-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H1/N7ua7UGvezwL6iqT6XNN/nYKGjwg3dBSuB35QkrJSGwcGQjdP+sRDNQOP8Ip8 aRp/Kn1CPXndP4ZPL0fiyQ== 0000944209-00-000813.txt : 20000512 0000944209-00-000813.hdr.sgml : 20000512 ACCESSION NUMBER: 0000944209-00-000813 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMPERIAL CREDIT INDUSTRIES INC CENTRAL INDEX KEY: 0000883811 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 954054791 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-19861 FILM NUMBER: 626858 BUSINESS ADDRESS: STREET 1: 23550 HAWTHORNE BLVD STREET 2: STE 110 CITY: TORRANCE STATE: CA ZIP: 90505 BUSINESS PHONE: 3103731704 MAIL ADDRESS: STREET 1: 23550 HAWTHORNE BLVD STREET 2: BUILDING ONE SUITE 110 CITY: TORRANCE STATE: CA ZIP: 90505 10-K405/A 1 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------ ------ Commission File Number: 0-19861 IMPERIAL CREDIT INDUSTRIES, INC. (Exact name of registrant as specified in its charter) California 95-4054791 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number)
23550 Hawthorne Boulevard, Building 1, Suite 110, Torrance, California 90505 (Address of principal executive offices) (Zip Code) (310) 373-1704 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Name of each exchange on which registered Common Stock, no par value Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The aggregate market value of the voting stock held by nonaffiliates of the registrant based upon the closing sales price of its Common Stock on March 28, 2000 on the Nasdaq National Market was approximately $145,331,423. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [X] The number of shares of Common Stock outstanding as of March 28, 2000: 33,218,611 DOCUMENTS INCORPORATED BY REFERENCE (not applicable) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- IMPERIAL CREDIT INDUSTRIES, INC. 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
Page ---- PART I ITEM 1. BUSINESS...................................................... 3 ITEM 2. PROPERTIES.................................................... 42 ITEM 3. LEGAL PROCEEDINGS............................................. 43 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 44 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS........................................... 45 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.......................... 47 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... 49 ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.... 81 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 82 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...................................... 146 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 146 ITEM 11. EXECUTIVE COMPENSATION........................................ 148 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................... 155 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 156 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8- K............................................................. 159
Forward-Looking Statements Certain statements contained herein are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1955, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as "may", "will", "intend", "should", "expect", "anticipate", "estimate", or "continue" or the negatives thereof or other comparable terminology. The Company's actual results could differ materially from those anticipated in such forward-looking statements due to a variety of factors. These factors include but are not limited to, the demand for our products; competitive factors in the businesses in which we compete; adverse changes in the securities markets; inflation and changes in the interest rate environment that reduce margins or the fair value of financial instruments; changes in national, regional or local business conditions or economic environments; government fiscal and monetary policies; legislative or regulatory changes that affect our business; factors inherent to the valuation and pricing of commercial loans; other factors generally understood to affect the value of commercial loans; and the other risks detailed in the Company's 8-K dated May 17, 1999 as filed with the Securities and Exchange Commission (the "SEC"); periodic reports on Forms 10-Q, 8-K and 10-K and any amendments with respect thereto filed with the SEC; and other filings made by the Company with the SEC. 2 We wish to caution readers not to place undue reliance on any such forward- looking statements, which speak only as of the date made. We do not undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements. ITEM 1. BUSINESS General Imperial Credit Industries, Inc. ("ICII") is a diversified commercial lending, financial services, and investment banking holding company with consolidated assets of $2.2 billion as of December 31, 1999. We were first organized in 1986 and our headquarters are located in Torrance, California. Over the course of 1999, we substantially completed our exit from non-core operations and concentrated on our core commercial lending and investment banking and brokerage service businesses. Each of our remaining core businesses operate in niche segments of the financial services industry, which include; business finance lending, multifamily and commercial lending, asset management activities, investment banking and brokerage services. In October 1999, we added to our commercial lending business by purchasing a commercial finance lending business specializing in the entertainment industry. Our near-term focus is to expand our commercial banking and investment banking business. We continuously monitor and review the performance of our subsidiaries and lines of business for profitability and performance. Business Strategy For an explanation of our current business strategy, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--General." The Company's operations are divided into several operating segments segregated by product line. See "Imperial Credit Industries, Inc., Notes to Consolidated Financial Statements", Note 13--Business Segments for a description of each of our business segments. We group our core business segments into four broad categories. Business Finance Lending Coast Business Credit Imperial Warehouse Finance, Inc. Loan Participation and Investment Group The Lewis Horwitz Organization Imperial Business Credit, Inc. Multifamily and Commercial Mortgage Lending Income Property Lending Division Asset Management Activities Imperial Credit Asset Management, Inc. Imperial Credit Commercial Asset Management Corporation Investment Banking and Brokerage Services. Imperial Capital Group, LLC 3 We also segregate certain business segments as: Other Core Operations Equity Interests, and De-emphasized/Discontinued/Exited Businesses Business Finance Lending Coast Business Credit General Coast Business Credit ("CBC") is the asset based lending division of our principal subsidiary, Southern Pacific Bank, ("SPB"), that makes revolving lines of credit and term loans available to growth companies in manufacturing, distribution, technology, telecommunications and retail industries. CBC is headquartered in Los Angeles, California, and conducts its lending business activities throughout the United States. CBC has 16 loan production offices located in the following cities at December 31, 1999: Atlanta Chicago Minneapolis San Francisco Baltimore Cleveland New York City Santa Clara Boston Irvine Phoenix Seattle Charlotte Kansas City Portland Stamford
CBC's Loan Portfolio CBC's principal business is asset-based lending to small-to-medium-sized businesses with annual revenues ranging from approximately $10 million to $100 million. Typically, revolving lines of credit are secured by accounts receivable and inventory. Term loans are usually secured by real property, equipment or other fixed assets. CBC's primary niche is the high-technology sector which includes businesses involved in computer hardware and software, telecommunications, internet services, industrial automation and office equipment. These customers provide CBC with opportunities for long-term relationships in industries with above average growth prospects. 4 Set forth below is a table showing CBC's outstanding loan and commitment balances by industry at December 31, 1999 and 1998:
At December 31, 1999 At December 31, 1998 ------------------------------------- ------------------------------------- Outstanding % of Commitment % of Outstanding % of Commitment % of Balance Total Balance Total Balance Total Balance Total ----------- ------ ---------- ------ ----------- ------ ---------- ------ (Dollars in thousands) Transportation & public utilities.............. $215,665 28.83% $ 371,380 26.68% $163,262 25.78% $ 236,077 22.47% Wholesale trade--durable goods.................. 57,075 7.63 100,600 7.23 90,663 14.32 131,646 12.53 Retail stores........... 44,861 6.00 85,500 6.14 43,128 6.81 67,500 6.43 Electronic and electrical equipment manufacturing.......... 44,045 5.89 94,793 6.81 36,280 5.73 85,826 8.17 Equipment leasing....... 43,341 5.79 82,900 5.95 18,939 2.99 35,400 3.37 Fabricated metal products............... 36,357 4.86 48,000 3.45 16,844 2.66 43,000 4.09 Computer software....... 31,318 4.18 44,000 3.16 10,509 1.66 19,000 1.81 Industrial & commercial equipment.............. 23,133 3.09 54,867 3.94 36,057 5.69 58,017 5.52 Computer systems design................. 22,131 2.96 43,000 3.09 12,398 1.96 22,000 2.09 Transportation equipment.............. 22,075 2.95 26,250 1.89 11,225 1.77 15,200 1.45 Food product manufacturing.......... 20,326 2.72 42,500 3.05 18,441 2.91 14,500 1.38 Wholesale trade-- nondurable goods....... 18,559 2.48 42,000 3.02 8,487 1.34 15,000 1.43 Health services......... 16,665 2.23 20,000 1.44 14,947 2.36 17,500 1.67 Management services..... 16,110 2.15 41,500 2.98 7,154 1.13 11,500 1.10 Other................... 136,461 18.24 294,678 21.17 144,965 22.89 278,260 26.49 -------- ------ ---------- ------ -------- ------ ---------- ------ Total................. $748,122 100.00% $1,391,968 100.00% $633,299 100.00% $1,050,426 100.00% ======== ====== ========== ====== ======== ====== ========== ======
Set forth below is a summary of CBC's loan portfolio at December 31, 1999, 1998 and 1997:
At December 31, -------------------------------- 1999 1998 1997 ---------- ---------- -------- (Dollars in thousands) Commitments.............................. $1,391,968 $1,050,426 $803,300 Outstanding loans........................ 748,122 633,299 484,800 Outstanding loans to technology companies............................... 293,521 208,800 201,800 Outstanding unfunded commitments......... 643,846 417,127 318,500 Average outstanding balance per customer................................ 4,310 3,700 3,400 Weighted average yield................... 13.17% 13.09% 13.88%
Loan Products and Originations CBC's loans typically have maturities of two to five years, providing borrowers with greater flexibility to manage their borrowing needs. These loans have an automatic renewal for an additional year at the end of the contract term and each renewal year unless terminated by either party (usually requiring 90 days written notice prior to the end of the term). Loans are categorized based on the type of collateral securing the loan. Accounts Receivable Loans. These loans are revolving lines of credit that are secured principally by accounts receivable from their customers. Each borrower's customers normally make their payments to a blocked account, lockbox or directly to CBC. CBC deposits the payments daily and applies the funds to the borrower's loan balances. CBC typically lends up to 80% of the principal balance of accounts receivable that meet its eligibility requirements. However, advance rates vary depending on the borrower's historical performance with CBC. CBC's internal auditors conduct quarterly examinations of the collateral and financial condition of each borrower. 5 Inventory Loans. These loans are typically revolving lines of credit secured by eligible inventory that is restricted to raw materials and finished goods. Inventory loans are generally made in conjunction with accounts receivable loans to qualifying borrowers. Borrowers are required to provide CBC with monthly inventory designations and these reports are compared to each borrower's financial statements for accuracy. CBC typically advances loan proceeds in amounts ranging from 25% to 75% of the eligible inventory value, with the percentage advanced determined based on the characteristics of the inventory and the expected orderly liquidation of the inventory based on an appraisal by a qualified appraisal firm with experience in that industry. Term Loans. CBC also originates term loans secured by real property, equipment or other fixed assets. These loans typically have three-to-five year amortization periods, but are due and payable upon termination of the master loan and security agreement. Participation Loans. Participation loans consist of both term loans and revolving lines of credit which CBC and other lenders (banks or other asset- based lenders) jointly lend to borrowers under one loan agreement. Set forth below is a table showing the principal amount of CBC's outstanding loans and the percentage of CBC's portfolio of each loan type at December 31, 1999, 1998 and 1997:
December 31, 1999 December 31, 1998 December 31, 1997 ----------------- ----------------- ----------------- Outstanding % of Outstanding % of Outstanding % of Balance Total Balance Total Balance Total ----------- ----- ----------- ----- ----------- ----- (Dollars in thousands) Accounts receivable loans.................. $411.2 55.0 % $363.5 57.4 % $267.5 55.2% Inventory loans......... 61.4 8.2 94.5 14.9 55.1 11.4 Term loans.............. 162.9 21.8 156.9 24.8 76.7 15.8 Participation loans purchased.............. 152.2 20.3 50.0 7.9 85.5 17.6 Participation loans sold................... (39.6) (5.3) (31.6) (5.0) -- -- ------ ----- ------ ----- ------ ----- Total................. $748.1 100.0 % $633.3 100.0 % $484.8 100.0% ====== ===== ====== ===== ====== =====
Underwriting Before a credit line proposal letter is issued and a line of credit is established, CBC conducts a due diligence review of the prospective client that includes all or part of the following: . An audit of the company's records which include verification of its accounts receivable and inventory, along with reviews of its financial statements, management information systems, accounts payable and reporting capability, . Independent appraisals of inventory, equipment or real estate, . Background checks on the principals and investors of the company, . Extensive research on the prospective client, its industry, suppliers, competitors and products, . Detailed analysis of the prospective client's audited financial statements including ratio analysis, trend analysis, comparison to budget projections, interim results and multi-year analysis, . Uniform Commercial Code searches and filings, and . Legal documentation review by outside attorneys. 6 For high technology borrowers, particular emphasis is placed on understanding the underlying value of the technology itself, including the value of the borrower's intangible assets. When necessary, filings at the patent and trademark office are made on copyrights, patents, trade names or other intangibles. Outside experts are sometimes consulted to assess the viability and value of intangibles. The underwriting process begins after a proposal letter is issued. At that time, CBC requires the prospective borrower to provide a deposit for the due diligence and audit. If the prospective borrower is providing inventory, equipment or real estate as collateral for the loan, then CBC will order appraisals for the various types of collateral. CBC's auditing staff conducts an audit generally consisting of a due diligence review of the prospective borrower's accounting and financial records, including a statistical review of accounts receivable and charge-off history. CBC auditors then submit their reports and work papers to CBC's credit committee along with the other due diligence being conducted by the underwriting department and appraisals by an outside appraisal firm. When CBC decides to approve a credit line, an appropriate credit limit is established under the revolving credit line. CBC analyzes the prospective borrower's customer base to assure compliance with CBC's policies. These policies generally limit CBC's overall exposure to borrowers, especially with respect to privately held or non-investment grade borrowers. When deemed necessary for credit approval, CBC may obtain guarantees or other types of security from a client or its affiliates and may also obtain subordination and intercreditor agreements from the borrower's other lenders. Although CBC's underwriting guidelines specify a review of the factors described above, CBC does not rely on a rigid scoring system to approve prospective borrowers. Decisions to enter into a relationship with a prospective client are made on a case-by-case basis. Credit Monitoring and Controls An assigned CBC account executive monitors each borrower's credit, collateral and advances. All account executives are required to meet with each of their assigned borrowers at least quarterly to: . monitor the borrower's business, . physically inspect the borrower's facilities and equipment, and . discuss any potential problems or opportunities the borrower may be experiencing. CBC monitors borrowers' accounts receivable using three reports. The first is an accounts receivable aging analysis report prepared monthly by the loan processor and reviewed by the account executive. This report includes details pertaining to account concentrations and aging trends. The second is an accounts receivable activity summary prepared weekly by the loan processor and reviewed by the account executive, summarizing borrowings, repayments and pledged collateral. The third is a daily report prepared by the borrower and reviewed by the account executive to determine credit availability for a particular day. If liquidation is required for a borrower to repay an outstanding loan, then CBC attempts to effect a consensual possession of the collateral property and joint collection of accounts receivable. In certain instances, court action may be required to ensure collection of receivables and to obtain possession of pledged assets. Pricing and Funding CBC typically charges its customers prime plus 1% to 3% (exclusive of loan fees) on the outstanding balance of their loans depending upon the credit quality of the borrower. In addition, CBC attempts to be flexible in the structuring of its revolving credit lines and to provide prompt service in order to gain an advantage over its competitors. When competing against more traditional lenders, CBC competes less on price and more on flexibility and speed of funding. CBC strives to fund its initial loan advance within three weeks of receiving the required information, and future advances generally by the next business day after receiving required documentation. CBC also charges fees for prepayments, line of credit facilities, loan originations and renewals, and may charge other special fees. 7 Asset Quality The amounts of non-performing assets attributable to CBC's business at December 31, 1999, 1998 and 1997 were $22.2 million, $1.1 million and $0 million, respectively. The amount of net charge-offs relating to CBC's loans for 1999, 1998 and 1997 were $17.4 million, $67,000 and $295,000, respectively. The increase in CBC's non-accrual loans and charge-offs for the year ended December 31, 1999 resulted from recent bank regulatory guidance that prevents, among other things, CBC from considering the liquidation value of certain intangible assets of its customers in determining a loan's accrual status or, if necessary, the required charge-off amount. The effect of this guidance resulted in CBC changing its charge-off policy in the second quarter of 1999, and charging off gross amounts of outstanding problem loans as opposed to CBC's previous practice of reserving for and, if necessary, ultimately charging off the net deficiency amount of problem loans. Marketing CBC obtains business through referrals from: . banks . existing borrowers . investment banks . venture capitalists . other finance companies . mezzanine funds . accounting firms . independent brokers . management . other affiliates of our company consultants
CBC's marketing officers call on CBC's referral sources to identify and receive introductions to potential clients and to also identify potential clients from database searches. CBC pays its marketing personnel competitive base salaries and commissions based on funded transactions. Commissions can be a significant portion of the total compensation paid to CBC's marketing personnel. CBC believes that this will motivate and reward the creation of new business and the retention of existing business. CBC's marketing personnel do not have credit decision authority. CBC's marketing efforts also include in- house telemarketing, magazine and newspaper advertising, attendance at and sponsorship of seminars and trade shows, banner ads and internet advertising. Imperial Warehouse Finance, Inc. General Imperial Warehouse Finance, Inc. ("IWF") is a wholly owned subsidiary of SPB with its primary business being residential mortgage warehouse lending provided under short-term revolving credit agreements to mostly small to medium sized mortgage bankers on a national basis. SPB acquired the assets of IWF in October 1997. During 1999 IWF relocated to Torrance, California. Prior to the relocation, IWF conducted its lending activities from Voorhees, New Jersey, although it has customer relationships nationwide. During 1999 and 1998, IWF's average outstanding loan commitments were $357.7 million and $352.6 million, respectively. IWF's mortgage warehouse lending provides short- term interim funding to finance residential mortgages originated by mortgage bankers until the mortgages are sold in the secondary market. The warehouse funding allows the mortgage bankers to accumulate and pool the loans until resale. IWF's Loan Portfolio Typically, IWF, through SPB, serves as the sole funding source for its mortgage warehouse lending customers. IWF has entered into a participation agreement with SPB pursuant to which SPB funds 100% of IWF's warehouse loans to brokers. IWF generates revenues from fees and net interest income on its loan portfolio based on the amount of warehouse loan advances extended and transaction fees from the mortgage bankers for each loan advance processed. Mortgage bankers pay interest on funds drawn based on the prime rate plus a percentage. The transaction fees are determined pursuant to an established fee schedule. 8 The following table sets forth certain information regarding IWF's warehouse lines at December 31, 1999, 1998 and 1997:
At December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- (Dollars in thousands) Commitments.................................... $300,415 $401,500 $247,100 Outstanding warehouse lines.................... 78,068 181,001 122,488 Outstanding unfunded commitments............... 222,347 220,499 124,612 Average outstanding balance per customer....... 940 1,602 1,655 Weighted average yield......................... 8.28% 9.94% 10.27%
IWF's outstanding balances to customers by geographic location were as follows at December 31, 1999, 1998 and 1997:
At December 31, ------------------------------------------ 1999 1998 -------------------- --------------------- % of Loans % of Loans Amount in Portfolio Amount in Portfolio ------- ------------ -------- ------------ (Dollars in thousands) New York.......................... $24,720 31.66% $ 41,177 22.75% Maryland.......................... 22,188 28.42 26,865 14.84 California........................ 6,140 7.86 241 0.13 Michigan.......................... 4,780 6.12 40,854 22.57 Florida........................... 3,369 4.32 25,844 14.28 New Jersey........................ 2,915 3.73 14,700 8.12 Indiana........................... 128 0.16 10,757 5.94 Other............................. 13,828 17.73 20,563 11.37 ------- ------ -------- ------ Total........................... $78,068 100.00% $181,001 100.00% ======= ====== ======== ======
During 1999, we made the decision to relocate IWF's operations from New Jersey to Torrance, California. As a result of the relocation, none of the employees of IWF made the move from New Jersey to California. We believe that as a result of the personal contacts that IWF's former employees had with the existing client base, a substantial number of customers have paid off their warehouse lines and moved their relationships to the new employers of our former IWF employees. Additionally, during the fourth quarter of 1999, we implemented stricter underwriting guidelines and changed our marketing focus to the Western United States. We believe that these factors are the primary cause of the overall decrease in the outstanding balance of IWF's warehouse lines. Recently, we retained a new director of marketing which has resulted in an increase in applications for new warehouse lines. Loan Products and Originations IWF is a full recourse lender whose advances on approved warehouse lines of credit are collateralized by individual mortgages. Before providing an advance on the warehouse line, IWF's policy requires that the pledged loan have in place a purchase commitment from an approved investor. To limit credit risk, IWF's customers must meet and maintain minimum levels of net worth and liquidity, and in certain cases, personal guarantees are required of the principals. 9 Underwriting During the fourth quarter of 1999, we initiated changes to our underwriting policies. In general, these new policies require borrowers to maintain a higher net worth and lower overall leverage ratios, among other things. Warehouse loans are underwritten in accordance with both IWF's and SPB's policies and procedures. Prospective loan originators prepare a loan application that requires detailed information on the originator's business. After evaluating the application and independently verifying the applicant's credit history, if the originator appears to be a likely candidate for approval, IWF personnel will visit the originator and review, among other things, its: . Business organization . Risk management . Management . Loan volume and historical delinquency rate . Reputation . Financial condition . Quality control . Contingent obligations . Funding sources . Regulatory compliance
If the originator meets the established criteria, its application is submitted for approval and the mortgage banker enters into a credit facility agreement with IWF. The credit facilities set forth the maximum percentage of any single mortgage loan that will be advanced, the fees received for each advance, the interest rate and the terms of repayment. Warehousing lines are generally renewable annually if the broker continues to meet all applicable requirements. All funds advanced to the mortgage bankers are secured by the underlying mortgages including assignment of the promissory note, deed of trust and all instruments and documents comprising the loan documentation on each loan funded by IWF, and may also be secured by a personal guaranty by the principals of the mortgage banker. The loans are normally sold no more than 45 days after origination to third party private investors. Credit Monitoring and Controls IWF attempts to minimize the risks associated with making warehouse loans by, among other things: . generally requiring that each pledged loan be committed for purchase by a third party investor, . directly receiving payment from secondary market investors when the loans are sold and remitting any balance to the borrower after deducting the amount borrowed for that particular advance, . visiting the originator's office from time to time to review its financial and other records, and . monitoring each originator by periodically reviewing each originator's financial statements, auditor's report to the originator's board of directors, loan production, delinquency, and commitment reports. Pricing and Funding IWF typically charges its customers prime plus 0.75%-2% (exclusive of loan fees) on the outstanding balance under their warehouse lines. Loan fees range between $50 and $140 dollars per loan placed on the line. Asset Quality The amount of non-performing assets attributable to IWF's business at December 31, 1999, 1998 and 1997 were $7.8 million, $4.1 million, and $0 respectively. We believe that as a result of our new underwriting policies and stricter collection policies that IWF's non-performing assets will increase in the short term. The amount of net charge-offs relating to IWF's loans during the year ended December 31, 1999 was $1.6 million. IWF experienced no charge- offs for the years ended December 31, 1998 and 1997. Marketing IWF expects to shift its marketing focus from the Eastern United States to the Western United States. IWF markets its business by attending industry tradeshows, and through advertising in such publications as the Mortgage Banker, the National Mortgage Professional and the National Mortgage News. 10 Loan Participation and Investment Group General SPB formed the Loan Participation and Investment Group ("LPIG") in September 1995 to invest in and purchase senior secured debt of other companies (referred to as a "participation") offered by commercial banks in the secondary market. The principal types of loans acquired by LPIG are senior-secured bank loans, in the form of revolving lines of credit and long- term loans or letters of credit. As a part of its business, LPIG invests in loan participations through both on and off balance sheet financing arrangements. The on balance sheet investments are funded by the FDIC insured deposits of SPB, while LPIG's off balance sheet financing is primarily conducted through various trust and total return swap instruments. LPIG's Loan Portfolio The following table sets forth certain information regarding LPIG's commitments and outstanding balances at December 31, 1999, 1998 and 1997 as follows:
At December 31, ---------------------------- (Dollars in thousands) 1999 1998 1997 -------- -------- -------- Commitments.................................. $459,500 $523,300 $483,700 Loans outstanding............................ 217,000 222,100 196,400 Average yield................................ 7.55% 8.21% 8.72%
Underwriting/Credit Monitoring and Controls By purchasing loan participations, LPIG builds its loan portfolio without loan origination costs or ongoing loan servicing costs and with minimal administrative costs. LPIG attempts to minimize the risk of investing in loan participations by performing a comprehensive analysis of a borrower's creditworthiness including analysis of operating performance, cash flow, capital structure, collateral, customers, suppliers, industry and competition. Once a loan is booked it is monitored on at least a quarterly basis for performance against projections and compliance with loan covenants. Risk is managed through diversification of the LPIG portfolio by number of borrowers, size of loans, industry and debt ratings. 11 Set forth below is a table showing LPIG's outstanding loan and commitment balances by industry at December 31, 1999 and 1998:
At December 31, 1999 At December 31, 1998 ------------------------------------- ------------------------------------- Outstanding % of Commitment % of Outstanding % of Commitment % of Balance Total Balance Total Balance Total Balance Total ----------- ------ ---------- ------ ----------- ------ ---------- ------ (Dollars in thousands) Manufacturing........... 26,469 12.20% 63,189 13.75% 12,407 5.59% 38,778 7.41% Television broadcasting........... 13,773 6.35 44,483 9.68 27,796 12.51 45,000 8.60 Entertainment........... 36,332 16.74 43,453 9.46 17,632 7.94 40,308 7.70 Packaging............... 19,432 8.96 31,545 6.86 14,500 6.53 49,838 9.52 Hotels.................. 18,135 8.36 28,774 6.26 26,022 11.72 30,523 5.83 Automobile rentals ..... -- -- 25,000 5.44 1,364 0.61 25,000 4.78 Telecommunications...... 20,238 9.33 25,000 5.44 2,701 1.22 28,165 5.38 Mining.................. 7,000 3.23 23,000 5.00 -- -- 16,000 3.06 Food processing ........ 11,216 5.17 18,697 4.07 10,593 4.77 19,710 3.77 Food distribution....... -- -- -- -- -- -- 16,800 3.21 Waste disposal services............... 8,433 3.89 18,643 4.06 2,821 1.27 14,326 2.74 Party goods distribution........... 3,780 1.74 14,940 3.25 2,280 1.03 12,000 2.29 Office products......... 6,624 3.05 14,725 3.20 6,545 2.95 25,000 4.78 Defense................. 4,131 1.90 14,421 3.14 4,876 2.19 15,165 2.90 Air carrier............. 9,106 4.20 13,400 2.92 18,400 8.28 18,400 3.51 Park management......... 7,636 3.52 13,091 2.85 9,818 4.42 14,318 2.73 Rail transportation..... 12,360 5.70 12,600 2.74 12,306 5.54 12,600 2.41 Chemicals............... -- -- 10,557 2.30 10,828 4.87 18,145 3.47 Healthcare.............. 9,687 4.46 9,835 2.14 8,256 3.72 10,595 2.02 Automobile parts........ -- -- 9,000 1.96 10,172 4.58 25,050 4.79 Electronics............. -- -- 7,143 1.55 -- -- -- -- Equipment rentals....... -- -- 6,750 1.47 -- -- -- -- Garment................. -- -- 5,400 1.18 2,027 0.91 5,400 1.03 Paper................... 2,323 1.07 3,030 0.66 1,616 0.73 3,030 0.58 Radio broadcasting...... -- -- -- -- 3,447 1.55 15,000 2.87 Amusement parks......... -- -- -- -- 3,545 1.60 9,234 1.76 Supermarkets............ -- -- -- -- 4,850 2.18 4,850 0.93 Restaurants............. -- -- -- -- 930 0.42 930 0.18 Collection services .... -- -- -- -- 6,374 2.87 9,145 1.75 Ecological.............. 286 0.13 2,857 0.62 -- -- -- -- -------- ------ -------- ------ -------- ------ -------- ------ Total.................. $216,961 100.00% $459,533 100.00% $222,106 100.00% $523,310 100.00% ======== ====== ======== ====== ======== ====== ======== ======
Pricing and Funding LPIG loans are typically priced based on the 6 month LIBOR rate plus a spread on the outstanding balance of loans. Asset Quality At December 31, 1999, 1998, and 1997, LPIG had no outstanding balance of non-performing assets. During the year ended December 31, 1999, LPIG experienced a $3.9 million charge-off related to one loan. LPIG did not experience any net loan charge-offs during 1998 and 1997. Loan Products, Origination and Marketing LPIG invests in senior secured commercial debt through participation in nationally syndicated bank credits by participating with the primary syndication group and by purchasing participations in the secondary market. 12 Lewis Horwitz Organization ("LHO") General We acquired LHO in October 1999. See "Management's Discussion and Analysis--The Lewis Horwitz Organization" for more information regarding the acquisition. LHO is an internationally recognized commercial finance lender engaged in providing financing for independent motion picture and television production. Typically, LHO lends to independent producers of film and television on a senior secured basis, basing its credit decisions on the creditworthiness and reputation of distributors and sales agents who have contracted to distribute the films. Loan Products and Originations LHO provides loans (with a typical term of 12 to 18 months) and letters of credit for the production of motion pictures and television shows or series that have a predictable market worldwide, and therefore, a predictable level of revenue arising from licensing of the distribution rights throughout the world. LHO is a widely-recognized leader in film financing with over 30 years of experience. LHO's lending officers have a combined total of over 100 years in financing experience. LHO believes it has a competitive advantage due to its extensive worldwide contacts among sales agents, distributors and independent producers in an industry where name recognition and personal contacts are crucial to success. LHO's experience has allowed it to rapidly adapt to changing industry standards in order to maintain its competitive position. LHO lends to "independent" producers of film and television, many of which are located in California. LHO, however, has borrowing clients based all over the world. LHO considers "independent" producers to be those producers that do not have major studio distribution outlets for their product. Large film and television studios generally maintain their own distribution outlets and finance their projects with internally generated financing. In addition to funding production loans against a number of distribution contracts, LHO has pioneered a conservative valuation of selected unsold rights to cover a modest portion of the production budget (gap). Several risks are inherent in the type of lending conducted by LHO, including the non-completion of the production, failure to perform on the part of the distributors and political and currency risks, each of which are mitigated by various means. For example, LHO requires an insurance policy (called a completion bond) to insure the project will be completed on budget. Distributor risks are minimized by adhering to strict credit limits and periodic reviews. Currency risks are mitigated by currency hedge contracts. Underwriting LHO's lending officers review the quality of the distributors and their contracts, the budget, the schedule of advances, and valuation of all distribution rights when considering a new lending opportunity. After closing, each requested advance is approved by the lending officer and the bonding company on a weekly basis to ensure that LHO is not advancing ahead of an agreed-upon cash flow schedule. The assigned lending officer also periodically speaks with the producer, bonding company and sales agent regarding the progress of the film. LHO's lending officers perform extensive follow-up on every loan to ensure that any unsold distribution rights are sold (i.e., distribution contracts are generated by the sales agent) prior to and after the delivery of the film or television production. Generally, a lending officer will speak to the sales agent at least monthly regarding the agent's progress on sales of distribution rights. The loan documentation grants LHO the right to impose certain penalties on the borrower and exercise certain other rights, including replacing the sales agent, if sales are not consummated within the appropriate time. Loans are repaid principally from revenue received from distribution contracts. In many instances, the distribution contracts provide for multiple payments payable at certain milestones (such as execution of contract, commencement of principal photography or completion of principal photography). The maturity date of the loan is generally six to nine months after completion of the production in order to permit all payments from distributors to be received within the maturity of the loan. Delivery of the 13 completed production is made to the various distributors only upon or after their minimum guarantees have been paid in full. From the acquisition date of October 1, 1999 to December 31, 1999, LHO originated $23.2 million of new film and television production commitments. Pricing and Funding LHO typically charges its customers an interest rate ranging from the Prime Rate to Prime plus 2.00% (exclusive of loan fees) on the outstanding balance of their loans. Loan fees typically range from, 1.00% to 2.50% with an additional fee up to 7.0% depending on the level of gap. See Item 7. "Management's Discussion and Analysis--The Lewis Horwitz Organization" for more information regarding the acquisition. Asset Quality The amount of non-accrual loans attributable to the LHO division at December 31, 1999 were $8.2 million. All of these loans were on non-accrual status at the time of their acquisition. Imperial Business Credit, Inc. General Imperial Business Credit, Inc. ("IBC") is a wholly owned subsidiary with corporate headquarters located in San Diego, California. IBC carries out its business equipment leasing operations from both its headquarters and its sales offices in Denver, Colorado and Atlanta, Georgia. IBC's Lease Portfolio The focus of IBC's lease activities has historically been equipment lease financing to small and medium- sized businesses. During the quarter ended December 31, 1999, defaults on leases originated through IBC's broker and small-ticket lease programs increased significantly. The increase in defaults caused us to reassess and increase the projected level of lease losses related to IBC's securitized leases. The reassessment resulted in a $7.7 million write-down of the carrying balance of retained interest in lease securitizations at IBC. As a result of the reassessment of the level of expected losses from IBC's small ticket and broker originated business, we decided to significantly curtail IBC's small ticket lease originations from brokers. We closed IBC's broker business in its San Diego and Irvine offices, and discontinued relationships with over 200 brokers in IBC's Denver office. We intend to focus IBC's future lease originations on middle market leasing programs. Generally, IBC funds the origination or acquisition of its leases through its short term warehouse credit facility with SPB and subsequently sells its receivables in the private asset securities market through its securitization program. The following table sets forth the lease activity for IBC for the years ended December 31, 1999, 1998 and 1997:
At December 31, -------------------------- 1999 1998 1997 -------- -------- -------- (In thousands) Leases funded.................................... $125,202 $114,318 $151,412 Lease securitizations............................ 132,359 117,724 130,335 Leases serviced for others....................... 243,463 242,624 246,996
Lease Finance Operations IBC specializes in originating, acquiring, selling, securitizing and servicing non-cancellable, full-payout equipment leases for small and medium- sized business in various industries throughout the United States. IBC has historically focused on small-ticket leases with contract amounts between $5,000 and $75,000. IBC derives 14 its earnings from gains recognized on the securitization or sale of leases, from the spread on portfolios held for investment and loans held for sale during the warehouse period and from servicing and related ancillary fees on its servicing portfolio. In each securitization, IBC receives advances based on a percentage which is less than the aggregate present value of cash flows from an undifferentiated pool of leases, effectively overcollaterizing lease - backed notes or certificates. Over the life of the lease pool securitized, IBC is eligible to receive the excess cash flow resulting from the difference between the lease payments received and the payment of (i) principal and interest to investors in lease-backed notes or certificates and (ii) backup servicing and trustee fees and other securitization expenses. In consideration for servicing the leases in the securitized portfolios, IBC receives a servicing fee of 1.15% (IBC received actual servicing fees of 1.225% through November 14, 1999) of the aggregate contract balances outstanding and, in addition, is entitled to receive all late fees and other miscellaneous fees related to the serviced portfolio. Lease Products and Originations IBC has historically emphasized full payout leases with terms of 24 to 60 months. Generally, these leases are categorized as direct finance leases. IBC uses a standard, non-cancellable, full-payment finance lease. The substantial majority of the leases originated by IBC provides that the lessee may purchase the equipment for $1.00 at the expiration of the lease, with the remainder of the leases calling for either a mandatory 10% firm price buy-out or an optional fair market value buy-out. IBC records a maximum residual value of 10% of the original equipment cost of leases other than those leases with a $1.00 buy-out. The following table sets forth IBC's lease originations by equipment type for the periods presented:
Year Ended December 31, 1999 Year Ended December 31, 1998 Year Ended December 31, 1997 ---------------------------------- ---------------------------------- ---------------------------------- Number Principal Number Principal Number Principal Of Leases Amount % of Total of Leases Amount % of Total of Leases Amount % of Total Originated Originated Originations Originated Originated Originations Originated Originated Originations ---------- ---------- ------------ ---------- ---------- ------------ ---------- ---------- ------------ (Dollars in thousands) Computers........ 910 $ 19,016 15.2% 1,130 $ 22,990 20.1% 1,981 $ 39,294 26.0% Automotive....... 1,465 16,092 12.9 1,574 17,474 15.3 1,843 15,879 10.5 Furniture and fixtures........ 778 16,778 13.4 522 12,232 10.7 984 18,407 12.2 Heavy equipment.. 549 12,829 10.2 524 10,775 9.4 430 9,449 6.2 Restaurant....... 770 11,762 9.4 864 10,074 8.8 1,047 13,072 8.6 Manufacturing/Machine Work............ 323 8,226 6.6 178 5,174 4.5 441 12,003 7.9 Health/Sports equipment....... 104 3,131 2.5 117 3,719 3.3 152 4,005 2.6 Print/Typeset equipment....... 89 2,403 1.9 107 2,337 2.0 136 3,418 2.3 Dry cleaning/Washing.. 32 875 0.7 34 1,235 1.1 102 2,385 1.6 Clothing manufacture..... 41 1,533 1.2 10 520 0.5 38 1,451 1.0 Radio and television Production equipment....... 896 7,756 6.2 527 7,277 6.4 374 7,883 5.2 Other............ 1,234 24,801 19.8 1,092 20,511 17.9 1,251 24,166 15.9 ----- -------- ----- ----- -------- ----- ----- -------- ----- Total........... 7,191 $125,202 100.0% 6,679 $114,318 100.0% 8,779 $151,412 100.0% ===== ======== ===== ===== ======== ===== ===== ======== =====
Underwriting IBC carefully screens its origination sources by checking personal and company financial and credit information, and verifying the reputations of these sources in the industry. Broker and certain vendor originators are compensated by IBC on a commission basis. Origination sources retain liability for leases only insofar as there is any fraud or misrepresentation in the applications or documentation. Because each of the lease originators is an independent contractor, IBC cannot require its lease originators to direct lease funding opportunities to IBC. 15 Upon receipt of an application, IBC begins an investigation of the creditworthiness of the applicant. Based upon management's experience, IBC has developed credit underwriting policies and procedures intended to select creditworthy equipment lessees. IBC credit underwriting procedures are based upon the use of, among other things, pre-screened broker referrals, standardized lease application documents, credit investigations, and in certain transactions, tax returns, financial statements and other relevant credit information concerning the lessee. IBC focuses on the time the business has been owned and operated, type of business and the applicant's credit requirements. Once a lease has been approved, a standardized lease agreement and other documents are prepared. Lease approvals are applicable for 90 days and with quoted rates for 60 days. When the equipment is shipped and installed, IBC verifies that the lessee has received and accepted the equipment before paying the vendor's invoice. In general, IBC makes payments to vendors within one day of receipt of the lessee's acceptance of equipment. Credit Monitoring and Controls IBC services all leases that it originated or purchased. IBC's servicing activities, with respect to both leases retained by IBC or leases securitized or sold to third parties, consist of: . collecting, accounting for and posting all payments received . responding to lessee inquiries . taking all necessary action to maintain the security interest granted in the leased equipment . investigating delinquencies and taking appropriate action . communicating with the lessee to obtain timely payments . repossessing and reselling the collateral when necessary and . generally monitoring each lease IBC believes that its ability to monitor lessee performance and collect payments is primarily a function of its collection and support systems. IBC's customer service and collection staff are centralized in its San Diego, California office. IBC's collections policy is designed to identify payment problems sufficiently early to permit IBC to quickly address delinquencies and, when necessary, to act to preserve equity in the equipment leased. Collection procedures are intended to commence immediately upon payments becoming 11 days past due. Pricing IBC typically charges its customers a fixed rate of 10.5% to 17% on the original equipment cost financed. We believe IBC's lease pricing is competitive. 16 Asset Quality The following table sets forth the amount of on balance sheet non- performing assets attributable to IBC's leasing operations at December 31, 1999, 1998 and 1997.
At December 31, ------------------------ 1999 1998 1997 ------- ------ ------- (Dollars in thousands) Nonaccrual leases.................................. $ 77 $ 669 $ 981 Other assets owned................................. 643 702 4,437 ------- ------ ------- Total NPA's........................................ 720 1,371 5,418 ======= ====== ======= Total leases and other assets owned................ $13,859 $8,115 $21,015 Total NPA's as a percentage of leases and other assets owned...................................... 5.2% 16.9% 25.8%
The following table sets forth the amount and delinquency status for IBC's lease servicing portfolio at December 31, 1999, 1998 and 1997.
At December 31, ----------------------------------------------------------- 1999 1998 1997 ------------------- ------------------- ------------------- (Dollars in thousands) Amount % of total Amount % of total Amount % of total -------- ---------- -------- ---------- -------- ---------- Current......... $235,884 96.9% $233,535 96.3% $238,380 96.5% 30-60 days...... 2,925 1.2 3,534 1.5 4,463 1.8 60-90 days...... 1,508 0.6 2,037 0.8 1,747 0.7 90+ days........ 3,146 1.3 3,519 1.4 2,407 1.0 -------- ----- -------- ----- -------- ----- Total........... $243,463 100.0% $242,625 100.0% $246,997 100.0% ======== ===== ======== ===== ======== =====
Marketing and Origination Network IBC originates new lease contracts primarily from vendors and brokers. Each lease originator has been reviewed and approved by IBC. From its offices in Colorado and Georgia. IBC employs 13 sales representatives to originate lease contracts from approximately 225 vendors and 100 brokers. The small ticket broker/lessor business is processed primarily through the Denver marketing unit. The vendor referral originated business is generated primarily by the Atlanta marketing unit. Multifamily and Commercial Mortgage Lending We conduct our commercial mortgage lending operations through the Income Property Lending Division of SPB. Income Property Lending Division General The Income Property Lending Division ("IPL") of SPB was formed in February 1994 to expand our apartment and commercial property lending business. As of December 31, 1999, IPL had 12 loan origination offices in California, Oregon, Colorado, Texas, Arizona, Illinois, Massachusetts and Florida. 17 Loan Portfolio The focus of IPL's lending activities is the small loan market for 4 to 20 unit multi-family apartments and commercial buildings. The following table sets forth the loan activity for IPL for the years ended December 31, 1999, 1998 and 1997:
At December 31, -------------------------- 1999 1998 1997 -------- -------- -------- (In thousands) Loans funded..................................... $339,666 $366,074 $295,896 Average loan size................................ 442 394 390 Loan securitizations............................. -- -- 203,100 Whole loan sales................................. 283,674 304,169 196,800 Loans outstanding................................ 254,140 145,456 59,373 Loans serviced for others........................ 25,110 759,247 665,598
Loan Products and Originations IPL generally seeks to make 70% of its loans secured by apartment buildings and 30% of its loans secured by commercial properties. Most of IPL's business is generated through in-house loan representatives who market the loans directly to mortgage brokers and borrowers. IPL also uses direct mailing, referrals from brokers and real estate developers. Most of IPL's loans have been secured by properties in California. Margins varied over the 6-month LIBOR index ranging from 2.75% to 5.0% depending on product type, property location and credit history of the borrower. IPL's loan programs include 30- year adjustable rate loans tied to the 6-month LIBOR, 1-year Treasury, or Bank of America prime indexes. IPL also originates fixed rate loans which accounted for approximately 42% and 67% of IPL's loan production in 1999 and 1998. During 1999, 50.3% of IPL's total loan originations were secured by property located in California. During 1998, 45.0% of IPL's total loan originations were secured by property located in California. Historically, IPL has sold the majority of its loan production to outside purchasers. Beginning in January 2000, we intend to retain IPL's multi-family loans, which qualify for favorable regulatory capital treatment, while continuing to sell IPL's commercial loans in the secondary market. Substantially all of IPL's loans contain prepayment restrictions. Prepayment provisions included in fixed rate loan documents provide for a prepayment fee equal to a percentage of the unpaid loan balance. Such restrictions may prohibit prepayments in whole or in part during a specified period of time and/or require the payment of a prepayment fee in connection with the loan's prepayment. Such prepayment restrictions can, but do not necessarily, provide a deterrent to prepayments. IPL may from time to time originate loans with a balloon payment due at maturity. The ability of a borrower to pay such amount will normally depend on its ability to fully refinance the loan or sell the related property at a price sufficient to permit the borrower to make balloon payments. Underwriting IPL generally uses underwriting criteria that require a maximum loan-to- value ratio of 70% and minimum debt coverage ratio of 1.2x on all loans. Loan originations not following this criteria may be funded based on other mitigating factors such as downpayment size, strength of borrower, etc. With respect to apartment loans, IPL uses standard government agency documentation and approved independent appraisers. IPL's underwriting is intended to assess the economic value of the mortgaged property and the financial capabilities, credit standing and managerial ability of the borrower. Appraisals and field inspections, performed by SPB approved appraisers and certified inspectors, and title insurance are required for each loan. With respect to the loans secured by commercial properties, IPL's policies typically require that usage comply with local zoning and use ordinances and the use of the commercial space is compatible with the property and neighborhood. The property must have a stable occupancy history, be located in a good market and have adequate parking. IPL reviews the state of 18 repairs of the property, whether there are any unacceptable covenants, if the property is built to code, and any environmental hazards. IPL also looks at the borrower's financial statements to determine the borrower's equity in the property. IPL analyzes whether the borrower will be able to meet all of the mortgaged property's loan obligations and if the borrower holds other property and how those other properties are performing. IPL also looks at the borrower's income as a possible source of repayment for the loan. Pricing IPL establishes loan pricing at least once every business day based on prevailing interest rates and general market conditions. The standard pricing is based on factors such as the anticipated price IPL would receive upon sale or securitization of the loan, the anticipated interest spread realized during the period of accumulating loans, the targeted profit margin and the anticipated costs associated with sale or securitization. Credit Monitoring and Controls SPB services all loans held for investment or available for sale. These servicing activities consist of: . collecting, accounting for and . communicating with the borrowers to posting all payments received, obtain timely payments, . responding to inquires, . repossessing and reselling the collateral when necessary, and . investigating delinquencies and . generally monitoring each loan. taking appropriate action,
Asset Quality The following table sets forth the amount of non-performing assets attributable to IPL's operations at December 31, 1999, 1998 and 1997.
At December 31, --------------------------- 1999 1998 1997 -------- -------- ------- (Dollars In thousands) Nonaccrual loans........ $ 237 $ 992 $ 497 OREO.................... 222 197 465 -------- -------- ------- Total NPA's............. $ 459 $ 1,189 $ 962 ======== ======== ======= Total loans and OREO.... $254,362 $145,653 $59,838 ======== ======== ======= Total NPA's as a percentage of loans and OREO................... 0.18% 0.82% 1.61%
Asset Management Activities We conduct advisory and asset management services through our wholly owned subsidiary Imperial Credit Asset Management, Inc. Through October 22, 1999, we also conducted asset management services through Imperial Credit Commercial Asset Management Corp. Imperial Credit Asset Management, Inc. Imperial Credit Asset Management, Inc. ("ICAM") was formed in April 1998. ICAM manages Pacifica Partners I L.P., and Cambria Investment Partnership I, L.P. Pacifica Partners I is a $500 million collateralized loan obligation fund we launched in August 1998. Pacifica Partners I's assets consist of approximately $400 million in nationally syndicated bank loans and approximately $100 million in high yield bonds. We have invested net cash of $25.9 million in the subordinated and equity interests of Pacifica Partners through December 31, 1999. The return on our cash investment was 22.3% for the year ended December 31, 1999 and for the period of August 1, 1998 through December 31, 1998. Additionally, we received net management fees of 19 approximately 60 basis points on total assets under management. For the year ended December 31, 1999 and 1998, ICAM earned net management fees before expenses of $3.1 million and $1.1 million, respectively, from managing Pacifica Partners I. We also invested $10.0 million in Cambria which is a hedge fund that invests in syndicated bank loans. At December 31, 1999 and 1998, Cambria had total assets under management of approximately $134.9 million and $130.0 million, respectively. The return on our investment was 14.0% for the year ended December 31, 1999 and 1% for the year ended December 31, 1998. ICAM earns fees equal to one percent of assets under management plus a 20% incentive fee for positive returns for each calendar year. For the years ended December 31, 1999 and 1998, ICAM earned management fees of $833,000 and $139,000 from managing Cambria. Imperial Credit Commercial Asset Management Corp. Imperial Credit Commercial Asset Management Corp. ("ICCAMC") was formed in 1997. See "Item 13. Certain Relationships and Certain Transactions-- Relationships with ICCMIC--ICCMIC Management Agreement". ICCMIC is a publicly traded corporation which elects to be taxed as a real estate investment trust that invests primarily in performing multi-family and commercial real estate loans, direct investments in real estate and commercial mortgage-backed securities. In October 1997, ICCMIC completed its initial public offering and sold approximately 34.5 million shares of common stock at $15.00 per share resulting in net proceeds of approximately $481.2 million. We purchased 2,970,000 shares of ICCMIC common stock in the offering and an additional 100,000 shares in December 1997 for a total of $43.0 million. During 1998, we wrote down our investment in ICCMIC common stock by $13.0 million to $9.75 per share due to an other than temporary decline in the value of ICCMIC's common stock. In 1999, we sold 500,000 shares of ICCMIC common stock at $10.88 per common share, generating net proceeds of $5.4 million, resulting in a gain on sale of securities totaling $562,000. As of December 31, 1999, we owned 9.0% of the common stock of ICCMIC. ICCAMC, a wholly-owned subsidiary, managed the day to day operations of ICCMIC through October 22, 1999. For the year ended December 31, 1999, 1998 and from the period of initial public offering through December 31, 1997, ICCAMC earned $5.9 million, $6.3 million and $940,000, respectively, in gross management fees from ICCMIC. In addition, we received cash dividends of $3.1 million, $3.6 million and $399,000 during the years ended December 31, 1999, 1998 and from the period of initial public offering through December 31, 1997, respectively. On July 23, 1999, we announced the signing of a definitive merger agreement by which a wholly owned subsidiary of ours would acquire all of the outstanding shares of ICCMIC (consisting of the 25,930,000 shares not already owned by us and certain of our affiliates and subsidiaries) for a cash purchase price of $11.575 per share. See "Liquidity and Capital Resources--The ICCMIC Acquisition," for further details. Investment Banking and Brokerage Imperial Capital Group, LLC Imperial Capital Group, LLC ("ICG") is a majority-owned subsidiary formed in July 1997. ICG together with its subsidiaries, Imperial Capital, LLC and Imperial Asset Management, LLC, offer individual and institutional investors financial products and services. Imperial Capital, LLC, is a registered broker/dealer with the United States Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc. It provides investment opportunities and research to individual and institutional investors, raises private and public capital for middle market companies, and trades debt, equity and asset backed securities. Imperial Asset Management, LLC, is an investment advisor registered with the United States Securities and Exchange Commission, and provides investment management services to high net worth individuals and institutional clients. ICG raised total debt and equity proceeds of $137.3 million in 1999 and $190.0 million in 1998 for its corporate clients through private placement offerings. For the year ended December 31, 1999, ICG generated $27.2 million in investment banking and brokerage fee revenues compared to $18.5 million in 1998 and $7.7 million in 1997. ICG earned net income (loss) of $2.5 million, ($3.9) million and $2.4 million for the 20 years ended December 31, 1999, 1998 and the period from its formation in July 1997 through December 31, 1997. Other Core Operations Imperial Credit Lender Services, Inc. In July 1998, we acquired the assets of Imperial Credit Lender Services, Inc. ("ICLS") formerly Statewide Documentation, Inc., for a purchase price of $5.0 million worth of our common stock. ICLS initially began its operations in 1981. Its primary business is providing loan documentation preparation and loan closing services nationwide. Additionally, ICLS provides national notary and recording services. ICLS has developed a proprietary document preparation and delivery system that provides new document preparation for ICLS's clients with substantial flexibility and speed, often allowing new documents to be processed within an hour of original receipt. ICLS utilizes a remote ordering system, whereby, rather than completing a document order form, a client can input all necessary data into its own desktop computer and transmit that information using ICLS's internet site. ICLS has implemented a four-step quality control system to ensure reliability and confidentiality upon receipt of a document order. The information is immediately transferred into ICLS's data entry department where it is entered into the document preparation system. Once entered, it is reviewed by the quality control department, then transferred to ICLS's printing department. All information is reviewed before allowing the loan documents to be printed. Once the loan documents have been signed, they are returned to ICLS's office for an additional review to verify the documents are returned and dated correctly. Completed documents are returned to the clients' offices the next business day. ICLS uses a pool of over 1,200 active field representatives to support over 2,000 loan closings per month. During the fourth quarter of 1999, ICLS entered into an agreement to provide document and closing services for a major financial institution. For the year ended December 31, 1999 and the period from our acquisition in July of 1998 through December 31, 1998, ICLS earned loan closing fees of $1.4 million and $845,000, respectively. ICLS's net losses were $694,000 and $135,000 for the year ended December 31, 1999 and the period from our acquisition in July 1998 through December 31, 1998, respectively. Total Return Swaps As a part of the Pacifica Partners I LP collateralized loan obligation ("CLO") fund we launched in August 1998, we delivered subordinate bonds of approximately $51.3 million into a total rate of return swap with the Canadian Imperial Bank of Commerce ("CIBC"). The provisions of the swap entitle us to receive the total return on the subordinate bonds delivered and pay CIBC a floating payment of LIBOR plus a weighted average spread of 1.36%. We delivered $25.9 million in cash at December 31, 1999 and $17.8 million in cash at December 31, 1998 to CIBC as collateral for the swap. These amounts are classified as Trading Securities on the consolidated balance sheet at December 31, 1999 and 1998. During the years ended December 31, 1999 and 1998, we entered into total rate of return swap contracts for investment purposes with various investment bank counterparties, the provisions of which entitle our company to receive the total return on various commercial loans and pay for a floating payment of one month LIBOR plus a spread. These contracts are off balance sheet instruments. As of December 31, 1999 and 1998, we were party to total rate of return swap contracts with a total notional amount of syndicated bank loans of $83.6 million and $280.4 million, under which we were obligated to pay one month LIBOR plus a weighted average spread of 0.88%. The weighted average remaining life of these contracts was 60.0 months and 31.2 months at December 31, 1999 and 1998. For the years ended December 31, 1999, 1998 and 1997, we recognized $2.9 million, $5.4 million and $448,000 in income on total return swaps, respectively. 21 NON CORE BUSINESS LINES We also operate "non-core" businesses, which consist of businesses that we've decided to de-emphasize or exit. We call these businesses Equity Interests and De-emphasized/Discontinued/Exited Businesses. Our exit from these non-core businesses will allow our management to focus on our core business lines that have proven to be our most profitable businesses. Equity Interests At December 31, 1999, we had no equity interests in publicly traded entities. During the years ended December 31, 1998 and 1997, we held equity interests in three publicly traded entities, Franchise Mortgage Acceptance Company ("FMC"), Impac Mortgage Holdings, Inc. ("IMH") and Southern Pacific Funding Corporation ("SPFC"). FMC FMC was a publicly traded company through November 1, 1999 (Nasdaq Symbol: FMAX) that originated and serviced loans and equipment leases to small businesses. We sponsored FMC's initial public offering in November 1997 and sold a portion of our holdings raising $59.7 million. As part of the initial public offering of FMC, we recorded a total gain on sale of FMC common stock of $92.1 million in 1997. Our investment in FMC contributed $30.0 million, $3.2 million and $41.8 million to our revenues in 1999, 1998 and 1997, respectively. During the fourth quarter of 1999, FMC was acquired by Bay View Capital Corporation ("BVC") and we sold our 38.3% common stock ownership interest resulting in a pre-tax gain on sale of $30.1 million for the year ended December 31, 1999. As of December 31, 1999 and 1998, we owned none and 11,023,492 shares or 38.3% of the outstanding common stock of FMC, respectively. For the year ended December 31, 1998, our investment in FMC was reflected on our consolidated balance sheet as "Equity Interest in Franchise Mortgage Acceptance Company" and was accounted for pursuant to the equity method of accounting until the third quarter of 1999. During the third quarter we determined that we did not have the ability to exercise significant influence over FMC and, therefore, we changed to the cost method of accounting for this investment. IMH IMH is a publicly traded real estate investment trust (AMEX symbol: IMH). We sponsored IMH as a publicly traded company in November 1995 and our subsidiary, Imperial Credit Advisors, Inc., acted as its manager until December 31, 1997. Pursuant to a Termination Agreement entered into in December 1997, related to the Management Agreement between Imperial Credit Advisors, Inc. and IMH, we received 2,009,310 shares of IMH common stock and certain securitization-related assets, and, in exchange, we canceled a note receivable from IMH's subsidiary, Impac Funding. During 1998, we wrote down our investment in IMH common stock by $24.5 million to $5.00 per share due to an other than temporary decline in the value of IMH's common stock. During the years ended December 31, 1999 and 1998, we sold 1,887,110 shares and 122,200 shares of IMH stock, resulting in a gain of $929,000 and a loss of $185,000 respectively. We received cash dividends of $157,000 and $2.9 million for the years ended December 31, 1999 and 1998. At December 31, 1999, we did not own any shares of IMH common stock. SPFC SPFC was a publicly traded sub-prime mortgage banking company which originated, purchased and sold high yielding, single family sub-prime mortgage loans. We sponsored SPFC as a public company in June 1996 and sold a portion of our holdings raising $64.6 million. At December 31, 1999, we did not own any shares of SPFC common stock. As of December 31, 1998, we owned 9,742,500 shares of SPFC common stock, representing 47.0% of the outstanding common stock. Our investment in SPFC contributed none, $12.7 million and $25.9 million to our revenues in 1999, 1998 and 1997, respectively. In October 1998, SPFC petitioned for Chapter 11 bankruptcy protection under Federal bankruptcy law. In 1998, as a result of SPFC's bankruptcy filing, we wrote-off our entire equity interest and other assets totaling $82.6 million. Our stockholdings in SPFC were reflected on our consolidated balance sheet as "Equity Interest in SPFC" and, until SPFC's bankruptcy filing and termination of new business activities, were accounted for pursuant to the equity method of accounting. 22 Discontinued/De-emphasized Operations/Exited Businesses De-emphasized/Discontinued/Exited Businesses--represents those business units we decided to either de-emphasize, discontinue, or exit. We decided to de-emphasize, discontinue or exit these business lines because they were not meeting our expectations for a variety of reasons. These reasons included: significant credit losses, insufficient loan production volumes, inadequate gross profit margins, and risks associated with international lending operations. We include the following significant operations in Exited Businesses: the Auto Lending, the Alternative Residential Mortgage, and the Consumer Loan Divisions of SPB, and Credito Imperial Argentina ("CIA"), our residential loan production business in Argentina. Auto Marketing Network, Inc. During the third quarter of 1998, we discontinued the operations of Auto Marketing Network, Inc ("AMN"). AMN financed the purchase of new and used automobiles primarily to sub-prime borrowers on a nationwide basis. Since the acquisition of AMN in March 1997, it had recorded losses and experienced significant increases in non-performing assets, loan charge-offs and loan loss provisions. Losses from AMN's discontinued operations, net of taxes were as follows:
Disposition For the Period from Period from year ended August 1, 1998 to January 1, 1998 December 31, 1999 December 31, 1998 to July 31, 1998 ----------------- ----------------- ---------------- (In thousands) Loss from discontinued operations............. $899 $ -- $3,232 Loss on disposal of AMN.................... -- 11,276 -- ---- ------- ------ Net loss from discontinued operations............. $899 $11,276 $3,232 ==== ======= ======
For the year ended December 31, 1999, AMN incurred additional operating losses from discontinued operations of $899,000, net of income taxes, primarily related to legal expenses and mark-to-market adjustments on AMN securities. In 1998 we recorded a loss on disposal of AMN totaling $11.3 million including charges (net of taxes) of $5.6 million for securities valuation, $1.2 million for disposition of furniture and equipment and other assets, $5.6 million for estimated future servicing obligations to a third party servicer, $1.3 million in liquidation allowances for nonaccrual loans and repossessed autos, $2.1 million in severance costs, occupancy and general and administrative expenses. These charges were partially offset by the estimated net interest income on loans and securities for the next year (disposition period) of $4.5 million. At December 31, 1999, AMN had no outstanding warehouse lines of credit. At December 31, 1998 AMN's $9.2 million warehouse line of credit with Greenwich Capital Financial is classified as other borrowings in the consolidated financial statements. The net assets of AMN's discontinued operations were as follows:
At December 31, --------------- 1999 1998 ------- ------- (In thousands) Loans....................................................... $ 5,207 $15,161 Securities.................................................. 8,685 7,844 Retained interests in securitization........................ 12,436 11,280 Income taxes receivable..................................... 8,971 10,725 Other net assets............................................ 2,193 1,802 ------- ------- $37,492 $46,812 ======= =======
On July 31, 1998 (measurement date), we determined that we would cease operations at AMN. Accordingly, a disposal plan was formulated, whereby the daily operations of AMN were terminated over the course of two months. 23 Consumer Credit Division Consumer Credit Division ("CCD"), a division of SPB, closed its operations in December 1998. The costs of closing this division were immaterial. We decided that the returns generated by CCD were not meeting our profitability expectations, and that the time necessary to improve profitability did not justify further investment. CCD was formed in early 1994 to offer loans primarily to finance home improvements and consumer goods. Home improvement loans ranged from $5,000 to $350,000 and the loans were typically secured by a junior lien. CCD also purchased unsecured installment sales contracts to finance certain home improvements. Total CCD loans outstanding were $18.7 million at December 31, 1999, $30.5 million at December 31, 1998 and $40.8 million at December 31, 1997. We sold $11.7 million, $14.6 million and $5.9 million of these loans in 1999, 1998 and 1997, respectively. At December 31, 1999, 1998 and 1997 we held $14.1 million, $29.4 million and $0 of these loans for sale. At December 31, 1999, 1998 and 1997, CCD had $633,000, $253,000, and $250,000 in non-accrual loans, respectively. Auto Lending Division The Auto Lending Division ("ALD"), a division of SPB, closed its operations in February 1999 due to significant losses on non-performing assets in 1998. We made the decision to close the operations of ALD in the fourth quarter of 1998. ALD offered loans primarily to finance automobile purchases by sub-prime borrowers. ALD also purchased automobile loans from other independent loan originators. We determined that ALD would not meet our future profitability expectations, and that the time necessary to improve profitability did not justify further investment in this business line. The costs of closing this division were immaterial. During the year ended December 31, 1999, we incurred additional significant losses on the existing auto loan portfolio and wrote- down the value of the portfolio by $24.3 million. At December 31, 1999, we held $6.0 million of ALD loans, which are being carried at 32.0% of their contractual amount. During the year ended December 31, 1998, we wrote down the value of ALD's loans held for sale by $21.5 million. At December 31, 1998, we held $94.2 million of ALD loans. During the year ended December 31, 1997, we did not incur any write downs of ALD's loans held for sale. During the years ended December 31, 1999, 1998 and 1997, we sold $45.3 million, $71.6 million and $0 of ALD's loans, respectively. The amount of non-performing assets attributable to ALD at December 31, 1999, 1998 and 1997 were $245,000, $5.8 million and $5.4 million, respectively. Imperial Credit Worldwide, Ltd. Imperial Credit Worldwide ("ICW") closed its operations in October 1998. ICW was the holding company for our international finance activities and was the majority owner of Credito Imperial Argentina ("CIA"), our former mortgage banking company conducting residential mortgage business in Argentina. Due to the decline in the Latin American financial markets, CIA ceased originating loans for its portfolio in October 1998. In May 1999, we sold the remaining balance of CIA's net mortgage loan portfolio totaling $22.8 million, for a loss of $112,000. Total CIA loans held for sale at December 31, 1999 and 1998 were zero and $30.0 million, respectively. These loans were carried on our company's books at their estimated fair value of $22.8 million at December 31, 1998. 24 Loans and Leases Held for Investment The following table sets forth certain information regarding our loans and leases held for investment. Substantially all of our company's loans and leases held for investment are held by Southern Pacific Bank and are funded by FDIC insured deposits:
At December 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- -------- (In thousands) Loans secured by real estate: One to four family...... $ 93,914 $ 125,616 $ 205,788 $ 375,476 $228,721 Multi-family............ 35,249 56,229 17,261 2,527 7,028 Commercial.............. 14,022 25,677 13,202 11,011 133,189 ---------- ---------- ---------- ---------- -------- 143,185 207,522 236,251 389,014 368,938 Leases.................. 1,125 1,048 7,745 99,717 7,297 Installment loans....... 7,072 26,511 147,603 34,248 1,900 Franchise loans......... 18,277 50,520 62,219 115,910 46,766 Asset based loans....... 748,122 633,299 484,828 288,528 154,252 Loan participations..... 216,961 222,106 196,420 160,672 87,726 Mortgage warehouse lines.................. 78,068 181,001 122,488 -- -- Film and television productions loans...... 23,985 -- -- -- -- Commercial loans........ 48,853 34,509 35,861 13,260 22,378 ---------- ---------- ---------- ---------- -------- 1,285,648 1,356,516 1,293,415 1,101,349 689,257 Loans in process........ (5,472) (5,636) (7,081) -- -- Unamortized premium (discount)............. 1,389 3,109 2,211 (6,336) (5,217) Deferred loan fees...... (8,492) (9,014) (9,104) (6,415) (1,540) ---------- ---------- ---------- ---------- -------- 1,273,073 1,344,975 1,279,441 1,088,598 682,500 Allowance for loan losses................. (31,841) (24,880) (26,954) (19,999) (13,729) ---------- ---------- ---------- ---------- -------- Total................. $1,241,232 $1,320,095 $1,252,487 $1,068,599 $668,771 ========== ========== ========== ========== ========
Our loans and leases held for investment are primarily: . asset-based loans to middle market companies mainly in California, . syndicated commercial loan participations, . first and second lien mortgages secured by residential and income producing real property mainly in California, . warehouse loans to residential mortgage loan brokers, and . television and motion picture production loans to independent producers. Although we continue to diversify our portfolio, a substantial portion of our debtors' ability to honor their contracts is dependent upon the economy of California. A decline in California real estate values may adversely affect certain underlying loan collateral. In order to reduce our risk of loss on any one credit, we have historically sought to maintain a fairly low average loan size within the portfolio of loans held for investment. The average loan size and single largest loan held for investment, excluding loans originated by CBC, at December 31, 1999 were $58,000 and $20.3 million compared to $118,000 and $21.6 million at December 31, 1998. The largest loan held for investment at December 31, 1999 and December 31, 1998 was a performing real estate loan secured by a first deed of trust. See "Item 1. Business--Coast Business Credit" for more information on CBC's average loan size. 25 Non-performing assets consist of nonaccrual loans, loans with modified terms, other real estate owned ("OREO") and other repossessed assets. Our policy is to place all loans 90 days or more past due on nonaccrual unless the loan is in the process of collection. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset Quality" for more information about our allowance for loan and lease losses. 26 The following table sets forth the amount of non-performing assets attributable to our core lending activities and our Exited Businesses.
1999 1998 1997 1996 ----------------------- ----------------------- ----------------------- ----------------------- Core Lending Exited Core Lending Exited Core Lending Exited Core Lending Exited Activities Businesses Activities Businesses Activities Businesses Activities Businesses ------------ ---------- ------------ ---------- ------------ ---------- ------------ ---------- (In thousands) Non-accrual loans: IPL............. $ 237 $ -- $ 992 $ -- $ 497 $ -- $ -- $ -- IWF............. 7,757 -- 4,141 -- -- -- -- -- CBC............. 22,173 -- 1,117 -- -- -- -- -- IBC............. 77 -- 669 -- 981 -- -- -- Film and television production loans........... 8,161 -- -- -- -- -- -- -- LPIG............ -- -- -- -- -- -- -- -- One to four family.......... -- 16,926 -- 18,576 -- 34,447 -- 44,639 Consumer loans.. -- 633 -- 253 -- 250 -- -- Auto loans...... -- 1,803 -- 5,476 -- 28,057 -- 152 Other commercial...... 656 996 -- 8,305 192 6,207 -- 5,318 ---------- -------- ---------- -------- ---------- -------- -------- ---------- Total non- accrual loans... 39,061 20,358 6,919 32,610 1,670 68,961 -- 50,109 ---------- -------- ---------- -------- ---------- -------- -------- ---------- OREO: IPL............. 222 -- 197 -- 465 -- -- -- One to four family.......... -- 3,220 -- 7,180 -- 8,326 -- 10,147 Other commercial...... -- 771 -- 1,307 -- 2,114 -- 2,067 ---------- -------- ---------- -------- ---------- -------- -------- ---------- Total OREO...... 222 3,991 197 8,487 465 10,440 -- 12,214 ---------- -------- ---------- -------- ---------- -------- -------- ---------- Loans with modified terms: One to four family.......... -- -- -- -- -- -- -- 800 Other commercial...... -- -- -- -- -- -- -- 456 ---------- -------- ---------- -------- ---------- -------- -------- ---------- Total OREO...... -- -- -- -- -- -- -- 1,256 ---------- -------- ---------- -------- ---------- -------- -------- ---------- Repossessed property: IBC............. 643 -- 702 -- 4,437 -- -- -- Auto Lending.... -- 127 -- 5,169 -- 4,563 -- -- ---------- -------- ---------- -------- ---------- -------- -------- ---------- Total repossessed property........ 643 127 702 5,169 4,437 4,563 -- -- ---------- -------- ---------- -------- ---------- -------- -------- ---------- Total NPA's..... $ 39,926 $ 24,476 $ 7,818 $ 46,266 $ 6,572 $ 83,964 $ -- $ 63,579 ========== ======== ========== ======== ========== ======== ======== ========== Total loans, OREO and repossessed property........ $1,431,996 $148,033 $1,310,283 $384,487 $1,023,007 $443,782 $953,809 $1,099,850 Total NPA's as a percentage of loans, OREO and repossessed property........ 2.79% 16.53% 0.60% 12.03% 0.64% 18.92% N/A 5.78% 1995 ------------------------ Core Lending Exited Activities Businesses ------------ ----------- Non-accrual loans: IPL............. $ -- $ -- IWF............. -- -- CBC............. -- -- IBC............. -- -- Film and television production loans........... -- -- LPIG............ -- -- One to four family.......... -- 23,642 Consumer loans.. -- -- Auto loans...... -- 7,062 Other commercial...... -- 284 ------------ ----------- Total non- accrual loans... -- 30,988 ------------ ----------- OREO: IPL............. -- -- One to four family.......... -- 6,110 Other commercial...... -- 1,069 ------------ ----------- Total OREO...... -- 7,179 ------------ ----------- Loans with modified terms: One to four family.......... -- 870 Other commercial...... -- -- ------------ ----------- Total OREO...... -- 870 ------------ ----------- Repossessed property: IBC............. -- -- Auto Lending.... -- -- ------------ ----------- Total repossessed property........ -- -- ------------ ----------- Total NPA's..... $ -- $ 39,037 ============ =========== Total loans, OREO and repossessed property........ $670,642 $1,367,604 Total NPA's as a percentage of loans, OREO and repossessed property........ N/A 2.85%
Excludes non-accrual loans held for sale which we carried at the lower of cost or market, includes non-accrual loans and non-performing assets from the discontinued operations of AMN. 27 Funding Our liquidity requirements are met primarily by SPB deposits and to a lesser extent warehouse lines and securitizations. Business operations conducted through divisions of SPB are primarily financed through deposits, our capital contributions, and Federal Home Loan Bank borrowings. Southern Pacific Bank Deposits SPB is an FDIC insured industrial bank which is regulated by the California Department of Financial Institutions and the FDIC. See "--Regulation" for a more detailed description of regulations governing SPB. At December 31, 1999 and 1998, SPB had total deposits of approximately $1.6 billion and $1.7 billion, respectively (amounts in both years exclude our deposits maintained with SPB). SPB solicits both individual and institutional depositors for new accounts through print advertisements and computerized referral networks. SPB currently maintains two deposit gathering facilities in Southern California. At these facilities, tellers provide banking services to customers such as accepting deposits and making withdrawals. However, customers are not offered check writing services or comparable demand deposit accounts. Generally, certificates of deposit are offered for terms of one to 12 months. See "--Regulation--Industrial Bank Operations--Limitations on Types of Deposits" for a description of limitations on types of deposits that SPB, as an industrial bank, can accept. The following table sets forth the distribution of SPB's deposit accounts (prior to eliminating inter-company transactions) and the weighted average nominal interest rates on each category of deposits:
At December 31, -------------------------------------------------------------------------------------- 1999 1998 1997 ---------------------------- ---------------------------- ---------------------------- Weighted Weighted Weighted Average Average Average % of Interest % of Interest % of Interest Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate ---------- -------- -------- ---------- -------- -------- ---------- -------- -------- (Dollars in thousands) Savings accounts........ $ 66,415 4.1% 4.79% $ 57,249 3.3% 4.27% $ 62,274 5.2% 3.55% Time deposits of less than $100,000.......... 1,235,468 76.0 5.82 1,199,825 69.9 5.61 891,102 74.4 5.91 Time deposits of $100,000 and over...... 324,271 19.9 5.49 459,614 26.8 5.62 244,320 20.4 5.89 ---------- ----- ---------- ----- ---------- ----- Total.................. $1,626,154 100.0% 5.71% $1,716,688 100.0% 5.57% $1,197,696 100.0% 5.79% ========== ===== ========== ===== ========== =====
The following table sets forth the dollar amount of deposits by time remaining to maturity:
At December 31 ----------------------------------------------------------- 1999 1998 1997 ------------------- ------------------- ------------------- % of % of % of Amount Deposits Amount Deposits Amount Deposits ---------- -------- ---------- -------- ---------- -------- (Dollars in thousands) Three months or less.... $ 459,128 28.3% $ 552,077 32.2% $ 457,269 38.2% Over three months through six months..... 353,999 21.8 452,782 26.4 296,512 24.8 Over six months through twelve months.......... 583,338 35.9 478,000 27.8 357,326 29.8 Over twelve months...... 227,689 14.0 233,829 13.6 86,589 7.2 ---------- ----- ---------- ----- ---------- ----- Total................. $1,626,154 100.0% $1,716,688 100.0% $1,197,696 100.0% ========== ===== ========== ===== ========== =====
28 The following table sets forth the time certificates greater than $100,000 by time remaining to maturity:
At December 31 ----------------------------------------------------- 1999 1998 1997 ----------------- ----------------- ----------------- % of % of % of Amount Deposits Amount Deposits Amount Deposits -------- -------- -------- -------- -------- -------- (Dollars in thousands) Three months or less.... $ 95,964 29.6% $129,479 28.1% $ 87,771 37.1% Over three months through six months..... 75,403 23.2 148,832 32.4 76,277 32.3 Over six months through twelve months.......... 103,129 31.8 114,803 25.0 55,330 23.4 Over twelve months...... 49,847 15.4 66,500 14.5 17,087 7.2 -------- ----- -------- ----- -------- ----- Total................. $324,343 100.0% $459,614 100.0% $236,465 100.0% ======== ===== ======== ===== ======== =====
Interest expense associated with certificates of deposit of $100,000 and over was approximately $18.2 million for the year ended December 31, 1999, $24.2 million for the year ended December 31, 1998 and $15.6 million for the year ended December 31, 1997. SPB has historically increased its deposits as necessary so that deposits together with its cash, liquid assets, Federal Home Loan Bank ("FHLB") borrowings and warehouse borrowings, have been sufficient to provide funds for all of SPB's lending activities. At December 31, 1999, there were no outstanding FHLB borrowings. Repurchase and Warehouse Facilities We use repurchase facilities and warehouse lines of credit in order to fund certain loan and lease originations and purchases. As of December 31, 1999, we had the following warehouse lines, reverse repurchase facilities and notes payable:
Interest Index Rate Commitment Outstanding (basis points) Expiration Date -------- ---------- ----------- -------------- ------------------ (Dollars in thousands) Lehman Bros (Corona Film Finance Fund)(1)....... 5.50% $66,398 $66,398 Fixed rate January 13, 2000 Imperial Bank (ICII).... 9.25 6,691 6,691 Prime plus 100 September 29, 2000 Other notes payble (ICII)................. 8.00 -- 1,220 Fixed rate None ------- ------- 5.88 $73,089 $74,309 ======= =======
- -------- (1) The borrowings from Lehman Bros were repaid on January 13, 2000. Securitization Transactions and Loan Sales Securitizations of Assets As a fundamental part of our business and financing strategy prior to 1998, we sold a significant amount of our loans and leases through securitization, except for loans held for investment by SPB. Securitizations were performed historically by our prior divisions and subsidiaries: FMC, SPFC and AMN. We have, however, de- emphasized the use of securitizations as part of our refocused business strategy. During 1999 and 1998, IBC was the only subsidiary that sold assets through securitizations. In a securitization, the cash flows of the underlying receivables, such as loans and leases, are apportioned to bonds having various credit ratings, yields and maturities. These bonds, which are collateralized by the underlying loans and leases, are sold to investors at market prices. In most cases, we retained the servicing of the loans and leases; servicing is the process of collecting the payments from the borrowers and remitting the required payments to the investors. We are paid a fee for such servicing, which is earned monthly and collected from the remittances on the assets securitized. 29 When we sell loans and leases in a securitization, we recognize a gain to the extent that the selling price in cash exceeds the carrying value of the loans and leases sold based on the estimated relative fair values of the loans and leases sold, any assets we obtain and any liabilities we incur in the securitization. When we securitize loans and leases, we generally retain an interest in the securitized assets which may be one or more of the bonds, servicing assets and/or call options created through the securitization. The liabilities we incur when we securitize loans and leases include, generally, recourse obligations, put options and servicing liabilities. The retained interest in a securitization represents, generally, a credit enhancement for the investors in that this interest is either subordinated to the other bonds sold or represents an overcollateralization amount. In either case, as holder of the retained interest, we incur the risk of loss and prepayment on the underlying loans and leases and will be last to receive the cash flows apportioned to such retained interests. At the time of the securitization, the retained interest and servicing assets are recorded at their fair values. Because an active market does not typically exist for these types of assets, we generally estimate their fair values by discounting cash flows we expect to receive. In discounting the cash flows, we make estimates of loan prepayments, loan defaults and loan losses. These estimates are based on actual historical prepayments in our servicing portfolios tempered by our expectation of how future changes in interest rates will impact prepayments, and actual default and loss rates we have experienced for the types of loans and leases sold. The discount rate we use is the rate determined by us to be the rate used by other market participants under similar circumstances. We evaluate the carrying value of the retained interests and servicing assets on a quarterly basis by re-estimating their fair values using updated assumptions for prepayments, default and loss rates, and discount rate. When the estimated fair value of these assets is less than their carrying value, we take a loss for the deficiency by writing down the carrying value of the asset. Based on our comparison of the carrying values of these assets to their estimated fair values, we realized a loss of $15.0 million and $4.4 million during 1999 and 1998, respectively. Similar losses could occur in the future and may have a material adverse effect on our net income. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations". At December 31, 1999, and 1998 our consolidated balance sheets include the following retained interests, interest-only and subordinated securities and servicing assets (in thousands):
December 31, --------------- Retained interest and servicing assets 1999 1998 -------------------------------------- ------- ------- Interest only securities included with trading securities............................................... $11,980 $17,189 Servicing rights.......................................... 802 4,329 Retained interest in loan and lease securitizations....... 10,220 27,011
For further information, see notes 1, 6 and 10 of Notes to Consolidated Financial Statements included in Item 8. During 1999 and 1998, we only securitized leases originated by IBC. For the years ended December 31, 1999, 1998 and 1997, we securitized loans and leases totaling $132.4 million, $117.7 million and $919.0 million, respectively. We sold $283.7 million of loans in 1999 and $288.5 million of loans in 1998 through whole loan sale transactions. Most of the loans sold through whole loan sales were originated by IPL. Competition The businesses in which we operate are highly competitive. We face significant competition from companies that may be substantially larger and have more capital than we do. These competitors include: . other commercial finance lenders . savings and loan associations . commercial banks . other thrift and loan companies . credit unions . money market mutual funds . securities firms
30 Competition can take many forms, including convenience in obtaining a loan or lease, customer service, marketing and distribution channels and interest rates and fees charged to borrowers. Regulation We are subject to extensive Federal and State regulation in the United States. This regulation affects our: . warehouse lending business, . maximum interest rates, finance and other charges, . loan origination and credit activities, . disclosure to customers, . terms of secured transactions, . collection, repossession and claims handling procedures, . multiple qualification and licensing requirements for doing business in various jurisdictions, and . other trade practices. Our subsidiary ICG's operating companies are registered as a broker-dealer with the Securities and Exchange Commission ("SEC") and state securities regulatory agencies, and with the SEC as an investment advisor. We are also a member of the National Association of Securities Dealers. Truth in Lending The Truth in Lending Act ("TILA") and the regulations of the Board of Governors of the Federal Reserve System, in particular Regulation Z, are designed to provide consumers with uniform, understandable information with respect to the terms and conditions of loans and credit transactions. This give consumers the ability to compare credit terms from different financial institutions. TILA also guarantees consumers a three-day right to cancel certain credit transactions, including loans of the type we originate. We believe that we are in compliance with TILA in all material respects. The enforcement provisions applicable to TILA grant broad powers to the appropriate federal regulatory agencies or the Federal Trade Commission to enforce TILA against those entities not otherwise subject to federal regulations, such as our company. TILA also contains criminal penalties for willful violations and grants a private right of action with specified statutory damage awards for certain violations. If we were found to violate TILA in our lending activities, aggrieved borrowers could have the right to cancel their mortgage loan transactions and to demand the return of finance charges paid to us, and other damages provided under TILA. However, under Regulation Z, minor discrepancies in the finance charge would not necessarily require or allow the borrower to rescind the loans. In addition, rescission rights may be restricted after the initiation of foreclosure proceedings under certain circumstances. TILA applies to all individuals and businesses that regularly extend consumer credit which is subject to a finance charge or is payable by a written agreement in more than four installments and is primarily for personal, family or household purposes. Hence, TILA is applicable to our company and our subsidiaries. Generally, TILA requires a creditor to make certain disclosures of information such as, finance charges and annual percentage rates. In addition to these general requirements, TILA also requires additional disclosures in connection with certain types of mortgage loans. These additional disclosure requirements apply to loans (other than mortgage loans to finance the acquisition or initial construction of a dwelling) with (i) total points and fees upon origination above of eight percent of the loan amount or $435, whichever is greater or (ii) an annual percentage rate of more than ten percentage points higher than comparably maturing United States Treasury securities ("Covered Loans"). Effective January 1, 1999, the $435 figure was adjusted by the Board of Governors of the Federal Reserve System to $441 until December 31, 1999, in accordance with Regulation Z. These TILA provisions prohibit lenders from originating 31 Covered Loans that are underwritten solely on the basis of the borrower's home equity without regard to the borrower's ability to repay the loan. We believe that only a small portion of loans we originated after October 1995 (the effective date of the requirements) are covered loans of the type that are subject to these additional restrictions. Our policy is to apply underwriting criteria to all Covered Loans that take into consideration the borrower's ability to repay. TILA also prohibits lenders from including prepayment fee clauses in Covered Loans to borrowers except in cases in which the penalty can be exercised only during the first five years following closing of the loan, the consumer's total monthly debt-to-income ratio does not exceed 50% and the Covered Loans are not used to refinance existing loans originated by the same lender or affiliate. We will continue to collect prepayment fees on loans originated prior to October 1995 (the effective date of the prepayment provision of TILA) and on non-Covered Loans, as well as on Covered Loans where we are allowed to do so, but the level of our prepayment fee revenue may decline in future years. TILA imposes other restrictions on Covered Loans, including restrictions on balloon payments and negative amortization features, which we do not believe will have a material impact on our operations. Other Lending Laws We are also required to comply with the Equal Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors from discriminating against applicants on the basis of race, color, religion, sex, age or marital status. ECOA also prohibits creditors from discriminating based on the fact that all or part of the applicant's income derives from a public assistance program or the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. Regulation B under ECOA restricts us from obtaining certain types of information from loan applicants. It also requires certain disclosures regarding consumer rights and requires us to advise applicants of the reasons for any credit denial. If the applicant is denied credit or the rate or charge for loans increases as a result of information obtained from a consumer credit agency, another statute, the Fair Credit Reporting Act of 1970 ("FCRA") requires us to supply the applicant with the name and address of the reporting agency. In addition, FCRA also imposes other reporting and disclosure requirements on creditors. We are also subject to the Real Estate Settlement Procedures Act of 1974, as amended, and are required to file an annual report with the Department of Housing and Urban Development under the Home Mortgage Disclosure Act. In addition, we are subject to various other Federal and state laws, rules and regulations governing, among other things, the licensing of, and procedures which must be followed by, mortgage lenders and servicers, and disclosures which must be made to consumer borrowers. We may incur civil and criminal liability if we fail to comply with the requirements and, in some cases, consumer borrowers have the right to rescind their mortgage loans and to demand the return of finance charges they paid to us. In addition, some of the loans we originate or purchase, such as Title I home improvement loans, are insured by an agency of the Federal government. These loans are subject to extensive government regulation. Environmental Liability We may foreclose on properties securing loans that are in default in the course of our business. There is a risk that hazardous or toxic substances or petroleum constituents could be on such properties. In such event, we could be held responsible for the cost of cleaning up or removing such waste depending upon our activities, and such cost could exceed the value of the underlying properties. Under the laws of certain states, contaminated property may be subject to a lien on the property to assure payment for cleanup costs. In several states, this lien has priority over the lien of an existing mortgage or owner's interest. In addition, under the laws of some states and under the Federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), we may become liable for cleanup of a property and adjacent properties that are contaminated by releases from the mortgaged property if we engage in certain activities. In 1996, CERCLA was amended to eliminate lender liability under CERCLA in certain circumstances, including foreclosure if the lender resells the property at the earliest practicable, commercially reasonable time 32 on commercially reasonable terms. In addition, CERCLA was changed to provide more guidance to lenders about the nature of activities that would and would not give rise to liability under CERCLA. These amendments do not apply to state environmental laws. Also, foreclosure and our other activities on contaminated property may subject us to state tort liability. Gramm-Leach-Bliley Act of 1999 On November 12, 1999, the federal Gramm-Leach-Bliley Act ("GLB") was enacted. The GLB, which is a major piece of financial reform legislation, repealed sections of the federal Glass-Steagall Act generally prohibiting affiliations and management interlocks between banking organizations and securities firms, and added new substantive provisions to the Bank Holding Company Act. Specifically, the GLB created a new entity, the "financial holding company" ("FHC"), which is authorized to engage in activities which are "financial" in nature and "incidental" to financial activities. Several of these new activities, such as insurance underwriting and agency activities, are activities which bank holding companies generally were not allowed to conduct prior to GLB. In addition, insured banks such as SPB have new authority under GLB, subject to certain limitations, to engage in various activities of a "financial" nature. GLB also makes major changes to the federal regulation of a bank's securities activities, and contains provisions governing (i) the insurance activities of FHCs and the regulation of these activities, (ii) the privacy of customer information, (iii) changes to the structure of and access to the Federal Home Loan Bank system, (iv) modifications of the Community Reinvestment Act, and (v) other changes to banking laws. Major provisions of GLB will begin to come into effect starting March 11, 2000. Our Company is not currently subject to the Bank Holding Company Act, and therefore this new law is not expected to have an immediate material effect on the nature and scope of our current operations. While the future impact of GLB on our Company's and SPB's operations cannot be predicted at this time, GLB may allow our Company, through SPB and otherwise, authority to engage in new activities of a banking and financial nature. In addition, the new law may increase the ability of other financial services providers to compete with us by permitting certain firms (such as securities firms and insurance companies) for the first time to establish or acquire banks, and allowing banking firms to enter into new lines of financial business. The customer privacy requirements of the GLB, which are expected to be effective in November 2000, will require SPB, as well as any of our other affiliates which are engaged in a financial business with retail customers, to disclose to these customers, when they establish the customer relationship and at least annually thereafter, their privacy policies and practices for disclosing and protecting customer financial information. In addition, a financial institution will not be able to share with a nonaffiliated third party any nonpublic personal information of its customers and consumers unless that financial institution provides advance notice of its information-sharing policies to these persons, and will be obliged to permit a customer or consumer to "opt out" of the financial institution's ability to share nonpublic customer information with nonaffiliated third parties. Several Federal regulatory agencies have proposed regulations implementing the privacy provisions of the GLB. Generally, these proposals (i) outline the type and content of notice initially required to customers and consumers of the institution's privacy policies and practices, (ii) limit the right to disclose nonpublic personal information to nonaffiliated third parties, and (iii) describe the form and method of providing information-sharing "opt out" notices to consumers and customers. When these regulations become final, SPB, as well as our Company's affiliates which are "financial institutions" (generally meaning any of our affiliates which engages in a retail financial business), will be required to comply with these requirements. At this time, the specific impact of GLB's new privacy and other regulatory requirements on our operations cannot be precisely determined. It is possible, however, that GLB will result in some increases in our federal regulatory and compliance costs and responsibilities as these new privacy and regulatory changes become effective. Further, the new law gives states authority to regulate, among other things, the insurance, privacy and information-sharing activities of financial organizations, and changes in state regulatory requirements may also have an impact on our compliance costs and responsibilities. 33 Future Laws Because each of our businesses is highly regulated, the applicable laws, rules and regulations are subject to change. There are currently proposed various laws, rules and regulations which, if adopted, could affect our operations. We cannot assure you that these proposed laws, rules and regulations, or other such laws, rules or regulations will not be adopted in the future. If adopted, they could make compliance more difficult or expensive, restrict our ability to originate, broker, purchase or sell loans, further limit or restrict the amount of commissions, interest and other charges we earn on loans we originate, broker, purchase or sell, or otherwise adversely affect our business or prospects. Industrial Bank Operations SPB is subject to regulation, supervision and examination by the California Department of Financial Institutions (the "DFI") and by the FDIC. In states other than California where SPB operates loan production offices, SPB may be subject to certain state and local laws, including those governing qualifications to do business. Our company is not otherwise regulated or supervised by the DFI, the FDIC, the Federal Reserve Board or any other bank regulatory authority, except indirectly with respect to: (1) transactions and dealings between our company or any of our affiliates and SPB: (2) the specific limitations regarding ownership of the capital stock of a parent company of any industrial bank; and (3) the specific limitations regarding the payment of dividends from SPB. General SPB is governed by the California Industrial Banking Law ("CIBL"), and the rules and regulations of the DFI. Among other things, these laws and regulations describe in certain limited circumstances the maximum interest rates payable on, and the terms of, certain industrial bank deposits as well as the collateral requirements, maximum maturities and repayment terms of the various types of loans that are permitted to be made by California chartered industrial banks, (also known as industrial loan companies, thrift and loan companies or thrifts). As SPB's primary regulator, the DFI has broad supervisory and enforcement authority over SPB and its subsidiaries. The DFI may impose penalties for and seek correction of violations of laws or regulations or unsafe or unsound practices by: (1) assessing monetary penalties; (2) issuing cease and desist or removal and prohibition orders against a company, its directors, officers or employees and other persons; (3) initiating injunctive actions; or (4) taking possession of the business and property of an industrial bank. Certain provisions of the CIBL also provide for the institution of civil or criminal actions against industrial banks and their officers, directors, employees and affiliates for violations of the law and related regulations. SPB's investment certificates (also referred to as "deposits") are insured by the Bank Insurance Fund of the FDIC to the full extent permissible by law. As an insurer of deposits, the FDIC issues regulations, conducts examinations, requires the filing of reports and generally regulates the operations of institutions to which it provides deposit insurance. SPB is subject to the rules and regulations of the FDIC to the same extent as other state financial institutions that are insured by that entity. Either notice to or approval by the FDIC and the DFI is required before any merger, consolidation or change in control, or the establishment, relocation or closing of a branch office of SPB. However, only the DFI's approval is required to establish a loan production office limited to the solicitation of loans. The DFI may exempt, by order or regulation, from the application requirement, the establishment of a branch or loan production office if the DFI finds such application and approval not necessary to regulate a company. To date, no regulation has been adopted. Orders are commonly issued on a case-by-case basis. The FDIC completed an information systems exam of SPB in May 1998 and the FDIC and DFI completed a joint examination of SPB for the period ended March 31, 1998. As a result of the examinations, the FDIC requested that SPB enter into two written memoranda of understanding ("MOUs") addressing deficiencies identified by the FDIC in SPB's accounting systems and controls, and perceived deficiencies in SPB's Y2K readiness and contingency planning. 34 The first MOU addressing these issues was signed by the FDIC on November 2, 1998. Under that MOU, SPB was required to take a number of actions to address and correct the accounting and Y2K preparedness concerns of the FDIC. SPB, under the direction of its board of directors, developed and implemented a Y2K readiness plan and budget, with specific deadlines and action steps. As a result of the progress SPB made in implementing its Y2K readiness plan, the FDIC terminated the November 2, 1998 MOU primarily relating to Y2K concerns, during the third quarter of 1999. On January 19, 1999, the FDIC and DFI issued a second MOU as a result of the 1998 joint exam, which addressed accounting controls and policies and apparent violations of law. Under the second MOU, SPB is required to: . adopt and implement policies to provide adequate accounting controls consistent with safe and sound banking practices, . eliminate or correct violations of law described in the FDIC/DFI examination, and . achieve and maintain regulatory capital requirements applicable to a "well capitalized" depository institution. SPB is allowed to pay dividends to ICII in accordance with its normal dividend policy. SPB's policy permits cash payment dividends of up to 35% of SPB's net income and prohibits paying any cash dividend if SPB is not, immediately prior and subsequent to the dividend, a "well-capitalized" institution within the meaning of FDIC regulations. We responded to the FDIC's criticisms in its May 1998 information systems examination by retaining an internationally-recognized independent accounting firm to conduct a general ledger account reconciliation project in order to identify, trace and resolve all outstanding unreconciled general ledger items on SPB's books and records. Work on this reconciliation project was substantially completed by December 31, 1998. In consultation with the independent accounting firm, SPB has developed and implemented new policies and procedures which are designed to improve the efficiency and timeliness of general ledger reconciliation tasks and related financial accounting matters. SPB continues to reconcile all general ledger accounts on a timely basis. SPB has addressed all items of concern described in the FDIC/DFI examination and referenced in the second MOU. The FDIC and DFI each have the authority to take a variety of informal and formal remedial and other enforcement actions with regard to violations of law, and unsafe and unsound banking practices, including, among other things, the institution of proceedings or actions imposing or seeking memoranda of understanding, injunctions, cease and desist orders, criminal or civil penalties, removal from office, the placing of SPB into conservatorship or receivership, or the revocation of SPB's charter. The MOU is one such instance of an informal remedial action which the FDIC or DFI may take. The FDIC is required to notify the DFI of its intent to take certain types of enforcement actions against a California chartered, FDIC-insured industrial bank and of the reasons for action. If satisfactory corrective action is not taken within an appropriate time, the FDIC may proceed with its enforcement action. The FDIC may also terminate the deposit insurance of any insured depository institution if it determines that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed in writing by the FDIC. The DFI also has the authority, independent of the FDIC, to issue cease and desist orders, impose operating restrictions, and take other actions to assure the safety and soundness of the institution. Although we do not believe that further enforcement action is warranted at this time, any such enforcement could have a material adverse effect on our company. Limitations on Investments Subject to restrictions imposed by California law, SPB is permitted to make secured and unsecured consumer and non-consumer loans. The maximum term for repayment of loans made by industrial banks may be as long as 40 years and 30 days depending upon collateral and priority of the lender's lien on the collateral. 35 However, loans with repayment terms in excess of 30 years and 30 days may not in the aggregate exceed five percent of total outstanding loans and obligations of the industrial bank. Although secured loans may generally be repayable in unequal periodic payments during their respective terms, consumer loans secured by real property with terms in excess of three years must be repayable in substantially equal periodic payments unless such loans were made or purchased by the industrial bank under the Garn-St. Germain Depository Institutions Act of 1982 (which applies primarily to one to four unit residential loans). California law limits SPB's lending activities outside of California to no more than 20% of its total assets, or 40% with the approval of the DFI. Effective January 1, 2000, these percentages increased to 25% and 50%, respectively. California law contains requirements for the diversification of the loan portfolios of industrial banks. An industrial bank with outstanding deposits may not, among other things: . make any loan secured primarily by unimproved real property in an amount in excess of 10% of its paid-up and unimpaired capital stock and surplus not available for dividends and all loans secured by unimproved real property shall not exceed in the aggregate 5% of the industrial bank's assets; . lend an amount in excess of five percent of its paid-up and unimpaired capital stock and surplus not available for dividends upon the security of the stock of any one corporation; . make loans to, or hold the obligations of, any one person as primary obligor in an aggregate principal amount exceeding 20% of its paid-up and unimpaired capital stock and surplus not available for dividends; . have more than 70% of its total assets in loans that have remaining terms to maturity in excess of seven years (as defined) and are secured solely or primarily by real property, which limitation is effective January 1, 2000; and . have more than 40% of its assets in loans to borrowers who do not reside in or have a place of business in the state of California; provided, however, that certain loans that are sold within 90 days are excluded from such portfolio limitation. This percentage increases to 50% on January 1, 2000. Additionally, any loan or obligation primarily secured by real property, or real and personal property, having a principal balance in excess of $10,000, must have a loan-to-value ratio as defined, of 90% or less, subject to certain exceptions, including loans or obligations held for 90 days or less or saleable to institutional investors evidenced by irrevocable commitments to buy. SPB had paid-up and unimpaired capital stock and surplus not available for dividends of $150.0 million at December 31, 1999 and 1998. At December 31, 1999 and 1998, SPB was in compliance with its California investment law restrictions. SPB originates and holds a portion of our loans held for sale, of which a majority have a maturity of greater than seven years. SPB believes that it will be able to continue to meet its requirements by managing the types of loans originated and where the loans are domiciled. Under California law, industrial banks are generally limited to investments that are legal investments for commercial banks. An industrial bank may acquire real property only in satisfaction of debts previously contracted, pursuant to certain foreclosure transactions, or as may be necessary as premises for the transaction of its business, in which case such investment is limited to one-third of an industrial bank's paid-in capital stock and surplus not available for dividends. Effective January 1, 1997, as a result of changes in the CIBL passed in 1996, SPB may invest in the capital stock, obligations, or other securities of one or more corporations, subject to rules or orders prescribed by the DFI, if such investment would be lawful for commercial banks. California chartered commercial banks may invest in equity securities of one or more subsidiary corporations upon receiving authorization from the DFI. Under Federal law, SPB is considered an insured non-member state bank, and therefore, it may make any equity investment, including an investment in the equity securities of an operating subsidiary, that is permissible for a national bank. 36 Operating subsidiaries include corporations, limited liability companies or similar entities. In turn, operating subsidiaries of national banks may engage in activities that are part of, or incidental to the business of banking, as determined by the Office of the Comptroller of the Currency (the "OCC"). Transactions With Affiliates Under California law, an industrial bank generally may not make any loan to, or hold an obligation of, any of its directors or officers or any director or officer of its holding company or affiliates, except in specified cases and subject to regulation by the DFI. In addition, an industrial bank may not make any loan to, or hold an obligation of, any of its shareholders or any shareholder of its holding company or affiliates, except to persons who own less than 10% of the stock of a holding company or an affiliate that is listed on a national securities exchange. As a result of these requirements, SPB may not make loans to our company or any of our affiliates or purchase a contract, loan or chose in action from us or our affiliates other than subsidiaries of SPB. Exemptions from these restrictions are available for: . purchase of loans from affiliates which are licensed mortgage brokers or other certain types of licensed lenders, subject to prior approval of the DFI; . purchase of loans pursuant to a sale and repurchase agreement between SPB and an affiliated company; or . purchase of loans from a subsidiary of SPB or a corporation in which SPB owns 50% or more of its common stock. However, these purchases would also be subject to strict limitations under Federal law. Generally, such transactions must be on terms and under conditions, that are substantially the same, or at least as favorable to SPB, as those prevailing at the time for comparable transactions with or involving other nonaffiliated companies. In addition, SPB is prohibited from engaging in "covered transactions" with an affiliate if the aggregate amount of such transactions with any one affiliate would exceed 10% of SPB's capital stock and surplus, or in the case of all affiliates, if the aggregate amount of such transactions exceeds 20% of SPB's capital stock and surplus. "Covered transactions" include loans or extensions of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from an affiliate (subject to certain exemptions), the acceptance of securities issued by an affiliate as collateral security for a loan or extension of credit to any person or company, or the issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate. For certain "covered transactions," collateral requirements in specified amounts will be applicable. SPB also is prohibited from purchasing low-quality assets from its affiliates, except under limited circumstances. SPB engages in many transactions which involve its affiliates, including our company and our other subsidiaries. As such, many of the transactions between ICII, our affiliates and SPB are subject to Federal and state affiliate transaction regulations. Further, under Federal law, a transaction by SPB with any person shall be deemed to be a transaction with an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or transferred to that affiliate. The term "affiliate" excludes any company (other than a bank), that is a subsidiary of SPB, unless the federal authorities have determined by regulation or order not to exclude such subsidiary. Absent such determination, transactions conducted between SPB and its non-bank subsidiaries would not be subject to the amount limitations and collateral requirements under federal law. This exemption, however, is unavailable for transactions between a bank and a subsidiary that engages in activities not permissible for the parent depository institution. Under the CIBL, unless the DFI has issued a permit authorizing such sale, it is unlawful for SPB to offer or sell any security in an issuer transaction which offer or sale is subject to applicable provisions of the California Corporate Securities Act of 1968, as amended. Effective July 1, 1997, any offer to an affiliate or institutional or registered investor under the California Corporate Securities Act of 1968, as amended, is exempt from the permit requirement, subject to certain conditions. 37 The DFI, however, has authority to exempt any such transaction which the DFI determines is not within the purposes of the qualification requirements and which the DFI finds not necessary or appropriate in the public interest or for the protection of investors. The DFI also has authority to impose conditions in any permit, including legends restricting transferability, impounding proceeds, or other conditions deemed reasonable and necessary in the public interest. Capital; Limitations on Borrowings Under California law, an industrial bank is subject to certain leverage limitations that are not generally applicable to commercial banks or savings and loan associations. In particular, an industrial bank that has been in operation for over 60 months may have outstanding at any time deposits no more than 20 times paid-up and unimpaired capital and surplus as restricted in its by-laws as not available for dividends, with the exact limitation subject to order by the DFI. The DFI has issued an order to SPB authorizing the maximum 20 times leverage standard. Industrial banks are not permitted to borrow, except by the issuance of investment certificates, in an amount exceeding 300% of outstanding capital stock, surplus and undivided profits, without the DFI's prior consent. All sums borrowed in excess of 150% of outstanding capital stock, surplus and undivided profits must be unsecured borrowings or, if secured, approved in advance by the DFI, and be included as certificates of deposit for purposes of computing the above ratios. However, collateralized FHLB advances and, as of January 1, 1999, borrowings from the FDIC and the Federal Reserve Bank, are excluded from this test of secured borrowings and are not specifically limited by California law. FDIC regulations contain risk-based capital adequacy standards applicable to financial institutions like SPB whose deposits are insured by the FDIC. These guidelines provide a measure of capital adequacy and are intended to reflect the degree of risk associated with both on and off balance sheet items, including residential loans sold with recourse, legally binding loan commitments and standby letters of credit. Unlike SPB, our company because it is not directly regulated by any bank regulatory agency, is not subject to any minimum capital requirements. See "--Holding Company Regulations." A financial institution's risk-based capital ratio is calculated by dividing its qualifying capital by its risk-weighted assets. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items to four risk-weighted categories ranging from 0% to 100%, with higher levels of capital being required for the categories perceived as representing greater risk. Financial institutions generally are expected to meet a minimum ratio of qualifying total capital to risk-weighted assets of 8%, of which at least 50% of qualifying total capital must be in the form of core capital (Tier 1), which includes common stock, noncumulative perpetual preferred stock, minority interests in equity capital accounts of combined subsidiaries and mortgage servicing rights and a percentage of purchased credit card relationships, subject to certain amount limitations. Supplementary capital (Tier 2) consists of the allowance for loan and lease losses up to 1.25% of risk-weighted assets, cumulative preferred stock, intermediate-term preferred stock, hybrid capital instruments and term subordinated debt. The risk-based capital standards were amended in September 1998 so that up to 45 percent of the pre-tax net unrealized holding gains on certain available-for-sale equity securities could be included in the Tier 2 capital calculation. The maximum amount of Tier 2 capital that may be recognized for risk-based capital purposes is limited to 100% of Tier 1 capital (after any deductions for disallowed intangibles). The aggregate amount of term subordinated debt and intermediate term preferred stock that may be treated as Tier 2 capital is limited to 50% of Tier 1 capital. Certain other limitations and restrictions apply as well. At December 31, 1999 and 1998, the Tier 2 capital of SPB consisted of its allowance for loan losses and $35.0 million in term subordinated indebtedness. The FDIC has adopted a 3% minimum leverage ratio that is intended to supplement risk-based capital requirements and to ensure that all financial institutions, even those that invest predominantly in low risk assets, continue to maintain a minimum level of core capital. A financial institution's minimum leverage ratio is determined by dividing its Tier 1 capital by its quarterly average total assets, less intangibles not includable in Tier 1 capital. 38 The FDIC rules provide that a minimum leverage ratio of 3% is required for institutions that have been determined to be in the highest category used by regulators to rate financial institutions. All other organizations are required to maintain leverage ratios of at least 100 to 200 basis points above the 3% minimum. At December 31, 1999 and 1998, SPB was in compliance with all of its capital requirements. Prompt Corrective Action The FDIC regulations contain a prompt corrective action rule which was adopted in response to requirements under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires the federal banking regulators to take "prompt corrective action" with respect to banks that do not meet minimum capital requirements. The FDIC's rules provide that an institution is "well capitalized" if its risk-based capital ratio is 10% or greater; its Tier 1 risk-based capital ratio is 6% or greater; its leverage ratio is 5% or greater; and the institution is not subject to a capital directive of a federal bank regulatory agency. A bank is "adequately capitalized" if its risk-based capital ratio is 8% or greater; its Tier 1 risk-based capital ratio is 4% or greater; and its leverage ratio is 4% or greater (3% or greater for the highest rated institutions). An institution is considered "undercapitalized" if its risk-based capital ratio is less than 8%; its Tier 1 risk-based capital ratio is less than 4%, or its leverage ratio is 4% or less (less than 3% for the highest rated institutions). An institution is "significantly undercapitalized" if its risk- based capital ratio is less than 6%; its Tier 1 risk-based capital ratio is less than 3%; or its leverage ratio is less than 3%. A bank is deemed to be "critically undercapitalized" if its ratio of tangible equity (Tier 1 capital) to total assets is equal to or less than 2%. An institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it engages in unsafe or unsound banking practices. The "well capitalized" this classification, however, is a regulatory capital classification used for internal regulatory purposes, and is not necessarily indicative of SPB's financial condition and operations. Undercapitalized institutions are required to submit a capital restoration plan for improving capital. In order to be accepted, such plan must include a financial guaranty from the institution's holding company that the institution will return to capital compliance. If such a guarantee were deemed to be a commitment to maintain capital under the Federal Bankruptcy Code, a claim for a subsequent breach of the obligations under such guarantee in a bankruptcy proceeding involving the holding company would be entitled to a priority over third party general unsecured creditors of the holding company. Undercapitalized institutions: are prohibited from making capital distributions or paying management fees to controlling persons; may be subject to growth limitations; are restricted from ongoing acquisitions, branching and entering into new lines of business, and transactions with affiliates; and are limited in the appointment of additional directors or senior executive officers. Finally, the institution's regulatory agency has discretion to impose certain of the restrictions generally applicable to significantly undercapitalized institutions. In the event an institution is deemed to be significantly undercapitalized, it may be required to: sell stock; merge or be acquired; restrict transactions with affiliates; restrict interest rates paid; divest a subsidiary; or dismiss specified directors or officers. If the institution is a bank holding company, it may be prohibited from making any capital distributions without prior approval of the Federal Reserve Board and may be required to divest its subsidiaries. Our parent company is not a bank holding company. A critically undercapitalized institution is generally prohibited from making payments on subordinated debt and may not, without the approval of its principal bank supervisory agency, enter into a material transaction other than in the ordinary course of business; engage in any covered transaction; or pay excessive compensation or bonuses. Critically undercapitalized institutions are subject to appointment of a receiver or conservator. Effectively, the FDIC would have general enforcement powers over SPB and our company in the event that SPB were deemed undercapitalized. 39 SPB's Capital Ratios. The following tables indicate SPB's capital ratios under (1) the California leverage limitation, (2) the FDIC risk-based capital requirements, and (3) the FDIC minimum leverage ratio at December 31, 1999 and 1998.
At December 31, ---------------------------------------------------------------------------------------------- 1999 1998 ---------------------------------------------- ---------------------------------------------- Well Well Minimum Capitalized Minimum Capitalized Actual Requirement Requirement Actual Requirement Requirement -------------- -------------- -------------- -------------- -------------- -------------- Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- (Dollars in Thousands) California Leverage Limitation............. $169,962 10.45% $ 81,308 5.00% $ N/A N/A% $179,022 10.45% $ 85,688 5.00% $ N/A N/A% Risk-based Capital...... 219,278 10.67 164,445 8.00 205,557 10.00 221,657 11.12 159,410 8.00 199,264 10.00 Risk-based Tier 1 Capital................ 160,018 7.78 82,223 4.00 123,334 6.00 167,823 8.42 79,705 4.00 119,558 6.00 FDIC Leverage Ratio..... 160,018 8.94 71,610 4.00 89,512 5.00 167,823 8.62 77,861 4.00 97,326 5.00
Limitations on Types of Deposits Because of limitations contained in the CIBL, and to maintain the exemption from the BHCA ("Holding Company Regulations"), SPB currently offers investment certificates in the form of passbook accounts and certificates of deposit. SPB does not offer nor is it authorized to offer demand deposit accounts. Insurance Premiums The FDIC administers two separate deposit insurance funds, the Bank Insurance Fund ("BIF"), which insures the deposits of institutions which were insured by the FDIC prior to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), and the Savings Association Insurance Fund ("SAIF"), which insures the deposits of institutions which were insured by the Federal Savings and Loan Insurance Corporation prior to the enactment of FIRREA. SPB's insurance premium for the year ended December 31, 1999 was approximately $672,000. As required by FDICIA, the FDIC has established a risk-based system for setting deposit insurance assessments. Under the risk-based assessment system, an institution's insurance assessments vary depending on the level of capital the institution holds and the degree to which it is of supervisory concern to the FDIC. Once an insurance fund has reached its designated reserve ratio of 1.25%, and as long as there are no outstanding borrowings by the FDIC from the United States Treasury, the FDIC is not permitted to charge assessment premiums that would increase the reserve ratio of the insurance fund above its designated reserve ratio. The BIF reached its designated reserve ratio in 1995. Recent Legislation A new California state regulatory department was created in 1996 known as the Department of Financial Institutions. The DFI became effective July 1, 1997. All California state chartered depository institutions are now licensed and regulated after July 1, 1997 by the DFI, which includes banks, savings associations, credit unions, and industrial banks. SPB, an industrial bank, is subject to the jurisdiction of the DFI as its state regulator. In effect, the California State Department of Banking was renamed as the DFI. The Superintendent of Banks was named as the Acting Commissioner of the DFI. Certain industrial loan administrative and examination staff personnel transferred to the DFI from the California Department of Corporations. Most administrative and examination staff of the former California State Banking Department remained with the renamed department. Consequently, the former California Department of Banking senior staff personnel, including persons in the office of general counsel and senior examination staff of the DFI, who prior to 1997 were generally unfamiliar with the Industrial Banking Law will be interpreting the Industrial Banking Law. The 1996 California legislation that created the DFI also authorized the use of the word "bank" by industrial banks, such as SPB, in their names. Effective October 8, 1997, Southern Pacific Thrift and Loan changed its name to "Southern Pacific Bank." That legislation also granted the DFI jurisdiction over the issuance of securities by a thrift and loan company requiring application and permit unless otherwise exempt. 40 On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act") was enacted which, among other things, imposes on BIF-insured deposits a special premium assessment on domestic deposits at one-fifth the premium rate imposed on SAIF-insured deposits, which will be used to pay the interest on Financial Corporation ("FICO") bonds issued by the federal government as part of the savings association bailout provisions of the 1989 FIRREA legislation. In the year 2000, however, the Funds Act requires BIF-insured institutions to share in the payment of the FICO obligations on a pro rata basis with all savings institutions, with annual assessments expected to equal approximately 2.4 basis points until the year 2017, and to be completely phased out by 2019. In addition, on December 6, 1996, the FDIC determined to continue the current downward adjustment to the assessment rate schedule applicable to deposits of BIF institutions for the semi-annual assessment period beginning January 1, 1997. For such period, and for succeeding semi-annual periods, the BIF assessment rates will range from 0 to 27 basis points. In addition, in accordance with the Funds Act, the FDIC eliminated the minimum assessment amount for BIF-insured institutions. SPB's combined FDIC and FICO assessment rate for 1999 and 1998 was approximately 1.2 and 4.2 cents per $100 of deposits. We cannot predict if, when and how frequently SPB's deposit insurance assessment rates will change or whether such changes will have a material effect on the bank. Holding Company Regulations We are exempt from regulation as a bank holding company because SPB is not considered a "bank" under the BHCA. The Competitive Equality Banking Act of 1987 ("CEBA") subjected certain previously unregulated companies to regulation as bank holding companies by expanding the definition of the term "bank" in the BHCA. Notwithstanding, the FDIC does view the source of strength doctrine applicable to bank holding companies to be relevant to the continued capital strength of non-member state banks such as SPB. SPB may cease to fall within those exceptions if it engages in certain operational practices, including accepting demand deposit accounts. SPB currently has no plans to engage in any operational practice that would cause it to fall outside of one or more of the exceptions to the term "bank" as defined by CEBA. Under CEBA, we are treated as if we are a bank holding company for the limited purposes of applying certain restrictions on loans to insiders, transactions with affiliates and anti-tying provisions. Limitations on Dividends Under the CIBL, an industrial bank may declare dividends on its capital stock only if it has at least $750,000 of unimpaired capital stock plus additional capital stock of $50,000 for each branch office. In addition, no distribution of dividends is permitted unless such distribution would not exceed an industrial bank's retained earnings; any payment would not result in a violation of the approved minimum capital to thrift and loan certificate of deposit ratio; and/or after giving effect to the distribution, both (a) the sum of an industrial bank's assets (net of goodwill, capitalized research and development expenses and deferred charges) would be at least 125% of its liabilities (net of deferred taxes, deferred income and other deferred credits), and (b) current assets would be not less than current liabilities (except that if a thrift and loan's average earnings before taxes for the last two fiscal years had been less than average interest expense, current assets must be at least 125% of current liabilities). Under California law, in order for capital (including surplus) of an institution to be included in calculating the leverage limitation described above, thrift institutions must amend their bylaws to restrict such capital from the payment of dividends. The amount of restricted capital maintained by an industrial bank also provides the basis for establishing the maximum amount that a thrift may lend to one borrower. As of December 31, 1999, 1998 and 1997, $150.0 million, $150.0 million and $125.0 million, respectively, of SPB's capital was so restricted. 41 The FDIC has advised insured institutions that the payment of cash dividends in excess of current earnings from operations is inappropriate and may be cause for supervisory action. As a result of this policy, SPB may find it difficult to pay dividends out of retained earnings from historical periods prior to the most recent fiscal year or to take advantage of earnings generated by extraordinary items. Under the Financial Institutions Supervisory Act and FIRREA, federal regulators also have authority to prohibit financial institutions from engaging in business practices which are considered to be unsafe or unsound. It is possible, depending upon the financial condition of SPB and other factors, that such regulators could assert that the payment of dividends in some circumstances might constitute unsafe or unsound practices and prohibit payment of dividends even though technically permissible. Pursuant to FDICIA, SPB is prohibited from paying dividends if the payment of such dividends would cause it to become "undercapitalized." These limitations on the payment of dividends may restrict our ability to use cash from SPB which may have been otherwise available to us for working capital. Limitations on Acquisitions of Voting Stock of the Company Any person who wishes to acquire 10% or more of the capital stock or capital of a California industrial bank or 10% or more of the voting capital stock or other securities giving control over management of its parent company must obtain the prior written approval of the DFI. Similarly, the federal Change in Bank Control Act of 1978 requires any person or company that obtains "control" of an insured depository institution to notify the appropriate Federal banking agency, which would be the FDIC in the case of SPB, 60 days prior to the proposed acquisition. If the FDIC has not issued a notice disapproving the proposed acquisition within that time period (including a possible 120-day extension), the person may retain its interest in such institution. Any person acquiring 10% or more of the common stock of our company is subject to these requirements. For purposes of the statute, "control" is defined as the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of an insured depository institution. However, there is a rebuttable presumption that any person acquiring 10% or more of any class of voting securities of said institution is presumed to have "control." In such cases, such person must file an application for approval with the FDIC or rebut the presumption. Employees As of December 31, 1999, we had 581 employees on a full-time equivalent ("FTE") basis, as follows: Southern Pacific Bank.................................................. 324 Imperial Business Credit, Inc.......................................... 94 Imperial Capital Group, LLC............................................ 79 Imperial Credit Industries, Inc........................................ 48 The Lewis Horwitz Organization (ICII).................................. 12 Imperial Credit Lender Services, Inc................................... 10 Imperial Credit Asset Management Inc................................... 9 Imperial Credit Advisors, Inc.......................................... 4 ICII Ventures, Inc..................................................... 1 --- Total................................................................ 581 ===
We believe that our relations with these employees are satisfactory. We are not a party to any collective bargaining agreement. ITEM 2. PROPERTIES Our executive offices occupy approximately 22,116 square feet of space in Torrance, California at a current monthly rental of approximately $31,200. SPB's executive offices occupy approximately 28,749 square feet of space in Torrance, California at a current monthly rental of $41,700. In February 2000, we moved SPB's executive offices from Los Angeles to Torrance, California. 42 Not including SPB, we currently lease offices in Beverly Hills, San Diego, Santa Ana Heights and Irvine, California, as well as in Denver, Colorado. SPB and its divisions operate in California through branches and loan production offices and in other states through loan production offices and representatives. ITEM 3. LEGAL PROCEEDINGS Our company is a defendant in a consolidated federal securities class action, In re Southern Pacific Funding Corporation Securities Litigation, Lead Case No. CV98-1239-MA, in the U.S. District Court for the District of Oregon. The action also names as defendants two current directors of ours, and others. This action was initially filed in October 1998. Plaintiffs allege that SPFC failed to properly mark down the value of its residual interests, failed to properly reflect increased levels of prepayments and actual prepayment and default rates on its loans and made false and misleading public statements concerning its financial condition. Following a number of motions to dismiss, defendants answered and alleged affirmative defenses to the second consolidated complaint on June 22, 1999. On July 21, 1999, the Court certified a class of persons who purchased the securities of SPFC during the period October 7, 1997 through October 1, 1998. On September 10, 1999, plaintiffs filed a third consolidated complaint, alleging claims against our company and two of its directors (and others) under Section 10(b) and 20(a) of the Securities Exchange Act of 1934. On September 21, 1999, plaintiffs sought leave to file a fourth consolidated complaint, alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11 and 12 of the Securities Act of 1933. On December 7, 1999, the Court granted plaintiffs' motion to file a fourth amended consolidated complaint, denied defendants' motions to dismiss except as to the Section 12 claim, and granted plaintiffs' motion to file a supplemental memorandum to add allegations to the complaint. Our company and three of its 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 U.S. District Court for the Central District of California. This action, purportedly filed on behalf of a class of persons who purchased our company's securities during the period January 29, 1998 through October 1, 1998, was originally filed in November 1998. Plaintiffs allege that defendants made false and misleading statements and omitted to reveal the truth concerning the value of Imperial Credit Industries, Inc.'s investments in SPFC and FMC, resulting in an artificial inflation of the price of our securities. On June 21, 1999, defendants moved to dismiss plaintiffs' complaints. The matter was fully briefed and the Court held a hearing on July 26, 1999. At the hearing, the Court granted defendants' motions to dismiss plaintiffs' complaints, with leave to amend. The Court subsequently issued a written order on September 7, 1999. Plaintiffs filed a consolidated amended class action complaint on October 4, 1999, alleging a claim against our company and three of its directors for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. On October 22, 1999, defendants moved to dismiss the consolidated amended class action complaint. On November 22, 1999, plaintiffs were granted leave to file an amended class action complaint, which plaintiffs filed on December 13, 1999. The Court held a hearing on defendants' motion to dismiss the second consolidated amended complaint on January 24, 2000. The motion was denied on February 22, 2000. The Court has not certified a class, nor have plaintiffs filed a motion for class certification. We are a defendant in Steadfast Insurance Company v. Auto Marketing Network Inc. and Imperial Credit Industries, Inc., filed on August 12, 1997 in the Northern District of Illinois, Case No. 97-C-5696. The plaintiff is seeking damages in the amount of $27 million allegedly resulting from the fraudulent inducement to enter into, and the subsequent breach of, a motor vehicle collateral enhancement insurance policy. In May 1998, we filed a counterclaim against the plaintiff for $54 million in damages based on the allegation that the underlying claim was filed in bad faith. In January 1999, the Court entered a preliminary injunction which enjoined us from transferring assets of Auto Marketing Network, Inc., in amounts that would cause the total assets of Auto Marketing Network to be less than $20 million in value. The injunction has since been removed and the parties are presently engaged in pretrial discovery. We have moved to dismiss ICII from the lawsuit. We intend to vigorously defend all of the above lawsuits. 43 We were a defendant along with ICCMIC and its directors, which includes one of our current directors and one former director, in a putative class action lawsuit filed on July 22, 1999 by Riviera-Enid, a Florida limited partnership, in Los Angeles Superior Court, Case No. BC213902. The complaint alleges that the proposed merger between a subsidiary of ours and ICCMIC constitutes a breach of fiduciary duty by the defendants in that, allegedly, the merger price is unfair to stockholders, the merger price is less than the liquidation value of ICCMIC's assets and the termination fee for the management contract is excessive. The complaint also alleges that certain of the directors have conflicts of interest because of their affiliation with us and that the merger will benefit us at the expense of ICCMIC's other stockholders. The complaint seeks certification of a class of all stockholders of ICCMIC whose stock will be acquired in connection with the merger and seeks injunctive relief that would, if granted, prevent the completion of the proposed merger. The complaint also seeks damages in an unspecified amount and other relief. On October 8, 1999, we filed a demurrer to plaintiff's complaint, which was set to be heard by the Court on November 22, 1999. On November 1, 1999, plaintiff served an amended class action complaint alleging the same claims but adding details from ICCMIC's preliminary proxy statement filed with the SEC. The Court has not certified a class, nor has plaintiff filed a motion for class certification. On November 3, 1999, ICCMIC's counsel received a letter from counsel for the plaintiffs asserting their intent to seek a temporary restraining order, expedited discovery, and a date for a preliminary injunction hearing. No motion for a preliminary injunction has been filed. By letter of November 10, 1999, counsel for the plaintiffs stated that the plaintiffs have decided not to move forward with a motion for a temporary restraining order or permanent injunction at this time. All defendants filed demurrers to the amended complaint, and on February 4, 2000, the Court granted ICII's demurrer and dismissed the action against ICII and the individual ICII defendants with prejudice and without leave to amend. We and ICCMIC believe that the material allegations of the complaint are without merit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 44 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Our common stock has been quoted on the Nasdaq National Market under the symbol "ICII" since May 18, 1992. The following table sets forth the high and low closing sales prices for our common stock as reported by the Nasdaq National Market.
1999 High Low 1998 High Low ---- ----- ----- ---- ------ ------ First Quarter $9.94 $7.06 First Quarter $27.38 $17.25 Second Quarter 9.44 6.94 Second Quarter 27.00 18.88 Third Quarter 6.97 4.31 Third Quarter 26.25 5.75 Fourth Quarter 6.50 4.00 Fourth Quarter 11.63 3.63
At March 28, 2000, the closing sales price of our common stock as reported by the Nasdaq National Market was $4.375. At March 28, 2000, there were approximately 1,000 shareholders of record. We have not paid cash dividends on our common stock and we do not anticipate paying cash dividends on our common stock in the foreseeable future. We intend to retain earnings for use in our operations and the expansion of our business. The indentures for our 9 7/8% Senior Notes and our Resettable Rate Debentures restrict our payment of cash dividends. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation--Liquidity and Capital Resources". SPB is subject to certain regulatory restrictions on the payment of dividends. See "Item 7. Business-- Management's Discussion and Analysis--Limitations on Dividends". Share Repurchase Programs. In the fourth quarter of 1997, our board of directors authorized the repurchase of up to 1.9 million shares, or approximately 5%, of our outstanding shares of common stock. During 1998, we repurchased and retired 1.9 million shares of common stock under this program at an average price of $10.62 per share. In the third quarter of 1998, our board of directors authorized an additional share repurchase program to buy back up to 3.7 million shares, or approximately 10%, of our outstanding shares of common stock. As of December 31, 1998, we had repurchased and retired 570,878 shares of common stock under this program at an average price of $6.72 per share. On May 8, 1999, our board of directors amended its repurchase authorization and increased the remaining number of shares available for repurchase by 600,000 shares to total of 3.8 million shares. On May 14, 1999, we entered into an agreement with our former parent Imperial Bank, a subsidiary of Imperial Bancorp (NYSE:IMP). On May 17, 1999, we repurchased 10% or 3,682,536 shares of our outstanding common stock for $8.00 per share or $29.5 million. The repurchase from Imperial Bank was financed through the private issuance of $30.0 million of Series B 11.50% Mandatorily Redeemable Cumulative Preferred Stock to a group of independent investors. As of December 31, 1999, we had repurchased and retired 4,253,414 shares of common stock under our second share repurchase program at an average price of $7.83 per share. The authorized share repurchase under the second repurchase program is 4,334,276 shares. Since beginning share repurchases in December of 1997, we have repurchased under both the first and second share repurchase programs a total of 6,193,220 shares of common stock at an average price of $8.70 per share. All of our repurchases effected under our stock repurchase programs were effected in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. Preferred Share Purchase Rights. On October 12, 1998, we distributed preferred share purchase rights as a dividend to our shareholders of record at the rate of one right for each outstanding share of our common stock. The rights are attached to our common stock and will only be exercisable and trade separately if a person or group acquires or announces the intent to acquire 15% or more of our common stock (25% or more for any 45 person or group holding 15% or more of our common stock on October 12, 1998). Each right will entitle shareholders to buy one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $40. If our company is acquired in a merger or other transaction after a person has acquired 15% or more of our outstanding common stock (25% or more for any person or group holding 15% or more of our common stock on October 12, 1998), each right will entitle the shareholder to purchase, at the right's then- current exercise price, a number of the acquiring company's common shares having a market value of twice such price. The acquiring person would not be entitled to exercise these rights. In addition, if a person or group acquires 15% or more of our company's common stock, each right will entitle the shareholder (other than the acquiring person) to purchase, at the right's then-current exercise price, a number of shares of our company's common stock having a market value of twice such price. Following the acquisition by a person of 15% or more of our common stock and before an acquisition of 50% or more of our common stock, our board of directors may exchange the rights (other than the rights owned by such person) at an exchange ratio of one share of common stock per right. Before a person or group acquires beneficial ownership of 15% (or 25% as applicable) or more of our common stock, the rights are redeemable for $.0001 per right at the option of our board of directors. The rights will expire on October 2, 2008 unless redeemed prior to that date. Our board is also authorized to reduce the ownership thresholds referred to above to not less than 10%. The rights are intended to enable all of our shareholders to realize the long-term value of their investment in our company. 46 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following schedules set forth selected consolidated financial data as of or for each of the years in the five-year period ended December 31, 1999. Such selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
Years Ended December 31, ------------------------------------------------ 1999 1998 1997 1996 1995 -------- --------- -------- -------- -------- (In thousands, except per share data) Income Statement Data: Revenues: Interest on loans and leases..................... $178,229 $ 200,827 $176,146 $188,242 $120,244 Interest on investments..... 25,841 28,965 24,776 10,807 6,630 Interest on other finance activities................. 3,368 6,048 2,678 8,422 2,608 -------- --------- -------- -------- -------- Total interest income..... 207,438 235,840 203,600 207,471 129,482 Interest expense............ 121,607 123,106 118,213 135,036 95,728 -------- --------- -------- -------- -------- Net interest income....... 85,831 112,734 85,387 72,435 33,754 Provision for loan and lease losses............... 35,340 15,450 20,975 9,773 5,450 -------- --------- -------- -------- -------- Net interest income after provision for loan and lease losses............. 50,491 97,284 64,412 62,662 28,304 Gain on sale of loans and leases..................... 6,480 14,888 69,737 88,156 39,557 Asset management fees....... 10,054 7,591 5,810 3,347 -- Investment banking and brokerage fees............. 27,198 18,463 7,702 -- -- Loan servicing income....... 6,885 11,983 9,474 1,680 12,718 Gain (loss) on sale of securities................. 32,742 (592) 112,185 82,690 -- Equity in net income of SPFC....................... -- 12,739 25,869 -- -- Equity in net (loss) income of FMC..................... (53) 3,235 (3,050) -- -- Mark to market on securities and loans held for sale................... (28,641) (42,388) (341) -- -- Loss on impairment of securities................. -- (120,138) -- -- -- Gain on termination of REIT advisory agreement......... -- -- 19,046 -- -- Gain on sale of servicing rights..................... -- -- -- 7,591 3,578 Other income................ 13,894 13,118 4,060 10,807 1,152 -------- --------- -------- -------- -------- Total other income (loss)................... 68,559 (81,101) 250,492 194,271 57,005 -------- --------- -------- -------- -------- Total revenues............ 119,050 16,183 314,904 256,933 85,309 Expenses: Personnel expense........... 60,341 61,636 51,609 48,355 34,053 Other expenses.............. 66,259 59,200 63,252 50,694 27,127 -------- --------- -------- -------- -------- Total expenses............ 126,600 120,836 114,861 99,049 61,180 -------- --------- -------- -------- -------- (Loss) income from continuing operations before income taxes, minority interest and extraordinary item....... (7,550) (104,653) 200,043 157,884 24,129 Income taxes................. (3,074) (44,064) 74,267 69,874 10,144 Minority interest in income (loss) of consolidated subsidiaries................ 1,474 (1,464) 10,513 12,026 (208) -------- --------- -------- -------- -------- (Loss) income from continuing operations before extraordinary item....................... (5,950) (59,125) 115,263 75,984 14,193 Operating loss from discontinued operations of AMN, net of income taxes.... (899) (3,232) (25,347) -- -- Loss on disposal of AMN, net of income taxes............. -- (11,276) -- -- -- -------- --------- -------- -------- -------- (Loss) income before extraordinary item......... (6,849) (73,633) 89,916 75,984 14,193 Extraordinary item--gain (loss) on early extinguishment of debt, net of income taxes............. 4,021 -- (3,995) -- -- -------- --------- -------- -------- -------- Net (loss) income........... $ (2,828) $ (73,633) $ 85,921 $ 75,984 $ 14,193 ======== ========= ======== ======== ======== Comprehensive income (loss)..................... $ 974 $ (76,745) $ 82,837 $ 77,783 $ 15,992 ======== ========= ======== ======== ======== Basic (loss) income per share(1): (Loss) income from continuing operations...... $ (0.17) $ (1.55) $ 2.99 $ 2.11 $ 0.45 Loss from discontinued operations, net of income taxes...................... (0.02) (0.08) (0.66) -- -- Loss on disposal of AMN, net of income taxes........ -- (0.30) -- -- -- Extraordinary item--gain (loss) on early extinguishment of debt, net of income taxes............. 0.11 -- (0.10) -- -- -------- --------- -------- -------- -------- Net (loss) income per common share............... $ (0.08) $ (1.93) $ 2.23 $ 2.11 $ 0.45 ======== ========= ======== ======== ======== Diluted (loss) income per share(1): (Loss) income from continuing operations...... $ (0.17) $ (1.55) $ 2.82 $ 1.95 $ 0.40 Loss from discontinued operations, net of income taxes...................... (0.02) (0.08) (0.62) -- -- Loss on disposal of AMN, net of income taxes........ -- (0.30) -- -- -- Extraordinary item--gain (loss) on early extinguishment of debt, net of income taxes............. 0.11 -- (0.10) -------- --------- -------- -------- -------- Net (loss) income per common share............... $ (0.08) $ (1.93) $ 2.10 $ 1.95 $ 0.40 ======== ========= ======== ======== ======== Weighted average diluted shares outstanding.......... 34,517 38,228 40,855 38,975 35,122
47
At or for the Year Ended December 31, ----------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- ----------- (Dollars in thousands) Cash Flow Data: Net cash provided by (used in) operating activities............. $ 151,622 $ (37,135) $ 18,563 $ (31,135) $(1,173,703) Net cash (used in) provided by investing activities............. (202,863) (174,982) (320,627) 244,177 140,961 Net cash (used in) provided by financing activities............. (212,633) 464,510 273,196 (177,961) 1,047,004 --------- --------- --------- --------- ----------- Net (decrease) increase in cash.... $(263,874) $ 252,393 $ (28,868) $ 35,081 $ 14,262 ========= ========= ========= ========= =========== SPB Regulatory Capital Ratios (at end of period): California leverage limitation(1).......... 10.45 % 10.45 % 13.20 % 13.50 % 11.58 % Risk-based--Tier 1...... 7.78 8.42 8.75 9.71 11.72 Risk-based--Total....... 10.67 11.12 12.25 10.87 13.18 FDIC Leverage Ratio..... 8.94 8.62 8.30 9.35 8.04 Asset Quality Ratios (at end of period): Nonperforming assets as a percentage of total assets................. 2.84 % 2.06 % 4.31 % 2.64 % 1.55 % Allowance for loan and lease losses as a percentage of non- performing loans....... 53.59 65.11 53.87 38.94 44.30 Net charge-offs as a percentage of average total loans and leases held for investment(2).......... 1.79 1.92 2.72 0.94 0.36 Selected Ratios: Ratio of earnings to fixed charges......... 0.9x 0.2x 2.7x 2.2x 1.2x Pre-tax interest coverage ratio........ 0.8x N/a 8.1x 17.4x 3.9x Ratio of indebtedness to total capitalization (at period end)(3)........ 54.6 % 55.4 % 47.2 % 40.5 % 46.1 %
At December 31, ------------------------------------------------------ 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (In thousands) Balance Sheet Data: Cash...................... $ 33,898 $ 297,772 $ 45,379 $ 74,247 $ 39,166 Interest-bearing deposits................. 248,182 1,415 103,738 3,369 267,776 Securities................ 242,139 235,423 227,468 84,296 5,963 Loans and leases held for sale..................... 289,398 319,061 153,469 940,096 1,341,810 Loans and leases held for investment, net.......... 1,241,232 1,320,095 1,252,487 1,068,599 668,771 Retained interests in loan and lease securitizations.......... 10,220 27,011 22,895 159,707 58,272 Total assets.............. 2,201,615 2,417,183 2,094,389 2,470,639 2,510,635 Deposits.................. 1,614,758 1,714,252 1,156,022 1,069,184 1,092,989 Borrowings from FHLB...... -- 20,000 45,000 140,500 190,000 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company ("ROPES")........... 61,750 70,000 70,000 -- -- Other borrowings.......... 74,309 102,270 144,841 694,352 992,810 Senior and convertible subordinated notes....... 185,185 219,858 219,813 163,209 80,472 Total liabilities......... 1,996,235 2,183,662 1,770,456 2,231,131 2,416,533 Shareholders' equity...... $ 205,380 $ 233,521 $ 323,933 $ 239,508 $ 94,102
- -------- (1) Ratio of (i) SPB's total shareholders' equity to (ii) total deposits. (2) Excluding charge-offs at AMN, the ratio of charge-offs to average loans held for investment was 1.73% in 1999, 0.59% in 1998 and 1.16% in 1997. (3) Ratio of (i) non-funding indebtedness to (ii) non-funding indebtedness plus total shareholders' equity. 48 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Organization We are a diversified commercial lending, financial services, and investment banking holding company that was incorporated in 1991 in the State of California. Our headquarters are located in Torrance, California. Our business activities are conducted through four wholly owned subsidiaries: Southern Pacific Bank ("SPB"), Imperial Business Credit Inc. ("IBC"), Imperial Credit Lender Services, Inc. ("ICLS") formerly Statewide Documentation, Inc., and Imperial Credit Asset Management, Inc. ("ICAM"). Imperial Capital Group, LLC ("ICG") is a majority owned consolidated subsidiary which is approximately 65% owned by us and approximately 35% owned by ICG's management. Prior to November 1, 1999, we held a significant equity interest in a publicly traded company-- Franchise Mortgage Acceptance Company ("FMC") (Nasdaq Symbol: FMAX) (See "Recent Developments--"FMAX Transaction"). Our company also owns a 9% equity interest in a commercial REIT, Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC") (Nasdaq Symbol: ICMI). Through October 22, 1999, a wholly owned subsidiary of ours, Imperial Credit Commercial Asset Management Corp. ("ICCAMC"), managed the assets and operations of ICCMIC (See--"Liquidity and Capital Resources--The ICCMIC Acquisition"). Our parent company, our subsidiaries, and affiliates offer a wide variety of deposit and commercial loan products, asset management, investment banking and brokerage, and loan documentation and closing services. Our core businesses originate loans and leases funded primarily by FDIC insured deposits. Our business strategy currently emphasizes: . holding the majority of the loans and leases that we originate for investment, except for equipment leases originated by IBC for sale and certain fixed-rate commercial loans originated by SPB's Income Property Lending Division ("IPL"), . investing in and managing businesses in high margin niche segments of the financial services industry, . maintaining conservative, disciplined underwriting and credit risk management, . originating loans and leases on a wholesale basis, where possible, and . providing investment banking and broker/dealer services to middle market companies and private individuals. Overview of Consolidated Operations At December 31, 1999, our total assets were $2.2 billion as compared to $2.4 billion at December 31, 1998. Our total net loans decreased to $1.5 billion at December 31, 1999 as compared to $1.6 billion at December 31, 1998. Our loan and lease originations from SPB's IPL division and IBC were $339.7 million and $125.2 million for 1999 as compared to $366.1 million and $114.3 million for 1998, respectively. Fundings of new commitments at Coast Business Credit ("CBC") were $511.0 million for 1999 as compared to $447.7 million for 1998. On a consolidated basis, our cash and interest bearing deposits decreased to $282.1 million at December 31, 1999 as compared to $299.2 million at December 31, 1998. At our parent company, cash and interest bearing deposits increased to $46.2 million at December 31, 1999 as compared to $5.5 million at December 31, 1998. Our deposits at SPB decreased $90.5 million to $1.6 billion at December 31, 1999 as compared to $1.7 billion at December 31, 1998. Our long term debt decreased to $246.9 million at December 31, 1999 as compared to $289.9 million at December 31, 1998 due to our repurchase of $43.1 million of our Senior Notes and company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company ("ROPES"). Additionally, we paid off certain other borrowings and Federal Home Loan Bank advances during 1999. The repurchase of the Senior Notes and ROPES for the year ended December 31, 1999 will result in annual pre-tax interest savings of approximately $4.3 million. 49 Our non-performing assets and non-accrual loans and leases increased to $64.4 million and $59.4 million at December 31, 1999 from $54.1 million and $39.5 million at December 31, 1998. The increase in non-performing assets and non-accrual loans occurred primarily in the CBC, Imperial Warehouse Finance, Inc. (formerly "PrinCap Mortgage Warehouse, Inc."), single family residential mortgage and purchased entertainment loan portfolios. The increase in non- accrual loans in the entertainment loan portfolio was solely related to non- accrual loans purchased from Imperial Bank in connection with the Lewis Horwitz Organization ("LHO") acquisition. See "Item 7. Management's Discussion and Analysis--The Lewis Horwitz Organization" for more information on the acquisition of LHO. Our retained interests in loan and lease securitizations were $10.2 million at December 31, 1999 as compared to $27.0 million at December 31, 1998. Approximately $6.5 million of the retained interest balance at December 31, 1999 resulted from lease securitizations at IBC. The decrease in retained interests primarily resulted from a $15.0 million write-down, coupled with cash collections, and sales of retained interests. Our securities available for sale and trading securities were $74.4 million and $160.8 million at December 31, 1999 as compared to $60.0 million and $170.8 million at December 31, 1998. At December 31, 1999 our shareholders equity decreased to $205.4 million as compared to $233.5 million at December 31, 1998. The decrease in shareholders' equity was primarily the result of our repurchase of 3,682,000 shares of our common stock. Our book value per share and tangible book value per share decreased to $6.19 and $5.50 at December 31, 1999 as compared to $6.35 and $5.76 at December 31, 1998, respectively. Consolidated Results of Operations We reported a net loss for the year ended December 31, 1999 of $2.8 million or $0.08 diluted net loss per share as compared to a net loss of $73.6 million or $1.93 diluted net loss per share for the prior year. The loss for 1999 included an extraordinary gain on the early extinguishment of debt of $4.0 million or $0.11 diluted net income per share and operating losses relating to the discontinued operations of AMN of $899,000 or $0.02 diluted net loss per share, respectively. The net loss for the same period last year included operating losses of $3.2 million or $0.08 diluted net loss per share relating to the discontinued operations of AMN and a loss on the disposal of AMN of $11.3 million or $0.30 diluted net loss per share. During 1999, our operating results included the following items: . A gain on sale of Franchise Mortgage Acceptance Company ("FMC") totaling $30.1 million resulting from the sale of our 38.3% interest in FMC. . The write-off of IBC's remaining balance of goodwill totaling $11.3 million. . The write-down of retained interests in lease securitizations at IBC totalling $11.9 million. The write downs for 1999 were primarily the result of increased lease defaults in the last quarter of 1999. . The write-down of auto loans at SPB totaling $24.8 million. An increase in delinquencies and non-accrual loans were the primary cause of the decline in the value of SPB's held for sale auto loan portfolio. . The acceleration of SPB's originated servicing rights amortization of $4.3 million due to SPB's exit from its third party loan servicing operations. Consolidated Net Revenue Our total net revenue increased to $119.1 million for 1999 as compared to $16.2 million for the prior year. The increase in net revenue was primarily due to the sale of our 38.3% equity ownership in FMC for a pre-tax gain of $30.1 million, an increase in investment banking and brokerage fees, and lower impairment and mark-to-market write-downs of loans and securities. These items were partially offset by lower net interest income and an increased provision loan and lease losses. 50 Our total net interest income decreased to $85.8 million for 1999 as compared to $112.7 million for 1998. The decrease in net interest income was primarily due to a decrease in the average yield on earning assets. The decrease in yield primarily relates to the sale and run-off of non-core loans which were $143.9 million at December 31, 1999 as compared to $371.5 million at December 31, 1998. Non-core loans included higher yielding, higher risk loans such as sub-prime auto loans. Additionally, the higher level of non performing loans had a negative impact on net interest income in 1999 as compared to 1998. Interest expense on long term debt increased to $30.5 million for the year ended December 31, 1999 as compared to $30.3 million for the prior year primarily due to the issuance of $30.0 million of Series B Mandatorily Redeemable Cumulative Preferred Stock, partially offset by lower average balances of Senior Notes and ROPES. During the third and fourth quarters of 1999 we repurchased $34.8 million and $8.3 million of Senior Notes and ROPES resulting in an extraordinary net gain of $5.2 million on the early extinguishment of debt. Additionally, we retired the Series B Mandatorily Redeemable Cumulative Preferred Stock in the fourth quarter of 1999 resulting in an extraordinary net loss of $1.2 million on the early extinguishment of debt. Due to the above factors, our net interest margin decreased to 4.52% for 1999 as compared to 5.86% for 1998. Our gain on sale of loans and leases decreased to $6.5 million for the year ended December 31, 1999 as compared to $14.9 million for the same period last year primarily due to lower gains on whole loan sales of multifamily real estate loans originated by IPL. During 1999 we continued our plan to sell loans from our exited and non-core businesses. During 1999, we sold $45.3 million of auto loans, $33.4 million of single family loans, $11.7 million of consumer loans, and the remaining Argentine mortgage loan portfolio of $22.8 million, generating a net gain on sale of $321,000. Asset management fees increased to $10.1 million for 1999 as compared to $7.6 million for 1998. The increase was primarily due to increased average outstanding assets under management at ICCMIC and Pacifica Partners I. Investment banking and brokerage fees increased to $27.2 million for 1999 as compared to $18.5 million for 1998. The increased income from ICG primarily resulted from increased trading gains, partially offset by lower commission revenues. ICG raised total proceeds for their clients through corporate finance transactions of $137.3 million during the year ended December 31, 1999 as compared to $190.0 million during the prior year. Loan servicing income decreased to $6.9 million for 1999 as compared to $12.0 million for 1998 primarily due to our exit from the third party multifamily and commercial mortgage loan servicing businesses. Net mark-to-market losses of loans and securities held for sale were $28.6 million for 1999 as compared to $42.4 million in 1998. The mark-to-market adjustments for 1999 were primarily related to SPB's sub-prime auto loan portfolio and IBC's retained interest on lease securitizations. The mark-to- market losses for 1998 primarily related to our Argentinean residential mortgage, sub prime auto loan, and consumer loan portfolios. Our equity in the net loss of FMC for 1999 was $53,000 as compared to income of $3.2 million for the prior year. We accounted for our equity interest in FMC using the equity method from January 1, 1999 through June 30, 1999. From July 1, 1999 through the sale of FMC's stock we accounted for our equity interest using the cost method. Our equity interest in FMC was sold during the fourth quarter of 1999. See "Item 7. Management's Discussion and Analysis--Equity Interests--Equity Interest and Gain on Sale of FMC." Consolidated Total Expenses Our total expenses increased to $126.6 million for 1999 as compared to $120.8 million for 1998. The increase was primarily related to increased goodwill amortization expense as a result of the write-off of $11.3 million of goodwill at IBC, and increased amortization of loan servicing rights as a result of SPB's exit from third party loan servicing. Our personnel expense decreased to $60.3 million for 1999 as compared to $61.6 million for 1998. During 1999, we reduced our full time equivalent ("FTE") employees by 11.6% to 581 at December 31, 1999 from 657 at December 31, 1998. 51 Our amortization of servicing rights was $4.2 million for 1999 as compared to $1.5 million for 1998. The increase for 1999 as compared to 1998 was primarily due to accelerated amortization of servicing rights on our non-core multifamily and commercial real estate loan servicing operations at SPB due to the release of the servicing rights to a third party in connection with our exit from this non-core business. IBC's unamortized balance of goodwill totaling $11.3 million was written off during the fourth quarter of 1999. The write-off of IBC's goodwill was based on our estimate of future operations and cash flows. Based on our estimate, we determined that IBC's goodwill was not recoverable from continuing IBC's existing lines of business. Our amortization of goodwill was $14.5 million for 1999 as compared to $2.7 million for 1998. Our professional, occupancy, telephone and other communications, and general and administrative expenses decreased to $46.1 million for 1999 as compared to $51.2 million for 1998. The overall decrease was primarily due to the exit from non-core businesses and our related focus on increasing operating efficiencies at our core business operations. We have diversified our business lines to include investment products and asset management services in order to reduce our dependency on commercial lending. We operate as a diversified commercial lending, financial services and investment banking and brokerage holding company. We manage our business by looking at the results of operations from each of our business units. Our core businesses include: . Coast Business Credit ("CBC")--an asset-based lending business; . Imperial Warehouse Finance, Inc. ("IWF")--a residential loan warehouse line business; . Loan Participation and Investment Group ("LPIG")--a division of SPB investing in nationally syndicated bank loans; . The Lewis Horwitz Organization ("LHO")--a film and television production lending business; . Imperial Business Credit, Inc. ("IBC")--an equipment leasing business; . Income Property Lending Division ("IPL")--a multifamily origination and commercial mortgage banking business; . Imperial Capital Group, LLC ("ICG")--an investment banking and brokerage business; . Asset Management Activities ("AMA")--an investment fund management business; . Other Core Operations ("OCO")--our holding company investments and support functions, our loan documentation service operations, and the administrative and servicing operations of Southern Pacific Bank. We also operated some other businesses in 1999, 1998 and 1997 that we consider our "non-core" businesses. These are businesses that we have made the decision to de-emphasize during 1999 and 1998. We group these businesses into the following categories: . Equity Interests--Franchise mortgage lending, sub prime residential mortgage banking business; . De-emphasized/Discontinued/Exited Businesses--Consumer lending, auto lending, residential lending, foreign mortgage lending businesses, and third party mortgage servicing operations. Our exit from these non-core businesses has allowed our management to focus on our core business lines that have proven to be our most profitable businesses. Following is a summary of these businesses' results of operations in 1999 as compared to 1998. 52 CORE BUSINESS LINES The following table reflects average loans and leases outstanding and the average yields earned on our core business units for 1999 and 1998:
Average Loans and Leases Average Outstanding Yield ----------------- ------------ Business Line 1999 1998 1999 1998 ------------- -------- -------- ----- ----- (Dollars in thousands) CBC.......................................... $658,764 $592,600 13.17% 13.09% IWF.......................................... 130,075 164,300 8.28 9.94 LPIG......................................... 240,621 240,100 7.55 8.21 LHO.......................................... 6,056 -- 14.77 -- IBC.......................................... 10,700 11,300 12.54 13.60 IPL.......................................... 226,548 96,400 8.85 10.16
Our largest subsidiary is SPB, a $1.8 billion industrial bank, which operates as of January 1, 2000, five of our core businesses: CBC, IPL, LPIG, IWF-formerly known as PrinCap Mortgage Warehouse, Inc., and LHO. The FDIC insured deposits of SPB are the primary source of funding for each of these businesses. Coast Business Credit CBC's net revenues were $40.4 million for 1999 as compared to $42.9 million for 1998. CBC's net income for 1999 was $9.7 million as compared to $12.4 million for 1998. Net revenues include a provision for loan losses of $21.8 million for 1999 as compared to $3.5 million for 1998. CBC increased its average loans outstanding for 1999 to $658.8 million as compared to $592.6 million for 1998. Fundings of new commitments at CBC were $511.0 million for 1999 as compared to $447.7 million for 1998. As a result of the increase in CBC's average loans outstanding, CBC's net interest income increased $11.4 million to $54.0 million for 1999 from $42.6 million for 1998. The average yield on CBC's loans for 1999 increased to 13.17% as compared to 13.09% for the prior year primarily as a result of an increase in the prime rate and loan prepayment fees. CBC also earned other income primarily consisting of gain on sale of stock acquired through the exercise of warrants and loan administration and audit fees charged to its customers. CBC earned other income totaling $8.2 million in 1999 as compared $3.8 million in 1998. CBC's total expenses were $24.3 million for 1999 as compared to $21.2 million for 1998. Total expenses increased for 1999 as compared to the prior year primarily due to higher occupancy and telephone and other communications expenses associated with CBC's continued geographic expansion into several major metropolitan areas of the United States. These increases in expenses were partially offset by lower administrative expenses resulting from CBC's efforts to increase operating efficiencies. Additionally, personnel expense decreased for 1999 as compared to 1998 due to decreased bonus expense resulting from decreased profitability. CBC's FTE increased to 135 FTE at December 31, 1999 as compared to 122 FTE at December 31, 1998. At December 31, 1999, CBC's non-accrual loans were $22.2 million as compared to $1.1 million at December 31, 1998. At December 31, 1999, one CBC loan totaling $2.7 million was 90 days delinquent and accruing interest as compared to none for the same period last year. As of February 28, 2000 there was no change in the accrual status of this loan, and it was in the process of collection. CBC incurred net charge-offs of non-accrual loans of $17.4 million for 1999 as compared to $67,000 for 1998. Non-performing loans at CBC are collateralized by accounts receivable and inventory. The increase in CBC's non-accrual loans, loan loss provision, and charge-offs resulted from recent regulatory guidance that prevents CBC from considering the liquidation of certain intangible assets of its customers in determining a loan's accrual status or, if necessary, the required charge-off amount. The effect of this guidance resulted in CBC reserving for, and charging off the gross amount of outstanding problem loans as opposed to CBC's previous practice of reserving for and, if necessary, ultimately charging off the net deficiency amount of problem loans. 53 Imperial Warehouse Finance, Inc. IWF's net revenues were $4.4 million for 1999 as compared to $8.5 million for 1998. IWF's net income for 1999 was $1.1 million as compared to $3.2 million for 1998. Net revenues includes a provision for loan losses of $1.2 million for 1999 and $704,000 for 1998. The increased loan loss provision for 1999 is primarily related to the increase in the balance of non-accrual loans. Net interest income was $4.1 million for 1999 as compared to $6.9 million for 1998. The decrease in IWF's net interest income is related to a decrease in the average outstanding balance of loans outstanding and an increase in non-accrual loans. IWF's average loans outstanding and average yields for 1999 decreased to $130.1 million and 8.28% as compared to $164.3 million and 9.94% for 1998. The decrease in IWF's loan yields, were primarily due to an increase in IWF's non-accrual loans. During 1999, we made the decision to relocate the IWF's operations from New Jersey to Torrance, California. As a result of the relocation, none of the employees of IWF made the move from New Jersey to California. We believe that as a result of the personal contacts that IWF's former employees had with the existing client base a substantial number of customers have paid off their warehouse lines with us and moved their relationships to the new employers of our former IWF employees. Additionally, during the fourth quarter of 1999, we implemented stricter underwriting guidelines and changed our marketing focus to the Western United States. We believe these factors are the primary cause of the overall decrease in the average outstanding balance of IWF's warehouse lines. Recently, we retained a new director of marketing which has resulted in an increase in applications for new warehouse lines. IWF earned other income consisting primarily of loan fees charged to its customers of $1.5 million for 1999 as compared to $2.3 million for 1998. IWF's total expenses decreased to $2.6 million for 1999 as compared to $3.0 million for 1998. Total expenses decreased for 1999 as compared to 1998 primarily due to lower personnel, general and administrative, telephone and other communications expenses resulting from our focus on increasing operating efficiencies. IWF's FTE decreased to 12 FTE at December 31, 1999 as compared to 14 FTE at December 31, 1998. At December 31, 1999, IWF's non-accrual loans increased to $7.8 million as compared to $4.1 million at December 31, 1998. We believe that as a result of our new underwriting policies and stricter collection policies, IWF's non- performing assets will increase in the short term. IWF incurred net charge- offs of non-accrual loans of $1.6 million for 1999 and $0 for 1998. IWF's non- performing loans are collateralized by mortgage loans on single family residences. Loan Participation and Investment Group LPIG's total net revenues were $3.4 million and net income was $1.2 million for 1999 as compared to net revenues and net income of $8.9 million and $3.8 million for 1998, respectively. LPIG's net revenues and net income decreased in 1999 as compared 1998 as a result of a significant increase in the provision for loan losses during 1999. Net revenues include a provision for loan losses of $7.0 million for 1999 and a net recovery of $391,000 for 1998. The provision for loan losses increased in 1999 as compared to 1998 as a result of increased charge-offs related to one single loan participation. At December 31, 1999 and 1998, LPIG had no loans classified as non-performing loans. LPIG's net interest income was $8.4 million for 1999 as compared to $8.3 million for 1998. The decrease in LPIG's loan yields to 7.55% for 1999 as compared to 8.21% for 1998 was primarily due to an increase in LPIG's average outstanding non-accrual loans. LPIG's average outstanding loans for 1999 and 1998 were approximately $240 million. For 1999 LPIG earned other income, which consisted primarily of loan fees and mark-to-market losses on securities of $2.0 million as compared to $166,000 for 1998. The decrease in loan fees resulted from reduced funding of new LPIG loan commitments. 54 LPIG's total expenses were $1.4 million for 1999 as compared to $2.3 million for 1998. Total expenses decreased for 1999 as compared to 1998 primarily due to lower personnel, commission, telephone and other communications, and lower general and administrative expenses relating to our focus on increasing operating efficiencies. LPIG had 4 FTE at December 31, 1999 and December 31, 1998. We are not originating any new commitments for LPIG at this time since we believe that the capital that is currently being deployed at SPB to support LPIG's business could be more profitably used in CBC's, IWF's, IPL's and LHO's businesses. As such, we anticipate that the current outstanding balance of LPIG's loans will decrease over time as this portfolio runs-off. We do expect to expand our investments in LPIG-type loan products through off-balance sheet financing instruments such as total rate of return swaps. The Lewis Horwitz Organization On October 1, 1999, we purchased from Imperial Bank substantially all of the assets and assumed certain liabilities of The Lewis Horwitz Organization ("LHO"). The acquisition was accounted for as a purchase, and the purchase price of $7.0 million was allocated to the net assets acquired based on their fair values resulting in goodwill of $12.0 million. As part of the acquisition, we acquired all right, title and interest in $98.2 million of motion picture and television production loans. The purchase price of the loans is equal to the gross carrying value of the loans on the books and records of Imperial Bank, except the purchase price of the first $20 million in non-accrual loans were allocated a discount of $3.6 million. Under the terms of the acquisition, we receive all contractually due interest and fees on the $98.2 million of LHO originated loans and pay Imperial Bank Prime minus 2.50%. We have agreed to immediately purchase all loans that either are currently or become classified as non-accrual, when an interest or principal payment is 90 days or more past due. Imperial Bank has agreed to finance 50% of all non-accrual purchases at the Prime rate + 1.00%. As of December 31, 1999, we acquired non-accrual loans with a fair market value of $8.2 million. We have also agreed to purchase a minimum of $50 million of the above referenced loans, inclusive of all non-accrual loans purchased, on or before March 31, 2000. Additionally, we have agreed to purchase any remaining above referenced loans on or before December 31, 2000. We also acquired other assets totaling $362,000 and assumed liabilities of $1.2 million in connection with the acquisition. LHO's net revenues were $768,000 for 1999. LHO was acquired by our company in October of 1999 and did not have any comparable net revenues, net income, or expenses in 1998. LHO's net income for the 1999 was $4,000. Net revenues include a provision for loan losses of $351,000 for 1999. LHO's net revenues and net income for 1999 are for the period from the date of acquisition (October 1, 1999) through December 31, 1999. Since October 1, 1999, LHO has originated $23.2 million of new film and television production commitments. LHO's average loans outstanding for 1999 were $6.1 million. From October 1, 1999 to December 31, 1999, LHO reported net interest income of $992,000. The average yield on LHO's loans from October 1, 1999 to December 31, 1999 was 14.77%. LHO also earned other income primarily consisting of loan fees totaling $127,000 for the period from October 1, 1999 to December 31, 1999. LHO's total expenses were $761,000 from October 1, 1999 to December 31, 1999. LHO had 12 FTE at December 31, 1999. At December 31, 1999, LHO's non-accrual loans were $8.2 million. LHO did not incur any charge offs of non-accrual loans from October 1, 1999 to December 31, 1999. Non-performing loans at LHO are collateralized by the distribution rights of the film or television production. All of LHO's non- accrual loans were acquired from Imperial Bank under the terms of the LHO purchase agreement. 55 Imperial Business Credit, Inc. IBC's net revenues decreased to $37,000 and net loss increased to $13.3 million in 1999 as compared to net revenues of $9.6 million and net loss of $960,000 for 1998, respectively. IBC's net revenues decreased and net loss increased for 1999 as compared to 1998 primarily due to the write-off of the remaining unamortized balance of goodwill and larger negative mark-to-market adjustments on retained interests in lease securitizations. IBC's unamortized balance of goodwill totaling $11.3 million was written off during the fourth quarter of 1999. The write-off of IBC's goodwill was based on our estimate of future operations and cash flows. Based on our estimate, we determined that IBC's goodwill was not recoverable from continuing IBC's existing lines of business. During the quarter ended December 31, 1999, defaults on leases originated through IBC's broker and small-ticket lease programs increased significantly. The increase in defaults caused us to reassess and increase the projected level of lease losses related to IBC's securitized leases. The reassessment resulted in a $11.9 million write-down of the carrying balance of retained interest in lease securitizations at IBC for 1999 as compared to a $2.3 million write-down for 1998. As a result of the reassessment of the level of expected losses from IBC's small ticket and broker originated business, we decided to significantly curtail IBC's lease originations from brokers. We closed IBC's broker business in its San Diego and Irvine offices, and discontinued relationships with over 200 brokers in IBC's Denver office. We intend to heavily weight IBC's future lease originations to middle market leasing and vendor leasing programs. IBC originated $125.2 million of leases for 1999, as compared to $114.3 million for 1998. IBC securitized $132.4 million of leases for 1999 generating gain on sale revenue of $4.5 million, or 3.4% of the principal balance securitized. For 1998, IBC securitized leases of $117.7 million, generating gain on sale revenue of $4.1 million, or 3.5% of the principal balance securitized. As a result of curtailing certain small ticket and broker business and increased loss assumptions in securitized leases, IBC expects lower originations and revenue in the near term. Currently, all of IBC's leases are initially funded with a warehouse line of credit from SPB, and then permanently funded through a revolving securitization facility. IBC's net interest income decreased to $1.1 million for 1999 as compared to $3.6 million for 1998 primarily due to an increase in borrowing costs and a decrease in the average balance and yield on outstanding leases held for sale. IBC also earned other income from servicing leases sold into its securitization facility of $4.5 million for 1999 as compared to $4.7 million for 1998. IBC earned other income of $1.5 million for 1999 as compared to $972,000 for 1998. IBC's total expenses were $22.2 million for 1999 as compared to $11.3 million for 1998. Total expenses increased for 1999 as compared to 1998 primarily due to the $11.3 million write-down of goodwill. IBC's FTE decreased to 94 FTE at December 31, 1999 compared to 99 FTE at December 31, 1998. At December 31, 1999, IBC's non-accruing leases were $77,000 as compared to $669,000 at December 31, 1998. Income Property Lending Division IPL's net revenues and net income decreased to $12.0 million and $2.0 million for 1999 as compared to net revenues and net income of $17.5 million and $3.3 million for 1998. The decrease in revenues and net income for 1999 as compared to the same periods last year primarily resulted from lower gain on sale of loans partially offset by increased interest income earned on higher average outstanding balances of income property loans. IPL originated $339.7 million of loans in 1999 as compared to $366.1 million of loans in 1998. During 1999, IPL sold $283.7 million of its loans generating a gain on sale of $2.0 million, or 0.7% of the principal 56 balance of loans sold. During 1998, IPL sold $304.2 million of its loans, generating a gain on sale of $8.8 million, or 2.9% of the principal balance of loans sold. Gain on sale of loan revenues as a percentage of IPL's loans sold decreased for 1999 as compared to 1998 due to decreased interest margins and a decrease in demand for small balance income property loans in the secondary market. IPL's net interest income for 1999 increased to $9.2 million as compared to $6.7 million for 1998. The increase was primarily the result of an increased average balance of outstanding loans. IPL's average outstanding loan balance increased to $226.5 million for 1999 as compared to $96.4 million for 1998. The increase was primarily the result of our strategy to retain for portfolio a higher level of multifamily real estate loans originated by IPL. The decrease in IPL's average loan yields to 8.85% in 1999 as compared to 10.16% in 1998, was primarily due to increased competition and reduced interest margins among income property loan originators. IPL's total expenses were $8.7 million for 1999 as compared to $11.7 million for 1998. Total expenses decreased for 1999 as compared to 1998 primarily due to lower personnel, telephone and other communications, and lower general and administrative expenses relating to our focus on increasing operating efficiencies partially offset by higher professional fees. FTE decreased to 69 FTE at December 31, 1999 compared to 70 FTE at December 31, 1998. IPL's non-accrual loans were $237,000 or 0.09% of its outstanding loan portfolio at December 31, 1999, as compared to $992,000 or 0.68% of its outstanding loan portfolio at December 31, 1998. Imperial Capital Group, LLC ICG's net revenues and pre-tax income increased to $26.7 million and $2.5 million for 1999 as compared to net revenues of $18.4 million and a pre-tax loss of $3.9 million for 1998, respectively. ICG's net revenue primarily consists of investment banking and brokerage fees. The increase in net revenue and pre-tax income for 1999 primarily resulted from increased trading gains and fees received for successful corporate finance transactions completed by ICG through private placements and a lower level of negative mark to market adjustments on trading securities. ICG raised total debt and equity proceeds of $137.3 million in 1999 and $190.0 million in 1998 for its corporate clients through private placement offerings. ICG's total expenses were $24.2 million for 1999 as compared to $22.3 million for 1998. Total expenses increased for 1999 as compared to 1998 primarily due to higher personnel, commission, telephone and other communications, and general and administrative expenses resulting from higher revenues received. ICG's FTE decreased to 79 FTE at December 31, 1999 compared to 93 FTE at December 31, 1998. Asset Management Activities AMA's net revenues and net (loss) income were $9.7 million and ($3,000) for 1999 as compared to $7.0 million and $1.8 million for 1998. AMA net revenues increased primarily as a result of growth in the average balance of assets under management. The average balance of assets under management increased to $1.3 billion for 1999 as compared to $1.1 billion for 1998. Through October 22, 1999, we managed a commercial mortgage and equity REIT (See--"Liquidity and Capital Resources--The ICCMIC Acquisition"), and for all of 1999, we managed a collateralized loan obligation fund, and two leveraged bank debt hedge funds. Total expenses from AMA activities were $9.8 million for 1999 as compared to $3.8 million for 1998. Total expenses increased for the period as compared to the same period last year due to increased management activities as a result of growth in the balance of assets under management in 1999 as compared to 1998. Total AMA FTE decreased to 13 FTE at December 31, 1999 compared to 20 FTE at December 31, 1998. 57 Other Core Operations For 1999, net revenues of OCO were $4.0 million and net loss was $962,000, as compared to ($42.2) million of net revenues and a net loss of $31.4 million for 1998. The net loss for 1999 includes a $4.0 million net gain from the early extinguishment of debt. The significant negative net revenues and net income for 1998 were primarily the result of impairment and mark-to-market charges relating to our investments in ICCMIC and IMH, and loan and leases held for sale. OCO includes but is not limited to interest and dividend income from parent company loans, equity investments, interest expense on our long- term debt, mark-to-market charges on the securities we invested in at our holding company, and the costs of our support functions. We provide support to our subsidiaries through executive management oversight and advice, accounting, audit, operations, legal services, merger and acquisitions advice, human resources administration, insurance programs, office services, premises administration, and management information systems support. For 1999 and 1998, OCO earned interest and dividend income of $20.0 million and $30.1 million and incurred interest expense of $30.8 million and $30.4 million, respectively. During 1999 the net revenues of other core operations includes a gain on sale of securities totaling $562,000 from the sale of 500,000 shares of ICCMIC common stock. At December 31, 1999, we owned 9.0% of ICCMIC's outstanding common stock and 100% of the company that managed ICCMIC's assets through October 22, 1999. (See--"Liquidity and Capital Resources--The ICCMIC Acquisition"). Total expenses of OCO were $10.8 million for 1999 as compared to $12.5 million for the prior year. Total expenses of OCO for 1998 included a provision for loan repurchases on former mortgage banking operations of $4.8 million; no such provision was needed in 1999. In addition, total expenses decreased for 1999 as compared to 1998 primarily due to lower personnel, telephone and other communications, and lower general and administrative expenses relating to reductions in personnel expense, partially offset by higher professional fees. OCO's FTE decreased to 53 FTE at December 31, 1999 as compared to 71 FTE at December 31, 1998. NON CORE BUSINESS LINES We also operate "non-core" businesses, which consist of businesses that we've decided to de-emphasize. We group these businesses into the following categories: . Equity Interests--Represents our equity investments in other publicly traded companies. Effective July 1, 1999, we began accounting for our equity investment in FMC under the cost method of accounting. Prior to July 1, 1999, we accounted for our investment in FMC under the equity method of accounting. From January 1, through October 31, 1999, we owned an equity interest of 38.3% in FMC. We changed our method of accounting for FMC since we determined that we did not have the ability to exercise significant influence over FMC, and the quarterly results of FMC were not made available to our company. In November 1999 we sold substantially all of our shares of the Bay View Capital Corporation ("Bay View") common stock we received in the FMC/Bay View merger resulting in a gain of approximately $30.1 million. This segment's source of revenue includes our common stock ownership percentage in the equity interests' reported net income or loss in addition to our gains on sales of the equity interests' stock; . De-emphasized/Discontinued/Exited Businesses--represents our business units we decided to either de-emphasize, discontinue, or exit. We decided to de-emphasize, discontinue or exit these business lines because they were not meeting our expectations for a variety of reasons. These reasons included: significant credit losses, insufficient loan production volumes, inadequate gross profit margins, and risks associated with international lending operations. We include the following significant operations in Exited Businesses: Auto Lending, Alternative Residential Mortgage, and Consumer Loan Divisions of SPB, and Credito Imperial Argentina ("CIA"), our residential loan production business in Argentina. Exited Businesses also includes our former mortgage banking operations, certain problem loan or securities portfolios, SPB's income property servicing operations, and any loan portfolios at SPB from businesses 58 which are no longer originating new loans. Exited Businesses' principal sources of net revenue are interest earned on mortgage and consumer loans and mark to market valuations on loan portfolios. Exited Businesses' principal expenses are interest expense allocations incurred from deposits and inter-company borrowings, and general and administrative expenses. Our exit from these non-core businesses will allow our management to focus on our core business lines that have proven to be our most profitable businesses. Equity Interests In 1999, our Equity Interests included our percentage ownership of the net income of FMC, as compared to 1998, which included FMC and Southern Pacific Funding Corporation ("SPFC"). For 1999, our Equity Interests generated net revenues of $31.2 million and a net income of $18.5 million as compared to net revenues of ($66.5) million and a net loss of ($38.2) million for 1998. The significant negative net revenues and net loss for 1998 were primarily the result of impairment charges on our equity investment in SPFC. Equity Interest and Gain on sale of FMC During 1999 and 1998, equity in the net (loss) income of FMC was $(53,000) and $3.2 million, respectively. On November 1, 1999, the merger between FMC and Bay View was completed. We received $27.7 million in cash and 4.4 million shares of Bay View common stock from the sale and exchange of our 38.3% interest in FMC. On November 5, 1999, we announced the sale of 4,342,451 shares of the Bay View common stock we received from the FMC/Bay View merger. As a result of these transactions, we received approximately $86.3 million in total cash proceeds and we recorded a pre-tax gain from both transactions of $30.1 million. Equity Interest in SPFC On October 1, 1998, SPFC petitioned for Chapter 11 bankruptcy protection under Federal bankruptcy laws in the U.S. Bankruptcy Court for the District of Oregon. As a result of SPFC declaring Chapter 11 bankruptcy and the corresponding decline in its common stock to below one dollar per share, and subsequent de-listing from the New York Stock Exchange, we wrote-off our total investment in and loan to SPFC. During 1999 and 1998 equity in the net income of SPFC was $0 and $12.7 million, respectively. De-emphasized/Discontinued/Exited Businesses The Exited Businesses' net revenues and net loss were ($11.1) million and $23.0 million for 1999 as compared to $12.3 million and $26.3 million for 1998, respectively. The decrease in net revenue for 1999 as compared to 1998 primarily resulted from a decline in net interest income, partially offset by a lower provision for loan losses. The Exited Businesses incurred negative mark-to-market charges of $28.3 million in 1999 and $31.6 million in 1998. Total expenses at our Exited Businesses decreased to $21.6 million for 1999 as compared to $32.8 million for 1998. The decrease in total expenses was primarily due to the closure of non-core businesses. Our non-core loans decreased to $143.9 million at December 31, 1999 as compared to $371.5 million at December 31, 1998. The remaining non-core portfolios primarily consist of lower risk single family mortgage loans of $104.0 million, franchise loans of $18.3 million, and consumer loans of $15.6 million. 59 The following table reflects the ending outstanding balances of the loans from our Exited Businesses:
Loans and Leases Outstanding at December 31, ----------------- Exited Business Line 1999 1998 -------------------- -------- -------- (In thousands) Auto Lending Division of SPB............................... $ 5,991 $ 94,225 Alternative Residential Mortgage Division of SPB .......... 6,884 34,280 Consumer Lending Division of SPB........................... 15,639 42,565 Credito Imperial Argentina................................. -- 22,772 Single family loans........................................ 97,124 127,125 Franchise loans............................................ 18,277 50,520 -------- -------- Total loans and leases from exited businesses............ $143,915 $371,487 ======== ========
The above table does not include net outstanding loans from the discontinued operations of AMN which were $5.2 million and $15.2 million at December 31, 1999 and 1998, respectively. During 1999 we continued to sell loans from our exited businesses. We sold $45.3 million of auto loans, $33.4 million of single family loans, $11.7 million of consumer loans, and the remaining Argentine mortgage loan portfolio of $22.4 million, generating an aggregate net gain on sale of $321,000. Additionally, we reduced our sub-prime auto loan balances to $6.0 million at December 31, 1999 as compared to $94.2 million at December 31, 1998. At December 31, 1999, the remaining sub-prime auto loans are carried at 32.0% of the outstanding contractual balance. During 1999 we sold 1,887,110 shares of Impac Mortgage Holdings, Inc. ("IMH") stock resulting in a gain of $929,000. At December 31, 1999, we did not own any shares of IMH common stock. FTE at our Exited Businesses decreased to 5 FTE at December 31, 1999 as compared to 100 FTE at December 31, 1998. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 We reported a consolidated net loss for the year ended December 31, 1998 of $73.6 million or $1.93 diluted loss per share. For the year ended December 31, 1997, we reported net income of $85.9 million or $2.10 diluted income per share. We reported a basic consolidated loss per share for the year ended December 31, 1998 of $1.93. For the year ended December 31, 1997 we reported basic net income per share of $2.23. Our consolidated net income for the year ended December 31, 1997, included an extraordinary item "Loss on early extinguishment of debt, net of income taxes," of $4.0 million, or $0.10 in basic and diluted loss per common share. The $298.7 million decrease in our revenues and the $159.6 million decrease in our net income was due primarily to non-recurring non-cash impairment and mark-to-market charges of $162.5 million that we incurred as a result of the financial and liquidity crisis in the capital markets during the third quarter of 1998. Comparatively, we recorded large gains on sales of stock in SPFC, FMC and IMH, along with a large gain on the termination of our advisory agreement with IMH which aggregated $131.2 million in 1997. The lack of such gains coupled with the impairment and mark-to-market charges we recognized in 1998 were the primary drivers for the significant difference in our operating results over the two year period. Our net interest income increased by $27.3 million to $112.7 million in 1998 as compared to $85.4 million in 1997. The increase in net interest income was primarily due to increased average balances of outstanding loans from our higher yielding commercial loan portfolios in 1998 as compared to 1997. We fund the vast majority of the loans we originate with the Federal Deposit Insurance Corporation ("FDIC") insured deposits of SPB. The weighted average cost of SPB's deposits was 5.57% at December 31, 1998 as compared to 5.79% at December 31, 1997. 60 Our total expenses increased by $5.9 million to $120.8 million in 1998 as compared to $114.9 million in 1997. Our personnel expense increased by $10.0 million, our occupancy expense increased by $1.4 million, and our professional services, telephone and other communications, and general and administrative expenses increased by $7.7 million in 1998 as compared to 1997. The primary reason for these increases was the inclusion of Imperial Capital Group's ("ICG") and Imperial Warehouse Finance, Inc.'s ("PrinCap") operations, which were formed or acquired in the fourth quarter of 1997, for the entire year of 1998. Our total expenses also increased at Coast Business Credit ("CBC") as a result of its continuing national expansion over the course of 1998. Partially offsetting these increases were decreases in our amortization of servicing rights of $1.6 million, and our real estate owned expenses of $7.4 million. To summarize our results for 1998, the decrease in our net income in 1998 from 1997 was attributable to several factors. These factors included: . Impairment losses on equity securities; . Negative mark-to-market adjustments on our loans and securities held for sale; . Reduced revenues from the sale of our loans and leases; . No gains from the sales of equity securities; . No gain on the termination of advisory agreements; . Reduced revenues from our equity investments; . Increased overall levels of expenses. These factors were partially offset by the following positive items: . Increasing net interest income and an improved net interest margin; . Increasing investment banking and brokerage fees; . Increasing asset management fees. Coast Business Credit CBC had total net revenues of $42.9 million, total expenses of $21.2 million, and net income of $12.4 million in 1998. CBC had total net revenues of $30.0 million, total expenses of $15.3 million and net income of $9.0 million in 1997. CBC was able to increase both its net revenues and net income by substantially increasing the amount of loans it made and increasing its average outstanding loan balance. CBC's average loans outstanding for 1998 were $592.6 million, and its loans outstanding at year end were $633.3 million. CBC's average loans outstanding for 1997 were $406.1 million, and its loans outstanding at year end were $484.8 million. CBC has been able to increase its average loans outstanding as a result of geographic expansion across the United States, and by offering its customers extended loan commitment periods. As a result of the $186.5 million increase in CBC's average loans outstanding, CBC's net interest income has increased $12.8 million to $42.6 million in 1998 from $29.8 million in 1997. Our average yield on CBC's loans decreased to 13.09% in 1998 from 13.88% in 1997. The decrease in CBC's yield resulted from downward movements in the prime rate during the 3rd & 4th quarters of 1998. All of CBC's loans were funded with the FDIC insured deposits of SPB. CBC recorded loan loss provisions of $3.5 million in 1998 and $4.9 million in 1997. At December 31, 1998 CBC had non-accrual loans totaling $1.1 million, or 0.18% of its outstanding loans. At December 31, 1997, CBC had non-accrual totaling $1.0 million. CBC also earned other income in the form of loan, prepayment, and audit fees charged to its customers. CBC earned other income totaling $3.8 million in 1998 as compared $5.2 million in 1997. In 1997, one of CBC's 61 larger credits prepaid, resulting in a prepayment fee of $2.5 million on one single credit. In 1998, while CBC did receive prepayment fees, there were no prepayments of similar large credit accounts. CBC's total expenses increased by approximately $6.0 million in 1998 as compared to 1997. During 1998, CBC's personnel expense increased by $3.5 million to $13.3 million, and general and administrative expenses increased by $600,000 to $2.9 million as compared to 1997. These increases were primarily the result of CBC's geographic expansion into several major metropolitan areas of the United States throughout 1998. Imperial Warehouse Finance, Inc. IWF had total net revenues of $8.5 million, total expenses of $3.0 million, and net income of $3.2 million in 1998. IWF had total net revenues of $1.6 million, total expenses of $738,000, and net income of $515,000 in 1997. We acquired the assets of IWF in October of 1997. IWF was also able to increase both its net revenues and net income by substantially increasing the amount of loans it made and increasing its average outstanding loan balance. IWF's average loans outstanding for 1998 were $164.3 million, and its loans outstanding at year end were $181.0 million. IWF's loans outstanding at year end 1997 were $122.5 million. The average balance of IWF's loans from the date of our acquisition through December 31, 1997 was $118.0 million. As a result of the increase in loans outstanding and a full year of operations with our company, IWF's net interest income increased $5.5 million to $6.9 million in 1998 from $1.4 million in 1997. We earned an average yield on IWF's loans of 9.94% in 1998 and 10.27% in 1997, and all of IWF's loans were funded with the FDIC insured deposits of SPB. The decrease in IWF's yield reflects downward movement in the prime rate during the 3rd & 4th quarters of 1998. IWF recorded loan loss provisions of $704,000 in 1998 and $435,000 in 1997. Since our acquisition, IWF has not charged off any loans. At December 31, 1998 IWF had non-accrual loans totaling $4.1 million, or 2.29% of its outstanding loans. At December 31, 1997, IWF had no non-accrual loans. IWF also earned other income in the form of loan and audit fees charged to its customers of $2.3 million in 1998 and $588,000 in 1997. IWF's total expenses increased primarily as a result of our owning IWF for all of 1998 as compared to three months in 1997. IWF's total expenses of $3.0 million in 1998 were largely made up of $1.3 million in personnel expense, $453,000 in amortization of goodwill, and $723,000 in general and administrative expenses. Loan Participation and Investment Group LPIG had total net revenues of $8.9 million, total expenses of $2.3 million, and net income of $3.8 million in 1998. LPIG had total net revenues of $6.5 million, total expenses of $2.2 million, and net income of $2.6 million in 1997. LPIG was also able to increase both its net revenues and net income by increasing the amount of participations it invested in and increasing its average outstanding loan balance, while maintaining its expense levels. LPIG's average loans outstanding for 1998 were $240.1 million, and its loans outstanding at year end were $222.1 million. LPIG's average loans outstanding for 1997 were $187.7 million, and its loans outstanding at year end were $196.4 million. We earned an average yield on LPIG's loans of 8.21% in 1998 and 8.72% in 1997, and all of LPIG's loans were funded with the FDIC insured deposits of SPB. As a result of the $52.4 million increase in LPIG's average loans outstanding, LPIG's net interest income has increased $1.2 million to $8.3 million in 1998 from $7.1 million in 1997. LPIG recorded a loan loss recovery of $391,000 in 1998 and a loan loss provision of $564,000 in 1997. LPIG has never had a loan charge-off. At both December 31, 1998 and December 31, 1997, LPIG had no 62 non-accrual loans. LPIG also earned other income, primarily in the form of loan fees. In 1998, LPIG earned other income totaling $156,000. In 1997, LPIG earned no other income. The total expenses of LPIG were relatively unchanged in 1998 as compared to 1997. The major components of LPIG's expenses in 1998 were personnel expense of $1.1 million, professional services of $225,000 and general and administrative expense of $694,000. We have made the decision to let LPIG's existing balance of loans run-off over the next few quarters. While LPIG has earned a reasonable risk-adjusted return in 1998 and 1997, we believe that the capital that is currently being deployed at SPB to support LPIG's business could be more profitably used in CBC's, IWF's, and IPL's businesses. As such, we anticipate that the current outstanding balance of LPIG's loans will decrease over time as this on-balance sheet portfolio runs-off. We do expect to expand our investments in LPIG-type loan products through off-balance sheet financing instruments such as total rate of return swaps or collateralized loan obligation funds. Imperial Business Credit, Inc. IBC had total net revenues of $9.6 million, total expenses of $11.3 million, and a net loss of $1.0 million in 1998. IBC had total net revenues of $18.3 million, total expenses of $11.6 million, and net income of $4.1 million in 1997. IBC's total net revenues decreased significantly in 1998 as compared to 1997. In early and mid 1998, several of IBC's competitors lowered the interest rates charged to their borrowers for their leases, increasing the demand for their leases in comparison to IBC's lease products. We made the decision not to significantly lower the rates we were charging borrowers for the leases originated by IBC. This had the effect of lowering IBC's total lease originations and increasing the average cost of each lease originated by IBC in 1998 as compared to 1997. The average rate charged to IBC's borrowers was 13.6% in 1998 and 14.6% in 1997. IBC originated $114.3 million of leases in 1998 and $151.4 million of leases in 1997. Even though IBC was able to substantially maintain the rate it charged its lease customers in 1998 as compared to 1997, the increased cost per lease originated by IBC resulted in significantly decreased profit margins for IBC. IBC securitized $118.7 million of its loans in 1998 generating gain on sale revenue of $4.1 million, or 3.4% of the principal balance of leases securitized. IBC securitized $213.6 million of its leases in 1997 generating gain on sale revenue of $7.9 million, or 3.7% of the principal balance of leases securitized. In late 1998, several of IBC's competitors increased the rates they charged their borrowers. As a result, the demand for leases from IBC's competitors decreased and IBC was able to originate an increased number of leases in a less competitive environment. IBC's net interest income also decreased in 1998 as compared to 1997 primarily due to a lower average outstanding balance of leases. IBC's average leases outstanding for 1998 were $11.3 million, and its leases outstanding at year end were $7.4 million. IBC's average leases outstanding for 1997 were $46.7 million, and its leases outstanding at year end were $16.6 million. We earned an average yield on IBC's leases of 13.6% in 1998 and 14.6% in 1997. All of IBC's leases are initially funded with a warehouse line of credit, and then permanently funded through a securitization facility. Primarily as a result of the significant decrease in the average balance of IBC's leases outstanding in 1998 as compared to 1997, IBC's net interest income decreased $2.0 million to $3.6 million in 1998 from $5.6 million in 1997. IBC also earned other income from servicing leases delivered into its securitization facility, and incurred mark-to-market charges related to its retained interests and securities from its securitizations. IBC earned total net other income of $3.3 million in 1998 and $5.9 million in 1997. The decrease in other revenue results primarily from mark-to-market charges on IBC's retained interests and securities from its lease securitizations of $2.3 million in 1998. IBC's total expenses remained relatively constant in 1998 as compared to 1997. The major components of IBC's expenses in 1998 were personnel expense of $5.6 million, professional services of $1.2 million, and 63 general and administrative expenses of $2.6 million. The major components of IBC's expenses in 1997 were personnel expense of $6.3 million, professional services of $697,000, and general and administrative expenses of $2.4 million. IBC recorded a loan loss provision of $1.3 million in 1998 and $1.1 million in 1997. IBC had net recoveries of $239,000 in 1998 and net charge-offs of $3.9 million in 1997. At December 31, 1998 IBC had non-accrual leases totaling $669,000 or 9.0% of its outstanding loans. At December 31, 1997 IBC had non- accrual leases totaling $981,000 or 5.9% of its outstanding leases. Income Property Lending IPL had total net revenues of $17.5 million, total expenses of $11.7 million, and net income of $3.3 million in 1998. IPL had total net revenues of $41.2 million, total expenses of $7.4 million, and net income of $20.6 million in 1997. IPL's total net revenues decreased significantly in 1998 as compared to 1997. In early and mid 1998, several of IPL's competitors lowered the interest rates charged to their borrowers for their loans. In order to remain competitive, we also lowered the interest rates that IPL charged to its borrowers. IPL originated $366.1 million of loans in 1998 and $295.9 million of loans in 1997. Even though IPL was able to originate more loans in 1998 than in 1997, the lower average interest rate on the loans originated in 1998 as compared to 1997 decreased the value of IPL's loan portfolio. IPL sold $288.5 million of its loans in 1998 generating cash gain on sale of $8.8 million, or 3.05% of the principal balance of loans sold. IPL sold for cash and securitized $399.9 million of its loans in 1997 generating gain on sale of $25.3 million, or 6.33% of the principal balance of loans sold. IPL's net interest income for 1998 also decreased $4.0 million to $6.7 million due to the lower average rate charged to IPL's borrowers, and due to a lower average balance of loans outstanding. IPL's average loans outstanding for 1998 were $96.4 million, and its loans outstanding at year end were $145.5 million. IPL's average loans outstanding for 1997 were $144.2 million, and its loans outstanding at year end were $59.4 million. All of IPL's loans were funded with the FDIC insured deposits of SPB. IPL recorded net recoveries of $345,000 in 1998 and $1.9 million in 1997. IPL had no net charge-offs in 1998 or 1997. At December 31, 1998 IPL had non- accrual loans totaling $992,000, or 0.69% of its outstanding loans. At December 31, 1997, IPL had non-accrual loans totaling $1.6 million, or 2.70% of its outstanding loans. IPL also earned other income from servicing loans that it sold to other companies and charged various fees to its borrowers. IPL earned total other revenues of $1.6 million in 1998 and $3.3 million in 1997. These amounts include all servicing fees on loans serviced for others. The decrease was primarily due to increased competition in 1998, which required IPL to reduce the amount of fees charged to its borrowers. IPL's total expenses increased by $4.3 million in 1998. IPL's personnel costs increased by $2.6 million in 1998 for a total of $6.9 million. IPL's general and administrative costs increased by $832,000 for a total of $2.5 million. These expenses increased primarily as a result of increased activity in IPL's loan origination and servicing operations related to the continued expansion of IPL's business. Imperial Capital Group ICG, which began operations in December 1997, had total net revenues of $18.4 million, total expenses of $22.3 million, and a net loss of $1.4 million in 1998. ICG had total net revenues of $8.5 million, total expenses of $6.1 million, and net income of $878,000 in 1997. We formed ICG in the fourth quarter of 1997. ICG's business includes a registered broker/dealer and an asset manager that offer individual and corporate investors a wide range of financial products and services. ICG's revenues declined in 1998 as compared to 1997 since ICG raised less money for their customers through corporate finance transactions. ICG's investment banking and brokerage fees were $18.5 million for 64 1998 as compared to $7.7 million for 1997. ICG raised $190.0 million for its corporate clients in 1998 and $323.0 million in 1997 through private placement debt and equity offerings. ICG's total expenses increased by $16.2 million in 1998 as compared to 1997, as we operated ICG for the entire year of 1998, and only one quarter in 1997. The major components of ICG's expenses in 1998 were personnel expense of $13.7 million, occupancy expense of $756,000, telephone and other communications expense of $1.2 million, and general and administrative expense of $5.3 million. Asset Management Activities AMA had total net revenues of $7.0 million, total expenses of $3.8 million, and net income of $1.8 million in 1998. AMA had total net revenues of $25.0 million, total expenses of $8.7 million, and net income of $9.9 million in 1997. Our AMA revenues decreased significantly in 1998 as compared to 1997 primarily due to the large revenues we generated from the termination of our management agreement with IMH in 1997. Excluding the gain we recognized from the Termination Agreement (discussed below), our net AMA revenues increased by $1.0 million in 1998 as compared to 1997. Our AMA revenues increased primarily due to growth in our assets under management. Currently we manage three different classes of assets for others. These classes include a commercial mortgage and equity REIT, a collateralized loan obligation fund, and leveraged bank debt hedge funds. Our total assets under management were $1.5 billion at December 31, 1998 and $495.1 million at December 31, 1997. Our total expenses from our AMA decreased by $4.8 million in 1998 as compared to 1997. Excluding expenses incurred in 1997 in connection with the Termination Agreement (discussed below) of $6.0 million, our AMA expenses increased by $1.2 million. This increase was primarily due to increased personnel expenses from additional employees conducting our AMA business. In 1997, we recognized a nonrecurring gain on the termination of a REIT advisory agreement of $19.0 million. In 1995, we entered into a management agreement with Impac Mortgage Holdings, Inc. ("IMH"), in which we agreed to advise IMH on its day-to-day operations, a service for which we were paid a management fee. In 1997, we negotiated the termination with IMH of the management agreement (the "Termination Agreement"). Under the Termination Agreement, we received 2,009,310 shares of IMH common stock and certain securitization-related assets, and we agreed to cancel a $29.1 million note receivable that we had from ICI Funding Corporation ("ICIFC"), which is now known as Impac Funding Corporation, the loan origination unit of IMH. We recorded the IMH common stock on our books at its fair value of approximately $35.0 million, and the securitization-related assets on our books at their fair values of approximately $13.1 million, for a total value of $48.1 million. This amount ($48.1 million), when netted with the $29.1 million cancellation of our ICIFC note receivable resulted in a net gain to us from the Termination Agreement of approximately $19.0 million. Other Core Operations OCO had negative net revenues of $39.5 million, total expenses of $18.3 million, and a net loss of $33.1 million in 1998. OCO had total net revenues of $6.9 million, total expenses of $26.7 million, and net loss of $16.0 million in 1997. Our OCO include those areas of business we conduct at our holding company and support operations. Such areas include interest and dividend income from parent company loans and equity investments, loan servicing income, interest expense on our long-term debt, mark-to-market charges on the securities we invested in at our holding company, and the costs of our support functions. We provided support to our subsidiaries through executive management's oversight and advice, accounting and legal services, merger and acquisitions advice, human resources administration, office services, and management information systems support. 65 OCO earned interest and dividend income of $30.1 million in 1998 and $28.9 million in 1997. OCO incurred interest expense of $30.4 million in 1998 and $25.6 million in 1997. The increase in OCO's interest expense was primarily attributable to increased borrowing costs associated with the Company's $70.0 million of Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company issued during 1997. In 1998, OCO recognized impairment charges on our equity investments in Impac Mortgage Holdings, Inc. ("IMH") and Imperial Credit Commercial Mortgage Investment Corp. ("ICMI"). Our book value of IMH stock was $4.56 per share and our book value of ICMI stock was $9.375 per share at December 31, 1998. During the third quarter of 1998 the market value of our equity holdings in IMH and ICMI declined substantially. We determined that the declines in IMH's and ICMI's stock prices were other than temporary. Therefore, we recorded pre-tax write-downs of $24.5 million on our IMH common stock and $13.0 million on our ICMI common stock. These write-downs reduced our book value of IMH from $17.88 to $5.00 per common share and our book value of ICMI from $13.98 to $9.75 per share. There were no impairment charges in 1997. In 1998 OCO also recognized negative mark-to-market charges on our trading securities. These securities included our investment in Pacifica Partners I and various mortgage backed securities. We wrote down the securities at OCO by $5.0 million in 1998 and $341,000 in 1997. Total expenses of OCO decreased by $8.4 million. The decrease was primarily due to two factors. First, in 1997 we recognized a $3.7 million charge on the restructuring of our investment in DRI (discussed below) for which there was no comparable expense incurred in 1998. Second, we had much better experience in the liquidation and administration of our real estate owned in 1998 as compared to 1997. We recognized net income from our real estate owned of $548,000 in 1998 and net expense of $4.5 million in 1997. In 1997, OCO incurred a loss on the restructuring of our loan to Dabney/Resnick/Imperial LLC ("DRI") of $3.7 million. In 1996, we made a loan to DRI, an investment banking firm. DRI offered full service investment banking, brokerage, and asset management services. In late 1997, we formed a new business, ICG (discussed above). In connection with the formation of ICG, we recognized a pre-tax charge of $3.7 million relating to the restructuring of our loan to DRI. Substantially all of the assets and personnel of DRI were acquired or hired by ICG. NON-CORE BUSINESS LINES Equity Interests The Equity Interests generated negative net revenues of $66.5 million, total expenses of $122,200, and a net loss of $38.2 million in 1998. Equity Interests generated total net revenues of $159.9 million, total expenses of $16.2 million, and net income of $81.5 million in 1997. Equity Interests include our portion of the net income or loss from Southern Pacific Funding Corporation ("SPFC") and Franchise Mortgage Acceptance Company ("FMC"). The Equity Investments generated equity in the net income of SPFC and FMC of $16.0 million in 1998 and $22.8 million in 1997. This represents our share of SPFC's and FMC's net income or loss for 1998 and 1997, based on our ownership percentage of SPFC and FMC. The decrease was due primarily to SPFC's bankruptcy in 1998. As a result of the bankruptcy, we only recognized income from SPFC for the first half of 1998 as compared to the entire year of 1997. Our Equity Interests also incurred a large impairment loss in 1998 as compared to no such loss in 1997. On October 1, 1998, SPFC petitioned for Chapter 11 bankruptcy protection under Federal bankruptcy laws in the U.S. Bankruptcy Court for the District of Oregon. As a result of SPFC declaring Chapter 11 bankruptcy and the corresponding decline in its common stock to below one dollar per share, we wrote-off our total investment in and loan to SPFC. Our write-off was $82.6 million for the year ended December 31, 1998. In 1997, we recognized a significant gain on the sale of our FMC stock. We had no gains from the sale of FMC stock in 1998. In 1997, we sold 3.6 million of our FMC shares in FMC's initial public offering at 66 $18.00 per share, generating net proceeds of $59.7 million and a corresponding gain of $48.9 million. We also recognized a gain of $43.2 million as a result of an adjustment to the basis of our investment in FMC due to FMC's capital raised in the offering and our reduced ownership percentage in FMC. As a result of FMC's initial public offering, our ownership percentage of FMC common stock was reduced to 38.4%. Accordingly, we account for our investment in FMC under the equity method. In 1997 we also recognized gains from the sale of our SPFC stock. In 1997, we sold 370,000 shares of our SPFC common stock at $16.63 per share generating net proceeds of $6.2 million and a gain of $4.3 million. We also sold an additional 500,000 shares of our SPFC common stock in 1997, generating net proceeds of $7.6 million and a gain of $5.2 million. These sales reduced our ownership percentage of SPFC common stock to 47%. Accordingly, until its bankruptcy and our corresponding write-off of our investment in SPFC, we accounted for our investment in SPFC under the equity method. The total expenses from our Equity Interests decreased by $16.0 million in 1998 as compared to 1997. This decrease results from the consolidation of FMC in the first nine months of 1997, as compared to no consolidation in 1998. Throughout the first nine months of 1997, our ownership percentage in FMC was 66.7%, and accordingly, FMC 's operating results were consolidated with ours. De-emphasized/Discontinued/Exited Businesses The De-emphasized/Discontinued/Exited Businesses ("Exited Businesses") generated net revenues of $9.6 million, total expenses of $27.0 million, and a net loss of $24.6 million in 1998. The Exited Businesses generated total net revenues of $15.6 million, total expenses of $19.2 million, and a net loss of $27.5 million in 1997. We have decided to either discontinue or exit some of the businesses we had been conducting as divisions of SPB, or separate consolidated subsidiaries. We decided to de-emphasize, discontinue or exit these business lines because they were not meeting our expectations for a variety of reasons. These reasons included; significant credit losses, insufficient loan production volumes, inadequate gross profit margins, and risks associated with international lending operations. None of our de-emphasized, discontinued, or exited business lines was a profitable business. We classify the following significant operations as Exited Businesses: our Auto Lending, Alternative Residential Mortgage, and Consumer Loan Divisions of SPB; Credito Imperial Argentina, ("CIA") our residential loan production business in Argentina; and Auto Marketing Network, Inc., our sub-prime automobile finance company. Our Exited Businesses also include our former mortgage banking operations, certain problem loan or securities portfolios, and any loan portfolios at SPB from businesses for which we are no longer originating new loans. Our Exited Businesses earned interest income of $77.7 million in 1998 and $59.3 million in 1997. The Exited Businesses incurred interest expense of $31.6 million in 1998 and $35.6 million in 1997. The increase in interest income and expense was primarily attributable to a larger average outstanding balance of loans and securities from those operations classified as Exited Businesses in 1998 as compared to 1997. In 1998, the Exited Businesses recognized impairment charges on our held for sale loan and securities portfolios, of $31.6 million. Our affected loan portfolios included our automobile loans at SPB and our Argentinean residential mortgage loans at CIA. We wrote down SPB's automobile loans by $21.5 million and CIA's residential loans by $7.3 million. Our affected securities portfolios include the retained interests we received from IMH in connection with the Termination Agreement discussed under Asset Management Activities. We wrote down the retained interests in our Exited Businesses by $2.0 million in 1998. There were no mark-to-market charges on any of these portfolios in 1997. 67 Total expenses at our Exited Businesses were $27.0 million in 1998 as compared to $19.2 million in 1997. The increase in total expenses of $7.8 million was primarily due to increased personnel, professional services, and general and administrative expenses at SPB's Auto and Consumer Credit divisions. In 1998 and 1997, our Exited Businesses recognized provisions for losses on the repurchase of our former mortgage banking operation loans. The provision in 1998 was $4.8 million and the provision in 1997 was $5.4 million. These provisions resulted from our analysis of our potential exposure to losses on the future repurchase of loans sold to investors from our former mortgage banking operations. We believe that these provisions adequately provide for known and estimated future losses from the repurchase of our former mortgage banking operations loans. Also included in our Exited Businesses are the results of our discontinued operation, AMN, for 1998 and 1997. We recognized net losses from these discontinued operations of $14.5 million in 1998 and $25.3 million in 1997. Year 2000 Compliance We have successfully negotiated the century date change. All mission- critical systems are functioning normally and since January 1, 2000, we are experiencing "business as usual". Our application processing systems are properly accounting for the leap year. The expenses we incurred in executing our Year 2000 Project were not material for any of our subsidiaries and were funded out of our normal operating budget. Our largest subsidiary, SPB, spent less than $700,000 during the two-year life of the project. Nearly half of that amount was spent on converting our asset based loan processing to a more sophisticated and functional system. SPB received a Memorandum of Understanding (MOU) from the FDIC that was related to deficiencies with its Year 2000 Project. The MOU was issued in November 1998 and was terminated in August 1999 when it was determined that all of the concerns had been satisfied. We will continue to carefully monitor all of our systems over the next several months and are confident that we can quickly address any date-related problems that might occur. Liquidity and Capital Resources General We generate liquidity at our holding company from a variety of sources, including interest income from loans and investments, income tax payments received from our subsidiaries, dividends from subsidiary earnings, dividends from common stock holdings in publicly traded companies, and sales of non-core assets. An industrial bank such as SPB may declare dividends only in accordance with California Industrial Banking Law and FDIC regulations which impose legal limitations on the payment of dividends. Our holding company's primary cash requirements include income tax payments and interest payments on outstanding debt and preferred stock obligations. We also use available cash to make loans to our operating companies and investments in subsidiaries and asset management vehicles. At December 31, 1999 we held $46.2 million of cash and interest bearing deposits at our holding company as compared to $5.5 million of cash and interest bearing deposits at December 31, 1998. We have an ongoing need for capital to finance our lending activities. This need is expected to increase as the volume of our loan and lease originations and acquisitions increases. Our primary cash requirements include the funding of (i) loan and lease originations and acquisitions, (ii) points and expenses paid in connection with the acquisition of wholesale loans, (iii) ongoing administrative and other operating expenses, (iv) the costs of our warehouse credit and repurchase facilities with certain financial institutions, (v) overcollateralization or reserve account requirements in connection with loans and leases pooled and sold and (vi) fees and expenses incurred in connection with our securitization. 68 We have financed our lending activities through warehouse lines of credit and repurchase facilities with financial institutions, equity and debt offerings in the capital markets, deposits or borrowings at SPB and securitizations. We believe that such sources will be sufficient to fund our known liquidity requirements in the future on both a short and long term basis. However, there can be no assurance that we will have access to the capital markets in the future or that financing will be available to satisfy our operating and debt service requirements or to fund our future growth. SPB obtains the liquidity necessary to fund its investing activities through deposits and, if necessary through borrowings under lines of credit and from the FHLB. At December 31, 1999 and 1998, SPB had maximum FHLB borrowings available equal to $35.7 million and $36.6 million, respectively. These borrowings must be fully collateralized by qualifying mortgage loans and may be in the form of overnight funds or term borrowings at SPB's option. The highest balance of FHLB advances outstanding during the year ended December 31, 1999 was $30.0 million, with an average outstanding balance of $7.6 million. The outstanding balance of FHLB advances was $0 at December 31, 1999. The FHLB advances are secured by certain real estate loans with a carrying value of $56.5 million and $49.9 million at December 31, 1999 and 1998, respectively. As of December 31, 1999, SPB's deposit portfolio, which consists primarily of certificate accounts decreased approximately $90.5 million to $1.6 billion at December 31, 1999 from $1.7 billion at December 31, 1998. SPB has been able to acquire new deposits through its local marketing strategies as well as domestic money markets. Additionally, SPB maintains liquidity in the form of cash and interest-bearing deposits with financial institutions. SPB tracks on a daily basis all new loan applications by office and, based on historical closing statistics, estimates expected fundings. Cash management systems at SPB allow SPB to anticipate both funding and sales and adjust deposit levels and short-term investments against the demands of SPB's lending activities. In addition to warehouse lines of credit and SPB borrowings, we have also accessed the capital markets to fund our operations. 1999 Activity Our operating activities produced cash of $151.6 million in 1999. The majority of this cash was generated by the interest income from our loan and investment portfolios after paying interest expense on our deposits, borrowings, and long term debt. Our investing activities used $202.9 million of cash in 1999. The most significant use of cash in our investing activities was a $246.8 million investment of available liquidity into short term interest bearing deposits. At December 31, 1999 our interest bearing deposits totaled $248.2 million. We also used cash to make net purchases of $21.9 million of securities available for sale. The most significant item of cash generation in our investing activities was from the proceeds we received on sales of stock we held in other publicly traded companies. In 1999, we received total proceeds from these sales of $100.6 million. These proceeds were primarily generated from the sales of our holdings in FMC and IMH. In 1999, we received cash and 4.4 million shares of Bay View common stock from the sale and exchange of our 38.3% interest in FMC. On November 5, 1999, we announced the sale of the Bay View common stock we received from the FMC/Bay View merger. As a result of these transactions, we received approximately $86.3 million in total cash proceeds. Also in 1999, we sold 1.9 million shares of our common stock investment in IMH generating net proceeds of $10.4 million. Additionally, in the second quarter of 1999, we sold 500,000 shares of common stock investment in ICCMIC, generating net proceeds of $5.4 million. We also generated $27.2 million of cash through investing activities in 1999 as a result of a net reduction in outstanding loans held for investment. 69 Our financing activities used $212.6 million of cash in 1999. We used $99.5 million to repay deposits at SPB, $20.0 million to repay borrowings by SPB from the FHLB, and $28.0 million to repay other borrowings. On May 14, 1999, we entered into an agreement with our former parent Imperial Bank, a subsidiary of Imperial Bancorp (NYSE:IMP) to repurchase 10% or 3.7 million shares of our outstanding common stock for $8.00 per share for a total use of cash of $29.5 million. The repurchase from Imperial Bank was financed through the private issuance of $30.0 million of Series B 11.50% Mandatorily Redeemable Cumulative Preferred Stock to a group of independent investors. In November 1999, we repurchased and retired the $30.0 million of the Mandatorily Redeemable Cumulative Preferred Stock. The issuance and subsequent repurchase and retirement used a net $1.4 million of cash during 1999. We also used $34.1 million of cash through our financing activities to repurchase $43.1 million of our long term debt. The repurchase generated an extraordinary gain on the early extinguishment of debt of $5.2 million, net of income taxes. 1998 Activity Our operating activities used $37.1 million of cash in 1998. The majority of this cash was used in the operations of our discontinued businesses. Our investing activities used $175.0 million of cash in 1998. The most significant use of cash in our investing activities was a $276.6 million net investment in loans held for investment. The most dramatic increase in loans occurred in the portfolio of asset based loans generated by CBC, which increased $148.5 million in 1998. The most significant source of cash from our investing activities was the liquidation of interest bearing deposits of $102.3 million. Our financing activities generated $464.5 million of cash in 1998. The most significant source of cash from financing activities was the receipt of $555.3 million in increased net deposits at SPB. Our financing activities used $25.0 million to repay net borrowings from the FHLB and $42.6 million to repay other borrowings. Through our financing activities, we also repurchased 2.5 million shares of our outstanding common stock for $9.78 per share for a total use of cash of $24.3 million. 1997 Activity Our operating activities produced cash of $18.6 million in 1997. The majority of this cash was generated by the net interest income from our loan and investment portfolios after paying interest expense on our deposits, borrowings, and long term debt, as well as from sales of loans generated by FMC. Our investing activities used $320.6 million of cash in 1997. The most significant use of cash in our investing activities was a $174.0 million net investment in loans held for investment. The most dramatic increase in loans occurred in the portfolio of asset based loans generated by CBC, which increased $196.3 million in 1997. We also used $100.4 of million cash to invest in interest bearing deposits in 1997. The last significant use of cash in 1997's investing activities was a $124.5 million use of cash to acquire all of the assets of PrinCap Mortgage Warehouse Inc. (since renamed IWF). The most significant item of cash generation in our investing activities during 1997 was from the proceeds we received on sales of stock we held in other publicly traded companies. In 1997, we received total proceeds from these sales of $85.4 million. These proceeds were primarily generated from the sales of our holdings in SPFC, FMC and IMH. In the first quarter of 1997, we sold 370,000 shares of common stock investment in SPFC, generating net proceeds of $6.2 million. During the fourth quarter of 1997, FMC completed an initial public offering of its common stock pursuant to which we were was a selling stockholder. We received net proceeds from FMC's offering of $59.7 million. During 1997, we also sold 462,269 shares of IMH generating cash proceeds of $12.0 million. We also used $37.5 million in net cash to make net purchases of securities available for sale, primarily 3.0 million shares of ICCMIC. Our financing activities generated $273.2 million of cash in 1997. We generated $86.8 million by increasing deposits at SPB. We used $95.5 million of cash to repay borrowings by SPB from the FHLB. Our financing activities in 1997 included the January 1997 issuance of $200.0 million principal amount of 9.875% Senior 70 Notes, generating net proceeds of $194.5 million. We used a portion of these proceeds to repurchase approximately $69.8 million of the 9.75% Senior Notes, using cash of $73.2 million, and generating an extraordinary loss on the early extinguishment of debt of $4.0 million, net of income taxes. Also, during the second quarter of 1997, we issued $70.0 million of company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company under a proprietary product known as "ROPES." These securities can be redeemed at par upon their maturity or remarketed as 30 year capital instruments. The issuance of the ROPES generated net cash proceeds of $68.1 million in 1997. Under current tax law, the interest payments on these securities are tax-deductible. The proceeds from the offering are being used for capital contributions to subsidiaries, strategic acquisitions, investments and general corporate purposes. Limitations on Dividends Under the California Industrial Banking Law, an industrial bank may declare dividends on its capital stock only if it has at least $750,000 of unimpaired capital stock plus additional capital stock of $50,000 for each branch office. In addition, no distribution of dividends is permitted unless such distribution would not exceed an industrial bank's retained earnings; any payment would not result in a violation of the approved minimum capital to thrift and loan certificate of deposit ratio; and/or after giving effect to the distribution, both (a) the sum of an industrial bank's assets (net of goodwill, capitalized research and development expenses and deferred charges) would be at least 125% of its liabilities (net of deferred taxes, deferred income and other deferred credits), and (b) current assets would be not less than current liabilities (except that if a thrift and loan's average earnings before taxes for the last two fiscal years had been less than average interest expense, current assets must be at least 125% of current liabilities). Under California law, in order for capital (including surplus) of an institution to be included in calculating the leverage limitation described above, thrift institutions must amend their bylaws to restrict such capital from the payment of dividends. The amount of restricted capital maintained by an industrial bank also provides the basis for establishing the maximum amount that a thrift may lend to one borrower. As of December 31, 1999, 1998 and 1997, $150.0 million, $150.0 million and $125.0 million, respectively, of SPB's capital was so restricted. The FDIC has advised insured institutions that the payment of cash dividends in excess of current earnings from operations is inappropriate and may be cause for supervisory action. As a result of this policy, SPB may find it difficult to pay dividends out of retained earnings from historical periods prior to the most recent fiscal year or to take advantage of earnings generated by extraordinary items. Under the Financial Institutions Supervisory Act and FIRREA, federal regulators also have authority to prohibit financial institutions from engaging in business practices which are considered to be unsafe or unsound. It is possible, depending upon the financial condition of SPB and other factors, that such regulators could assert that the payment of dividends in some circumstances might constitute unsafe or unsound practices and prohibit payment of dividends even though technically permissible. Pursuant to FDICIA, SPB is prohibited from paying dividends if the payment of such dividends would cause it to become "undercapitalized." These limitations on the payment of dividends may restrict our ability to use cash from SPB which may have been otherwise available to us for working capital. Imperial Business Credit, Inc. IBC primarily funds its lease originations through the use of an interim bank warehouse facility at SPB and a permanent revolving securitization facility. The securitization facility utilizes a trust structure and has a five-year revolving period, which expires in November 2002, and a three and one-half year amortization period. The IBC Lease Receivables Trust 1997-2 ("1997-2 Trust") was created pursuant to a pooling and servicing agreement among IBC, as originator, IBC Funding Corp. ("IFC"), IBC's wholly-owned special purpose subsidiary, as seller, and Norwest Bank Minnesota, as trustee and back-up servicer. IBC sells its lease 71 originations to IFC under a sale and contribution agreement ("IBC Agreement"), which simultaneously assigns its rights in the leases to the Trust in exchange for trust certificates. The Class A certificates are sold to Triple-A One Funding Corp., a special purpose corporation administered by Capital Markets Assurance Corporation ("CAPMAC"), which issues commercial paper to fund its acquisitions. The Class A purchase limit under the facility is $250 million and as of December 31, 1999 and 1998, there was approximately $218.6 million and $197.9 million, respectively, of Class A Certificates outstanding. IFC assigns all receivables acquired pursuant to the IBC Agreement to the 1997-2 Trust. The transactions are accounted for as sales for reporting purposes under generally accepted accounting principles ("GAAP") and as financings for tax purposes. IFC assigns all its rights, title and interest in the leases, together with a security interest in the underlying leased equipment, which ownership and security interests have been perfected under the Uniform Commercial Code. Payments of the purchase price are made directly from payments by lessees on the lease receivables. Multifamily and Commercial Mortgage Lending During the years ended December 31, 1999 and 1998, SPB did not securitize IPL multi-family and commercial mortgage loans. However, during the years ended December 31, 1999 and 1998, IPL sold for cash $283.7 million and $304.2 million of loans, respectively. The ICCMIC Acquisition ICCMIC has entered into a merger agreement with us under which, subject to certain conditions including ICCMIC stockholder approval, we will acquire all of the outstanding shares of the ICCMIC that we do not already own for a cash purchase price of approximately $11.575 per share. The merger agreement was amended effective as of February 7, 2000 to extend to April 30, 2000 the date after which any party to the merger agreement may terminate the proposed merger transaction. Our offer was subjected to a 60-day market check process last year during which ICCMIC determined that no superior proposal for ICCMIC or its assets was received. ICCMIC's stockholder meeting to approve the merger will be held on Monday, March 20, 2000 and, if approved at that time, the merger is expected to close by March 31, 2000. We estimate that the total cost of the ICCMIC acquisition will be approximately $315.1 million. We intend to fund the acquisition of ICCMIC from a combination of cash and liquid assets held by our company and its subsidiaries, cash and cash equivalents held by ICCMIC, and to the extent, if any, that additional cash may be required to complete the merger, we would obtain those funds from borrowings or other financing arrangements with third parties. On March 28, 2000, we acquired all of the issued and outstanding shares of ICCMIC's common stock (other than the 2,570,000 shares already owned by us) for a cash purchase price of $11.5753246 per common share. At December 31, 1999 ICCMIC had total assets of $664.9 million, and total liabilities of $269.3 million. Inflation The Consolidated Financial Statements and Notes thereto presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, nearly all of the assets and liabilities of our company are monetary in nature. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Inflation affects the Company primarily through its effect on interest rates, since interest rates normally increase during periods of high inflation and decrease during periods of low inflation. 72 Asset Quality The provision for loan and lease losses for 1999 increased to $35.3 million as compared to $15.5 million for 1998 and $21.0 million for 1997. The increase in 1999 was primarily due to increased non accrual loans and net charge-offs. Net charge-offs increased to $30.2 million for 1999 as compared to $17.5 million for 1998 and $13.0 million for 1997. The increase in charge-offs in 1999 primarily resulted from higher net charge-offs at LPIG and CBC. Net charge-offs at CBC were $17.4 million for 1999 as compared to $67,000 for 1998 and $295,000 for 1997. Net charge-offs at LPIG were $3.9 million in 1999 and related to one single loan participation. LPIG did not have any net charge-offs in 1998 and 1997. Total nonaccrual loans increased to $59.4 million at December 31, 1999, as compared to $39.5 million at December 31, 1998 and $70.6 million at December 31, 1997. Total nonaccrual loans as a percentage of loans and leases held for investment were 4.73% at December 31, 1999 as compared to 2.92% at December 31, 1998 and 5.46% at December 31, 1997. The increase in CBC's non-accrual loans and charge-offs at December 31, 1999 as compared to December 31, 1998 resulted from recent regulatory guidance that prevents CBC from considering the liquidation value of certain intangible assets of its customers in determining a loan's accrual status or, if necessary, any required charge-off amount. The effect of this guidance resulted in CBC changing its loan impairment and charge-off policies in the second quarter of 1999. The changes require CBC to charge-off gross amounts of outstanding problem loans as opposed to CBC's previous practice of reserving for and, if necessary, ultimately charging off the net deficiency amount of problem loans. 73 The following table summarizes certain information regarding our allowance for loan and lease losses and losses on OREO:
1999 1998 1997 1996 1995 -------- -------- -------- ------- ------- (In thousands) Beginning balance as of January 1,................... $ 24,880 $ 26,954 $ 19,999 $13,729 $ 7,054 Provision for loan and lease losses....................... 35,340 15,450 20,975 9,773 5,450 Business acquisition and bulk loan purchases............... 1,846 -- 578 4,500 4,320 Sale of leases................ -- -- (900) -- -- Deconsolidation of ICIFC...... -- -- (687) -- -- -------- -------- -------- ------- ------- 62,066 42,404 39,965 28,002 16,824 -------- -------- -------- ------- ------- Loans and Leases charged off-- Core Business Lines: Multifamily and commercial loans........................ (857) (918) (3,021) (1,560) (503) Asset based loans............. (17,530) (112) (295) -- -- Loan Participations........... (3,882) -- -- -- -- Mortgage warehouse lines...... (1,625) -- -- -- -- Leases........................ (2,217) (1,496) (4,860) (3,318) (466) -------- -------- -------- ------- ------- (26,111) (2,526) (8,176) (4,878) (969) -------- -------- -------- ------- ------- Loans charged off--Non-Core Business: Single family residential..... (2,960) (4,661) (2,164) (2,485) (2,013) Consumer loans................ (2,611) (15,487) (3,933) (963) (124) -------- -------- -------- ------- ------- (5,571) (20,148) (6,097) (3,448) (2,137) -------- -------- -------- ------- ------- Total Charge-offs............. (31,682) (22,674) (14,273) (8,326) (3,106) -------- -------- -------- ------- ------- Recoveries on loans and leases previously charged off--Core Business: Multifamily and commercial loans........................ 55 142 29 -- -- Asset based loans............. 163 45 -- -- -- Leases........................ 1,086 1,721 900 176 5 -------- -------- -------- ------- ------- 1,304 1,908 929 176 5 -------- -------- -------- ------- ------- Net charge-offs--Core Business Lines........................ (24,807) (618) (7,247) (4,702) (964) -------- -------- -------- ------- ------- Recoveries on loans previously charged off--Non-Core Business: Single family residential..... 3 2,401 30 -- -- Consumer...................... 150 841 303 147 6 -------- -------- -------- ------- ------- 153 3,242 333 147 6 -------- -------- -------- ------- ------- Total recoveries.............. 1,457 5,150 1,262 323 11 -------- -------- -------- ------- ------- Net charge-offs--Non-core business lines............... (5,418) (16,906) (5,764) (3,301) (2,131) -------- -------- -------- ------- ------- Total net-charge-offs......... (30,225) (17,524) (13,011) (8,003) (3,095) -------- -------- -------- ------- ------- Balance as of December 31, ... 31,841 24,880 26,954 19,999 13,729 Loan loss allowance at AMN as of December 31,.............. 30 857 11,093 -- -- -------- -------- -------- ------- ------- Total loan loss allowance..... $ 31,871 $ 25,737 $ 38,047 $19,999 $13,729 ======== ======== ======== ======= ======= OREO losses: OREO writedowns (recovery) and expenses............... $ 617 $ (1,498) $ 2,074 $ 4,171 $ 2,870 Loss (gain) on sale of OREO....................... 769 597 4,453 2,843 (957) -------- -------- -------- ------- ------- Total OREO (gains) losses................... $ 1,386 $ (901) $ 6,527 $ 7,014 $ 1,913 ======== ======== ======== ======= =======
74 The percentage of the allowance for loan and lease losses to nonaccrual loans will not remain constant due to the changing nature of our portfolio. We analyze the collateral for each non-performing loan to determine potential loss exposure, and in conjunction with other factors, this loss exposure contributes to the overall assessment of the adequacy of the allowance for loan and lease losses. On an ongoing basis, we monitor the loan and lease portfolio and evaluate the adequacy of the allowance for loan and lease losses. In determining the adequacy of the allowance for loan and lease losses, we consider such factors as: . historical loss experience . underlying collateral values . evaluations made by bank regulatory authorities . assessment of economic conditions and . other appropriate data to identify the risks in the portfolio. Loans and leases that we believe are uncollectible are charged to the allowance for loan and lease losses. Recoveries on loans and leases previously charged off are credited to the allowance. Provisions for loan and lease losses are charged to expense and credited to the allowance in amounts we believe are appropriate based upon our evaluation of the known and inherent risks in the loan and lease portfolio. While we believe that the current allowance for loan and lease losses is sufficient, future additions to the allowance may be necessary. The allocation of the Company's allowance for loan and lease losses and the percentage of loans and leases by loan type to total loans and leases as of December 31, 1999 and 1998 is as follows:
1999 1998 -------------------------- -------------------------- Percentage of Percentage of Loans and Leases Loans and Leases to Total Loans To Total Loans and Leases And Leases Allocated Held for Allocated Held for Allowance Investment Allowance Investment --------- ---------------- --------- ---------------- Loans secured by real estate: One to four family.... $ 4,034 7.3% $ 2,664 9.3% Multi-family.......... 228 2.7 1,299 4.1 Commercial............ 282 1.1 128 1.9 ------- ----- ------- ----- 4,544 11.1 4,091 15.3 Leases.................. 126 0.1 -- 0.1 Consumer and auto loans.................. 812 0.6 1,567 1.9 Franchise loans......... 307 1.4 934 3.7 Asset based loans....... 15,018 58.2 10,764 46.7 Other commercial loans.. 9,498 28.6 7,310 32.3 ------- ----- ------- ----- 25,761 88.9 20,575 84.7 Unallocated............. 1,536 -- 214 -- ------- ----- ------- ----- $31,841 100.0% $24,880 100.0% ======= ===== ======= =====
Although the above table allocates the allowance for loan and lease losses by loan types, the total allowance is available to absorb losses on all loans and leases. The ratio of the allowance for loan and lease losses to total loans held for investment was 2.50%, 1.85%, and 2.10% at December 31, 1999, 1998, and 1997, respectively. The ratio of the allowance for loan losses to nonaccrual loans was 53.59% at December 31, 1999 as compared to 65.11% at December 31, 1998 and 53.87% at December 31, 1997. We evaluate expected losses on nonaccrual loans on a loan-by-loan basis and we believe that the allowance is adequate to cover both expected losses on nonaccrual loans and inherent losses in the remainder of our loans and leases held for investment portfolio. The percentage of the allowance for loan and 75 lease losses to nonaccrual loans does not remain constant due to the changing nature of our loan portfolio. We analyze the collateral for each nonperforming loan to determine our potential loss exposure, and in conjunction with other factors, this loss exposure contributes to the overall assessment of the adequacy of the allowance for loan and lease losses. On an ongoing basis, we monitor the loan portfolio and evaluate the adequacy of the allowance for loan and lease losses. In determining the adequacy of the allowance for loan and lease losses, we consider such factors as historical loan loss experience, underlying collateral values, evaluations made by bank regulatory authorities, assessment of economic conditions and other appropriate data to identify the risks in the loan portfolio. Loans we deem to be uncollectible are charged to the allowance for loan losses. Recoveries on loans previously charged off are credited to the allowance. Provisions for loan and lease losses are charged to expense and credited to the allowance in amounts we deem appropriate based on our evaluation of the known and inherent risks in the loan portfolio. Future additions to the allowance for loan and lease losses may be necessary. For further information, see Item 1--"Business--Loans Held for Investment." Asset/Liability Management and Market Risk General The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest- earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of falling interest rates, the net earnings of an institution with a positive gap theoretically may be adversely affected due to its interest- earning assets repricing to a greater extent than its interest-bearing liabilities. Conversely, during a period of rising interest rates, theoretically, the net earnings of an institution with a positive gap position may increase as it is able to invest in higher yielding interest-earning assets at a more rapid rate than its interest-bearing liabilities reprice. In addition, a positive gap may not protect an institution with a large portfolio of ARM's from increases in interest rates for extended time periods as such instruments generally have periodic and lifetime interest rate caps. Our ARM's are predominantly tied to LIBOR. Interest rates and the resulting cost of funds increases in a rapidly increasing rate environment could exceed the cap levels on these loan products and negatively impact net interest income. We manage portfolio interest rate risk through the aggressive marketing and funding of adjustable rate loans, which generally reprice at least semi- annually and are generally indexed to Prime or LIBOR. As a result of this strategy, at December 31, 1999, our total interest-earning assets maturing or repricing within one year exceeded our total interest-bearing liabilities maturing or repricing in the same time by $286.9 million, representing a positive cumulative gap ratio of 119.6%. We closely monitor our interest rate risk as such risk relates to operational strategies. Our cumulative gap position is at a level satisfactory to management and we are attempting to maintain a positive gap position in light of the current interest rate environment. However, there can be no assurances that we will be able to maintain a positive gap position or that our strategies will not result in a negative gap position in the future. The level of the movement of interest rates, up or down, is an uncertainty and could have a negative impact on the earnings of our company. Total Rate of Return Swaps During 1999, 1998 and 1997, we entered into total rate of return swap contracts for investment purposes with various counterparties, the provisions of which entitle our company to receive the total return on various commercial loans in exchange for a floating payment of one month LIBOR plus a spread. These contracts are off balance sheet instruments. 76 As of December 31, 1999, 1998 and 1997, we were party to total rate of return swap contracts with a total notional amount of $83.6 million, $280.4 million and $150.6 million, under which our company was obligated to pay one month LIBOR plus a weighted average spread of 0.88%, 0.88% and 0.78%, respectively. The weighted average remaining life of these contracts was 60.0 months, 31.2 months and 37.1 months as of December 31, 1999, 1998 and 1997. For the years ended December 31, 1999, 1998 and 1997, our company recognized income of $2.9 million and $5.4 million and $448,000 on our total return swaps, respectively. As a part of the Pacifica Partners I LP collateralized loan obligation ("CLO") fund launched by the Company in August 1998, the Company delivered subordinate bonds of approximately $51.3 million into a total rate of return swap with the Canadian Imperial Bank of Commerce ("CIBC"). The provisions of the swap entitle the Company to receive the total return on the subordinate bonds delivered and pay a floating payment of LIBOR plus a weighted average spread of 1.36%. The Company delivered cash and various equity securities to CIBC as collateral for the swap. At December 31, 1999 and 1998, $25.9 million and $17.8 million was outstanding and classified as Trading Securities on the consolidated balance sheet. Risk Management and Market Sensitive Instruments Interest rate risk is managed within a tight duration band, and credit risk is managed by maintaining high average quality ratings and diversified sector exposure within the securities and loan portfolios. In connection with our investment and risk management objectives, we also use financial instruments whose market value is at least partially determined by, among other things, levels of or changes in domestic interest rates (short-term or long-term), prepayment rates, equity markets or credit ratings/spreads. Using financial modeling and other techniques, we regularly evaluate the appropriateness of investments relative to management-approved investment guidelines and the business objective of the portfolios. We operate within these investment guidelines by maintaining a mix of loans and investments that diversifies our assets. The following discussion about our risk management activities includes "forward-looking statements" that involve risk and uncertainties. Set forth below are management's projections of hypothetical net losses in fair value of shareholders' equity of our market sensitive financial instruments if certain assumed changes in market rates and prices were to occur (sensitivity analysis). While we believe that the assumed market rate changes are reasonably possible in the near term, actual results may differ, particularly as a result of any management actions that would be taken to mitigate such hypothetical losses in fair value of shareholders' equity. Based on our overall exposure to interest rate risk and equity price risk, we believe that these changes in market rates and prices would not materially affect the consolidated near-term financial position, results of operations or cash flows of our company. Interest Rate Risk. Assuming immediate increases of 100 and 200 basis points in interest rates the net hypothetical increase of net income and the value of shareholders' equity related to financial and derivative instruments is estimated to be $9.0 million and $17.7 million (after tax), or 4.38% and 8.61%, of total shareholders' equity, respectively, at December 31, 1999. We believe that an interest rate shift of this magnitude represents a moderately advantageous scenario. Assuming immediate decreases of 100 and 200 basis points in interest rates the net hypothetical loss of net income and the value of shareholders' equity related to financial and derivative instruments is estimated to be ($9.4) million and ($19.0) million (after tax), or 4.55% and 9.27%, of total shareholders' equity, respectively, at December 31, 1999. The Company believes that an interest rate shift of this magnitude represents a moderately adverse scenario. The effect of interest rate risk on potential near-term net income, cash flow and fair value was determined based on commonly used models. The models project the impact of interest rate changes on a wide range of factors, including duration, prepayment, put options and call options. Fair value was estimated based on the net present value of cash flows or duration estimates, using a representative set of likely future interest rate scenarios. Equity Price Risk. Our available for sale equity securities includes the common stock of ICCMIC. Assuming an immediate decrease of 10% in equity prices for such equity securities, the hypothetical loss in fair 77 value of shareholders' equity related equity securities is estimated to be $1.7 million after tax or 0.82% of total shareholders' equity at December 31, 1999. Assuming an immediate increase of 10% in equity prices for such equity securities, the hypothetical gain in fair value of shareholders' equity related equity securities is estimated to be $1.7 million after tax or 0.82% of total shareholders' equity at December 31, 1999. Repricing/Maturity of Interest-Earning Assets and Interest-Bearing Liabilities The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1999, which we anticipate to reprice or mature in each of the future time periods shown. The amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual terms of the asset or liability.
At December 31, 1999 ----------------------------------------------------------------------------------------------------- More than More than More than More than More than More Non 3 Months 3 Months to 6 Months 1 Year to 3 Years to 5 Years to than Interest or Less 6 Months to 1 Year 3 Years 5 Years 10 Years 10 Years Bearing Total ---------- ----------- --------- --------- ---------- ---------- -------- -------- ---------- Interest-earning assets: Cash.................. $ 33,898 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 33,898 Interest earning deposits............. 248,182 -- -- -- -- -- -- -- 248,182 Trading securities.... 160,805 -- -- -- -- -- -- -- 160,805 Securities available for sale............. 61,546 -- -- -- -- -- 12,828 -- 74,374 FHLB stock............ 6,960 -- -- -- -- -- -- -- 6,960 Mortgage loans held for sale............. 289,398 -- -- -- -- -- -- -- 289,398 Loans held for investment, net of unearned discount and deferred loan fees(1)............... 814,793 78,157 53,922 27,551 10,681 62,307 170,963 54,699 1,273,073 ---------- -------- --------- --------- -------- --------- -------- -------- ---------- Total interest-earning assets............... 1,615,582 78,157 53,922 27,551 10,681 62,307 183,791 54,699 2,086,690 Less: Allowance for loan losses............... -- -- -- -- -- -- -- (31,841) (31,841) ---------- -------- --------- --------- -------- --------- -------- -------- ---------- Net interest-earning assets............... 1,615,582 78,157 53,922 27,551 10,681 62,307 183,791 22,858 2,054,849 Non-interest-earning assets............... -- -- -- -- -- -- -- 146,766 146,766 ---------- -------- --------- --------- -------- --------- -------- -------- ---------- Total assets.......... $1,615,582 $ 78,157 $ 53,922 $ 27,551 $ 10,681 $ 62,307 $183,791 $169,623 $2,201,615 ========== ======== ========= ========= ======== ========= ======== ======== ========== Interest-bearing liabilities: Deposits.............. $ 449,092 $454,906 $ 482,451 $ 227,349 $ 440 $ -- $ -- $ 520 $1,614,758 Other borrowings...... 74,309 -- -- -- -- -- -- -- 74,309 Senior Notes.......... -- -- -- -- -- 185,185 -- -- 185,185 ROPES................. -- -- -- -- 61,750 -- -- -- 61,750 ---------- -------- --------- --------- -------- --------- -------- -------- ---------- Total interest-bearing liabilities.......... 523,401 454,906 $ 482,451 $ 227,349 $ 62,190 $ 185,185 $ -- 520 1,936,002 Non-interest bearing liabilities.......... -- -- -- -- -- -- -- 60,233 60,233 Shareholders' equity.. -- -- -- -- -- -- -- 205,380 205,380 ---------- -------- --------- --------- -------- --------- -------- -------- ---------- Total liabilities and shareholders' equity............... $ 523,401 $454,906 $ 482,451 $ 227,349 $ 62,190 $ 185,185 $ -- $266,133 $2,201,615 ========== ======== ========= ========= ======== ========= ======== ======== ========== Interest rate sensitivity gap(2)... 1,092,181 (376,749) (428,529) (199,798) (51,509) (122,878) 183,791 22,338 118,847 Cumulative interest Sensitivity Gap...... $1,092,181 $715,432 $ 286,903 $ 87,105 $ 35,596 $(87,282) $ 96,509 $118,847 Cumulative interest sensitivity gap as a % of total assets.... 49.61% 32.50% 13.03% 3.96% 1.62 % -3.96 % 4.38% Cumulative net interest earning assets as a percentage of cumulative interest- bearing liabilities.. 308.67% 173.13% 119.64% 105.16% 102.03 % 95.49 % 104.99% 106.14 %
- ------- (1) For purposes of the gap analysis, unearned discount and deferred fees are pro rated for loans receivable. (2) Interest sensitivity gap represents the difference between net interest- earning assets and interest-bearing liabilities. 78 Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM's, have features which restrict changes in interest rates on a short term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those reflected in the table. Finally, the ability of many borrowers to service their ARM's may decrease in the event of an interest rate increase. 79 Average Balance Sheet The following tables set forth certain information relating to our company for 1999, 1998, and 1997. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average month-end balances. Management does not believe that the use of average monthly balances instead of average daily balances has caused any material differences in the information presented. The average balance of loans receivable includes loans on which we have discontinued accruing interest. The yields and costs include fees which are considered adjustments to yields.
Year Ended December 31, ------------------------------------------------------------------------------------ 1999 1998 1997 --------------------------- --------------------------- --------------------------- Yield/ Yield/ Yield/ Average Average Average Average Average Average Balance Interest Cost Balance Interest Cost Balance Interest Cost ---------- -------- ------- ---------- -------- ------- ---------- -------- ------- (Dollars in thousands) ASSETS: ------- Interest-earning assets: Investments and interest-earning deposits.............. $ 295,197 25,520 8.65% $ 242,246 $ 28,674 11.84% $ 219,664 $ 24,157 11.00% FHLB stock............. 6,166 321 5.21 5,031 291 5.78 10,334 619 5.99 Loans held for sale and investment, net(1)................ 1,572,668 178,229 11.33 1,643,147 200,827 12.22 1,616,263 176,146 10.90 Retained interest and capitalized excess servicing fees receivable............ 24,926 3,368 13.51 31,956 6,048 18.93 29,064 2,678 9.21 ---------- -------- ----- ---------- -------- ------ ---------- -------- ------ Total interest- earning assets...... 1,898,957 207,438 10.92 1,922,380 235,840 12.27 1,875,325 203,600 10.86 ---------- -------- ----- ---------- -------- ------ ---------- -------- ------ Non interest-earning assets................. 268,728 361,593 299,782 Total assets......... $2,167,685 $2,283,973 $2,175,107 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: --------------------- Interest-bearing liabilities: Deposits............... $1,579,605 $ 86,582 5.48% $1,512,057 $ 87,030 5.76% $1,218,123 $ 71,014 5.83% Borrowings from FHLB... 7,590 630 8.30 24,451 1,631 6.67 57,154 3,327 5.82 Other borrowings....... 69,306 3,920 5.66 69,844 4,150 5.94 327,076 17,896 5.47 Senior Notes........... 207,706 21,540 10.37 219,837 22,392 10.19 209,672 21,671 10.34 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company............... 66,192 7,390 11.16 70,000 7,903 11.29 39,101 4,305 11.01 Preferred Stock Series B..................... 11,539 1,545 13.39 -- -- -- -- -- -- ---------- -------- ----- ---------- -------- ------ ---------- -------- ------ Total interest-bearing liabilities........... 1,941,938 121,607 6.26 1,896,189 123,106 6.49 1,851,126 118,213 6.39 ---------- -------- ----- ---------- -------- ------ ---------- -------- ------ Non interest-bearing liabilities............ 11,461 95,122 78,117 Shareholders' equity.... 214,286 292,662 245,864 ---------- ---------- ---------- Total liabilities and shareholders' equity................ $2,167,685 $2,283,973 $2,175,107 ========== ========== ========== Net interest rate spread................. $ 85,831 4.66% $112,734 5.78% $ 85,387 4.47% ======== ======== ======== Net interest margin..... 4.52% 5.86% 4.55% Ratio of interest- earning assets to interest-bearing liabilities............ 97.79% 101.38% 101.31%
- ------- (1) Net of deferred income and the allowance for loan losses, includes nonaccrual loans. 80 Analysis of Net Interest Income Net interest income represents the difference between income on interest- earning assets and expense on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them, respectively. Rate/Volume Analysis The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our net interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), (iii) changes in interest due to both rate and volume and (iv) the net change.
Year Ended December 31, -------------------------------------------------------------------------------- 1999 Over 1998 1998 Over 1997 --------------------------------------- --------------------------------------- Volume Rate Rate/Volume Total Volume Rate Rate/Volume Total ------- -------- ----------- -------- -------- ------- ----------- -------- (In thousands) Increase/(decrease) in: Investments and interest-- bearing deposits $ 6,269 $ (7,728) $(1,695) $ (3,154) $ 2,484 $ 1,845 $ 188 $ 4,517 FHLB stock............ 66 (29) (7) 30 (318) (22) 12 (328) Loans held for sale... -- -- -- -- (35,500) 2,790 (1,476) (34,186) Loans held for investment, net...... (8,613) (14,624) 639 (22,598) 30,053 22,624 6,190 58,867 Retained interest and capitalized excess servicing fees receivable........... (1,331) (1,732) 383 (2,680) 266 2,825 279 3,370 ------- -------- ------- -------- -------- ------- ------- -------- Total interest income.............. (3,609) (24,113) (680) (28,402) (3,015) 30,062 5,193 32,240 ------- -------- ------- -------- -------- ------- ------- -------- Deposits.............. 3,891 (4,234) (105) (448) 17,136 (853) (267) 16,016 Borrowings from Imperial Bank........ -- -- -- -- -- -- -- -- FHLB borrowings....... (1,125) 399 (275) (1,001) (1,903) 486 (279) (1,696) Other borrowings...... (32) (196) (2) (230) (14,071) 1,537 (1,212) (13,746) Senior Notes.......... (1,236) 396 (12) (852) 1,051 (315) (15) 721 ROPES................. (430) (91) 8 (513) 3,402 109 87 3,598 Mandatorily redeemable cumulative preferred stock................ -- -- 1,545 1,545 -- -- -- -- ------- -------- ------- -------- -------- ------- ------- -------- Total interest expense............. 1,068 (3,726) 1,159 (1,499) 5,615 964 (1,686) 4,893 ------- -------- ------- -------- -------- ------- ------- -------- Change in net interest income................. $(4,677) $(20,387) $(1,839) $(26,903) $ (8,630) $29,098 $ 6,879 $ 27,347 ======= ======== ======= ======== ======== ======= ======= ========
Recent Accounting Pronouncements The Company is affected by recent accounting pronouncements. For a description of these standards and the effect, if any, adoption has had or will have on the Company's consolidated financial statements, see "Note 3 of Notes to Consolidated Financial Statements." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Item 7--"Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset/Liability Management and Market Risk." 81 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report.............................................. 83 Consolidated Balance Sheets............................................... 84 Consolidated Statements of Operations and Comprehensive Income (Loss)..... 85 Consolidated Statements of Changes in Shareholders' Equity................ 87 Consolidated Statements of Cash Flows..................................... 88 Notes to Consolidated Financial Statements................................ 90
All supplemental schedules are omitted as inapplicable or because the required information is included in the consolidated financial statements or notes thereto. 82 INDEPENDENT AUDITORS' REPORT The Board of Directors Imperial Credit Industries, Inc.: We have audited the accompanying consolidated balance sheets of Imperial Credit Industries, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations and comprehensive income (loss), changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of Imperial Credit Industries, Inc. and subsidiaries' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Imperial Credit Industries, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. KPMG LLP Los Angeles, California January 24, 2000 83 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
December 31, --------------------- 1999 1998 ---------- ---------- ASSETS Cash.................................................... $ 33,898 $ 297,772 Interest bearing deposits............................... 248,182 1,415 Investment in Federal Home Loan Bank stock.............. 6,960 4,657 Securities held for trading, at market.................. 160,805 170,752 Securities available for sale, at market................ 74,374 60,015 Loans and leases held for sale, net..................... 289,398 319,061 Loans and leases held for investment, net............... 1,241,232 1,320,095 Servicing rights........................................ 802 4,329 Retained interest in loan and lease securitizations..... 10,220 27,011 Accrued interest receivable............................. 8,272 10,114 Premises and equipment, net............................. 13,576 11,664 Other real estate and other assets owned, net........... 4,894 14,024 Goodwill................................................ 34,961 37,498 Investment in Franchise Mortgage Acceptance Company..... -- 56,334 Other assets............................................ 36,549 35,630 Net assets of discontinued operations................... 37,492 46,812 ---------- ---------- Total assets.......................................... $2,201,615 $2,417,183 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits................................................ $1,614,758 $1,714,252 Borrowings from Federal Home Loan Bank.................. -- 20,000 Other borrowings........................................ 74,309 102,270 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company ("ROPES").................... 61,750 70,000 Senior Notes............................................ 185,185 219,858 Accrued interest payable................................ 18,811 25,421 Accrued income taxes payable............................ 16,101 3,840 Minority interest in consolidated subsidiaries.......... 2,684 3,217 Other liabilities....................................... 22,637 24,804 ---------- ---------- Total liabilities..................................... 1,996,235 2,183,662 ---------- ---------- Shareholders' equity: Preferred stock, 8,000,000 shares authorized; none issued or outstanding.................................. -- -- Common stock, no par value. Authorized 80,000,000 shares; 33,198,661 and 36,785,898 shares issued and outstanding at December 31, 1999 and 1998, respectively........................................... 97,220 129,609 Retained earnings....................................... 98,437 101,265 Shares held in deferred executive compensation plan..... 7,107 3,833 Accumulated other comprehensive income (loss)-- unrealized gain (loss) on securities available for sale, net.............................................. 2,616 (1,186) ---------- ---------- Total shareholders' equity............................ 205,380 233,521 ---------- ---------- Total liabilities and shareholders' equity............ $2,201,615 $2,417,183 ========== ==========
See accompanying notes to consolidated financial statements. 84 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Dollars in thousands, except per share data)
Years Ended December 31, ----------------------------- 1999 1998 1997 -------- --------- -------- Revenue: Interest on loans and leases................... $178,229 $ 200,827 $176,146 Interest on investments........................ 25,841 28,965 24,776 Interest on other finance activities........... 3,368 6,048 2,678 -------- --------- -------- Total interest income........................ 207,438 235,840 203,600 Interest on deposits........................... 86,582 87,030 71,014 Interest on other borrowings................... 4,550 5,781 21,223 Interest on long term debt..................... 30,475 30,295 25,976 -------- --------- -------- Total interest expense....................... 121,607 123,106 118,213 -------- --------- -------- Net interest income.......................... 85,831 112,734 85,387 Provision for loan and lease losses............ 35,340 15,450 20,975 -------- --------- -------- Net interest income after provision for loan and lease losses.............................. 50,491 97,284 64,412 -------- --------- -------- Gain on sale of loans and leases............... 6,480 14,888 69,737 Asset management fees.......................... 10,054 7,591 5,810 Investment banking and brokerage fees.......... 27,198 18,463 7,702 Loan servicing income.......................... 6,885 11,983 9,474 Gain (loss) on sale of securities.............. 32,742 (592) 112,185 Equity in net income of Southern Pacific Funding Corporation........................... -- 12,739 25,869 Equity in net (loss) income of Franchise Mortgage Acceptance Company................... (53) 3,235 (3,050) Mark to market on securities and loans held for sale...................................... (28,641) (42,388) (341) Loss on impairment of equity securities........ -- (120,138) -- Gain on termination of REIT advisory agreement..................................... -- -- 19,046 Other income................................... 13,894 13,118 4,060 -------- --------- -------- Total other income (loss).................... 68,559 (81,101) 250,492 -------- --------- -------- Total revenue.................................. 119,050 16,183 314,904 -------- --------- -------- Expenses: Personnel expense.............................. 50,034 52,003 45,192 Commission expense............................. 10,307 9,633 6,417 Amortization of servicing rights............... 4,223 1,486 3,088 Occupancy expense.............................. 5,658 5,750 4,319 Net expenses (income) of other real estate owned......................................... 1,386 (901) 6,527 Professional services.......................... 10,265 10,848 9,665 Telephone and other communications............. 3,768 3,692 2,222 Amortization of goodwill....................... 14,506 2,686 2,491 Provision for loss on repurchase of former mortgage banking loans........................ -- 4,750 5,400 Loss on restructuring of loan to Dabney/Resnick/Imperial, LLC.................. -- -- 3,709 General and administrative expense............. 26,453 30,889 25,831 -------- --------- -------- Total expenses............................... 126,600 120,836 114,861 -------- --------- -------- (Loss) income from continuing operations before income taxes, minority interest and extraordinary item............................ (7,550) (104,653) 200,043 Income taxes................................... (3,074) (44,064) 74,267 Minority interest in income (loss) of consolidated subsidiaries..................... 1,474 (1,464) 10,513 -------- --------- -------- (Loss) income from continuing operations before extraordinary item..................... (5,950) (59,125) 115,263 Operating loss from discontinued operations of AMN (net of $557,000, $2.1 million and $15.5 million of income taxes in 1999, 1998 and 1997, respectively)....................... (899) (3,232) (25,347) Loss on disposal of AMN including provision of $3.7 million for operating losses during phase-out period (net of $6.6 million of income taxes)................................. -- (11,276) -- -------- --------- -------- (Loss) income before extraordinary item........ (6,849) (73,633) 89,916 Extraordinary item--gain (loss) on early extinguishment of debt, net of income taxes... 4,021 -- (3,995) -------- --------- -------- Net (loss) income............................ $ (2,828) $ (73,633) $ 85,921 -------- --------- -------- Other comprehensive income: Unrealized gains (losses) on securities available for sale............................ 7,890 (5,333) 3,332 Reclassification adjustment for gains included in noninterest income......................... (1,492) (53) (8,668) Income taxes................................... 2,596 (2,274) (2,252) -------- --------- -------- Other comprehensive income (loss)............ 3,802 (3,112) (3,084) -------- --------- -------- Comprehensive income (loss).................. $ 974 $ (76,745) $ 82,837 ======== ========= ========
See accompanying notes to consolidated financial statements. 85 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)--(Continued) (Dollars in thousands, except per share data)
Years Ended December 31, ---------------------- 1999 1998 1997 ------ ------ ------ Basic (loss) income per share: (Loss) income from continuing operations before extraordinary item.................................. $(0.17) $(1.55) $ 2.99 Loss from discontinued operations, net of income taxes............................................... (0.02) (0.08) (0.66) Loss on disposal of AMN, net of income taxes......... -- (0.30) -- Extraordinary item--gain (loss) on early extinguishment of debt, net of income taxes......... 0.11 -- (0.10) ------ ------ ------ Net (loss) income per common share................... $(0.08) $(1.93) $ 2.23 ====== ====== ====== Diluted (loss) income per share: (Loss) income from continuing operations before extraordinary item.................................. $(0.17) $(1.55) $ 2.82 Loss from discontinued operations, net of income taxes............................................... (0.02) (0.08) (0.62) Loss on disposal of AMN, net of income taxes......... -- (0.30) -- Extraordinary item--gain (loss) on early extinguishment of debt, net of income taxes......... 0.11 -- (0.10) ------ ------ ------ Net (loss) income per common share................... $(0.08) $(1.93) $ 2.10 ====== ====== ======
See accompanying notes to consolidated financial statements. 86 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Shares Held Accumulated Common in Other Total Shares Common Retained DEC Comprehensive Shareholders' Outstanding Stock Earnings Plan Income (Loss) Equity ----------- -------- -------- ------ ------------- ------------- (In thousands) Balance, December 31, 1996................... 38,291 $145,521 $ 88,977 $ -- $ 5,010 $239,508 Exercise of stock options................ 530 1,332 -- -- -- 1,332 Unrealized depreciation on securities available for sale, net.......... -- -- -- -- (3,084) (3,084) Tax benefit from exercise of stock options................ -- 807 -- -- -- 807 Repurchase and retirement of stock and warrants............... (30) (551) -- -- -- (551) Net income, 1997........ -- -- 85,921 -- -- 85,921 ------ -------- -------- ------ ------- -------- Balance, December 31, 1997................... 38,791 147,109 174,898 -- 1,926 323,933 Exercise of stock options................ 244 1,037 -- -- -- 1,037 Stock held for deferred compensation plan...... -- (3,833) -- 3,833 -- -- Issuance of common stock for Imperial Credit Lender Services, Inc. acquisition............ 236 5,000 -- -- -- 5,000 Unrealized depreciation on securities available for sale, net.......... -- -- -- -- (3,112) (3,112) Tax benefit from exercise of stock options................ -- 4,601 -- -- -- 4,601 Repurchase and retirement of stock and warrants............... (2,485) (24,305) -- -- -- (24,305) Net loss, 1998.......... -- -- (73,633) -- -- (73,633) ------ -------- -------- ------ ------- -------- Balance, December 31, 1998................... 36,786 $129,609 $101,265 $3,833 $(1,186) $233,521 Exercise of stock options................ 95 249 -- -- -- 249 Stock held for deferred compensation plan...... -- (3,274) -- 3,274 -- -- Unrealized appreciation on securities available for sale, net.......... -- -- -- -- 3,802 3,802 Tax benefit from exercise of stock options................ -- 96 -- -- -- 96 Repurchase and retirement of stock and warrants............... (3,682) (29,460) -- -- -- (29,460) Net loss, 1999.......... -- -- (2,828) -- -- (2,828) ------ -------- -------- ------ ------- -------- Balance, December 31, 1999................... 33,199 $ 97,220 $ 98,437 $7,107 $ 2,616 $205,380 ====== ======== ======== ====== ======= ========
See accompanying notes to consolidated financial statements. 87 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, --------------------------------- 1999 1998 1997 --------- --------- ----------- (In thousands) Cash flows from operating activities: (Loss) income from continuing operations.. $ (5,950) $ (59,125) $ 115,263 Adjustments to reconcile (loss) income from continuing operations to net cash provided by (used in) operating activities: Cash used in discontinued operations.... (2,513) (1,824) (22,112) Provision for loan and lease losses..... 35,340 15,450 20,975 Loss on impairment of equity securities............................. -- 120,138 -- Mark to market on securities and loans held for sale.......................... 28,641 42,388 -- Loss on restructuring of loan to Dabney/Resnick/Imperial, LLC........... -- -- 3,709 Provision for loss on repurchase of former mortgage banking loans.......... -- 4,750 5,400 Depreciation............................ 4,394 3,714 4,180 Amortization of goodwill................ 14,506 2,686 2,491 Amortization of servicing rights........ 4,223 1,486 3,088 Accretion of discount................... (3,368) (6,048) (2,678) Gain on sale of loans and leases........ (6,480) (14,888) (69,737) (Gain) loss on sale of securities....... (32,742) 592 (112,185) Gain on termination of REIT advisory agreement.............................. -- -- (19,046) Equity in net earnings of SPFC.......... -- (12,739) (25,869) Equity in net loss (income) of FMC...... 53 (3,235) 3,050 Loss on sale of OREO.................... 769 597 4,453 Writedowns (recovery) on other real estate owned........................... 287 (2,075) 892 (Benefit) provision for deferred income taxes.................................. (6,253) (55,540) 40,294 Originations of loans held for sale..... (466,000) (660,000) (1,061,500) Sales and collections on loans held for sale................................... 540,672 673,426 1,149,839 Purchase of trading securities.......... (71,997) (146,187) (126,083) Sales of trading securities............. 100,469 113,819 48,369 Other, net.............................. 17,571 (54,520) 55,770 --------- --------- ----------- Net cash provided by (used in) by operating activities................................. 151,622 (37,135) 18,563 --------- --------- ----------- Cash flows from investing activities: Net (increase) decrease in interest bearing deposits......................... (246,767) 102,323 (100,369) Proceeds from sale of servicing rights.... -- -- 2,213 Proceeds from sale of other real estate owned.................................... 10,351 13,743 21,171 Purchase of securities available for sale..................................... (26,757) (17,551) (42,938) Sales of securities available for sale.... 4,875 8,818 5,404 Net change in loans held for investment... (27,241) (276,629) (173,965) Purchases of premises and equipment....... (7,767) (7,833) (4,549) Proceeds from sale of securities.......... 100,558 867 85,388 Purchases of Federal Home Loan Bank stock.................................... (1,983) -- (3,634) Redemption of stock in Federal Home Loan Bank..................................... -- 1,280 15,140 Cash utilized for acquisitions............ (8,132) -- (124,488) --------- --------- ----------- Net cash used in investing activities....... (202,863) (174,982) (320,627) --------- --------- -----------
88 IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Years ended December 31, ------------------------------ 1999 1998 1997 --------- -------- --------- (In thousands) Cash flows from financing activities: Net (decrease) increase in deposits.......... $ (99,494) $555,306 $ 86,838 Advances from Federal Home Loan Bank......... 30,000 44,500 50,000 Repayments of advances from Federal Home Loan Bank........................................ (50,000) (69,500) (145,500) Net change in other borrowings............... (27,961) (42,571) 143,505 Proceeds from issuance of mandatorily redeemable cumulative preferred stock....... 30,000 -- -- Repurchase and retirement of mandatorily redeemable cumulative preferred stock....... (31,353) -- -- Proceeds from issuance of Senior Notes due 2007........................................ -- -- 194,500 Proceeds from issuance of Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company ("ROPES")......... -- -- 68,075 Repurchase of Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company ("ROPES").................... (6,628) -- -- Repurchase and retirement of common stock and warrants.................................... (29,460) (24,305) (551) Repurchase of Senior Notes................... (27,453) -- (73,241) Net change in minority interest.............. (533) 43 (51,762) Proceeds from exercise of stock options...... 249 1,037 1,332 --------- -------- --------- Net cash (used in) provided by financing activities.................................... (212,633) 464,510 273,196 --------- -------- --------- Net change in cash............................. (263,874) 252,393 (28,868) Cash at beginning of year...................... 297,772 45,379 74,247 --------- -------- --------- Cash at end of year............................ $ 33,898 $297,772 $ 45,379 ========= ======== =========
See accompanying notes to consolidated financial statements. 89 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended December 31, 1999, 1998 and 1997 1. Organization Imperial Credit Industries, Inc., is a diversified commercial lending, financial services, and investment banking company that was incorporated in 1986 in the State of California. The consolidated financial statements include Imperial Credit Industries, Inc. ("ICII"), and its wholly or majority owned consolidated subsidiaries (collectively, the "Company"). The wholly-owned subsidiaries include but are not limited to Southern Pacific Bank ("SPB"), Imperial Business Credit Inc. ("IBC"), Imperial Credit Lender Services, Inc. ("ICLS") formerly Statewide Documentation, Inc., and Imperial Credit Asset Management, Inc. ("ICAM"). Imperial Capital Group, LLC ("ICG") is a majority owned consolidated subsidiary which is approximately 65% owned by our company and approximately 35% owned by ICG's management. Prior to November 1, 1999, we held a significant equity interest in a publicly traded company--Franchise Mortgage Acceptance Company ("FMC") (Nasdaq Symbol: FMAX) (See "Franchise Mortgage Acceptance Company"). Our company also owns a 9% equity interest in a commercial REIT, Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC") (Nasdaq Symbol: ICMI). Through October 22, 1999, a wholly owned subsidiary of ours, Imperial Credit Commercial Asset Management Corp. ("ICCAMC"), managed the assets and operations of ICCMIC. All material intercompany balances and transactions with consolidated subsidiaries have been eliminated. 2. Operating Activities General Business Activities In 1995, the Company began to diversify away from the conforming residential mortgage lending business, the Company's traditional focus, and into other select lending businesses. The Company expanded several existing businesses and commenced several new businesses, including non-conforming residential mortgage banking, commercial mortgage banking, business lending and consumer lending. The Company's loans and leases by operating segments consist primarily of the following: commercial mortgage loans, income producing property loans and business lending--equipment leasing, asset-based lending, film and television productions loans, and participations in syndicated commercial loans. The Company solicits loans and leases from brokers on a wholesale and portfolio basis and originates loans directly with borrowers. The majority of the Company's loans and leases are funded by FDIC insured deposits at SPB. Coast Business Credit Coast Business Credit ("CBC"), a division of SPB, was acquired from Coast Federal Bank in 1995 and provides senior secured loans that are secured by accounts receivable, inventory and other assets of the borrower. Coast is headquartered in Los Angeles, California, and it has 3 loan production offices in California and has opened additional offices in Atlanta, Baltimore, Chicago, Cleveland, Detroit, Houston, Minneapolis, Phoenix, Portland, Providence and Seattle. At December 31, 1999 CBC had total commitments of $1.4 billion and loans outstanding of $748.1 million, respectively. At December 31, 1998 CBC had total commitments of $1.1 billion and loans outstanding of $633.3 million, respectively. Imperial Warehouse Finance, Inc. In October 1997, the Company's wholly-owned subsidiary, SPB, acquired substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and PrinCap Mortgage Backed, L.P. (collectively, "PrinCap") and contributed such assets to a subsidiary. The acquisition was accounted for as a purchase, and the purchase price of $123.7 million was allocated to the net assets acquired based on their fair value resulting in goodwill of $6.8 million. In 1999, PrinCap changed its name to Imperial Warehouse Finance, Inc. ("IWF"). IWF's primary business is to arrange for the extension of short-term lines of credit to mortgage companies to fund their 90 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) residential mortgage loan originations until such loans are sold. SPB provides the funding for each draw on a line, and therefore outstanding loans receivable from mortgage companies are assets of SPB. Loans are secured by the mortgage note of the property being funded. At December 31, 1999 IWF had total commitments and warehouse lines outstanding of $300.4 million and $78.1 million, respectively. At December 31, 1998 IWF had total commitments and loans outstanding of $401.5 million and $181.0 million, respectively. Loan Participation and Investment Group The Loan Participation and Investment Group ("LPIG") was formed by SPB in September 1995. This Group invests in and purchases senior secured debt of other companies (referred to as a "participation") in the secondary market. At December 31, 1999, LPIG had total commitments and outstanding loans of $459.5 million and $217.0 million, respectively, as compared to $523.3 million and $222.1 million, respectively at December 31, 1998. The Lewis Horwitz Organization On October 1, 1999, we purchased from Imperial Bank substantially all of the assets and assumed certain liabilities of The Lewis Horwitz Organization ("LHO"). The acquisition was accounted for as a purchase, and the purchase price of $7.0 million was allocated to the net assets acquired based on their fair values resulting in goodwill of $12.0 million. As part of the acquisition, we acquired all right, title and interest in $98.2 million of motion picture and television production loans. The purchase price of the loans is equal to the gross carrying value of the loans on the books and records of Imperial Bank, except the purchase price of the first $20 million in non-accrual loans were allocated a discount of $3.6 million. Under the terms of the acquisition, we receive all contractually due interest and fees on the $98.2 million of LHO originated loans and pay Imperial Bank Prime minus 2.50%. We have agreed to immediately purchase all loans that either are currently or become classified as non-accrual, when an interest or principal payment is 90 days or more past due. Imperial Bank has agreed to finance 50% of all non-accrual purchases at the Prime rate + 1.00%. As of December 31, 1999, we acquired non-accrual loans with a fair market value of $8.2 million. We have also agreed to purchase a minimum of $50 million of the above referenced loans, inclusive of all non-accrual loans purchased, on or before March 31, 2000. Additionally, we have agreed to purchase any remaining above referenced loans on or before December 31, 2000. We also acquired other assets totaling $362,000 and assumed liabilities of $1.2 million in connection with the acquisition. Imperial Business Credit, Inc. The Company conducts its commercial equipment leasing business through its wholly owned subsidiary, Imperial Business Credit ("IBC"). IBC began its commercial leasing business through the acquisition of First Concord Acceptance Corporation in 1995 and Avco Leasing Services, Inc. in 1996. IBC's lease originations were $125.2 million and $114.3 million, and it securitized and sold $132.4 million and $117.7 million during the years ended December 31, 1999, and 1998, respectively. At December 31, 1999 and 1998, IBC serviced a total of $243.5 million and $242.6 million of leases, respectively. Income Property Lending Division The Income Property Lending Division ("IPL") of SPB was formed in February 1994 to expand our apartment and commercial property lending business. As of December 31, 1999, it had 12 loan origination offices 91 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) in California, Oregon, Colorado, Texas, Arizona, Illinois, Massachusetts and Florida. At December 31, 1999 and 1998, IPL's loans outstanding were $254.1 million and $145.5 million, respectively. For the year ended December 31, 1999 and 1998, IPL originated $339.7 million and $366.1 million of loans, respectively. Imperial Credit Asset Management, Inc. Imperial Credit Asset Management, Inc. ("ICAM") was formed in April 1998. ICAM manages Pacifica Partners I L.P., Cambria Investment Partnership I, L.P., and Catalina Investment Partnership I, L.P. Pacifica Partners I is a collateralized loan obligation fund the Company launched in August 1998. Pacifica Partners I's assets consist of nationally syndicated bank loans and high yield bonds. Cambria is a hedge fund that invests in syndicated bank loans. Imperial Credit Commercial Asset Management Corp. In October 1997, ICCMIC completed its initial public offering and sold approximately 34.5 million shares of common stock at $15.00 per share resulting in net proceeds of approximately $481.2 million. The Company purchased 2,970,000 shares of ICCMIC common stock in the offering and an additional 100,000 shares in December 1997 for a total of $43.0 million. In 1999, we sold 500,000 shares of ICCMIC common stock at $10.88 per common share, generating net proceeds of $5.4 million, resulting in a gain on sale of securities totaling $562,000. As of December 31, 1999, the Company owned 9.0% of the common stock of ICCMIC. ICCAMC, a wholly-owned subsidiary, managed the day to day operations of Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC") through October 22, 1999, an investment trust which invests primarily in performing multi-family and commercial real estate loans and mortgage-backed securities. For the year ended December 31, 1999, 1998 and from the period of initial public offering (October 1997) through December 31, 1997, ICCAMC earned $5.9 million $6.3 million and $940,000, respectively, in gross management fees from ICCMIC. In addition, the Company has received cash dividends of $3.1 million, $3.6 million and $399,000 during the years ended December 31, 1999, 1998 and from the period of initial public offering (October 1997) through December 31, 1997, respectively. During the third quarter of 1998 the market value of the Company's equity holdings in ICCMIC declined substantially to $9.75 per common share as compared to the Company's book value of $13.98 per common share. In the third quarter of 1998, we recorded an impairment charge of $13.0 million due to the other-than-temporary decline in the value of our ICCMIC stock. On July 23, 1999, we announced the signing of a definitive merger agreement by which a wholly owned subsidiary of ours would acquire all of the outstanding shares of ICCMIC (consisting of the 25,930,000 shares not already owned by us and certain of our affiliates and subsidiaries) for a cash purchase price of $11.50 per share. The merger agreement contemplated that ICCMIC will solicit and explore alternative transactions which would provide its stockholders with a more favorable alternative to the ICII merger during the 60 days following the appointment of an appraisal firm to be engaged to appraise the value of our management agreement with ICCMIC. On October 18, 1999, ICCMIC reported that the 60-day market check period during which ICCMIC was permitted to conduct an unrestricted solicitation of potentially superior proposals pursuant to the previously announced merger agreement with the Company had expired. The special committee of the ICCMIC board of directors, comprised of ICCMIC's four independent directors, with advice from Prudential Securities Incorporated, determined that none of the proposals received during the 60-day market check period was superior to the proposed merger transaction with the Company. The merger agreement provides that ICCMIC retains the ability to consider superior proposals, if any, received on an unsolicited basis. Upon completion of the proposed merger, ICCMIC's stockholders (other than ICII) will receive approximately $11.575 in cash per share. 92 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The final purchase price was determined based on the Company's offer of $11.50 per share, plus a price adjustment of $0.07 per share in connection with the results of an appraisal of ICII's management contract which expired on October 22, 1999. The proposed merger is expected to be completed during March 2000. Imperial Capital Group, LLC In 1996, the Company acquired a 1% interest in Dabney/Resnick/Imperial LLC ("DRI"), an investment banking firm located in Beverly Hills, California and purchased a warrant to acquire an additional 48% ownership. During the fourth quarter of 1997, the Company formed a new subsidiary, ICG, which includes a registered broker/dealer and an asset management company offering individual and corporate investors a wide range of financial products and services. For the year ended December 31, 1997, in connection with the formation of ICG, the Company recognized a pre-tax charge of $3.7 million relating to the restructuring of its loan to DRI. As part of the DRI restructuring, substantially all of the assets and personnel of DRI were acquired or hired by ICG. During the year ended December 31, 1999 and 1998, ICG raised $137.3 million and $190.0 million for corporate clients through private placement debt and equity offerings generating investment banking and brokerage fees of $27.2 million and $18.5 million, respectively. At December 31, 1999, the Company's ownership interest in ICG was approximately 65%. Impac Mortgage Holdings, Inc. and Impac Funding Corporation During 1995, the Company sold its mortgage conduit operations and SPB's warehouse lending operations to Impac Mortgage Holdings, Inc. ("IMH"), formerly Imperial Credit Mortgage Holdings, Inc. In exchange for these assets, the Company received approximately 11.8% of the common stock of IMH. Additionally, Imperial Credit Advisors, Inc. ("ICAI") entered into a management agreement with IMH pursuant to which ICAI advised upon the day-to- day operations of IMH and for which it was paid a management fee. During 1997, the Company sold its common stock interest in IMH for a gain of approximately $11.5 million. In December 1997, IMH and the Company negotiated a termination of the management agreement (the "Termination Agreement"). The consideration received by the Company pursuant to the Termination Agreement was $44 million, comprised of 2,009,310 shares of IMH common stock and certain securitization- related assets. Additionally, the Company agreed to cancel its note receivable from ICI Funding Corporation ("ICIFC"), a former subsidiary of ICII which is now known as Impac Funding Corporation and is the origination unit of IMH, in the amount of $29.1 million. During the first quarter of 1997, the Company disposed of its common stock interest in ICIFC at a loss of $100,000. At December 31, 1997, the IMH common stock and the securitization-related assets were recorded by the Company at their estimated fair values of approximately $35.0 million and $13.1 million, respectively, for a total of $48.1 million. This amount, when netted with the $29.1 million cancellation of the ICIFC note receivable, resulted in the gain on termination of the management agreement of approximately $19.0 million. During the third quarter of 1998 the market value of the Company's equity holdings in IMH declined substantially. Management judged the decline in IMH's stock price to be other than temporary, therefore, the Company recorded a pre-tax writedown of $24.5 million. This writedown reduced the Company's book value from $17.88 to $5.00 per common share. During 1999, the Company sold 1,887,110 common shares of IMH for an average price of $5.49 per common share, generating net proceeds of $10.4 million, resulting in a gain on sale of $929,000. At December 31, 1999, the Company did not own any shares of IMH. Franchise Mortgage Acceptance Company On March 11, 1999, FMC and Bay View Capital Corporation ("Bay View") announced that they had executed a definitive merger agreement providing for the merger of FMC with Bay View. This agreement 93 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) included selling our 38.3% ownership in FMC to Bay View. In accordance with the terms of the definitive agreement, Bay View acquired all of the common stock of FMC. Each share of FMC common stock was converted into, at the election of the holder, either $9.80 in cash, or .5444 shares of Bay View's common stock. On November 1, 1999, the merger between FMC and Bay View was completed. We received $27.7 million in cash and 4.4 million shares of Bay View common stock from the sale and exchange of our 38.3% interest in FMC. On November 5, 1999, we announced the sale of 4,342,451 shares of our Bay View common stock. As a result of these transactions, we received approximately $86.3 million in total cash proceeds and recorded a gain on sale of $30.1 million. Southern Pacific Funding Corporation In 1996, a substantial portion of the Company's operations were conducted through its sub-prime residential lending subsidiary, Southern Pacific Funding Corporation ("SPFC"). In June 1996, SPFC completed an initial public offering of its common stock pursuant to which ICII was a selling shareholder. SPFC and the Company sold 5.2 million shares and 3.5 million shares, respectively, at $11.33 per share. In a secondary offering, the Company sold 1.5 million SPFC shares at $19.83 per share. The Company recognized a gain on sale of the SPFC shares it owned of $51.2 million, which is net of offering expenses and the Company's cost basis in the shares. The Company also recognized a gain of $31.4 million related to the stock sold by SPFC. The gain related to the stock sold by SPFC was based on the difference between the Company's equity ownership in SPFC after the sale and such equity ownership prior to the sale, using the Company's respective SPFC ownership percentages. During the first quarter of 1997, the Company sold 370,000 shares of SPFC common stock at $16.63 per share generating net proceeds of $6.2 million and a gain of $4.3 million. Such transactions reduced the Company's ownership percentage in SPFC from 51.2% at December 31, 1996, to 49.4% at March 31, 1997. Accordingly, SPFC's operating results were no longer consolidated with those of the Company and the Company's investment in SPFC was accounted for under the equity method. During the third quarter of 1997, the Company sold an additional 500,000 shares of SPFC common stock generating net proceeds of $7.6 million and a gain of $5.2 million, reducing the Company's ownership percentage to 9,742,500 common shares or 47.0% of SPFC's outstanding common stock at December 31, 1997. The Company did not sell shares of SPFC stock during the years ended December 31, 1999 and 1998. On October 1, 1998, SPFC petitioned for Chapter 11 bankruptcy protection under the Federal bankruptcy laws in the U.S. Bankruptcy Court for the District of Oregon. As a result of SPFC declaring Chapter 11 bankruptcy and the resultant decline in its common stock to below one dollar per share, the Company wrote- off its total investment in and loan to SPFC. The write-off was $82.6 million for the year ended December 31, 1998. 3. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent liabilities as of the dates of the balance sheets and revenues and expenses for the periods presented. Significant balance sheet items which could be materially affected by such estimates include: the allowance for loan and lease losses, securities held for sale or available for sale, and the carrying value of the Company's trading securities, securitization related assets and loans held for sale. Actual results could differ significantly from management's estimates. Prior years' consolidated financial statements have been reclassified to conform to the 1999 presentation including the 94 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) discontinuation of the operations of AMN in 1998. Factors affecting the comparability of the financial statements between periods include the deconsolidation of FMC in the fourth quarter of 1997. Investment Securities The Company classifies investment securities as trading or available for sale. Securities held for trading are reported at fair value with unrealized gains and losses included in operations, and securities available for sale are reported at fair value with unrealized gains and losses, net of related income taxes, included as a separate component of shareholders' equity in accumulated other comprehensive income. Realized gains and losses on investment securities are included in income and are derived using the specific identification method for determining the cost of securities sold. Premiums and discounts are amortized over the life of the securities by use of the interest method. When a decline in value of a security is judged to be other than temporary, it is written down to fair value by a charge to earnings. Loans and Leases Held for Sale Loans and leases held for sale are carried at the lower of aggregate cost or market, which is based on sale commitments, discounted cash flow analysis or prices for similar products. Loans and leases which are ineligible for sale, generally those 90 days past due, are transferred to loans held for investment at the lower of cost or market on the date of transfer. Loans and Leases Held for Investment Loans and leases held for investment are recorded at the contractual amounts owed by borrowers adjusted for unamortized discounts, premiums, unearned income, undisbursed funds, deferred loan fees and the allowance for loan and lease losses. Interest income is recorded on the accrual basis in accordance with the terms of receivables, except that interest accruals are discontinued when the payment of principal or interest is 90 or more days past due or when repayment of principal and interest in full is doubtful. In general, payments received on nonaccrual loans are applied to the principal outstanding until the loan is restored to accrual status. A loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The measurement of impairment may be based on (i) the present value of the expected future cash flows of the impaired loan discounted at the loan's original effective interest rate, (ii) the observable market price of the impaired loan or (iii) the fair value of the collateral. If the recorded investment of the loan exceeds the measure of impairment, a valuation allowance is recorded in the amount of the excess. For all loans secured by real estate, the Company measures impairment by utilizing the fair value of the collateral; for other loans, discounted cash flows are used to measure impairment. The Company's income recognition policies for impaired loans are consistent with those on nonaccrual loans. All loans designated as impaired are either placed on nonaccrual status or are designated as restructured. Payments received on impaired loans are applied to the principal outstanding until the loan is returned to accrual status. On an ongoing basis, management monitors the loan and lease portfolio and evaluates the adequacy of the allowance for loan and lease losses. In determining the adequacy of the allowance for loan and lease losses, management considers such factors as historical loss experience, underlying collateral values, known problem loans, evaluations made by bank regulatory authorities, assessment of economic conditions and other appropriate data to identify the risks in the loan and lease portfolio. The amount of the allowance for loan and lease losses is based on estimates and ultimate losses may vary from current estimates. Loans deemed by management to be 95 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) uncollectible are charged to the allowance for loan and lease losses. Recoveries on loans previously charged off are credited to the allowance for loan losses. Provisions for loan and lease losses are charged to expense and credited to the allowance for loan and lease losses in amounts that satisfy regulatory requirements and are deemed appropriate by management based upon its evaluation of the known and inherent risks in the portfolio. Management believes that the allowance for loan and lease losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the SPB allowance for loan losses. Such agencies may require SPB to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Servicing Assets Servicing assets are recorded when the Company sells or securitizes loans or leases and retains the servicing rights. The total cost of the mortgage loans is allocated to the mortgage servicing rights and the loans (without the mortgage servicing rights) based on their relative fair values. Purchased servicing rights represent the cost of acquiring the rights. Servicing rights are amortized in proportion to, and over the period of, estimated future net servicing income. The Company assesses the servicing rights portfolio for impairment based on the fair value of those rights with any impairment recognized through a valuation allowance. In order to determine the fair value of the loan servicing assets, the company uses market prices under comparable servicing sales contracts, when available. Alternatively, it uses a valuation model that calculates the present value of future cash flows. Assumptions used in the valuation model include market discount rates, estimated default rates and estimated prepayment speeds. Prepayment speeds and default estimates are based on the actual prepayment and default histories of the underlying loan or lease pool. Retained Interest in Loan and Lease Securitizations The Company adopted on January 1, 1997, Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement specifies when financial assets and liabilities are to be removed from an entity's financial statements, the accounting for servicing assets and liabilities and the accounting for assets that can be contractually prepaid in such a way that the holder would not recover substantially all of its recorded investment. Under SFAS 125, an entity recognizes only assets it controls and liabilities it has incurred, discontinues recognition of assets only when control has been surrendered, and discontinues recognition of liabilities only when they have been extinguished. SFAS 125 requires that the selling entity continue to carry retained interests, including servicing assets, relating to assets it no longer recognizes. Such retained interests are based on the relative fair values of the retained interests of the subject assets at the date of transfer. Transfers not meeting the criteria for sale recognition are accounted for as a secured borrowing with a pledge of collateral. SFAS 125 requires an entity to recognize its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset or liability. The servicing asset or liability is amortized in proportion to, and over the period of, net servicing income or loss. Servicing assets and liabilities are assessed for impairment based on their fair value. The implementation of SFAS 125 did not have a material impact on the Company's financial condition or results of operation. Under the provisions of SFAS 125, securitization interests retained by the Company as a 96 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) result of securitization transactions are held as either available for sale or trading. The Company may create retained interests in loan and lease securitizations as a result of the sale of loans and leases into securitization trusts. Loan and lease securitizations have specific credit enhancement requirements in the form of overcollateralization which must be met before the Company receives cash flows due. As the securitized assets generate excess cash flows, they are initially used to pay down the balance of the pass-through certificates until such time as the ratio of securitized assets to pass-through certificates reaches the overcollateralization requirement specified in each securitization. This overcollateralization amount is carried on the balance sheet as retained interest in loan and lease securitizations. After the overcollateralization requirement and the other requirements specified in the pooling and servicing agreement have been met, the Company begins to receive the cash flows from any subordinated bonds or residual interests retained on a monthly basis. Retained interest in loan and lease securitizations is classified as a trading asset. To the extent that the future performance results are less than the Company's initial performance estimates, the Company's retained interest in loan and lease securitizations will be written down through a charge to operations. Accretion of income under the interest method on retained interest in securitizations is included in the caption "Interest on other financing activities" in the accompanying consolidated statements of operations and comprehensive income (loss). In determining the estimated fair values of the retained interest in loan and lease securitizations, the Company estimates the cash flows received by the Company after being released by the respective trust and discounts such cash flows at interest rates determined by management to be rates market participants would use in similar circumstances. Discount rates ranged from and 15% to 28% and 14% to 28%, as of and for the years ended December 31, 1999 and 1998, respectively. Quoted market prices are not available as no active market exists for retained interest in loan and lease securitizations. In estimating the cash flows, the Company considers default and prepayment rates. The default rates used by the Company as of and for the years ended December 31, 1999 and 1998 have ranged from 0.3% to 9.4% and 1.0% to 8.0%, respectively, and the prepayment rates used by the Company have ranged from 4.0% to 39.9% and 4.0% to 55.0%, respectively. Loan and Lease Sales and Related Gain or Loss Loans and leases are sold through either securitizations with servicing retained by the Company or whole loan sales. Securitizations typically require credit enhancements in the form of cash reserves or overcollateralization that are reflected as retained interest in loan and lease securitizations on the balance sheet. Sales are recognized when the transaction settles and the risks and rewards of ownership are determined to have been passed to the purchaser. Gain is recognized to the extent that the selling prices exceed the carrying value of the loans sold based on the estimated relative fair values of the assets transferred, assets obtained and liabilities incurred. The assets obtained in a sale include, generally, retained interest in loan and lease securitizations, loan servicing assets, and call options. Liabilities incurred in a sale include, generally, recourse obligations, put options, and servicing liabilities. In the securitizations completed to date, the Company retained call options giving it the right to repurchase loans sold when the outstanding amount of such loans is 1% to 10% or less of the original amount sold, depending on the terms of the related securitization. As these call options are equivalent to a cleanup call, the Company has ascribed no value to them. The securitizations completed to date had no put option features. Loan Origination Fees Origination fees received on loans held for sale, net of direct costs related to the origination of the loans, are deferred until the time of sale and are included in the computation of the gain or loss on the sale of the related loans. Commitment fee income is deferred until each loan is funded and sold, and recorded as a part of 97 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the gain on sale of the loan in the same percentage as such loan is to the total commitment. Any remaining deferred commitment fee income is recognized at expiration of the commitment. When exercise of such commitment is deemed remote, the fee is recognized over the remaining commitment period. Origination fees on loans held for investment, net of direct costs related to the origination of the loans, are deferred and amortized over the contractual lives of the related loans using the interest method. When a loan is classified as a nonaccrual loan, the related net deferred origination fees are no longer accreted to income. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation or amortization. Depreciation on premises and equipment is recorded using the straight-line method over the estimated useful lives of individual assets (3 to 7 years). Leasehold improvements are amortized over the terms of their related leases or the estimated useful lives of improvements, whichever is shorter. Interest Bearing Deposits Interest bearing deposits consist of time certificates, investment in federal funds and money market accounts. Amounts are carried at cost which approximates market value. Other Real Estate Owned Foreclosed real estate is transferred from the loan portfolio at the lower of the carrying value of the loan or net fair value of the property less estimated selling costs and is classified as other real estate owned ("OREO"). The excess carrying value, if any, of the loan over the estimated fair value of the collateral based on appraisal or broker opinion of value less estimated selling costs is charged to the allowance for loan losses. Any subsequent impairments in value are recognized through a valuation allowance. Gains and losses from sales of OREO, provisions for losses on OREO, and net operating expenses of OREO are recorded in operations and included in the caption "net expenses of other real estate owned" in the accompanying consolidated statements of operations and comprehensive income (loss). Income Taxes The Company files a combined California franchise tax return and a consolidated Federal income tax return with all of its operating subsidiaries except ICG. The Company accounts for income taxes using the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Goodwill Goodwill is amortized on a straight-line basis over its estimated useful life of 15 years. Goodwill is reviewed for possible impairment when events or changed circumstances may affect the underlying basis of the asset. Impairment is measured by discounting operating income of the related entity at an appropriate discount 98 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) rate. Impairment charges of $11.3 million related to goodwill at IBC are classified as amortization of goodwill. At December 31, 1999 and 1998, Goodwill is presented net of accumulated amortization of $21.9 million and $7.4 million, respectively. Debt Issue Costs Capitalized debt issue costs are included in Other Assets and are amortized to interest expense over the life of the related debt using the interest method. Hedging Loans Held for Sale The Company regularly sells or securitizes fixed and variable rate mortgage loans. To offset the effects of interest rate fluctuations on the value of its fixed-rate loans held for sale, the Company in certain cases will hedge its interest rate risk related to loans held for sale by selling United States Treasury futures contracts. Unrealized and realized gains and losses on such positions are deferred as an adjustment to the carrying value of loans and leases held for sale and included in income as gain or loss on sale of loans when the related loans are sold. Management has determined that hedge accounting is appropriate for the Company's hedging program because the hedged loans expose the Company to price risk. The futures contracts reduce that risk and are designated as hedges, and at the inception of the hedge and throughout the hedge period, there is a high correlation between the price of the futures contracts and the fair value of the loans being hedged. In the event correlation does not remain high, the futures contracts will cease to be accounted for as hedges and a gain or loss will be recognized to the extent the futures results have not been offset by the price changes of the hedged loans. Total Rate of Return Swaps The Company has entered into total rate of return swap contracts with various investment bank counterparties, the provisions of which entitle the Company to receive the total return on various commercial and income property loans and securities in exchange for a floating payment of one month LIBOR plus a spread. These contracts are off-balance sheet financial instruments. The Company's cash collateral held by the counterparties is included in trading securities. Net income or expense on these contracts is included in interest income, and the contracts are carried at their estimated fair values. Equity Investments Equity investments are carried under the equity method of accounting. Accordingly, the Company records as a part of its earnings its ownership percentage of the equity investment's net income. Dividends received from such subsidiaries, if any, are credited to the investment balance and not recorded as earnings. The Company records gains from the sale of stock in subsidiaries carried under the equity method based on the difference between the Company's equity ownership after the sale and such equity ownership prior to the sale, using the Company's respective ownership percentages. Deferred income tax liabilities on such gains are accrued at the time such gains are recognized. During the third quarter of 1999, the Company determined that we did not have the ability to exercise significant influence over FMC, and therefore, we changed to the cost method of accounting for this investment. Stock Based Compensation As permitted by SFAS No. 123, "Accounting for Stock Based Compensation", the Company accounts for stock based employee compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. The Company provides the pro forma and plan disclosures as set forth in SFAS 123. 99 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Comprehensive Income Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners. Comprehensive income generally includes net income, foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on investments in certain debt and equity investments (i.e., securities available for sale). Income (Loss) Per Share Diluted loss per share for 1999 and 1998 was calculated using the weighted average number of shares outstanding for the respective year ends. Diluted income per share was calculated using the weighted average number of diluted common shares outstanding including common stock equivalents which consist of certain outstanding dilutive stock options for the year ended December 31, 1997. The following table reconciles the number of shares used in the computations of basic and diluted (loss) income per share for the years ended December 31:
1999 1998 1997 ---------- ---------- ---------- Weighted-average common shares outstanding during the year used to compute basic (loss) income per share................... 34,517,165 38,228,325 38,610,952 Assumed common shares issued on exercise of dilutive stock options.................... -- -- 2,244,321 ---------- ---------- ---------- Number of common shares used to compute diluted (loss) income per share........... 34,517,165 38,228,325 40,855,273 ========== ========== ==========
Recent Accounting Pronouncements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available for sale security, or a foreign- currency-denominated forecasted transaction. Under SFAS 133, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. This statement is effective for the Company on January 1, 2001. Management is in the process of determining what effect, if any, adoption of this statement will have on the financial position and results of operations of the Company. 100 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. Supplemental Disclosure of Cash Flow Information The following information supplements the statements of cash flows:
Year Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- --------- (In thousands) Cash paid during the period for: Interest...................................... $128,217 $119,169 $119,144 Income taxes.................................. 817 5,884 24,611 Significant non-cash activities: Loans transferred from held for investment to held for sale................................ 63,829 197,518 -- Loans transferred to OREO or repossessed assets....................................... 11,834 10,046 29,359 Loans transferred from held for sale to held for investment............................... -- -- 37,007 Loans to facilitate the sale of OREO.......... -- 1,011 2,347 Retained interest in loan and lease securitizations capitalized.................. 1,964 7,182 23,592 Transfer of securities from available for sale to trading................................... -- -- 15,178 Securities received in consideration of IMH Termination Agreement........................ -- -- 48,167 Cancellation of note receivable from ICIFC in consideration of IMH Termination Agreement... -- -- 29,121 Change in unrealized gain (loss) on securities available for sale........................... 3,802 (3,112) (3,084) Deconsolidation of SPFC, ICIFC and FMAC: Decrease in loans held for sale............... -- -- 768,025 Decrease in interest only and residual certificates................................. -- -- 87,017 Decrease in retained interest in loan securitizations.............................. -- -- 30,035 Decrease in servicing rights.................. -- -- 23,142 Decrease in accrued interest receivable....... -- -- 5,026 Decrease in other borrowings.................. -- -- 693,016 Decrease in convertible subordinated debt..... -- -- 75,000 Purchase of Imperial Credit Lender Services, Inc.: Assets acquired, including goodwill of $5,000....................................... -- 5,050 -- Liabilities assumed........................... -- 50 -- Common stock issued........................... -- 5,000 -- Purchase of Imperial Warehouse Finance, Inc. assets: Assets acquired, including goodwill of $6,800....................................... -- -- 123,767 Liabilities assumed........................... -- -- 29 Cash paid..................................... -- -- 123,738 Purchase of Auto Marketing Network: Assets acquired, including goodwill of $20,770...................................... -- -- 82,484 Liabilities assumed........................... -- -- 81,734 Cash paid..................................... -- -- 750 Purchase of Lewis Horwitz Organization: Assets acquired, including goodwill of $12.0 million...................................... 19,380 -- -- Liabilities assumed........................... 11,248 -- -- Cash paid..................................... 8,132 -- --
101 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Investment in FHLB Stock As a member of the FHLB system, the Company's wholly owned subsidiary, SPB, is required to maintain an investment in the capital stock of the FHLB in an amount at least equal to the greater of 1% of residential mortgage assets, or 5% of outstanding borrowings (advances), or 0.3% of total assets. FHLB stock and loans are pledged to secure FHLB advances. 6. Trading Securities The following table provides a summary of trading securities as of December 31, 1999 and 1998.
1999 1998 -------- -------- (In thousands) U.S. Treasury Securities.................................. $ 66,997 $ 82,528 FLRT 1996-A interest-only securities...................... 6,349 7,575 SPTL 1997 C-1 interest-only securities.................... 3,351 5,585 SPTL 1996 C-1 interest-only securities.................... 2,279 4,029 IBC 1997-2 B-1 and C-1 securities......................... 12,201 8,395 Commercial mortgage-backed securities..................... 1,722 9,387 Investment in total return swap--Pacifica Partners I LP... 38,151 17,837 Collateral for total return swap--syndicated loans........ 18,750 20,265 Other..................................................... 11,005 15,151 -------- -------- $160,805 $170,752 ======== ========
Gross unrealized gains and losses on trading securities included in income were $14.6 million and $1.9 million, and $0 and $13.6 million for the years ended December 31, 1999 and 1998, respectively. The Company also recorded write-downs of retained interests of $15.0 million and $4.4 million during the years ended December 31, 1999 and 1998, respectively. 7. Securities Available for Sale The following table provides a summary of securities available for sale with a comparison of amortized cost and fair values as of December 31, 1999 and 1998.
Gross Gross Amortized Unrealized Unrealized Fair December 31, 1999 Cost Gains Losses Value ----------------- --------- ---------- ---------- ------- (In thousands) ICCMIC common stock................ $25,058 $4,176 $ -- $29,234 Cambria Investment Partnership leveraged bank debt............... 10,000 1,581 -- 11,581 Preferred Stock--Auction Finance Group............................. 6,500 -- -- 6,500 Avalon total return fund........... 2,164 -- (834) 1,330 Residential mortgage-backed securities........................ 13,407 83 (662) 12,828 IBC 1997-2 Class A-2 securities.... 12,000 -- -- 12,000 Other.............................. 901 -- -- 901 ------- ------ ------- ------- $70,030 $5,840 $(1,496) $74,374 ======= ====== ======= =======
102 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Gross Gross Amortized Unrealized Unrealized Fair December 31, 1998 Cost Gains Losses Value ----------------- --------- ---------- ---------- ------- (In thousands) IMH common stock................... $ 9,436 $ -- $ (844) $ 8,592 ICCMIC common stock................ 29,933 -- (1,151) 28,782 Cambria Investment Partnership leveraged bank debt............... 10,000 54 -- 10,054 Preferred Stock--Auction Finance Group............................. 6,500 -- -- 6,500 Avalon total return fund........... 5,000 -- (113) 4,887 Other.............................. 1,200 -- -- 1,200 ------- ---- ------- ------- $62,069 $ 54 $(2,108) $60,015 ======= ==== ======= =======
Gross realized gains and (losses) on the sale of available for sale securities were $2.6 million and ($1.1) million, and $0 and ($592,000) for the years ended December 31, 1999 and 1998, respectively. Gross realized losses on investments in IMH and ICCMIC common stock resulting from a decline in market value judged by management to be other than temporary were $24.5 million and $13.0 million, respectively, for the year ended December 31, 1998. 8. Loans and Leases Held for Sale Loans and leases held for sale, at the lower of cost or market, consisted of the following at December 31, 1999 and 1998:
1999 1998 -------- -------- (In thousands) Loans secured by real estate: One-to four family...................................... $ 10,095 $ 71,189 Multi-family and commercial............................. 252,944 143,763 -------- -------- 263,039 214,952 Automobile loans.......................................... -- 64,337 Installment loans......................................... 14,058 29,384 Leases.................................................... 12,301 10,388 -------- -------- $289,398 $319,061 ======== ========
At December 31, 1999 and 1998, loans held for sale were net of $500,000 and $16.8 million lower of cost or market valuation allowance, respectively. At December 31, 1999 and 1998, loans held for sale included nonaccrual loans of $0 and $11.1 million, respectively. Nonaccrual loans are presented in the table above at the lower of cost or market value. 103 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. Loans and Leases Held for Investment, net Loans and leases held for investment consisted of the following at December 31, 1999 and 1998:
1999 1998 ---------- ---------- (In thousands) Loans secured by real estate: One-to-four family................................. $93,914 $ 125,616 Multi-family....................................... 35,249 56,229 Commercial......................................... 14,022 25,677 ---------- ---------- 143,185 207,522 Leases............................................... 1,125 1,048 Consumer and auto loans.............................. 7,072 26,511 Franchise loans...................................... 18,277 50,520 Asset based loans.................................... 748,122 633,299 Loan participations.................................. 216,961 222,106 Mortgage warehouse lines............................. 78,068 181,001 Film and television productions loans................ 23,985 -- Commercial loans..................................... 48,853 34,509 ---------- ---------- 1,285,648 1,356,516 Loans in process..................................... (5,472) (5,636) Unamortized premium.................................. 1,389 3,109 Deferred loan fees................................... (8,492) (9,014) ---------- ---------- 1,273,073 1,344,975 Allowance for loan and lease losses.................. (31,841) (24,880) ---------- ---------- $1,241,232 $1,320,095 ========== ==========
The Company's loans and leases held for investment are primarily comprised of first and second lien mortgages secured by residential and income producing real property in California, leases secured by equipment, asset based loans to middle market companies mainly in California, loans to experienced franchisees of nationally recognized restaurant concepts, and participations in syndicated commercial loans. As a result, the loan portfolio has a high concentration in the same geographic region. Although the Company has a diversified portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the economy of California. The Company's film and television production loans may carry inherent currency risks to the degree that underlying distribution contracts are denominated in foreign currency. The Company may enter into foreign currency hedge contracts to minimize these risks. At December 31, 1999, the Company did not have any loans secured by distribution rights denominated in a foreign currency. 104 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Activity in the allowance for loan and lease losses was as follows:
For the Years Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- Beginning balance as of January 1............... $ 24,880 $ 26,954 $ 19,999 Provision for loan and lease losses............. 35,340 15,450 20,975 Business acquisitions........................... 1,846 -- 578 Sale of leases.................................. -- -- (900) Deconsolidation of ICIFC........................ -- -- (687) -------- -------- -------- 62,066 42,404 39,965 -------- -------- -------- Loans and Leases charged off--Core Business Lines: Multifamily and commercial loans................ (857) (918) (3,021) Asset based loans............................... (17,530) (112) (295) Loan Participations............................. (3,882) -- -- Mortgage warehouse lines........................ (1,625) -- -- Leases.......................................... (2,217) (1,496) (4,860) -------- -------- -------- (26,111) (2,526) (8,176) -------- -------- -------- Loans charged off--Non-Core Business: Single family residential....................... (2,960) (4,661) (2,164) Consumer loans.................................. (2,611) (15,487) (3,933) -------- -------- -------- (5,571) (20,148) (6,097) -------- -------- -------- Total Charge-offs............................... (31,682) (22,674) (14,273) -------- -------- -------- Recoveries on loans and leases previously charged off--Core Business: Multifamily and commercial loans................ 55 142 29 Asset based loans............................... 163 45 -- Leases.......................................... 1,086 1,721 900 -------- -------- -------- 1,304 1,908 929 -------- -------- -------- Net charge-offs--Core Business Lines............ (24,807) (618) (7,247) -------- -------- -------- Recoveries on loans previously charged off--Non- Core Business: Single family residential....................... 3 2,401 30 Consumer........................................ 150 841 303 -------- -------- -------- 153 3,242 333 -------- -------- -------- Total recoveries................................ 1,457 5,150 1,262 -------- -------- -------- Net charge-offs--Non-core business lines........ (5,418) (16,906) (5,764) -------- -------- -------- Total net-charge-offs........................... (30,225) (17,524) (13,011) -------- -------- -------- Balance as of December 31....................... 31,841 24,880 26,954 -------- -------- -------- Loan loss allowance at AMN as of December 31.... 30 857 11,093 -------- -------- -------- $ 31,871 $ 25,737 $ 38,047 ======== ======== ======== Loan loss allowance to non accrual loans........ 53.59% 65.11% 53.87%
As of December 31, 1999, 1998 and 1997, non-accrual and impaired loans totaled $59.4 million, $39.5 million, and $70.6 million, respectively. Interest income foregone on nonaccrual loans was $4.4 million, $2.2 million, and $1.8 million, for the years ended December 31, 1999, 1998 and 1997, respectively. 105 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At December 31, 1999 and 1998, impaired loans and the related allowance for loan and lease losses were as follows:
1999 1998 ------------------------------ ----------------------------- Specific Specific Allowance Recorded Allowance Carrying Recorded for Carrying Investment For Losses Value Investment Losses Value ---------- ---------- -------- ---------- --------- -------- (In thousands) Continuing operations........... $57,823 $(5,278) $52,545 $34,953 $(820) $34,133 Discontinued operations of AMN.... 1,596 -- 1,596 4,576 -- 4,576 ------- ------- ------- ------- ----- ------- Total impaired loans.............. $59,419 $(5,278) $54,141 $39,529 $(820) $38,709 ======= ======= ======= ======= ===== =======
Impaired loans averaged $57.5 million, $27.3 million, and $43.6 million during 1999, 1998 and 1997, respectively. 10. Servicing Rights Changes in servicing rights were as follows:
Year Ended December 31, ------------------------- 1999 1998 1997 ------- ------- ------- (In thousands) Beginning Balance............................... $ 4,329 $ 4,731 $14,887 Additions....................................... 1,061 1,084 2,981 Decrease as a result of the ICIFC deconsolidation................................ -- -- (8,785) Sales of servicing rights....................... (365) -- (1,264) Amortization.................................... (4,223) (1,486) (3,088) ------- ------- ------- Ending balance.................................. $ 802 $ 4,329 $ 4,731 ======= ======= =======
The servicing portfolio associated with servicing rights at December 31, 1999 and 1998 was $106.0 million and $732.6 million, respectively. 11. Premises and Equipment, net Premises and equipment consisted of the following at December 31, 1999 and 1998:
1999 1998 -------- ------- (In thousands) Premises and equipment.................................... $ 18,146 $18,659 Leasehold improvements.................................... 5,863 1,685 -------- ------- 24,009 20,344 Less accumulated depreciation and amortization............ (10,433) (8,680) -------- ------- $ 13,576 $11,664 ======== =======
106 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 12. Discontinued Operations Auto Marketing Network ("AMN") In March 1997, the Company acquired all the outstanding common stock of AMN, a sub-prime auto lender engaged in the financing of new and used motor vehicles on a national basis, for $750,000. As part of the acquisition, the Company advanced $11.6 million to repay amounts owed pursuant to operating lines of credit and for working capital purposes. The acquisition was recorded using the purchase method of accounting. The purchase price was allocated to the net assets acquired based on their fair value and goodwill of approximately $20.8 million was recorded. Since the March 1997 acquisition date, AMN posted operating losses and experienced significant increases in non-performing assets, loan charge-offs and loan loss provisions. In December 1997, the Company developed revised operating projections which indicated that the goodwill resulting from the AMN acquisition was not recoverable. Accordingly, the remaining goodwill balance of $20.1 million was written off during the fourth quarter of 1997. As of July 31, 1998 (measurement date), management determined to cease operations at Auto Marketing Network, Inc. ("AMN"). Accordingly, a disposal plan was formulated, whereby daily operations of AMN were terminated in two months. Losses from AMN's discontinued operations, net of tax, were as follows: (In thousands)
Disposition Year ended Period from Period from Period from December 31, August 1, 1998 to January 1, 1998 to March 17 to 1999 December 31, 1998 July 31, 1998 December 31, 1997 ------------ ----------------- ------------------ ----------------- Loss from discontinued operations............. $899 $ -- $3,232 $25,347 Loss on disposal of AMN.................... -- 11,276 -- -- ---- ------- ------ ------- Net loss from discontinued operations............. $899 $11,276 $3,232 $25,347 ==== ======= ====== =======
During 1999, AMN incurred additional operating losses of $899,000, net of income taxes, primarily related to legal expenses and mark-to-market adjustments on AMN securities. The loss on disposal of AMN in 1998 included charges (net of taxes) for the following items: $5.6 million for securities and retained interest valuation, $1.2 million for the disposition of furniture and equipment, $5.6 million for estimated future servicing obligations to a third party servicer, $1.3 million in liquidation allowances for nonaccrual loans and repossessed autos, $2.1 million in severance pay, occupancy and general and administrative expenses. The charges in 1998 were partially offset by the estimated net interest income on loans and securities for the next year (disposition period) of $4.5 million. The net assets of AMN's discontinued operations were as follows: (In thousands)
At December 31, --------------- 1999 1998 ------- ------- Loans held for sale......................................... $ 5,207 $15,161 Securities held for sale.................................... 8,685 7,844 Retained interests.......................................... 12,436 11,280 Income tax asset............................................ 8,971 10,725 Other net assets............................................ 2,193 1,802 ------- ------- $37,492 $46,812 ======= =======
107 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) AMN's warehouse lines of credit of $0 and $9.2 million are classified as other borrowings in the consolidated balance sheets at December 31, 1999 and 1998, respectively. Total non-accrual AMN loans were $1.6 million and $4.6 million as of December 31, 1999 and 1998, respectively. 13. Business Segments Business segment financial information is reported on the basis that is used internally by management in making decisions related to resource allocation and segment performance. The company's reportable segments are operated and managed as strategic business units and are organized based on products and services. Business units operated at different locations are aggregated for reporting purposes when their products and services are similar. The Company's operations are divided into eleven business segments as follows: 1. Coast Business Credit 6. Income Property Lending Division 2. Imperial Warehouse Finance, Inc. 7. Asset Management Activities (formerly PrinCap Mortgage Warehouse, Inc.) 8. Imperial Capital Group, LLC 3. Loan Participation and Investment Group 9. Other Core Operations 4. The Lewis Horwitz Organization 10. Equity Interests 5. Imperial Business Credit, Inc. 11. De-emphasized/Discontinued/Exited Businesses
The following describes the 11 business segments: Coast Business Credit ("CBC"), a division of SPB, provides asset-based lending to small-to-medium sized businesses secured by the assets of the borrower. CBC's principal source of revenue is interest earned on asset-based loans. CBC's principal expenses are interest expense allocations from deposits, inter-company borrowings, and general and administrative expenses. Imperial Warehouse Finance, Inc. ("IWF"), a subsidiary of SPB, provides residential mortgage warehouse lending to mostly small to medium sized brokers and mortgage bankers on a national basis. IWF derives revenues from referral fees and interest income on its portfolio of warehouse lines based on the amount of warehouse loans extended and transaction fees from the broker for each loan file processed. IWF's principal expenses are interest expense allocations from deposits, inter-company borrowings, and general and administrative expenses. Loan Participation and Investment Group ("LPIG"), a division of SPB, invests in and purchases senior secured debt of other companies (referred to as a "participation") in the secondary market. LPIG's principal sources of revenue are interest earned on participation loans and loan commitment fees. LPIG's principal expenses are interest expense allocations from deposits, inter-company borrowings, and general and administrative expenses. The Lewis Horwitz Organization ("LHO"), a division of SPB, provides senior, secured financing for independent motion picture and television production. LHO's principal source of revenue is interest and fees earned on film and television productions loans. LHO's principal expenses are interest expense, primarily from allocations of deposits, intercompany borrowings, and general and administrative expenses. Imperial Business Credit, Inc. ("IBC"), a wholly owned subsidiary of the Company, originates, acquires, sells, securitizes and services non- cancellable, full-payout equipment leases for small and medium-sized businesses in various industries throughout the United States. IBC derives its principal revenue from gains recognized on the securitization or sale of leases, from the spread on portfolios held for investment and held for sale during the warehouse period and from servicing and related ancillary fees on its servicing portfolio. IBC's principal expenses are interest expense from warehouse lines of credit, inter-company borrowings, and general and administrative expenses. 108 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Income Property Lending Division ("IPL"), a division of SPB, provides multifamily and commercial mortgage lending to the small loan market for multi-family apartments and commercial buildings. IPL's principal source of revenue is gain on sale of and interest earned on mortgage loans. IPL's principal expenses are interest expense allocations from deposits, inter- company borrowings, and general and administrative expenses. Asset Management Activities ("AMA"), includes two wholly owned subsidiaries, ICCAMC and ICAM. ICCAMC received management fee income through October 22, 1999 for overseeing the day-to-day operations of ICCMIC. ICCAMC's principal expenses are general and administrative expenses. ICAM's principal source of revenues are management fee income for managing the assets of Pacifica Partners I L.P., Cambria Investment Partnership I, L.P., and Catalina Investment Partnership I, L.P. ICAM's principal expenses are general and administrative expenses. Imperial Capital Group, LLC ("ICG"), a majority-owned subsidiary of the Company, offers individual and institutional investors financial products and services. ICG provides investment opportunities and research to individual and institutional investors, raises private and public capital for middle market companies, trades debt, equity and asset backed securities and provides investment management services to high net worth individuals. ICG's principal sources of revenue are investment banking and brokerage fees, gains and losses on securities trading and mark to market valuations on securities held for trading. ICG's principal expenses are inter-company interest expense and general and administrative expenses. Other Core Operations ("OCO"), includes other areas of business such as Imperial Credit Lender Services, as well as other support operations. OCO also includes interest and dividend income from parent company loans and equity investments, loan servicing income, interest expense on long-term debt, mark- to-market charges on the securities invested in at the holding company, and the costs of support functions. The Company provides support to its subsidiaries through executive management's oversight and advice, accounting and legal services, merger and acquisitions advice, human resources administration, office services, and management information systems support. Income taxes are allocated to the segments based on their separate income or loss before income taxes. The Company evaluates segment performance based on net income of the segment. Interest is charged on intercompany borrowings and certain operating expenses are allocated from OCO to other segments. Equity Interests, represents the Company's equity investments in other publicly traded companies. At December 31, 1999, the Company owned no equity interests in companies. At December 31, 1998, the Company owned equity interests of 38.4% and 47.2% in two companies; FMC and SPFC. This segment's source of revenue was the Company's common stock ownership percentage in the equity investments' reported net income or loss in addition to gains on sales of the equity investments' stock by the Company, or write-downs from the impairment of the equity investment. In October 1998, SPFC petitioned for Chapter 11 bankruptcy protection under the Federal bankruptcy laws. SPFC has been de-listed from the New York Stock Exchange. As a result of SPFC's bankruptcy filing, we incurred a write-off totaling $82.6 million for the year ended December 31, 1998. At December 31, 1998, the Company's investment in SPFC was $0. De-emphasized/Discontinued/Exited Businesses ("Exited Businesses"), represents the Company's business units it decided to either de-emphasize, discontinue, or exit. The Company decided to de-emphasize, discontinue or exit these business lines because they were not meeting the Company's expectations for a variety of reasons. These reasons included: significant credit losses, insufficient loan production volumes, inadequate gross profit margins, and risks associated with international lending operations. Each of the de- emphasized, discontinued or exited business lines was not a profitable business. 109 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company includes the following significant operations in Exited Businesses: Auto Lending, Alternative Residential Mortgage, and Consumer Loan Divisions of SPB, Credito Imperial Argentina ("CIA"), the Company's residential loan production business in Argentina. Exited Businesses also includes the Company' former mortgage banking operations, certain problem loan or securities portfolios, any loan portfolios at SPB from businesses which are no longer originating new loans and third party servicing on IPLD loans. Exited Businesses' principal sources of revenue are interest earned on mortgage and consumer loans and mark to market valuations on loan portfolios. Exited Businesses' principal expenses are interest expense allocations incurred from deposits and inter-company borrowings, and general and administrative expenses. Eliminations. As of December 31, 1999 and 1998, the Company had outstanding inter-company debt to SPB and ICG of $35.0 million and $5.6 million and $35.0 and $6.3 million, respectively. All inter-company debt and corresponding interest are eliminated in consolidation. Additionally, the Company's investments in subsidiaries and inter-company management fees are included in eliminations. 110 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following represents the operating results and selected financial data by major business segments for 1999, 1998 and 1997:
At or for the year ended December 31, 1999 ---------------------------------------------------------------------------------------- Loan Participation Imperial Income Coast Imperial And The Lewis Business Property Asset Imperial Business Warehouse Investment Horwitz Credit, Lending Management Capital Other Core Equity Credit Finance, Inc. Group Organization Inc. Division Activities Group, LLC Operations Interests -------- ------------- ------------- ------------ -------- -------- ---------- ---------- ---------- --------- (Dollars in thousands) Total loans, net............. $718,966 $ 78,396 $211,292 $21,195 $ 12,649 $252,492 $ -- $ -- $ 51,665 $ 1,250 Total assets.... 869,119 105,680 272,444 36,103 28,440 299,842 (832) 14,245 574,564 1,258 Total deposits.. 767,242 93,255 238,025 15,881 -- 273,449 -- -- (10,081) (1,260) Interest income.......... 92,318 11,976 22,547 2,278 4,162 22,625 7 (82) 19,803 267 Interest expense......... 38,308 7,883 14,188 1,286 1,814 13,419 -- 437 30,829 -- Provision (recovery) for loan and lease losses.......... 21,824 1,190 6,982 351 (350) 142 -- -- 210 -- External revenue......... 40,379 4,421 3,409 768 1,322 12,026 10,011 26,729 3,751 31,188 Intercompany revenue......... -- -- -- -- -- -- -- -- 236 -- Intercompany expense......... -- -- -- -- 1,284 -- 262 -- -- -- Mark to market on securities and loans held for sale........ 189 43 268 -- (11,901) 62 (38) -- 11,016 -- Equity in net loss of FMC..... -- -- -- -- -- -- -- -- -- (53) Total revenue... 40,379 4,421 3,409 768 37 12,026 9,748 26,729 3,988 31,188 Depreciation.... 1,579 84 80 7 263 304 300 452 868 2 Amortization of goodwill........ 1,113 453 -- 200 12,279 -- -- 87 374 -- Amortization of servicing rights.......... -- -- -- -- 259 -- -- -- -- -- Income taxes.... 6,449 718 815 3 (8,858) 1,326 (2) 628 (2,400) 12,351 Net income (loss) from continuing operations...... $ 9,673 $ 1,078 $ 1,222 $ 4 $(13,286) $ 1,990 $ (3) $ 942 $ (4,983) $18,527 De- emphasized/ Discontinued/ Exited Businesses Eliminations Consolidated ------------- ------------ ------------ Total loans, net............. $231,731 $ (49,006) $1,530,630 Total assets.... 319,857 (319,105) 2,201,615 Total deposits.. 238,247 -- 1,614,758 Interest income.......... 38,835 (7,298) 207,438 Interest expense......... 18,215 (4,772) 121,607 Provision (recovery) for loan and lease losses.......... 4,991 -- 35,340 External revenue......... (12,427) (2,527) 119,050 Intercompany revenue......... 1,310 -- 1,546 Intercompany expense......... -- -- 1,546 Mark to market on securities and loans held for sale........ (28,280) -- (28,641) Equity in net loss of FMC..... -- -- (53) Total revenue... (11,116) (2,527) 119,050 Depreciation.... 455 -- 4,394 Amortization of goodwill........ -- -- 14,506 Amortization of servicing rights.......... 3,964 -- 4,223 Income taxes.... (13,093) (1,011) (3,074) Net income (loss) from continuing operations...... $(19,592) $ (1,522) $ (5,950)
111 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At or for the year ended December 31, 1998 ---------------------------------------------------------------------------- Loan Participation Imperial Income Coast Imperial And Business Property Asset Imperial Business Warehouse Investment Credit, Lending Management Capital Other Core Equity Credit Finance, Inc. Group Inc. Division Activities Group, LLC Operations Interests -------- ------------- ------------- -------- -------- ---------- ---------- ---------- --------- (Dollars in thousands) Total loans, net............. $623,748 $179,284 $221,030 $ 7,413 $144,573 $ -- $ -- $ 47,907 $ 1,162 Total assets.... 628,636 186,257 241,854 44,899 146,250 3,831 6,774 331,578 60,098 Total deposits.. 674,956 196,410 222,009 -- 162,939 -- -- (2,403) -- Interest income.......... 76,916 16,747 21,569 5,823 13,336 19 (185) 28,295 83 Interest expense......... 34,299 9,817 13,249 1,353 6,659 -- 124 30,395 -- (Recovery) provision for loan and lease losses.......... 3,523 704 (391) 1,300 (345) -- -- -- -- External revenue......... 42,869 8,533 8,877 10,538 17,471 7,143 18,411 (43,991) (66,496) Intercompany revenue......... -- -- -- -- -- -- -- 1,770 -- Intercompany expense......... -- -- -- 910 -- 121 -- -- -- Mark to market on securities and loans held for sale........ (904) (263) (2,104) (2,305) (178) -- -- (4,993) -- Loss on impairment of equity securities...... -- -- -- -- -- -- -- (37,538) (82,600) Equity in net income of SPFC.. -- -- -- -- -- -- -- -- 12,739 Equity in net income of FMC... -- -- -- -- -- -- -- -- 3,235 Total revenue... 42,869 8,533 8,877 9,628 17,471 7,022 18,411 (42,221) (66,496) Depreciation.... 779 99 96 141 299 33 473 1,157 -- Amortization of goodwill........ 1,113 453 -- 950 -- -- 36 134 -- Amortization of servicing rights.......... -- -- -- -- -- (365) -- -- -- Income taxes.... 9,267 2,352 2,819 (716) 2,476 1,360 (1,012) (23,372) (28,449) Net income (loss) from continuing operations...... $ 12,435 $ 3,157 $ 3,783 $ (960) $ 3,323 $1,825 $(1,358) $(31,368) $(38,169) De- emphasized/ Discontinued/ Exited Businesses Eliminations Consolidated ------------- ------------ ------------ Total loans, net............. $455,339 $(41,300) $1,639,156 Total assets.... 813,931 (46,925) 2,417,183 Total deposits.. 460,341 -- 1,714,252 Interest income.......... 77,650 (4,413) 235,840 Interest expense......... 31,623 (4,413) 123,106 (Recovery) provision for loan and lease losses.......... 10,659 -- 15,450 External revenue......... 12,998 (170) 16,183 Intercompany revenue......... -- -- 1,770 Intercompany expense......... 739 -- 1,770 Mark to market on securities and loans held for sale........ (31,641) -- (42,388) Loss on impairment of equity securities...... -- -- (120,138) Equity in net income of SPFC.. -- -- 12,739 Equity in net income of FMC... -- -- 3,235 Total revenue... 12,259 (170) 16,183 Depreciation.... 637 -- 3,714 Amortization of goodwill........ -- -- 2,686 Amortization of servicing rights.......... 1,851 -- 1,486 Income taxes.... (8,789) -- (44,064) Net income (loss) from continuing operations...... $(11,793) $ -- $ (59,125)
112 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At or for the year ended December 31, 1997 --------------------------------------------------------------------------- Loan Participation Imperial Income Coast Imperial And Business Property Asset Imperial Business Warehouse Investment Credit, Lending Management Capital Other Core Equity Credit Finance, Inc. Group Inc. Division Activities Group, LLC Operations Interests -------- ------------- ------------- -------- -------- ---------- ---------- ---------- --------- (Dollars in thousands) Total loans..... $479,922 $121,888 $195,554 $16,578 $58,282 $ -- $ -- $ 72,665 $ -- Total assets.... 496,230 140,058 195,554 51,640 58,282 5,815 12,720 371,959 118,402 Total deposits.. 425,615 105,703 175,743 -- 53,145 -- -- (12,620) -- Interest income.......... 50,360 3,265 17,458 10,899 22,834 189 767 24,354 18,847 Interest expense......... 20,577 1,834 10,343 2,903 12,126 -- -- 25,579 13,921 Provision for loan and lease losses (recovery)...... 4,937 435 564 1,075 (1,930) -- -- 5,000 -- External revenue......... 30,045 1,584 6,483 20,662 41,201 25,353 8,486 2,330 161,720 Intercompany revenue......... -- -- -- -- -- -- -- 4,562 -- Intercompany expense......... -- -- -- 2,363 -- 319 -- -- 1,866 Mark to market on securities and loans held for sale........ -- -- -- -- -- -- -- (341) -- Equity in net income of SPFC.. -- -- -- -- -- -- -- -- 25,869 Equity in net loss of FMC..... -- -- -- -- -- -- -- -- (3,050) Total revenue... 30,045 1,584 6,483 18,299 41,201 25,034 8,486 6,892 159,854 Depreciation.... 284 24 91 190 122 15 635 2,157 298 Amortization of goodwill........ 1,113 113 -- 955 -- -- -- -- 310 Amortization of servicing rights.......... -- -- -- -- -- 637 -- 1,579 -- Income taxes.... 5,788 332 1,699 2,641 13,252 6,408 566 (6,832) 52,533 Net income (loss) from continuing operations...... $ 8,984 $ 515 $ 2,637 $ 4,099 $20,566 $ 9,946 $ 878 $(10,603) $ 81,532 De-emphasized/ Discontinued/ Exited Businesses Eliminations Consolidated -------------- ------------ ------------ Total loans..... $502,367 $(41,300) $1,405,956 Total assets.... 701,238 (57,509) 2,094,389 Total deposits.. 408,436 -- 1,156,022 Interest income.......... 59,270 (4,643) 203,600 Interest expense......... 35,573 (4,643) 118,213 Provision for loan and lease losses (recovery)...... 10,894 -- 20,975 External revenue......... 15,602 1,438 314,904 Intercompany revenue......... -- -- 4,562 Intercompany expense......... 14 -- 4,562 Mark to market on securities and loans held for sale........ -- -- (341) Equity in net income of SPFC.. -- -- 25,869 Equity in net loss of FMC..... -- -- (3,050) Total revenue... 15,588 1,438 314,904 Depreciation.... 364 -- 4,180 Amortization of goodwill........ -- -- 2,491 Amortization of servicing rights.......... -- 872 3,088 Income taxes.... (2,342) 222 74,267 Net income (loss) from continuing operations...... $ (3,635) $ 344 115,263
113 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 14. Deposits Deposits of $100,000 and over totaled approximately $324.3 million and $459.6 million at December 31, 1999 and 1998, respectively. Interest expense associated with certificates of deposit of $100,000 and over was approximately $18.2 million, $24.2 million, and $15.6 million, for the years ended December 31, 1999, 1998, and 1997, respectively. 15. Borrowings from Federal Home Loan Bank SPB is approved as a member of the Federal Home Loan Bank ("FHLB") to borrow up to a maximum of 35% of the assets of SPB. These borrowings must be fully collateralized by qualifying mortgage loans and may be in the form of overnight funds or term borrowings at SPB's option. The FHLB advances are secured by the investment in stock of the FHLB and certain real estate mortgage loans with a carrying value of $56.5 million and $49.9 million at December 31, 1999 and 1998, respectively. At December 31, 1999, 1998 and 1997, FHLB borrowings are summarized as follows:
1999 1998 1997 ------- ------- -------- (Dollars in thousands) Balance at year end............................. $ -- $20,000 $ 45,000 Maximum outstanding at any month end............ 30,000 45,000 109,500 Average balance during the year................. 7,603 24,451 57,154 Weighted average rate during the year........... 8.30% 6.67% 5.82% Weighted average rate at year end............... N/A 5.93% 6.71%
Interest expense on borrowings from the FHLB was $631,000, $1.6 million, and $3.3 million for the years ended December 31, 1999, 1998 and 1997, respectively. 16. Other Borrowings Other borrowings primarily consist of revolving warehouse lines of credit to fund the Company's and its subsidiaries' lending activities. At December 31, 1999 and 1998, approximately $18.2 million and $84 million of loans and securities were pledged as collateral for other borrowings. These lines of credit are short term borrowings used in the normal course of business. ICII and its subsidiaries have various revolving warehouse lines of credit and repurchase facilities available at December 31, 1999, as follows:
Interest Index Rate Commitment Outstanding (basis points) Expiration Date -------- ---------- ----------- -------------- ------------------ (Dollars in thousands) Lehman Brothers (Corona Film Finance Fund)..... 5.50% $66,398 $66,398 Fixed rate January 13, 2000 Imperial Bank (ICII).... 9.25 6,691 6,691 Prime plus 100 September 29, 2000 Other notes payable (ICII)................. 8.00 -- 1,220 Fixed rate None ------- ------- 5.88 $73,089 $74,309 ======= =======
114 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) ICII and its subsidiaries had various revolving warehouse lines of credit and repurchase facilities available at December 31, 1998, as follows:
Interest Index Rate Commitment Outstanding (basis points) Expiration Date -------- ---------- ----------- -------------- ---------------- (Dollars in thousands) Greenwich Capital Financial (AMN)........ 6.89% $100,000 $ 9,193 Libor plus 125 April 30, 1999 Lehman Brothers (Corona Film Finance Fund) .... 4.75 66,692 66,692 Fixed rate January 7, 1999 First Union National Bank (ICII)............ 5.22 14,879 14,879 Fixed rate January 29, 1999 Greenwich Capital Financial (ICII)....... 5.94 4,382 4,382 Fixed rate January 14, 1999 First Union National Bank (IBC)............. 8.07 15,000 5,904 Libor plus 245 March 31, 1999 Other notes payable (ICII)................. 8.00 -- 1,220 Fixed rate None -------- -------- 5.29 $200,953 $102,270 ======== ========
Interest expense on warehouse lines of credit and repurchase facilities was $4.0 million, $4.2 million, and $17.9 million for the years ended December 31, 1999, 1998 and 1997, respectively. 17. Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company ("ROPES") During the second quarter of 1997, Imperial Credit Capital Trust I ("ICCTI"), a wholly-owned subsidiary of the Company organized for the sole purpose of issuing trust securities, issued $70.0 million of 10.25% Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company ("ROPES") due June 14, 2002 at par. The ROPES are secured by resettable rate debentures which are general unsecured obligations of the Company, are and can be redeemed at par upon their maturity or remarketed as 30 year capital instruments at the Company's option. Under current tax law, the interest payments on these securities are tax-deductible. The proceeds from the offering were used for capital contributions to subsidiaries, strategic acquisitions, investments and general corporate purposes. During 1999, the Company repurchased and extinguished $8.3 million of ROPES debt resulting in a extraordinary gain of $921,000, net of income taxes. At December 31, 1999 and 1998, the Company had ROPES debt of $61.8 million and $70.0 million, respectively. Interest expense on the ROPES was $7.4 million, $7.8 million and $4.3 million for the years ended December 31, 1999, 1998 and 1997. The Trust Indenture for the ROPES includes provisions which limit the ability of the Company to incur additional indebtedness or issue certain stock of the Company, to make certain investments, engage in certain transactions with affiliates, create restrictions on the ability of subsidiaries to pay dividends or certain other distributions, create liens and encumbrances, or allow its subsidiaries to issue certain classes of stock. As of December 31, 1999 and 1998, the Company was in compliance with the debt covenants related to the ROPES. 115 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 18. Senior Notes
December 31, 1999 ----------------------------- Face Unamortized Carrying Value Discount Value -------- ----------- -------- 9.75% Senior Notes due 2004................... $ 13,074 $(171) $ 12,903 9.875% Senior Notes due 2007.................. 172,282 -- 172,282 -------- ----- -------- $185,356 $(171) $185,185 ======== ===== ========
December 31, 1998 ----------------------------- Face Unamortized Carrying Value Discount Value -------- ----------- -------- 9.75% Senior Notes due 2004................... $ 20,174 $(316) $ 19,858 9.875% Senior Notes due 2007.................. 200,000 -- 200,000 -------- ----- -------- $220,174 $(316) $219,858 ======== ===== ========
During the first quarter of 1997, the Company successfully completed a $200.0 million offering of 9.875% Senior Notes due 2007 (the "9.875% Senior Notes"). A portion of the proceeds from the offering was used to repurchase $69.8 million of the outstanding 9.75% Senior Notes due 2004 (the "9.75% Senior Notes") on which the Company recorded an extraordinary after-tax loss of $4.0 million. The remaining proceeds were used to make capital contributions to subsidiaries, strategic acquisitions, investments, and for general corporate purposes. The effective interest rate on the tendered notes was approximately 10.8% after the amortization of original issue discount and capitalized debt issue costs. The effective interest rate on the new notes is approximately 10.4% after the amortization of capitalized debt issue costs. The 9.875% Senior Notes may be redeemed after January 15, 2002 at the option of the Company until maturity at a declining premium, plus accrued interest. The 9.875% Senior Notes are general unsecured obligations of the Company ranking pari passu with all senior indebtedness of the Company, but are effectively subordinated to the liabilities of SPB. The Indenture for the 9.875% Senior Notes includes provisions which limit the ability of the Company to incur additional indebtedness or issue certain stock of the Company, to make certain investments, engage in certain transactions with affiliates, create restrictions on the ability of subsidiaries to pay dividends or certain other distributions, create liens and encumbrances, or allow its subsidiaries to issue certain classes of stock. As of December 31, 1999, the Company was in compliance with the debt covenants related to the 9.875% Senior Notes. In January 1994, the Company issued $90.0 million of 9.75% Senior Notes due 2004. At December 31, 1999 and 1998, $13.1 million and $20.2 million of the 9.75% Senior Notes were outstanding. The 9.75% Senior Notes may be redeemed after January 15, 1999 at the option of the Company until maturity at a declining premium, plus accrued interest. The 9.75% Senior Notes are unsecured and rank pari passu with all other senior unsecured indebtedness of the Company, but are effectively subordinated to the deposits of SPB. 116 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During 1999, the Company repurchased and extinguished $27.7 million of 9.875% Senior Notes due 2007 and $7.1 million of 9.75% Senior Notes due 2004 resulting in a extraordinary gain of $4.2 million, net of income taxes. Total interest expense on the Senior Notes for the years ended December 31, 1999, 1998 and 1997 was $21.5 million, $22.5 million, and $21.7 million, respectively. 19. Preferred and Common Stock The Company has authorized 8,000,000 shares of Preferred Stock. The Board has the authority to issue the preferred stock in one or more series, and to fix the designations, rights, preferences, privileges, qualifications and restrictions, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preferences and sinking fund terms, any or all of which may be greater than the rights of the Common Stock. On May 14, 1999, the Company entered into an agreement with its former parent Imperial Bank, a subsidiary of Imperial Bancorp (NYSE:IMP). On May 17, 1999, the Company repurchased 10% or 3,682,536 shares of its outstanding common stock for $8.00 per share or $29.5 million. The repurchase from Imperial Bank was financed through the private issuance of $30.0 million Series B 11.50% Mandatorily Redeemable Cumulative Preferred Stock to a group of independent investors. During the fourth quarter of 1999, the Company repurchased and extinguished the $30.0 million Series B 11.50% Mandatorily Redeemable Cumulative Preferred Stock, incurring an extraordinary loss of $1.1 million, net of income taxes. Interest expense from date of issuance to date of extinguishment was $1.5 million. In the fourth quarter of 1997, the Company's board of directors authorized the repurchase of up to approximately 5% of the company's common stock, or as much as 1.9 million shares. During 1998, the Company repurchased and retired 1.9 million shares of common stock under this program at an average price of $10.62 per share. As of December 31, 1999, the Company repurchased and retired 4,253,414 shares of common stock under the second share repurchase program at an average price of $7.83 per share which included the 3,682,536 shares repurchased from Imperial Bank. The authorized share repurchase under the second repurchase program is 4,334,276 shares. Since beginning share repurchases in December of 1997, the Company has repurchased a total of 6.2 million shares of common stock at an average price of $8.70 per share. On July 1, 1998 the Company established a deferred executive compensation plan. From July 1, 1998 through December 31, 1999, the Company's management and directors have made investments net of redemptions of $7.1 million with the plan's trustee who made net acquisitions of 855,170 shares of common stock at an average price of $8.31 per share. All shares acquired by the plan's trustee are acquired for the benefit of the Company's participating management and directors. On October 12, 1998, the Company distributed preferred share purchase rights as a dividend to its shareholders of record at the rate of one right for each outstanding share of its common stock. The rights are attached to the Company's common stock and will only be exercisable and trade separately if a person or group acquires or announces the intent to acquire 15% or more of the Company's common stock (25% or more for any person or group currently holding 15% or more of the Company's common stock). Each right will entitle shareholders to buy one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $40. 117 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) If the Company is acquired in a merger or other transaction after a person has acquired 15 percent or more of the Company's outstanding common stock (25% or more for any person or group currently holding 15% or more of the Company's common stock), each right will entitle the shareholder to purchase, at the right's then-current exercise price, a number of the acquiring company's common shares having a market value of twice such price. The acquiring person would not be entitled to exercise these rights. In addition, if a person or group acquires 15% or more of the Company's common stock, each right will entitle the shareholder (other than the acquiring person) to purchase, at the right's then-current exercise price, a number of shares of the Company's common stock having a market value of twice such price. Following the acquisition by a person of 15% or more of the Company's common stock and before an acquisition of 50 percent or more of the Company's common stock, the Company's board of directors may exchange the rights (other than the rights owned by such person) at an exchange ratio of one share of common stock per right. Before a person or group acquires beneficial ownership of 15 percent (or 25% as applicable) or more of the Company's common stock, the rights are redeemable for $.0001 per right at the option of the Company's board of directors. The rights will expire on October 2, 2008 unless redeemed prior to that date. The Company's board is also authorized to reduce the ownership thresholds referred to above to not less than 10%. The rights are intended to enable all of the Company's shareholders to realize the long-term value of their investment in the Company. 20. Income Taxes Income taxes are included in the accompanying consolidated statements of operations and comprehensive income as follows:
Year Ended December 31, --------------------------- 1999 1998 1997 ------- -------- -------- (In thousands) Income taxes from: Continuing operations......................... $(3,074) $(44,064) $ 74,267 Discontinued operations....................... (557) (8,675) (15,520) Extraordinary item............................ 3,446 -- (2,919) ------- -------- -------- Total....................................... $ (185) $(52,739) $ 55,828 ======= ======== ========
118 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's income taxes from continuing operations for the years ended December 31, 1999, 1998 and 1997 were as follows:
Year Ended December 31, -------------------------- 1999 1998 1997 ------- -------- ------- (In thousands) Current: Federal...................................... $ 440 $ 6,140 $28,848 State........................................ 191 2,019 8,108 ------- -------- ------- Total current taxes........................ 631 8,159 36,956 ------- -------- ------- Deferred: Federal...................................... (4,623) (39,701) 31,324 State........................................ (1,630) (15,839) 8,970 ------- -------- ------- Total deferred taxes....................... (6,253) (55,540) 40,294 ------- -------- ------- Taxes credited to shareholders' equity......... 2,548 3,317 2,916 Reduction of deferred tax liability due to FMC public offering............................... -- -- (5,899) ------- -------- ------- Taxes on income from continuing operations..... $(3,074) $(44,064) $74,267 ======= ======== =======
The Company had current income taxes payable from continuing operations of approximately $5.5 million at December 31, 1999 and current income taxes receivable of $13.1 million at December 31, 1998. Included in the net assets of discontinued operations were income taxes receivable of $9.0 million and $10.7 million at December 31, 1999 and 1998, respectively. 119 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Deferred income taxes arise from differences in the timing of recognition of income and expense for tax and financial reporting purposes. The following table shows the primary components of the Company's net deferred tax liability at December 31, 1999 and 1998.
1999 1998 -------- -------- (In thousands) Deferred tax assets: REMIC Income......................................... $ 5,011 $ 10,080 Allowances for loan and lease losses................. 14,593 11,461 Mark to market on securities and loans held for sale................................................ -- 9,468 Leases............................................... 2,021 -- State taxes.......................................... 2,261 2,900 Executive stock options.............................. 450 450 Unrealized loss on securities available for sale..... 1,999 -- Deferred compensation................................ 1,993 630 Depreciation......................................... 372 321 -------- -------- Total.............................................. 28,700 35,310 ======== ======== Deferred tax liabilities: Sales/investments in subsidiaries and equity securities.......................................... (25,960) (39,570) Servicing rights..................................... (903) (2,747) Mark to market on securities and loans held for sale................................................ (3,081) -- Leases............................................... -- (2,751) Deferred loan fees................................... (1,971) (1,971) Unrealized gain on securities available for sale..... -- (907) Other................................................ (6,118) (2,758) FHLB stock dividends................................. (1,273) (1,465) -------- -------- Total.............................................. (39,306) (52,169) ======== ======== Net deferred tax liability............................. $(10,606) $(16,859) ======== ========
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities and available tax carrybacks and future taxable income in making this assessment. Based upon the schedule of reversals, future taxable income and available tax carrybacks, management believes it is more likely than not the Company will realize the deferred tax assets. A reconciliation of the statutory Federal corporate income tax rate of 35% to the effective income tax rate on income or loss from continuing operations is as follows:
Year Ended December 31, ------------------ 1999 1998 1997 ---- ---- ---- Statutory U.S. federal income tax rate................ 35.0 % 35.0 % 35.0 % Increase (reduction) in rate resulting from: State income taxes, net of Federal benefit............ 5.0 8.9 6.6 Preferred stock dividends classified as interest expense............................................ (6.8) -- -- Reduction of deferred tax liability due to FMC public offering.................................... -- -- (3.1) Other, net.......................................... 0.9 (1.2) (0.7) ---- ---- ---- Effective income tax rate............................. 34.1 % 42.7 % 39.2 % ==== ==== ====
120 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 21. Employee Benefit Plans Profit Sharing and 401(k) Plan Under the Company's 401(k) plan, employees may elect to enroll on the first of any month, provided that they have been employed for at least six months. Employees may contribute up to 14% of their salaries. The Company will match 50% of the first 4% of employee contributions. The Company recorded 401(k) matching expense of $334,000, $457,000, and $246,000, for the years ended December 31, 1999, 1998 and 1997, respectively. An additional Company contribution may be made at the discretion of the Company. Should a discretionary contribution be made, the contribution would first be allocated to those employees deferring salaries in excess of 4%. The matching contribution would be 50% of any deferral in excess of 4% up to a maximum deferral of 8%. Should discretionary contribution funds remain following the allocation outlined above, any remaining Company matching funds would be allocated as a 50% match of employee contributions on the first 4% of the employee's deferrals. No discretionary contributions were charged to operations for the years ended December 31, 1999, 1998 and 1997. Company matching contributions are made as of December 31st each year. 1992 Stock Option Plan A total of 2,292,632 shares of the Company's Common Stock has been reserved for issuance under the Company's 1992 Incentive Stock Option and Nonstatutory Stock Option Plan (the "1992 Stock Option Plan"), which expires by its own terms in 2002. A total of 734,268 and 868,813 stock options were outstanding at December 31, 1999 and 1998, respectively. The 1992 Stock Option Plan provides for the grant of "incentive stock options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock options ("NQSOs") to employees, officers, directors and consultants of the Company. Incentive stock options may be granted only to employees. The 1992 Stock Option Plan is administered by the Board of Directors or a committee appointed by the Board, which determines the terms of options granted, including the exercise price, the number of shares subject to the option, and the option's exercisability. The exercise price of all options granted under the 1992 Stock Option Plan must be at least equal to the fair market value of such shares on the date of grant. The maximum term of options granted under the 1992 Stock Option Plan is 10 years. With respect to any participant who owns stock representing more than 10% of the voting rights of the Company's outstanding capital stock, the exercise price of any option must be at least equal to 110% of the fair market value on the date of grant. 1996 Stock Option Plan The Company adopted the 1996 Stock Option, Deferred Stock and Restricted Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards consisting of deferred stock, restricted stock, stock appreciation rights and limited stock appreciation rights ("Awards"). The 1996 Stock Option Plan is administered by a committee of directors appointed by the Board of Directors (the "Committee"). ISOs may be granted to the officers and key employees of the Company or any of its subsidiaries. 121 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The exercise price for any option granted under the 1996 Stock Option Plan may not be less than 100% (110% in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the outstanding Common Stock) of the fair market value of the shares of Common Stock at the time the option is granted. The purpose of the 1996 Stock Option Plan is to provide a means of performance-based compensation in order to attract and retain qualified personnel and to provide an incentive to those whose job performance affects the Company. The effective date of the 1996 Stock Option Plan was June 21, 1996. A total of 3,000,000 shares of the Company's Common Stock has been reserved for issuance under the 1996 Stock Option Plan and a total of 2,635,580 and 1,937,220 stock options were outstanding at December 31, 1999 and 1998, respectively. If an option granted under the 1996 Stock Option Plan expires or terminates, or an Award is forfeited, the shares subject to any unexercised portion of such option or Award will again become available for the issuance of further options or Awards under the 1996 Stock Option Plan. Unless previously terminated by the Board of Directors, no options or Awards may be granted under the 1996 Stock Option Plan after June 21, 2006. Options granted under the 1996 Stock Option Plan will become exercisable upon the terms of the grant made by the Committee. Awards will be subject to the terms and restrictions of the Award made by the Committee. The Committee has discretionary authority to select participants from among eligible persons and to determine at the time an option or Award is granted and in the case of options, whether it is intended to be an ISO or a NQSO. Under current law, ISOs may not be granted to any individual who is not also an officer or employee of the Company or any subsidiary. Each option must terminate no more than 10 years from the date it is granted (or five years in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the combined voting power of the Company's outstanding Common Stock). Options may be granted on terms providing for exercise in whole or in part at any time or times during their respective terms, or only in specified percentages at stated time periods or intervals during the term of the option, as determined by the Committee. The exercise price of any option granted under the 1996 Stock Option Plan is payable in full (i) in cash, (ii) by surrender of shares of the Company's Common Stock already owned by the option holder having a market value equal to the aggregate exercise price of all shares to be purchased including, in the case of the exercise of NQSOs, restricted stock subject to an Award under the 1996 Stock Option Plan, (iii) by cancellation of indebtedness owed by the Company to the optionholder, or (iv) by any combination of the foregoing. The Board of Directors may from time to time revise or amend the 1996 Stock Option Plan, and may suspend or discontinue it at any time. However, no such revision or amendment may impair the rights of any participant under any outstanding options or Award without such participant's consent or may, without shareholder approval, increase the number of shares subject to the 1996 Stock Option Plan or decrease the exercise price of a stock option to less than 100% of fair market value on the date of grant (with the exception of adjustments resulting from changes in capitalization), materially modify the class of participants eligible to receive options or Awards under the 1996 Stock Option Plan, materially increase the benefits accruing to participants under the 1996 Stock Option Plan or extend the maximum option term under the 1996 Stock Option Plan. 122 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A summary of changes in outstanding stock options under the 1992 and 1996 Stock Option Plans follows:
Year Ended December 31, -------------------------------------------------- 1999 1998 1997 ---------------- ---------------- ---------------- Weighted Weighted Weighted Number Average Number Average Number Average of Exercise of Exercise of Exercise Shares in thousands Shares Price Shares Price Shares Price ------------------- ------ -------- ------ -------- ------ -------- (In thousands, except per share data) Options outstanding, January 1.............. 2,806 $10.62 2,536 $11.41 2,589 $ 8.58 Options granted......... 969 6.84 1,093 11.52 470 18.72 Options exercised....... (96) 2.80 (177) 5.26 (430) 2.61 Options canceled........ (309) 11.12 (646) 16.70 (93) 10.56 ----- ----- ----- Options outstanding, December 31............ 3,370 9.72 2,806 10.62 2,536 11.41 ===== ===== ===== Options Exercisable..... 1,279 10.25 911 9.20 678 6.95
There were 528,921 options available for future grants at December 31, 1999. Effective January 1, 1996, The Company adopted the disclosure requirements of SFAS 123, and continued to measure its employee stock-based compensation arrangements under the provisions of APB 25. Accordingly, no compensation expense has been recognized for the stock option plans. Had compensation expense for the Company's stock option plans been determined based on the fair value at the grant date for awards after 1994 consistent with the provisions of SFAS 123, the Company's net (loss) income and (loss) income per share would have been reduced to the pro forma amounts indicated below:
Year ended December 31, -------------------------- 1999 1998 1997 ------- -------- ------- (In thousands, except per share data) Net (loss) income: As reported.................................... $(2,828) $(73,633) $85,921 Pro forma...................................... (4,935) (74,996) 81,707 Basic (loss) income per share: As reported.................................... $ (0.08) $ (1.93) $ 2.23 Pro forma...................................... (0.14) (1.96) 2.12 Diluted (loss) income per share: As reported.................................... $ (0.08) $ (1.93) $ 2.10 Pro forma...................................... (0.14) (1.96) 2.00
The effects of applying SFAS 123 for disclosing compensation cost may not be representative of the effects on reported net income (loss) for future years. 123 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The weighted average fair value at date of grant of options granted during 1999, 1998 and 1997 was $3.85, $4.79, and $11.27 per option, respectively. The fair value of options at the date of grant was estimated using the Black- Scholes model with the following weighted average assumptions:
Year ended December 31, ------------------- 1999 1998 1997 ----- ----- ----- Expected life (years).................................. 5.01 5.11 5.53 Interest rate.......................................... 6.34% 4.54% 5.76% Volatility............................................. 66.86 66.81 64.33 Dividend yield......................................... 0.00% 0.00% 0.00%
Deferred Executive Compensation Plans Effective July 1, 1998, the Company adopted our Deferred Executive Compensation Plan (the "DEC Plan 1") and the Deferred Executive Compensation Plan 2 (the "DEC Plan 2", and together with the DEC Plan 1, the "DEC Plans"). The DEC Plans are each administered by a committee appointed by the board of directors. Any employee who has an annual base salary of at least $100,000 or who had an annual base salary of at least $100,000 in the prior year and directors may elect to participate in the DEC Plans. A participant's annual base salary includes all cash compensation excluding bonuses, commissions, employee benefits, stock options, relocation expenses, incentive payments, non-monetary awards, automobile and other allowances. Participants in the DEC Plans may defer up to 50% of their annual base salary and commissions and/or up to 100% of their annual bonus payments. Benefits accrued under the DEC Plans will be paid to all participants, other than participants who have voluntarily resigned their positions, in the form of a lifetime annuity issued by a life insurance company. DEC Plan benefits accrue through retirement so long as the participant remains employed by our company. Participants who voluntarily resign prior to retirement will be paid all of their vested benefits under the DEC Plans. If the Company terminates the DEC Plans, the Company may elect to pay participants in a lump sum, or in a lifetime annuity. Deferred compensation contributed to DEC Plan 1 is invested in the Company's common stock. In 1999 and 1998 the Company matched contributions to the DEC Plan 1, to be paid in our common stock, on a dollar-for-dollar basis up to $50,000 per participant. The Company ceased matching contributions for FYE 2000. The Company also reserves the right to make discretionary matches, to be paid in its common stock, in any year. Matching contributions vest 50% a year, commencing one year from the date of the matching contribution. Matching contributions vest completely if a participating employee retires, becomes permanently disabled, or dies. Deferred compensation contributed to DEC Plan 2 may be invested in certain mutual and money market funds. The Company will not make matching contributions to the DEC Plan 2. All DEC Plan 2 contributions are completely vested immediately. The Company incurred $1.5 million and $248,000 in expense for matching contributions to DEC Plan 1 during the years ended December 31, 1999 and 1998, respectively. DEC Plan 1 owned a total of 852,072 and 366,021 shares of ICII common stock at December 31, 1999 and 1998. 22. Executive Compensation Employment Agreements On January 1, 1997, the Company entered into a five-year employment contracts with H. Wayne Snavely, Chairman of the Board, President and Chief Executive Officer, which currently provides for minimum annual aggregate compensation of $500,000 , subject to adjustment for inflation, plus an annual bonus approved by the Company's Board of the Directors based on the attainment of performance objectives, including the Company's return on equity, income per share and increase in the price of the Company's common stock. 124 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of September 1, 1998, Mr. Sampson entered into an employment agreement that expires on January 31, 2002, which provides for an annual base salary of $300,000 plus an annual incentive bonus. Mr. Sampson's bonus is equal to 1.5% of Coast Business Credit's annual pre-tax profit determined in accordance with generally accepted accounting principles and is contingent upon Coast Business Credit's annual net profit equaling or exceeding either 2% of its average assets for the calendar year, exclusive of goodwill, or a pretax return on its capital for the year of 20%. Stock Options On January 1, 1992, options were granted to three senior officers of the Company to purchase a total of 2,292,628 shares, adjusted for stock dividends and splits, of the Company's Common Stock. The exercise price of these options is $0.89 per share of common stock for one-half of the options, with the other half exercisable at $1.40 per share. These options became exercisable in September 1995 (vesting was accelerated from January 1, 1997). These options expire on December 1, 2001 and are not covered by the Company's 1992 or 1996 Stock Option Plans. Compensation expense relating to these options was recorded in the Company's consolidated financial statements over a four year period which ended December 31, 1995 for an amount representing the difference between the exercise price of the options and the market price of the Company's stock at the grant date. The aggregate amount of compensation expense recognized on these stock options since their grant date was $2.2 million. 23. Interest Rate Swaps The Company may enter into interest rate cap, floor, and swap transactions to manage its exposure to fluctuations in interest rates and market movements in securities values. These instruments involve, to varying degrees, elements of credit and interest rate risk. The contract or notional amounts do not represent exposure to credit loss. Risk originates from the inability of counterparties to meet the terms of the contracts and from market movements in securities values and interest rates. The Company controls the credit risk of its interest rate cap, floor and swap agreements through credit approvals, limits and monitoring procedures. During the years ended December 31, 1999 and 1998, the Company entered into total rate of return swap contracts for investment purposes with various investment bank counterparties, the provisions of which entitle the Company to receive the total return on various commercial loans and pay for a floating payment of one month LIBOR plus a spread. These contracts are off balance sheet instruments. As of December 31, 1999 and 1998, respectively, the Company was party to total rate of return swap contracts with a total notional amount of $83.6 million and $280.4 million, under which the Company was obligated to pay one month LIBOR plus a weighted average spread of 0.88%, respectively. The weighted average remaining life of these contracts was 60 months and 31.2 months as of December 31, 1999 and 1998. For the years ended December 31, 1999, 1998 and 1997, the Company recognized $2.9 million, $5.4 million and $448,000 in income on total return swaps, respectively. As a part of the Pacifica Partners I LP collateralized loan obligation ("CLO") fund launched by the Company in August 1998, the Company delivered subordinate bonds of approximately $51.3 million into a total rate of return swap with the Canadian Imperial Bank of Commerce ("CIBC"). The provisions of the swap entitle the Company to receive the total return on the subordinate bonds delivered and pay a floating payment of LIBOR plus a weighted average spread of 1.36%. The Company delivered cash and various equity securities to CIBC as collateral for the swap. At December 31, 1999 and 1998, $25.9 million and $17.8 million was the amount of outstanding cash collateral classified as Trading Securities on the consolidated balance sheet. We had amortizing interest rate swaps outstanding at IBC associated with the IBC Lease Receivables Trust 1997-2 a with notional amounts of $218.6 million and $197.9 million at December 31, 1999 and December 31, 1998, respectively. 125 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 24. Commitments and Contingencies Loan Servicing As of December 31, 1999 and 1998 the Company was servicing loans and leases for others, directly and through sub-servicing arrangements, totaling approximately $268.6 million and $930.0 million, respectively. Related fiduciary funds held in trust for investors in non-interest bearing accounts totaled $520,000 and $7.6 million at December 31, 1999 and 1998, respectively. These funds are segregated in special bank accounts and are held as deposits at SPB. The Company is a guarantor of certain performances and lease servicing by IBC. The Company is a guarantor for AMN's performance with regards to the Auto Trust 1997-A securitization. Sales of Loans and Servicing Rights In the ordinary course of business, the Company is exposed to liability under representations and warranties made to purchasers and insurers of leases and mortgage loans and the purchasers of servicing rights. Under certain circumstances, the Company is required to repurchase mortgage loans if there has been a breach of representations or warranties. The Company provided $0 and $4.8 million in 1999 and 1998, respectively, as an allowance for losses on repurchases of former mortgage banking loans. At December 31, 1999 and 1998, the related repurchase liability totalled $638,000 and $5.1 million. During the years ended December 31, 1999 and 1998, respectively, the Company retained servicing rights on $25.1 million and $190.0 million of mortgage loans sold through traditional secondary market channels and $132.4 million and $118.7 million on loans and leases sold through securitizations. Additionally, during the year ended December 31, 1999 and 1998, respectively, the Company released servicing rights to the purchasers on $258.5 million and $215.3 million of mortgage loans sold. Loan Commitments As of December 31, 1999 and 1998, the Company had unfunded open loan commitments amounting to $1.1 billion and $1.0 billion, respectively, to fund loans. There is no exposure to credit loss in this type of commitment until the loans are funded. Interest rate risk is mitigated by the use of variable rate loan contracts. Lease Commitments Minimum rental commitments under all noncancelable operating leases net of aggregate sublease payments of $2.4 million at December 31, 1999 were as follows:
(In thousands) -------------- 2000........................................................ $ 4,480 2001........................................................ 3,928 2002........................................................ 3,468 2003........................................................ 2,699 2004........................................................ 1,685 Thereafter.................................................. 3,008 ------- Total..................................................... $19,268 =======
Rent expense for the years ended December 31, 1999, 1998 and 1997 was $5.2 million, $5.3 million, and $4.0 million, respectively. 126 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Legal Proceedings Our company is a defendant in a consolidated federal securities class action, In re Southern Pacific Funding Corporation Securities Litigation, Lead Case No. CV98-1239-MA, in the U.S. District Court for the District of Oregon. The action also names as defendants two current directors of ours, and others. This action was initially filed in October 1998. Plaintiffs allege that SPFC failed to properly mark down the value of its residual interests, failed to properly reflect increased levels of prepayments and actual prepayment and default rates on its loans and made false and misleading public statements concerning its financial condition. Following a number of motions to dismiss, defendants answered and alleged affirmative defenses to the second consolidated complaint on June 22, 1999. On July 21, 1999, the Court certified a class of persons who purchased the securities of SPFC during the period October 7, 1997 through October 1, 1998. On September 10, 1999, plaintiffs filed a third consolidated complaint, alleging claims against our company and two of its directors (and others) under Section 10(b) and 20(a) of the Securities Exchange Act of 1934. On September 21, 1999, plaintiffs sought leave to file a fourth consolidated complaint, alleging claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11 and 12 of the Securities Act of 1933. On December 7, 1999, the Court granted plaintiffs' motion to file a fourth amended consolidated complaint, denied defendants' motions to dismiss except as to the Section 12 claim, and granted plaintiffs' motion to file a supplemental memorandum to add allegations to the complaint. Our company and three of its 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 U.S. District Court for the Central District of California. This action, purportedly filed on behalf of a class of persons who purchased our company's securities during the period January 29, 1998 through October 1, 1998, was originally filed in November 1998. Plaintiffs allege that defendants made false and misleading statements and omitted to reveal the truth concerning the value of Imperial Credit Industries, Inc.'s investments in SPFC and FMC, resulting in an artificial inflation of the price of our securities. On June 21, 1999, defendants moved to dismiss plaintiffs' complaints. The matter was fully briefed and the Court held a hearing on July 26, 1999. At the hearing, the Court granted defendants' motions to dismiss plaintiffs' complaints, with leave to amend. The Court subsequently issued a written order on September 7, 1999. Plaintiffs filed a consolidated amended class action complaint on October 4, 1999, alleging a claim against our company and three of its directors for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. On October 22, 1999, defendants moved to dismiss the consolidated amended class action complaint. On November 22, 1999, plaintiffs were granted leave to file an amended class action complaint, which plaintiffs filed on December 13, 1999. The Court held a hearing on defendants' motion to dismiss the second consolidated amended complaint on January 24, 2000. The Court has not certified a class, nor have plaintiffs filed a motion for class certification. We are a defendant in Steadfast Insurance Company v. Auto Marketing Network Inc. and Imperial Credit Industries, Inc., filed on August 12, 1997 in the Northern District of Illinois, Case No. 97-C-5696. The plaintiff is seeking damages in the amount of $27 million allegedly resulting from the fraudulent inducement to enter into, and the subsequent breach of, a motor vehicle collateral enhancement insurance policy. In May 1998, we filed a counterclaim against the plaintiff for $54 million in damages based on the allegation that the underlying claim was filed in bad faith. In January 1999, the Court entered a preliminary injunction which enjoined us from transferring assets of Auto Marketing Network, Inc., in amounts that would cause the total assets of Auto Marketing Network to be less than $20 million in value. The injunction has since been removed and the parties are presently engaged in pretrial discovery. We have moved to dismiss ICII from the lawsuit. We have been a defendant along with ICCMIC and its directors, which includes one of our current directors and one former director, in a putative class action lawsuit filed on July 22, 1999 by Riviera-Enid, a Florida limited partnership, in Los Angeles Superior Court, Case No. BC213902. The complaint alleges that the proposed 127 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) merger between a subsidiary of ours and ICCMIC constitutes a breach of fiduciary duty by the defendants in that, allegedly, the merger price is unfair to stockholders, the merger price is less than the liquidation value of ICCMIC's assets and the termination fee for the management contract is excessive. The complaint also alleges that certain of the directors have conflicts of interest because of their affiliation with us and that the merger will benefit us at the expense of ICCMIC other stockholders. The complaint seeks certification of a class of all stockholders of ICCMIC whose stock will be acquired in connection with the merger and seeks injunctive relief that would, if granted, prevent the completion of the proposed merger. The complaint also seeks damages in an unspecified amount and other relief. On October 8, 1999, we filed a demurrer to plaintiff's complaint, which is set to be heard by the Court on November 22, 1999. On November 1, 1999, plaintiff served an amended class action complaint alleging the same claims but adding details from ICCMIC's preliminary proxy statement filed with the SEC. The Court has not certified a class, nor has plaintiff filed a motion for class certification. On November 3, 1999, ICCMIC's counsel received a letter from counsel for the plaintiffs asserting their intent to seek a temporary restraining order, expedited discovery, and a date for a preliminary injunction hearing. No motion for a preliminary injunction has been filed. By letter of November 10, 1999, counsel for the plaintiffs stated that the plaintiffs have decided not to move forward with a motion for a temporary restraining order or permanent injunction at this time. All defendants filed demurrers to the amended complaint, and on February 4, 2000, the Court granted ICII's demurrer and dismissed the action against ICII and the individual ICII defendants with prejudice and without leave to amend. We and ICCMIC believe that the material allegations of the complaint are without merit. We intend to vigorously defend all of the above lawsuits. 25. Fair Value of Financial Instruments Financial instruments include securities, loans receivable, deposits and borrowings, and various off-balance sheet items. Because no market exists for a portion of the Company's loans held for investment and securitization related assets, fair value estimates are based on judgments regarding credit risk, investor expectation of future economic conditions, normal cost of administration and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the fair value estimates presented do not include the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Financial Assets The carrying values of cash, interest bearing deposits, FHLB stock, and accrued interest receivable are considered to approximate fair value. The carrying values of securities held for trading and available for sale approximate fair value. Such market value is determined by reference to quoted market prices. When quoted market prices are not available, fair value is estimated by reference to market values for similar securities or by discounting cash flows at an appropriate risk rate. The fair value of loans and leases held for sale is based on sale commitments, discounted cash flow analysis or prices for similar products. The fair value of loans held for investment is estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices for similar instruments, taking into consideration the varying degrees of credit risk. The fair value of servicing rights and securitization related assets is estimated by discounting future cash flows using appropriate risk, default and prepayment rates. The fair value of investments in unconsolidated publicly traded affiliates is based on quoted market prices. 128 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Financial Liabilities The carrying amounts of deposits due on demand and accrued interest payable is considered to approximate fair value. For fixed maturity deposits, fair value is estimated by discounting estimated future cash flows using currently offered rates for deposits of similar maturities. The fair value of debt is based on rates currently available to the Company for debt with similar terms and remaining maturities. Off-Balance Sheet Financial Instruments The fair value of lending commitments is estimated using the fees currently charged to enter into similar agreements; such estimated fair value is not material. The fair value of interest rate swaps, forward treasury contracts, interest rate futures and interest rate swaps is based on quoted market prices. Total rate of return swaps are carried in securities held for trading at their fair value. The estimated fair values of the Company's financial instruments at December 31, 1999 and 1998 are as follows:
1999 1998 --------------------- --------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ---------- ---------- ---------- ---------- (In thousands) Assets: Cash.............................. $ 33,898 $ 33,898 $ 297,772 $ 297,772 Interest bearing deposits......... 248,182 248,182 1,415 1,415 Investment in Federal Home Loan Bank stock....................... 6,960 6,960 4,657 4,657 Securities held for trading....... 160,805 160,805 170,752 170,752 Securities available for sale..... 74,374 74,374 60,015 60,015 Loans and leases held for sale.... 289,398 289,638 319,061 319,061 Loans and leases held for investment, net.................. 1,241,232 1,240,488 1,320,095 1,325,237 Servicing rights.................. 802 802 4,329 4,329 Retained interest in loan and lease securitizations............ 10,220 10,220 27,011 27,011 Accrued interest receivable....... 8,272 8,272 10,114 10,114 Equity interest in Franchise Mortgage Acceptance Company...... -- -- 56,334 85,432 Liabilities: Deposits.......................... $1,614,758 $1,613,143 $1,714,252 $1,722,320 Borrowings from Federal Home Loan Bank............................. -- -- 20,000 20,000 Other borrowings.................. 74,309 74,309 102,270 102,270 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company ("ROPES")........................ 61,750 47,717 70,000 47,950 Senior notes...................... 185,185 144,444 219,858 147,305 Accrued interest payable.......... 18,811 18,811 25,421 25,421 Off balance sheet: Interest rate swaps............... $ 218,600 $ 1,400 $ 197,900 $ (2,600)
129 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 26. Summary of Quarterly Financial Information (unaudited)
Three months ended ------------------------------------------- March 31 June 30 September 30 December 31 -------- -------- ------------ ----------- (In thousands, except per share data) Year ended December 31, 1999 Net interest income.......... $25,251 $ 20,368 $ 19,082 $21,130 Other revenues (1)........... 17,813 (11,438) 19,297 42,887 Provision for loan and lease losses...................... 2,200 22,255 3,675 7,210 Other expenses............... 30,788 29,906 25,233 40,673 Net income (loss)............ 6,762 (25,901) 8,243 8,068 Comprehensive income (loss).. 7,904 (24,018) 8,595 8,493 Income (loss) per share: Basic...................... $ 0.18 $ (0.74) $ 0.25 $ 0.24 Diluted.................... $ 0.18 $ (0.74) $ 0.24 $ 0.24 Year ended December 31, 1998 Net interest income.......... $25,745 $ 29,070 $ 29,077 $28,842 Other revenues (1)........... 24,745 27,034 (143,343) 10,464 Provision for loan and lease losses...................... 3,000 4,300 9,500 (1,350) Other expenses............... 23,937 25,759 39,330 31,809 Net income (loss)............ 12,900 16,262 (109,440) 6,645 Income (loss) per share: Basic...................... $ 0.33 $ 0.42 $ (2.83) $ 0.18 Diluted.................... $ 0.32 $ 0.40 $ (2.83) $ 0.18
- -------- (1) Other revenues includes negative mark-to-market and loss on impairment charges. 27. Selected Financial Information of Subsidiaries and Equity Investment The following represents summarized financial information with respect to the operations of SPB, a significant wholly-owned subsidiary of ICII.
As of and for the Year Ended December 31, --------------------------------- Southern Pacific Bank 1999 1998 1997 --------------------- ---------- ---------- ---------- (In thousands) Total assets.............................. $1,846,992 $1,976,055 $1,503,807 Deposits.................................. 1,626,153 1,716,688 1,197,696 Borrowings from Federal Home Loan Bank.... -- 20,000 45,000 Other borrowings.......................... 35,000 35,000 70,000 Stockholder's equity...................... 169,962 179,022 157,082 Interest income........................... 183,052 197,325 153,180 Interest expense.......................... 92,162 95,647 80,452 Net noninterest revenue................... (10,033) 2,738 37,047 Noninterest expense....................... 57,202 63,548 41,535 Provision for loan losses................. 31,930 12,500 14,900 (Loss) income before taxes................ (8,275) 28,368 53,339 Net (loss) income......................... (4,969) 16,393 30,824 Comprehensive (loss) income............... (5,316) 16,393 30,824
130 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 28. Condensed Consolidating Financial Information The following represents condensed consolidating financial information as of December 31, 1999 and December 31, 1998, and for the years ended December 31, 1999, 1998 and 1997, with respect to the financial position, results of operations and cash flows of the Company and its wholly-owned and majority- owned subsidiaries. On January 17, 1997, the Company sold $200 million of 9.875% Senior Notes due 2007. As of December 31, 1999, the 9.875% Senior Notes are guaranteed by five of the Company's wholly-owned subsidiaries, IBC, ICAI, ICCAMC, Imperial Credit Worldwide ("ICW") and AMN (the "Guarantor Subsidiaries"). As of December 31, 1999, the non-guarantor subsidiaries are SPB, ICG and ICCTI. FMC was a guarantor subsidiary through September 30, 1997. Each of the guarantees is full and unconditional and joint and several. The summarized consolidated financial information is presented in lieu of separate financial statements and other related disclosures of the wholly-owned subsidiary guarantors as management has determined that such information is not material to investors. None of the subsidiary guarantors is restricted from making distributions to the Company. IMPERIAL CREDIT INDUSTRIES, INC. CONSOLIDATING CONDENSED BALANCE SHEET As of December 31, 1999
Non- Guarantor Guarantor ICII Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) ASSETS ------ Cash.................... $ 11,110 $ 1,382 $ 34,852 $ (13,446) $ 33,898 Interest bearing deposits............... 35,049 -- 213,133 -- 248,182 Investments in Federal Home Loan Bank stock... -- -- 6,960 -- 6,960 Securities available for sale and trading....... 74,827 41,460 132,042 (13,150) 235,179 Loans held for sale..... 1,441 12,300 275,657 -- 289,398 Loans held for investment, net........ 55,721 17,105 1,211,862 (43,456) 1,241,232 Servicing rights........ -- 802 -- -- 802 Retained interest in loan and lease securitizations........ -- 10,220 -- -- 10,220 Investment in subsidiaries........... 255,024 -- -- (255,024) -- Goodwill................ 11,778 4,306 18,877 -- 34,961 Other assets............ 26,230 11,686 27,300 (1,925) 63,291 Net assets of discontinued operations............. 44,396 (6,904) -- -- 37,492 -------- ------- ---------- --------- ---------- Total assets.......... $515,576 $92,357 $1,920,683 $(327,001) $2,201,615 ======== ======= ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY -------------------- Deposits................ $ -- $ 2,050 $1,626,154 $ (13,446) $1,614,758 Other borrowings........ 7,911 8,456 103,323 (45,381) 74,309 ROPES................... 63,915 (2,165) -- -- 61,750 Senior notes............ 185,185 -- -- -- 185,185 Minority interest in consolidated subsidiaries........... 103 2 155 2,424 2,684 Other liabilities....... 53,082 4,341 126 -- 57,549 -------- ------- ---------- --------- ---------- Total liabilities..... 310,196 12,684 1,729,758 (56,403) 1,996,235 -------- ------- ---------- --------- ---------- Shareholders' equity: Preferred stock......... -- 14,150 -- (14,150) -- Common stock............ 97,220 120,551 110,977 (231,528) 97,220 Retained earnings (deficit).............. 98,437 (64,641) 80,295 (15,654) 98,437 Shares held in deferred executive compensation plan................... 7,107 7,107 -- (7,107) 7,107 Accumulated other comprehensive income (loss)................. 2,616 2,506 (347) (2,159) 2,616 -------- ------- ---------- --------- ---------- Total shareholders' equity............... 205,380 79,673 190,925 (270,598) 205,380 -------- ------- ---------- --------- ---------- Total liabilities and shareholders' equity............... $515,576 $92,357 $1,920,683 $(327,001) $2,201,615 ======== ======= ========== ========= ==========
131 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS Year ended December 31, 1999
Non- Guarantor Guarantor ICII Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Revenue: Interest income......... $ 21,521 $ 9,639 $183,576 $ (7,298) $207,438 Interest expense........ 32,184 1,595 92,599 (4,771) 121,607 --------- -------- -------- -------- -------- Net interest (expense) income................. (10,663) 8,044 90,977 (2,527) 85,831 Provision for loan and lease losses........... 210 3,200 31,930 -- 35,340 --------- -------- -------- -------- -------- Net interest (expense) income after provision for loan and lease losses..... (10,873) 4,844 59,047 (2,527) 50,491 --------- -------- -------- -------- -------- Gain on sale of loans and leases............. 20 4,398 2,062 -- 6,480 Asset management fees... -- 10,054 -- -- 10,054 Brokerage commission and investment banking fees................... -- -- 27,198 -- 27,198 Loan servicing income... 59 4,397 2,429 -- 6,885 Gain (loss) on sale of equity securities...... 31,434 (298) 1,606 -- 32,742 Equity in net loss of FMC.................... (53) -- -- -- (53) Mark to market on securities and loans held for sale.......... 11,314 (15,022) (24,933) -- (28,641) Dividends received from subsidiaries........... 6,564 -- -- (6,564) -- Other income............ 1,965 3,169 8,760 -- 13,894 --------- -------- -------- -------- -------- Total other income.... 51,303 6,698 17,122 (6,564) 68,559 --------- -------- -------- -------- -------- Total revenues....... 40,430 11,542 76,169 (9,091) 119,050 --------- -------- -------- -------- -------- Expenses: Personnel expense....... 3,133 14,574 42,634 -- 60,341 Amortization of servicing rights....... -- 259 3,964 -- 4,223 Occupancy expense....... 784 911 3,963 -- 5,658 Net (income) expenses of other real estate owned.................. (23) 717 692 -- 1,386 Professional services... 2,770 2,725 4,770 -- 10,265 Amortization of goodwill............... 200 12,653 1,653 -- 14,506 General, administrative and other expense...... 2,454 4,048 23,719 -- 30,221 --------- -------- -------- -------- -------- Total expenses........ 9,318 35,887 81,395 -- 126,600 --------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes, minority interest, deferred inter-company expense and extraordinary item..... 31,112 (24,345) (5,226) (9,091) (7,550) Income taxes............ 10,020 (9,789) (3,305) -- (3,074) Minority interest in income (loss) of consolidated subsidiaries........... 421 (46) 572 527 1,474 --------- -------- -------- -------- -------- Income (loss) from continuing operations before equity in undistributed income of subsidiaries........... 20,671 (14,510) (2,493) (9,618) (5,950) Equity in undistributed (loss) income of subsidiaries........... (27,520) -- -- 27,520 -- --------- -------- -------- -------- -------- (Loss) income from continuing operations.. (6,849) (14,510) (2,493) 17,902 (5,950) Loss from discontinued operations............. -- (899) -- -- (899) --------- -------- -------- -------- -------- (Loss) income before extraordinary item..... (6,849) (15,409) (2,493) 17,902 (6,849) Extraordinary item--gain on early extinguishment of debt, net of income taxes.................. 4,021 -- -- -- 4,021 --------- -------- -------- -------- -------- Net (loss) income....... (2,828) (15,409) (2,493) 17,902 (2,828) Preferred stock dividends.............. -- 2,527 -- (2,527) -- --------- -------- -------- -------- -------- Net (loss) income available for common shares................. $ (2,828) $(17,936) $ (2,493) $ 20,429 $ (2,828) ========= ======== ======== ======== ========
132 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS Year ended December 31, 1999
Non- Guarantor Guarantor ICII Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) Net cash provided by operating activities... $ 19,031 $ 4,385 $ 96,793 $ 31,413 $ 151,622 -------- -------- --------- -------- --------- Cash flows from investing activities: Net change in interest bearing deposits..... (32,768) 423 (214,422) -- (246,767) Sale of securities available for sale... 4,875 -- -- -- 4,875 Purchase of securities available for sale... (4,050) -- (26,757) 4,050 (26,757) Net change loans held for investment....... (11,984) (12,868) (1,524) (865) (27,241) Proceeds of sale of OREO................. 1,216 4,907 4,228 -- 10,351 Proceeds of sales of securities........... 91,709 8,849 -- -- 100,558 Purchases of premises and equipment........ (1,246) (612) (5,909) -- (7,767) Purchase of FHLB stock................ -- -- (1,983) -- (1,983) Cash utilized for acquisitions......... (8,132) -- -- -- (8,132) Net change in investment in subsidiaries......... 21,839 -- -- (21,839) -- -------- -------- --------- -------- --------- Net cash provided by (used in) investing activities............. 61,459 699 (246,367) (18,654) (202,863) -------- -------- --------- -------- --------- Cash flows from financing activities: Net change in deposits............. -- -- (87,611) (11,883) (99,494) Advances from Federal Home Loan Bank....... -- -- 30,000 -- 30,000 Repayments of advances from Federal Home Loan Bank............ -- -- (50,000) -- (50,000) Proceeds from issuance of mandatorily redeemable cumulative preferred stock...... 30,000 -- -- -- 30,000 Repurchase of mandatorily redeemable cumulative preferred stock...... (31,353) -- -- -- (31,353) Net change in other borrowings........... (12,570) (4,591) (294) (10,506) (27,961) Repurchase of Senior Notes................ (27,453) -- -- -- (27,453) Repurchase of ROPES... (6,628) -- -- -- (6,628) Capital contributions from ICII............ (2,681) 2,555 126 -- -- Dividends paid to ICII................. 6,561 (2,485) (4,076) -- -- Proceeds from exercise of stock options..... 249 -- -- -- 249 Net change in minority interest............. 731 94 22 (1,380) (533) Repurchase and retirement of stock.. (29,460) -- -- -- (29,460) -------- -------- --------- -------- --------- Net cash used in financing activities... (72,604) (4,427) (111,833) (23,769) (212,633) -------- -------- --------- -------- --------- Net change in cash.... 7,886 657 (261,407) (11,010) (263,874) Cash at beginning of period............... 3,224 725 296,259 (2,436) 297,772 -------- -------- --------- -------- --------- Cash at end of period............... $ 11,110 $ 1,382 $ 34,852 $(13,446) $ 33,898 ======== ======== ========= ======== =========
133 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONSOLIDATING CONDENSED BALANCE SHEET As of December 31, 1998
Non- Guarantor Guarantor ICII Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) ASSETS ------ Cash.................... $ 3,224 $ 725 $ 296,259 $ (2,436) $ 297,772 Interest bearing deposits............... 2,281 423 (1,289) -- 1,415 Investments in Federal Home Loan Bank stock... -- -- 4,657 -- 4,657 Securities available for sale and trading....... 118,623 8,421 113,723 (10,000) 230,767 Loans held for sale..... 1,698 33,160 284,203 -- 319,061 Loans held for investment, net........ 45,029 7,467 1,302,599 (35,000) 1,320,095 Servicing rights........ -- 365 3,964 -- 4,329 Retained interest in loan and lease securitizations........ -- 27,011 -- -- 27,011 Investment in FMC....... 56,334 -- -- -- 56,334 Investment in subsidiaries........... 276,863 -- -- (276,863) -- Goodwill................ -- 16,959 20,539 -- 37,498 Other assets............ 32,247 12,200 28,910 (1,925) 71,432 Net assets of discontinued operations............. 43,624 3,188 -- -- 46,812 -------- -------- ---------- --------- ---------- Total assets.......... $579,923 $109,919 $2,053,565 $(326,224) $2,417,183 ======== ======== ========== ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY -------------------- Deposits................ $ -- $ -- $1,716,689 $ (2,437) $1,714,252 Borrowings from FHLB.... -- -- 20,000 -- 20,000 Other borrowings........ 20,481 15,097 103,617 (36,925) 102,270 ROPES................... 72,165 (2,165) -- -- 70,000 Senior notes............ 219,858 -- -- -- 219,858 Minority interest in consolidated subsidiaries........... (628) 2,109 133 1,603 3,217 Other liabilities....... 34,526 7,253 12,286 -- 54,065 -------- -------- ---------- --------- ---------- Total liabilities..... 346,402 22,294 1,852,725 (37,759) 2,183,662 -------- -------- ---------- --------- ---------- Shareholders' equity: Preferred stock......... -- 12,000 -- (12,000) -- Common stock............ 129,609 135,279 114,258 (249,537) 129,609 Retained earnings....... 101,265 (63,487) 86,582 (23,095) 101,265 Shares held in deferred executive compensation plan................... 3,833 3,833 -- (3,833) 3,833 Accumulated other comprehensive loss..... (1,186) -- -- -- (1,186) -------- -------- ---------- --------- ---------- Total shareholders' equity............... 233,521 87,625 200,840 (288,465) 233,521 -------- -------- ---------- --------- ---------- Total liabilities and shareholders' equity............... $579,923 $109,919 $2,053,565 $(326,224) $2,417,183 ======== ======== ========== ========= ==========
134 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS Year ended December 31, 1998
Non- Guarantor Guarantor ICII Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Revenue: Interest income......... $ 30,082 $ 12,962 $197,209 $ (4,413) $ 235,840 Interest expense........ 30,617 1,131 95,771 (4,413) 123,106 --------- -------- -------- -------- --------- Net interest (expense) income................. (535) 11,831 101,438 -- 112,734 Provision for loan and lease losses........... -- 2,950 12,500 -- 15,450 --------- -------- -------- -------- --------- Net interest (expense) income after provision for loan and lease losses..... (535) 8,881 88,938 -- 97,284 --------- -------- -------- -------- --------- Gain on sale of loans and leases............. 46 4,790 10,052 -- 14,888 Asset management fees... -- 7,591 -- -- 7,591 Brokerage commission and investment banking fees................... -- -- 18,633 (170) 18,463 Loan servicing (expense) income................. (434) 4,907 7,510 -- 11,983 Loss on sale of equity securities............. (179) (50) (363) -- (592) Equity in net income of SPFC................... 12,739 -- -- -- 12,739 Equity in net income of FMC.................... 3,235 -- -- -- 3,235 Mark to market on securities and loans held for sale.......... (4,993) (11,604) (25,791) -- (42,388) Loss on impairment of equity securities...... (120,138) -- -- -- (120,138) Dividends received from subsidiaries........... 25,410 -- -- (25,410) -- Other income............ 362 1,292 11,464 -- 13,118 --------- -------- -------- -------- --------- Total other (loss) income............... (83,952) 6,926 21,505 (25,580) (81,101) --------- -------- -------- -------- --------- Total revenues....... (84,487) 15,807 110,443 (25,580) 16,183 --------- -------- -------- -------- --------- Expenses: Personnel expense....... 4,415 9,715 47,506 -- 61,636 Amortization of servicing rights....... -- (365) 1,851 -- 1,486 Occupancy expense....... 1,267 942 3,541 -- 5,750 Net (income) expenses of other real estate owned.................. (548) 459 (812) -- (901) Professional services... 2,897 2,773 5,348 (170) 10,848 Amortization of goodwill............... -- 1,084 1,602 -- 2,686 Provision for loss on loan repurchase........ 4,750 -- -- -- 4,750 General, administrative and other expense...... 3,493 4,121 26,967 -- 34,581 --------- -------- -------- -------- --------- Total expenses........ 16,274 18,729 86,003 (170) 120,836 --------- -------- -------- -------- --------- (Loss) income from continuing operations before income taxes, minority interest, deferred inter-company expense and extraordinary item..... (100,761) (2,922) 24,440 (25,410) (104,653) Income taxes............ (55,061) (981) 11,978 -- (44,064) Minority interest in (loss) income of consolidated subsidiaries........... (1,552) 88 22 (22) (1,464) --------- -------- -------- -------- --------- (Loss) income from continuing operations before equity in undistributed income of subsidiaries........... (44,148) (2,029) 12,440 (25,388) (59,125) Equity in undistributed (loss) income of subsidiaries........... (29,485) -- -- 29,485 -- --------- -------- -------- -------- --------- (Loss) income from continuing operations.. (73,633) (2,029) 12,440 4,097 (59,125) Loss from discontinued operations............. -- (3,232) -- -- (3,232) Loss on disposal of AMN.................... -- (11,276) -- -- (11,276) --------- -------- -------- -------- --------- Net (loss) income....... $ (73,633) $(16,537) $ 12,440 $ 4,097 $ (73,633) ========= ======== ======== ======== =========
135 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS Year ended December 31, 1998
Non- Guarantor Guarantor ICII Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) Net cash (used in) provided by operating activities............. $(50,644) $(27,150) 39,006 $ 1,653 $ (37,135) -------- -------- -------- -------- --------- Cash flows from investing activities: Net change in interest bearing deposits..... 29,109 726 72,488 -- 102,323 Purchase of securities available for sale... (16,651) (900) -- -- (17,551) Sale of securities available for sale... -- 8,818 -- -- 8,818 Net change loans held for investment....... 10,884 15,738 (303,251) -- (276,629) Proceeds of sale of OREO................. 2,558 9,360 1,825 -- 13,743 Proceeds of sales of IMH stock............ 867 -- -- -- 867 Purchases of premises and equipment........ (1,721) (671) (5,441) -- (7,833) Redemption of FHLB stock................ -- -- 1,280 -- 1,280 Net change in investment in subsidiaries......... 4,591 -- -- (4,591) -- -------- -------- -------- -------- --------- Net cash provided by (used in) investing activities............. 29,637 33,071 (233,099) (4,591) (174,982) -------- -------- -------- -------- --------- Cash flows from financing activities: Net change in deposits............. -- -- 523,924 31,382 555,306 Advances from Federal Home Loan Bank....... -- -- 44,500 -- 44,500 Repayments of advances from Federal Home Loan Bank............ -- -- (69,500) -- (69,500) Net change in other borrowings........... 19,261 (15,153) (47,911) 1,232 (42,571) Capital contributions from ICII............ (4,332) 4,332 -- -- -- Dividends paid to ICII................. 20,915 (16,915) (4,000) -- -- Proceeds from exercise of stock options..... 1,037 -- -- -- 1,037 Net change in minority interest............. (1,574) (111) 22 1,706 43 Repurchase and retirement of stock.. (24,305) -- -- -- (24,305) -------- -------- -------- -------- --------- Net cash provided by (used in) financing activities............. 11,002 (27,847) 447,035 34,320 464,510 -------- -------- -------- -------- --------- Net change in cash.... (10,005) (21,926) 252,942 31,382 252,393 Cash at beginning of period............... 13,229 22,651 43,317 (33,818) 45,379 -------- -------- -------- -------- --------- Cash at end of period............... $ 3,224 $ 725 $296,259 $ (2,436) $ 297,772 ======== ======== ======== ======== =========
136 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS Year ended December 31, 1997
Non- Guarantor Guarantor ICII Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) Revenue: Interest income.......... $ 28,916 $ 8,399 $170,928 $ (4,643) $203,600 Interest expense......... 25,703 2,779 94,374 (4,643) 118,213 -------- -------- -------- -------- -------- Net interest income...... 3,213 5,620 76,554 -- 85,387 Provision for loan and lease losses............ 5,000 1,075 14,900 -- 20,975 -------- -------- -------- -------- -------- Net interest income after provision for loan and lease losses................. (1,787) 4,545 61,654 -- 64,412 -------- -------- -------- -------- -------- (Loss) gain on sale of loans and leases........ (4,427) 7,908 66,256 -- 69,737 Asset management fees.... -- 5,810 -- -- 5,810 Brokerage commission and investment banking fees.................... -- -- 7,702 -- 7,702 Loan servicing (expense) income.................. (2,283) 3,943 6,942 872 9,474 Gains on sale of securities.............. 110,317 411 891 566 112,185 Equity in net income of SPFC.................... 25,869 -- -- -- 25,869 Equity in net loss of FMC..................... (3,050) -- -- -- (3,050) Mark to market on securities and loans held for sale........... (341) -- -- -- (341) Gain on termination of REIT contract........... -- 19,046 -- -- 19,046 Dividends received from subsidiaries............ 27,514 -- -- (27,514) -- Other (expense) income... (2,573) 1,820 4,813 -- 4,060 -------- -------- -------- -------- -------- Total other income.... 151,026 38,938 86,604 (26,076) 250,492 -------- -------- -------- -------- -------- Total revenues........ 149,239 43,483 148,258 (26,076) 314,904 -------- -------- -------- -------- -------- Expenses: Personnel expense........ 4,682 8,548 38,379 -- 51,609 Amortization of servicing rights.................. 1,580 636 -- 872 3,088 Occupancy expense........ 1,310 598 2,411 -- 4,319 Net expenses of other real estate owned....... 4,513 (254) 2,268 -- 6,527 Professional services.... 3,611 1,046 5,008 -- 9,665 Amortization of goodwill................ -- 955 1,536 -- 2,491 Provision for loss on loan repurchase......... 5,400 -- -- -- 5,400 Loss on restructuring to Dabney/Resnick/Imperial, LLC..................... 3,709 -- -- -- 3,709 General, administrative and other expense....... 4,922 8,880 14,251 -- 28,053 -------- -------- -------- -------- -------- Total expenses........ 29,727 20,409 63,853 872 114,861 -------- -------- -------- -------- -------- Income (loss) before income taxes, minority interest, deferred inter-company expense and extraordinary item.. 119,512 23,074 84,405 (26,948) 200,043 Income taxes............. 41,611 9,902 22,515 239 74,267 Minority interest in income of consolidated subsidiaries............ 10,513 -- 11 (11) 10,513 -------- -------- -------- -------- -------- Income (loss) from continuing operations before deferred inter- company expense......... 67,388 13,172 61,879 (27,176) 115,263 Deferred inter-company expense, net of income taxes................... (327) -- -- 327 -- -------- -------- -------- -------- -------- Income (loss) from continuing operations before equity in undistributed income of subsidiaries............ 67,715 13,172 61,879 (27,503) 115,263 Equity in undistributed income of subsidiaries.. 22,201 -- -- (22,201) -- -------- -------- -------- -------- -------- Income (loss) from continuing operations... 89,916 13,172 61,879 (49,704) 115,263 Loss from discontinued operations.............. -- (25,347) -- -- (25,347) -------- -------- -------- -------- -------- Income (loss) before extraordinary item...... 89,916 (12,175) 61,879 (49,704) 89,916 Extraordinary item--Loss on early extinguishment of debt, net of income taxes................... (3,995) -- -- -- (3,995) -------- -------- -------- -------- -------- Net income (loss)........ $ 85,921 $(12,175) $ 61,879 $(49,704) $ 85,921 ======== ======== ======== ======== ========
137 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS (Year ended December 31, 1997)
Non- Guarantor Guarantor ICII Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Net cash (used in) provided by operating activities............. $ (19,966) $ 7,312 $ 834,215 $(802,998) $ 18,563 --------- -------- --------- --------- --------- Cash flows from investing activities: Net change in interest bearing deposits..... (31,390) (986) (70,797) 2,804 (100,369) Purchase of securities available for sale... (42,938) -- -- -- (42,938) Sale of securities available for sale... -- -- 29,354 (23,950) 5,404 Net change loans held for investment....... (56,088) 47,751 (272,429) 106,801 (173,965) Proceeds from sales of stock................ 83,117 411 1,295 565 85,388 Investment in Imperial Credit Asset Resolution Inc....... (74,810) -- -- 74,810 -- Cash utilized for acquisitions......... (750) -- (123,738) -- (124,488) Net change in investment in subsidiaries......... (11,803) -- -- 11,803 -- Other, net............ 3,645 (2,513) (40,377) 69,586 30,341 --------- -------- --------- --------- --------- Net cash (used in) provided by investing activities............. (131,017) 44,663 (476,692) 242,419 (320,627) --------- -------- --------- --------- --------- Cash flows from financing activities: Net change in deposits............. -- -- 117,575 (30,737) 86,838 Advances from Federal Home Loan Bank....... -- -- 50,000 -- 50,000 Repayments of advances from Federal Home Loan Bank............ -- -- (145,500) -- (145,500) Net change in other borrowings........... (15,363) (58,518) (290,113) 507,499 143,505 Proceeds from offering of Senior Notes...... 194,500 -- -- -- 194,500 Borrowings from Imperial Credit Investment Corp...... 10,000 -- -- (10,000) -- Proceeds from offering of Remarketed Securities........... 68,075 -- -- -- 68,075 Repurchase of Senior Notes................ (73,241) -- -- -- (73,241) Dividends paid to ICII................. 18,450 -- (18,450) -- -- Net change in minority interest............. (44,203) -- 111 (7,670) (51,762) Other, net............ 781 20 (92,754) 92,734 781 --------- -------- --------- --------- --------- Net cash provided by (used in) financing activities............. 158,999 (58,498) (379,131) 551,826 273,196 --------- -------- --------- --------- --------- Net change in cash.... 8,016 (6,523) (21,608) (8,753) (28,868) Cash at beginning of period............... 5,213 7,973 64,926 (3,865) 74,247 --------- -------- --------- --------- --------- Cash at end of period............... $ 13,229 $ 1,450 $ 43,318 $ (12,618) $ 45,379 ========= ======== ========= ========= =========
138 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 29. SPB Regulatory Matters General SPB is subject to federal and state regulation and periodic examinations by the California Department of Financial Institutions and the FDIC. SPB's ability to pay dividends is limited by federal and state regulation. California Regulations California industrial loan law establishes minimum capital levels and other ratios that limit the ability of the Bank to pay dividends. Under these regulations, SPB cannot pay dividends if the amount of SPB's non-demand deposits is greater than 20 times the amount of SPB's "capital not available for dividends." "Capital not available for dividends" is the amount of equity capital that is established by the Board of Directors through an amendment to SPB's by-laws. At its January 1998 meeting, the Directors approved a by-law amendment declaring $150 million of capital not available for dividends, representing a $25 million increase from the previously declared amount. At December 31, 1999 and 1998, the relationships of non-demand deposits to capital not available for dividends were 10.8 times and 11.4 times, respectively. Federal Deposit Insurance Corporation Regulations SPB is subject to capital requirements as administered by the FDIC. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by the FDIC that, if undertaken, could have a direct material effect on SPB's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, SPB must meet specific capital guidelines that involve quantitative measures of SPB's assets, liabilities and certain off- balance sheet items as calculated under regulatory accounting practices. SPB's capital amounts and classifications are also subject to qualitative judgments by the FDIC with respect to components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require SPB to maintain minimum amounts and ratios, set forth in the table below, of Total and Tier-1 capital to risk-weighted assets and Tier-1 capital to average assets. Management believes, as of December 31, 1999, that SPB meets all capital adequacy requirements to which it is subject. As of December 31, 1999, the most recent notification from the FDIC categorized SPB as well-capitalized under the regulatory framework for prompt and corrective action. To be categorized as well-capitalized, SPB must maintain minimum total risk-based, Tier-1 risk-based and Tier-1 leverage ratios. The following table sets forth the capital categories and the SPB's ratios as of December 31, 1999: The following table sets forth the capital categories and the Bank's ratios as of December 31, 1999:
Total Risk-based Tier-1 Risk-based Tier-1 Leverage Capital Category Ratio Ratio Ratio ---------------- ------------------------- ------------------------ ------------------------ Well-capitalized........ (greater than or =) 10% (greater than or =) 6% (greater than or =) 5% Adequately capitalized.. (greater than or =) 8% (greater than or =) 4% (greater than or =) 4% Under-capitalized....... (greater than or =) 8% (greater than or =) 4% (greater than or =) 4% Significantly under- capitalized............ (greater than or =) 6% (greater than or =) 3% (greater than or =) 3% Southern Pacific Bank, December 31, 1999...... (greater than or =)10.67% (greater than or =)7.78% (greater than or =)8.94%
139 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table presents SPB's actual capital ratios and the corresponding minimum and well capitalized capital ratio requirements under the (i) California Leverage limitation, (ii) FDIC Risk-based Capital and Tier 1 Capital regulations, and (iii) the FDIC Leverage ratio regulation as of December 31, 1999 and 1998. December 31, 1999
Well Minimum Capitalized Actual Requirement Requirement -------------- -------------- -------------- Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- (Dollars in Thousands) California Leverage Limitation................... $169,962 10.45% $ 81,308 5.00% $ N/A N/A% Risk-based Capital............ 219,278 10.67 164,445 8.00 205,557 10.00 Risk-based Tier 1 Capital..... 160,018 7.78 82,223 4.00 123,334 6.00 FDIC Leverage Ratio........... 160,018 8.94 71,610 4.00 89,512 5.00
December 31, 1998
Well Minimum Capitalized Actual Requirement Requirement -------------- -------------- -------------- Amount Ratio Amount Ratio Amount Ratio -------- ----- -------- ----- -------- ----- (Dollars in Thousands) California Leverage Limitation................... $179,022 10.45% $ 85,688 5.00% $ N/A N/A% Risk-based Capital............ 221,657 11.12 159,410 8.00 199,264 10.00 Risk-based Tier 1 Capital..... 167,823 8.42 79,705 4.00 119,558 6.00 FDIC Leverage Ratio........... 167,823 8.62 77,861 4.00 97,326 5.00
The FDIC completed an information systems exam of SPB in May 1998 and the FDIC and DFI completed a joint examination of SPB for the period ended March 31, 1998. As a result of the examinations, the FDIC requested that SPB enter into two written memoranda of understanding ("MOUs") addressing deficiencies identified by the FDIC in SPB's accounting systems and controls, and perceived deficiencies in SPB's Y2K readiness and contingency planning. The first MOU addressing these issues was signed by the FDIC and SPB on November 2, 1998. Under this MOU, SPB is required to take a number of actions to address and correct the accounting and Y2K preparedness concerns of the FDIC. SPB, under the direction of its board of directors, developed and implemented a Y2K readiness plan and budget, with specific deadlines and action steps. SPB believes it is currently in compliance in all material respects with FDIC minimum Y2K readiness requirements and guidelines. In the first quarter of 1999, SPB received an interim satisfactory rating from the FDIC related to SPB's Y2K preparedness and contingency planning. As a result of the progress SPB made in implementing its Y2K readiness plan, the FDIC and California Department of Financial Institutions ("DFI") terminated the November 2, 1998 Memorandum of Understanding ("MOU") primarily relating to Y2K concerns, during the third quarter of 1999. On January 19, 1999, the FDIC and DFI issued a second MOU as a result of the 1998 joint exam, which addressed accounting controls and policies and alleged violations of law. Under the second MOU, SPB is required to: . adopt and implement policies to provide adequate accounting controls consistent with safe and sound banking practices, . eliminate or correct violations of law described in the FDIC/DFI examination, and . achieve and maintain regulatory capital requirements applicable to a "well capitalized" depository institution. In addition, under the second MOU, SPB is allowed to pay dividends to ICII in accordance 140 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) with its normal dividend policy. Our policy allows SPB to pay cash dividends of up to 35% of SPB's net income. Our policy further states that SPB is prohibited from paying any cash dividend if it is not, immediately prior and subsequent to the dividend, a "well-capitalized" institution within the meaning of FDIC regulations. SPB responded to the FDIC's criticisms in its May 1998 information systems examination by retaining an internationally-recognized independent accounting firm to conduct a general ledger account reconciliation project in order to identify, trace and resolve all outstanding unreconciled general ledger items on SPB's books and records. Work on this reconciliation project was completed by December 31, 1998. In consultation with the independent accounting firm, SPB has developed and implemented new policies and procedures which are designed to improve the efficiency and timeliness of general ledger reconciliation tasks and related financial accounting matters. SPB continues to reconcile all general ledger accounts on a timely basis. Management believes it is in compliance with the terms of the MOU at December 31, 1999. 141 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 30. Imperial Credit Industries, Inc. (Parent Company Only) CONDENSED BALANCE SHEETS
December 31, ----------------- 1999 1998 -------- -------- (In thousands) ASSETS ------ Cash....................................................... $ 11,110 $ 3,224 Interest bearing deposits.................................. 35,049 2,281 Securities available for sale.............................. 41,365 69,115 Trading securities......................................... 33,462 49,507 Loans held for sale........................................ 1,441 1,698 Loans held for investment, net............................. 55,721 45,029 Premises and equipment, net................................ 1,846 2,808 Other real estate owned, net............................... 187 318 Investment in FMC.......................................... -- 56,334 Investment in subsidiaries................................. 255,024 276,863 Accrued interest on loans.................................. 2,135 3,216 Goodwill................................................... 11,778 -- Other assets............................................... 22,062 25,906 Net assets of discontinued operations...................... 44,396 43,624 -------- -------- Total assets........................................... $515,576 $579,923 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Other borrowings........................................... $ 7,911 $ 20,481 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely debentures of the company ("ROPES") 63,915 72,165 Senior Notes............................................... 185,185 219,858 Minority interest in consolidated subsidiaries............. 103 (628) Other liabilities.......................................... 53,082 34,526 -------- -------- Total liabilities...................................... 310,196 346,402 -------- -------- Shareholders' equity: Common stock, no par value, authorized 80,000,000 shares; 33,198,661 and 36,785,898 shares issued and outstanding at December 31, 1999 and 1998, respectively............. 97,220 129,609 Retained earnings........................................ 98,437 101,265 Shares held in deferred executive compensation plan...... 7,107 3,833 Accumulated other comprehensive income--unrealized gain (loss) on securities available for sale, net............ 2,616 (1,186) -------- -------- Total shareholders' equity............................. 205,380 233,521 -------- -------- Total liabilities and shareholders' equity............. $515,576 $579,923 ======== ========
142 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
December 31, ----------------------------- 1999 1998 1997 -------- --------- -------- (In thousands) Revenues: Interest income............................... $ 21,521 $ 30,082 $ 28,916 Interest expense.............................. 32,184 30,617 25,703 -------- --------- -------- Net interest (expense) income............... (10,663) (535) 3,213 Provision for loan and lease losses........... 210 -- 5,000 -------- --------- -------- Net interest expense after provision for loan and lease losses............................. (10,873) (535) (1,787) Gain (loss) on sale of loans.................. 20 46 (4,427) Loan servicing income (expense)............... 59 (434) (2,283) Loss on impairment of securities.............. -- (120,138) -- Gain (loss) on sale of securities............. 31,434 (179) 110,317 Mark to market on securities.................. 11,314 (4,993) (341) Dividends received from subsidiaries.......... 6,564 25,410 27,514 Equity in net income of SPFC.................. -- 12,739 25,869 Equity in net (loss) income of FMC............ (53) 3,235 (3,050) Other income (loss)........................... 1,965 362 (2,573) -------- --------- -------- Total other income (loss)................... 51,303 (83,952) 151,026 -------- --------- -------- Total revenue................................. 40,430 (84,487) 149,239 -------- --------- -------- Expenses: Personnel expense............................. 3,133 4,415 4,682 Occupancy expense............................. 784 1,267 1,310 Other expense................................. 5,401 10,592 23,735 -------- --------- -------- Total expenses.............................. 9,318 16,274 29,727 -------- --------- -------- Income (loss) before income taxes, minority interest, deferred inter-company items and extraordinary item........................... 31,112 (100,761) 119,512 Income taxes.................................. 10,020 (55,061) 41,611 -------- --------- -------- Income (loss) before minority interest, deferred inter-company items and extraordinary item........................... 21,092 (45,700) 77,901 Minority interest in income (loss) of consolidated subsidiaries.................... 421 (1,552) 10,513 Deferred inter-company expense, net of income taxes........................................ -- -- (327) -------- --------- -------- Income (loss) before extraordinary item....... 20,671 (44,148) 67,715 Extraordinary item--income (loss) on extinguishment of debt, net of income taxes.. 4,021 -- (3,995) -------- --------- -------- Income (loss) before equity in undistributed income of subsidiaries....................... 24,692 (44,148) 63,720 Equity in undistributed (loss) income income of subsidiaries, net of income taxes(1)...... (27,520) (29,485) 22,201 -------- --------- -------- Net (loss) income........................... $ (2,828) $ (73,633) $ 85,921 ======== ========= ======== Other comprehensive income (loss)............. 3,802 (3,112) (3,084) -------- --------- -------- Comprehensive income (loss)................. $ 974 $ (76,745) $ 82,837 ======== ========= ========
- -------- (1) Includes net loss from discontinued operations of $899,000, $14.5 million and $25.3 million for 1999, 1998 and 1997, respectively. 143 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) CONDENSED STATEMENTS OF CASH FLOWS
December 31, ----------------------------- 1999 1998 1997 -------- -------- --------- (In thousands) Net cash provided by (used in) operating activities..................................... $ 19,031 $(50,644) $ (19,966) -------- -------- --------- Cash flows from investing activities: Net change in interest bearing deposits....... (32,768) 29,109 (31,390) Proceeds from sale of other real estate owned........................................ 1,216 2,558 4,637 Purchase of securities available for sale..... (4,050) (16,651) (42,938) Sale of securities available for sale......... 4,875 -- -- Investment in Imperial Credit Asset Resolution Inc.......................................... -- -- (74,810) Proceeds from sale of securities.............. 91,709 867 83,117 Net change in loans held for investment....... (11,984) 10,884 (56,088) Net change in investment in subsidiaries...... 21,839 4,591 (11,803) Cash utilized for acquisitions................ (8,132) -- (750) Purchase of premises and equipment............ (1,246) (1,721) (992) -------- -------- --------- Net cash provided by (used in) investing activities..................................... 61,459 29,637 (131,017) -------- -------- --------- Cash flows from financing activities: Proceeds from offering of Senior Notes due 2007......................................... -- -- 194,500 Proceeds from offering of ROPES............... -- -- 68,075 Repayments of Senior Notes due 2004........... -- -- (73,241) Borrowings from Imperial Credit Investment Corporation.................................. -- -- 10,000 Proceeds from issuance of mandatorily redeemable cumulative preferred stock........ 30,000 -- -- Repurchase and extinguishment of mandatorily redeemable cumulative preferred stock........ (31,353) -- -- Repurchase and extinguishment of ROPES........ (6,628) -- -- Repurchase and extinguishment of Senior Notes........................................ (27,453) -- -- Repurchase and retirement of common stock and warrants..................................... (29,460) (24,305) (551) Capital contributions to consolidated subsidiaries................................. (2,681) (4,332) -- Dividends and return of capital received from consolidated subsidiaries................................. 6,561 20,915 18,450 Proceeds from exercise of stock options....... 249 1,037 1,332 Net change in other borrowings................ (12,570) 19,261 (15,363) Net change in minority interest............... 731 (1,574) (44,203) -------- -------- --------- Net cash (used in) provided by financing activities..................................... (72,604) 11,002 158,999 -------- -------- --------- Net change in cash.............................. 7,886 (10,005) 8,016 Cash at beginning of year....................... 3,224 13,229 5,213 -------- -------- --------- Cash at end of year............................. $ 11,110 $ 3,224 $ 13,229 ======== ======== =========
144 IMPERIAL CREDIT INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Supplemental Disclosure of Cash Flow Information The following information supplements the condensed statements of cash flows:
December 31, ------------------------ 1999 1998 1997 ------- ------- ------- (In thousands) Cash paid during the period for: Interest....................................... $33,911 $28,892 $19,349 Income taxes................................... 817 5,884 24,611 Significant non-cash activities: Loans transferred to OREO...................... 1,082 2,798 6,751 Change in unrealized gain on securities available for sale, net....................... 3,802 (3,112) (3,084) Assets contributed to SPB...................... -- 9,547 --
145 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to the directors and executive officers of the Company.
Name Age Position with Company ---- --- --------------------- H. Wayne Snavely(1)(4)...... 58 Chairman of the Board, President and Chief Executive Officer Brad S. Plantiko(1)(4)...... 44 Executive Vice President, Chief Financial Officer and Director Irwin L. Gubman(1).......... 57 General Counsel and Secretary Paul B. Lasiter(4).......... 33 Senior Vice President and Controller John G. Getzelman(1)(4)..... 57 President of SPB Scott B. Sampson(1)(4)...... 57 President of Coast Business Credit Kevin E. Villani............ 51 Executive Vice President Stephen J. Shugerman........ 52 Director Robert S. Muehlenbeck(2).... 52 Director Perry A. Lerner(2)(3)....... 56 Director James P. Staes(3)........... 61 Director
- -------- (1) Member of Executive Committee. (2) Member of Compensation Committee. (3) Member of Audit Committee. (4) Member of Asset & Liability Committee. H. Wayne Snavely has been our Chairman of the Board and Chief Executive Officer since December 1991 and President since February 1996. Mr. Snavely served as a director of Imperial Bank from 1975 to 1983 and from 1993 to January 1998. He serves on the Board of Visitors of the Graduate School of Business Management at Pepperdine University. Mr. Snavely is Chairman of the Board of ICCMIC. Brad S. Plantiko has been Executive Vice President and Chief Financial Officer of the Company since July 1998. From October 1980 to July 1998, Mr. Plantiko was with KPMG Peat Marwick, LLP, where he was partner in-charge of its finance company services for the western United States. Mr. Plantiko has more than 18 years of experience serving banks, thrifts, mortgage banks and finance companies. He serves on the Board of Visitors of the Graduate School of Business Management at Pepperdine University. Mr. Plantiko is a member of the American Institute of Certified Public Accountants. Irwin L. Gubman has been our General Counsel and Secretary since October 1996. From February 1992 to September 1996, Mr. Gubman was a Partner at Coudert Brothers serving in various capacities including syndicated lending, structured finance, and regulatory matters. From December 1970 to September 1991, Mr. Gubman served in various capacities at Bank of America, most recently as Senior Vice President and Associate General Counsel. Paul B. Lasiter has been our Senior Vice President and Controller since November 1992. From June 1988 to November 1992, Mr. Lasiter was a Supervising Senior Accountant for KPMG Peat Marwick, LLP, specializing in the financial institutions industry. Mr. Lasiter is a Certified Public Accountant. 146 John C. Getzelman has been President of SPB since December 1998. Prior to this, Mr. Getzelman was President of Community Bank of Pasadena, California from 1992 through 1998. From 1971 to 1992, Mr. Getzelman was associated with Security Pacific Corporation including 16 years on international assignments in Latin America and Asia. Mr. Getzelman served as Chairman and CEO of Rainier Bank in Seattle, a subsidiary of Security Pacific from 1988 to 1992. Mr. Getzelman is a member of the Board of Trustees of Seattle University, a member of the boards of the House Ear Institute and the Pasadena Symphony. He is also a member of the Visiting Committee of the University of Southern California. Scott B. Sampson has been President of the Coast Business Credit division of SPB since February 1995. Prior to this, Mr. Sampson was President Of Security Pacific Business Credit from 1985 to 1994. From 1975 to 1985, Mr. Sampson was Western Group Manager at Aetna Life and Casualty. Kevin E. Villani was our Executive Vice President, Finance, from July 1998 to October 1999. Mr. Villani was Executive Vice President and Chief FInancial Officer from September 1995 through July 1998. Mr. Villani was President of ICAM and served as a member of our Board of Directors until December 31, 1999, and is Vice Chairman of the Board of ICCMIC. Mr. Villani joined the University of Southern California as the Wells Fargo Visiting Professor of Finance in 1990 and remained on the full-time faculty through 1997. From 1985 to 1990, he was the Executive Vice President and Chief Financial Officer for Imperial Corporation of America. From 1982 to 1985, Mr. Villani served in various capacities at the Federal Home Loan Mortgage Corporation, including Chief Economist and Chief Financial Officer. Mr. Villani resigned as of September 30, 1999 as an executive officer of ICII and resigned as of December 31, 1999 as President of ICAM and as a director of ICII. Stephen J. Shugerman has been a Director since December 1991. From June 1987 until December 1998, Mr. Shugerman was President of SPB. Mr. Shugerman has been Vice-Chairman of SPB since December 1998. From June 1985 to May 1987, Mr. Shugerman was President of ATI Thrift & Loan Association, a privately owned thrift and loan association, and, from 1979 to 1985, he was Senior Vice President of Imperial Thrift and Loan Association, a former subsidiary of Imperial Bank. Mr. Shugerman has recently served as President of the California Association of Thrift & Loan Companies. Robert S. Muehlenbeck has been a Director since December 1991. Mr. Muehlenbeck retired in 1998 as an Executive Vice President of Imperial Bank with primary responsibility for corporate finance and mergers and acquisitions. In addition, he also served as President of Imperial Ventures, Inc., Imperial Bank's venture capital small business investment company and President of Imperial Credit Corp., an investment and mezzanine lending entity. Mr. Muehlenbeck was formerly the President of Seaborg, Incorporated and has been involved in commercial and residential real estate development and finance activities. Perry A. Lerner has been a Director since May 1992. He has been a principal in the investment firm of Crown Capital Group, Inc., since 1996. Mr. Lerner was with the law firm of O'Melveny & Myers from 1982 to 1997, having been a partner with the firm from 1984 to 1996. Mr. Lerner was an Attorney-Advisor of the International Tax Counsel of the United States Treasury Department from 1973 to 1976. Mr. Lerner is a Director of Boss Holdings Inc., a specialty consumer products company. James P. Staes has been a Director since December 1999. Mr. Staes, a commercial banker and retired Navy Captain, served as President and CEO of Home Bank in Signal Hill, California from 1982 to 1996 and Vice Chairman of California United Bank from 1996 to 1997. Mr. Staes is a past President of the California Bankers Association and Southern California Community Bankers Association. Mr. Staes also served as a director of the Western Independent Bankers Association and as a member of the Conference of State Bank Supervisors. Our directors hold office until the next annual meeting of shareholders and until their successors are elected and qualified, or until their earlier resignation or removal. All officers are appointed by and serve at the discretion of our Board of Directors, subject to employment agreements, where applicable. With the exception of Mr. Snavely and Mr. Shugerman, in their capacities as Chairman and Director of Southern Pacific Funding Corporation, respectively, no directors or executive officers were involved in any petitions under the Federal bankruptcy laws during the past five years. 147 ITEM 11. EXECUTIVE COMPENSATION The members of our board of directors who are not employees of our company receive cash compensation of $7,500 per quarter and $500 for each board of directors meeting attended and for each committee meeting attended which is not on the same day as another board meeting. In addition, these non-employee directors receive options to purchase 10,000 shares of our common stock which vest on the one-year anniversary of the date of grant and become first exercisable one year from the date of the grant at a price equal to the fair market value of the common stock on the date of the grant, and which expire on the tenth anniversary of the date of the grant. In addition to the compensation received by directors described above, Stephen J. Shugerman received additional compensation of $140,268 during the period from September 1, 1999 to December 31, 1999. Mr. Shugerman was paid $80,291 after his last day of employment with the Company in satisfaction of accrued vacation Mr. Shugerman earned while he was an employee of the Company. Additionally, Mr. Shugerman was paid $59,977 under the terms of his severance agreement. All of these amounts are included in Mr. Shugerman's compensation information for 1999 in the table below. The following table provides information concerning the cash and non-cash compensation earned and received by our Chief Executive Officer and our highly compensated executive officers (the "Named Executive Officers"), other than our Chief Executive Officer, whose salary and bonus during the fiscal year ended December 31, 1999 exceeded $100,000: SUMMARY COMPENSATION TABLE
Long Term Compensation Annual Compensation Awards ------------------------ ------------ Name and Principal Fiscal Other Annual Options Position Year Salary Bonus Compensation Granted ------------------ ------ -------- -------- ------------ ------------ H. Wayne Snavely.......... 1999 $500,000 $500,000 $76,558(1) 150,000(2) President, Chief Executive 1998 502,114 -- 78,640(1) -- Officer and Chairman 1997 450,000 700,000 29,082(1) -- Brad S. Plantiko.......... 1999 $175,000 $225,471 $63,828(3) 100,000(2) Executive Vice President 1998 77,403 99,519 55,815(3) 84,000(2) and Chief Financial Officer Irwin L. Gubman........... 1999 $210,385 $100,000 $64,703(4) 100,000(2) General Counsel and Secretary 1998 201,532 125,000 18,557(4) 26,800(2) 1997 200,000 200,000 16,852(4) 70,000(2) John C. Getzelman......... 1999 $196,285 $100,000 $16,614(5) 50,000(2) President, Southern Pacific Bank 1998 15,385 -- 923(5) 50,000(2) Scott B. Sampson.......... 1999 $300,000 $391,000 $10,228(6) -- President, the Coast 1998 227,302 471,404 13,517(6) 67,000(2) Business Credit division of Southern Pacific Bank 1997 200,000 334,527 12,663(6) -- Kevin E. Villani.......... 1999 $350,000 $ -- $66,753(8) 50,000(2) Executive Vice President, Finance(7) 1998 352,691 150,000 71,110(8) 34,000(2) 1997 300,000 266,666 17,082(8) 50,000(2) Stephen J. Shugerman...... 1999 $334,615 $ -- $65,233(10) -- Vice-Chairman of SPB(9) 1998 304,224 -- 71,325(10) -- 1997 250,000 501,000 21,882(10) --
- -------- (1) In 1999, 1998 and 1997, consists of (1) a car allowance paid by our company of $18,000, $18,000 and $18,000, respectively, and (2) aggregate contributions paid by our company of $58,558, $60,640 and $11,082, respectively, under employee benefit plans. (2) See "--Stock Option Plans" for details regarding the terms of such options. 148 (3) In 1999 and 1998, consists of (1) a car allowance paid by our company of $9,000 and $3,980, respectively, and (2) aggregate contributions paid by our company of $54,828 and $51,835, respectively, under employee benefit plans. (4) In 1999, 1998 and 1997 consists of (1) a car allowance paid by our company of $9,000, $8,307 and $6,000, respectively, and (2) aggregate contributions paid by our company of $55,703, $10,250 and $10,852, respectively, under employee benefit plans. (5) In 1999 and 1998, consists of (1) a car allowance paid by our company of $12,000 and $923, respectively, and (2) aggregate contributions paid by our company of $4,614 and $0, respectively, under employee benefit plans. (6) In 1999, 1998 and 1997, consists of (1) a car allowance paid by our company of $6,000, $6,000 and $6,000, respectively, and (2) aggregate contributions paid by our company of $4,228, $7,517 and $6,663, respectively, under employee benefit plans. (7) Mr. Villani served as Chief Financial Officer until July 1998. Mr. Villani served as Executive Vice President, Finance until September 30, 1999. Mr. Villani served as a director and President of Imperial Credit Asset Management until December 31, 1999. (8) In 1999, 1998 and 1997, consists of (1) a car allowance paid by our company of $12,000, $10,615, and $6,000, respectively, and (2) aggregate contributions paid by our company of $54,753, $60,495, and $11,082, respectively, under employee benefit plans. (9) Mr. Shugerman resigned as President of SPB effective December 1998. Mr. Shugerman resigned as Vice Chairman of SPB on September 1, 1999. (10) In 1999, 1998 and 1997, consists of (1) a car allowance paid by our company of $7,061, $10,800, and $10,800, respectively, and (2) aggregate contributions paid by our company of $58,172, $60,525, and $11,082, respectively, under employment benefit plans. Option Grants, Exercises and Year End Values
Potential Realized Value at Assumed Annual Rates of Stock Price Appreciation for 1999 Percentage Exercise Option Term Options of Total Price Expiration ----------------- Name Granted Grants Per Option Date 5% 10% ---- ------- ---------- ---------- ---------- -------- -------- H. Wayne Snavely.... 100,000 10.32% $7.56 1/27/04 $208,938 $461,698 H. Wayne Snavely.... 50,000 5.16 8.00 2/23/04 110,513 244,204 Brad S. Plantiko.... 50,000 5.16 8.00 2/23/04 110,513 244,204 Brad S. Plantiko.... 50,000 5.16 4.00 10/25/04 55,256 122,102 Irwin L. Gubman..... 50,000 5.16 8.00 2/23/04 110,513 244,204 Irwin L. Gubman..... 50,000 5.16 4.00 10/25/04 55,256 122,102 John C. Getzelman... 50,000 5.16 8.00 2/23/04 110,513 244,204 Kevin E. Villani.... 50,000 5.16 8.00 2/23/04 110,513 244,204
149 Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Number of Number of Unexercised Unexercised Senior Options at FY- Management End Options at Under the Option FY-End Under the Value of all Unexercised Shares Plan Option Plan In-the-Money Options at Acquired on Value Exercisable/ Exercisable/ December 31, 1999 Name Exercise Realized Unexercisable(1) Unexercisable(2) Exercisable/Unexercisable(3) ---- ----------- -------- ---------------- ------------------ ---------------------------- H. Wayne Snavely........ -- -- 240,000/310,000 917,052/-- $4,683,958/$-- Brad S. Plantiko........ -- -- 16,800/167,200 --/-- --/112,500 Irwin L. Gubman......... -- -- 51,360/175,440 --/-- --/112,500 John C. Getzelman....... -- -- 10,000/90,000 --/-- --/-- Scott B. Sampson........ -- -- --/84,000 --/-- --/-- Kevin E. Villani........ -- -- 116,800/154,000 --/-- 5,999/2,000 Stephen J. Shugerman.... -- -- 60,000/40,000 158,524/-- 768,818/--
- -------- (1) For a description of the terms of such options, see "--Stock Option Plans." (2) For a description of the terms of such options, see "--Senior Management Stock Options." (3) Based on a price per share of $6.25, which was the price of a share of our common stock as quoted on the Nasdaq National Market at the close of business on December 31, 1999. Employment Agreements As of January 1, 1997, Mr. Snavely entered into a five-year employment agreement at an annual base salary, since adjusted to $500,000, plus an annual bonus based on attainment of performance objectives, including our company's return on equity, earnings per share and increase in the price of our company's common stock. Mr. Snavely's total cash compensation may not exceed $1.5 million annually. Pursuant to the employment agreement with Mr. Snavely, he is entitled to receive compensation following his termination, as follows: (1) with cause: base salary shall be paid through the date on which termination occurs, or (2) without cause (or for "good reason" as defined in the employment agreement), base salary shall be paid through the date of termination together with the pro-rata portion of any cash bonus award the employee would be entitled to receive at year end and a severance amount equal to base salary reduced by the employee's projected primary social security benefit. The severance amount shall be further reduced if the executive becomes employed by another company or becomes an independent contractor of another company and shall be eliminated entirely if such other company is determined by our board of directors to compete with our company. As of September 1, 1998, Mr. Sampson entered into an employment agreement that expires on January 31, 2002, which provides for an annual base salary of $300,000 plus an annual incentive bonus. Mr. Sampson's bonus is equal to 1.5% of Coast Business Credit's annual pre-tax profit determined in accordance with generally accepted accounting principles and is contingent upon Coast Business Credit's annual net profit equaling or exceeding either 2% of its average assets for the calendar year, exclusive of goodwill, or a pretax return on its capital for the year of 20%. Pursuant to the employment agreement with Mr. Sampson, he is entitled to receive compensation following his termination, as follows: (1) with cause or by mutual agreement or voluntarily by Mr. Sampson: base salary shall be paid through the date on which termination occurs, or (2) without cause (or if there is more than a 10 mile change in physical location of employment): base salary shall be paid through the term of employment together with the prorata portion of any incentive cash bonus the employee would be entitled to receive for the year of termination. Compensation Committee Interlocks and Insider Participation Our company's Compensation Committee consists of Messrs. Muehlenbeck and Lerner. Mr. Muehlenbeck retired in 1998 as an Executive Vice President of Imperial Bank. Mr Lerner is the Manager of Corona Film Finance Fund (in which ICII is an investor). 150 Termination Protection Agreements In January 1999, we entered into termination protection agreements with Messrs. Snavely, Gubman and Plantiko. The agreements provide for severance payments to those senior executives in the event of a change in control of our company and a subsequent termination of any one of these senior executives within three years of a change in control for any reason. The senior executives will receive a lump sum payment of three times their respective base salaries and their highest bonus earned in any of the last three fiscal years preceding the change in control and a percentage of their respective bonuses for the year in which the change of control occurs. In addition, we will continue to provide these senior executives with medical, dental, life insurance, disability and accidental death and dismemberment benefits until the third anniversary of the termination unless the executive becomes employed by another employer, in which case these coverages will be secondary to those provided by the new employer. All deferred compensation in respect of each senior executive will also become fully vested and we will pay such executive in cash all deferred compensation and any unpaid portion of the executive's bonus. Any amounts payable to an executive will include additional amounts to cover certain taxes resulting from those payments. A change in control for purposes of the termination protection agreements includes the following events: (1) any person or persons become the beneficial owner of at least 40% of our outstanding common stock other than by the acquisition of such common stock directly from our company, or (2) any merger or other business combination, liquidation or sale of substantially all of our assets where our shareholders and any trustee or fiduciary of our employee benefit plans own less than 60% of the surviving corporation, or (3) within any 24 month period, the persons who were directors immediately before the beginning of such period cease to constitute at least a majority of our board, or the board of any successor corporation. Senior Management Stock Options Effective January 1992, members of senior management received ten year options to purchase shares of our company's common stock. Such options are not covered by our option plans described below. The exercise price of these options is $0.89 per share for one-half of the options, with the other half exercisable at $1.40 per share. These options are currently exercisable. H. Wayne Snavely, Joseph R. Tomkinson, and Stephen J. Shugerman were granted 917,053, 917,053 and 458,526 of such options, respectively. In April 1996, Mr. Tomkinson sold 750,000 shares of our common stock he acquired under the option agreement described above. In November 1996, Mr. Shugerman sold 300,000 shares of our common stock he acquired under the option agreement described above. We recognize compensation expense with respect to the senior management stock options because they were granted at less than the estimated market value of our common stock. The total compensation expense was $2.2 million, all of which was recognized as of December 31, 1997. See "Note 22 of Notes to Consolidated Financial Statements." Stock Option Plans 1992 Stock Option Plan A total of 2,292,632 shares of our Common Stock has been reserved for issuance under our 1992 Incentive Stock Option and Nonstatutory Stock Option Plan (the "1992 Stock Option Plan"), which expires by its own terms in 2002. A total of 734,268 options were outstanding at December 31, 1999. The 1992 Stock Option Plan provides for the grant of "incentive stock options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock options ("NQSOs") to employees, officers, directors and consultants. ISOs may be granted only to employees. The 1992 Stock Option Plan is administered by our board of directors or a committee appointed by our board, 151 which determines the terms of options granted, including the exercise price, the number of shares subject to the option, and the option's exercisability. The exercise price of all options granted under the 1992 Stock Option Plan must be at least equal to the fair market value of such shares on the date of grant. The maximum term of options granted under the 1992 Stock Option Plan is 10 years. With respect to any participant who owns stock representing more than 10% of the voting rights of our outstanding capital stock, the exercise price of any option must be at least equal to 110% of the fair market value on the date of grant. 1996 Stock Option Plan In 1996, we adopted our 1996 Stock Option, Deferred Stock and Restricted Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards consisting of deferred stock, restricted stock, stock appreciation rights and limited stock appreciation rights ("Awards"). The 1996 Stock Option Plan is administered by a committee of directors appointed by the board of directors (the "Committee"). ISOs may be granted to the officers and key employees of the Company or any of its subsidiaries. The exercise price for any option granted under the 1996 Stock Option Plan may not be less than 100% (110% in the case of ISOs granted to an employee who is deemed to own in excess of 10% of our outstanding common stock) of the fair market value of the shares of common stock at the time the option is granted. The purpose of the 1996 Stock Option Plan is to provide a means of performance-based compensation in order to attract and retain qualified personnel and to provide an incentive to those whose job performance affects our company. The effective date of the 1996 Stock Option Plan was June 21, 1996. A total of 3,000,000 shares of our common stock is reserved for issuance under the 1996 Stock Option Plan and a total of 2,635,580 options were outstanding at December 31, 1999. If an option granted under the 1996 Stock Option Plan expires or terminates, or an Award is forfeited, the shares subject to any unexercised portion of such option or Award will again become available for the issuance of further options or Awards under the 1996 Stock Option Plan. Unless previously terminated by our board of directors, no options or Awards may be granted under the 1996 Stock Option Plan after June 21, 2006. Options granted under the 1996 Stock Option Plan will become exercisable upon the terms of the grant made by the Committee. Awards will be subject to the terms and restrictions of the Award made by the Committee. The Committee has discretionary authority to select participants from among eligible persons and to determine at the time an option or Award is granted and in the case of options, whether it is intended to be an ISO or a NQSO. Under current law, ISOs may not be granted to any individual who is not also an officer or employee of our company or any subsidiary. Each option must terminate no more than 10 years from the date it is granted (or five years in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the combined voting power of our outstanding common stock). Options may be granted on terms providing for exercise in whole or in part at any time or times during their respective terms, or only in specified percentages at stated time periods or intervals during the term of the option, as determined by the Committee. The exercise price of any option granted under the 1996 Stock Option Plan is payable in full: (1) in cash (2) by surrender of shares of the Company's Common Stock already owned by the option holder having a market value equal to the aggregate exercise price of all shares to be purchased including, in the case of the exercise of NQSOs, restricted stock subject to an Award under the 1996 Stock Option Plan, (3) by cancellation of indebtedness owed by the Company to the optionholder, or (4) by any combination of the foregoing. Our board of directors may from time to time revise or amend the 1996 Stock Option Plan, and may suspend or discontinue it at any time. However, no such revision or amendment may impair the rights of any participant under any outstanding options or Award without such participant's consent or may, without shareholder approval, increase the number of shares subject to the 1996 Stock Option Plan or decrease the exercise price of a stock 152 option to less than 100% of fair market value on the date of grant (with the exception of adjustments resulting from changes in capitalization), materially modify the class of participants eligible to receive options or Awards under the 1996 Stock Option Plan, materially increase the benefits accruing to participants under the 1996 Stock Option Plan or extend the maximum option term under the 1996 Stock Option Plan. Profit Sharing and 401(k) Plan On July 1, 1993, we terminated participation in Imperial Bancorp's 401(k) and profit sharing plans, and we established our own 401(k) plan. On September 30, 1993, Imperial Bancorp transferred all plan assets to our company. Under our 401(k) plan, employees may elect to enroll on the first of any month, provided that they have been employed for at least six months. Employees may contribute up to 14% of their salaries. We will match 50% of the first 4% of employee contributions. We recorded 401(k) matching expense of $334,000, $457,000 and $246,000, for the years ended December 31, 1999, 1998, and 1997, respectively. We may make an additional contribution at our discretion. If we made a discretionary contribution, the contribution would first be allocated to those employees deferring salaries in excess of 4%. The matching contribution would be 50% of any deferral in excess of 4% up to a maximum deferral of 8%. If discretionary contribution funds remain following the allocation outlined above, then any remaining company discretionary contributions would be allocated as a 50% match of employee contributions, on the first 4% of the employee's deferrals. There were no discretionary contributions charged to operations in 1999, 1998, or 1997. We make matching contributions as of December 31st each year. Deferred Executive Compensation Plans Effective July 1, 1998, we adopted our Deferred Executive Compensation Plan (the "DEC Plan 1") and our Deferred Executive Compensation Plan 2 (the "DEC Plan 2", and together with the DEC Plan 1, the "DEC Plans"). The DEC Plans are each administered by a committee appointed by our board of directors. Any of our employees who have an annual base salary of at least $100,000 or who had an annual base salary of at least $100,000 in the prior year and our directors may elect to participate in the DEC Plans. A participant's annual base salary includes all cash compensation excluding bonuses, commissions, employee benefits, stock options, relocation expenses, incentive payments, non-monetary awards, automobile and other allowances. Participants in the DEC Plans may defer up to 50% of their annual base salary and commissions and/or up to 100% of their annual bonus payments. Benefits accrued under the DEC Plans will be paid to all participants, other than participants who have voluntarily resigned their positions, in the form of a lifetime annuity issued by a life insurance company. DEC Plan benefits accrue through retirement so long as the participant remains employed by our company. Participants who voluntarily resign prior to retirement will be paid all of their vested benefits under the DEC Plans. If we terminate the DEC Plans, we may elect to pay participants in a lump sum, or in a lifetime annuity. Deferred compensation contributed to DEC Plan 1 will be invested in our common stock. In 1998 and 1999, we matched contributions to the DEC Plan 1, to be paid in our common stock, on a formula basis up to $50,000 per participant provided minimum returns or equity have been met. The Company has elected not to match contributions in FYE 2000. We also reserve the right to make discretionary matches, to be paid in our common stock, in any year. Matching contributions will vest 50% a year, commencing one year from the date of the matching contributions. Matching contributions will vest completely if a participating employee retires, becomes permanently disabled, or dies. Deferred compensation contributed to DEC Plan 2 may be invested in certain mutual and money market funds. We will not make matching contributions to the DEC Plan 2. All DEC Plan 2 contributions are completely vested immediately. 153 Limitations on Directors' Liabilities and Indemnification Our company and our subsidiaries' Articles of Incorporation and Bylaws provide for indemnification of our officers and directors to the full extent permitted by law. The General Corporation Law of the State of California permits a corporation to limit, under certain circumstances, a director's liability for monetary damages in actions brought by or in the right of the corporation. Our company's and our subsidiaries' Articles of Incorporation also provide for the elimination of the liability of directors for monetary damages to the full extent permitted by law. We also entered into agreements to indemnify our directors and officers in addition to the indemnification provided for in the Articles of Incorporation and Bylaws. These agreements, among other things, indemnify our directors and officers for certain expenses (including attorneys' fees), judgments, fines, and settlement amounts incurred in any action or proceeding, including any action by or in the right of our company, on account of services as our director or officer, as a director or officer of any of our subsidiaries, or as a director or officer of any other enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers. We have directors' and officers' liability insurance in the amount of $20.0 million. At present, there is no pending litigation or proceeding involving a director, officer or employee of the Company as to which indemnification is sought, nor are we aware of any threatened litigation or proceeding that may result in claims for indemnification, except as set forth in Item 3. Legal Proceedings. 154 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information known to the Company with respect to the beneficial ownership of the Company's Common Stock as of January 31, 2000, by (I) each director of the Company, (ii) the Chief Executive Officer and the four most highly compensated executive officers whose salary exceeded $100,000 for the year ended December 31, 1999, (iii) each person who is known to the Company to own beneficially more than 5% of the Common Stock, and (iv) all directors and executive officers of the Company as a group. Unless otherwise indicated, the Company believes that the beneficial owners of the Common Stock listed below have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
Number of Shares % of Total Beneficial Owner(1) Beneficially Owned Outstanding(2) ------------------- ------------------ -------------- Wallace R. Weitz & Company(3)............... 8,890,700 25.4 H. Wayne Snavely(4)......................... 1,774,904 5.1 Stephen J. Shugerman(5)..................... 331,027 * Perry A. Lerner(6).......................... 141,091 * Robert S. Muehlenbeck(7).................... 126,187 * James P. Staes.............................. 500 * Paul B. Lasiter(8).......................... 80,171 * Irwin L. Gubman(9).......................... 80,468 * Brad S. Plantiko(10)........................ 52,259 * John G. Getzelman(11)....................... 10,000 * Scott B. Sampson(12)........................ 43,269 * Kevin E. Villani(13)........................ 123,570 * All Directors and Officers as a Group (12 persons)(14)............................... 2,775,213 7.9%
- -------- * Less than 1%. (1) Each of such persons, except Wallace R. Weitz & Company, may be reached through our company at 23550 Hawthorne Boulevard, Building One, Suite 110, Torrance, California 90505, telephone (310) 373-1704. (2) Percentage ownership is based on 35,067,441 shares of common stock outstanding as of January 31, 2000. (3) Based upon a Schedule 13G filed with the Company reflecting beneficial ownership as of December 31, 1999. The shares are owned by various investment advisory clients of Wallace R. Weitz & Co., which is deemed a beneficial owner of the shares only by virtue of the direct or indirect investment and/or voting discretion they possess pursuant to the provisions of investment advisory agreements with such clients. Wallace R. Weitz & Company may be reached at 1125 South 103rd Street, Suite 600, Omaha NE 68124-6008. (4) Includes 1,177,052 shares subject to stock options exercisable within 60 days of January 31, 2000. (5) Includes 218,524 shares subject to stock options exercisable within 60 days of January 31, 2000. (6) Includes 126,422 shares subject to stock options exercisable within 60 days of January 31, 2000. (7) Includes 90,022 shares subject to stock options exercisable within 60 days of January 31, 2000. (8) Includes 17,000 shares subject to stock options exercisable within 60 days of January 31, 2000. (9) Includes 51,360 shares subject to stock options exercisable within 60 days of January 31, 2000. (10) Includes 16,800 shares subject to stock options exercisable within 60 days of January 31, 2000. (11) Includes 10,000 shares subject to stock options exercisable within 60 days of January 31, 2000. (12) Includes 39,800 shares subject to stock options exercisable within 60 days of January 31, 2000. (13) Includes 116,800 shares subject to stock options exercisable within 60 days of January 31, 2000. Mr. Villani resigned from ICII in September 1999 and from our subsidiary ICAM in December 1999, and resigned from our board of directors as of the latter date. (14) Includes 1,868,780 shares subject to stock options exercisable within 60 days of January 31, 2000. 155 ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS Sale of Holdings by former Principal Shareholder and Outstanding Line of Credit On May 14, 1999, we entered into an agreement with our former parent Imperial Bank, a subsidiary of Imperial Bancorp (NYSE:IMP). On May 17, 1999, we repurchased 10% or 3,682,536 shares of our outstanding common stock for $8.00 per share or $29.5 million. At December 31, 1999, Imperial Bank owns no shares of ICII common stock. In October 1999, we purchased the Lewis Horwitz Organization and certain loan portfolios from Imperial Bancorp. As part of the transaction, a line of credit was established with Imperial Bank in order to fund the acquisition. As of December 31, 1999, the outstanding balance for the line of credit was $6.7 million. Relationships with IMH In December 1997, we negotiated a termination of the management agreement between ICAI and IMH (the "Termination Agreement"). We received consideration pursuant to the Termination Agreement comprised of 2,009,310 shares of IMH common stock and certain securitization-related assets. Additionally, we agreed to cancel our note receivable from ICIFC, the origination unit of IMH, in the amount of $29.1 million. We recorded the IMH common stock and the securitization related assets at their estimated fair values of approximately $35.0 million and $13.1 million, respectively, for a total of $48.1 million. This amount, when netted with the $29.1 million cancellation of the ICIFC note receivable resulted in the gain on termination of the management agreement of approximately $19.0 million. Pursuant to the IMH Registration Rights Agreement IMH agreed to file one or more registration statements under the Securities Act in the future for shares of IMH held by ICAI pursuant to the Termination Agreement, subject to certain conditions. Pursuant to the IMH Registration Rights Agreement, IMH will use its reasonable efforts to cause such registration statements to be kept continuously effective for the public sale from time to time of the shares of IMH held by ICAI pursuant to the Termination Agreement. ICAI contributed the shares to ICII. During the years ended December 31, 1999, 1998 and 1997, we sold 1,887,110 shares, 122,200 shares and 374,538 shares of IMH stock. At December 31, 1999, we owned no shares of IMH common stock. Relationships with ICCMIC ICCMIC Management Agreement On October 20, 1997, ICCMIC entered into a management agreement (the "ICCMIC Management Agreement") with Imperial Credit Commercial Asset Management Corporation ("ICCAMC"), a wholly-owned subsidiary of ICII, for an initial term expiring on October 20, 1999. Mr. Snavely is the Chairman of ICCMIC's board of directors. On July 23, 1999, we announced the signing of a definitive merger agreement by which a wholly owned subsidiary of ours would acquire all of the outstanding shares of ICCMIC (consisting of the 25,930,000 shares not already owned by us and certain of our affiliates and subsidiaries) for a cash purchase price of $11.50 per share. (See--Item 8, "Notes to Consolidated Financial Statements--Note 2) for further information). Fees under the management agreement were payable in arrears. ICCAMC's base and incentive fees and reimbursable costs and expenses are calculated by ICCAMC within 45 days after the end of each quarter, and such calculation promptly delivered to ICCMIC. ICCMIC is obligated to pay such fees, costs and expenses within 60 days after the end of each fiscal quarter. ICCMIC paid ICCAMC $5.9 million, $6.3 million and $940,000 in fees related to the ICCMIC Management Agreement during the years ended December 31, 1999, 1998 and 1997. Other Items In November 1999, ICCMIC purchased from SPB approximately $25 million in principal amount of mortgage loans at a price of par plus accrued interest and with the right to resell those loans to SPB at par plus 156 accrued interest on or after February 28, 2000 or earlier upon the termination of the merger agreement. During 1999, SPB repurchased from ICCMIC certain multifamily and commercial real estate loans with an aggregate principal balance of $47.3 million. ICCMIC is presently negotiating with ICII to resolve certain claims that ICCMIC may have against SPB, ICII or both in connection with the repurchased loans and other loans that ICCMIC previously purchased from SPB. ICII has informed ICCMIC that it believes ICCMIC's claims, which aggregate to approximately $1.4 million, are largely without merit. Mortgage Loan and Other Asset Purchases In 1998, ICCMIC purchased a pool of multifamily and commercial mortgage loans from SPB and from the Company for an aggregate purchase price of approximately $190.0 million plus interest. Equity Investment As of December 31, 1999, we own 9.0% of the outstanding common stock of ICCMIC. ICCMIC invests primarily in performing multifamily and commercial loans and in mortgage backed securities. Other Matters In October 1997, we loaned H. Wayne Snavely, our Chairman and Chief Executive Officer, $1,999,998 for the purpose of assisting him to purchase ICCMIC common stock. The loan was evidenced by a promissory note maturing June 14, 2002, secured by a deed of trust and stock of ICCMIC held by such individual. The note bears interest at an annual rate of 10.4% and was payable in semi-annual installments commencing June 15, 1998. At January 31, 2000, the remaining balance was $288,182, for Mr. Snavely. This loan was made in our ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than normal risk of collectibility or present other unfavorable features. On December 22, 1999, we loaned H. Wayne Snavely, Brad S. Plantiko, Irwin L. Gubman, Paul B. Lasiter, and John C. Getzelman each $61,050 in connection with their purchase of $81,400 of Imperial Credit Asset Resolution, Inc. ("ICARI"), Preferred Stock. ICARI is a 100% owned consolidated subsidiary of our parent company, ICII. Each loan is evidenced by a promissory note maturing on December 22, 2019, and is secured by the Preferred Stock of ICARI purchased by each of the above named executive officers. Each note bears interest at an annual rate of 10.4% and is payable in semi-annual installments commencing June 15, 2000. At January 31, 2000, the outstanding balance of each note was $61,050 for each of the above named executive officers. Each of these loans was made in our ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than normal risk of collectibility or present other unfavorable features. 157 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Imperial Credit Industries, Inc. /s/ H. Wayne Snavely By: _________________________________ H. Wayne Snavely Chairman of the Board, President and Chief Executive Officer Date: February 25, 2000 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints H. Wayne Snavely and Irwin L. Gubman and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection wherewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorneys-in fact and agents or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Signature Title Date --------- ----- ---- /s/ H. Wayne Snavely Chairman of the Board, February 25, 2000 ____________________________________ President and Chief (H. Wayne Snavely) Executive Officer and Director (Principal Executive Officer) /s/ Brad S. Plantiko Executive Vice President, February 25, 2000 ____________________________________ Chief Financial Officer, (Brad S. Plantiko) and Director (Principal Financial Officer and Principal Accounting Officer) /s/ Stephen J. Shugerman Director February 25, 2000 ____________________________________ (Stephen J. Shugerman) /s/ Robert S. Muehlenbeck Director February 25, 2000 ____________________________________ (Robert S. Muehlenbeck) /s/ Perry A. Lerner Director February 25, 2000 ____________________________________ (Perry A. Lerner) /s/ James P. Staes Director February 25, 2000 ____________________________________ (James P. Staes)
158 ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8K (a) Exhibits are listed in the table below.
Exhibit Number Description of Exhibit ------- ---------------------- 3.1(S) Articles of Incorporation, as amended of Registrant. 3.2(S) Bylaws of Registrant. 4.1(S) Form of Common Stock Certificate. 4.2# Indenture relating to 9 7/8% Senior Notes, dated as of January 23, 1997, with forms of 9 7/8% Senior Notes. 4.3+ Certificate of Trust of Imperial Credit Capital Trust I. 4.4+ Amended and Restated Declaration of Trust of Imperial Credit Capital Trust I, with form of Remarketed Redeemable Par Securities, dated June 9, 1997. 4.5+ Indenture relating to the Resettable Rate Debentures, dated as of June 9, 1997, with forms of Resettable Rate Debentures. 4.6+ Remarketing Agreement, by and among, the Registrant, the Trust and Lehman Brothers, Inc., dated as of June 9, 1997. 4.7+ Guarantee Agreement by the Registrant, for the benefit of the Holders of Remarketed Redeemable Par Securities, Series B. 10.1(S) Form of Indemnification Agreement for directors and officers. 10.2(S) 1992 Incentive Stock Option Plan and Nonstatutory Stock Option Plan and form of Stock Option Agreement thereunder. 10.3* 1996 Stock Option, Deferred Stock and Restricted Stock Plan effective as of June 21, 1996. 10.4(S) Senior Management Stock Option Agreement dated effective as of January 1, 1992 by and between Registrant and H. Wayne Snavely. 10.5** Senior Management Stock Option Agreement dated effective as of January 1, 1992 by and between Registrant and Joseph R. Tomkinson. 10.6** Senior Management Stock Option Agreement dated effective as of January 1, 1992 by and between Registrant and Stephen J. Shugerman. 10.7** Amendment No. 1 to Senior Management Stock Option Agreement by and between Registrant and H. Wayne Snavely, effective as of January 1, 1992. 10.8** Amendment No. 1 to Senior Management Stock Option Agreement by and between Registrant and Joseph R. Tomkinson, effective as of January 1, 1992. 10.9** Amendment No. 1 to Senior Management Stock Option Agreement by and between Registrant and Stephen J. Shugerman, effective as of January 1, 1992. 10.10** Amendment No. 2 to Senior Management Stock Option by and between Registrant and H. Wayne Snavely, effective as of September 30, 1995. 10.11** Amendment No. 2 to Senior Management Stock Option by and between Registrant and Joseph R. Tomkinson, effective as of September 30, 1995. 10.12** Amendment No. 2 to Senior Management Stock Option by and between Registrant and Stephen J. Shugerman, effective as of September 30, 1995. 10.13*** Employment agreement dated as of January 1, 1997 by and between Registrant and H. Wayne Snavely. 10.15*** Employment agreement dated as of January 1, 1997 by and between Registrant and Stephen J. Shugerman.
159
Exhibit Number Description of Exhibit ------- ---------------------- 10.16*** Registration Rights Agreement dated as of August 26, 1997, by and among Registrant, FLRT, Inc., and Franchise Mortgage Acceptance Company. 10.17+ Agreement for Purchase and Sale of Real Estate Loans between Southern Pacific Bank and Imperial Credit Commercial Mortgage Investment Corp., dated as of October 1, 1997. 10.18+ Agreement for Purchase and Sale of Mortgage-Backed Securities between Southern Pacific Bank and Imperial Credit Commercial Mortgage Investment Corp., dated as of October 22, 1997. 10.19+ Agreement for Purchase of Mortgage-Backed Securities between Registrant and Imperial Credit Commercial Mortgage Investment Corp., dated as of October 22, 1997. 10.20*** Registration Rights Agreement dated as of December 29, 1997, by and between ICAI and IMH. 10.21*** Termination Agreement dated as of December 19, 1997, by and between ICAI and IMH. 10.22*** Promissory Note Secured by Stock Pledge and Deed of Trust dated as of October 21, 1997, Between Registrant and H. Wayne Snavely. 10.24## Deferral of Executive Compensation Plan effective July 1, 1998. 10.25## Deferral of Executive Compensation Plan, Plan I, effective January 1, 1999. 10.26## Deferral of Executive Compensation Plan, Plan II, Effective January 1, 1999. 10.28## Termination Protection Agreement, effective as of January 27, 1999, by and between Registrant and H. Wayne Snavely. 10.29## Termination Protection Agreement, effective as of January 27, 1999, by and between Registrant and Irwin L. Gubman. 10.30## Termination Protection Agreement, effective as of January 27, 1999, by and between Registrant and Brad S. Plantiko. 10.31### Employment Agreement dated as of September 18, 1995, by and between Registrant and Scott B. Sampson. 10.32### Amendment to Employment Agreement by and between Registrant and Scott B. Sampson, effective as of September 1, 1998. 10.33### Asset Purchase Agreement by and between Registrant and Imperial Bank, dated as of October 1, 1999. 10.34### Servicing Agreement between Registrant and Imperial Bank, effective as of October 1, 1999. 10.35### Assignment and Assumption Agreement, dated as of October 1, 1999, between Imperial Bank and Registrant. 10.36### Services Agreement between Registrant and Southern Pacific Bank, effective October 1, 1999. 10.37### Severance Agreement between The Lewis Horwitz Organization and Imperial Bank, effective September 30, 1999. 10.38### General Assignment and Assumption of Loan between Imperial Bank and Registrant, dated October 1, 1999. 10.39### Form of Endorsement to Note between Imperial Bank and the Registrant, dated October 1, 1999. 10.40### Employment Severance Agreement, Settlement Agreement and General Release, effective September 1, 1999, between Registrant and Stephen J. Shugerman. 10.41### Employment Severance Agreement, Settlement Agreement and General Release, effective September 30, 1999, between Registrant and Kevin E. Villani. 11### Statement Regarding Computation of Earnings Per Share. 21### Subsidiaries of Registrant.
160
Exhibit Number Description of Exhibit ------- ---------------------- 23.1.1### Consent of KPMG LLP. 24### Power of Attorney (included on signature page of Form 10-K). 27### Financial Data Schedule
- -------- (S) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 33-45606) and Amendments No. 1, 2 and 3 filed with the SEC on February 10, 1992, April 20, 1992, May 7, 1992 and May 18, 1992, respectively. + Incorporated by reference to Registrant's Registration Statement on Form S-4 (Registration No. 333-30809) filed on July 3, 1997. # Incorporated by reference to Registrant's Registration Statement on Form S-4 (Registration No. 333-22141) filed with the SEC on February 19, 1997. * Incorporated by reference to Registrant's Registration Statement on Form S-8 (Registration No. 333-13805) filed October 9, 1996. ** Incorporated by reference to Registrant's Registration Statement on Form S-8 (Registration No. 333-15149) filed October 31, 1996. *** Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1997. + Incorporated by reference to Imperial Credit Commercial Mortgage Investment Corp.'s Form 10-Q for the quarter ended September 30, 1997. ## Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. ### Previously filed on Registrant's Annual Report on Form 10-K for the year ended December 31, 1999. (b) Report on Form 8-K The Registrant filed the following Report on Form 8-K during the three months ended December 31, 1999; on November 5, 1999, the Registrant filed a press release announcing the sale of 4.3 million shares of Bay View Capital Corporation common stock. 161 -----END PRIVACY-ENHANCED MESSAGE-----