................................................. 194 227 352 1,252
Legal and professional services......................................................... 1,808 1,993 5,440 4,447
Lawsuit settlements..................................................................... 233 7,005 604 6,892
Collection costs........................................................................ 1,584 287 4,663 1,115
FDIC insurance premiums................................................................. 1,085 243 2,107 715
Telephone and other communications...................................................... 329 509 1,032 1,583
Real property expense................................................................... 459 1,566 1,908 3,047
Amortization of goodwill, net........................................................... (696) 2,894 (2,115) 2,188
General and administrative expense...................................................... 3,639 3,775 11,046 11,949
-------- -------- -------- --------
Noninterest expenses................................................................. 18,801 27,527 52,236 64,656
Acquisition costs....................................................................... -- -- -- 9,397
-------- -------- -------- --------
Total expenses....................................................................... 18,801 27,527 52,236 74,053
-------- -------- -------- --------
Loss from continuing operations before income taxes,
minority interest and extraordinary item............................................. (23,751) (33,159) (50,472) (95,303)
Income taxes............................................................................ -- (9,986) 10,021 (35,400)
Minority interest in income of consolidated subsidiaries................................ 32 32 97 97
-------- -------- -------- --------
Loss from continuing operations...................................................... (23,783) (23,205) (60,590) (60,000)
Operating losses from discontinued operations of AMN, net of income taxes............... (724) (1,105) (1,885) (1,105)
-------- -------- -------- --------
Loss before extraordinary item....................................................... (24,507) (24,310) (62,475) (61,105)
Extraordinary item--Gain (loss) on early extinguishment of debt, net of income taxes.... -- 312 (1,542) 2,405
-------- -------- -------- --------
Net loss............................................................................. $(24,507) $(23,998) $(64,017) $(58,700)
======== ======== ======== ========
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
ICII is a diversified commercial and real estate lending and financial
services holding company that was incorporated in 1991 in the State of
California. The Company's headquarters are located in Torrance, California. The
Company's business activities are conducted principally through three wholly
owned subsidiaries: Southern Pacific Bank ("SPB"), Imperial Business Credit Inc.
("IBC"), and Imperial Credit Asset Management, Inc. ("ICAM"). ICII, our
subsidiaries, and our affiliates offer a wide variety of deposit and commercial
loan products and asset management services.
Financial Position
At September 30, 2001, as a part of our strategic and capital plans, the
total assets of our company decreased by $441.3 million to $1.69 billion as
compared to $2.13 billion at December 31, 2000. Our company's total loans net
of allowances decreased $198.7 million to $1.31 billion at September 30, 2001
as compared to $1.51 billion at December 31, 2000.
Cash and interest bearing deposits decreased to $96.6 million at September
30, 2001 as compared to $214.1 million at December 31, 2000. Cash and interest
bearing deposits at ICII decreased to $5.1 million at September 30, 2001 as
compared to $15.9 million at December 31, 2000. Liquidity at ICII was reduced
during the nine months ended September 30, 2001 primarily due to additional
capital investments into SPB.
At September 30, 2001, trading securities were $70.9 million as compared to
$164.1 million at December 31, 2000. The $93.2 million decrease is primarily a
result of the sale of $39.4 million in U.S. Treasury securities that were
pledged as collateral for repurchase borrowings from Lehman Brothers, the
reclassification of $26.0 million to securities available for sale, and the sale
of $19.2 million in interest-only and subordinated bonds related to the FLRT
1996-A franchise loan and SPTL 1996-1 commercial and multifamily loan
securitizations.
Deposits at SPB decreased $270.2 million to $1.36 billion at September 30,
2001 as compared to $1.63 billion at December 31, 2000. Other borrowings
decreased $59.7 million to $24.4 million at September 30, 2001 as compared to
$84.1 million at December 31, 2000 primarily as a result of the repayment of
borrowings to Lehman Brothers in addition to the repayment of $10.0 million in
short-term borrowings related to the sale of property at Imperial Credit
Commercial Mortgage Investment Corporation ("ICCMIC").
The outstanding principal balance of our secured and senior debt decreased to
$183.8 million at September 30, 2001 as compared to $219.8 million at December
31, 2000. The net decrease was the result of the issuance of $16.2 million of
senior Secured debt on March 30, 2001, $10.0 million of Secured Convertible debt
on June 28, 2001, and a $60.3 million reduction in Senior debt as a result of
the Debt Exchange (See Note 7 of Notes to Consolidated Financial Statements)
completed on June 28, 2001. During the first quarter of 2001, we repurchased
$1.9 million of our Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures of the company
("ROPES"), resulting in an extraordinary gain on the early extinguishment of
debt of $618,000. During the second quarter of 2001, our company completed the
Debt Exchange, which resulted in a $2.2 million extraordinary loss on the early
extinguishment of debt.
At September 30, 2001 shareholders' equity (deficit) decreased to ($10.8)
million as compared to $39.4 million at December 31, 2000. The decrease in
shareholders' equity (deficit) was primarily the result of the $64.0 million net
loss recorded during the nine months ended September 30, 2001, partially offset
by an increase in capital of $12.2 million as the result of the issuance of
common stock and warrants in connection with the Debt Exchange. At September
30, 2001 the total shareholders' equity at SPB was $102.5 million as compared to
$81.6 million at December 31, 2000. At September 30, 2001, SPB's Risk Based
Capital and Risk-Based Tier 1 Capital, were $126.0 million and $87.3 million, as
compared to $121.8 million and $65.5 million at December 31, 2000, respectively.
Consolidated Results of Operations
We reported a net loss for the quarter ended September 30, 2001 of $24.5
million or $0.59 diluted net loss per share including an operating loss from
discontinued operations of $724,000 or $0.02 diluted net loss per share. The
operating results for the quarter ended September 30, 2001 were negatively
impacted by a decrease in Prime and Libor rates, mark-to-market losses totaling
$8.3 million, a provision for loan and lease losses of $14.9 million, and loan
collection costs of $1.6 million. These items were partially offset by a $14.6
million reduction in noninterest expenses. For the quarter ended September 30,
2000, we reported a net loss of
17
$24.0 million or $0.75 diluted net loss per share including an operating loss
from discontinued operations of $1.1 million or $0.03 diluted net loss per share
and an extraordinary gain on the early extinguishment of debt of $312,000 or
$0.01 diluted net income per share.
Our net loss for the nine months ended September 30, 2001 was $64.0 million
or $1.81 diluted net loss per share including an operating loss from
discontinued operations of $1.9 million or $0.05 diluted net loss per share and
an extraordinary loss on the early extinguishment of debt of $1.5 million or
$0.05 diluted net loss per share. The operating results for the nine months
ended September 30, 2001 were negatively impacted by a decrease in Prime and
Libor rates, mark-to-market and impairment losses totaling $13.6 million, a
provision for loan and lease losses of $46.2 million, and loan collection costs
of $4.7 million. Additionally, reduced interest income as a result of the 350
basis point Prime rate decrease during the nine months ended September 30, 2001
negatively affected our company's operating results. For the nine months ended
September 30, 2000, we reported a net loss of $58.7 million or $1.79 diluted net
loss per share including an operating loss from discontinued operations of $1.1
million or $0.03 diluted net loss per share and an extraordinary gain on the
early retirement of debt of $2.4 million or $0.07 diluted net income per share.
Net Interest Income
For the quarter ended September 30, 2001, net interest income before
provision for loan and lease losses and net interest margin at SPB decreased to
$12.3 million and 3.83% as compared to $20.3 million and 4.82% for the same
period last year, respectively. For the nine months ended September 30, 2001,
net interest income before provision for loan and lease losses and net interest
margin at SPB decreased to $38.3 million and 3.90% as compared to $67.0 million
and 5.14% for the same period last year, respectively. Net interest income
before provision for loan and lease losses and net interest margin at SPB for
both periods decreased primarily as a result of a reduction in average loans
outstanding and the 350 bps Prime rate decrease during the nine months ended
September 30, 2001. Average loans outstanding decreased as a result of the
implementation of our strategic and capital plans filed with SPB's regulators.
The plans forecast reductions in SPB's outstanding assets in an effort to
achieve the capital ratios required under its Regulatory Orders.
For the quarter ended September 30, 2001, SPB's average outstanding loans and
average yield on loans were $1.48 billion and 9.42% as compared to $1.73 billion
and 11.08% for the same period last year, respectively. For the nine months
ended September 30, 2001, SPB's average outstanding loans and average yield on
loans were $1.58 billion and 9.90% compared to $1.69 billion and 11.14% for the
same period last year, respectively. A majority of SPB's loans are indexed to
the Prime and Libor interest rates. As a result of decreases in the Prime and
Libor rates, SPB's loans have re-priced to reduced yields, while a majority of
its fixed-term deposits will re-price over the next five months. At September
30, 2001, approximately 47.8% of SPB's $606.6 million asset based loan portfolio
had reached their interest rate floors. After the October and November
decreases in the Prime rate, the percentage of asset based loans at their
interest rate floors had increased to approximately 56.8%.
For the quarter ended September 30, 2001, interest expense was $25.8 million
compared to $37.1 million for the same period last year. For the nine months
ended September 30, 2001, interest expense was $91.9 million compared to $104.8
million for the same period last year. Interest expense decreased for the
quarter and nine months ended September 30, 2001 primarily as a result of
decreases in the outstanding average balance of the Federal Deposit Insurance
Corporation ("FDIC") insured deposits of SPB and a decrease in the rate paid on
deposits due to decreases in the Libor rate during the nine months ended
September 30, 2001. Interest expense also decreased for the quarter and nine
months as a result of the Company's debt exchange which was completed in the
second quarter of 2001. SPB's average outstanding deposits and weighted average
cost of deposits based on daily averages were $1.45 billion and 5.65% for the
quarter ended September 30, 2001 as compared to $1.76 billion and 6.51% for the
same period last year. SPB's average outstanding deposits and weighted average
cost of deposits based on daily averages were $1.56 billion and 6.18% for the
nine months ended September 30, 2001 as compared to $1.72 billion and 6.28% for
the same period last year. At September 30, 2001, the average cost of SPB's
deposits was 5.29%. We expect continued decreases in deposit costs as our
deposits mature and new deposits are generated at lower yields. As of November
13, 2001, SPB was offering six month and one-year deposits in the 3.00% to 3.30%
range. Additionally, at November 13, 2001, SPB had $100.0 million of
outstanding FHLB advances with a weighted average maturity date of July 9, 2002,
at a weighted average interest rate of 2.17%.
Provision for Loan and Lease Losses
For the quarter and nine months ended September 30, 2001, the provision for
loan and lease losses was $14.9 million and $46.2 million as compared to $27.5
million and $114.7 million for the same periods of last year, respectively. Net
charge-offs were $8.6 million and $48.4 million for the quarter and nine months
ended September 30, 2001 as compared to $19.9 million and $89.4 million for the
same periods of the last year, respectively.
18
The reduction in the provision for loan and lease losses and net charge offs
is primarily due to improvement in the underwriting and administration of Coast
Business Credit's ("CBC") loans. CBC's prior management allowed significant
unsecured over-advances, which ultimately led to increased charge-offs and the
need for additional provisions for loan and lease losses. The charge-offs
related to unsecured over-advances were approximately $56.0 million, the bulk of
which were provided for between September 30, 1999 and September 30, 2000.
SPB's current management has improved underwriting and administration practices
and, as of September 30, 2001, had no loans outstanding which had unsecured
over-advances.
Reduced exposure to nationally syndicated credits at LPIG also contributed to
the decrease in the provision for loan and lease losses and net charge-offs.
During the nine months ended September 30, 2001 LPIG's outstanding loans and
related year to date net charge-offs decreased to $75.4 million and $8.2 million
as compared to $150.6 million and $15.9 million at or for the same periods last
year, respectively.
Additionally, reduced non-performing assets at Imperial Warehouse Finance
("IWF") contributed to the decrease in the provision for loan and lease losses
and net charge offs. Non-performing assets and year to date net charge-offs at
IWF decreased to $5.4 million and $3.0 million at or for the nine months ended
September 30, 2001 as compared to $11.5 million and $14.4 million at or for the
nine months ended September 30, 2000, respectively.
For additional information about the provision for loan and lease losses see
- - "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset Quality - Allowance for Loan and Lease Losses"
Fee and Other Income
Fee and other income decreased due to the deconsolidation of Imperial Capital
Group ("ICG") during the fourth quarter of 2000. As a result of the
deconsolidation, we no longer report investment banking and brokerage fees,
other income, or the expenses of ICG. From the fourth quarter of 2000 through
the first quarter of 2001, the income from our 38.5% equity interest in ICG was
reported as equity in the net income of ICG. Other than due to the
deconsolidation of ICG, fee and other income decreased for the quarter ended
September 30, 2001 as compared to the same period last year primarily as a
result of increased net mark-to-market losses. Fee and other income decreased
for the nine months ended September 30, 2001 as compared to the same period last
year primarily due to reduced gains on sales of securities, and increased net
mark-to-market losses.
The net mark-to-market losses of $8.3 million for the quarter ended September
30, 2001 primarily related to a $4.8 million write-down of the entire remaining
balance of the retained interests in lease securitizations at Imperial Business
Credit ("IBC"), a write-down of $808,000 in interest-only securities due to
increased prepayment rates and losses, a write-down of $782,000 of the Company's
investment in syndicated bank loans funded through total return swaps and write-
downs of $1.9 million of all other trading securities. For the nine months
ended September 30, 2001 and 2000, net mark-to-market losses were $12.4 million
and $8.0 million, respectively. The net mark-to-market losses for the nine
months ended September 30, 2001 primarily related to a $4.8 million decline in
the value of the retained interests in lease securitizations at IBC, a $2.5
million write-down of SPB's interest-only securities due to increased prepayment
rates and charge-offs, a write-down of $2.2 million of SPB's investment in
syndicated bank loans funded through total return swaps and write-downs of $2.9
million in all of our other trading securities.
The net mark-to-market write-downs at IBC primarily relate to the "Turbo"
amortization of the IBC's trust securitization facility. Under Turbo
amortization, virtually all cash flows generated in the Trust are used to pay
down the outstanding balance of the Class A certificates while Class B and C
Certificates, a majority of which are owned by IBC, receive no cash flows for
principal and interest payments until the Class A certificates have been paid in
full. The $4.8 million write-down represents the discount resulting from IBC
projecting to receive its estimated future cash flows over an extended period of
time.
Gain on sale of securities was $108,000 for the quarter ended September 30,
2001 as compared to $161,000 for the same period last year. Gain on sale of
securities was $3.3 million for the nine months ended September 30, 2001 as
compared to $13.1 million for the same period last year. Gain on sale of
securities for the nine months ended September 30, 2001 includes a $1.1 million
gain from the sale of our minority interest in the Auction Finance Group ("AFG")
and a $1.9 million gain from the sale of our interest in ICG. Through September
2001, we received a $1.1 million distribution of contingent sale proceeds
related to the June 2000 sale of our interest in AFG. At September 30, 2001,
there was a maximum of approximately $2.8 million in escrowed sale proceeds
distributable to our company over the next three years. Gain on sale of
securities for the nine months ended September 30, 2000 includes a $12.4 million
gain from the sale of our interest in AFG. Also during the nine months ended
September 30, 2000, CBC recorded a $1.1
19
million gain on the sale of securities from the exercise of warrants in the
equity securities of a borrower and the subsequent sale of its stock.
Noninterest Expenses
During the quarter ended September 30, 2001 noninterest expenses decreased
31.7% to $18.8 million as compared to $27.5 million for the same period last
year assuming ICG was accounted for under the equity method during 2000. The
decrease in expenses occurred in all expense categories except personnel,
collection costs associated with non-performing assets, and FDIC insurance
premiums. Assuming ICG was accounted for under the equity method, during the
quarter ended September 30, 2000, the following significant changes in expense
levels for the quarter ended September 30, 2001 were as follows:
Personnel expenses increased 15.3% to $8.4 million as compared to $7.3
million for the same period last year. The increase was primarily the result of
recording $1.3 million in expenses related to employee severance costs. At
September 30, 2001, the Company had 374 Full Time Equivalent employees ("FTE")
as compared to 464 FTE (excluding ICG) at September 30, 2000. On October 15,
2001 we issued a press release announcing a reduction in staff by approximately
47 employees during October 2001. The staff reductions represent a 13% decrease
from the Company's 352 employee workforce at September 30, 2001. The layoffs
will result in a charge to earnings in the fourth quarter ending December 31,
2001 of approximately $2.1 million. The staff reductions are expected to reduce
our personnel costs by approximately $4.0 million annually.
Legal, professional and collection costs increased 48.8% to $3.4 million as
compared to $2.3 million for the same period last year. The increase was
primarily the result of collection costs associated with our continued efforts
to accelerate the resolution of problem loans.
Real property expenses decreased 70.7% to $459,000 as compared to $1.6
million for the same period last year. The decrease in real property expense is
primarily the result of sales of income producing properties over the last year.
The changes in noninterest expenses between the nine month periods ended
September 30, 2001 and 2000, were substantially similar to the changes described
above.
Income Taxes
During the nine months ended September 30, 2001, we recorded income tax
expense of $10.0 million. Due to recurring losses, we established a deferred
tax asset valuation allowance of $63.3 million in the fourth quarter of 2000.
The additional income tax expense during the nine months ended September 30,
2001 increased this valuation allowance to $73.3 million, or $1.80 per common
share. The valuation allowance at September 30, 2001 covers all of our
company's gross deferred tax asset after allowable offsets of certain deferred
tax liabilities.
Agreements with 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 (the "Regulatory Orders") with the
FDIC and with the DFI. The Regulatory 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 restrictions. Management believes
our company has responded affirmatively to all of the directives addressed in
the Orders including the recent additions of new credit administration and risk
management personnel, the partial recapitalization of SPB and the reduction of
SPB's classified assets. At September 30, 2001, SPB had not attained the
required Tier I and Total Risk-Based Capital ratios of 8.50% and 11.00%,
respectively.
At September 30, 2001, SPB Tier I Leverage and Total Risk-Based Capital
ratios were 5.35% and 8.63%, respectively. SPB is subject to the regulatory
requirements of the DFI under California law and the regulations of the FDIC.
The regulatory capital requirements of the DFI and the FDIC are discussed in
greater detail (in "Item 1. Business-Regulations") in our Annual Report on Form
10-K/A for the year ended December 31, 2000. The Regulatory Orders contain
several requirements, including requirements that SPB's regulatory capital and
capital ratios be increased by specified amounts within specified time periods,
prohibitions on payments of Bank dividends without regulatory approval,
classified asset reductions, lending policy restrictions and procedures, and
other operational restrictions. Management believes that SPB is substantially in
compliance with the
20
Regulatory Orders except for achieving the required regulatory capital ratios.
Although we believe that the recapitalization transactions provide the basis
for enabling us to supply SPB a portion of the amounts and types of additional
regulatory capital it needs to comply with the Regulatory Orders, such
transactions would not by themselves enable SPB to meet such requirements nor
were all of the Recapitalization Transactions completed by September 30, 2001.
Approximately $42.0 million of additional Tier I capital was needed to meet the
capital requirements set forth in the Regulatory Orders that were required to be
met by September 30, 2001. Further, additional capital contributions are
required during 2001 in order to meet the increasing capital levels required
under the Regulatory Orders.
During August 2001, we submitted an updated capital plan to the FDIC and the
DFI that indicates how the Bank proposes to achieve compliance with the capital
requirements set forth in the Regulatory Orders by December 31, 2001. Under
this updated capital plan, the Bank plans to reduce the total amount of its
outstanding assets and we will seek to obtain additional capital to infuse into
the bank or the Bank may raise its own additional capital directly. The updated
capital plan forecast an approximate $269.4 million reduction in the Bank's
assets by December 31, 2001 as compared to June 30, 2001 levels. The asset
reductions forecast under the updated capital plan are expected to be
accomplished primarily through increased sales of the Bank's income property and
other loans held for sale. The Bank does not anticipate any write-downs of its
income property and other loans held for sale as a result of executing the loan
sales forecast in the updated capital plan. Loans classified as held for sale
are carried on the Bank's books at the lower of their cost or market value. The
remaining forecast asset reductions are expected to occur as a result of loan
repayments, coupled with anticipated reduced levels of loan funding activity
through December 31, 2001.
In addition to the forecasted level of asset reductions, the Bank's updated
capital plan includes the infusion of approximately $26.5 million of additional
capital. We will seek to raise this capital through various capital raising
alternatives, which may include one or more of the following: the issuance of
additional debt securities, the issuance of additional shares of our common
stock, and the issuance of additional shares of the Bank's Series B Preferred
Stock or, subject to regulatory approval, the issuance of shares of new series
of noncumulative perpetual preferred stock of the Bank constituting Tier I
capital. Also under the updated capital plan, it is forecast that we will
contribute approximately $15.0 million in new capital to the Bank in the six
months ended December 31, 2001. During the third quarter we contributed $4.0
million in new capital to the Bank. We will seek to obtain the remaining $11.0
million through the liquidation of some of our holding company assets. These
assets may consist of investments in trading securities, available for sale
securities, loans, and real property. Any actual amount of net proceeds and the
related gain or loss on sale from such liquidations are dependent on the
interest rate environment, the credit quality of any assets sold, general
economic conditions, and other factors affecting the financial markets at the
time of those sales. There is no assurance that the forecast asset reductions
will be achieved, that we will be able to raise the additional $26.5 million in
capital or further obtain the remaining $11.0 million by liquidating our holding
company assets, or that this amended capital plan, even if approved by the
Bank's regulators and fully implemented, will be successful in complying with
the Regulatory Orders.
Possible Delisting From Nasdaq National Market System
Although Nasdaq's staff terminated its proceedings for delisting our common
stock from the Nasdaq National Market arising from its April 20, 2001
determination that our common stock failed to comply with Nasdaq's minimum bid
price listing requirements, we received a Nasdaq staff determination on
September 10, 2001 stating that our common stock was again subject to delisting
from the Nasdaq National Market in that it had failed to maintain a minimum bid
price of $1.00 over the preceding 30 consecutive trading days, unless we meet
the requirements for continued listing by December 10, 2001.
On September 27, 2001, we received a Nasdaq bulletin indicating that Nasdaq
had suspended, among other things, its minimum bid price requirement until
January 2, 2002. The bulletin also indicated that during this period it would
consider whether it is appropriate to recommend further and more permanent
action. As a result of this suspension, we are not currently under review for
delisting. Upon reinstatement of the minimum bid price listing requirement, if
it is reinstated, our common stock will once again be subject to delisting if we
do not achieve compliance with the minimum bid price requirement. Assuming that
Nasdaq's minimum bid price listing requirement is resumed in its prior form, if
the closing bid price of our common stock thereafter remained below $1.00 for a
period of 30 consecutive business days, Nasdaq would notify us that we have a
period of 90 calendar days from that notification to achieve compliance with the
minimum bid price requirement. Compliance can be achieved by the closing bid
price of our common stock meeting or exceeding the $1.00 per share minimum price
requirement for ten consecutive business days during that 90-day compliance
period. However, if we were unable to demonstrate our compliance with the
minimum bid price listing requirements by expiration of the 90-day compliance
period, we would receive written notification that our securities would be
delisted. At that time, we would have the opportunity to appeal Nasdaq's
decision to a Nasdaq listing qualification panel. No assurance can be given that
our
21
common stock will satisfy the minimum bid price requirements to maintain its
listing on the Nasdaq National Market if that requirement is reinstated.
Our shareholders approved up to a 1 for 4 reverse stock split at our annual
shareholders' meeting. In order to insure that the price of our company's
common stock complies with the minimum bid price requirement, our board of
directors may declare a reverse stock split in the future.
Additionally, as of September 30, 2001, our total shareholders' deficit of
$10.8 million was below the minimum equity requirement for continued listing as
a Nasdaq National Market participant. We expect to meet the minimum
requirements through future results including the recognition of negative
goodwill totaling $19.3 million. Additionally, the capital raising activities
currently underway by our company may also increase the balance of shareholders'
equity to levels within Nasdaq's requirements. As of November 15, 2001, we had
not received any communications from the Nasdaq staff stating that our common
stock was again subject to delisting from the Nasdaq National Market due as a
result of our current failure to meet the minimum equity requirement.
Delisting from the Nasdaq National Market could cause our common stock to
become significantly less liquid, with a possible negative impact on its value.
Also, if our common stock is delisted and is not thereafter traded as a
"Bulletin Board Stock," our common stock would be classified as a "penny stock"
which, if certain disclosure and broker or dealer qualifications are not met,
could further restrict the market for resale of the common stock to only such
persons as are deemed to be suitable investors of such stock, such as
institutional investors, or directors, officers, or owners of 5% or more of our
company's common stock. If our common stock is delisted, we intend to have it
traded as a "Bulletin Board Stock."
BUSINESS LINES
We manage our business by evaluating the results of operations from each of
our business units. Our businesses include:
. Coast Business Credit ("CBC")--an asset-based commercial lender;
. Imperial Warehouse Finance, Inc. ("IWF")--a residential mortgage
repurchase facilities business;
. 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 and
commercial mortgage banking business;
. Loan Participation and Investment Group ("LPIG")--a division of SPB
investing in nationally syndicated bank loans;
. Asset Management Activities ("AMA")--an investment fund management
business;
. Other Core Operations ("OCO")--our holding company investments and
support functions, and certain other operations of SPB.
We also operate other businesses which consist of activities that we've
decided to de-emphasize. We group these businesses into the following
categories:
. Equity Interests--beginning in the fourth quarter of 2000 and ending
in the second quarter of 2001;
. 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.
CORE BUSINESS LINES
The following table reflects average loans outstanding and the average yields
earned on our business units for the quarter and nine months ended September 30,
2001 and 2000:
22
For the quarter ended September 30, For the Nine months ended September 30,
----------------------------------- ---------------------------------------
(Dollars in thousands) (Dollars in thousands)
Average Loans Average Loans
Outstanding Average Yield Outstanding Average Yield
----------- ------------- ----------- -------------
Business Line 2001 2000 2001 2000 2001 2000 2001 2000
- ------------- ---- ---- ---- ---- ---- ---- ---- ----
CBC.................... $640,595 $841,448 10.34 % 12.94 % $703,816 $810,161 10.89% 13.29%
IWF.................... 132,850 62,911 7.42 7.95 132,174 73,915 7.64 7.59
LHO.................... 105,296 75,566 10.41 12.46 107,744 51,637 11.13 12.42
IPL.................... 378,102 392,792 9.06 9.40 383,013 344,499 9.47 9.32
LPIG................... 83,241 172,178 7.32 8.02 102,944 194,082 7.63 8.24
Our businesses are primarily conducted through our largest subsidiary, SPB.
SPB is a $1.5 billion industrial bank that includes: CBC, an asset-based lender;
IWF, which provides repurchase facilities to third party residential mortgage
loan originators; LPIG, an investor in syndicated bank loan participations; LHO,
a commercial finance lender that provides financing for independent motion
picture and television production; and IPL, a multifamily and commercial real
estate mortgage banking business. The FDIC insured deposits of SPB primarily
fund each of these businesses.
Coast Business Credit
CBC's net loss was $6.4 million for the quarter ended September 30, 2001 as
compared to a net loss of $1.4 million for the same period last year. CBC's net
loss was $24.1 million for the nine months ended September 30, 2001 as compared
to a net loss of $17.1 million for the same period last year. The increase in
CBC's net loss for the quarter and nine months ended September 30, 2001 was
primarily attributable to reduced interest income associated with a reduction in
average outstanding loans, an increase in average non-accrual loans, increased
legal and collection costs, and reduced net interest income and margin resulting
from reductions in the Prime and Libor rates. Net income includes a provision
for loan losses of $9.4 million and $35.7 million for the quarter and nine
months ended September 30, 2001 as compared to $12.7 million and $64.1 million
for the same periods last year, respectively.
CBC's average outstanding loans decreased for the quarter and nine months
ended September 30, 2001 to $640.6 million and $703.8 million as compared to
$841.4 million and $810.2 million for the same periods last year, respectively.
The decrease is primarily associated with the continued reduction of problem
credits and net loan runoff associated with management's strategy in
implementing more stringent credit underwriting criteria and guidelines.
CBC's net interest income decreased $6.3 million to $8.9 million during the
quarter ended September 30, 2001 as compared to $15.3 million for the same
period last year. CBC's net interest income decreased $18.6 million to $29.3
million during the nine months ended September 30, 2001 as compared to $47.9
million for the same period last year. CBC's loan yield for the quarter ended
September 30, 2001 decreased 260 basis points to 10.34% as compared to 12.94%
for the same period last year. CBC's yield for the nine months ended September
30, 2001 decreased 240 bps to 10.89% as compared to 13.29% for the same period
last year. The decrease in net interest income for the quarter and nine months
ended September 30, 2001 compared to the same periods last year are primarily
attributable to a decrease in average loans outstanding, an increase in the
average balance of non-accrual loans for the comparable periods and to reduced
loan yields as a result of a 350 bps decrease in the Bank's Prime rates and a
decrease in Libor rates during the nine months ended September 30, 2001. CBC's
average non-accrual loans were $43.0 million and $42.1 million for the quarter
and nine months ended September 30, 2001 as compared to $40.7 million and $27.1
million for the same periods last year, respectively. At September 30, 2001,
approximately 47.8% of CBC's $606.6 million asset based loan portfolio had
reached their interest rate floors. After the October and November decreases in
the Prime rate, the percentage of asset based loans at their interest rate
floors had increased to approximately 56.8%.
CBC's other income was $1.2 million for the quarter ended September 30, 2001
as compared to $1.6 million for the same period last year. CBC's other income
was $3.4 million for the nine months ended September 30, 2001 as compared to the
$7.6 million for same period last year. CBC's other income decreased for both
periods due to reduced loan fee income as a result of a reduction in the average
balance of loans outstanding for the comparable periods in addition to CBC
recording a $1.1 million gain on sale of securities from the exercise of
warrants in the equity securities of a borrower and the subsequent sale of its
stock for the nine months ended September 30, 2000.
CBC's total expenses were $7.1 million for the quarter ended September 30,
2001 as compared to $4.8 million for the same period last year. CBC's total
expenses were $21.1 million for the nine months ended September 30, 2001 as
compared to $18.6 million for the same period last year. Total expenses
increased for the quarter ended September 30, 2001 as compared to the same
period last year primarily due to a $1.5 million increase in personnel costs and
a $1.3 million increase in collection costs related to the resolution of problem
loans. Personnel costs increased for the quarter ended September 30, 2001
compared to the prior year due to the reversal of previously
23
accrued management bonus in the same period of the previous year. Collection
costs increased for the quarter ended September 30, 2001 due to increased
average balances of non performing assets at CBC as compared to the same period
in the previous year. Total expenses increased for the nine months ended
September 30, 2001 as compared to the same period last year primarily due to a
$3.6 million increase in collection costs related to the resolution of problem
loans. CBC's FTE decreased to 107 FTE at September 30, 2001 as compared to 149
FTE at September 30, 2000.
At September 30, 2001, CBC's non-accrual loans were $42.9 million as compared
$31.8 million at December 31, 2000. CBC incurred net charge-offs of $6.4
million for the quarter ended September 30, 2001 as compared to $7.1 million for
the prior period last year. Net charge-offs for the nine months ended September
30, 2001 were $36.5 million as compared to $53.5 million for the prior period
last year. Charge-offs for the nine months ended September 30, 2001 were
primarily related to the bankruptcy of two CBC borrowers in the
telecommunications and technology industries in addition to the discovery of
potential fraud by one CBC borrower. Non-performing loans at CBC are generally
collateralized by accounts receivable, inventory and other assets including
furniture, premises and equipment, and real estate. See - "Asset Quality"
Imperial Warehouse Finance
IWF's net loss was $881,000 for the quarter ended September 30, 2001 as
compared to a net loss of $4.9 million for the same period last year. IWF's net
loss was $3.9 million for the nine months ended September 30, 2001 as compared
to a net loss of $11.2 million for the same period last year. The reduction in
IWF's net loss for the quarter and nine months ended September 30, 2001 was
primarily attributable to a reduction in the provision for loan losses as a
result of reductions in the level of non-accrual and classified loans at
September 30, 2001 as compared to September 30, 2000. Net loss includes a
provision for loan losses of $63,000 and $1.3 million for the quarter and nine
months ended September 30, 2001 as compared to $6.1 million and $15.6 million
for the same periods last year, respectively.
IWF's average outstanding loan balances increased for the quarter and nine
months ended September 30, 2001 to $132.9 million and $132.2 million as compared
to $62.9 million and $73.9 million for the same periods last year, respectively.
IWF's net interest income increased $371,000 to $525,000 during the quarter
ended September 30, 2001 from $154,000 for the same period last year. IWF's net
interest income increased $459,000 to $1.1 million during the nine months ended
September 30, 2001 from $615,000 for the same period last year. The increase in
net interest income for the quarter and nine months ended September 30, 2001 as
compared to the same periods last year was primarily attributable to an increase
in the balance of average loans outstanding coupled with a decrease in non-
accrual loans as a percentage of total loans for the nine months ended September
30, 2001 as compared to the same periods last year, respectively. IWF's yield
for the quarter ended September 30, 2001 decreased 53 basis points to 7.42% as
compared to 7.95% for the same period last year primarily as a result of
reductions in the Prime rate during the nine months ended September 30, 2001.
IWF's yield for the nine months ended September 30, 2001 increased 5 basis
points to 7.64% as compared to 7.59% for the same period last year primarily as
a result of a reduction in the level of non-accrual loans, partially offset by
the decrease in the Prime interest rate.
IWF's other income was $168,000 for the quarter ended September 30, 2001 as
compared to $35,000 for same period last year. IWF's other income was $395,000
for the nine months ended September 30, 2001 as compared to $222,000 for same
period last year. Other income increased for the quarter and nine months ended
September 30, 2001 as a result of an increase in funding activity on IWF's
warehouse lines.
IWF's total expenses were $1.5 million for the quarter ended September 30,
2001 as compared to $1.2 million for the same period last year. IWF's total
expenses were $4.1 million for the nine months ended September 30, 2001 as
compared to $3.1 million for the same period last year. Total expenses
increased for the quarter ended September 30, 2001 as compared to the same
period last year primarily due to a $117,000 increase in the net expenses of
other real estate owned. Total expenses increased for the nine months ended
September 30, 2001 as compared to the same period last year primarily due to a
$248,000 increase in net expenses of other real estate owned and a $285,000
increase in professional service expenses related to problem asset collection
costs. IWF's FTE increased to 15 FTE at September 30, 2001 as compared to 11
FTE at September 30, 2000.
Excluding IWF's results of operations related to its prior management,
including the items listed above, the operations of IWF attributable to its new
management were as follows: Net interest income of $488,000 and $1.6 million,
total revenues of the above listed results include the following items related
to IWF's assets originated prior to the implementation of new managements
operating guidelines: Net interest income (expense) of $37,000 and ($252,000), a
provision for loan and lease losses of $22,000 and $1.9 million, and collection
costs of $9,000 and $40,000 for the quarter and nine months ended September 30,
2001, respectively.
24
$612,000 and $2.3 million, total expenses of $761,000 and $2.0 million, and net
income of $149,000 and $217,000 for the quarter and nine months ended September
30, 2001, respectively.
At September 30, 2001, IWF's non-accrual loans were $5.4 million as compared
to $9.4 million at December 31, 2000. IWF incurred net charge-offs of $198,000
for the quarter ended September 30, 2001 as compared $7.7 million for the same
period last year. IWF incurred net charge-offs of $3.0 million for the nine
months ended September 30, 2001 as compared $14.4 million for the same period
last year. See - "Asset Quality"
The Lewis Horwitz Organization
LHO's net income was $175,000 for the quarter ended September 30, 2001 as
compared to net income of $480,000 for the same period last year. LHO's net
income was $355,000 for the nine months ended September 30, 2001 as compared to
net income of $137,000 for the same period last year. The decrease in LHO's net
income for the quarter ended September 30, 2001 was primarily attributable to a
$663,000 increase in provision for loan losses. The increase in LHO's net
income for the nine months ended September 30, 2001 was primarily attributable
to an increase in net interest income as a result of increases in the average
balance of loans outstanding. The increase in net interest income was partially
offset by an increased provision for loan losses of $54,000 and $928,000 for the
quarter and nine months ended September 30, 2001 as compared to $(609,000) and
$262,000 for the same periods last year, respectively. The provision for loan
losses increased as a result on an increase in the outstanding balance of loans
as compared to the same periods of the previous year.
LHO's average loans outstanding increased to $105.3 million and $107.7
million for the quarter and nine months ended September 30, 2001 as compared to
$75.6 million and $51.6 million for the same periods last year, respectively.
LHO's net interest income was $1.4 million and $4.5 million for the quarter
and nine months ended September 30, 2001 as compared to $1.3 million and $3.5
million for the same periods last year, respectively. The yield on LHO's loans
for the quarter ended September 30, 2001 decreased 205 basis points to 10.41% as
compared to 12.46% for the same period last year. The yield on LHO's loans for
the nine months ended September 30, 2001 decreased 129 basis points to 11.13% as
compared to 12.42% for the same period last year. The yield on LHO's loans for
the quarter and nine months ended September 30, 2001 decreased primarily as a
result of reductions in the Prime rate during the nine months ended September
30, 2001.
LHO's other income was $24,000 for the quarter ended September 30, 2001 as
compared to $69,000 for same period last year. LHO's other income was $375,000
for the nine months ended September 30, 2001 as compared to $159,000 for same
period last year. The increase in other income for the nine months ended
September 30, 2001 was primarily the result of increased loan fee income related
to the increase in the balance of average loans outstanding as compared to the
same periods last year.
LHO's total expenses were $1.2 million for the quarter ended September 30,
2001 as compared to $1.1 million for the same period last year. LHO's total
expenses were $3.6 million for the nine months ended September 30, 2001 as
compared to $3.2 million for the same period last year. Total expenses
increased for the quarter and nine months ended September 30, 2001 as compared
to the same periods last year primarily due to increases in general and
administrative costs. LHO had 15 FTE at September 30, 2001 as compared to 16
FTE at September 30, 2000.
At September 30, 2001, LHO's non-accrual loans were $199,000 as compared to
$246,000 at December 31, 2000. LHO has not incurred any charge offs of non-
accrual loans since its acquisition in October of 1999. Non-performing loans at
LHO are supported by the existing and estimated value of all future distribution
rights of the film or television production. All of LHO's acquired film and
television assets were acquired from Imperial Bank under the terms of the LHO
purchase agreement, and are carried at their estimated realizable values. See -
"Asset Quality"
Income Property Lending Division
IPL's net loss was $578,000 for the quarter ended September 30, 2001 as
compared to net income of $1.3 million for the same period last year. IPL's net
income was $3.0 million for the nine months ended September 30, 2001 as compared
to net income of $2.7 million for the same period last year. The decrease in
IPL's net income for the quarter ended September 30, 2001 primarily relates to
provision for loan losses of $1.3 million as compared to $209,000 for the same
period last year and a $200,000 write-off of capitalized software costs. The
increase in IPL's provision for loan losses for the quarter and nine months
ended September 30, 2001 primarily relates to an increase in the balance of
outstanding loans. The average balance out IPL's loans held for investment
primarily increased due to the transfer of $184.0 million of loans classified as
held for sale to held for investment based upon management's determination that
these loans would not be sold.
25
IPL's net interest income was $3.2 million for the quarter ended September
30, 2001 as compared to $3.0 million for the same period last year. IPL's net
interest income was $9.8 million for the nine months ended September 30, 2001 as
compared to $8.7 million for the same period last year. Despite both a reduction
in yield and the average outstanding balance of loans for the comparable
quarters, net interest income increased for the quarter ended September 30, 2001
as compared to the same period last year as a result of reduced deposit funding
costs which re-priced at a faster rate the reduction in IPL's loan yields. The
increase for the nine months ended September 30, 2001 as compared to the same
period last year was primarily the result of an increase in the average balance
of outstanding loans. IPL's average outstanding loan balance for the quarter
ended September 30, 2001, decreased $14.7 million to $378.1 million as compared
to $392.8 million for the same period last year. IPL's loan yields were 9.06%
for the quarter ended September 30, 2001 as compared to 9.40% for the same
period last year. IPL's average outstanding loan balance for the nine months
ended September 30, 2001, increased $38.5 million to $383.0 million as compared
to $344.5 million for the same period last year. IPL's loan yields were 9.47%
for the nine months ended September 30, 2001 as compared to 9.32% for the same
period last year. The increases in loan yields for the quarter and nine months
ended September 30, 2001 as compared to the same periods last year are a result
of increased pre-payment penalty fees collected.
IPL originated $44.1 million and $161.6 million of loans for the quarter and
nine months ended September 30, 2001 as compared to $56.2 million and $183.7
million of loans for the same periods last year, respectively. During the
quarter and nine months ended September 30, 2001, IPL sold $41.8 million and
$149.7 million as compared to $37.9 million and $169.8 million of its loans for
the same periods last year, respectively.
IPL earned total other income of $253,000 and $1.0 million for the quarter
and nine months ended September 30, 2001 as compared to $776,000 and $1.5
million for the same periods last year, respectively. IPL's other income
consists of gain on sale of loans, loan servicing income and other fee income.
IPL's total expenses increased to $2.7 million for the quarter ended
September 30, 2001 as compared to $1.6 million for the same period last year.
IPL's total expenses were $7.1 million for the nine months ended September 30,
2001 as compared to $5.7 million for the same period last year. Total expenses
increased for the quarter and nine months ended September 30, 2001 as compared
to the same periods last year primarily due to increased personnel, occupancy,
FDIC insurance costs, and general and administrative expenses. Personnel costs
increased despite the reduction in FTE due to reduced levels of capitalized loan
origination costs as a result of decreased loan origination volumes. General
and administrative costs increased as a result of the write-off of approximately
$200,000 in capitalized software costs. IPL's FTE decreased to 41 FTE at
September 30, 2001 compared to 58 FTE at September 30, 2000.
At September 30, 2001, IPL's non-accrual loans were $7.5 million as compared
to $1.7 million at December 31, 2000. The increase in IPL's non-accrual loans
was primarily attributable to one real estate secured loan totaling $3.5
million. See - "Asset Quality"
Imperial Business Credit
During the second quarter of 2000, we decided to cease originations of all
small ticket leases by IBC. During April 2000, we sold or closed IBC's remaining
origination offices. 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 $4.5 million for the quarter ended September 30, 2001 as
compared to a net loss of $1.2 million for the same period last year. IBC's net
loss was $4.3 million for the nine months ended September 30, 2001 as compared
to a net loss of $1.7 million for the same period last year. The increase in
IBC's net loss for the quarter and nine months ended September 30, 2001 as
compared to the same periods last year was primarily attributable to increased
mark-to-market charges on retained interests in lease securitizations.
IBC's other income was ($3.7) million for the quarter ended September 30,
2001 as compared to ($895,000) for the same period last year. IBC's other
income was ($1.7) million for the nine months ended September 30, 2001 as
compared to $1.8 million for the same period last year. Other income decreased
for the quarter and nine months ended September 30, 2001 primarily as the result
of increased mark-to-market losses on trading securities and retained interest
in lease securitizations of $4.9 million and $5.7 million for the quarter and
nine months ended September 30, 2001 as compared to $2.6 million and $3.6
million for the same periods last year, respectively. The net mark-to-market
write-downs at IBC primarily relate to the "Turbo" amortization of IBC's the
trust securitization facility. Under Turbo amortization, virtually all cash
flows generated in the Trust are used to pay down the outstanding balance of the
26
Class A certificates while Class B and C Certificates, a majority of which are
owned by IBC, receive no cash flows for principal and interest payments until
the Class A certificates have been paid in full. $4.8 million of IBC's write
down represents the discount resulting from IBC projecting to receive its
estimated future cash flows over an extended period of time. The $4.8 million
write-down represents the entire remaining balance of IBC's retained interests
in lease securitizations.
At September 30, 2001, IBC was servicing $132.1 million of leases, generating
lease servicing income of $736,000 during the quarter ended September 30, 2001
as compared to $188.8 million of leases at September 30, 2000 and $1.2 million
in servicing income for the same period last year, respectively.
IBC's total expenses were $1.2 million for the quarter ended September 30,
2001 as compared to $1.4 million for the same period last year. IBC's total
expenses were $4.1 million for the nine months ended September 30, 2001 as
compared to $6.2 million for the same period last year. Total expenses
decreased for the quarter and nine months ended September 30, 2001 as compared
to the same periods last year primarily due to reduced personnel and operating
expenses. IBC's FTE decreased to 44 FTE at September 30, 2001 compared to 53
FTE at September 30, 2000.
At September 30, 2001, IBC had no non-accruing leases as compared to $7,000
at December 31, 2000.
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 $5.1 million for the quarter ended September 30, 2001 as
compared to a net loss of $5.4 million for the same period last year. LPIG's
net loss was $7.2 million for the nine months ended September 30, 2001 as
compared to a net loss of $18.4 million for the same period last year. The
decreases in LPIG's net loss for the quarter and nine months ended September 30,
2001 was primarily attributable to a decrease in net interest income offset by a
reduction in the provision for loan losses as a result of reductions in the
level of classified assets and non-accrual loans. Net income includes a
provision for loan losses of $4.1 million and $5.0 million for the quarter and
nine months ended September 30, 2001 as compared to $5.1 million and $28.9
million for the same periods last year, respectively.
LPIG's average loans outstanding decreased to $83.2 million and $102.9
million for the quarter and nine months ended September 30, 2001 as compared to
$172.2 million and $194.1 million for the same periods last year, respectively.
As a result of the decreases in LPIG's average loans outstanding and a
reduction in loan yield related to decreases in the Libor rate, LPIG's net
interest income decreased to $77,000 and $1.2 million for the quarter and nine
months ended September 30, 2001 as compared to $935,000 and $4.0 million for
same periods last year, respectively. The yield on LPIG's loans for the quarter
ended September 30, 2001 decreased 70 bps to 7.32% as compared to 8.02% in the
prior year. The yield on LPIG's loans for the nine months ended September 30,
2001 decreased 61 bps to 7.63% as compared to 8.24% in the prior year.
LPIG's other income was ($841,000) for the quarter ended September 30, 2001
as compared to ($2.7) million for same period last year. LPIG's other income
was ($2.5) million for the nine months ended September 30, 2001 as compared to
($3.2) million for same period last year. The change in other income was
primarily the result of decreased losses on sales of potential problem LPIG
loans and mark-to-market losses on nationally syndicated bank loans funded
through total return swaps. For the quarter and nine months ended September 30,
2001, LPIG's gains/(losses) on sale of loans were $2,000 and ($135,000) as
compared to ($2.3) million and ($2.7) million for the same periods last year,
respectively. For the quarter and nine months ended September 30, 2001, LPIG's
mark-to-market losses were $829,000 and $2.3 million as compared to $674,000 and
$1.6 million for the same periods last year, respectively.
LPIG's total expenses were $284,000 for the quarter ended September 30, 2001
as compared to $377,000 for the same period last year. LPIG's total expenses
were $889,000 for the nine months ended September 30, 2001 as compared to $1.1
million for the same period last year. Total expenses decreased for the quarter
and nine months ended September 30, 2001 as compared to the same periods last
year primarily due to reductions in legal and professional expenses. LPIG's FTE
decreased to three FTE at September 30, 2001 as compared to four FTE at
September 30, 2000.
At September 30, 2001, LPIG's non-accrual loans were $11.4 million as
compared to $26.2 million at December 31, 2000. LPIG incurred net charge-offs
of $2.5 million for the quarter ended September 30, 2001 as compared net charge-
offs of $1.5 million
27
for the same period last year. LPIG incurred net charge-offs of $8.2 million for
the nine months ended September 30, 2001 as compared net charge-offs of $15.9
million for the same period last year. See - "Asset Quality"
Asset Management Activities
AMA's net income was $180,000 for the quarter ended September 30, 2001 as
compared to net income of $160,000 for the same period last year. AMA's net
income was $248,000 for the nine months ended September 30, 2001 as compared to
net income of $117,000 for the same period last year. The increase in net income
for the nine months ended September 30, 2001 as compared to last year was
primarily related to reduced personnel and general and administrative costs.
AMA's FTE was 7 FTE at September 30, 2001 compared to 8 FTE at September 30,
2000.
Total expenses from AMA activities were $568,000 for the quarter ended
September 30, 2001 as compared to $500,000 for the same period last year. Total
expenses from AMA activities were $1.9 million for the nine months ended
September 30, 2001 as compared to $2.1 million for the same period last year.
Total expenses decreased for the nine months as compared to the same period last
year due to decreased professional services and general and administrative
expenses.
Other Core Operations
OCO provides support to our subsidiaries through executive management
oversight and advice, accounting, audit, operations, legal services, human
resources administration, insurance programs, office services, premises
administration, and management information systems support. OCO also includes
but is not limited to interest and dividend income from parent company loans,
interest expense on our long-term debt, mark-to-market charges on the securities
we invested in at our holding company, and extraordinary items.
The net loss of OCO was $9.2 million for the quarter ended September 30, 2001
as compared to a net loss of $8.9 million for the same period last year. The
net loss of OCO was $32.5 million for the nine months ended September 30, 2001
as compared to a net loss of $6.6 million for the same period last year. The net
loss for the nine months ended September 30, 2001 includes establishing an
additional $10.0 million deferred tax asset valuation allowance. The net loss
for the nine months ended September 30, 2001 also includes a $1.2 million loss
on impairment of securities and a $1.5 million net loss from the early
extinguishment of debt as compared to a gain on sale of securities of $12.0
million and a $2.4 million net gain from the early extinguishment of debt for
the same period last year. OCO's FTE decreased to 7 FTE at September 30, 2001
as compared to 39 FTE at September 30, 2000.
Total expenses of OCO were $4.1 million for the quarter ended September 30,
2001 as compared to $14.6 million for the same period last year. Total expenses
of OCO were $8.3 million for the nine months ended September 30, 2001 as
compared to $17.6 million for the same period last year. The decrease in
expenses for the quarter and nine months ended September 30, 2001 as compared to
the same periods in the prior year primarily resulted from reduced legal and
professional fees and litigation settlements.
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
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 and ending in the first quarter of 2001 as a
result of the sale of our remaining interest in ICG. For the quarter and nine
months ended September 30, 2001, our Equity Interests generated net revenues of
$0 and $1.1 million, exclusively from ICG, and net income of $0 and $912,000.
De-emphasized/Discontinued/Exited Businesses
De-emphasized/Discontinued/Exited Businesses - Represents our business units
we decided to either de-emphasize,
28
discontinue, or exit. We decided to de-emphasize, discontinue or exit these
business lines because they were not meeting our expectations. Our exit from
these non-core businesses will allow our management to focus on our core
business lines. Exited Businesses' principal sources of net revenue are interest
earned on mortgage and consumer loans and mark-to-market valuations on loan
portfolios. Exited Businesses' principal expenses are the merger and other
operational costs incurred as a result of the ICCMIC acquisition, interest
expense allocations incurred from deposits and inter-company borrowings, and
general and administrative expenses.
Exited Businesses
Net income from Exited Businesses operations was $2.8 million for the quarter
ended September 30, 2001 as compared to a net loss of $3.9 million for the same
period last year. Net income from Exited Businesses operations was $4.5 million
for the nine months ended September 30, 2001 as compared to a net loss of $7.3
million for the same period last year. The increase in net income for the
quarter ended September 30, 2001 as compared to the same period last year
primarily resulted from reductions in the provision for loan and lease losses
related to exited loan portfolios. Net income includes a provision (recovery)
for loan losses of ($1.4) million and ($68,000) for the quarter and nine months
ended September 30, 2001 as compared to $4.9 million and $5.5 million for the
same periods last year, respectively.
Total expenses at our Exited Businesses decreased to $137,000 and $1.1
million for the quarter and nine months ended September 30, 2001 as compared to
$1.1 million and $6.3 million for the same periods last year, respectively. The
decrease in total expenses for the quarter and nine months ended September 30,
2001 was primarily due to the wind-down of non-core businesses in addition to
the negative goodwill amortization generated by the ICCMIC purchase.
Our non-core loans decreased to $35.8 million at September 30, 2001 as
compared to $95.1 million at December 31, 2000. The remaining non-core
portfolios primarily consist of lower risk single family mortgage loans.
FUNDING
Our liquidity requirements are met primarily by SPB deposits and to a much
lesser extent warehouse lines and loan securitizations or sales. Business
operations conducted through the divisions of SPB are primarily financed through
FDIC insured deposits, Federal Home Loan Bank ("FHLB") borrowings, and capital
contributions from our parent company.
Southern Pacific Bank Deposits
SPB is an FDIC insured industrial bank that is regulated by the California
Department of Financial Institutions and the FDIC.
At September 30, 2001 and December 31, 2000, SPB had total deposits of
approximately $1.37 billion compared to $1.64 billion, respectively. SPB
solicits both individual and institutional depositors for new accounts through
print advertisements and computerized referral networks. SPB currently
maintains two deposit gathering facilities in Southern California. At these
facilities, tellers provide banking services to customers such as accepting
deposits and making withdrawals. SPB's certificates of deposit are offered for
terms of one to 36 months.
The following table reflects average deposits outstanding and the average
rate paid on SPB's deposits for the quarter and nine months ended September 30,
2001 and 2000:
For the quarter ended September 30, For the Nine months ended September 30,
--------------------------------------- -----------------------------------------
(Dollars in thousands) (Dollars in thousands)
Average Balance Average Rate Average Balance Average Rate
----------------------- -------------- ------------------------- --------------
Deposit type 2001 2000 2001 2000 2001 2000 2001 2000
- -------------- ---------- ---------- ------ ------ ---------- ---------- ------ ------
Savings.............................. $ 49,123 $ 57,058 3.80% 4.53% $ 56,262 $ 55,709 4.41% 4.72%
Money Market Accounts................ 41,429 6,962 3.77 5.96 34,918 2,338 4.45 5.96
Certificates of Deposits............. 1,355,624 1,691,310 5.77 6.58 1,465,711 1,666,436 6.29 6.27
---------- ---------- ---- ---- ---------- ---------- ------ -----
Total................................ $1,446,176 $1,755,330 5.65% 6.51% $1,556,891 $1,724,483 6.18% 6.28%
========== ========== ==== ==== ========== ========== ====== =====
SPB has historically increased its deposits as necessary so that deposits
together with its cash, securities, liquid assets, and Federal Home Loan Bank
borrowings have been sufficient to provide funds for all of SPB's lending
activities. We track, on a daily basis, all new loan applications and, based on
historical closing statistics, estimate expected fundings. Cash management
systems at SPB allow it to anticipate both fundings and sales and adjust deposit
levels and short-term investments against the demands of our
29
lending activities. We believe that SPB's local marketing strategies and its use
of domestic money markets have allowed SPB to acquire new deposits at levels
consistent with management's financial targets.
As an additional source of funds, SPB was approved in 1991 to become a member
of the Federal Home Loan Bank of San Francisco. Currently, SPB is approved for
borrowings from the Federal Home Loan Bank pursuant to a secured line of credit
that is automatically adjusted subject to applicable regulations and available
pledged collateral. At September 30, 2001 and December 31, 2000, SPB had
maximum FHLB borrowing capacity equal to $138.8 million and $137.2 million,
respectively. There were $10.0 million of outstanding FHLB advances at
September 30, 2001 as compared to $65.0 million at December 31, 2000. FHLB
advances are secured by certain real estate loans with a carrying value of
$145.8 million at September 30, 2001.
ASSET QUALITY
Allowance for Loan and Lease Losses
The allowance for loan and lease losses was $61.4 million or 5.12% of total
net loans held for investment as compared to $63.6 million or 5.36% of total net
loans held for investment at December 31, 2000, respectively. The ratio of the
allowance for loan and lease losses to non-accrual loans and leases ("coverage
ratio") was 79.37% at September 30, 2001 as compared to 81.02% at December 31,
2000 and 71.14% at September 30, 2000.
For the quarter and nine months ended September 30, 2001, the provision for
loan and lease losses was $14.9 million and $46.2 million as compared to $27.5
million and $114.7 million for the same periods of the prior year, respectively.
The provisions for loan and lease losses for the quarter and nine months ended
September 30, 2001 were primarily the result of charge-offs related to loans
centered in the telecommunications and technology industries, the discovery of
potential fraud by one CBC borrower, and continued deterioration in the
underlying collateral of assets supporting certain LPIG credits.
Of the $14.9 million provision for loan and lease losses for the quarter
ended September 30, 2001, $9.7 million is attributable to CBC. Consistent
progress continues to be made in the repositioning of CBC's loan portfolio and
$6.0 million of the $9.7 million provision at CBC covers markdowns in CBC's
telecommunications related loans such that CBC's reserves exceed the recommended
reserve established by the federal banking agencies shared national credit
("SNC") program for these particular assets. In addition, after the events of
September 11, the decision was made to add $2.7 million to reserves covering
loans in the commercial aviation and related industries. Approximately $4.7
million of the provision for the quarter ended September 30, 2001 was recorded
in conjunction with SPB's decreasing portfolio of shared national credits held
in its LPIG division. At September 30, 2001, SPB maintained an unallocated
allowance for loan and lease losses at LPIG of $2.0 million or 2.8% of LPIG's
outstanding loans to cover further potential weakness in this segment. The
increase in reserves was concentrated in these two areas, and the bulk of SPB's
loan portfolio is stable.
The reduction in the provision for loan and lease losses and net charge offs
is primarily due to improvement in the underwriting and administration of Coast
Business Credit's ("CBC") loans. CBC's prior management allowed significant
unsecured over-advances, which ultimately led to increased charge-offs and the
need for additional provisions for loan and lease losses. The charge-offs
related to unsecured over-advances were approximately $56.0 million, the bulk of
which were provided for between September 30, 1999 and September 30, 2000.
SPB's current management has improved underwriting and administration practices
and, as of September 30, 2001, had no loans outstanding which had unsecured
over-advances.
Reduced exposure to nationally syndicated credits at LPIG also contributed to
the decrease in the provision for loan and lease losses and net charge-offs.
During the nine months ended September 30, 2001 LPIG's outstanding loans and
related year to date net charge-offs decreased to $75.4 million and $8.2 million
as compared to $150.6 million and $15.9 million at or for the same periods last
year, respectively.
Additionally, reduced non-performing assets at Imperial Warehouse Finance
("IWF") contributed to the decrease in the provision for loan and lease losses
and net charge offs. Non-performing assets and year to date net charge-offs at
IWF decreased to $5.4 million and $3.0 million at or for the nine months ended
September 30, 2001 as compared to $11.5 million and $14.4 million at or for the
nine months ended September 30, 2000, respectively.
Our recovery experience related to previously charged-off loans has also
improved dramatically compared to last year. Through September 30, 2001, we
have had recoveries totaling approximately $8.5 million. This compares to
recoveries totaling $2.4 million for the same period last year.
30
Activity in the allowance for loan and lease losses was as follows:
For the Nine months ended
September 30,
----------------------------
2001 2000
------------ -------------
(Dollars in thousands)
Beginning balance as of January 1, 2001 and 2000........................... $ 63,625 $ 31,841
Provision for loan and lease losses........................................ 46,235 114,675
Business acquisition....................................................... -- 719
-------- --------
109,860 147,235
-------- --------
Loans and Leases charged off--Core Business Lines:
Multifamily and commercial real estate..................................... (97) (273)
Asset based and cash stream loans.......................................... (43,170) (53,892)
Loan Participations........................................................ (8,616) (16,437)
Leases..................................................................... (60) (349)
Mortgage warehouse lines................................................... (3,565) (14,446)
Commercial and industrial loans............................................ -- (27)
Autolend................................................................... -- (950)
-------- --------
(55,508) (86,374)
-------- --------
Loans charged off--Non-Core Business Lines:
Single family residential.................................................. (1,134) (4,337)
Consumer loans............................................................. (332) (416)
Franchise loans............................................................ -- (634)
Auto loans................................................................. -- (32)
-------- --------
(1,466) (5419)
-------- --------
Total charge-offs.......................................................... (56,974) (91,793)
-------- --------
Recoveries on loans and leases previously charged off --Core Business
Lines:
Asset based and cash stream loans.......................................... 6,636 362
Loan participations........................................................ 379 541
Mortgage warehouse lines................................................... 517 --
Leases..................................................................... 177 211
-------- --------
7,709 1,114
-------- --------
Net charge-offs--Core Business Lines....................................... (47,799) (85,260)
-------- --------
Recoveries on loans previously charged off --Non-Core Business Lines:
Single family residential.................................................. 7 213
Consumer................................................................... 272 98
Franchise loans............................................................ 533 34
Auto loans................................................................. -- 929
-------- --------
812 1,274
-------- --------
Total recoveries........................................................... 8,521 2,388
-------- --------
Net charge-offs--Non-core business lines................................... (654) (4,145)
-------- --------
Total net-charge-offs...................................................... (48,453) (89,405)
-------- --------
Balance as of September 30, 2001 and 2000.................................. 61,407 57,830
-------- --------
Allowance for loan losses at AMN as of September 30, 2001 and 2000......... 71 9
-------- --------
Total allowance for loan and lease losses.................................. $ 61,478 $ 57,839
======== ========
Total allowance for loan and lease losses to non-accrual loans and leases.. 79.37% 71.14%
Non-performing Assets ("NPA") and Non-accrual Loans and Leases
Our NPA's consist of non-accruing loans, Other Real Estate Owned ("OREO") and
repossessed assets. NPA's and non-accrual loans were $90.5 million and $77.5
million at September 30, 2001 as compared to $87.4 million and $78.5 million at
December 31, 2000, respectively. The increase in NPA's was primarily related to
the CBC, LHO and IPL loan portfolios. CBC's non-accrual loans increased to $42.9
million as compared to $31.8 million at December 31, 2000. The increase in
CBC's non-accrual loans was primarily due to the addition of three new non-
accrual loans totaling $22.3 million in the telecommunications and technology
industries, partially offset by reductions of non accrual loans centered in
other industries. LHO's non-performing assets were $11.7 million at September
30, 2001 as compared to $8.0 million at December 31, 2000. The increase related
to LHO's non-performing assets was primarily attributable to the purchase of
additional non-performing entertainment assets with an estimated value of $4.9
million. This purchase during the quarter ended March 31, 2001 completed the
Company's obligation to purchase non-performing assets under the LHO purchase
agreement. IPL's non-accrual loans increased to $7.5 million as compared to $1.7
million. The increase in IPL's non-accrual loans was primarily attributable to
one real estate secured loan totaling $3.5 million. These increases were
partially offset by decreases of non-accrual loans at the IWF and LPIG loan
portfolios. IWF's non-accrual loans decreased to $5.4 million at September 30,
2001 as compared to $9.4 million at December 31, 2000. LPIG's non-accrual loans
decreased to $11.4 million at September 30, 2001 as compared to $26.2 million at
December 31, 2000. The reduction in non-performing assets at IWF was the result
of increased liquidation efforts. Reduced exposure to nationally syndicated
credits contributed to the decrease in LPIG's non-accrual loans.
Total NPA's as a percentage of loans, OREO and repossessed assets were 6.49%
at September 30, 2001, as compared to 5.54%
31
at December 31, 2000. In general, accounts receivable, inventory, fixed assets,
real estate, and intangibles collateralize the non-performing loans at CBC and
LPIG. The non-performing loans at IPL are generally collateralized by real
estate. Non-performing loans at LHO are supported by the existing and estimated
value of all future distribution rights of the film or television production.
All of LHO's acquired film and television assets were acquired from Imperial
Bank under the terms of the LHO purchase agreement, and are carried at their
estimated realizable values.
The following table sets forth the amount of non-performing assets
attributable to our core lending activities and our Exited Businesses:
September 30, December 31,
2001 2000
---- ----
Core Core
Lending Exited Lending Exited
Activities Businesses Activities Businesses
------------ ---------- ------------ ----------
(Dollars in thousands)
Non-accrual loans:
IPL............................................................ $ 7,501 $ -- $ 1,650 $ --
IWF............................................................ 5,449 -- 9,404 --
CBC............................................................ 42,934 -- 31,795 --
IBC............................................................ -- -- 7 --
Film and television production loans........................... 199 -- 246 --
LPIG........................................................... 11,358 -- 26,206 --
One-to-four family............................................. -- 2,590 -- 3,564
Leases......................................................... 4,646 -- -- --
Consumer loans................................................. -- 11 -- 85
Auto loans..................................................... -- 437 -- 716
Other commercial............................................... -- 2,329 -- 4,856
---------- ------- ---------- -------
Total non-accrual loans........................................ 72,087 5,367 69,308 9,221
---------- ------- ---------- -------
OREO and repossessed assets:...................................
Acquired film and television assets............................ 11,510 -- 7,752 --
IBC............................................................ -- -- 2 --
Auto Lending................................................... -- 32 -- 82
One-to-four family............................................. -- 935 -- 816
Leases......................................................... 541 -- -- --
Other commercial............................................... -- -- -- 188
---------- ------- ---------- -------
Total OREO and repossessed assets.............................. 12,051 967 7,754 1,086
---------- ------- ---------- -------
Total NPA's.................................................... $ 84,138 $ 6,334 $ 77,062 $10,307
========== ======= ========== =======
Total loans, OREO and repossessed assets....................... $1,357,834 $36,750 $1,479,924 $96,218
Total NPA's as a percentage of loans, OREO
and repossessed assets....................................... 6.20% 17.24% 5.21% 10.71%
The following table sets forth the amounts of and changes in non-performing
loans attributable to our core lending activities:
CBC LPIG IWF IPL LHO IBC Other Total
--- ---- --- --- --- --- ----- -----
(Dollars in thousands)
----------------------
December 31, 2000...................... $ 31,795 $ 26,206 $ 9,404 $ 1,650 $ 246 $ 7 $ -- $ 69,308
New non-accrual loans.................. 67,867 9,861 12,578 9,975 752 26 5,257 106,316
Loans sold............................. -- (13,013) (140) (259) -- -- -- (13,412)
Transferred to REO..................... -- -- (818) (261) -- -- -- (1,079)
Gross charge-offs...................... (43,170) (8,616) (3,565) (97) -- -- (60) (55,508)
Reinstatements and paydowns............ (13,558) (3,080) (12,010) (3,507) (799) (33) (551) (33,538)
-------- -------- -------- ------- ----- ---- ------ --------
September 30, 2001..................... $ 42,934 $ 11,358 $ 5,449 $ 7,501 $ 199 $ -- $4,646 $ 72,087
======== ======== ======== ======= ===== ==== ====== ========
Number of non-accrual
loans at September 30, 13 3 34 15 1 -- 3 69
2001....................
Principal balance of smallest
non-accrual loan at
September 30, 2001..... $ 400 $ 91 $ 17 $ 91 $ 199 $ -- $1,111 $ 17
Principal balance of largest
non-accrual loan at
September 30, 2001.... $ 13,000 $ 9,332 $ 1,428 $ 3,482 $ 199 $ -- $1,839 $ 13,000
32
On an ongoing basis, we monitor each of our loan portfolios and evaluate the
adequacy of the allowance for loan and lease losses. In determining the adequacy
of the allowance for loan and lease losses, we consider such factors as
historical loan loss experience, underlying collateral values, evaluations made
by bank regulatory authorities, assessment of economic conditions and other
appropriate data to identify the risks in the loan portfolio.
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 upon changes in economic
conditions. In addition, bank regulatory agencies, as an integral part of their
examination process, periodically review SPB's allowance for loan and lease
losses. Such agencies may require SPB to recognize additions to the allowance
for loan and lease losses based on their judgments about information available
to them at the time of their examination.
Loans deemed by us to be uncollectible are charged to the allowance for loan
and lease losses. Recoveries on loans and leases previously charged off are
credited to the allowance. Provisions for loan and lease losses are charged to
expense and credited to the allowance in amounts deemed appropriate by us based
upon our evaluation of the known and inherent risks in the loan portfolio. Based
on current trends in non-performing assets, higher levels of provision for loan
and lease losses and the related allowance for loan and lease losses may be
necessary in future periods.
At September 30, 2001, CBC had aircraft and aircraft related loans totaling
$117.0 million as compared to $131.4 million at September 31, 2000. As a result
of the events of September 11, 2001, CBC increased the general allowance for
loan losses on these loans to 4.27% from 2.12%. At September 30, 2001, two
aircraft and aircraft related loans totaling $8.3 million were classified as
"Substandard." At September 30, 2001, CBC had allocated specific loss
allowances of $1.3 million to these classified loans.
Loans and leases held for investment consisted of the following at September
30, 2001 and December 31, 2000:
September 30, December 31,
2001 2000
---- ----
(Dollars in thousands)
Loans secured by real estate:
One-to-four family............................................................................. $ 24,234 $ 72,502
Multifamily.................................................................................... 195,877 42,695
Commercial..................................................................................... 43,762 14,025
---------- ----------
Total loans secured by real estate............................................................ 263,873 129,222
Leases......................................................................................... 33,153 10,431
Consumer and auto loans........................................................................ 1,120 3,480
Franchise loans................................................................................ 4,978 8,797
Asset based and cash stream loans.............................................................. 606,587 752,883
Loan participations............................................................................ 75,363 123,471
Mortgage repurchase facilities................................................................. 105,937 50,639
Film and television production loans........................................................... 106,013 83,688
Commercial loans............................................................................... 13,015 18,223
---------- ----------
Total......................................................................................... 1,210,039 1,180,834
Loans in process............................................................................... 171 11,860
Unamortized premium............................................................................ 915 1,341
Deferred loan fees............................................................................. (10,957) (7,916)
---------- ----------
Total net loans and leases held for investment................................................ 1,200,168 1,186,119
Allowance for loan and lease losses............................................................ (61,407) (63,625)
---------- ----------
Total......................................................................................... $1,138,761 $1,122,494
========== ==========
Allowance for loan and lease losses to net loans and leases held for investment................. 5.12% 5.36%
During the quarter ended September 30, 2001, we transferred $184.0 million of
loans classified as held for sale to held for investment based upon management's
determination that these loans would not be sold.
Loans held for investment are primarily comprised of asset based loans to
middle market companies mainly in California, participations in commercial loan
syndications, first and second lien mortgages secured by income producing and
residential real property in California, and mortgage repurchase facilities
secured by newly originated residential mortgage loans. CBC historically
concentrated its lending efforts in the domestic technology and aircraft
industries.
33
REGULATORY MATTERS
SPB's Capital Ratios
The following table presents SPB's actual capital ratios and the
corresponding minimum adequate and well capitalized capital ratio requirements
under the (i) FDIC Risk-based Capital and Tier 1 Capital regulations and (ii)
the FDIC Leverage ratio regulation as of September 30, 2001. See -"Agreements
with Regulators".
"Minimum" Well
Minimum "Adequate" "Capitalized"
Actual Requirement Requirement
------ ----------- -----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Risk-based Capital...................... $126,002 8.63% $116,827 8.00% $146,033 10.00%
Risk-based Tier 1 Capital............... 87,268 5.98 58,413 4.00 87,620 6.00
FDIC Leverage Ratio..................... 87,268 5.35 65,283 4.00 81,604 5.00
LIQUIDITY AND CAPITAL RESOURCES
We generate liquidity at ICII 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 its Regulatory Orders, SPB 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 SPB, and because of the restrictions contained in the Regulatory
Orders, it is unlikely that SPB will pay cash dividends to us on its stock in
the near future and there is no assurance that SPB will ever resume paying cash
dividends to ICII. The continued prohibition against SPB 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 SPB to
obtain regulatory approvals necessary to permit it to pay us dividends on its
common stock and bank preferred stock, as well as upon our future performance
and that of SPB which, are subject to general economic, financial, competitive,
legislative, regulatory and other factors beyond our control. The ability of SPB
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 continued liquidation of ICII's assets, and assuming that SPB is able to
obtain the necessary regulatory approvals to pay ICII 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.
ICII'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 September
30, 2001 ICII held $5.1 million of cash and interest bearing deposits as
compared to $15.9 million at December 31, 2000. At September 30, 2001, ICII and
its non-bank subsidiaries had available cash and cash equivalents of $10.8
million.
The current amount of cash and interest bearing deposits held at ICII is
significantly less than the $183.8 million principal amount of outstanding
ROPES, Senior Secured Notes, and long term debt at September 30, 2001. The
ability of ICII to repay these obligations in accordance with their stated
maturities is dependent on the cash flows generated by it and other
subsidiaries, in addition to future dividend payments from SPB to ICII. SPB is
unable to pay dividends at the present time.
On March 30, 2001, ICII exchanged $22.0 million of SPB's subordinated debt
and contributed $14.0 million in cash in exchange for SPB's Series B
noncumulative perpetual preferred stock and also made a common equity
contribution of $7.2 million in cash to SPB. Although such capital contributions
resulted in SPB's capital ratios being above that required by statute to be
considered "adequately capitalized", SPB does not meet the capital ratio targets
specified by the Regulatory Orders. On June 30, 2001, ICII contributed $5.0
million in cash as common equity to SPB. On September 30, 2001, ICII
contributed an additional $4.0 million in cash as common equity to SPB.
Approximately $42.0 million would have had to be contributed to cause SPB to
meet the capital ratio targets specified by the Regulatory Orders at September
30, 2001.
We formerly financed our lending activities through warehouse lines of credit
and repurchase facilities with financial
34
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 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
deposits and, if necessary, through borrowings under lines of credit and from
the FHLB. At September 30, 2001 and December 31, 2000, SPB had maximum FHLB
borrowing capacity equal to $138.8 million and $137.2 million, respectively.
There were $10.0 million of outstanding FHLB advances at September 30, 2001 as
compared to $65.0 million at December 31, 2000. FHLB advances are secured by
certain real estate loans with a carrying value of $145.8 million at September
30, 2001. Additionally, at November 13, 2001, SPB had $100.0 million of
outstanding FHLB advances with a weighted average maturity date of July 9, 2002,
at a weighted average interest rate of 2.17%.
For the quarter ended September 30, 2001, SPB's deposit portfolio, which
consists primarily of certificates of deposit, decreased $270.2 million to $1.37
billion at September 30, 2001 from $1.64 billion at December 31, 2000.
SPB has been able to acquire new deposits through its local marketing
strategies as well as domestic money markets. Under regulatory orders applicable
during the third quarter of 2001, SPB may raise brokered deposits of no more
than $39.8 million so long as SPB remains "Adequately Capitalized" as defined by
banking regulations. As of September 30, 2001, SPB's outstanding balance of
brokered deposits was $17.4 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.
35
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
There have been no material changes to the quantitative and qualitative
disclosures about market risk included in our annual report on Form 10-K/A for
the year ended December 31, 2000.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Our company and three of our former 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 its affiliate, Southern Pacific Funding
Corporation, resulting in an artificial inflation of the price of our
securities. 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. On May
2, 2001, we received notice from the United States District Court for the
Central District of California that it has granted our motion for summary
judgment.
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. 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 had 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
had counter-moved for summary judgment on ICII's counterclaim, and the parties
filed motions seeking the exclusion of each other's expert witnesses. On July
31, 2001, the Court granted motions to exclude the parties' experts' testimony,
decided a number of motions for partial summary judgments, and ordered a status
hearing, which occurred on October 4, 2001. The Court set a further status
conference for December 6, 2001 and trial on June 10, 2002.
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. CVOO-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 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. Plaintiff subsequently moved for the appointment of
lead plaintiff and lead counsel. Defendants opposed these motions. After these
motions had been fully briefed, the Court ordered defendants to move to
disqualify plaintiff's counsel. Defendants brought such a motion on August 20,
2001. That motion has been fully briefed but has not yet been ruled upon by the
Court.
Our company and two of our former 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.
Our company and its two former directors moved to dismiss the adversary
proceedings for lack of subject matter jurisdiction and failure to state a
claim. These motions
36
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. On September 10, 2001, the trustee filed
its First Amended Complaint, which re-alleges each of the same causes of action
set forth in the original complaint. On October 9, 2001, our company, along with
each of the individual defendants, moved to dismiss the First Amended Complaint
for failure to state a claim. Defendants' motion to dismiss is pending and has
not been decided by the Court. On November 13, 2001, the Court entered an order
staying the action for 90 days.
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
The Registrant filed the following Report on Form 8-K during the
quarter ended September 30, 2001; on August 6, 2001, the Registrant announced
second quarter 2001 results of operations and the status of its recapitalization
plan.
37
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Imperial Credit Industries, Inc.
Date: November 19, 2001 By: /s/ Paul B. Lasiter
----------------- -------------------
Paul B. Lasiter
Senior Vice President - Corporate Controller
38