Notes and Debenture Payable

6 Months Ended

Jun. 30, 2011

Notes and Debenture Payable

Notes and Debenture Payable

(17)   Notes and Debenture Payable

A summary of the principal balances of notes payable included in the consolidated and combined balance sheet as of June 30, 2011 and December 31, 2010 is as follows (in thousands):

	June 30,		December 31,
	2011		2010
Cedar Lane	$	27,838	$	34,209
Skarbonka debenture		—		29,767
White Oak, Inc.		9,280		21,219
Acorn Capital Group		227		3,988
CTL Holdings, LLC		—		24
		37,345		89,207
Related Party		—		2,402
Total	$	37,345	$	91,609

Cedar Lane

On December 2, 2009, Imperial PFC Financing II, LLC was formed to enter into a financing agreement with Cedar Lane Capital, LLC, so that Imperial PFC Financing II, LLC could purchase Imperial Premium Finance notes for cash or a participation interest in the notes. The financing agreement is for a minimum of $5 million to a maximum of $250 million. The agreement is for a term of 28 months from the time of borrowing and the borrowings bear an annual interest rate of 14%, 15% or 16%, depending on the class of lender and are compounded monthly. All

of the assets of Imperial PFC Financing II, LLC serve as collateral under this credit facility. The Company is subject to several restrictive covenants under the facility. The restrictive covenants include items such as restrictions on the ability to pay dividends or incur additional indebtedness by Imperial PFC Financing II, LLC. The Company believes it is in compliance at June 30, 2011. The outstanding principal at June 30, 2011 and December 31, 2010 was approximately $27.8 million and $34.2 million, respectively, and accrued interest was approximately $5.7 million and $4.3 million, respectively. The Company is required to retain 2% of the principal amount of each loan made to the borrower, for purposes of indemnifying the facility for any breaches of representations, warranties or covenants of the borrower, as well as to fund collection efforts, if required. As of June 30, 2011 and December 31, 2010 the Company's consolidated financial statements reflected balances of approximately $691,000 and $691,000 included in restricted cash, respectively. Our lender protection insurer ceased providing us with lender protection insurance under this credit facility on December 31, 2010. As a result, the Company is no longer able to originate new premium finance loans under our credit facility.

Skarbonka Debenture

On November 1, 2010, the Series B Preferred Units owned by Premium Funding, Inc. were exchanged along with the common units owned by Premium Funding, Inc. and a promissory note issued to Skarbonka for $30.0 million debenture that matures October 4, 2011. The Company valued the components of the $30 million debenture as follows: $8.0 million of the debenture was attributed to the repurchase of 112,500 shares of common units. These common units were originally issued on December 15, 2006 for $5.0 million in cash. The value attributed to the common units reflects an agreement between the Company and its shareholders and equates to a return on investment of approximately 15% per annum for the period they have been outstanding (approximately 4 years); $19.0 million of the debenture was attributed to (i) the repayment of $18.3 million ($16.1 million of principal and $2.2 million of accrued interest) due as of November 1, 2010 on the promissory note in favor of Skarbonka and (ii) an agreement between the Company and its shareholders to contribute an additional $700,000 in value to imputed interest on the debenture until the expected repayment date; and, $3.0 million of value was attributed to the repurchase of 25,000 shares of Series B preferred units. The Series B preferred units were originally issued on December 30, 2009 for $2.5 million. As of November 1, 2010 (issuance of debenture), these units had an unpaid preferred return of $333,000.

During the first quarter of 2011, the Company had amortized $233,000 of imputed interest relating to the debenture payable as a component of interest expense in the accompanying consolidated and combined statement of operations. On February 11, 2011, the date of the closing of the Company's initial public offering, the debenture was converted into shares of the Company's common stock (see Note 19).

White Oak, Inc.

On February 5, 2009, Imperial Life Financing II, LLC, was formed to enter into a loan agreement with White Oak Global Advisors, LLC, so that Imperial Life Financing II, LLC could purchase Imperial Premium Finance notes in exchange for cash or a participation interest in the notes.

The loan agreement is for $27 million. The interest rate for each borrowing made under the agreement varies and the weighted average interest rate for the loans under this facility as of June 30, 2011 and December 31, 2010 was 20.41% and 19.65%, respectively. All of the assets of Imperial Life Financing II, LLC serve as collateral under this facility. The Company is subject to several restrictive covenants under the facility. The restrictive covenants include items such as restrictions on the ability to pay dividends or incur additional indebtedness by Imperial Life Financing II, LLC. The Company believes it is in compliance at June 30, 2011. The notes are payable 6-26 months from issuance and the facility matures on March 11, 2012. The outstanding principal at June 30, 2011 and December 31, 2010, was approximately $9.3 million and $21.2 million, respectively, and accrued interest was approximately $4.5 million and $8.2 million, respectively. After December 31, 2010, the Company ceased

originating premium finance loans with lender protection insurance. As a result, we are no longer able to originate new premium finance loans under this credit facility.

Acorn Capital Group

A lender, Acorn Capital Group ("Acorn"), breached a credit facility agreement with the Company by not funding ongoing premiums on certain life insurance policies serving as collateral for premium finance loans. The first time that they failed to make scheduled premium payments was in July 2008 and the Company had no forewarning that this lender was experiencing financial difficulties. When they stopped funding under the credit facility, the Company had no time to seek other financing to fund the ongoing premiums. The result was that a total of 111 policies out of 119 loans originally financed in the Acorn facility lapsed due to non-payment of premiums from January 1, 2008 through June 30, 2011. Of the remaining 8 policies, the Company acquired 6 policies from Acorn which are recorded in investments in life settlements on the Company's consolidated and combined balance sheet and 2 policies remain outstanding as of June 30, 2011.

In May 2009, the Company entered a settlement agreement whereby Acorn released us from our obligations related to the credit agreement. Acorn subsequently assigned all of its rights and obligations under the settlement agreement to Asset Based Resource Group, LLC ("ABRG"). As part of the settlement agreement, the Company continues to service the original loans and ABRG determines whether or not it will continue to fund the loans. If ABRG chooses not to continue funding a loan, the Company has the option to fund the loan or try to sell the loan or related policy to another party. The Company elects to fund the loan only if it believes there is value in the policy servicing as collateral for the loans after considering the costs of keeping the policy in force. Regardless of whether the Company funds the loan or sells the loan or related policy to another party, the Company's debt under the Acorn facility is forgiven and it records a gain on forgiveness of debt. If the Company funds the loan, it remains on the balance sheet, otherwise it is written off and the Company records the amount written off as a loss on loan payoffs and settlements, net. If ABRG funds the premium payment, this additional funding is evidenced by a new note, with an annual interest rate of 14.5% per annum, which is due and payable by the Company thirteen (13) months following the advance. Once the Company is legally released from their debt obligation either judicially or by ABRG, the Company will record a corresponding debt reduction.

As part of the settlement agreement, new notes were signed with annual interest rates of 14.5% compounding annually and totaled approximately $12.7 million on May 19, 2009. On the notes that were cancelled by ABRG during the three months ended June 30, 2011 and 2010, the Company was forgiven principal totaling approximately $1.4 million and $2.1 million, respectively, and interest of approximately $723,000 and $716,000, respectively. On the notes that were cancelled by ABRG during the six months ended June 30, 2011 and 2010, the Company was forgiven principal totaling approximately $3.4 million and $3.2 million, respectively, and interest of approximately $1.3 million and $1.3 million, respectively. The Company recorded these amounts as gain on forgiveness of debt. Partially offsetting these gains, the Company had loan losses totaling approximately $1.4 million and $1.6 million during the three months ended June 30, 2011 and 2010, respectively and $4.2 million and $3.3 million, during the six months ended June 30, 2011 and 2010, respectively. The Company recorded these amounts as loss on loan payoffs and settlements, net. As of June 30, 2011, only 2 loans out of 119 loans originally financed in the Acorn facility remained outstanding. These notes have a carrying amount of $269,000 which is included within loans receivable, net.

As of June 30, 2011 and December 31, 2010, the Company owed approximately $227,000 and $4 million, respectively, and accrued interest was approximately $102,000 and $1.3 million, respectively. These notes mature by June 5, 2012.

CTL Holdings LLC

In November 2008, Imperial Life Financing, LLC entered into a promissory note for $30 million with CTL Holdings, LLC. The note is due on December 26, 2012 and bears interest at a fixed rate per advance. The average

interest rate as of June 30, 2011 and December 31, 2010 was approximately 0% and 9.5%, respectively. On September 8, 2010, the lender protection insurance related to our credit facility with Ableco Finance, LLC ("Ableco") was terminated and settled pursuant to a claims settlement agreement, resulting in our receipt of an insurance claims settlement of approximately $96.9 million. The Company used approximately $32.9 million of the settlement proceeds to pay off the amounts borrowed under the grid promissory note in favor of CTL Holdings, LLC. The outstanding principal at June 30, 2011 and December 31, 2010 was approximately $0 and $24,000, respectively, and accrued interest was approximately $0 and $1,000, respectively. There are no financial or restrictive covenants under this promissory note.

Related Party

In October 2008, the Company entered into two balloon promissory note agreements with a related party where money was borrowed to cover operating expenses of approximately $8.9 million. The loan agreements were for $4.5 million each, are unsecured, have terms of two years, and bear an annual interest rate of 16.5% compounded monthly. On August 31, 2009, these notes were assigned to another related party and consolidated into a new revolving promissory note which bears an interest rate of 16.5% and matured on August 1, 2011. The outstanding principal at June 30, 2011 and at December 31, 2010 was approximately $0 and $2.4 million, respectively, and accrued interest was approximately $0 and $55,000, respectively. There are no financial or restrictive covenants contained in this promissory note. The amount was subsequently converted in connection with the initial public offering (see Note 19).