<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1996
REGISTRATION NO. 333-15263
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
WILSHIRE FINANCIAL SERVICES GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6719 APPLIED FOR
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
1776 SW MADISON ST.
PORTLAND, OR 97205
(503) 223-5600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
LAWRENCE A. MENDELSOHN
PRESIDENT
1776 SW MADISON ST.
PORTLAND, OR 97205
(503) 223-5600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
JAMES M. WADDINGTON, ESQ. ROBERT E. DEAN, ESQ.
PROSKAUER ROSE GOETZ & MENDELSOHN LLP GIBSON, DUNN & CRUTCHER LLP
1585 BROADWAY 4 PARK PLAZA
NEW YORK, NEW YORK 10036-8299 IRVINE,CALIFORNIA 92614-8557
(212) 969-3000 (714) 451-3800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERINGPRICE AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SHARE OR NOTE(3) PRICE(3) FEE(4)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per
share.......................... 1,725,000 shares(1) $12.00 $20,700,000 $6,272.73
- ------------------------------------------------------------------------------------------------
Notes due 2003.................. $69,000,000(2) 100% $69,000,000 $20,909.09
- ------------------------------------------------------------------------------------------------
Total....................... $89,700,000 $27,181.82
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 225,000 shares of Common Stock which the Common Stock
Underwriters have an option to purchase to cover over-allotments, if any.
(2) Includes $9,000,000 of Notes which the Notes Underwriter has an option to
purchase to cover over-allotments, if any.
(3) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as
amended, solely for the purpose of calculating the registration fee.
(4)Includes $21,424.24 previously paid.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement is being filed with respect to (i) 1,500,000
shares of common stock, par value $.01 per share (the "Common Stock"), of
Wilshire Financial Services Group Inc. (and an additional 225,000 shares of
Common Stock issuable upon exercise of the Common Stock Underwriters' over-
allotment option), and (ii) $60 million principal amount of % Notes due 2003
(the "Notes") of Wilshire Financial Services Group Inc. (and an additional
$9,000,000 of Notes issuable upon exercise of the Notes Underwriter's over-
allotment option).
This Registration Statement contains two forms of Prospectus. The first
Prospectus relates to the offering of the Common Stock and the second
Prospectus relates to the offering of the Notes.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 18, 1996
PROSPECTUS
------------------------
WILLSHIRE
Financial Services Group
------------------------
1,500,000 SHARES OF COMMON STOCK
This Prospectus relates to the offering by Wilshire Financial Services Group
Inc., a Delaware corporation ("WFSG" and together with its subsidiaries, the
"Company"), of 1,500,000 shares of Common Stock, par value $0.01 per share (the
"Common Stock") of WFSG (the "Common Stock Offering"). Prior to the Common
Stock Offering, there has been no public market for the Common Stock. It is
currently estimated that the initial public offering price for the shares of
Common Stock offered hereby will be between $10.00 and $12.00 per share. See
"Underwriting" for information relating to the factors considered in
determining the initial public offering price. The Company has applied for
quotation of the Common Stock on the Nasdaq National Market ("Nasdaq") under
the symbol "WFSG." Upon completion of the Common Stock Offering and assuming
the Underwriters' over-allotment option is not exercised, certain executive
officers and directors of the Company will have approximately 78% of the
combined voting power of all outstanding shares of the Common Stock.
The Underwriters have reserved 4.2% of the shares of Common Stock offered
hereby for sale at the initial public offering price to directors, officers and
employees of the Company and to certain other persons.
In addition, WFSG is concurrently offering $60 million aggregate principal
amount of % Notes due 2003 (the "Notes") of WFSG (the "Notes Offering"). See
"Description of Notes Offering." The Common Stock Offering and the Notes
Offering are each conditioned on the completion of the other offering.
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING AT PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED CAREFULLY BY PROSPECTIVE INVESTORS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION ("FDIC"), ANY OTHER GOVERNMENTAL AGENCY OR OTHERWISE.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE FDIC, THE OFFICE OF THRIFT SUPERVISION
("OTS") OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, FDIC, OTS OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) THE COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $ $ $
Total(3).................................. $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting" for information relating to the indemnification of the
Underwriters.
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) WFSG has granted the Common Stock Underwriters an option, exercisable
within 30 days of the date hereof, to purchase from WFSG up to 225,000
additional shares of Common Stock solely to cover over-allotments, if any.
To the extent the option is exercised, the Underwriters will offer the
additional shares of Common Stock at the Price to Public shown above. If
the option is exercised in full, the total Price to Public, Underwriting
Discounts and Proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting."
The shares of Common Stock are offered subject to receipt and acceptance by
the Underwriters, to prior sale and to the Underwriters' right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the shares of Common Stock will be made
at the offices of Friedman, Billings, Ramsey & Co., Inc., Arlington, Virginia,
the representative of the several Underwriters (the "Representative"), or in
book-entry form through the facilities of The Depository Trust Company on or
about , 1996.
-----------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1996.
<PAGE>
IN CONNECTION WITH THE COMMON STOCK OFFERING AND THE NOTES OFFERING, THE
UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN
THE MARKET PRICE OF SUCH SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
NASDAQ NATIONAL MARKET, IN THE OVER THE COUNTER MARKET, OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
WFSG has filed with the Securities and Exchange Commission (the
"Commission") via the Electronic Data Gathering Analysis and Retrieval System
("EDGAR") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act") with respect to the Common Stock
Offering and the Notes Offering. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which have been omitted as permitted by
the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance where such contract or other
document is an exhibit to the Registration Statement, reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement, each statement being qualified in all respects by such
reference. As a result of the filing of the Registration Statement with the
Commission, WFSG will become subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will be required to file reports and other information
with the Commission. WFSG intends to furnish its stockholders annual reports
containing audited financial statements and an opinion thereon expressed by
WFSG's independent auditors as well as quarterly reports for the first three
quarters of each fiscal year containing unaudited financial statements. Copies
of the Registration Statement, including all exhibits thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60601 upon payment of prescribed rates. The
Commission also maintains a web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants, including WFSG. The Company has applied for quotation of the
Common Stock on Nasdaq. If the Common Stock is quoted on Nasdaq, reports,
proxy and information statements and other information regarding the Company
will be available for inspection at the National Association of Securities
Dealers, Inc. (the "NASD"), 1735 K Street, N.W., Washington, D.C. 20006.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information contained in this Prospectus assumes no exercise of the
Underwriters' over-allotment option to purchase additional shares of Common
Stock. Unless the context otherwise requires, all references to the Company
herein shall be deemed to include the Company and its subsidiaries. Unless
otherwise indicated, all information in this Prospectus assumes that no
outstanding stock options are exercised. The information contained in this
Prospectus gives effect to certain transactions to be consummated prior to or
simultaneously with the closing of the Common Stock Offering and the Notes
Offering.
THE COMPANY
GENERAL
Wilshire Financial Services Group Inc. ("WFSG" and, together with its
subsidiaries, the "Company") is a newly formed financial services holding
company for certain companies and businesses previously held as a part of, and
operated by, the Wilshire group of companies (the "Private Companies") pursuant
to a reorganization of the Private Companies (the "Reorganization"). The
Company will engage in a wide variety of financial activities, including the
acquisition, origination, ownership and securitization of loan portfolios
("Loan Portfolios"), banking and non-traditional bankcard processing.
HISTORICAL STRUCTURE
Prior to the Reorganization, the Private Companies operated principally
through two separate companies: (i) Wilshire Credit Corporation ("WCC"), which
conducted a substantial portion of the loan acquisition activities of and all
of the loan servicing for the Private Companies; and (ii) Wilshire Acquisitions
Corporation ("WAC"), the holding company for two federally-chartered savings
banks, First Bank of Beverly Hills, F.S.B. ("First Bank"), and Girard Savings
Bank, F.S.B. ("Girard" and together with First Bank, the "Savings Banks"). WCC
commenced Loan Portfolio acquisitions in 1990 funded primarily by lines of
credit and joint ventures with institutional partners. Through October 21,
1996, the Private Companies had purchased or committed to purchase
approximately 409 Loan Portfolios, aggregating $2.4 billion in principal
amount. In addition, at September 30, 1996 WCC serviced $1.4 billion of loans.
WCC's income has been principally derived from ownership and servicing of, and
profit participations in, Loan Portfolios.
In the early 1990's, WCC acquired loans primarily from the Federal Deposit
Insurance Corporation ("FDIC") and the Resolution Trust Corporation (the
"RTC"), generally in auctions of pools of loans acquired from financial
institutions which failed during the late 1980's and early 1990's. Although
governmental agencies such as the FDIC and the Department of Housing and Urban
Development ("HUD") continue to be potential sources of loans, the amount of
loans sold by such agencies has substantially declined. In recent years, the
Private Companies purchased loans primarily from various private sector
sellers, such as banks, savings institutions, mortgage companies and insurance
companies.
Andrew A. Wiederhorn and Lawrence A. Mendelsohn, the principal owners of the
Private Companies (the "Principals"), purchased First Bank and Girard through
WAC in October 1993 and November 1994, respectively, using funds loaned to them
by WCC (the "Shareholder Loans"). The Savings Banks were acquired to provide a
deposit-based funding source for the loan purchase activities of the Private
Companies. Both Savings Banks were acquired at substantial discounts to their
respective book values, reflecting the poor quality of their assets and, in the
case of First Bank, an expected imminent regulatory takeover. WAC has increased
assets from $230.6 million at December 31, 1994 to $533.1 million at September
30, 1996 primarily through the acquisition of Loan Portfolios.
3
<PAGE>
The Principals have injected approximately $30 million into WAC since the
acquisition of the Savings Banks to fund substantial asset growth and to
maintain required capital levels given the substantial reserves taken on loans
acquired as part of the acquisition of the Savings Banks (the "Inherited
Loans") and approximately $24.5 million of sub-prime auto loans acquired in the
fourth quarter of 1995 and the first quarter of 1996 (the "Sub-Prime Auto
Loans"). As a result of the high level of loan loss reserves required in 1996,
and other regulatory concerns regarding the management of the Savings Banks and
other matters, the Office of Thrift Supervision (the "OTS"), on October 31,
1996 increased the level of regulatory supervision and imposed cease-and-desist
orders (the "Orders") on and restricted further growth of assets at both
Savings Banks. The Company recently has hired additional management for the
Savings Banks and taken other steps to address these regulatory concerns, but
the Company will not be able to use the Savings Banks for growth until the
Orders are lifted or modified. See "Risk Factors--Results of Regulatory
Examinations; Imposition of Cease and Desist Orders."
REORGANIZED STRUCTURE
Following the Reorganization, WFSG will be the holding company for WAC, the
Savings Banks, Wilshire Funding Corporation, a company formed to pursue loan
acquisition and loan origination businesses similar to WCC following the Common
Stock Offering and the Notes Offering ("WFC"), and Wilshire Servicing
Corporation, a company formed to engage in the loan servicing business
following the receipt of necessary licenses ("WSC"). The Company intends to
build on the expertise of the Private Companies and aggressively pursue the
acquisition of Loan Portfolios. The Company evaluates Loan Portfolios based on
anticipated future cash flows, available funding sources and minimum expected
returns on equity. The Company will seek to identify niche areas primarily
within the real estate loan market where it believes its funding flexibility,
experienced personnel and its proprietary software and U.S. mortgage loan
database give it a competitive advantage in pricing and purchasing Loan
Portfolios. The aggregate principal amount of the loans acquired by the Private
Companies during the nine months ended September 30, 1996 and the years ended
December 31, 1995, 1994 and 1993 was approximately $501.4 million, $337.4
million, $388.5 million and $333.8 million, respectively. As of September 30,
1996, the Company had $533.1 million of assets and stockholders' equity of
$34.6 million.
After giving effect to the Reorganization, the organizational structure of
the Company will be as follows:
[CHART]
- --------
*Expected to commence servicing activities in 2-3 years following receipt of
necessary licenses.
**Entities to be formed for financings and to complete securitizations.
4
<PAGE>
In the Reorganization, WCC will not become a subsidiary of WFSG or transfer
any assets or liabilities to the Company. WCC is not being included in the new
public entity due to certain tax considerations and to allow WCC to retain
sufficient assets and servicing rights to retire the Shareholder Loans. See
"The Company--The Reorganization." WCC will cease to acquire new product or
servicing for its own account, but will continue to service and liquidate its
existing portfolio. New loan acquisitions and originations will be conducted by
WFC. For a period of two to three years after the closing of the Common Stock
Offering and Notes Offering while WSC is in the process of obtaining the
relevant licensing approvals for its servicing activities, WCC will continue to
service loans for the Company at a market rate. Following such period, WSC will
commence servicing loans for the Company and WCC. See "Certain Relationships
and Related Transactions." In addition, WCC and the Principals have agreed not
to compete with the Company with respect to the acquisition of Loan Portfolios.
BUSINESS ACTIVITIES
Business Strategy. The Company's strategy is to aggressively pursue Loan
Portfolio acquisitions where it believes it can receive acceptable rates of
return on invested capital and effectively utilize leverage. Key elements of
this strategy include:
. Significant Growth in Loan Portfolio Investments. During the last four
years, the Private Companies have developed expertise in the business of
acquiring Loan Portfolios, including residential mortgage loans,
manufactured housing loans, second lien loans, commercial real estate
loans, multi-family residential loans, commercial and business loans,
boat loans and other consumer loans, and Subordinate Securities (as
defined herein). The Company expects to utilize its available funding
sources to aggressively pursue Loan Portfolio acquisitions in the United
States and Western Europe, a substantial portion of which are expected
to be non-performing Loan Portfolios purchased at a discount
("Discounted Loans"). In addition, the Company expects to increase its
purchases of commercial real estate loans.
. Utilization of Varied Funding Sources. The Company, in addition to
deposits at the Savings Banks, will have extensive funding sources
available for investment and lending activities from investment banking
firms and institutional investors, including secured term loans,
warehouse lines of credit, and repurchase facilities. As of the closing
of the Common Stock Offering and the Notes Offering, certain existing
undrawn lines of credit ($413.3 million as of September 30, 1996) of the
Private Companies will be transferred to the Company. Amounts currently
drawn under such lines of credit by the Private Companies ($86.7 million
as of September 30, 1996) will be transferred to the Company once such
amounts are repaid by the Private Companies. Substantially all of the
Company's Loan Portfolio investments are expected to utilize borrowed
funds, minimizing the Company's equity investment to the extent
possible. Since the Private Companies' initial use of securitization in
1995 through September 30, 1996, the Private Companies have issued
$368.7 million of securities through two publicly underwritten and three
privately placed securitizations, including securitizations of non-
performing and sub-performing mortgage loans, manufactured housing
loans, consumer loans and conventional and non-conforming mortgage
loans. The Company expects to securitize its Loan Portfolios when
advantageous.
. Expansion into European Markets. The Company recently decided to expand
its loan acquisition and servicing activities to encompass the United
Kingdom and France with a view towards future expansion in Western
Europe. Management is in discussions with a major U.S. investment
banking company regarding the formation of a joint venture for
conducting servicing activities in the United Kingdom. The Company is
also considering either establishing its own servicing operation,
acquiring an already existing entity or entering into a joint venture
with a company already active in France. Management believes that
conditions in the French real estate market and, to a lesser degree, in
the United Kingdom real estate market are similar to conditions in the
United States real estate market in
5
<PAGE>
the late 1980's and early 1990's and that there may be opportunities to
acquire Loan Portfolios at favorable prices. In addition, management
believes that there is a demand in the European market for U.S.-style
servicing with its automated systems, detailed investor reporting and
aggressive servicing and work-out approaches.
. Capitalize on Servicing Expertise. The Company believes that WCC's loan
servicing experience, its highly trained servicing personnel and its
investment in proprietary software have allowed the Private Companies to
effectively value and price Loan Portfolios. As of September 30, 1996,
WCC was servicing more than $1.4 billion principal amount of loans,
including $502.0 million for the Savings Banks. For a period of two to
three years after the closing of the Common Stock Offering and the Notes
Offering, while the Company is in the process of obtaining the relevant
licensing approvals for its servicing activities, WCC will continue to
service loans for the Company generally at a market rate. Accordingly,
the Company does not expect any significant servicing income until it
commences servicing loans for its own account in two to three years.
. Growth of Non-Traditional Bankcard Processing Operations. The Company
plans to continue development of its non-traditional bankcard processing
operations, which generate revenues through merchant discounts and
processing fees for Visa (R) and Mastercard (R) transactions. The
Company's bankcard processing operations focus on certain high-risk
market niches, principally mail order/telephone order and audio-text
where the Company believes it obtains higher returns on processing
transactions. Revenues from the bankcard operation, which was commenced
in the third quarter of 1994, have demonstrated strong growth increasing
from $0.6 million in 1994 to $4.7 million in 1995 and to $5.1 million
during the nine months ended September 30, 1996. Management believes
that there are opportunities to expand this business using the Company's
existing infrastructure.
. Development of Wholesale Origination Network. In late 1995, the Private
Companies launched a mortgage conduit program for the purchase of newly-
originated residential mortgage and manufactured housing loans on a
nationwide basis through correspondents. Originations to date have been
modest. While the Company is obtaining necessary licensing, WCC will
continue to originate residential mortgage loans for the Company's
account through its correspondent relationships and will then transfer
the newly originated loans at acquisition cost to the Company.
Currently, this program focuses on the origination of in park
manufactured housing loans and conforming and non-conforming first and
second lien mortgage loans. The Company is in the process of launching
two new programs for loans to good-credit borrowers.
6
<PAGE>
THE COMMON STOCK OFFERING
Common Stock Offered.... 1,500,000 shares (plus up to 225,000 shares subject
to the Underwriters' over-allotment option).
Common Stock
outstanding (after the
Common Stock
Offering)...............
7,000,000 shares (plus up to 225,000 shares subject
to the Underwriters' over-allotment option).
Dividend Policy......... The Company intends to retain its earnings to support
its future growth strategy and does not anticipate
paying cash dividends on the Common Stock in the
foreseeable future. See "Dividend Policy."
Reserved Nasdaq WFSG.
symbol..................
Use of Proceeds.........
The net proceeds from the Common Stock Offering and
the Notes Offering are expected to be used by the
Company to support leveraged acquisitions of Loan
Portfolios and for other general corporate purposes,
including expansion into Western Europe.
THE NOTES OFFERING
Concurrently with the Common Stock Offering, the Company is separately
offering $60 million principal amount of Notes (plus up to $9 million of Notes
subject to the Notes Underwriters' over-allotment option), which will mature on
, 2003. The Notes will be general unsecured obligations of the Company.
Interest on the Notes will accrue at the rate of % per annum and will be
payable semi-annually in arrears on and of each year commencing on
, 1997. For information regarding the anticipated use of proceeds from the
Notes Offering by the Company and the Notes generally, see "Use of Proceeds"
and "Description of Notes Offering."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered carefully by prospective investors of the Common Stock offered
hereby.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following tables present Summary Consolidated Financial Information for
the Company at the dates and for the periods indicated. The historical income
statement and balance sheet data at and for the nine month period ended
September 30, 1996 and the years ended December 31, 1995 and 1994 have been
derived from the audited consolidated financial statements of the Company
included elsewhere in this Prospectus (the "Audited Financial Statements").
On October 7, 1993, WAC acquired 94.9% of the common stock of First Bank in a
purchase accounting transaction. On November 9, 1994, a newly-formed entity
with ownership and management common to WAC-Wilshire Acquisitions Corporation
II ("WACII") acquired 94.9% of the common stock of Girard in a purchase
accounting transactions.
Because WAC and WACII were under common control, the accompanying financial
statements are presented on a combined basis as of December 31, 1994 and for
the period from November 9 through December 31, 1994. On December 27, 1995, WAC
and WACII were merged and WAC was named as the surviving entity. Financial
information as of September 30, 1996 and December 31, 1995 and for the nine
months and year then ended, respectively, is presented on a consolidated basis
and includes the accounts of WAC, First Bank, and Girard. With respect to all
consolidated and combined financial information, intercompany transactions and
balances have been eliminated. For convenience, all the accompanying financial
statements are referred to as "consolidated".
The historical income statement and data presented for the nine months ended
September 30, 1995 has been derived from unaudited consolidated financial
statements (the "Unaudited Financial Statements" and, together with the Audited
Financial Statements, the "Consolidated Financial Statements") and include all
adjustments, consisting only of normal recurring accruals, which the Company
considers necessary for a fair presentation of the Company's results of
operations for these periods. Operating results for the nine months ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for any other interim period of the entire year ending December 31,
1996. The Summary Consolidated Financial Information should be read in
conjunction with, and is qualified in its entirety by reference to, the
Consolidated Financial Statements and related notes as set forth elsewhere
herein.
8
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------- -----------------
1996 1995 1995 1994
------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income........ $34,137 $17,052 $24,381 $ 9,569
Total interest expense....... 19,592 10,411 14,481 5,457
------- ------- ------- --------
Net interest income.......... 14,545 6,641 9,900 4,112
Provision for estimated
losses on loans............. 15,751 3,221 4,266 2,173
------- ------- ------- --------
Net interest income (loss)
after provision for esti-
mated losses on loans....... (1,206) 3,420 5,634 1,939
Other income (loss):
Bankcard income(1)........... 5,078 3,202 4,694 635
Bankcard processing expense.. (3,865) (2,408) (3,462) (274)
Other, net................... 5,164 1,940 1,875 866
------- ------- ------- --------
Total other income (loss).. 6,377 2,734 3,107 1,227
Other expenses:
Other general and administra-
tive expenses............... 10,905 5,247 8,102 4,944
------- ------- ------- --------
(Loss) income before income
tax provision............... (5,734) 907 639 (1,778)
Income tax (benefit) provi-
sion........................ (4,652) 68 47 (526)
------- ------- ------- --------
Net (loss) income ........... $(1,082) $ 839 $ 592 $ (1,252)
======= ======= ======= ========
(Loss) earnings per share.... $(14.05) $ 35.56 $ 25.09 $(135.43)
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1996 1995 1994
------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.............................. $ 533,109 $ 341,454 $ 230,636
Loan portfolio, net(2).................... 177,280 258,827 179,377
Discounted loan portfolio:
Total loans.............................. 10,767 20,210 2,995
Unaccreted discount...................... (1,632) (3,008) (470)
Allowance for loan losses................ (5,716) (3,855) (431)
Discounted loans, net.................... 3,419 13,347 2,094
Loans held for sale, net, at lower of cost
or market(3)............................. 260,804 18,597 --
Real estate owned, net.................... 2,514 4,964 1,208
Deposits, net............................. 487,535 303,524 196,289
Borrowings................................ -- 13,000 21,500
Stockholders' equity(4)................... 34,554 7,039 6,793
</TABLE>
- --------
(1) The Company began its bankcard operations in 1994.
(2) Does not include Discounted Loans.
(3) Loans held for sale increased due to the Company's intent to sell
approximately $277.5 million of single-family residential loans in the
fourth quarter of 1996.
(4) Effective January 1, 1996, $11.0 million of Common Stock was issued in
exchange for Subordinated Debt. Subsequently, an additional $17.8 million
of Common Stock was issued for cash.
9
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- ------
<S> <C> <C> <C>
FINANCIAL RATIOS AND OTHER DATA:
Return on average assets..................... (.22)% .24% (.92)%
Return on average equity..................... (3.09)% 8.65% (31.03)%
Average interest rate on total loans......... 9.39% 9.57% 7.65%
Average equity to average assets............. 7.24% 2.72% 2.96%
Net interest spread(5)....................... 3.15% 3.08% 2.85%
Net interest margin(6)....................... 3.88% 3.72% 3.04%
Ratio of earnings to fixed charges(7):
Including interest on deposits.............. .71 1.04 .67
Excluding interest on deposits.............. (1.67) 2.19 (3.04)
Non-performing loans to loans at end of
period(2)................................... 9.11% 4.46% 5.95%
Allowance for loan losses to total loans at
end of period............................... 9.2% 7.6% 3.9%
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
LOAN ORIGINATIONS(8)......................... $ 2,280 $ 8,748 $4,345
LOAN ACQUISITION DATA(8):
Loans:
Single-family residential................... 221,581(9) 121,883 36,462
Multi-family residential.................... -- -- 61,247
Commercial and other mortgage loans......... -- 2,126 31,091
Consumer and other loans(10)................ 18,742 11,012 10,847
Discounted Loans............................. -- (11) 55,995 3,624
LOANS SOLD(8)................................ 27,965(9) 16,673 --
</TABLE>
- --------
(5) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by total average
earnings assets.
(7) The ratios of earnings to fixed charges were computed by dividing (x)
income from continuing operations before income taxes, extraordinary gains
and cumulative effect of a change in accounting principle plus fixed
charges by (y) fixed charges. Fixed charges represent total interest
expense, including and excluding interest on deposits, as applicable, as
well as the interest component of rental expense. Earnings for the nine
months ended September 30, 1996 and the year ended December 31, 1994 were
inadequate to cover fixed charges by $5,734 and $1,778, respectively.
(8) Unpaid principal balances.
(9) The Company currently expects that Girard will sell certain single-family
residential loans to WFC which in turn is expected to securitize such
loans. See "Recent Developments."
(10) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(11) Girard recently purchased or committed to purchase approximately $272
million unpaid principal amount of discounted residential mortgage loans.
See "Recent Developments."
10
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors, as
well as the other information contained in this Prospectus, before deciding to
make an investment in shares of Common Stock.
RECENT LOSSES; NO ASSURANCE AS TO CONSISTENCY OF RESULTS OF OPERATIONS
Recent Losses. The Company reported a net loss of approximately $1.1 million
for the nine months ended September 30, 1996, principally due to provisions
for estimated losses on the Sub-Prime Auto Loans ($8.6 million) and the
Inherited Loans ($4.8 million). A $1.4 million charge for the Savings
Association Insurance Fund (the "SAIF") special assessment also contributed to
the year-to-date loss. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Regulation--The Savings Banks--
Recapitalization of SAIF."
Consistency of Results of Operations. The results of operations of the
Company may be significantly affected by required provisions for estimated
loan losses, the timing and size of such provisions, variations in the volume
of the Company's loan acquisitions, the volume of loans resolved, the
differences between the Company's cost of funds and the average interest rates
of the acquired loans, the effectiveness of the Company's hedging strategies,
the interest rate for Senior Securities (as defined herein) issued in
securitizations, and the timing and size of securitizations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Since the Company is not acquiring the assets and liabilities of WCC nor its
servicing income, its result of operations in the short term following the
closing of the Common Stock Offering in the Reorganization and the Notes
Offering principally will be determined by the results of operations of the
Savings Banks. Additionally, it is expected that the management of the Company
will take approximately six months or more to fully utilize (through leverage)
the proceeds of the Common Stock Offering and the Notes Offering.
RESULTS OF REGULATORY EXAMINATIONS; IMPOSITION OF CEASE-AND-DESIST ORDERS
Recent Regulatory Examinations. Following examinations of the Savings Banks
and WAC by the OTS in 1994, 1995 and 1996, the OTS issued Reports of
Examination that were critical of the Savings Banks and WAC in a number of
respects. These regulatory concerns initially resulted in the OTS requiring
First Bank to enter into a Supervisory Agreement on June 8, 1995. The
Supervisory Agreement required First Bank to take actions to achieve
compliance with certain laws and regulations and safe and sound practices and
to (a) develop plans and procedures concerning (i) reduction of non-performing
assets, (ii) internal asset review, (iii) asset monitoring, (iv) appraisals,
(v) loan underwriting, (vi) loan purchases; (b) enhance recordkeeping; (c)
develop requirements to ensure that the servicing of loans by WCC is
satisfactory; and (d) maintain its separate corporate existence. In addition,
the Supervisory Agreement required First Bank to maintain certain minimum
capital ratios and prohibited First Bank from increasing total assets beyond
specified levels and acquiring non-performing assets without the prior written
consent of the Assistant Regional Director of the OTS-West Region.
Imposition of Cease-and-Desist Orders. In July 1996, the OTS advised First
Bank that it had not fully complied with the terms of the Supervisory
Agreement and that both Savings Banks had failed in a number of respects to
address regulatory concerns raised in the 1994 and 1995 examination reports.
The OTS also expressed continuing concerns regarding the adequacy of
management of First Bank in light of its business activities. As a result of
these issues, the OTS replaced the Supervisory Agreement with a Cease and
Desist Order, effective October 31, 1996. Given the similar nature of Girard's
business activities, the OTS has also issued a Cease and Desist Order to
Girard similar to the Order issued to First Bank. The issuance of a cease and
desist order is generally evidence of an increased level of regulatory concern
regarding the subject institution.
The Orders require that both Savings Banks not engage in unsafe and unsound
practices and that they maintain minimum capital ratios as of December 31,
1996 required of institutions to be deemed "well-capitalized" (as that term is
defined under the regulatory framework for prompt corrective action). The
Orders also require the Savings Banks to: (a) revise policies and procedures
concerning (i) internal asset reviews, (ii) the allowances for loan and lease
losses, (iii) loan purchases, (iv) internal audits and (v) hedging
transactions;
11
<PAGE>
(b) develop plans to augment the depth and expertise of the management teams;
(c) revise business plans; (d) modify certain policies concerning the
accounting for loan discounts; (e) improve monitoring of (i) interest rate
risk, (ii) asset classifications (e.g., as held for sale versus held to
maturity) and (iii) compliance with laws and regulations concerning
transactions with affiliates; (f) ensure compliance with the proper servicing
of adjustable-rate mortgages and escrow accounts; (g) ensure servicer
correction of OTS-identified deficiencies in information systems; and (h)
enhance recordkeeping. In addition, First Bank is required to correct OTS-
identified deficiencies in its merchant bankcard processing operations. These
requirements are accompanied by related requirements that the Savings Banks
submit to the OTS, by certain specified dates, various policies, plans and
reports on other actions to comply with the Orders. In some cases, OTS
approval of such information is required.
Management believes that the Savings Banks are complying with those
requirements of the Orders that have taken effect immediately. In addition,
the Savings Banks have implemented several actions to address the other
requirements of the Orders, including (i) hiring a new chief executive officer
for the Savings Banks, (ii) engaging a "big six" accounting firm to review
management's implementation of corrective actions required by the OTS, (iii)
increasing the size of the internal asset review department, and (iv) revising
internal asset review policies. The Company is also in the process of hiring a
manager to complete the development and implementation of an effective asset
review system.
The Orders are enforceable by the OTS as written agreements under the
Federal Deposit Insurance Act. Therefore, failure to comply with the
requirements of the Orders could subject the Savings Banks and their directors
and officers to further enforcement actions, including termination of FDIC
insurance or civil money penalties. There can be no assurances that the OTS
will approve the required submissions by the Savings Banks without
modifications. Additionally there can be no assurances that the OTS will not
impose further restrictions on the Savings Banks.
AGGRESSIVE EXPANSION STRATEGY; IMPACT OF OTS GROWTH RESTRICTIONS
Significant Growth in Recent Periods. The Company, primarily through Girard,
has had rapid growth during 1995 and the first nine months of 1996. The
Savings Banks' deposits increased from $196.3 million at December 31, 1994 to
$487.5 million at September 30, 1996. More than 73% of Girard's total loan
portfolio was acquired in the five quarters ended September 30, 1996.
Impact of OTS Growth Restrictions. Since June 30, 1995, First Bank has had
limited ability to increase deposits due to the provisions of an OTS
Supervisory Agreement which prohibited First Bank from increasing assets above
specified levels. Accordingly, the Company's asset growth has principally been
financed through the raising of deposits at Girard. However, due to the
issuance of the Orders, the Company will not be able to utilize the Savings
Banks as vehicles for growth until and unless the Orders are lifted or
modified. The Orders prohibit First Bank and Girard from increasing their
total assets, as measured at the end of each calendar quarter, in excess of
$145 million and $408 million, respectively, plus total net interest credited
on deposit liabilities.
No Assurances of Expansion. A substantial amount of the net proceeds from
the Common Stock Offering and the Notes Offering will be invested by the
Company to support future expansion and growth of its lending activities and
loan acquisition and servicing activities. There can be no assurance that the
Company will be able to increase these activities in a manner which is
consistent with management's business strategy and objectives or otherwise
successfully expand its operations.
Impact of Growth on Asset Quality. Part of the Company's business strategy
is to aggressively pursue the acquisition of Loan Portfolios, a substantial
portion of which are expected to be Loan Portfolios purchased at a discount.
Additionally, the Company may decide to purchase loans with respect to which
the Company does not have any prior loan acquisition experience. A substantial
increase in the Company's total loan portfolio or the purchase of new
categories of loans may increase the risk of loss on acquired loans and could
have an adverse affect on the Company's results of operations.
12
<PAGE>
RISK OF ADDITIONAL PROVISIONS FOR ESTIMATED LOSSES ON LOANS
Inherited Loans. In connection with the Company's acquisition of First Bank
in 1993 and Girard in 1994 the Company acquired a substantial volume of
impaired loans which required the Savings Banks to establish allowances for
loan losses. For the nine months ended September 30, 1996 and for each of the
years ended December 31, 1995, 1994, and 1993 First Bank was required to
increase its allowances for loan losses with respect to the Inherited Loans by
$2.2 million, $2.6 million, $1.1 million and $1.1 million, respectively. For
the nine months ended September 30, 1996 and for each of the years ended
December 31, 1995 and 1994, Girard was required to increase its allowances for
loan losses with respect to the Inherited Loans by $2.6 million, $0.9 million,
$1.1 million, respectively.
Sub-Prime Auto Loan Portfolio. In the fourth quarter of 1995 and the first
quarter of 1996, the Savings Banks acquired approximately $24.5 million of
Sub-Prime Auto Loans. Under OTS regulations, the Savings Banks have been
required to write off as a loss all auto loans in excess of 120 days
delinquent, notwithstanding that the Savings Banks retain rights in the cars
as collateral. The aggregate portfolio of Sub-Prime Auto Loans purchased is
approximately 3,000 loans, approximately 50.7% of which have become greater
than 30 days delinquent. The Savings Banks established reserves aggregating
$8.6 million during the nine months ended September 30, 1996, including a 10%
reserve on such loans which are current. As a result of the repossession of
the collateral securing the loans, the Savings Banks now hold approximately
317 cars as assets, which they plan to sell as soon as practicable. The cars
are not carried as assets on the Company's balance sheet since the loans were
written off in full.
Future Provisions; OTS Review. Although the Company believes its allowances
for loan losses are now adequate, no assurance can be given that future events
will not require significant additional provisions for loan losses, for the
Inherited Loans, Sub-Prime Auto Loans or otherwise at the Savings Banks.
Future additions to these allowances may be required by the OTS, which
periodically reviews the Savings Banks' allowances for losses and the carrying
value of assets. Increases in the Company's or the Savings Banks' provisions
for losses on loans would adversely affect the Company's results of operations
and could result in losses in future periods. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
MAINTENANCE OF CAPITAL AT SAVINGS BANKS
The Orders require both Savings Banks to maintain "well-capitalized" status
as measured at the end of each calendar quarter commencing December 31, 1996.
The Principals have injected approximately $30 million into WAC since the
acquisitions of the Savings Banks to fund the substantial asset growth and to
maintain required capital levels given reserves taken on the Inherited Loans
and the Sub-Prime Auto Loans.
Failure to comply with the Orders could have significant adverse
consequences to the Savings Banks. To the extent that either or both of the
Savings Banks incur future losses, including losses as a result of required
additional loan loss provisions, the Company may be required to inject
additional capital into the Savings Banks to maintain compliance with the
Orders, whether or not such capital can more effectively be utilized for other
operations of the Company. Such additional capital contributions may have the
effect of reducing or eliminating the Company's overall net income or
requiring the Company to obtain additional debt or equity capital.
OTS regulations permit the OTS to impose higher capital requirements on a
savings bank if it determines that the capital level is or may become
inadequate in view of such bank's circumstances. In making such determination,
the OTS can take into account a number of factors, including the savings
bank's loan portfolio quality, recent operating losses or anticipated losses,
the condition of its holding company and whether the savings bank is receiving
special supervisory attention, among other matters. Should the OTS impose an
individual minimum capital requirement on either of the Savings Banks, the
Company would be required to inject additional capital into such Savings Bank,
whether or not such usage of capital is optimal for the Company.
13
<PAGE>
EXTENSIVE USE OF FINANCIAL LEVERAGE
The Company's acquisitions of Loan Portfolios through WFC are expected to be
highly leveraged with full recourse to the Company. Performing Loan Portfolios
acquired by WCC were generally financed approximately 95% with borrowed funds
and non-performing Loan Portfolios generally were financed approximately 90%
with borrowed funds. While the highly leveraged nature of the Company's Loan
Portfolios can offer the opportunity for increased rates of return on equity,
it involves a greater degree of risk and relatively smaller declines in the
value of a Loan Portfolio can reduce or eliminate the Company's capital
invested in such Loan Portfolio. In addition, such declines can result in
margin calls (i.e., demands by the Company's lenders for additional cash or
assets as security for their lending) which can have an adverse impact on the
Company's liquidity and capital resources. The high degree of leverage on the
Company's Loan Portfolios also may make the Company more vulnerable to a
downturn in business, real estate values or the economy generally. An increase
in market interest rates or a decline in the value of the collateral may have
an adverse effect on the ability of the Company to satisfy its loan
obligations and could therefore have a material adverse effect on the
Company's results of operations. The Company's aggressive expansion strategy
may result in the need for additional debt and/or equity financing in the
future. Any additional debt financing could increase the Company's leverage
over current levels.
DISCOUNTED LOAN ACQUISITION ACTIVITIES
Since 1993, WCC has aggressively sought to increase its discounted loan
portfolio. As of September 30, 1996, WCC's discounted loan portfolio included
$490.8 million gross unpaid principal balances of Discounted Loans. The
Company currently expects to continue to aggressively acquire non-performing
loan portfolios. Although management of the Company has been actively involved
in the acquisition of loans since 1991, the acquisition of non-performing
("discounted loans") and under-performing loans involves uncertainties and
risks, including without limitation the risk that the discount on the loans
acquired may not be sufficient to profitably resolve the loans and the risk
concerning the ability to continue to acquire the desired amount and type of
discounted loans. Any Discounted Loans become real estate owned when the
Company forecloses on the collateral properties. The value of real estate
owned properties can be significantly affected by the economies and markets
for real estate in which they are located and require the establishment of
provisions for losses to ensure that they are carried at the lower of cost or
fair value, less estimated costs to dispose of the properties. In addition,
there can be no assurance that in the future the Company's real estate owned
will not have environmental problems which could materially adversely affect
the Company's financial condition or operations. See "Business--Asset
Quality--Real Estate Owned."
DEPENDENCE ON WILSHIRE CREDIT CORPORATION
Following the closing of the Common Stock Offering and the Notes Offering,
the Company will not have the necessary licenses to conduct loan origination
and loan servicing activities directly. Until necessary licenses are obtained,
the Company will rely upon WCC to conduct loan origination and loan servicing
activities for the Company pursuant to certain agreements with WCC. See
"Certain Relationships and Related Transactions."
DEPENDENCE ON KEY PERSONNEL; MANAGEMENT GROWTH
The Company's growth and development to date have been largely dependent
upon the services of Andrew A. Wiederhorn, Chief Executive Officer of the
Company and Lawrence A. Mendelsohn, President of the Company. Although the
Company has been able to attract and retain other qualified management
personnel, the loss of either Andrew Wiederhorn's or Lawrence Mendelsohn's
services for any reason could have a material adverse effect on the Company.
The Company has entered into employment agreements with each of Messrs.
Wiederhorn and Mendelsohn, which contain non-competition agreements. See
"Management-- Employment Agreements." The Company also maintains "key man"
life insurance on the lives of Messrs. Wiederhorn and Mendelsohn.
The Company has undergone a period of significant growth, and further
expansion may significantly strain the Company's management, financial and
other resources. There is no assurance that the Company can manage its growth
effectively or that the Company will be able to attract and retain the
necessary personnel to meet its
14
<PAGE>
business objectives. If the Company is unable to manage its growth
effectively, the Company's business, operating results and financial condition
could be materially and adversely affected.
RISKS RELATED TO FUNDING SOURCES
General. The Company will fund the loans that it originates or purchases
through borrowings under warehouse and repurchase financing facilities with
certain national investment banking firms, brokered and wholesale deposits,
secured term loans and internally generated funds. To the extent that the
Company is not successful in maintaining or replacing its existing financing
sources, it would have to curtail its loan acquisition activities or sell
loans, which may have an adverse effect on the Company's business, results of
operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Risks Related to Reliance on Wholesale and Brokered Deposits. Though the
Company as a whole has other sources of funding, the Savings Banks currently
use brokered and wholesale deposits as a significant source of funds. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Funding Sources."
The Savings Banks' funding strategy has been to offer deposit rates above
those customarily offered by banks and savings and loans in its market.
Because the Savings Banks compete for deposits primarily on the basis of
rates, the Savings Banks could experience difficulties in attracting deposits
to fund their operations if they could not continue to offer deposit rates at
levels above those of other banks and savings institutions. In addition, such
funding sources, when compared to retail deposits attracted through a branch
network, are generally more sensitive to changes in interest rates and
volatility in the capital markets and are more likely to be compared by the
investor to competing investments.
NO PRIOR EXPERIENCE WITH INTERNATIONAL OPERATIONS; START-UP PERIOD
The Company is expanding its activities internationally. Neither the Company
nor the Private Companies has previously conducted operations outside the
United States. Risks inherent in the Company's international business
activities generally include unexpected changes in regulatory requirements,
heightened risks of political and economic instability, difficulties in
managing international operations, potentially adverse tax consequences,
enhanced accounting and control expenses and the burden of complying with a
wide variety of foreign laws. There can be no assurance that one or more of
these factors will not have a materially adverse effect on the Company's
European operations. Since the Company's financial statements are stated in
U.S. Dollars, and since not all the Company's expenses are incurred in U.S.
Dollars, the Company's operations may be affected by fluctuations in currency
exchange rates.
The Company's international expansion will require significant capital which
will initially result in losses for such operations. As a result, the Company
does not expect its European operations to make a significant contribution to
revenues or income in the near term.
HIGH-RISK NON-TRADITIONAL BANKCARD PROCESSING ACTIVITIES
There is a higher risk of consumer charge-backs associated with non-
traditional mail order, telephone order and audiotext bankcard processing
activities because the consumer is not physically present at the time of the
transaction. Management attempts to minimize this risk through due diligence
and merchant reserves.
RISKS RELATED TO CHANGING ECONOMIC CONDITIONS AND CHANGES IN INTEREST RATES
Effect of Changing Economic Conditions. The success of the Company is
dependent to a certain extent upon the general economic conditions in the
geographic areas in which it conducts substantial business activities. Adverse
changes in national economic conditions or in the economic conditions of
regions in which the Company conducts substantial business or their real
estate markets likely would impair the ability of the Company to collect loans
and would otherwise have an adverse effect on its business, including the
demand for new loans, the ability of customers to repay loans and the value of
its collateral. Moreover, earthquakes and other natural disasters could have
similar effects.
15
<PAGE>
Effects of Changes in Interest Rates. The Company's operating results depend
to a large extent on its net interest income, which is the difference between
the interest income earned on interest-earning assets plus accreted purchase
discount and the interest expense incurred in connection with its interest-
bearing liabilities. Changes in the general level of interest rates can affect
the Company's net interest income by affecting the spread between the
Company's interest-earning assets and interest-bearing liabilities, as well
as, among other things, the ability of the Company to originate and purchase
loans; the value of the Company's interest-earning assets and its ability to
realize gains from the sale of such assets; the average life of the Company's
interest-earning assets; and the Savings Banks' ability to obtain deposits in
competition with other available investment alternatives. Interest rates are
highly sensitive to many factors, including governmental monetary policies,
domestic and international economic and political conditions and other factors
beyond the control of the Company. The Company actively monitors its assets
and liabilities and employs a hedging strategy which seeks to limit the
effects of changes in interest rates on its operations. An effective hedging
strategy is complex and no hedging strategy can completely insulate the
Company from interest rate risks. The nature and timing of and the counter-
party to a hedging transaction may impact the effectiveness of hedging
strategies. Poorly designed strategies or improperly executed transactions may
increase rather than mitigate the risk. In addition, hedging involves
transaction and other costs, and such costs could increase as the period
covered by the hedging protection increases or in periods of rising or
fluctuating interest rates. Therefore, the Company may be prevented from
effectively hedging its interest rate risks, which could have a material
adverse effect on the Company's results of operations.
CONCENTRATION IN THE STATE OF CALIFORNIA
At September 30, 1996, approximately 54.9% of the Company's total loan
portfolio was in the state of California, which from time to time, including
recently, has experienced adverse economic conditions, including a decline in
real estate values. These factors have adversely affected borrowers' ability
to repay loans. Additional declines in the local economy, rising interest
rates and regulatory requirements could have a material adverse effect on the
Company's result of operations. The concentration of the Company's total loan
portfolio is expected to change in the near future. See "Recent Developments."
REGULATION
General. The Company, as a savings and loan holding company, and the Savings
Banks, as federally-chartered savings associations, are subject to extensive
regulation and supervision, which is intended primarily for the protection of
depositors. See "Regulation." The OTS is the primary federal banking regulator
of the Company and the Savings Banks. The Savings Banks are also subject to
supervision by the FDIC, and the FDIC has "back up" authority to take
enforcement action against the Savings Banks if the OTS fails to take such
action after a recommendation by the FDIC.
Activities Limitations. The Company is currently classified as a multiple
savings and loan holding company under applicable law as a result of its
ownership of the two Savings Banks, First Bank and Girard. A savings and loan
holding company which has only one insured financial institution subsidiary
(known as a "unitary" savings and loan holding company) and which subsidiary
qualifies as a qualified thrift lender (as defined herein) generally has the
broadest authority to engage in various types of business activities with
little to no restrictions on its activities, except that historically savings
and loan holding companies have not been permitted to acquire or be acquired
by an entity engaged in securities underwriting or market making. Multiple
savings and loan holding companies are subject to activities limitations. In
general, a multiple savings and loan holding company (or subsidiary thereof
that is not an insured institution) may not commence or continue for more than
a limited period of time after becoming a multiple savings and loan holding
company (or a subsidiary thereof), any business activity other than (i)
furnishing or performing management services for a subsidiary insured
institution; (ii) conducting an insurance agency or an escrow business; (iii)
holding, managing or liquidating assets owned by or acquired from a subsidiary
insured institution; (iv) holding or managing properties used or occupied by a
subsidiary insured institution; (v) acting as trustee under deeds of trust;
(vi) those activities previously directly authorized by the OTS by regulation
as of March 5, 1987 to be engaged in by multiple
16
<PAGE>
savings and loan holding companies; or (vii) subject to prior approval of the
OTS, those activities authorized by the Federal Reserve Board (the "FRB") as
permissible investment for bank holding companies. The Company is currently
unable to merge First Bank and Girard, thereby becoming a unitary savings and
loan holding company subject to fewer activities restrictions, until certain
regulatory concerns regarding the Savings Banks are resolved. There can be no
assurance that the Company will be able to merge the Savings Banks.
LIMITATIONS ON STOCK OWNERSHIP
With certain limited exceptions, federal regulations prohibit a person or
company or a group of persons deemed to be acting in concert from, directly or
indirectly, acquiring more than 10% of any class of voting stock of the
Company or obtaining the ability to control in any manner the election of the
directors or otherwise direct the management or policies of a savings and loan
holding company or a savings institution, without prior notice or application
to and approval of the OTS.
COMPETITION
The businesses in which the Company is engaged generally are highly
competitive. Many of the Company's competitors are significantly larger than
the Company and have access to greater capital and other resources. The
acquisition of loans is particularly capital-intensive and is typically based
on competitive bidding.
CONTROL OF CURRENT STOCKHOLDERS
Upon completion of the Common Stock Offering and assuming the Underwriters'
over-allotment option is not exercised, certain executive officers and
directors of the Company will have approximately 78% of the combined voting
power of all outstanding shares of Common Stock of the Company. As a result,
these stockholders, acting together, would be able to effectively control
virtually all matters requiring approval by the stockholders of the Company.
This voting control may have the effect of discouraging offers to acquire the
Company because the consummation of any such acquisition would require the
consent of Andrew A. Wiederhorn and Lawrence A. Mendelsohn.
ABSENCE OF A PRIOR MARKET FOR THE COMMON STOCK
Prior to the Common Stock Offering, there has been no public market for the
Common Stock. The Company has applied for quotation of the Common Stock on
Nasdaq under the symbol "WFSG." Any approval of such application will be
subject to the Company's compliance with certain requirements of the NASD,
including, among other requirements, a requirement that there be at least two
market makers for the Common Stock and at least 400 stockholders of record.
Although the Company will use its best efforts to encourage and assist market
makers in establishing and maintaining a market for the Common Stock in the
over-the-counter market, there can be no assurance that there will be one or
more other market makers for the Common Stock, or that the Company will be
able to comply with the number of stockholders and other requirements of the
NASD for quotation of the Common Stock on the Nasdaq National Market.
Moreover, even if such requirements are met, there can be no assurance that an
established and liquid trading market will develop or that, if developed, it
will be sustained, especially given the small size of the Common Stock
Offering.
The initial public offering price of the Common Stock offered hereby will be
determined by negotiations among the Company and the Representative and may
not be indicative of the prices at which the Common Stock will trade after the
Common Stock Offering. See "Underwriting." Moreover, there may be significant
volatility in the market price for the Common Stock after the Common Stock
Offering. Quarterly operating results of the Company, changes in conditions in
the economy or the financial services industry or other developments affecting
the Company could cause the market price of the Common Stock to fluctuate
substantially.
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of the
Common Stock or the availability of the Common Stock for future sales, will
have on the market price of the Common Stock prevailing from time
17
<PAGE>
to time. Upon completion of the Common Stock Offering, 7,000,000 shares of
Common Stock will be issued and outstanding and 1,081,225 shares of Common
Stock (assuming the Underwriter's overallotment option is not exercised) will
be issuable upon the exercise of stock options that the Company has granted or
agreed to grant. Of such oustanding shares, 5,500,000 shares of Common Stock
will be "restricted" shares as defined in Rule 144 ("Rule 144") promulgated
under the Securities Act. Accordingly, such shares of Common Stock may not be
sold unless they are registered under the Securities Act or are sold pursuant
to an exemption from registration, including an exemption contained in Rule
144. Under Rule 144, if at least three years have elapsed since the
acquisition of restricted shares from the Company or an affiliate of the
Company (whichever is later), a holder of such restricted shares that has not
been an affiliate of the Company for the three months preceding the sale will
in general be entitled to sell such shares in the public market, without
restriction under the Securities Act. The shares of Common Stock held by
affiliates of the Company as well as any restricted shares as to which the
three-year period has not yet elapsed, will be eligible for sale under Rule
144 if the minimum two-year holding period thereunder for such shares has
elapsed, subject to volume and other restrictions. The Commission is
considering shortening these periods.
All officers and directors of the Company holding an aggregate of 5,447,927
shares have agreed not to offer, sell, or otherwise dispose of any shares of
Common Stock without the prior written consent of the Representative for a
period of 180 days after the date of this Prospectus. Sales of substantial
amounts of the Common Stock, or the perception that such sales could occur,
may affect the market price of the Common Stock prevailing from time to time.
See "Underwriting" and "Shares Eligible for Future Sale." As of the date
hereof, the Company had granted or agreed to grant options to purchase an
aggregate of approximately 1,081,225 shares of Common Stock, none of which are
currently exercisable. Such outstanding options will become exercisable 60
days after the closing of the Common Stock Offering and the Notes Offering.
Shortly after the date of this Prospectus, the Company intends to file a
registration statement on Form S-8 under the Securities Act registering
approximately 1,750,000 shares of Common Stock issuable upon the exercise of
options granted under the Company's Stock Incentive Plan pursuant to which the
Company has granted or agreed to grant options to purchase an aggregate of
1,050,000 shares of Common Stock, assuming the Underwriters' overallotment
option is not exercised. Upon effectiveness of the registration statement,
shares issued to nonaffiliates upon the exercise of the options generally will
be freely tradeable without restriction or further registration under the
Securities Act.
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate
dilution in net tangible book value per share of Common Stock from the initial
public offering price. The initial public offering price is substantially
greater than the effective price at which the Company's existing stockholders
purchased their shares and the effective exercise price of the Company's
outstanding stock options. See "Dilution."
18
<PAGE>
THE COMPANY
GENERAL
WFSG was recently formed as a financial services holding company for a group
of companies previously held as a part of, and operated by, the Private
Companies. The Company will engage in a wide variety of financial activities,
including the acquisition, origination, ownership and securitization of Loan
Portfolios, banking and non-traditional bankcard processing. The Company, as a
savings and loan holding company, is subject to regulation by the OTS.
Prior to the Reorganization, the Private Companies operated principally
through two separate companies: (i) WCC, which conducted the servicing and a
portion of the loan acquisition activities; and (ii) WAC, the holding company
for the Savings Banks. The Savings Banks are subject to regulation by the OTS,
as their chartering authority, and by the FDIC as a result of their membership
in the SAIF, which insures the Savings Banks' deposits up to the maximum
extent permitted by law. The Savings Banks are also members of the Federal
Home Loan Bank ("FHLB") of San Francisco, one of 12 regional banks which
comprise the FHLB system.
The Private Companies began in 1987 as an equipment leasing company
primarily involved in leasing cellular phones. WCC was formed in May 1989 to
manage the Private Companies' activities in the loan and lease servicing
business and to service a third party's heavy industrial equipment leasing
portfolio which consisted of leases of containers, railroad cars and other
similar equipment. During the early 1990s, the Private Companies sought to
take advantage of the general decline in asset quality of financial
institutions in many areas of the country and the large number of failed
savings institutions during this period by acquiring Loan Portfolios from the
RTC, the FDIC and private sellers such as banks, thrifts, finance companies
and leasing companies and selling participations in such Loan Portfolios to
institutional investors while retaining the servicing rights and a
participation in the overall return on such Loan Portfolios. The Principals
purchased First Bank and Girard through WAC in October 1993 and November 1994,
respectively, using funds loaned to them by WCC. The Savings Banks were
acquired to provide a deposit-based funding source for the loan purchase
activities of the Private Companies. Both of the Savings Banks were acquired
at substantial discounts to their respective book values, reflecting the poor
quality of their assets and, in the case of First Bank, an expected imminent
regulatory takeover. More recently, the Company decided to expand its loan
acquisitions and servicing activities to encompass the United Kingdom and
France with a view towards future expansion in Western Europe. See "Business--
European Operations."
THE REORGANIZATION
Following the Reorganization, the Company will be the holding company for
WAC and the Savings Banks and its other subsidiaries will include WFC, a
company formed to continue the loan acquisition and loan origination
businesses of the Private Companies following the Common Stock Offering and
the Notes Offering, and WSC, a company formed to continue the loan servicing
business of the Private Companies following the receipt of necessary licenses.
In the Reorganization, WCC will not become a subsidiary of the Company or
transfer any assets or liabilities to the Company. WCC is not being included
in the new public entity due to certain tax considerations and to allow WCC to
retain sufficient assets and servicing rights to retire the Shareholder Loans.
WCC will cease to acquire new product or servicing for its own account, but
will continue to service and liquidate its existing portfolio. New loan
acquisitions and originations will be conducted by WFC. For a period of two to
three years after the closing of the Common Stock Offering and the Notes
Offering, while WSC is in the process of obtaining the relevant licensing
approvals for its servicing activities, WCC will continue to service loans for
the Company at market rates. Following such period, WSC will commence
servicing loans for the Company and WCC. See "Certain Relationships and
Related Transactions." In addition, WCC and the Principals have agreed not to
compete with the Company with respect to the acquisition of Loan Portfolios.
The Company's executive offices are located at 1776 SW Madison St.,
Portland, Oregon 97205, and the telephone number of its executive offices is
(503) 223-5600 and its facsimile number is (503) 223-8799.
19
<PAGE>
RECENT DEVELOPMENTS
LOAN ACQUISITIONS
During October 1996, the Private Companies have acquired or committed to
acquire four Loan Portfolios aggregating $311.0 million principal amount, all
of which were or will be acquired by the Savings Banks.
In October 1996, Girard committed to purchase approximately $240.8 million
unpaid principal amount of discounted residential mortgage loans offered by
Citicorp North America Inc. and Citibank N.A. in a sealed bid auction (the
"Citicorp Portfolio"). Such transaction settled on November 1, 1996 (the
"Settlement Date"). Girard made a concurrent sale of approximately $38.8
million unpaid principal amount of the Citicorp Portfolio to an unaffiliated
third party on the Settlement Date resulting in a gain. The remainder of the
purchase price to Citicorp was financed by Girard under a master repurchase
agreement with Bear Stearns Mortgage Capital Corporation ("BSMCC") pursuant to
which BSMCC has purchased certain performing and non-performing mortgage loans
and Girard has simultaneously agreed to repurchase such loans on a specified
date. The Company currently expects that Girard will repay such financing by
selling certain performing residential mortgage loans to WFC, which in turn is
expected to securitize such loans.
In October 1996, Girard acquired approximately $38.2 million in unpaid
principal amount of discounted residential mortgage loans from a successful
bidder in an auction conducted by HUD. Girard also agreed to acquire in
December 1996 approximately $31.9 million in unpaid principal amount of
discounted residential mortgage loans to be sold by a successful bidder in an
auction conducted by HUD.
As a result, on completion of such series of transactions, Girard will have
purchased approximately $272 million of unpaid principal balance discounted
residential mortgage loans and sold an equivalent market value of performing
residential mortgage loans. Although the Orders prohibit Girard from
increasing its total assets above $408 million, the amount of total assets is
only measured on a quarterly basis. Therefore, Girard may increase its assets
so long as at the end of a quarter the assets are not in excess of the amount
specified by the OTS.
WFC has also agreed to acquire approximately $106 million unpaid principal
amount of home equity loans, second lien mortgages, consumer loans and
Subordinate Securities (the "Institutional Portfolio") from a major
institutional investor (the "Institutional Investor") at a discount. The
settlement of this transaction is expected to occur in the first quarter of
1997. WCC receives a small percentage of the initial cash flow and a portion
of the profits as a servicing fee, which servicing fee will be assigned by WCC
to WSC prior to the sale of the Institutional Portfolio to WFC.
ACQUISITION OF SERVICING RIGHTS
In October 1996, Girard committed to acquire the servicing rights to a
portfolio of approximately $292 million unpaid principal amount of residential
mortgage loans offered by Merrill Lynch Credit Corporation through a
competitive bid (the "Merrill Portfolio") and the servicing transfer is
expected to be completed in the fourth quarter of 1996. Girard is expected to
retain WCC as a subservicer of the Merrill Portfolio at below-market rates.
EUROPEAN EXPANSION
The Company has agreed in principal with a major U.S. investment bank (the
"J.V. Partner") to form a joint venture to service residential mortgage loans
in the United Kingdom. Under the preliminary terms of the proposed joint
venture, the Company would acquire a 50% interest in a United Kingdom
servicing company (the "U.K. Servicer") for a nominal amount. The Company and
the J.V. Partner would each appoint three directors, and the Company would
manage the day-to-day operations of the U.K. Servicer. Each of the Company and
the J.V. Partner are expected to agree to use the U.K. Servicer to service any
U.K. residential mortgage loans acquired by such party or mortgage loans
included in securitizations placed by the J.V. Partner to the extent that
seller of such loans does not retain servicing. At September 30, 1996, the
U.K. Servicer serviced approximately (Pounds)500 million principal amount of
loans (or approximately 9,000 loans). The Company is currently negotiating the
definitive terms of the joint venture with the J.V. Partner and expects that
definitive documents will be executed in the fourth quarter of 1996 or the
first quarter of 1997. There can be no assurance, however, that this joint
venture will be completed, or as to the terms on which it may be completed.
20
<PAGE>
WILSHIRE CREDIT CORPORATION
WCC'S LOAN ACTIVITY
Since the Company has and will be engaged in the loan acquisition and
origination businesses similar to those conducted by WCC, this section
contains certain information with respect to loans serviced, acquired or
originated by WCC to assist investors in evaluating the Company's ability to
engage in these activities on an ongoing basis. These loans (including
servicing rights) are not owned by the Company and investors in the Common
Stock or the Notes will have no right or claim to such assets. The financial
statements of WCC are included as an appendix since the Company will carry on
certain similar business operations with some of the same management as WCC.
However, the Company does not believe that the historical results of
operations of WCC are representative of future results of operations of the
Company or WFC. In addition, there can be no assurance that the results of
operations of WCC will be indicative of future performance or that the Company
will be able to acquire, originate and service mortgage loans to the same
extent as WCC.
ACTIVITY IN WCC'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
1996 1995 1994 1993
------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
LOAN ACQUISITION AND ORIGINATION
DATA:
Loan purchases and originations:
Single-family residential.......... $ 143,581 $ 5,742 $ 57,832 $ 1,059
Multi-family residential........... -- 983 667 --
Commercial and other mortgage
loans............................. 3,915 2,671 39,002 1,964
Consumer and other................. 45 14,223 101,890 39,330
---------- -------- -------- --------
Total............................ 147,541 23,619 199,391 42,353
Discounted loan purchases:
Single-family residential.......... 92,444 36,653 26,342 95
Multi-family residential........... 1,158 4,773 1,392 191
Commercial and other mortgage
loans............................. 16,598 22,252 8,087 4,322
Consumer and other................. 1,030 50,345 5,669 284,663
---------- -------- -------- --------
Total............................ 111,230 114,023 41,490 289,271
---------- -------- -------- --------
Total loan acquisitions and
originations........................ $ 258,771 $137,642 $240,881 $331,624
========== ======== ======== ========
LOANS SOLD........................... $ 138,429 $133,500 $ 9,000 $ --
LOANS SERVICED-END OF PERIOD......... $1,418,507 $894,649 $889,585 $606,122
</TABLE>
21
<PAGE>
The following table sets forth the composition of WCC's total gross loan
portfolio at the end of the periods indicated.
COMPOSITION OF WCC'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------------------------
1996 1995 1994 1993
------------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan Portfolio:
Single-family residential...... $ 72,425 $ 60,951 $ 138,063 $ 197
Multi-family residential....... 1,838 2,196 721 --
Commercial and other mortgage
loans......................... 26,079 25,277 36,276 242
Consumer and other............. 30,841 51,848 96,980 50,563
--------- --------- --------- --------
Loan Portfolio............... 131,183 140,272 272,040 51,002
Discounted Loan Portfolio:
Single-family residential...... 112,972 79,636 19,939 68
Multi-family residential....... 6,265 8,835 699 135
Commercial and other mortgage
loans......................... 58,027 60,736 8,905 2,008
Consumer and other............. 313,496 261,880 324,358 453,693
--------- --------- --------- --------
Discounted Loan Portfolio.... 490,760 411,087 353,901 455,904
Accrued Interest................. 266,617 238,021 210,050 210,667
Unaccreted discount (1).......... (601,840) (615,341) (583,870) (658,946)
--------- --------- --------- --------
Total Loan Portfolio, net ....... $ 286,720 $ 174,039 $ 252,121 $ 58,627
========= ========= ========= ========
</TABLE>
- --------
(1) Includes unaccreted discount for principal and accrued interest.
WCC'S FINANCIAL INFORMATION
General. The following tables present Summary Combined Financial Information
for WCC and affiliates at the dates and for the periods indicated. The
historical income statement and balance sheet data at and for the nine months
ended September 30, 1996 and the years ended December 31, 1995, 1994 and 1993
have been derived from the audited combined financial statements of WCC and
affiliates included elsewhere in this Prospectus (the "WCC Audited Financial
Statements").
Operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for any other
interim period or the entire year ending December 31, 1996. The Summary
Consolidated Financial Information should be read in conjunction with, and is
qualified in its entirety by reference to, the WCC Financial Statements and
related notes as set forth elsewhere herein.
Management believes that WCC's historical financial information is not
directly relevant in evaluating the Company's current business or results of
operations because (i) the servicing revenues of WCC--its primary source of
revenues--are significantly different from the servicing revenues that the
Company may generate in the future, (ii) the public investors will acquire no
interest in the historical assets or liabilities of WCC and the earnings on
such assets are substantially different from that which might be expected for
the Company, and (iii) the Company is not expected to generate significant
servicing revenues for at least two years.
22
<PAGE>
Significant Differences in Servicing Revenues. The servicing revenues
expected to be derived by the Company in the future are expected to be a fixed
rate per performing loan on the principal amount of such loan or a specified
dollar amount per month and a fixed rate as a percentage of the principal
amount or cash flow for a non-performing loan, in each case consistent with
standard industry practice. Servicing revenues generated by WCC in the past
are very different from those expected to be generated by the Company since a
substantial percentage of loans owned and serviced by WCC were participated
out to third party investors pursuant to participation agreements. These
participation agreements provided that WCC would generally receive 5-10% of
cash flow from each asset until the investors had received their capital and
thereafter WCC was generally entitled to receive 15-35% of the cash flow.
Accordingly, WCC's servicing revenues included an element of profit
participation which is not expected to be present in a typical servicing
arrangement for the Company and WCC's servicing revenues would be expected to
be higher than the servicing revenues expected to be generated by the Company
in the future.
No Transfer of Historical Assets and Liabilities. As part of the
Reorganization, the public investors will acquire no interest in the
historical assets or liabilities of WCC, nor in any income to be derived from
those assets or expense associated with those liabilities. As mentioned above,
the most significant assets on the WCC balance sheet are the loans subject to
participation agreements, which agreements have a significant impact on WCC's
rights to such assets and the income stream generated by such assets. It is
currently anticipated that the Company will seek to acquire assets outright
and not engage in participation agreements (in order to obtain all of the
benefit (and risk) of such assets).
Timing of Servicing Revenues. Following the completion of the Common Stock
Offering and the Notes Offering, WCC would service at market rates any loans
acquired by the Company for at least two years following the offering and
possibly longer (up to three years). Accordingly, the Company would have a
servicing expense (the fee payable to WCC) during such period and WCC would
generate the profits associated with such servicing (the servicing fee less
the cost of servicing).
<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
WCC SELECTED FINANCIAL 1996 1995 1994 1993
INFORMATION ------------- -------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Servicing fees.................. $ 6,041 $ 9,739 $ 3,339 $1,356
Interest and dividend income.... 6,718 5,124 1,667 560
Other revenues.................. 1,542 668 657 4,509
Compensation and other general
and administrative expenses.... (9,278) (11,029) (5,964) (4,509)
Interest expense................ (9,116) (3,789) (894) (339)
Other........................... 72 (194) 133 --
-------- -------- -------- ------
Net income (loss)............... $ (4,021) $ 519 $ (1,062) $1,577
======== ======== ======== ======
BALANCE SHEET DATA:
Total assets.................... $353,168 $206,373 $288,004
Loan portfolio, net............. -- 121,420 125,942
Discounted Loan portfolio, net.. 4,824 19,352 17,188
Loans held for sale, at lower of
cost or market................. 281,896 33,267 108,991
Participation liabilities....... 143,424 150,298 205,331
Borrowings...................... 243,239 70,165 60,941
Stockholders' equity (deficit).. (50,963) (23,801) (11,099)
</TABLE>
23
<PAGE>
Servicing Fees and Income from Investments in Loans and Securities. WCC's
servicing fees decreased by $1.7 million, and income from investments in loans
and securities increased by $3.8 million, during the nine months ended
September 30, 1996 (annualized basis) compared to the year ended December 31,
1995. These changes are related to a shift between mid-1995 and mid-1996 to a
strategy of acquiring more loan portfolios for WCC's own account rather than
acquiring loans with participation funding. Participation arrangements entail
greater servicing income, whereas direct ownership in loans entails more
interest income.
Other Revenues. Other revenues are derived from various sources including
rental income from commercial properties and gains on sales of loans. Total
other revenues increased during the first nine months of 1996 compared to the
year ended December 31, 1995 due to the sale of loans which resulted in a gain
of approximately $0.9 million.
General and Administrative Expense. WCC's general and administrative expense
increased by approximately $1.3 million during the nine months ended September
30, 1996 (annualized basis) compared to the year ended December 31, 1995 as a
result of the increased cost in acquiring and servicing a greater number of
loan portfolios.
Interest Expense. WCC's interest expense increased by approximately $8.4
million during the nine months ended September 30, 1996 (annualized basis)
compared to the year ended December 31, 1995 as a result of increased
borrowings to acquire loan portfolios and to fund shareholder loans to
capitalize the Savings Banks.
Performing and Discounted Loans. WCC's loans increased by approximately
$112.7 million during the nine months ended September 30, 1996 as a result of
the Company's business strategy of aggressively acquiring loan portfolios of
discounted loans and performing mortgage loans.
Participations. Participations decreased by approximately $6.9 million
during the nine months ended September 30, 1996 primarily as a result of
securitization of portfolios or the resolution of outstanding loans and
decreased reliance on participation funding for acquiring loan portfolios.
Borrowings. Borrowings increased by approximately $173.1 million during the
nine months ended September 30, 1996 as a result of WCC securitizing certain
loans (accounted for as a financing), acquiring more loan portfolios for WCC's
own account rather than acquiring loans with participation funding, and
distributions to shareholders.
Stockholders' Equity. Stockholders' equity decreased by approximately $27.2
million during the nine months ended September 30, 1996 primarily as a result
of distributions to shareholders, primarily for the purpose of adding capital
to affiliated banks to fund growth and for other purposes.
24
<PAGE>
USE OF PROCEEDS
Net proceeds to be received by the Company from the Common Stock Offering
currently are estimated to be $ million after deducting the underwriting
discount and estimated offering expenses payable by the Company ($
million, if the Common Stock Underwriters' over-allotment option is exercised
in full). Net proceeds to be received by the Company from the Notes Offering
currently are estimated to be $ million after deducting the underwriting
discount and estimated offering expenses payable by the Company ($ million,
if the Notes Underwriters' over-allotment is exercised in full).
Net proceeds will be available for leveraged acquisitions of Loan Portfolios
and for general corporate purposes, including expansion into Western Europe.
Such net proceeds will give the Company increased flexibility in conducting
the businesses in which it is engaged, including the acquisition and
resolution of Discounted Loans and other loans.
DIVIDEND POLICY
The Company currently intends to retain its earnings to support its future
growth strategy and does not anticipate paying any dividends on the Common
Stock in the foreseeable future. As a holding company, the ability of the
Company to pay dividends is dependent upon the receipt of dividends or other
payments from its subsidiaries. There are various regulatory restrictions on
the ability of the Savings Banks to pay dividends or make other distributions
to the Company. See "Regulation--The Savings Banks--Restrictions on Capital
Distributions" and "--Affiliate Transactions." In addition, the Company is
subject to certain restrictions on distributions to stockholders under the
indenture relating to the Notes. Any determination to pay dividends in the
future will be at the discretion of the Company's Board of Directors and will
be dependent upon the Company's results of operations, financial condition,
contractual restrictions, and other factors deemed relevant at that time by
the Company's Board of Directors.
25
<PAGE>
DILUTION
The net book value of the Company's Common Stock as of September 30, 1996
was $34.6 million or approximately $6.28 per share. Net tangible book value
per share represents the amount of the Company's stockholders' equity, less
intangible assets, divided by shares of Common Stock outstanding.
Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of shares of Common Stock in the Common
Stock Offering and the pro forma net tangible book value per share of Common
Stock immediately after the completion of the Common Stock Offering. Shares
used in the computation of per share amounts below include 5,500,000 shares
outstanding as of September 30, 1996 and 1,500,000 shares of Common Stock
issued in the Common Stock Offering. After giving effect to the sale by the
Company of 1,500,000 shares of Common Stock in the Common Stock Offering and
$60 million principal amount of Notes in the Notes Offering and the
application of the estimated net proceeds therefrom, the pro forma net
tangible book value of the Company as of September 30, 1996 would have been
$50.7 million or $7.24 per share. This represents an immediate increase in net
tangible book value of $.96 per share to existing stockholders and an
immediate dilution in net tangible book value of $4.76 per share to purchasers
of Common Stock in the Common Stock Offering, as illustrated in the following
table:
<TABLE>
<S> <C>
Assumed Common Stock Offering price per share(1)....................... $12.00
Pro-forma net tangible book value per share as of September 30,
1996(2)............................................................. $ 6.28
Increase per share attributable to new investors..................... $ .96
Pro forma net tangible book value per share after the Common Stock Of-
fering and Notes Offering(3).......................................... $ 7.24
Dilution per share to new investors.................................... $ 4.76
</TABLE>
- --------
(1) Before deducting estimated underwriting discounts and estimated expenses
of the Common Stock Offering payable by the Company.
(2) Outstanding shares as of September 30, 1996 are based on Common Stock
issued, at the date when WFSG was formed, to existing shareholders of WAC
and the Savings Banks in exchange for their Common Stock of those
entities. WFSG was actually formed subsequent to September 30, 1996.
(3) Excludes 1,050,000 shares of Common Stock issuable upon the exercise of
options to be granted at the Closing of the Common Stock Offering and
Notes Offering pursuant to the Incentive Stock Plan and 31,225 shares of
Common Stock issuable upon the exercise of options. See "Management--
Incentive Stock Plan--Options to be Granted at Closing."
The following table summarizes on a pro forma as adjusted basis as of
September 30, 1996, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share of the Common Stock paid by the existing stockholders and the new
investors in the Common Stock Offering.
<TABLE>
<CAPTION>
SHARES OWNED
AFTER THE PUBLIC
OFFERING TOTAL CONSIDERATION AVERAGE
----------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1).... 5,500,000 78.57% 34,554 65.75% $ 6.28
New Investors............... 1,500,000 21.43% 18,000 34.25% $12.00
--------- ----- ---------- --------- ------
Total..................... 7,000,000 100% 52,554 100%
</TABLE>
- --------
(1) Excludes shares of Common Stock issuable upon the exercise of options. See
"Management--Incentive Stock Plan--Options to be Granted at Closing."
26
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996 and as adjusted as of that date to give effect to (i) the
Common Stock Offering and the Notes Offering and the application of the net
proceeds therefrom as described under "Use of Proceeds"; (ii) no exercise of
any over-allotment option; and (iii) the Reorganization pursuant to which
certain of companies in the Private Companies became subsidiaries of the
Company. This information below should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto which are included
elsewhere herein. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Use of Proceeds" and "Management--
Executive Compensation" and "--Incentive Stock Plan."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED
---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Repurchase agreements.............................. $ -- $ --
Long-term debt:
% Notes due 2003.................................. -- 60,000
---------- -----------
Total.......................................... -- 60,000
---------- -----------
Stockholders' equity:
Preferred Stock, par value $0.01 per share;
10,000,000 shares authorized; no shares outstand-
ing............................................... -- --
Common Stock, par value $0.01 per share; 50,000,000
shares authorized; 5,500,000 shares issued and
outstanding (actual); 7,000,000 shares issued and
outstanding (as adjusted) for the Common Stock Of-
fering(1)......................................... 35,550 50,690
Retained earnings (accumulated deficit)............ (827) (827)
Unrealized gain on available for sale securities... (169) (169)
---------- -----------
Total stockholders' equity..................... 34,554 50,694
---------- -----------
Total capitalization........................... $ 34,554 $ 110,694
========== ===========
Savings Banks' Regulatory Capital:
Regulatory capital ratios of First Bank
Tangible capital................................. 6.0% 6.0%
Core capital..................................... 5.9% 5.9%
Total capital to risk-weighted assets............ 10.0% 10.0%
Regulatory capital ratios of Girard
Tangible capital................................. 6.8% 6.8%
Core capital..................................... 7.0% 7.0%
Total capital to risk-weighted assets............ 11.0% 11.0%
</TABLE>
- --------
(1) Excludes shares of Common Stock issuable upon the exercise of options. See
"Management--Incentive Stock Plan--Options to be Granted at Closing."
27
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables present Selected Financial Information for the Company
at the dates and for the periods indicated. The historical income statement
and balance sheet data at and for the nine months ended September 30, 1996 and
the years ended December 31, 1995 and 1994 have been derived from the Audited
Consolidated Financial Statements included elsewhere in this Prospectus.
On October 7, 1993, WAC acquired 94.9% of the common stock of First Bank in
a purchase accounting transaction. On November 9, 1994, a newly-formed entity
with ownership and management common to WAC, Wilshire Acquisitions Corporation
II ("WACII") acquired 94.9% of the common stock of Girard in a purchase
accounting transaction.
Because WAC and WACII were under common control, the accompanying financial
statements are presented on a combined basis as of December 31, 1994 and for
the period from November 9 through December 31, 1994. On December 27, 1995,
WAC and WACII were merged and WAC was named as the surviving entity. Financial
information as of September 30, 1996 and December 31, 1995 and for the nine
months and year then ended, respectively, is presented on a consolidated basis
and includes the accounts of WAC, First Bank, and Girard. With respect to all
consolidated and combined financial information, intercompany transactions and
balances have been eliminated. For convenience, all the accompanying financial
statements are referred to as "consolidated".
The historical income statement and data presented for the nine months ended
September 30, 1995 has been derived from unaudited consolidated financial
statements (the "Unaudited Financial Statements" and, together with the
Audited Financial Statements, the "Consolidated Financial Statements") and
include all adjustments, consisting only of normal recurring accruals, which
the Company considers necessary for a fair presentations to the Company's
results of operations for these periods. Operating results for the nine months
ended September 30, 1996 are not necessarily indicative of the results that
may be expected for any other interim period or the entire year ending
December 31, 1996. The Summary Consolidated Financial Information should be
read in conjunction with, and is qualified in its entirety by reference to,
the Consolidated Financial Statements and related notes as set forth elsewhere
herein.
28
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ------------------
1996 1995 1995 1994
-------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest Income:
Loans..................... $ 31,686 $ 15,224 $ 21,821 $ 7,923
Mortgage-backed
securities............... 1,280 1,099 1,359 1,361
Investments and federal
funds sold............... 1,171 729 1,201 285
-------- -------- -------- --------
Total interest income..... 34,137 17,052 24,381 9,569
-------- -------- -------- --------
Interest expense:
Deposits.................. 17,448 9,979 13,944 5,017
Borrowings................ 2,144 432 537 440
-------- -------- -------- --------
Total interest expense.... 19,592 10,411 14,481 5,457
-------- -------- -------- --------
Net interest income........ 14,545 6,641 9,900 4,112
Provision for estimated
losses on loans........... 15,751 3,221 4,266 2,173
-------- -------- -------- --------
Net interest (loss) income
after provision for
estimated losses on
loans..................... (1,206) 3,420 5,634 1,939
-------- -------- -------- --------
Other Income:
Bankcard income(1)........ 5,078 3,202 4,694 635
Bankcard processing
expense.................. (3,865) (2,408) (3,462) (274)
Gain on sale of loans..... 1,983 981 642 --
Loan fees and charges..... 1,217 522 610 43
Trading account--
unrealized gain.......... 1,601 -- -- --
Gain on sale of mortgage-
backed securities
available for sale....... -- -- 14 54
Amortization of deferred
credits.................. 346 346 460 388
Other, net................ 17 91 149 381
-------- -------- -------- --------
Total other income........ 6,377 2,734 3,107 1,227
-------- -------- -------- --------
Other Expenses:
Compensation and employee
benefits................. 2,955 1,716 2,516 1,922
FDIC insurance premiums... 2,066 444 721 261
Occupancy................. 218 221 385 319
Professional services..... 572 461 1,028 507
Data processing and
equipment rentals........ 189 146 232 162
Real estate owned, net.... 231 46 170 241
Loan service fees and
expenses................. 3,522 1,015 1,958 242
Other general and
administrative expenses.. 1,152 1,198 1,092 1,290
-------- -------- -------- --------
Total other expenses...... 10,905 5,247 8,102 4,944
-------- -------- -------- --------
(Loss) income before income
tax (benefit) provision... (5,734) 907 639 (1,778)
Income tax (benefit)
provision................. (4,652) 68 47 (526)
-------- -------- -------- --------
Net (loss) income.......... $ (1,082) $ 839 $ 592 $ (1,252)
======== ======== ======== ========
(Loss) earnings per
share(2).................. $ (14.05) $ 35.56 $ 25.09 $(135.43)
======== ======== ======== ========
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994
------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................. $533,109 $341,454 $230,636
Cash and due from banks...................... 11,231 3,382 4,880
Federal funds sold........................... 9,300 1,100 3,950
Trading account securities................... 7,092 -- --
Investment securities held to maturity, at
amortized cost.............................. 7,425 6,470 4,505
Mortgage-backed securities available for
sale, at fair value......................... 6,483 9,083 10,943
Mortgage-backed securities held to maturity,
at amortized cost........................... 22,380 13,119 14,439
Loan portfolio, net(3)....................... 177,280 258,827 179,377
Discounted loan portfolio:
Total loans................................. 10,767 20,210 2,995
Unaccreted discount......................... (1,632) (3,008) (470)
Allowance for loan losses................... (5,716) (3,855) (431)
Discounted loans, net....................... 3,419 13,347 2,094
Loans held for sale, net, at lower of cost or
market...................................... 260,804 18,597 --
Stock in FHLB of San Francisco, at cost...... 2,911 1,421 1,612
Real estate owned, net....................... 2,514 4,964 1,208
Leasehold improvements and equipment......... 336 275 167
Due from affiliate(4)........................ 8,357 4,514 4,062
Accrued interest receivable.................. 4,268 3,042 1,599
Prepaid expenses and other assets............ 3,887 1,724 1,026
Income taxes receivable, net................. 5,422 1,589 774
Deposits..................................... 487,535 303,524 196,289
Borrowings................................... -- 13,000 21,500
Due to affiliates(5)......................... 2,286 759 652
Deferred credits(6).......................... 832 1,134 1,772
Subordinated debt(7)......................... -- 11,000 --
Minority interest............................ 277 600 574
Preferred stock in subsidiary held by oth-
ers......................................... -- -- 1,000
Accounts payable and other liabilities....... 7,625 4,398 2,056
Stockholders' equity(7)...................... 34,554 7,039 6,793
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
NINE MONTHS
ENDED
SEPTEMBER 30,
1996 1995 1994
------------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FINANCIAL RATIOS AND OTHER DATA:
Return on average assets....................... (.22)% .24% (.92)%
Return on average equity....................... (3.09)% 8.65% (31.03)%
Average interest rate on total loans........... 9.39 % 9.57% 7.65 %
Average equity to average assets............... 7.24 % 2.72% 2.96 %
Net interest spread(8)......................... 3.15 % 3.08% 2.85 %
Net interest margin(9)......................... 3.88 % 3.72% 3.04 %
Ratio of earnings to fixed charges(10)(11):
Including interest on deposits................ .71 1.04 .67
Excluding interest on deposits................ (1.67) 2.19 (3.04)
Non-performing loans to loans at end of
period(3)..................................... 9.11 % 4.46% 5.95 %
Allowance for loan losses to total loans at end
of period..................................... 9.2 % 7.6% 3.9 %
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- -------
<S> <C> <C> <C>
LOAN ORIGINATIONS............................... $ 2,280 $ 8,748 $ 4,345
LOAN ACQUISITION DATA:
Loan Portfolio:
Single-family residential...................... 221,581(12) 121,883 36,462
Multi-family residential....................... -- -- 61,247
Commercial and other mortgage loans............ -- 2,126 31,091
Consumer and other loans(13)................... 18,742 11,012 10,847
Discounted Loans:
Single-family residential...................... -- (14) 49,662 1,542
Multi-family residential....................... -- (14) 96 --
Commercial and other mortgage loans............ -- 869 1,843
Consumer and other loans....................... -- 5,368 239
LOANS SOLD...................................... 27,965 16,673 --
</TABLE>
- --------
(1) The Company began its bankcard operations in 1994.
(2) (Loss) earnings per share amounts are based on weighted average number of
shares outstanding of WAC during the applicable periods. See Note 1 in
the Company's Consolidated Financial Statements. The capital structure of
WAC is substantially different from that of WFSG, which did not exist at
or prior to September 30, 1996. There were no dividend payments on common
stock by WAC during any periods presented.
(3) This item does not include Discounted Loans.
(4) Due from affiliate consists of amounts received by WCC from mortgagors on
loans it is servicing for the Company and has not yet transferred to the
Company.
(5) Due to affiliates primarily consists of amounts owed to WCC for WAC
operating expenses paid by WCC.
(6) Deferred credits represent negative goodwill--the excess of the net fair
values of the Savings Banks' assets and liabilities over the purchases
prices paid by WAC for the Savings Banks.
(7) Effective January 1, 1996, $11.0 million of Common Stock was issued in
exchange for subordinated debt. Subsequently, an additional $17.8 million
of Common Stock was issued for cash.
(8) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(9) Net interest margin represents net interest income divided by total
average earning assets.
(10) The ratios of earnings to fixed charges were computed by dividing (x)
income from continuing operations before income taxes, extraordinary
gains and cumulative effect of a change in accounting principle plus
fixed charges by (y) fixed charges. Fixed charges represent total
interest expense, including and excluding interest on deposits, as
applicable, as well as the interest component of rental expense. Earnings
for the nine months ended September 30, 1996 and the year ended December
31, 1994 were inadequate to cover fixed charges by $5,734 and $1,778,
respectively.
(11) Pro forma ratio of earnings to fixed charges for the nine months ended
September 30, 1996 and the year ended December 31, 1995 were .67 and .65,
respectively.
(12) The Company currently expects that Girard will sell certain single-family
residential loans to WFC which in turn is expected to securitize such
loans. See "Recent Developments."
(13) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(14) Girard has purchased or committed to purchase approximately $272 million
unpaid principal amount of discounted residential mortgage loans. See
"Recent Developments."
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Selected
Financial Information and the Consolidated Financial Statements of the Company
and the notes thereto included elsewhere in this Prospectus.
OVERVIEW
The Company's net interest income has increased substantially during the
last three years primarily due to the growth in the Company's total loan
portfolio resulting from the Company's strategy of aggressively acquiring Loan
Portfolios and by the acquisition of First Bank in 1993 and Girard in 1994.
The Company's total loan portfolio, net as of September 30, 1996 and December
31, 1995 and 1994 was $441.5 million, $290.8 million and $181.5 million,
respectively. Net interest income for the nine month period ended September
30, 1996 and for the years ended December 31, 1995 and 1994 was $14.5 million,
$9.9 million and $4.1 million, respectively.
The Company has reported net losses and reduced net income in recent periods
primarily as a result of significant additions to the Company's provision for
estimated losses on loans, primarily Inherited Loans and Sub-Prime Auto Loans.
The Company reported a net loss of approximately $1.1 million for the nine
months ended September 30, 1996, compared to net income in the similar prior
year period of $0.8 million. The Company reported net income of $0.6 million
for the fiscal year ended December 31, 1995 compared to a loss in calendar
1994 of $1.3 million.
The Company's net losses during the first nine months of fiscal year 1996
and the fiscal year 1994 and lower net income in fiscal year 1995 resulted
primarily from provisions for losses on loans. Provisions for loan losses
totaled approximately $15.8 million in the first nine months of 1996, $4.3
million for the year ended December 31, 1995 and $2.2 million in 1994. These
loss provisions resulted primarily from deterioration in the Company's
Inherited Loans and Sub-Prime Auto Loans. These loss provisions reflect the
poor quality of the assets of the Savings Banks at the time they were acquired
by the Company and loan loss provisions taken with respect to Sub-Prime Auto
Loans. Following the addition of approximately $4.5 million of reserves taken
in the third quarter of 1996, allowances for Sub-Prime Auto Loans as a
percentage of the unpaid principal balances were 52.3% at September 30, 1996.
PRINCIPAL SOURCES OF REVENUE
The principal component of the Company's revenues is interest income, with
lesser contributions from gains on securitizations and income from bankcard
processing operations. The following table sets forth the components of the
Company's revenues for the periods indicated:
SOURCES OF REVENUE
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- ---------------
1996 1995 1995 1994
-------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income.......................... $34,137 $17,052 $24,381 $ 9,569
Gains on sale of loans................... 1,983 981 642 --
Bankcard income.......................... 5,078 3,202 4,694 635
Other, net(1)............................ 3,181 959 1,233 866
-------- -------- ------- -------
Total revenue.......................... $44,379 $22,194 $30,950 $11,070
======== ======== ======= =======
</TABLE>
- --------
(1) Other consists primarily of loan fees and charges, the amortization of
negative goodwill and unrealized gain on trading securities.
Net Interest Income. The operations of the Company are substantially
dependent on its net interest income, which is the difference between the
interest income received plus accreted purchase discount from its assets and
32
<PAGE>
the interest expense paid on its interest-bearing liabilities. Net interest
income is affected by the relative amount of interest-earning assets and
interest-bearing liabilities, the degree of mismatch in the maturity and
repricing characteristics of its interest-earning assets and interest-bearing
liabilities and timing of receipt of purchased principal discount. With
respect to the Company's Discounted Loan portfolio, the Company treats
accreted discount on Discounted Loans as interest for accounting purposes.
The following table sets forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resultant average yields, the interest expense associated with interest-
bearing liabilities, expressed in dollars and rates, and the net interest
spread and net interest margin. Information is based on quarterly balances
during the indicated periods.
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED -----------------------------------------------------------
SEPTEMBER 30, 1996 1995 1994
-------------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE(1) BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
-------- -------- ------------- -------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Assets:
Mortgage-backed
securities............. $ 28,934 $ 1,280 5.90% $ 24,054 $ 1,359 5.65% $ 23,515 $1,361 5.79%
Loan portfolio(2)....... 449,947 31,686 9.39 227,970 21,821 9.57 103,583 7,923 7.65
Investment securities
and other.............. 21,242 1,171 7.35 14,216 1,201 8.45 7,969 285 3.58
-------- ------- -------- ------- -------- ------
Total interest-earning
assets, interest
income................. 500,123 34,137 9.10 266,240 24,381 9.16 135,067 9,569 7.08
Non-interest earning
cash................... 5,218 -- -- 1,868 -- -- 2,053 -- --
Allowance for loan
losses and unaccreted
discount............... (50,732) -- -- (31,845) -- -- (8,595) -- --
Other assets............ 29,225 -- -- 15,277 -- -- 7,646 -- --
-------- ------- -------- ------- -------- ------
Total assets........... $483,834 $34,137 $251,540 $24,381 $136,171 $9,569
======== ======= ======== ======= ======== ======
Average Liabilities and
Stockholders' Equity:
Interest-bearing
deposits............... $405,549 $17,448 5.74 $231,555 $13,944 6.02 $118,277 $5,017 4.24
FHLB advances........... 1,778 105 7.87 1,381 104 7.53 5,916 228 3.85
Subordinated debentures
and other interest-
bearing obligations.... 31,697 2,039 8.58 5,383 433 8.04 4,757 212 4.46
-------- ------- -------- ------- -------- ------
Total interest-bearing
liabilities, interest
expense............... 439,024 19,592 5.95 238,319 14,481 6.08 128,950 5,457 4.23
Non-interest bearing
deposits............... 2,202 -- -- 2,196 -- -- 1,537 -- --
Escrow deposits......... 225 -- -- 106 -- -- 74 -- --
Other liabilities....... 7,364 -- -- 4,077 -- -- 1,582 -- --
-------- ------- -------- ------- -------- ------
Total liabilities...... 448,815 19,592 244,698 14,481 132,143 5,457
Stockholders' equity.... 35,019 -- -- 6,842 -- -- 4,028 -- --
-------- ------- -------- ------- -------- ------
Total liabilities and
stockholders' equity.. $483,834 $19,592 $251,540 $14,481 $136,171 $5,457
======== ======= ======== ======= ======== ======
Net interest income..... $14,545 $ 9,900 $4,112
Net interest spread..... 3.15 3.08 2.85
Net interest margin..... 3.88 3.72 3.04
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 113.9% 111.7% 104.7%
======== ======== ========
</TABLE>
- --------
(1) Presented on an annualized basis.
(2) The average balances of the loan portfolio include Discounted Loans and
non-performing loans, interest on which is recognized on a cash basis.
33
<PAGE>
The following table describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (i)
changes in volume (change in volume multiplied by prior rate), (ii) changes in
rate (change in rate multiplied by prior volume) and (iii) total change in
rate and volume. Changes attributable to both volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996 VS. YEAR ENDED DECEMBER 31,
YEAR ENDED ------------------------------------------------
DECEMBER 31, 1995 1995 VS. 1994 1994 VS. 1993
------------------------- ----------------------- -----------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
------------------------- ----------------------- -----------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL RATE VOLUME TOTAL
------ -------- ------- ------ ------- ------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Mortgage-backed
securities............ $ (14) $ (65) $ (79) $ (37) $ 35 $ (2) $ 168 $ 975 $1,143
Loan portfolio......... (197) 10,062 9,865 2,405 11,493 13,898 60 6,480 6,540
Investment securities
and other............. 11 (41) (30) 581 335 916 (112) 344 232
------ -------- ------- ------ ------- ------- ------- ------ ------
Total interest-earning
assets................ (200) 9,956 9,756 2,949 11,863 14,812 116 7,799 7,915
Interest-Bearing Liabil-
ities:
Interest-bearing depos-
its................... (236) 3,740 3,504 2,723 6,204 8,927 1,368 2,885 4,253
FHLB advances.......... -- 1 1 (626) 502 (124) -- 228 228
Other interest-bearing
obligations........... 22 1,584 1,606 191 30 221 146 (19) 127
------ -------- ------- ------ ------- ------- ------- ------ ------
Total interest-bearing
liabilities........... (214) 5,325 5,111 2,288 6,736 9,024 1,514 3,094 4,608
------ -------- ------- ------ ------- ------- ------- ------ ------
Increase (decrease) in
net interest income.... $ 14 $ 4,631 $ 4,645 $ 661 $ 5,127 $ 5,788 $(1,398) $4,705 $3,307
====== ======== ======= ====== ======= ======= ======= ====== ======
</TABLE>
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1996
VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1995
NET INTEREST INCOME
The Company's net interest income increased by approximately $7.9 million or
118.9% during the nine months ended September 30, 1996, as compared to the
same period in the prior year. This increase resulted from an approximately
$17.1 million or 100.2% increase to interest income due to an approximately
$239.1 million or 91.6% increase in average interest-earning assets from
period to period. The increase in interest income was offset in part by an
approximately $9.2 million or 88.2% increase in interest expense due to an
approximately $216.8 million or 97.6% increase in average interest-bearing
liabilities, primarily certificates of deposit, and, to a lesser extent, a 21
basis point increase in the weighted average rate paid on interest-bearing
liabilities.
The increase in interest income during the nine months ended September 30,
1996, as compared to the same period in the prior year, reflects substantial
increases in the average balances of the loan portfolio. The Company's
business strategy currently contemplates continued strong growth in its total
loan portfolio, with a particular emphasis on increasing its Discounted Loan
portfolio. For information on the growth in the Company's total loan
portfolio, including its Discounted Loan portfolio, see "--Changes in
Financial Condition" below.
The average balance of the Company's interest-bearing liabilities increased
$216.8 million or 97.6% during the nine months ended September 30, 1996, as
compared to the same period in the prior year, as a result of the Savings
Banks' financing of growth of interest-bearing assets. As of the closing of
the Common Stock Offering, the Company will have extensive funding sources
available for investment and lending activities. See "Business--Funding
Sources."
34
<PAGE>
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
Provisions for losses on loans are charged to operations to maintain an
allowance for losses on each of the loan portfolio and the Discounted Loan
portfolio at a level which management considers adequate based upon an
evaluation of known and inherent risks in such loan portfolio and the
Discounted Loan portfolio, historical loss experience, current economic
conditions and other relevant factors. See "Business--Asset Quality--
Allowances for Loan Losses" for a discussion of management's methods of
estimating loan loss provisions.
The Company recorded provisions for estimated losses on loans totalling
approximately $15.8 million for the nine months ended September 30, 1996, as
compared to approximately $3.2 million for the comparable period in the prior
year, an increase of 389.0%. The following table sets forth the Company's
provision for estimated losses on loans for the nine months ended September
30, 1996:
<TABLE>
<CAPTION>
% OF
PROVISIONS TOTAL
---------- ------
(IN THOUSANDS)
<S> <C> <C>
Inherited Loans.......................................... $ 4,774 30.3%
Sub-Prime Auto Loans..................................... 8,583 54.5%
Other Purchased Loans.................................... 2,394 15.2%
------- ------
Total provision for estimated losses on loans............ $15,751 100.0%
======= ======
</TABLE>
Approximately $6.1 million of the increase in the provisions from 1995 to
1996 was made after discussions between the OTS and the Savings Banks
concerning the appropriate provision for the Sub-Prime Auto Loans acquired by
the Savings Banks in the fourth quarter of 1995 and the first quarter of 1996.
The Company also made a provision of approximately $4.8 million in the nine
months ended September 30, 1996 related to Inherited Loans owned by First Bank
or Girard at the time the Savings Banks were acquired by the Company. Both
Savings Banks were acquired at substantial discounts to their respective book
values, reflecting the poor quality of their assets.
Although management attempts to utilize its best judgment in providing for
possible loan losses, changing economic and business conditions, fluctuations
in local markets for real estate, future changes in non-performing asset
trends, large movements in market interest rates or other factors could affect
the Company's future provisions for loan losses. In addition, the OTS, as an
integral part of its examination process, periodically reviews the adequacy of
the Bank's allowances for losses on loans and Discounted Loans and such agency
may require the Company to recognize changes to such allowances for losses
based on its judgment about information available to it at the time of
examination.
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOSSES ON LOANS
The Company's net interest income (loss) after provision for estimated
losses on loans decreased 135.3% to a loss of approximately $(1.2) million for
the nine months ended September 30, 1996 from income of approximately $3.4
million for the same period in 1995. This decrease was due to the substantial
increase in provisions for estimated losses on loans.
35
<PAGE>
OTHER INCOME
The Company's other income was approximately $6.4 million for the nine
months ended September 30, 1996 compared to approximately $2.7 million for the
same period in the prior year, an increase of 133.3%. This increase was
primarily attributable to revenue growth in the Company's bankcard operation
and from gains on the sale of loans. The components of the Company's non-
interest income are reflected in the following table:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other income:
Bankcard income................................ $ 5,078 $ 3,202
Bankcard processing expense.................... (3,865) (2,408)
Gain on sale of loans.......................... 1,983 981
Loan fees and charges.......................... 1,217 522
Amortization of deferred credits............... 346 346
Trading account-unrealized gain................ 1,601 --
Other, net..................................... 17 91
----------- -----------
Total other income........................... $ 6,377 $ 2,734
=========== ===========
</TABLE>
Bankcard Income and Processing Expense. The increase in other income for the
nine months ended September 30, 1996 was due in part to an increase of
approximately $1.9 million in bankcard income, from approximately $3.2 million
for the nine months ended September 30, 1995 to approximately $5.1 million for
the nine months ended September 30, 1996. The large increase in income from
the Company's bankcard operations was primarily due to the development of a
number of new accounts. Bankcard processing expense increased by approximately
$1.5 million from approximately $2.4 million for the nine months ended
September 30, 1995 to approximately $3.9 million for the nine months ended
September 30, 1996. This increase resulted primarily from an increase in
bankcard processing due to growth in merchant transactions evidenced by the
growth in bankcard income.
Gains on Sale of Loans. The increase in other income in 1996 was also due in
part to an increase of approximately $1.0 million in gains on sales of loans,
from $1.0 million for the nine months ended September 30, 1995 to
approximately $2.0 million for the nine months ended September 30, 1996. This
increase was due to gains from the securitization of approximately $33.1
million of non-performing and sub-performing mortgage loans and real estate
owned.
Gains or losses on Loan Portfolios sold through securitization transactions
are based on the difference between the cash proceeds received on the
certificates sold to outside investors (the "Senior Securities") and the
Company's cost basis allocated to the Senior Securities. The Company's cost
basis in Loan Portfolios sold is allocated between the Senior Securities and
the Subordinate Securities retained by the Company based on the relative fair
values of the two types of securities. The cost basis of the loans securitized
is determined by their acquisition cost (for purchased loans) or net carrying
value (for originated loans). The Company carries Subordinate Securities at
fair value. As such, the carrying value of these securities is impacted by
changes in market interest rates and prepayment and loss experiences of these
and similar securities. The Company determines the fair value of the
Subordinate Securities utilizing prepayment and credit loss assumptions
appropriate for each particular securitization. The range of values
attributable to the factors used in determining fair value is broad.
Accordingly, the Company's estimate of fair value is subjective.
Other income also includes loan fees and charges (e.g. late fees, commitment
fees). Loan fees and charges increased approximately $0.7 million, from
approximately $0.5 million for the nine months ended September 30, 1995 to
approximately $1.2 million for the nine months ended September 30, 1996. The
increase was primarily due to an increase in loan volume.
36
<PAGE>
OTHER EXPENSE
The Company's other expenses totalled approximately $10.9 million for the
nine months ended September 30, 1996 compared to approximately $5.2 million
for the nine months ended September 30, 1995, an increase of 107.8%.
Loan Service Fees and Expenses. The largest component of other expenses in
1996 was loan service fees and expense which increased by approximately $2.5
million from approximately $1.0 million for the nine months ended September
30, 1995 to approximately $3.5 million for the nine months ended September 30,
1996. Loan servicing fees and charges are paid to WCC and include (a) "normal"
servicing fees, and (b) collection-related expenses incurred directly by WCC
and reimbursed by the Company. Servicing fees for Discounted Loans have been
based on a percentage of cash flows collected. Therefore, when Discounted
Loans are sold, servicing fees increase substantially. The Savings Banks'
volume of loans being serviced by WCC, and particularly the volume of
Discounted Loans, increased substantially during 1996 compared to 1995
resulting from substantial growth in the Savings Banks' total loan portfolio.
Also, due to a securitization of non-performing loans (primarily Discounted
Loans) in March 1996, higher fees associated with the accelerated cash flows
to the Savings Banks were paid to WCC in the first quarter. These factors
accounted for the increase in servicing fees and charges in the nine months
ended September 30, 1996 compared to the same period in 1995.
Compensation and Employee Benefits. Other expense relating to compensation
and employee benefits also increased from approximately $1.7 million for the
nine months ended September 30, 1995 to approximately $3.0 million for the
nine months ended September 30, 1996, an increase of approximately $1.3
million (or 72.2%). The increase in compensation and employee benefits during
this period reflected normal salary adjustments and an increase in the average
number of full-time equivalent employees from 37 for the nine months ended
September 30, 1995 to 48 for the nine months ended September 30, 1996,
reflecting the expansion of business activities, particularly loan acquisition
activities and the growth of non-traditional bankcard activities. In addition,
the Bank's administrative offices were relocated to Portland, Oregon in August
1996 which resulted in approximately $0.7 million of additional employee
compensation.
FDIC Insurance Premiums. FDIC insurance premiums increased from
approximately $0.4 million for the nine months ended September 30, 1995 to
approximately $2.1 million for the nine months ended September 30, 1996, an
increase of approximately $1.7 million (or 365.3%), as a result of growth in
deposits outstanding and the SAIF special assessment.
INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit) amounted to a benefit of approximately $4.7
million during the nine months ended September 30, 1996 compared to a
provision of less than $0.1 million during the nine months ended September 30,
1995. This increase was due primarily to assessment of the valuation
allowances against deferred tax assets. The Company's effective tax rate
amounted to (81.1%) and 7.5% during the nine months ended September 30, 1996
and 1995, respectively. Differences in the Company's effective tax rates in
recent periods compared to combined Federal and State statutory rates were
primarily attributable to changes in assessments of the realization of
deferred tax assets. Exclusive of such amounts, the Company's effective tax
rate amounted to (41%) and 41% during the nine months ended September 30, 1996
and 1995, respectively.
37
<PAGE>
RESULTS OF OPERATIONS--1995 COMPARED TO 1994
NET INTEREST INCOME
The Company's net interest income was $9.9 million for fiscal year 1995
compared to $4.1 million for the fiscal year 1994, an increase of 140.8%. The
components of the Company's net interest income for these fiscal years are
discussed below.
Interest Income. The Company's interest income was approximately $24.4
million for fiscal year 1995 compared to $9.6 million for fiscal year 1994, an
increase of 154.8%. The increase in the Company's interest income from 1994 to
1995 was due primarily to an increase in interest received on loans from $7.9
million in 1994 to $21.8 million in 1995. The increase in interest received on
loans was a result of an increase in the gross principal amount of the
Company's total loan portfolio from $198.6 million in 1994 to $337.5 million
in 1995, an increase of 69.9%. The Savings Banks made substantial acquisitions
of Discounted Loans in June 1995 and performing single-family loans in the
fourth quarter of 1995. In addition, the Company acquired Girard in November
1994 and, as a result, the Company's 1994 results of operations only reflect
two months of Girard's operations while 1995 results reflect a full year of
operations by Girard. In addition, the average rate earned by the Company on
its interest-bearing assets increased from 7.08% in 1994 to 9.16% in 1995.
Interest Expense. The Company's interest expense was approximately $14.5
million for fiscal year 1995 compared to approximately $5.5 million in fiscal
year 1994, an increase of 165.4%. The increase in interest expense from 1994
to 1995 was due primarily to an increase in average certificates of deposit
outstanding from approximately $118.3 million in 1994 to approximately $231.6
million in 1995 (an increase of 104.4%), which occurred in order to fund the
growth of the loan portfolio noted above. In addition, interest expense
increased due to the inclusion of Girard's results of operations for the full
year ending December 31, 1995, compared to fiscal year 1994 which only
reflected two months of Girard's operations. In addition, the average interest
rate on the Company's borrowings increased from 4.23% to 6.08% from 1994 to
1995.
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
In connection with its provision for estimated losses on loans the Company
recorded an expense totalling approximately $4.3 million for fiscal year 1995
compared to approximately $2.2 million for fiscal year 1994, an increase of
96.3%.
The increase in the provisions from 1994 to 1995 was primarily attributable
to higher provisions related to the Inherited Loans and having a full year of
Girard's operations presented in 1995. The increase in the provisions from
1994 to 1995 was also to a lesser degree attributable to the earthquake in
Southern California in January 1994, which affected delinquency and collateral
values in 1995. For a discussion of the Company's methods for establishing
provisions for loan losses, see "Business--Asset Quality--Allowances for Loan
Losses."
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOSSES ON LOANS
The Company's net interest income after provision for estimated losses on
loans increased 190.6% to approximately $5.6 million for fiscal year 1995 from
approximately $1.9 million for fiscal year 1994.
38
<PAGE>
OTHER INCOME
The Company's other income was approximately $3.1 million for fiscal year
1995 compared to approximately $1.2 million for fiscal year 1994, an increase
of 153.2%. This increase was primarily attributable to growth in the Company's
bankcard operation and gains from the sale of loans. The components of the
Company's non-interest income are reflected in the following table:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other Income:
Bankcard income.................................... $ 4,694 $ 635
Bankcard processing expense........................ (3,462) (274)
Gain on sale of loans.............................. 642 --
Loan fees and charges.............................. 610 43
Gain on sale of mortgage-backed securities avail-
able for sale..................................... 14 54
Amortization of deferred credits................... 460 388
Other, net......................................... 149 381
----------- -----------
Total other income............................... $ 3,107 $ 1,227
=========== ===========
</TABLE>
The increase in other income in 1995 was due primarily to an increase of
approximately $4.1 million in bankcard income, from approximately $0.6 million
for fiscal year 1994 to approximately $4.7 million for fiscal year 1995. The
large increase in income from the Company's bankcard operations reflects a
full year of bankcard operations in 1995 compared to a partial year for 1994,
since bankcard operations commenced in mid-1994. Bankcard processing expense
increased by approximately $3.2 million from approximately $0.3 million for
fiscal year 1994 to approximately $3.5 million for fiscal year 1995. The
increase in bankcard processing expense was primarily the result of the same
factors. The increase in other income in 1995 was also due in part to
approximately $0.6 million in gains on sales of loans in fiscal year 1995 from
no gains on sales of loans for fiscal 1994. This increase was due to gains
from the 1995 sale of approximately $7.9 million of mortgage loans into a
securitization. The increase in other income in 1995 was also due in part to
an increase of approximately $0.6 million in loan fees and charges, from less
than $0.1 million in 1994 to approximately $0.6 million in 1995. The increases
in loan fees and charges are primarily attributable to an increase in the
average Loan Portfolio from $103.6 million in 1994 to $228.0 million in 1995,
an increase of 120.1%.
OTHER EXPENSE
The Company's other expense totalled approximately $8.1 million for fiscal
year 1995 compared to approximately $4.9 million for fiscal year 1994, an
increase of 63.9%. The largest component of other expense was loan service
fees and expenses which increased by approximately $1.8 million from
approximately $0.2 million in fiscal year 1994 to $2.0 million in fiscal year
1995. This increase resulted from the substantially higher volume of loans
being serviced in 1995, including a full year of operations of Girard, and the
purchase of a portfolio of Discounted Loans in June 1995 which was serviced at
higher fees. All of the key items of other expense (including loan service
fees and expenses, compensation and employee benefits, FDIC insurance premiums
and professional services) showed an increase from 1994 to 1995 except for
real estate owned (net) and other general and administrative expenses. This
increase was primarily attributable to growth in the Savings Banks.
Other expense relating to compensation and employee benefits increased from
approximately $1.9 million in 1994 to approximately $2.5 million in 1995, an
increase of $0.6 million (or 30.9%), primarily as a result of an increase in
the average number of full-time equivalent employees from 31 in 1994 to 44 in
1995 (including an entire year's compensation expenses for Girard in 1995).
FDIC insurance premiums increased from $0.3 million in 1994 to $0.7 million
in 1995, an increase of approximately $0.4 million (or 176.2%), as a result of
growth in certificates of deposit outstanding. Other
39
<PAGE>
expense relating to professional services also increased from approximately
$0.5 million in 1994 to approximately $1.0 million in 1995 primarily as a
result of legal and accounting expenses incurred in connection with a proposed
acquisition of another savings bank in 1995, which was not completed due to a
failure of the principals ultimately to agree on terms.
These increases in other expense were partially offset by a small decrease
in expenses related to real estate owned (net). Other expenses related to real
estate owned (net) were approximately $0.2 million in fiscal year 1994 and
$0.2 million in fiscal year 1995. Other general and administrative expenses
decreased from approximately $1.3 million in 1994 to approximately $1.1
million in 1995, a decrease of 15.3%.
INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit) amounted to an expense of less than $0.1
million in 1995 compared to a benefit of approximately $0.5 million for 1994.
The Company's effective tax rate amounted to 7.4% and (29.6)% during 1995 and
1994, respectively. Differences in the Company's effective tax rates in recent
periods compared to combined Federal and State statutory rates were primarily
attributable to changes in assessments of the realization of deferred tax
assets. Exclusive of such amounts, the Company's effective tax rate amounted
to 41% and (41)% during 1995 and 1994, respectively. For additional
information regarding the Company's income tax provisions and tax rates and
information regarding net operating loss carryforwards of the Company, see
Note 8 to the Consolidated Financial Statements.
40
<PAGE>
CHANGES IN FINANCIAL CONDITION
The following table sets forth certain information relating to the Company's
assets and liabilities at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------
1996 1995 1994
------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents..................... $ 20,531 $ 4,482 $ 8,830
Trading account securities.................... 7,092 -- --
Securities held to maturity, at amortized
cost......................................... 7,425 6,470 4,505
Mortgage-backed securities available for sale,
at fair value................................ 6,483 9,083 10,943
Mortgage-backed securities held to maturity,
at amortized cost............................ 22,380 13,119 14,439
Loans receivable, net......................... 177,280 258,827 181,471
Discounted loans net.......................... 3,419 13,347 --
Loans held for sale, at lower of cost or mar-
ket.......................................... 260,804 18,597 --
Stock in Federal Home Loan Bank of San Fran-
cisco, at cost............................... 2,911 1,421 1,612
Real estate owned, net........................ 2,514 4,964 1,208
Leasehold improvements and equipment, net..... 336 275 167
Due from affiliate............................ 8,357 4,514 4,062
Accrued interest receivable................... 4,268 3,042 1,599
Prepaid expenses and other assets............. 3,887 1,724 1,026
Income taxes receivable, net.................. 5,422 1,589 774
-------- -------- --------
Total Assets................................ $533,109 $341,454 $230,636
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits...................................... $487,535 $303,524 $196,289
Borrowings.................................... -- 13,000 21,500
Accounts payable and other liabilities........ 7,625 4,398 2,056
Subordinated debt............................. -- 11,000 --
Preferred stock in subsidiary held by others.. -- -- 1,000
Deferred credits.............................. 832 1,134 1,772
Minority interest in subsidiaries............. 277 600 574
Due from affiliates........................... 2,286 759 652
-------- -------- --------
Total liabilities........................... 498,555 334,415 223,843
Stockholders' Equity.......................... 34,554 7,039 6,793
-------- -------- --------
Total Liabilities and Stockholders' Equity.. $533,109 $341,454 $230,636
======== ======== ========
</TABLE>
Mortgage-Backed and Other Securities. The Company's mortgage-backed
securities available for sale and trading account securities increased $4.4
million during the nine months ended September 30, 1996 primarily as a result
of purchasing certain subordinated bonds associated with the sale of
Discounted Loans. Investment securities and mortgage-backed securities held to
maturity increased by approximately $1.0 million and $9.3 million,
respectively, during the nine months ended September 30, 1996. United States
Treasury securities are generally held for the purpose of meeting regulatory
liquidity requirements. As the amount of deposits and borrowings increases,
the regulatory liquidity requirement increases proportionately. The increase
in mortgage-backed securities held to maturity resulted primarily from
purchases of GNMA adjustable-rate mortgage securities to secure certain
representations and warranties under a mortgage loan securitization and for
collateral securing an interest-rate swap contract.
41
<PAGE>
Loans Receivable, Net. Since 1994, the Company has emphasized the
acquisition of traditional performing mortgage loans as well as under-
performing and non-performing loans which generally are purchased at a
discount to both unpaid principal amount of the loan and the estimated value
of the property securing the loan. As a result, the average balance of the
Company's Total Loan Portfolio has increased significantly since 1993 as
illustrated by the following table:
AVERAGE BALANCE OF THE COMPANY'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, ---------------------------
1996 1995 1994 1993
----------------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan Portfolio:
Single-family residen-
tial..................... $288,243 $ 93,350 $ 31,414 $20,254
Multi-family residential.. 74,131 70,631 36,089 25,567
Commercial and other mort-
gage loans............... 57,899 53,852 33,163 26,396
Consumer and other........ 29,675 10,137 2,917 383
-------- -------- -------- -------
Total loans............. 449,947 227,970 103,583 72,600
Unaccreted discount....... (17,281) (10,254) (4,086) (988)
Allowance for loan loss-
es....................... (33,451) (21,591) (4,509) (4,314)
-------- -------- -------- -------
$399,215 $196,125 $ 94,988 $67,298
======== ======== ======== =======
</TABLE>
The Company's total loan portfolio, net of discounts and allowances,
increased by approximately $150.7 million during the nine months ended
September 30, 1996 primarily as a result of the Company's business strategy of
aggressively acquiring loan portfolios of Discounted Loans and other mortgage
loans. The Company's total loan portfolio, net of discounts and allowances,
increased by approximately $109.3 million during 1995 primarily as a result of
the Company's loan purchase strategy. Included in the amount of increases in
the Company's total loan portfolio in the nine months ended September 30, 1996
and the year ended December 31, 1995 are a decrease of $26.2 million and an
increase of $29.3 million, respectively, in the net carrying amount of
Discounted Loans. The increase in 1995 reflected the initial implementation of
the Discounted Loan acquisition strategy. The decrease in the first six months
of 1996 reflected paydowns and other resolutions of some of the loans, and the
sale of most of the Discounted Loans in a securitization transaction completed
in March 1996.
Loans Held For Sale. The Company's loans held for sale increased by $243.3
million during the nine months ended September 30,1996 due to the Company's
intent to sell approximately $277.5 million of single-family residential loans
in the fourth quarter of 1996.
Real Estate Owned, Net. Real estate owned, net consists almost entirely of
properties acquired by foreclosure or deed-in-lieu thereof on loans in the
Company's total loan portfolio. Real estate owned decreased by approximately
$2.5 million or 49.4% during the nine months ended September 30, 1996 as a
result of the securitization of certain real estate owned and other resolution
activities. The approximately $3.8 million increase in the Company's net real
estate owned during 1995 primarily reflects increases in real estate owned
related to the Company's Discounted Loan portfolio, which reflects the growth
in the Company's Discounted Loan acquisition and resolution activities in
recent periods.
The Company actively manages its real estate owned. During the nine months
ended September 30, 1996, the Company sold 57 properties of real estate owned
related to its total loan portfolio with a carrying value of approximately
$6.6 million. During 1995, the Company sold 17 properties of real estate owned
related to its total loan portfolio with a carrying value of approximately
$5.5 million, as compared to the sale of properties of real estate owned
related to its total loan portfolio with carrying values of approximately $3.3
million during 1994.
42
<PAGE>
Due from Affiliate. Due from affiliate increased by approximately $3.8
million or 85.1% during the nine months ended September 30, 1996 primarily as
a result of growth in loan portfolios. The balance in the account as of any
month-end reflects the lag between receipts of loan payments by WCC, as
servicer, and payment to the Company. Due from affiliate increased by
approximately $0.5 million during 1995 for the same reason.
Deposits. Deposits increased by approximately $184.0 million or 60.6% during
the nine months ended September 30, 1996 primarily as a result of the
Company's strategy to increase deposits to permit the Savings Banks to acquire
loan portfolios. Deposits increased by approximately $107.2 million during
1995 primarily for the same reason.
Borrowings. Borrowings decreased by approximately $13.0 million during 1996
as a result of replacing short-term borrowings with longer term deposits.
Subordinated Debt. Subordinated debt decreased by approximately $11.0
million during the nine months ended September 30, 1996 because on January 1,
1996, the subordinated debt was exchanged for common stock.
Stockholders' Equity. Stockholders' equity increased by $27.5 million during
the nine months ended September 30, 1996 primarily as a result of the exchange
of $11.0 million of outstanding subordinated debt for common stock and the
infusion of approximately $17.8 million to support growth and maintain
required regulatory capital ratios at the Savings Banks. Stockholders' equity
increased during 1995 primarily as a result of the Company's net income during
the period.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude of
the repricing of assets and liabilities. It is the objective of the Company to
attempt to control risks associated with interest rate movements. In general,
management's strategy is to limit the Company's exposure to earnings
variations and variations in the value of assets and liabilities as interest
rates change over time. The Company's asset and liability management strategy
is formulated and monitored by the asset and liability committees for the
Company and the Savings Banks (the "Asset and Liability Committees") which
meet regularly to review, among other things, the sensitivity of the Company's
assets and liabilities to interest rate changes the book and market values of
assets and liabilities, unrealized gains and losses, including those
attributable to hedging transactions, purchase and securitization activity,
and maturities of investments and borrowings. The Asset and Liability
Committees coordinate with the Savings Banks' boards of directors and the
Company's investment committees with respect to overall asset and liability
composition.
Since most of the Company's assets and liabilities reprice relatively
frequently, the Company's gap tends to be relatively easy to manage and the
Company's interest rate risk analysis focuses less on managing the overall gap
and more on ensuring that individual Loan Portfolios are properly hedged. In
hedging the interest rate exposure of a fixed-rate or lagging-index asset that
is held for sale, the Company creates a hedge which matches the principal
amortization of such asset against the maturity of the Company's liabilities
generally by entering into short sales or forward sales of U.S. Treasury
securities, U.S. agency mortgage-backed securities or interest rate futures
contracts. This results in market gains or losses on hedging instruments, in
response to interest rate increases or decreases, respectively, which
approximate the amount of the corresponding market losses or gains,
respectively, on loans being hedged. The Company evaluates the interest rate
sensitivity of each Loan Portfolio and decides whether to hedge the interest
rate exposure of a particular portfolio. In general, the Company tends to
hedge its fixed-rate Loan Portfolios. The Company generally does not hedge the
interest rate risk associated with holding non-lagging index adjustable-rate
mortgages pending their sale or securitization due to the decreased
significance of such risk.
The Asset and Liability Committees are authorized to utilize a wide variety
of off-balance sheet financial techniques to assist them in the management of
interest rate risk. These techniques include interest rate swap agreements,
pursuant to which the parties exchange the difference between fixed-rate and
floating-rate interest
43
<PAGE>
payments on a specified principal amount (referred to as the "notional
amount") for a specified period without the exchange of the underlying
principal amount. Interest rate swap agreements are utilized by the Company to
protect against the narrowing of the interest spread between fixed rate loans
and associated liabilities funding those loans. The Company had approximately
$65.6 million notional principal amount of interest rate swap agreements
outstanding at September 30, 1996, which had the effect of decreasing the
Company's net interest income by approximately $0.1 million during the nine
months ended September 30, 1996. For additional information see Note 7 to the
Consolidated Financial Statements. There was no significant hedging activity
in 1995.
In addition, as required by OTS regulations, the Asset and Liability
Committees also regularly review interest rate risk by forecasting the impact
of alternative interest rate environments on net interest income and market
value of portfolio equity ("MVPE"), which is defined as the net present value
of an institution's existing assets, liabilities and off-balance sheet
instruments, and evaluating such impacts against the maximum potential changes
in net interest income and MVPE that is authorized by the Boards of Directors
of the Savings Banks. In addition, at June 30, 1996, management estimates
based upon the MVPE analysis prepared by the OTS that the estimated percentage
change in the Company's MVPE over the ensuing four-quarter period as a result
of a 200 basis point increase or decrease in interest rates would be an
approximate 15% decrease or 6% increase, respectively. The following table
highlights the interest rate sensitivity of MVPE of a change in rates from 0
to 400 basis points ("bp").
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
AT JUNE 30, 1996
Net Portfolio Value
Change in --------------------------
Rates Amount $ Change % Change
+400bp $42,628 $(22,944) -35%
+300bp 49,563 (16,009) -24%
+200bp 55,986 (9,586) -15%
+100bp 61,464 (4,108) -6%
0bp 65,572 --
-100bp 68,312 2,740 4%
-200bp 69,521 3,949 6%
-300bp 69,923 4,351 7%
-400bp 70,738 5,166 8%
Management of the Company believes that the assumptions (including pre-
payment assumptions) used by it to evaluate the vulnerability of the Company's
operations to changes in interest rates approximate actual experience and
considers them reasonable; however, the interest rate sensitivity of the
Company's assets and liabilities and the estimated effects of changes in
interest rates on the Company's net interest income and MVPE could vary
substantially if different assumptions were used or actual experience differs
from the historical experience on which they are based.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the measurement of the Company's ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, purchase loans, purchase Discounted Loans, fund lending
activities and for general business purposes. The Company's sources of cash
flow include certificates of deposit, securitizations, net interest income and
borrowings under its warehouse and repurchase financing facilities and from
institutional investors and other lenders. In addition, the Savings Banks
obtain funding through FHLB advances.
The Company's liquidity is actively managed on a daily basis, monitored
regularly by the Asset and Liability Committees and reviewed periodically by
the Board of Directors. This process is intended to ensure the maintenance of
sufficient funds to meet the needs of the Company, including adequate cash
flows for off-balance sheet instruments.
44
<PAGE>
Sources of liquidity include wholesale and brokered certificates of deposit.
As of September 30, 1996, the Company had approximately $480.3 million of
certificates of deposit. As of September 30, 1996, scheduled maturities of
certificates of deposit during the 15 months ending December 31, 1997 and
thereafter amounted to approximately $381.4 million and approximately $98.9
million, respectively. Brokered and other wholesale deposits generally are
more responsive to changes in interest rates than core deposits and, thus, are
more likely to be withdrawn by the investor upon maturity as changes in
interest rates and other factors are perceived by investors to make other
investments more attractive. However, management of the Company believes that
it can adjust the rates paid on certificates of deposit to retain deposits in
changing interest rate environments and that brokered and other wholesale
deposits can be both a relatively cost-effective and stable source of funds.
As of September 30, 1996, the Company's sources of borrowing included Master
Repurchase Agreements between each of the Savings Banks and Bear Stearns
Mortgage Capital Corporation as to which the parties have orally agreed that
approximately $210 million in aggregate would be available for the purchase of
loans. On closing of the Common Stock Offering and Notes Offering, the amounts
available to the Private Companies under a $100 million warehouse lending
agreement (the "Warehouse Financing Facility") with Prudential Securities
Realty Funding Corp. and certain repurchase arrangements will be made
available to the Company or one of its subsidiaries, including $150 million
under a repurchase agreement with First Boston Mortgage Capital Corporation.
Such Repurchase Agreement will be increased to $250 million upon transfer to
WFC. See "Business--Funding Sources."
Sources of borrowings also include FHLB advances, which are required to be
secured by single-family and/or multi-family residential loans or other
acceptable collateral, and reverse repurchase agreements. As of September 30,
1996, the Company had no FHLB advances outstanding, and was eligible to borrow
up to an aggregate of $11.6 million from the FHLB of San Francisco and had
$2.0 million of single-family residential loans, approximately $16.6 million
of multi-family residential loans and $2.6 million of commercial loans which
were pledged as security for such advances. At the same date, the Company had
a contractual relationship with the FHLB of San Francisco pursuant to which it
could obtain funds from reverse repurchase agreements and had $7.6 million of
unencumbered investment securities and mortgage-backed and related securities
which could be used to secure such borrowings.
The Company's uses of cash include the funding of loan purchases and
origination, payment of interest expenses, repayment of loans, funding of
initial over-collateralization requirements for securitizations, operating and
administrative expenses, income taxes and capital expenditures. Capital
expenditures were immaterial for the nine months ended September 30, 1996 and
the years ended December 31, 1995, and 1994. In addition to commitments to
extend credit, the Company is party to various off-balance sheet financial
instruments in the normal course of business to manage its interest rate risk.
See "--Asset and Liability Management" above and Note 7 to the Consolidated
Financial Statements.
The Company conducts business with a variety of financial institutions and
other companies in the normal course of business, including counterparties to
its off-balance sheet financial instruments. The Company is subject to
potential financial loss if the counterparty is unable to complete an agreed
upon transaction. The Company seeks to limit counterparty risk through
financial analysis and other monitoring procedures.
Adequate credit facilities and other sources of funding, including the
ability of the Company to securitize loans, are essential to the continuation
of the Company's ability to purchase and originate loans, and acquire
Subordinate Securities. During the first nine months of 1996, and fiscal years
1995 and 1994, the Company used cash in the approximate amounts of $227.6
million, $186.9 million, and $41.6 million, respectively, for new loan
purchases. During the first nine months of 1996 and fiscal year 1995, the
Company received cash from the securitization of loans of approximately, $26.3
million and $16.7 million, respectively.
After utilizing available working capital, deposits and any securitization
proceeds, the Company borrows money to fund its loan purchases and
originations. During the first nine months of 1996, and fiscal years 1995 and
1994, the Company used borrowings under various repurchase arrangements and
FHLB advances in the
45
<PAGE>
approximate amounts of $308.1 million, $77.4 million and $41.7 million,
respectively, for new loan purchases and origination. The Company's business
plan generally calls for using a high degree of leverage in acquiring Loan
Portfolios. With respect to Loan Portfolios of Discounted Loans and performing
loans, the Company generally seeks to fund 90% and 95%, respectively, of the
market value of such Loan Portfolios with borrowed money. See "Risk Factors--
Extensive Use of Financial Leverage." The Company draws on a number of sources
to obtain such funds including certificates of deposit and repurchase
arrangements with Wall Street investment banks. As of the closing of the
Common Stock Offering and the Notes Offering, certain existing lines of credit
will be transferred to the Company. See "Business--Funding Sources."
The Company believes that cash flow from operations, the net proceeds of the
Common Stock Offering and the Notes Offering, the proceeds of certificates of
deposit, the availability under the warehouse financing facility and other
borrowings, and the net proceeds from securitizations will be sufficient to
fund operating needs, commitments and capital expenditures.
The Savings Banks are required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of U.S.
Government, federal agency and other investments having maturities of five
years or less. Current OTS regulations require that a savings association
maintain liquid assets of not less than 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity
requirements. First Bank's liquidity, as measured for regulatory purposes,
amounted to 9.0% as of September 30, 1996 and averaged 11.4%, 9.1%, and 8.0%
during the nine months ended September 30, 1996 and the years ended December
31, 1995 and 1994, respectively. Girard's liquidity, as measured for
regulatory purposes, amounted to 6.4% as of September 30, 1996 and averaged
6.4%, 11.2%, and 8.5% during the nine months ended September 30, 1996, the
year ended December 31, 1995, and the quarter ended December 31, 1994,
respectively.
REGULATORY CAPITAL REQUIREMENTS
Federally-insured savings associations such as the Banks are required to
maintain minimum levels of regulatory capital. These standards generally must
be as stringent as the comparable capital requirements imposed on national
banks. The OTS also is authorized to impose capital requirements in excess of
these standards on individual associations on a case-by-case basis. Under the
Orders, the Savings Banks are required to be "well-capitalized" as of December
31, 1996. See "Regulation--Imposition of Cease and Desist Orders."
46
<PAGE>
The following table sets forth the regulatory capital ratios of the Savings
Banks at September 30, 1996.
REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
TO BE
CATEGORIZED
AS "WELL
CAPITALIZED"
OTS MINIMUM UNDER OTS
ACTUAL REQUIREMENTS EXCESS REGULATIONS EXCESS
------------- ------------ ------------- ------------ ------------
AMOUNT RATIO RATIO AMOUNT RATIO RATIO AMOUNT RATIO
------- ----- ------------ ------- ----- ------------ ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible Capital:
First Bank............. $ 8,434 6.0% 1.5% $ 6,314 4.5% N.A. N.A. N.A.
Girard................. 26,739 6.8% 1.5% 20,884 5.3% N.A. N.A. N.A.
Tier 1 Capital to Aver-
age Assets:
First Bank............. 8,434 5.9% 4.0% 2,728 1.9% 5.0% $1,302 0.9%
Girard................. 26,739 7.0% 4.0% 11,419 3.0% 5.0% 7,589 2.0%
Tier 1 Capital to Risk-
Weighted Assets:
First Bank............. 8,434 8.7% N.A. N.A. N.A. 6.0% 2,614 2.7%
Girard................. 26,739 9.7% N.A. N.A. N.A. 6.0% 10,231 3.7%
Total Risk-Based Capital
to Risk-Weighted As-
sets:
First Bank............. 9,711 10.0% 8.0% 1,951 2.0% 10% 10 0.0%
Girard................. 30,297 11.0% 8.0% 8,287 3.0% 10% 2,784 1.0%
</TABLE>
In August 1993, the OTS promulgated regulations which incorporate an
interest rate risk component into the OTS' risk-based capital requirements,
and in August 1995 the OTS postponed the effectiveness of this regulation
after having previously deferred the effective date several times. Because
only institutions whose measured interest rate risk exceeds certain parameters
will be subject to the interest rate risk capital requirement, management of
the Company does not believe that this regulation will increase the Savings
Banks' risk-based regulatory capital requirement if it becomes effective in
its current form. For additional information relating to regulatory capital
requirements, see "Regulation--The Savings Banks--Regulatory Capital
Requirements" and Note 10 to the Consolidated Financial Statements.
47
<PAGE>
BUSINESS
This Prospectus contains certain information with respect to loans serviced,
acquired or originated by WCC to assist investors in evaluating the Company's
ability to engage in these activities on an ongoing basis. These loans are not
owned by the Company and investors in the Common Stock or the Notes will have
no right or claim to such assets. In addition, there can be no assurance that
the Company will be able to acquire, originate and service mortgage loans to
the same extent as WCC.
GENERAL
WFSG is a newly formed financial services holding company for certain
companies and businesses previously held as part of, and operated by, the
Private Companies. The Company will engage in a wide variety of financial
activities, including the acquisition, origination, ownership and
securitization of Loan Portfolios, banking and non-traditional merchant credit
card processing.
BUSINESS ACTIVITIES
Business Strategy. The Company's strategy is to aggressively pursue Loan
Portfolio acquisitions where it believes it can receive acceptable rates of
return on invested capital and effectively utilize leverage. Key elements of
this strategy include:
. significant growth in Loan Portfolio investments;
. utilize varied funding sources;
. expansion into European markets;
. utilize servicing expertise;
. growth of non-traditional bankcard processing operations; and
. develop wholesale origination network.
LOAN ACQUISITIONS
General. During the last four years, the Private Companies have developed
expertise in the business of acquiring Loan Portfolios, including residential
mortgage loans, manufactured housing loans, second lien loans, commercial real
estate loans, multi-family residential loans, commercial and business loans,
boat loans, other consumer loans and Subordinate Securities. The aggregate
principal amount of the loans acquired by the Private Companies during the
nine months ended September 30, 1996 and the years ended December 31, 1995,
1994 and 1993 was $501.4 million, $337.4 million, $388.5 million and $333.8
million, respectively, including $242.6 million, $191.0 million, $143.3
million, and $2.2 million, respectively, by the Savings Banks.
In the early 1990's, WCC acquired loans primarily from the FDIC and the RTC,
primarily in auctions of pools of loans acquired from financial institutions
which failed during the late 1980s and early 1990s. Although governmental
agencies, such as the FDIC and HUD, continue to be potential sources of loans,
the amount of loans sold by such agencies has substantially declined. In
recent years, the Private Companies purchased loans from various private
sector sellers, such as banks, savings institutions, mortgage companies and
insurance companies. Whether because a financial institution desires to reduce
overhead costs, is not staffed to handle large volumes of Loan Portfolios or
simply does not want to distract management and personnel with the intensive
and time-consuming job of servicing Loan Portfolios, many financial
institutions now recognize that outside contractors often are better staffed
to manage and service Loan Portfolios. These financial institutions include
multi-national, money center, super-regional and regional banking institutions
as well as mortgage companies and insurance companies. Moreover, many
financial institutions have embraced the concept of packaging and selling Loan
Portfolios to investors as a means of disposing of non-performing and under-
performing loans and improving a financial institution's balance sheet.
Consolidations within the banking industry have reinforced this
48
<PAGE>
trend. Additionally, management believes that there is a market for management
and resolution services for delinquent, sub-performing and non-performing
loans.
The Company intends to build on the expertise of the Private Companies and
aggressively pursue Loan Portfolio acquisitions in the United States and
Europe, a substantial portion of which are expected to be Discounted Loans. In
addition, the Company expects to increase its purchases of commercial real
estate loans above existing levels. The Company believes it can significantly
increase its acquisition activities without a commensurate increase in
operating costs.
The Company will seek to identify niche areas primarily within the real
estate loan market where it believes its funding flexibility, experienced
personnel and its proprietary software and U.S. mortgage loan database give it
a competitive advantage in pricing and purchasing Loan Portfolios. Areas in
which the Company views itself as having a competitive advantage include (i)
under-performing, non-performing and charged-off loans which generally are
purchased at substantial discount to both the unpaid principal amount of the
loan and the estimated value of the properties securing the loans; (ii) single
family and multi-family loan portfolios which do not comply with Federal
National Mortgage Association (the "FNMA") or Federal Home Loan Mortgage
Corporation (the "FHLMC") guidelines or may not meet preset securitization
guidelines for certain mortgage loan conduit programs; (iii) manufactured
housing loans; (iv) home equity or second lien loans; and (v) to a lesser
degree, consumer and other loans.
Loan Acquisition Procedures. Loans generally are acquired in pools ("Loan
Portfolios") from a wide variety of sources, including private sellers such as
banks, thrifts, finance companies, leasing companies, mortgage companies and
governmental agencies. The Company expects to obtain information on available
Loan Portfolios from several sources, such as referrals from Loan Portfolio
sellers with whom the Private Companies have transacted business in the past
and from co-investors who seek the Company's participation in Loan Portfolio
purchases. Management of the Company has developed relationships with banks,
finance companies, mortgage companies and institutional investment banks which
management believes will be a continuing source of information on available
Loan Portfolios.
Loan Portfolios generally are acquired through competitive bids in which
there is often substantial competition or negotiated transactions. The
competition for larger Loan Portfolios is generally more intense. In addition
to bidding on and often acquiring large Loan Portfolios, the Company and the
Private Companies have often acquired small Loan Portfolios where competition
is less. The average size of the Loan Portfolios acquired by the Company was
$9.3 million for the first nine months of 1996 and $3.8 million for the year
ended December 31, 1995. The Company believes that its funding flexibility,
experienced personnel, proprietary software and mortgage loan database provide
the Company with a competitive advantage in pricing and ultimately purchasing
Loan Portfolios.
Prior to making an offer to purchase a Loan Portfolio, the Company's
employees who specialize in the analysis of loans will conduct an extensive
investigation and evaluation of the individual loans in the Loan Portfolio.
This examination typically consists of analyzing the information made
available by the Loan Portfolio seller (generally, the respective credit and
collateral files for the loans), reviewing other relevant material that may be
available (including tax records), and analyzing the underlying collateral
(including consulting the Company's United States mortgage loan database which
contains among other things, listings of property values and loan loss
experience in local markets for similar assets, obtaining value opinions from
third parties and, in some cases, conducting site inspections). The Company
also will review information on the local economy and real estate markets
(including the amount of time required to foreclose on real property) in the
area in which the loan collateral is located.
The Company's senior acquisition personnel who conduct the due diligence on
the Loan Portfolio will determine the amount to be offered by the Company to
acquire the Loan Portfolio by using a proprietary modeling system which
focuses on, among other things, the anticipated recovery amount, timing, type
and quality of the servicing transfer and cost of the resolution of the loans.
With respect to Discounted Loans and
49
<PAGE>
with certain other loans as well, the amount that will be offered by the
Company will generally be at a discount from both the stated value of the loan
and the value of the underlying collateral which the Company estimates is
sufficient to generate an acceptable return on its investment. The Company's
Investment Committee which consists of senior management and the senior
acquisition personnel that conducted the due diligence on the Loan Portfolio
will review the due diligence file and make a final determination as to the
amount of the offer. Loan acquisition decisions at the Savings Banks are made
by their respective boards of directors.
The Private Companies originally funded their acquisitions of loans by
selling participations in the Loan Portfolios to institutional investors while
retaining the servicing rights and a participation in the overall return on
such portfolios. In 1994 and 1995, the Private Companies began acquiring loans
for their own portfolio. Such acquisitions were funded either by warehouse or
repurchase financing facilities, certificates of deposit, other borrowings, or
internal cash flow. The Private Companies' securitizations of loans in the
secondary market provided an additional source of funds for such acquisitions.
LOAN PORTFOLIO
General. The Company's total loan portfolio currently includes residential
mortgage loans, multi-family residential loans, commercial real estate loans,
manufactured housing loans, commercial and business loans, auto loans, boat
loans and other consumer loans. As of September 30, 1996, the Company's total
loan portfolio, net of unaccreted discount and allowance for loan losses
amounted to $441.5 million. The Company expects to utilize its available
funding sources to continue to aggressively expand its loan portfolio through
the acquisition of Loan Portfolios from government agencies and private sector
entities and through its mortgage conduit program. As part of the
Reorganization, WCC will continue to originate mortgage loans for the Company,
during the period of time that the Company is obtaining the necessary licenses
to conduct the mortgage conduit program. See "--Loan Origination."
The Company expects to securitize its Loan Portfolios when advantageous. The
Company may also from time to time engage in whole loan sales or determine to
hold loans until maturity. Loans not presented as held for sale in the Audited
Consolidated Financial Statements are expected to be held to maturity.
50
<PAGE>
Activity in the Company's Loan Portfolio.
The following table sets forth the activity in the gross principal amount of
the Company's total loan portfolio during the periods indicated, excluding
activity in the allowance for loan losses, deferred fees and unaccreted
discount on purchased loans.
ACTIVITY IN THE COMPANY'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994(1)
---------------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period..... $337,455 $198,588 $ 74,045
Originations:
Single-family residential........ 1,906 3,508 1,478
Multi-family residential......... 374 1,180 252
Commercial and other mortgage
loans........................... -- 4,060 2,615
Consumer and other loans......... -- -- --
-------- -------- --------
Total loans originated......... 2,280 8,748 4,345
Loan Purchases(3):
Single-family residential........ 221,581 121,883 36,462
Multi-family residential......... -- -- 61,247
Commercial and other mortgage
loans........................... -- 2,126 31,091
Consumer and other loans(2)...... 18,742 11,012 10,847
-------- -------- --------
Total loans purchased.......... 240,323 135,021 139,647
Discounted Loan Purchases:
Single-family residential........ -- 49,662 1,542
Multi-family residential......... -- 96 --
Commercial and other mortgage
loans........................... -- 869 1,843
Consumer and other loans......... -- 5,368 239
-------- -------- --------
Total Discounted Loans pur-
chased........................ -- 55,995 3,624
Sales.............................. (27,965) (16,673) --
Principal repayments, net of capi-
talized interest.................. (37,789) (27,464) (14,813)
Transfer to real estate owned and
other............................. (12,350) (16,760) (8,260)
-------- -------- --------
Net increase (decrease) in loans... 164,499 138,867 124,543
-------- -------- --------
Balance at end of period........... $501,954 $337,455 $198,588
======== ======== ========
</TABLE>
- --------
(1) Includes as purchases $90.6 million aggregate principal amount of loans
held by Girard on the date that it was acquired by WACII.
(2) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(3) Excludes Discounted Loans.
51
<PAGE>
Composition of Total Loan Portfolio. As of September 30, 1996, the Company's
total loan portfolio, net of unaccreted discount, deferred fees and allowance
for loan losses, amounted to $441.5 million or 83.6% of the Company's total
assets. The following table sets forth the composition of the Company's total
loan portfolio by type of loan at the dates indicated.
COMPOSITION OF THE COMPANY'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ---------------------------
1996 1995 1994 1993
------------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
LOAN PORTFOLIO:
Single-family residential....... $324,910(2) $139,566 $ 53,095 $20,657
Multi-family residential........ 72,717 71,239 77,884 26,076
Commercial real estate.......... 61,235 53,458 57,881 26,921
Consumer and other.............. 30,698 19,753 6,733 391
-------- -------- -------- -------
Loan portfolio.................... 489,560 284,016 195,593 74,045
Unaccreted discount and deferred
fees............................. (12,400) (14,362) (8,946) (988)
Valuation allowance............... (40,086) (10,237) (7,270) (4,314)
-------- -------- -------- -------
Loan portfolio, net............... $437,074 $259,417 $179,377 $68,743
======== ======== ======== =======
DISCOUNTED LOAN PORTFOLIO:
Single-family residential....... $ 11,188(3) $ 50,937 $ 348 $ --
Multi-family residential........ -- (3) -- -- --
Commercial real estate.......... 482 1,523 432 --
Consumer and other.............. 724 979 2,215 --
-------- -------- -------- -------
Discounted Loan portfolio......... 12,394 53,439 2,995 --
Unaccreted discount and deferred
fees............................. (1,747) (6,671) (470) --
Valuation allowance(1)............ (6,218) (15,414) (431) --
-------- -------- -------- -------
Discounted Loan portfolio, net.... $ 4,429 $ 31,354 $ 2,094 $ --
======== ======== ======== =======
</TABLE>
- --------
(1) For discussion of the valuation allowance allocation for purchase
discount, see "--Asset Quality--Allowances for Losses."
(2) The Company currently expects that Girard will sell certain single-family
residential loans to WFC which in turn is expected to securitize such
loans. See "Recent Developments."
(3) Girard has purchased or committed to purchase approximately $272 million
unpaid principal amount of discounted residential mortgage loans. See
"Recent Developments."
The real properties which secure the Company's mortgage loans are located
throughout the United States. As of September 30, 1996, the five states with
the greatest concentration of properties securing the Company's loans were
California, New York, New Jersey, Florida and Texas, which had $274.2 million,
$32.8 million, $21.9 million, $17.4 million and $10.8 million principal amount
of loans, respectively. The real properties which secure the Company's
Discounted Loans are located throughout the United States. As of September 30,
1996, the five states with the greatest concentration of properties securing
the Company's Discounted Loans were Massachusetts, Connecticut, California,
Texas and New Jersey, which had $3.8 million, $3.1 million, $1.2 million, $1.1
million and $.9 million principal amount of loans, respectively. The Company
believes that the broad distribution of the real property in its Discounted
Loan portfolio reduces the risks associated with concentrating such loans in
limited geographic areas. The geographic concentration of the Company's
Discounted Loan portfolio is expected to change with the acquisition of the
Citicorp Portfolio, which is concentrated in New York and New Jersey. See
"Recent Developments."
52
<PAGE>
Contractual Principal Repayments. The following table sets forth certain
information as of September 30, 1996 regarding the dollar amount of loans
maturing in the Company's loan portfolio (excluding Discounted Loans) based on
their contractual terms to maturity and includes scheduled payments but not
potential prepayments, as well as the dollar amount of loans which have fixed
or adjustable interest rates. Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one
year or less. Loan balances have not been reduced for undisbursed loan
proceeds, unearned discounts and the allowance for loan losses.
MATURITY OF THE COMPANY'S LOAN PORTFOLIO(1)
<TABLE>
<CAPTION>
MATURING IN
-------------------------------------------------------
ONE YEAR AFTER ONE YEAR AFTER FIVE YEARS AFTER
OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS TEN YEARS
-------- ------------------ ----------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Single-family residen-
tial................... $ 6,999 $23,385 $15,681 $278,845
Multi-family residen-
tial................... 16,226 26,205 15,943 14,343
Commercial and other
mortgage loans......... 18,025 25,288 14,130 3,792
Consumer and other
loans.................. 6,019 23,589 370 720
Interest rate terms on
amounts due after one
year:
Fixed................. -- 47,317 12,415 98,277
Adjustable............ -- 51,150 33,709 199,423
</TABLE>
- --------
(1) Excludes Discounted Loans.
Scheduled contractual principal repayments do not reflect the actual
maturities of loans because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses. The average life of mortgage loans,
particularly fixed-rate loans, tends to increase when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgages are substantially higher
than current mortgage loan rates.
LOAN ORIGINATION
General. In late 1995, the Private Companies launched a mortgage conduit
program for the purchase of newly-originated residential mortgage loans on a
nationwide basis through correspondents. From the launch of the program in the
fourth quarter of 1995 through September 30, 1996, the Private Companies
purchased or committed to purchase under its mortgage conduit program
approximately $5.9 million principal amount of manufactured housing loans and
$18.0 million principal amount of first and second lien mortgage loans. While
the Company is obtaining necessary regulatory approvals, WCC will continue to
originate residential mortgage loans for the Company's account through its
correspondent relationships and will then transfer the newly originated loans
to the Company. The Company will simultaneously provide the funding for the
newly originated residential mortgage loans. Although WCC will be originating
mortgage loans for the Company's account while the Company obtains necessary
licenses, the mortgage conduit program will be conducted by the Company.
The mortgage conduit program currently focuses on the origination of
manufactured housing loans, and conforming and non-conforming first and
related second lien mortgage loans. All borrowers and the collateral must meet
the Company's credit underwriting guidelines. The Company believes that the
higher risk generally associated with non-agency borrowers is partially offset
by the Company's strong credit underwriting guidelines and the better pricing
associated with these loans. The Company is in the process of launching two
new programs for loans to good credit borrowers. The Company expects to
further expand the mortgage conduit program as it identifies market niches in
the mortgage lending market where the Company believes it has a competitive
advantage.
53
<PAGE>
The Company expects to securitize loans that it originates when
advantageous. The Company may also from time to time sell whole loans or
determine to hold loans until maturity. Loans not presented as held for sale
in the Audited Consolidated Financial Statements are expected to be held to
maturity.
Correspondent Relationships. Mortgage loans are currently acquired by WCC
through its correspondent relationships with mortgage banking firms and other
financial services companies. WCC has entered into mortgage loan purchase
agreements with each such correspondent which require specified minimum levels
of experience in origination of non-conventional mortgage loans and provide
representations, warranties and buy-back provisions identical to the
representations and warranties required of the Private Companies for the
securitization of their own loans. Correspondent institutions originate loans
based on guidelines provided by the Company and currently sell the loans to
WCC on a servicing-released basis. As of October 1996, WCC had approximately
seventy-eight approved correspondents. The Company's current strategy is to
continue to solidify and expand the correspondent relationships, which are
subject to a thorough due diligence and approval process to ensure quality
sources of new business.
Underwriting. The Company has adopted guidelines that set forth the specific
lending requirements of the Company as they relate to the processing,
underwriting, property appraisal, closing, funding and delivery of loans to
borrowers. While the Company is in the process of obtaining necessary
licenses, WCC will conduct the underwriting process for the Company. Once a
correspondent has completed its underwriting process it will submit the
initial loan application to WCC. Upon receipt of an application, WCC's
underwriting department will review the application and perform its own
underwriting. Evaluations of initial loan applications will be conducted by
WCC's employees who specialize in the analysis of loans, often with further
specialization based on geographic or collateral specific factors. Initial
loan applications are reviewed for completeness, accuracy, and compliance with
the Company's underwriting criteria and governmental regulations. The
Company's underwriting criteria focuses on debt-to-income ratios, loan-to-
value ratios, current credit reports of potential borrowers, property
appraisals and a potential borrower's job history. As part of the underwriting
process the Company requires an additional field review appraisal of the
collateral to be conducted by an approved third party at the correspondent's
expense.
Loans which clearly conform to the Company's underwriting guidelines are
approved by the underwriting department. Loans which clearly do not conform
are rejected and returned to the correspondent. Loans that present certain
underwriting issues may be returned to correspondents requesting changes or
may be forward to underwriting managers for approval. Variations from the
Company's underwriting guidelines must be approved by an appropriate officer
of the Company.
EUROPEAN OPERATIONS
The Company recently decided to expand its loan acquisition and servicing
activities to encompass the United Kingdom and France with a view towards
future expansion in Western Europe. The Company's expansion strategy involves
understanding each new market's regulatory requirements and tailoring the
Company's acquisitions and servicing to comply with such requirements and
identifying and training management and employees to run the Company's
European operations. Management is in discussions with a major U.S. investment
banking company regarding the formation of a joint venture for continuing and
expanding the servicing activities of a company located in the United Kingdom.
See "Recent Developments." The Company is also considering either establishing
its own servicing operation, acquiring an already existing entity or entering
into a joint venture with a company already active in France. Management
believes that conditions in the French real estate market and, to a lesser
degree, in the United Kingdom real estate market are similar to conditions in
the United States real estate market in the late 1980's and early 1990's and
there may be opportunities to acquire Loan Portfolios at favorable prices. In
addition, management believes that there is a demand in the European market
for U.S.-style servicing with its automated systems and detailed investor
reporting and aggressive servicing and work-out approaches.
54
<PAGE>
FUNDING SOURCES
General. The Company, in addition to deposits at the Savings Bank, will have
extensive funding sources available for investment and lending activities from
investment banking firms and institutional investors, including secured term
loans, warehouse lines of credit, repurchase facilities and sales of
participation interests in Loan Portfolios. Substantially all of the Company's
Loan Portfolio investments are expected to utilize borrowed funds, minimizing
the Company's equity investment to the extent possible. Management of the
Company closely monitors rates and terms of competing sources of funds on a
regular basis and generally utilizes the source which is the most cost
effective. Following the Common Stock Offering and Notes Offering, the Company
will continue to rely on these sources of capital, in addition to the proceeds
of the Common Stock Offering and Notes Offering, to finance its operations. As
of the closing of the Common Stock Offering and Notes Offering, certain
existing undrawn lines of credit ($413.3 million as of September 30, 1996)
will be transferred to the Company. Amounts currently drawn under the lines of
credit by the Private Companies ($86.7 million as of September 30, 1996) will
be transferred to the Company as such amounts are repaid by the Private
Companies.
Deposits. The primary source of deposits for the Savings Banks currently is
"wholesale" certificates of deposit. To a lesser extent the Savings Banks
obtain brokered certificates of deposit from national investment banking firms
which pursuant to agreements with the Savings Banks, solicit funds from their
customers for deposit with the banks. As of September 30, 1996, $154.6 million
or 31% of the Savings Banks' total deposits were brokered and $325.6 million
or 67% were wholesale deposits. Wholesale deposits generally are obtained on
more economically attractive terms to the Savings Banks than brokered
deposits.
The Savings Banks' funding strategy has been to offer deposit rates above
those customarily offered by banks and savings and loans in its markets. The
Savings Banks have been able to pursue this strategy because the general and
administrative costs associated with operating the Savings Banks is
significantly lower than traditional banks and savings institutions with
branch office networks. The Savings Banks have generally accumulated deposits
by participating in deposit rate surveys which list the Savings Banks among
the higher rate paying insured institutions, and periodically advertising in
various local market newspapers and other media. However, because the Savings
Banks compete for deposits primarily on the basis of rates, the Savings Banks
could experience difficulties in attracting deposits if they could not
continue to offer deposit rates at levels above those of other banks and
savings institutions. The Orders issued by the OTS currently prohibit the
Savings Banks from increasing their total assets above specified levels. See
"Risk Factors--Results of Regulatory Examinations--Imposition of Cease and
Desist Orders."
55
<PAGE>
The following table sets forth information relating to the Company's
deposits at the dates indicated.
THE COMPANY'S DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------------------------------------
1996 1995 1994 1993
------------------ ------------------ ------------------ -----------------
AMOUNT AVG. RATE AMOUNT AVG. RATE AMOUNT AVG. RATE AMOUNT AVG. RATE
-------- --------- -------- --------- -------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
checking accounts...... $ 5,192 0.00% $ 3,532 0.00% $ 3,045 0.00% $ -- -- %
NOW and money market
checking accounts...... 1,706 1.82 2,846 2.99 3,170 3.28 3,633 2.96
Saving accounts......... 371 2.10 304 2.38 215 2.25 194 2.50
Certificates of depos-
it..................... 480,266 5.89 296,842 6.15 189,859 5.48 80,994 3.86
-------- ---- -------- ---- -------- ---- ------- ----
Total deposits......... $487,535 5.81% $303,524 6.04% $196,298 5.35% $84,821 3.83%
======== ==== ======== ==== ======== ==== ======= ====
</TABLE>
The following table sets forth by various interest rate categories the
certificates of deposit in the Company at September 30, 1996.
INTEREST RATE CATEGORIES FOR THE COMPANY'S CERTIFICATES OF DEPOSIT
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
3.50% or less...................................... $ 1,070
3.51-4.50.......................................... 46
4.51-5.50.......................................... 50,126
5.51-6.50.......................................... 409,925
6.51-7.50.......................................... 16,232
7.51-8.50.......................................... 2,867
--------
Total............................................ $480,266
========
</TABLE>
The following table sets forth the amount and maturities of the certificates
of deposit in the Company as of September 30, 1996.
MATURITIES OF THE COMPANY'S CERTIFICATES OF DEPOSIT
<TABLE>
<CAPTION>
ORIGINAL MATURITY IN MONTHS
-------------------------------
12 OR LESS 13 TO 26 37 OR MORE
---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balances Maturing in 3
Months or Less.......... $145,202 $ 6,394 $ 0
Weighted Avg............ 5.74% 6.57% 0.0%
Balances Maturing in 4 to
12 Months............... $236,176 $36,866 $446
Weighted Avg............ 5.89% 6.32% 6.67%
Balances Maturing in 13
to 36 Months............ -- $54,637 $497
Weighted Avg............ 6.07% 6.98%
Balances Maturing in 37
or More Months.......... -- -- $ 48
Weighted Avg............ 2.76%
</TABLE>
As of September 30, 1996, the Company had $13.2 million of certificates of
deposit in amounts greater than $100,000 maturing as follows: $4.6 million
within three months; $2.5 million over three months through six months; $4.1
million over six months through 12 months; and $2.0 million thereafter.
56
<PAGE>
Borrowings. The following table sets forth information relating to the
Company's borrowings and other interest-bearing obligations at the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------
1996 1995 1994 1993
------------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB Advances............................. $ 0 $ -- $13,000 $ --
Reverse Repurchase Agreements............. 0 13,000 8,500 6,608
--- ------- ------- ------
Total................................... $0 $13,000 $21,500 $6,608
=== ======= ======= ======
</TABLE>
The following table sets forth certain information related to the Company's
short-term borrowings having average balances during the period of greater
than 30% of stockholders' equity at the end of the period. During each
reported period, FHLB advances and repurchase agreements are the only
categories for borrowings meeting this criteria. Averages determined by
utilizing month-end balances.
SHORT-TERM BORROWINGS OF THE COMPANY
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED
AT OR FOR THE DECEMBER 31,
NINE MONTHS ENDED ------------------------
SEPTEMBER 30, 1996 1995 1994 1993
------------------ ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB advances:....................
Average amount outstanding dur-
ing the period................. $ 2,396 $ 1,381 $ 5,916 $ --
Maximum month-end balance out-
standing during the period..... $11,000 $ 8,000 $13,000 $ --
Weighted average rate:
During the period............. 5.80% 7.53% 3.85% --
At end of period.............. -- -- 4.33% --
Repurchase agreements:
Average amount outstanding dur-
ing the period................. $35,721 $ 4,122 $ 4,757 $4,507
Maximum month-end balance out-
standing during the period..... $97,000 $14,950 $11,377 $6,654
Weighted average rate:
During the period............. 6.83% 5.62% 4.44% 7.54%
At end of period.............. 0.0% 6.70% 5.81% 3.35%
</TABLE>
The Company, in addition to deposits at the Savings Banks, will have
extensive funding sources available for investment and lending activities. The
following table sets forth the Company's post-Reorganization lending
arrangements and amounts utilized by the Company and the Private Companies as
of September 30, 1996.
<TABLE>
<CAPTION>
CURRENT BORROWER AFTER
LENDER BORROWER REORGANIZATION AMOUNT UTILIZED(2)
------ -------------------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
COMMITTED FACILITIES:
CS First Boston
Mortgage Capital
Corporation........... Private Companies(1) WFC $250 million(5) $67,012
Prudential Securities
Realty Funding
Corp. ................ Private Companies(1) WFC(4) $100 million $12,374
UNCOMMITTED FACILI-
TIES(3):
Bear Stearns Mortgage
Capital Corporation... First Bank First Bank $ 10 million --
Bear Stearns Mortgage
Capital
Corporation........... Girard Girard $200 million --
Bear, Stearns Interna- Private Companies(1) WFC(4) $100 million $ 1,673
tional (U.K.).........
CS First Boston Corpo-
ration
(Hong Kong) Limited... Private Companies(1) WFC(4) $ 50 million $ 2,912
------------
TOTAL AMOUNT............ $710 million
============
</TABLE>
57
<PAGE>
- --------
(1) On the closing of the Common Stock Offering and the Notes Offering,
existing lines of credit will be transferred to the Company or a wholly
owned Subsidiary of the Company.
(2) Amounts currently drawn under the lines of credit by the Private Companies
will be transferred to the Company as they become available.
(3) Though agreements governing such commitments do not specify a minimum or
maximum amount available, the parties have agreed that such agreements may
be used up to the specified amount. Any such agreement may be modified at
any time.
(4) These facilities will be transferred to a wholly owned subsidiary of WFC.
(5) Amount will be increased to $250 million upon transfer to WFC.
Repurchase Facilities. Each of First Bank and Girard entered into a Master
Repurchase Agreement with Bear Stearns Mortgage Capital Corporation ("BSMCC").
Pursuant to these agreements, the parties may enter into transactions in which
First Bank or Girard agrees to transfer to BSMCC mortgage loans or other
financial instruments against the transfer of funds by BSMCC, with a
simultaneous agreement by BSMCC to retransfer such assets at a date certain or
on demand, against the transfer of the borrowed funds by First Bank and
Girard, as the case may be. Though such master repurchase agreements do not
specify a maximum amount available under such agreements, the parties have
currently agreed that such agreement may be used for up to $210 million of
acquisitions in the aggregate. These agreements enable First Bank and/or
Girard to purchase Loan Portfolios with immediate financing from BSMCC which
can then be repaid as First Bank and/or Girard increases its deposits. See "--
Deposits" for a discussion of certain limitations on the ability of the
Savings Banks to increase deposits.
In 1996, the Private Companies entered into a master repurchase agreement
with CS First Boston Mortgage Capital Corporation ("FBMCC") pursuant to which
FBMCC has agreed to lend up to $150 million to the Private Companies for the
purchase of portfolios of performing and non-performing mortgage loans.
Pursuant to the agreement, The First Boston Corporation may generally
participate in the securitization of any loans acquired with any funds lent by
FBMCC and will be repaid out of the proceeds of any such structured
transaction. This facility will be increased to $250 million as part of the
transfer to WFC.
In 1996, the Private Companies entered into a master repurchase agreement
with an affiliate of Bear, Stearns & Co., Inc. pursuant to which such
affiliate may lend money to the Private Companies for the purchase of
portfolios of Subordinate Securities. Though such master repurchase agreement
does not specify a maximum amount available under such agreement, the parties
have currently agreed that such agreement may be used for up to $100 million
of acquisitions. Pursuant to the agreement, Bear, Stearns & Co., Inc. may
generally participate in the securitization of any portfolio of Subordinate
Securities acquired with any funds lent by such affiliate and will be repaid
out of the proceeds of any such structured transaction.
In 1996, the Private Companies entered into a master repurchase agreement
with CS First Boston (Hong Kong) Limited pursuant to which such affiliate may
lend money to the Private Companies for the purchase of portfolios of
Subordinate Securities. Though such master repurchase agreement does not
specify a maximum amount available under such agreement, the parties have
currently agreed that such agreement may be used for up to $50 million of
acquisitions. Pursuant to the agreement, The First Boston Corporation may
generally participate in the securitization of any portfolio of Subordinate
Securities acquired with any funds lent by CS First Boston (Hong Kong) Limited
and will be repaid out of the proceeds of any such structured transaction.
Warehouse Facilities. The Private Companies have a secured warehouse
financing facility (the "Warehouse Financing Facility") with Prudential
Securities Realty Funding Corp. ("Prudential Securities") of up to $100
million for the origination or purchase of residential first and second lien
mortgage loans. Pursuant to the agreement, Prudential Securities may generally
participate in the securitization of the mortgage loans acquired with any
funds lent by Prudential Securities and will be repaid out of the proceeds of
any such structured transaction.
FHLB Advances. The Savings Banks obtain advances from the FHLB of San
Francisco upon the security of certain of its assets, including FHLB stock,
provided certain standards related to the creditworthiness of the Savings
Banks have been met. FHLB advances are available to member financial
institutions such as the Savings Banks for investment and lending activities
and other general business purposes. FHLB advances are made
58
<PAGE>
pursuant to several different credit programs, each of which has its own
interest rate, which may be fixed or adjustable, and a range of maturities.
Securitizations. Since the Private Companies's initial use of securitization
in 1995 through September 1996, the Private Companies have issued $368.7
million of securities through two publicly underwritten and three privately
placed securitizations, including non-performing and sub-performing mortgage
loans, manufactured housing loans, consumer loans and conventional and non-
conforming loans. Securitizations are expected to allow the Company to
increase its loan acquisition and origination volume, reduce the risks
associated with interest rate fluctuations and provide access to longer term
funding sources. The Company currently intends to complete securitizations
either through private placements or in public offerings when advantageous.
The Company is currently in the process of securitizing a pool of consumer
receivables and expects to securitize a portfolio of non-performing and under-
performing assets in the near future.
In a securitization, a company will generally transfer a pool of loans to a
separate entity (a "Special Purpose Entity") in exchange for subordinate
securities ("Subordinate Securities") in the Special Purpose Entity and cash,
which constitutes the proceeds of Senior Securities issued by the Special
Purpose Entity. The cash generally will be used to repay borrowings used to
finance the pool of loans that were acquired by the company. Generally, the
holders of the Senior Securities are entitled to receive scheduled principal
collected on the pool of securitized loans and interest at the pass-through
interest rate on the certificate balance. The Subordinate Securities represent
the subordinated right to receive cash flows from the pool of securitized
loans after payment of the required amounts to the holders of the Senior
Securities and the costs associated with the securitization.
The Company may arrange for credit enhancement for a transaction to achieve
an improved credit rating on the Senior Securities issued if this improves the
level of profitability for such transaction. This credit enhancement may take
the form of an insurance and indemnity policy, insuring the holders of the
Senior Securities of timely payment of the scheduled pass-through interest and
principal. In addition, the pooling and servicing agreements that govern the
distribution of cash flows from the loan pool included in the transaction
typically require over-collateralization as an additional means of credit
enhancement. Over-collateralization may in some cases also require an initial
deposit, the sale of loans at less than par or retention in the Special
Purpose Entity of collections from the pool until a specified over-
collateralization amount has been attained. This retention of excess cash flow
creates a faster amortization of the scheduled balance of the Senior
Securities than the amortization of the principal balance of the securitized
loan pool. The purpose of the over-collateralization is to provide a source of
payment in the event of higher than anticipated credit losses. Losses
resulting from defaults by borrowers on the payment of principal or interest
on the loans in a securitized loan pool will reduce the over-collateralization
to the extent that funds are available and may result in a reduction in the
value of the Subordinate Securities.
The Company intends to retain the servicing rights to the loans it
securitizes and WCC will initially service such loans on the Company's behalf.
See "--Servicing Relationships." In addition, the Company may, in the future,
consider using Subordinated Securities that it purchases or acquires pursuant
to a securitization in a structured transaction, including a securitization.
SERVICING RELATIONSHIPS
The Company believes that WCC's loan servicing experience, its highly
trained servicing personnel and its proprietary software and U.S. mortgage
loan database has allowed the Private Companies to more effectively value and
price Loan Portfolios. As of September 30, 1996, WCC was servicing
approximately $1.4 billion principal amount of loans, including approximately
$502.0 million for the Savings Banks.
The Company, WFC and WCC will enter into a loan servicing agreement (the
"Loan Servicing Agreement") pursuant to which WCC will provide loan portfolio
management services, including billing, portfolio administration and
collection services for all loans owned, acquired or made by the Company or
its affiliates (including new third party servicing) (the "Loans"). Pursuant
to the Loan Servicing Agreement, the Company shall be required to pay a
servicing fee equal to a market rate. WCC has also agreed to license its
59
<PAGE>
proprietary computer software to the Company and WFC. WCC has agreed not to
compete with or be engaged in the same business as currently conducted by the
Company.
After the second anniversary of the closing of the Common Stock Offering,
the Company will have the option to begin servicing its Loan Portfolios and
WCC's loans and assume certain assets and liabilities of WCC relating thereto
(the "Servicing Transfer"), provided that, the Company or one of its
subsidiaries has obtained the appropriate regulatory approvals.
Notwithstanding the foregoing, the Company may request that the Servicing
Transfer occur on an earlier date, provided that the foregoing conditions are
met. WCC, in its sole discretion may refuse to effect the Servicing Transfer
prior to the end of the second year. The Servicing Transfer will occur
automatically on the third anniversary of the closing of the Common Stock
Offering, unless prohibited by applicable law. After the Servicing Transfer
WCC will permit the Company, subject to certain conditions, to have access to
its books, records and forms to ensure the orderly transfer of the servicing.
The fees and costs to be paid by WCC for the servicing of its loans shall be
the Company's average costs for such collection as specified in the Loan
Servicing Agreement.
Girard and First Bank have each entered into loan servicing agreements for
performing loans with WCC pursuant to which WCC provides loan portfolio
management services, including billing, portfolio administration and
collection services for all loans owned, acquired or made by the Savings
Banks. WCC receives a fee equal to ten dollars per month for each performing
loan serviced (which the Company believes is a below-market rate). The loan
servicing agreements are year-to-year and may be terminated by the Savings
Banks or WCC by giving notice at least sixty days prior to renewal date. It is
anticipated that the Savings Banks will terminate their agreements with WCC
once WCC's servicing operations have been transferred to WSC. At such time the
Savings Banks would enter into an agreement with WSC pursuant to which WSC
would service the mortgage loans and other assets of the Savings Banks.
The Savings Banks and WCC have also entered into loan servicing agreements
with respect to specific Discounted Loan portfolios. Pursuant to these loan
servicing agreements WCC provides loan portfolio management services,
including billing, portfolio administration and collection services for the
loans in the specified Discounted Loan portfolios. To date each of these loan
servicing agreements provides that WCC shall be entitled to an amount equal to
(i) all costs and expenses incurred by WCC for providing loan portfolio
management services, and (ii) an amount equal to twenty-five percent of the
amount collected on the specified Discounted Loan portfolios (other than
escrow payments, if any) which is excess of the initial payments made by the
Savings Banks to acquire the Discounted Loan portfolios. Due to the OTS
requirements, servicing fees for new Discounted Loan portfolios will be chosen
by the board of directors of the Savings Banks based upon fees charged by WCC
in any other appropriate third party servicing agreement on a portfolio basis.
WCC's servicing staff has extensive experience in servicing all types of
financial assets and over the years the Private Companies have developed clear
cut servicing procedures designed to effectively service and if necessary
liquidate a loan. The system, which is able to service a variety of loans,
provides WCC with, among other things, payment-processing, cashiering,
collection and reporting functions.
In addition, the servicing system and procedures are structured to deal
specifically with problem assets and discounted loans and to maximize in a
timely manner cash recovery on each loan in a Loan Portfolio. If a loan
becomes delinquent or once a non-performing loan is acquired, WCC enters
information with respect to each loan that is acquired in its computer system.
WCC then attempts to resolve each loan in accordance with specified procedures
as expeditiously as possible. The various resolution alternatives generally
include the following: (i) the borrower brings the loan current in accordance
with original or modified terms, (ii) the borrower repays the loan or a
negotiated amount of the loan, (iii) the borrower agrees to deed the property
to WCC in lieu of foreclosure, and (iv) WCC forecloses on the loan and the
property is acquired at the foreclosure sale either by a third party or by the
WCC. The general goal of WCC's asset resolution process is to maximize in a
timely manner cash recovery on each loan.
Under the Orders, the Savings Banks can terminate WCC's servicing agreement
if WCC fails to complete a comprehensive audit of the Savings Banks'
adjustable rate mortgages serviced by WCC, fails to correct certain
information system items, or fails to deliver certain statements to borrowers.
60
<PAGE>
NON-TRADITIONAL BANKCARD PROCESSING OPERATIONS
The Company plans to continue development of its non-traditional bankcard
processing operations, which generate revenues through merchant discounts and
processing fees for Visa and Mastercard transactions. The Company's bankcard
processing operations focus on certain high-risk market niches, principally
mail order/telephone order and audio-text where the Company believes it
obtains higher returns on processing transactions. Revenues from the bankcard
operation which commenced in the third quarter have demonstrated strong growth
increasing from $0.6 million in 1994 to $4.7 million in 1995 and to $5.1
million during the nine months ended September 30, 1996. Management believes
that there are opportunities to expand this business using its existing
infrastructure.
ASSET QUALITY
The Company, like all financial institutions, is exposed to certain credit
risks related to the value of the collateral that secures its loans and the
ability of borrowers to repay their loans. Management of the Company closely
monitors the Company's loan and investment portfolios and the Company's real
estate owned for potential problems on a periodic basis and reports to the
Board of Directors at regularly scheduled meetings.
Non-Performing Loans. It is the Company's policy to establish an allowance
for uncollectible interest on loans in its loan portfolio (excluding
discounted loans) which are past due 90 days or more and to place such loans
on non-accrual status. The Company does not accrue interest on Discounted
Loans (unless such loan later becomes performing). Loans also may be placed on
non-accrual status when, in the judgment of management, the probability of
collection of interest is deemed to be insufficient to warrant further
accrual. When a loan is placed on non-accrual status, previously accrued but
unpaid interest is reversed by a charge to interest income.
The following table sets forth certain information relating to the Company's
non-performing loans in its loan portfolio at the dates indicated.
NON-PERFORMING LOANS IN THE COMPANY'S LOAN PORTFOLIO(1)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------------
1996 1995 1994 1993
------------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-performing loans:
Single-family residential........... $31,112 $10,996 $ 5,554 $1,285
Multi-family residential............ 1,583 270 1,471 379
Commercial real estate and land..... 7,301 910 4,207 5,354
Consumer and other loans............ 4,586 503 400 175
------- ------- ------- ------
Total............................. $44,582 $12,679 $11,632 $7,193
======= ======= ======= ======
Non-performing loans as a percentage
of:
Total loans(2)...................... 9.11% 4.46% 5.95% 9.71%
Total assets........................ 8.36% 3.71% 5.04% 7.27%
Allowance for loan losses as a per-
centage of:
Total loans(2)...................... 8.19% 3.60% 3.72% 5.83%
Non-performing loans................ 89.92% 80.74% 62.50% 59.97%
</TABLE>
- --------
(1) This table does not include Discounted Loans although a substantial
portion of such loans are non-performing.
(2) Total loans is exclusive of Discounted Loans, undisbursed loan proceeds,
unaccreted discount and allowance for loan losses. For information
relating to the Company's Discounted Loan portfolio, see "--Loan
Portfolio."
Real Estate Owned. Properties acquired through foreclosure or by deed-in-
lieu thereof are valued at the lower of cost or fair value. Properties
included in the Company's real estate owned are periodically re-evaluated to
determine that they are being carried at the lower of cost or fair value less
estimated costs to sell. Holding and
61
<PAGE>
maintenance costs related to properties are recorded as expenses in the period
incurred. Deficiencies resulting from valuation adjustments to real estate
owned subsequent to acquisition are recognized as a valuation allowance.
Subsequent increases related to the valuation of real estate owned are
reflected as a reduction in the valuation allowance, but not below zero.
Increases and decreases in the valuation allowance are charged or credited to
income, respectively.
The following table sets forth certain information relating to the Company's
real estate owned (by source of acquisition) at the dates indicated.
REAL ESTATE OWNED BY THE COMPANY
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------
1996 1995 1994 1993
------------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Discounted loan portfolio:
Single-family residential.............. $ 663(1) $ 3,226 $ -- $ --
Multi-family residential............... -- -- -- --
Commercial and other mortgage loans.... 290 66 -- --
------ ------- ------ ------
Total................................ 953 3,292 -- --
Loan portfolio:
Singe-family residential............... 787 1,676 613 764
Multi-family residential............... 275 611 254 --
Commercial and other mortgage loans.... 855 578 464 328
------ ------- ------ ------
Total Portfolio...................... 1,917 2,865 1,331 1,092
Total................................ 2,870 6,157 1,331 1.092
Allowance for total losses............... (356) (1,193) (123) (55)
------ ------- ------ ------
Real estate owned, net................... $2,514 $ 4,964 $1,208 $1,037
====== ======= ====== ======
</TABLE>
- --------
(1) The differences between the balance at December 31, 1995 and September 30,
1996 reflects the securitization of certain single-family residential
loans and properties.
The following table sets forth certain geographical information as of
September 30, 1996 related to the Company's real estate owned attributable to
the Company's total loan portfolio.
REAL ESTATE OWNED ATTRIBUTABLE TO THE COMPANY'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
MULTI-FAMILY
RESIDENTIAL AND
SINGLE FAMILY RESIDENTIAL COMMERCIAL REAL ESTATE
----------------------------- --------------------------
NO. OF NO. OF
AMOUNT PROPERTIES AMOUNT PROPERTIES
-------------- -------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
California............. $399 10 $1,130 4
Connecticut............ 366 5 91 1
Texas.................. 325 10 29 5
New Jersey............. -- -- 170 1
New York............... 101 1 -- --
Other.................. 259 18 -- --
-------------- ----------- ------------ ---------
Total................ $1,450 44 $1,420 11
============== =========== ============ =========
</TABLE>
62
<PAGE>
Classified Assets. OTS regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured associations, OTS examiners have authority to
identify problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: "substandard," "doubtful"
and "loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified loss is considered uncollectible
and of such little value that continuance as an asset of the institution is
not warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified loss,
the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss or
charge off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital.
Excluding assets which have been classified loss and fully reserved by the
Savings Banks, the Savings Banks' classified assets as of September 30, 1996
consisted of $63.5 million of assets classified as substandard and $3.1
million of assets classified as doubtful. The substandard and doubtful asset
classifications include $2.8 million and $3.1 million of Discounted Loans,
respectively. In addition, at the same date, $41.6 million of assets were
designated as special mention, which includes $10.9 million of Sub-Prime Auto
Loans.
Allowances for Losses. The Company maintains an allowance for loan losses at
a level believed adequate by management to absorb potential losses in the loan
portfolio. The allowance is increased by provisions for loan losses charged
against operations, recoveries of previously charged off credits, and
allocations of discounts on purchased loans, and is decreased by charge-offs.
Loans are charged off when they are deemed to be uncollectible, or in the case
of automobile and other consumer loans, when payments are delinquent by more
than 120 days.
The Company uses its internal asset review system to identify and evaluate
impaired loans and to classify loans as special mention, substandard,
doubtful, loss. These terms correspond to varying degrees of risk that the
loans will not be collected in part or in full. The Company's policy is to
evaluate smaller-balance, homogenous pools of loans for impairment on a pooled
basis. These are primarily single-family residential and automobile and other
consumer loans. All other loans, whether Discounted Loans or other loans, are
evaluated for impairment on a loan-by-loan basis. All loans are subject to
potential classification as special mention, substandard, doubtful, or loss.
The frequency at which a specific loan is subjected to internal asset review
depends on the type and size of the loan and the presence or absence of other
risk factors, such as delinquency and changes in collateral values.
The allowance for loan losses comprises specific valuation allowances
established for impaired loans and for certain other classified loans, and
general valuation allowances. Specific valuation allowances are based on the
estimated fair value of the collateral for impaired or troubled collateral
dependent loans, in most cases. General valuation allowances are based on
management's periodic analyses of the composition of the loan portfolio,
delinquencies, loan classifications, historical loss experience, peer group
data, OTS guidelines, economic factors and other relevant information. These
estimation techniques apply to allowances established for both loans and
Discounted Loans.
When the Company increases the allowance for loan losses related to loans
other than Discounted Loans, it records a corresponding increase to the
provision for loan losses in the statement of operations. For Discounted
Loans, increases to the allowance for loan losses are recorded shortly after
each acquisition of a pool by
63
<PAGE>
allocating a portion of the purchase discount deemed to be associated with
measurable credit risk. The allocation is based on the analyses of specific
and general valuation allowances discussed above. Amounts allocated to the
allowance for loan losses from purchase discounts do not increase the
provision for loan losses recorded in the statement of operations; rather they
decrease the amounts of the purchase discounts that are accreted into the
interest income over the lives of the loans. If, after the initial allocation
of the purchase discount to the allowance for loan losses, management
subsequently identifies the need for additional allowances against Discounted
Loans, the additional allowances are established through charges to the
provision for loan losses.
Accretion of purchase discounts (excluding amounts allocated to the
allowance for loan losses) and interest income on Discounted Loans are
recorded based on cash receipts. The same income recognition policies apply to
loans other than Discounted Loans when they are deemed to be non-performing,
generally when they are 90 days or more delinquent.
The Private Companies acquired the Savings Banks at substantial discounts to
their respective book values, reflecting the poor quality of their assets and
in the case of First Bank, an expected imminent regulatory takeover. As part
of the acquisition, the Company acquired a substantial volume of impaired
loans, which required the Savings Banks to establish allowances for loan
losses. In addition, the OTS, as part of its examination process, periodically
reviews the Savings Banks' allowances for losses and the carrying values of
assets.
First Bank and Girard increased their allowances for loan losses with
respect to the Inherited Loans by $4.8 million through September 30, 1996. In
the fourth quarter of 1995 and the first quarter of 1996, the Savings Banks
acquired approximately $24.5 million of Sub-Prime Auto Loans. Under OTS
regulations the Savings Banks have been required to write-off all auto loans
in excess of 120 days delinquent, notwithstanding that the Savings Banks
retain the cars as collateral. The aggregate portfolio of Sub-Prime Auto Loans
purchased is approximately 3,000 loans, approximately 65.9% of which have
become delinquent. The Savings Banks have established reserves aggregating
$8.6 million through the third quarter of 1996, including a 10% reserve on
such loans which are current.
In the third quarter of 1996, the Company established $4.5 million of
reserves for the Sub-Prime Auto Loans so that as of September 30, 1996
reserves have been provided for all loans in excess of 60 days delinquent.
Although the Company believes its allowances for loan losses are now adequate,
future additions to these allowances, in the form of provisions for losses on
loans, may be necessary due to changes in economic conditions, increases in
the size of the Company's loan portfolio and the performance of the loan
portfolio. The following table sets forth the Company's provision for
estimated losses on loans, net of recoveries, for the nine months ended
September 30, 1996.
<TABLE>
<CAPTION>
% OF
PROVISIONS TOTAL
------------- ----------
(DOLLARS IN THOUSANDS)
------------------------
<S> <C> <C>
Inherited Loans.................................. $ 4,774 30.3%
Sub-Prime Auto Loans............................. 8,583 54.5%
Other Purchased Loans............................ 2,394 15.2%
----------- ----------
Total provision for estimated losses on loans.... $ 15,751 100.0%
=========== ==========
</TABLE>
64
<PAGE>
The following table sets forth the breakdown of the Company's allowances for
losses on the Company's loan portfolio and Discounted Loan portfolio by
category of loan and the percentage of loans in each category to total loans
in the respective portfolios at the dates indicated. The Company's allowances
for losses includes purchased discount.
COMPANY'S TOTAL ALLOWANCES FOR LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------
1996 1995 1994
------------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loan portfolio:
Real estate.......................... $34,824 $ 9,830 $ 6,883
Non-real estate...................... 5,261 407 322
Discounted Loan portfolio............ 6,219(1) 15,414 496
------- ------------ -----------
Total Allowances................... $46,304 $ 25,651 $ 7,701
======= ============ ===========
</TABLE>
- --------
(1)The difference between the balance at December 31, 1995 and September 30,
1996 reflects a securitization.
The following table sets forth an analysis of activity in the allowance for
losses relating to the Company's total loan portfolio during the periods
indicated.
ACTIVITY IN COMPANY'S ALLOWANCES FOR LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
1996 1995 1994
------------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period... $25,651 $ 7,701 $ 4,314
Provision for loan losses...... 15,751 4,266 2,173
Allocation from purchased loan
discounts..................... 15,972 19,007 2,809
Charge-offs:
Real estate.................. 10,394 5,096 1,620
Non-real estate.............. 2,100 308 46
------- ------------ -----------
Total charge-offs............ 12,494 5,404 1,666
Recoveries:
Real estate.................. 1,361 81 71
Non-real estate.............. 63 -- --
------- ------------ -----------
Total Recoveries............. 1,424 81 71
------- ------------ -----------
Net (charge-offs) recoveries... (11,070) (5,323) (1,595)
------- ------------ -----------
Balance, end of period......... $46,304 $ 25,651 $ 7,701
======= ============ ===========
Net (charge-offs) recoveries as
a percentage of average loan
portfolio..................... (2.5)% (2.2)% (1.4)%
</TABLE>
65
<PAGE>
Delinquency. The table below sets forth the delinquency status of the
Company's loan portfolio (excluding Discounted Loans) at each of the dates
indicated.
DELINQUENCY IN THE COMPANY'S LOAN PORTFOLIO(1)
<TABLE>
<CAPTION>
DECEMBER 31,
NINE MONTHS ENDED -------------------------------------
SEPTEMBER 30, 1996 1995 1994
------------------ ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF
BALANCE PORTFOLIO BALANCE PORTFOLIO BALANCE PORTFOLIO
------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Period of Delinquency:
30-59 days............ $17,956 3.7% $ 3,726 1.3% $ 4,513 2.4%
60-89 days............ 10,577 2.2 3,037 1.1 2,202 1.1
90 days or more(2).... 44,582 9.1 12,679 4.5 11,632 6.1
------- ---- ------- --- ------- ---
Total loans delin-
quent.............. $73,115 15.0% $19,442 6.9% $18,347 9.6%
======= ======= =======
</TABLE>
- --------
(1) This table excludes Discounted Loans.
(2) All loans delinquent 90 days or more were on nonaccrual status.
(3) Increase is primarily due to Inherited Loans, Sub-Prime Auto Loans and
purchased sub-performing residential loans.
INVESTMENT ACTIVITIES
Investment Securities. Investment securities consist primarily of U.S.
Government securities and required investment in FHLB stock.
The following table sets forth the Company's investment securities available
for sale and held for investment at the dates indicated:
THE COMPANY'S INVESTMENT SECURITIES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, DECEMBER 31,
------------- -----------------------
1996 1995 1994 1993
------------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities.......... $ 6,483 $ 9,083 $10,943 $ 6,632
Held to maturity
U.S. Government securities.......... 7,425 6,470 4,505 --
Mortgage-backed securities.......... 22,380 13,119 14,439 14,787
FHLB stock(1)....................... 2,911 1,421 1,612 564
------- ------- ------- -------
Total............................. 32,716 21,010 20,556 15,351
------- ------- ------- -------
Total investment securities......... $39,199 $30,093 $31,499 $21,983
======= ======= ======= =======
</TABLE>
- --------
(1) As a member of the FHLB of San Francisco, the Savings Banks are required
to purchase and maintain stock in the FHLB of San Francisco in an amount
equal to at least 1% of its aggregate unpaid residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each
year or 3% of borrowings, whichever is greater.
PROPERTIES
The Company's corporate headquarters are located in Portland, Oregon, where
the Company leases approximately 5,000 square feet of office space from a
corporation which is beneficially owned by Andrew A. Wiederhorn and Lawrence
A. Mendelsohn. See "Certain Relationships and Related Transactions." The
Savings Banks also rent approximately 8,000 sq. ft. of office space in two
locations in Portland, Oregon from a corporation which is beneficially owned
by Messrs. Wiederhorn and Mendelsohn. See "Certain Relationships and Related
Transactions." Girard leases its branch office in La Jolla, California
pursuant to a lease expiring May 31, 1997. First Bank leases its branch office
in Beverly Hills, California and office space for its merchant bankcard
operations in Calabasas, California pursuant to leases expiring February 29,
2000 and November 30,
66
<PAGE>
1999, respectively. The Company also leases office space in London, England
pursuant to a month-to-month lease. The Company believes its facilities are
both suitable and adequate for its current business purposes.
COMPUTER SYSTEMS AND OTHER EQUIPMENT
The Company believes that its use of information technology is a key factor
in achieving a competitive advantage in acquiring Loan Portfolios, minimizing
operating costs and increasing overall profitability. The Company uses
proprietary software which was developed over a period of years by the Private
Companies. In addition to standard industry software applications, the Private
Companies have internally developed fully integrated proprietary applications
designed to provide decision support and automation of portfolio tracking and
reporting. The Company's systems have significant additional capacity for
expansion without commensurate cost increases.
The proprietary software packages developed for asset resolution use
advanced financial models to support the resolution strategy, as well as track
performance against specified timeliness for each procedure. The system
permits immediate access to pertinent loan information and the automatic
preparation of letters and notices to borrowers. The Company also maintains a
centralized data warehouse.
EMPLOYEES
As of September 30, 1996, the Savings Banks had 46 employees. As of the
closing of the Common Stock Offering and the Notes Offering the Company and
its subsidiaries are expected to have approximately 80 full-time and shared
employees in the United States and 6 employees in the United Kingdom. The
employees are not represented by a collective bargaining agreement, and
management believes that it has good relations with its employees.
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings occurring in the
ordinary course of business which management of the Company believes will not
have a material adverse effect on the financial condition or operations of the
Company.
ENVIRONMENTAL MATTERS
To date, the Company has not been required to perform any investigation or
clean-up activities, nor has it been subject to any environmental claims.
There can be no assurance, however, that this will remain the case in the
future.
In the course of its business, the Company has acquired and may acquire in
the future, properties securing loans that are in default. Although to date
the Company primarily lends to owners of and purchases loans secured by
residential properties, there is a risk that the Company could be required to
investigate and clean-up hazardous or toxic substances or chemical releases at
such properties after acquisition by the Company, and may be held liable to a
governmental entity or to third parties for property damage, personal injury
and investigation and clean-up costs incurred by such parties in connection
with the contamination. In addition, the owner or former owners of a
contaminated site may be subject to common law claims by third parties based
on damages and costs resulting from environmental contamination emanating from
such property.
COMPETITION
The Company's competition in the financial services business includes
mortgage banking companies, mortgage brokers, commercial banks, credit unions,
thrift institutions, credit card issuers and finance companies. Many of these
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. Competition in loan
markets can take many forms including convenience in obtaining a loan,
customer service, marketing and distribution channels, amount and term of the
loan, loan origination fees, and interest rates. The Company believes that it
is able to compete on the basis of providing
67
<PAGE>
prompt and responsive service and its ability to analyze and purchase
performing, sub-performing and discounted loans secured by varied collateral.
The Company also faces competition in its discounted loan acquisition
activities. Discounted loans are generally acquired in auctions or competitive
bid circumstances. Although many of the Company's competitors have access to
greater capital and have other advantages, the Company believes that it has a
competitive advantage relative to many of its competitors as a result of its
experience in servicing and resolving troubled loans, its large investment in
proprietary software, technology and other resources which are necessary to
conduct its business, and the strategic relationships and contacts which it
has developed in connection with these activities.
68
<PAGE>
REGULATION
Financial institutions and their holding companies are extensively regulated
under federal and state laws. As a result, the business, financial condition
and prospects of the Savings Banks and the Company can be materially affected
not only by management decisions and general economic conditions, but also by
applicable statutes and regulations and other regulatory pronouncements and
policies promulgated by regulatory agencies with jurisdiction over the Savings
Banks and the Company, such as the OTS and the FDIC. The effect of such
statutes, regulations and other pronouncements and policies can be
significant, cannot be predicted with a high degree of certainty and can
change over time. Moreover, such statutes, regulations and other
pronouncements and policies are intended to protect depositors and the
insurance funds administered by the FDIC, and not stockholders or holders of
indebtedness which is not insured by the FDIC.
The enforcement powers available to federal banking regulators is
substantial and includes, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and institution-
affiliated parties, as defined. In general, these enforcement actions must be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with regulatory
authorities.
The following discussion and other references to and descriptions of the
regulation of financial institutions contained herein constitute brief
summaries thereof as in effect on the date of this Prospectus. This discussion
is not intended to constitute and does not purport to be a complete statement
of all legal restrictions and requirements applicable to the Company and the
Savings Banks and all such descriptions are qualified in their entirety by
reference to applicable statutes, regulations and other regulatory
pronouncements.
Recent Regulatory Examinations. Following examinations of the Savings Banks
and WAC by the OTS in 1994, 1995 and 1996, the OTS issued Reports of
Examination that were critical of the Savings Banks and WAC in a number of
respects. These regulatory concerns initially resulted in the OTS requiring
First Bank to enter into a Supervisory Agreement on June 8, 1995. The
Supervisory Agreement required First Bank to (a) develop plans and procedures
concerning (i) reduction of non-performing assets, (ii) internal asset review,
(iii) asset monitoring, (iv) appraisals, (v) loan underwriting, (vi) loan
purchases; (b) enhance recordkeeping; (c) develop requirements to ensure that
the servicing of loans by WCC is satisfactory; and (d) maintain its separate
corporate existence. In addition, the Supervisory Agreement required First
Bank to maintain certain minimum capital ratios and prohibited First Bank from
increasing total assets beyond specified levels and acquiring non-performing
assets without the prior written consent of the Assistant Regional Director of
the OTS--West Region.
Imposition of Cease-and-Desist Orders. In July 1996, the OTS advised First
Bank that it had not fully complied with the terms of the Supervisory
Agreement and that both Savings Banks had failed in a number of respects to
address regulatory concerns raised in the 1994 and 1995 examination reports.
The OTS also expressed continuing concerns regarding the adequacy of
management of First Bank in light of its business activities. As a result of
these issues, the OTS replaced the Supervisory Agreement with a Cease and
Desist Order, effective October 31, 1996. Given the similar nature of Girard's
business activities, the OTS has also issued a Cease and Desist Order to
Girard similar to the Order issued to First Bank, also effective October 31,
1996. The issuance of a cease and desist order is generally evidence of an
increased level of regulatory concern regarding the subject institution.
The Orders require that both Savings Banks not engage in unsafe and unsound
practices and that they maintain minimum capital ratios as of December 31,
1996 required of institutions to be deemed "well- capitalized" under OTS
regulations. The Orders further require that the Savings Banks appropriately
risk-weight their assets and off-balance sheet items pursuant to OTS
regulations and establish and thereafter maintain internal controls sufficient
to ensure the accuracy and integrity of the calculation of their regulatory
capital ratios. The Orders also require the Savings Banks to: (a) revise
policies and procedures concerning (i) internal asset reviews, (ii) the
allowances for loan and lease losses, (iii) loan purchases, (iv) internal
audits and (v) hedging transactions;
69
<PAGE>
(b) develop plans to augment the depth and expertise of the management teams;
(c) revise business plans; (d) modify certain policies concerning the
accounting for loan discounts; (e) improve monitoring of (i) interest rate
risk, (ii) asset classifications (e.g., as held for sale versus held to
maturity) and (iii) compliance with laws and regulations concerning
transactions with affiliates; (f) ensure compliance with the proper servicing
of adjustable-rate mortgages and escrow accounts; (g) ensure servicer
correction of OTS-identified deficiencies in information systems; and
(h) enhance recordkeeping. In addition, First Bank is required to correct OTS-
identified deficiencies in its merchant bankcard processing operations. These
requirements are accompanied by related requirements that the Savings Banks
submit to the OTS, by certain specified dates, various policies, plans and
reports on other actions to comply with the Orders. In some cases, OTS
approval of such information is required.
Specifically, among other things, the Orders require that the Savings Banks
revise and submit to the OTS their internal asset review policies and
procedures (the "IAR Policies") to provide guidance on identifying and
classifying troubled, collateral dependent loans under OTS regulatory guidance
and, for purposes of ensuring the independence of the internal asset review
process, to require that loan underwriting, servicing and purchasing functions
be generally segregated from the credit review function. In addition, the
Orders require the Savings Banks to develop, implement and maintain an
effective internal asset review system that provides for adequate internal
controls to ensure that management timely reviews and classifies assets under
the IAR Policies.
The Orders also require the Savings Banks to revise and submit to the OTS
their policies and procedures for allowances for loan and lease losses (the
"ALLL Policies") regarding the factors considered in setting loan loss
allowances and to provide adequate internal controls to ensure that management
and the Savings Banks comply with the revised ALLL Policies. Under the Orders,
when the Savings Banks report quarterly to the OTS on their progress in
implementing the ALLL Policies, the Savings Banks must also submit their
reserve analyses for the preceding calendar quarter.
The Orders also require that the Savings Banks revise and submit to the OTS
their loan purchase policies and procedures (the "Loan Purchase Policies") to
provide specific guidance on due diligence scope and sampling, assign
personnel to oversee due diligence activities and require such personnel to
ensure that all diligence is completed in accordance with the Loan Purchase
Policies and to provide specific guidance regarding the use and reliance on
broker price opinions. Under the Orders, the Savings Banks are directed to
establish and maintain sufficient internal controls to confirm that loan data
for all purchased loans meet certain minimum standards set by the Savings
Banks and to identify loan documentation deficiencies prior to purchase.
The Orders require that the Savings Banks submit to the OTS an amended
accounting policy that requires management to establish and adhere to
appropriate guidance and procedures for the amortization of discounts on
Discounted Loans, to establish appropriate reserves on Discounted Loans prior
to recognizing the yield adjustment on such loans into income and to
demonstrate the accuracy of the yield adjustment component of the discount.
In connection with the requirements of the Orders regarding asset liability
management, the Savings Banks are required to submit to the OTS a hedging
policy that fully complies with relevant accounting guidance and that
establishes written guidelines to ensure the Savings Banks document their
hedging strategy. In addition, the Savings Banks are required to submit to the
OTS a plan to develop or obtain internal expertise and resources necessary to
measure, monitor and model the Savings Banks' interest rate risk.
The Orders provide that the Savings Banks must submit a plan detailing how
WCC will complete a comprehensive audit of certain of its servicing activities
for the Savings Banks and take such action to ensure that WCC fully implements
the results of such audit. Further, the Orders require that the Savings Banks
take corrective actions specified, and adhere to the controls developed, in
the audit.
70
<PAGE>
Management believes that the Savings Banks are complying with those
requirements of the Orders that have taken effect immediately. In addition,
the Savings Banks have implemented several actions to address the other
requirements of the Orders, including (i) hiring a new chief executive officer
for the Savings Banks, (ii) engaging Arthur Andersen LLP to review
management's implementation of corrective actions required by the OTS,
(iii) increasing the size of the internal asset review department, and (iv)
revising the internal asset review policy. The Company is also in the process
of hiring a manager to complete the development and implementation of an
effective internal asset review system.
The Orders are enforceable by the OTS as written agreements under the
Federal Deposit Insurance Act. Therefore, failure to comply with the
requirements of the Orders could subject the Savings Banks and their directors
and officers to further enforcement actions, including termination of FDIC
insurance or civil money penalties. There can be no assurances that the OTS
will approve the required submissions by the Savings Banks without further
modification or will not impose further restrictions on the Savings Banks.
OTS Growth Restrictions. Since June 30, 1995, First Bank has had limited
ability to increase deposits due to the provisions of an OTS Supervisory
Agreement which prohibited First Bank from increasing assets above specified
levels. Accordingly, the Company's asset growth has principally been financed
through the raising of deposits at Girard. However, due to the issuance of the
Orders, the Company will not be able to utilize the Savings Banks as vehicles
for growth until and unless the Orders are lifted or modified. The Orders
prohibit First Bank and Girard from increasing their total assets, as measured
at the end of each calendar quarter, above $145 million and $408 million,
respectively, unless such increase is an amount that represents the total net
interest credited on deposit liabilities earned during that quarter plus any
increase permitted under the Orders in prior quarters.
SAVINGS AND LOAN HOLDING COMPANIES
The Company is a savings and loan holding company that is regulated and
subject to examination by the OTS. The activities of savings and loan holding
companies are governed by the provisions of the Home Owners' Loan Act, as
amended (the "HOLA"). Pursuant to the HOLA, a savings and loan holding company
may not (i) acquire control of a savings association or savings and loan
holding company without prior OTS approval; (ii) acquire, except with prior
OTS approval, by process of merger, consolidation, or purchase of assets of
another savings association or savings and loan holding company, all or
substantially all of the assets of any such association or holding company; or
(iii) acquire, by purchase or otherwise, more than 5% of the voting shares of
a savings association that is not a subsidiary, or of a savings and loan
holding company that is not a subsidiary. In considering whether to grant
approval for any such transaction, the OTS will take into consideration a
number of factors, including the competitive effects of the transaction, the
financial and managerial resources and future prospects of the holding company
and the institution involved, and the compliance records of such subsidiaries
with the Community Reinvestment Act ("CRA").
Federal law empowers the Director of the OTS to take substantive action when
he determines that there is reasonable cause to believe that the continuation
by a savings and loan holding company of any particular activity constitutes a
serious risk to the financial safety, soundness or stability of a savings and
loan holding company's subsidiary savings institutions. In addition, the
Director of the OTS has oversight authority with respect to all holding
company affiliates. Specifically, the Director of the OTS may, as necessary
(i) limit the payment of dividends by the savings institutions; (ii) limit
transactions between the savings institutions, the holding company and the
subsidiaries or affiliates of either; or (iii) limit any activities of the
savings institutions that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
institutions. Any such limits would be issued in the form of a directive
having the legal effect of a cease and desist order.
Activities Limitations--The Company is currently classified as a multiple
savings and loan holding company under applicable law as a result of its
ownership of the two Savings Banks, First Bank and Girard. A savings and loan
holding company which has only one insured institution subsidiary (known as a
"unitary" savings and loan holding company) and which subsidiary qualifies as
a qualified thrift lender ("QTL"), described below,
71
<PAGE>
generally has the broadest authority to engage in various types of business
activities with few restrictions on its activities, except that historically
savings and loan holding companies have not been permitted to acquire or be
acquired by an entity engaged in securities underwriting or market making. A
holding company that owns two or more financial institutions, such as the
Company, or whose sole subsidiary fails to meet the QTL test is subject to the
activities limitations applicable to multiple savings and loan holding
companies. In general, a multiple savings and loan holding company (or
subsidiary thereof that is not an insured institution) may not commence or
continue for more than a limited period of time after becoming a multiple
savings and loan holding company (or a subsidiary thereof), any business
activity other than (i) furnishing or performing management services for a
subsidiary insured institution; (ii) conducting an insurance agency or an
escrow business; (iii) holding, managing or liquidating assets owned by or
acquired from a subsidiary insured institution; (iv) holding or managing
properties used or occupied by a subsidiary insured institution; (v) acting as
trustee under deeds of trust; (vi) those activities previously directly
authorized by the OTS by regulation as of March 5, 1987 to be engaged in by
multiple savings and loan holding companies; or (vii) subject to prior
approval of the OTS, those activities authorized by the FRB as permissible
investment for bank holding companies.
Restrictions on Transactions with the Savings Banks--The Savings Banks are
subject to restrictions in their dealings with the Company and the Company's
non-bank subsidiaries under HOLA and certain provisions of the Federal Reserve
Act ("FRA") that are made applicable to savings institutions by HOLA and OTS
regulations.
A savings institution's transactions with its affiliates are subject to
limitations set forth in the HOLA and OTS regulations, which incorporate
Sections 23A, 23B, 22(g) and 22(h) of the FRA and Regulation O adopted by the
FRB. Under Section 23A, an "affiliate" of an institution is defined generally
as (i) any company that controls the institution and any other company that is
controlled by the company that controls the institution, (ii) any company that
is controlled by the shareholders who control the institution or any company
that controls the institution or (iii) any company that is determined by
regulation or order to have a relationship with the institution (or any
subsidiary or affiliate of the institution) such that "covered transactions"
with the company may be affected by the relationship to the detriment of the
institution. "Control" is determined to exist if a percentage stock ownership
test is met or if there is control over the election of directors or the
management or policies of the company or institution. "Covered transactions"
generally include loans or extensions of credit to an affiliate, purchases of
securities issued by an affiliate, purchases of assets from an affiliate
(except as may be exempted by order or regulation), and certain other
transactions.
THE SAVINGS BANKS
General. The Savings Banks are federally-chartered savings banks organized
under HOLA. As such, the Savings Banks are subject to regulation, supervision
and examination by the OTS. The deposit accounts of the Savings Banks are
insured up to applicable limits by the FDIC through the SAIF and, as a result,
the Savings Banks also are subject to regulation, supervision and examination
by the FDIC.
The business and affairs of the Savings Banks are regulated in a variety of
ways. Regulations apply to, among other things, insurance of deposit accounts,
capital ratios, payment of dividends, liquidity requirements, the nature and
amount of the investments that the Savings Banks may make, transactions with
affiliates, community and consumer lending laws, internal policies and
controls, reporting by and examination of the Savings Banks and changes in
control of the Savings Banks.
Regulatory Capital Requirements. Federally-insured savings associations are
required to maintain minimum levels of regulatory capital. These standards
generally must be as stringent as the comparable capital requirements imposed
on national banks. The OTS also is authorized to impose capital requirements
in excess of these standards on individual associations on a case-by-case
basis. The Orders require that both Savings Banks maintain minimum capital
ratios required of institutions to be deemed "well-capitalized" commencing
December 31, 1996.
72
<PAGE>
Federally-insured savings associations are subject to three capital
requirements: a tangible capital requirement, a core or leverage capital
requirement and a risk-based capital requirement. All savings associations
currently are required to maintain tangible capital of at least 1.5% of
adjusted total assets (as defined in the regulations), core capital equal to
3% of adjusted total assets and total capital (a combination of core and
supplementary capital) equal to 8% of risk-weighted assets. For these
purposes, tangible capital is core capital less all intangibles other than
qualifying mortgage servicing rights. Since neither Savings Bank had
intangibles at September 30, 1996, tangible Capital was the same as core
Capital for both Savings Banks. Core capital includes common stockholders'
equity, non-cumulative perpetual preferred stock and related surplus' minority
interests in the equity accounts of fully consolidated subsidiaries and
certain non-withdrawable accounts and pledged deposits.
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital included does not exceed the savings association's core capital.
Supplementary capital consists of certain capital instruments that do not
qualify as core capital, including subordinated debt which meets specified
requirements, subject to certain limitations, and loan and lease loss general
valuation allowances. General valuation allowances can generally be included
up to 1.25% of risk-weighted assets. In determining the required amount of
risk-based capital, total assets, including certain off-balance sheet items,
are multiplied by a risk weight based on the risks inherent in the type of
assets. The risk weights assigned by the OTS for principal categories of
assets currently range from 0% to 100%, depending on the type of asset.
OTS policy imposes a limitation on the amount of net deferred tax assets
under SFAS No. 109 that may be included in regulatory capital. (Net deferred
tax assets represent deferred tax assets, reduced by any valuation allowances,
in excess of deferred tax liabilities.) Application of the limit depends on
the possible sources of taxable income available to an institution to realize
deferred tax assets. Deferred tax assets that can be realized from the
following generally are not limited to taxes paid in prior carryback years and
future reversals of existing taxable temporary differences. To the extent that
the realization of deferred tax assets depends on an institution's future
taxable income (exclusive of reversing temporary differences and
carryforwards), or its tax-planning strategies, such deferred tax assets are
limited for regulatory capital purposes to the lesser of the amount that can
be realized within one year of the quarter-end report date or 10% of core
capital. The foregoing considerations did not affect the calculation of the
Savings Banks' regulatory capital as of September 30, 1996.
The OTS promulgated a regulation that requires that an interest-rate ("IRR")
risk component be included in the risk-based capital regulation. However, the
effective date of the interest-rate risk component has been delayed. Under the
rule, an institution with a greater than specified level of interest rate risk
is subject to a deduction of its interest rate risk component from total
capital for purposes of calculating the risk-based capital requirement. As a
result, such an institution would be required to maintain additional capital
in order to comply with the risk-based capital requirement. Had the interest-
rate risk component been in effect at June 30, 1996, the Savings Banks'
capital ratios would not have been affected by this rule.
Insurance of Accounts. As an FDIC-insured institution, the Savings Banks are
required to pay deposit insurance premiums to the SAIF as administered by the
FDIC. The SAIF maintains a fund to insure deposits of savings institutions,
including the Savings Banks. The SAIF also maintains a fund to insure the
deposits of institutions, such as the Savings Banks, that were previously
insured by the Federal Savings and Loan Insurance Corporation ("FSLIC"). The
SAIF historically has had three major obligations: to fund losses associated
with the failure of institutions with SAIF-insured deposits; to increase the
SAIF's reserves to 1.25% of insured deposits; and to make interest payments on
debt incurred to provide funds to the FSLIC (the "FICO debt"). Under current
FDIC regulations, institutions are assigned to one of three capital groups
based on the level of an institution's capital, "well-capitalized,"
"adequately capitalized," or "undercapitalized," which are defined in the same
manner as in the regulations establishing the prompt corrective action system,
as discussed below. These three groups are then divided into three subgroups
which are based on supervisory evaluations by the
73
<PAGE>
institution's primary federal banking regulator, resulting in nine assessment
classifications. Deposit insurance premium assessment rates currently range
from .23% for well capitalized institutions with only a few supervisory
concerns to .31% for undercapitalized institutions with substantial
supervisory concerns.
Recently proposed FDIC regulations would reduce future semi-annual SAIF
assessments for savings institutions such as the Savings Banks. The proposed
reduced assessment schedule would reduce rates to .18% for well capitalized
with only a few minor supervisory concerns to .27% for undercapitalized
institutions with substantial supervisory concerns for the period October 1,
1996 through December 31, 1996 and thereafter to .0% to .27%, respectively. In
addition, savings institutions such as the Savings Banks will pay an
additional .0645% in semi-annual premiums to cover costs of the FICO debt.
Recapitalization of SAIF. The SAIF, due to the large number of failed
savings institutions in the late 1980's and early 1990's, has been unable to
attain the statutorily-required reserve ratio of 1.25% of insured deposits.
Legislation enacted on September 30, 1996, provides for a special assessment
to be collected no later than 60 days after the date of enactment based on
deposits held as of March 31, 1995, at a rate sufficient to provide the SAIF
with reserves equal to 1.25% of total deposits. The FDIC currently estimates
that the special assessment rate will be 65.7 basis points. Based on the
Savings Banks' deposits as of March 31, 1995, the one-time special assessment
at 67.5 basis points resulted in the Savings Banks' incurring a pre-tax charge
of approximately $1.4 million.
The law also provides that the SAIF and the Bank Insurance Fund ("BIF") BIF
shall be merged on January 1, 1999, provided that all savings associations
have converted to banks by that date, but does not provide legislation to
implement such a conversion. The law further provides that between January 1,
1997, and December 31, 1999 (or the date the last savings association ceases
to exist, whichever is earlier), the interest costs for FICO debt will be
shared by SAIF and BIF assessments, with SAIF institutions paying about 60% of
the dollar amount and BIF institutions paying about 40% of the dollar amount.
If the BIF and SAIF have not merged by January 1, 2000, these FICO interest
costs will be assessed pro rata, with all insured institutions paying the same
rate. The law also includes a provision intended to limit "deposit shifting"
from a SAIF-insured institution to a BIF-insured affiliate.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Savings Banks, if it determines after a hearing
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 by an
agreement with the FDIC. It also may suspend deposit insurance temporarily
during the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is terminated,
the accounts at the institution at the time of the termination, less
subsequent withdrawals shall continue to be insured for a period of six months
to two years, as determined by the FDIC. Management is aware of no existing
circumstances which would result in termination of the Savings Banks' deposit
insurance.
Prompt Corrective Action. Federal law provides the federal banking
regulators with broad power to take "prompt corrective action" to resolve the
problems of undercapitalized institutions. The extent of the regulators'
powers depends on whether the institution in question is "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Under regulations adopted by the federal
banking regulators, an institution shall be deemed to be (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or more, has
a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage
capital ratio of 5.0% or more and is not subject to specified requirements to
meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized," (iii)
74
<PAGE>
"undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier
I leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total risk-
based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio
that is less than 3.0% or a Tier I leverage capital ratio that is less than
3.00%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to adjusted total assets that is equal to or less than 2.0.% The
regulations also permit the appropriate federal banking regulator to downgrade
an institution to the next lower category (provided that a significantly
undercapitalized institution may not be downgraded to critically
undercapitalized) if the regulator determines (i) after notice and opportunity
for hearing or response, that the institution is in an unsafe or unsound
condition or (ii) that the institution has received (and not corrected) a
less-than-satisfactory rating for any of the categories of asset quality,
management, earnings or liquidity in its most recent exam. As of September 30,
1996, the Savings Banks were "well capitalized" institutions under the prompt
corrective action regulations of the OTS.
Depending upon the capital category to which an institution is assigned, the
regulators' corrective powers, many of which are mandatory in certain
circumstances, include prohibition on capital distributions; prohibition on
payment of management fees to controlling persons; requiring the submission of
a capital restoration plan; placing limits on asset growth; limiting
acquisitions, branching or new lines of business; requiring the institution to
issue additional capital stock (including additional voting stock) or to be
acquired; restricting transactions with affiliates; restricting the interest
rates that the institution may pay on deposits; ordering a new election of
directors of the institution; requiring that senior executive officers or
directors be dismissed; prohibiting the institution from accepting deposits
from correspondent banks; requiring the institution to divest certain
subsidiaries; prohibiting the payment of principal or interest on subordinated
debt; and, ultimately, appointing a receiver for the institution.
Brokered Deposits. Under applicable laws and regulations, an insured
depository institution may be restricted in obtaining, directly or indirectly,
funds by or through any "deposit broker," as defined, for deposit into one or
more deposit accounts at the institution. The term "deposit broker" generally
includes any person engaged in the business of placing deposits, or
facilitating the placement of deposits, of third parties with insured
depository institutions or the business of placing deposits with insured
depository institutions for the purpose of selling interests in those deposits
to third parties. Under FDIC regulations, well-capitalized institutions are
not subject to any brokered deposit limitations, while adequately capitalized
institutions are able to accept, renew or roll over brokered deposits only (i)
with a waiver from the FDIC and (ii) subject to the limitation that they do
not pay an effective yield on any such deposit which exceeds by more than (a)
75 basis points the effective yield paid on deposits of comparable size and
maturity in such institution's normal market area for deposits accepted in its
normal market area or (b) by 120% for retail deposits and 130% for wholesale
deposits, respectively, of the current yield on comparable maturity U.S.
treasury obligations for deposits accepted outside the institution's normal
market area. Undercapitalized institutions are not permitted to accept
brokered deposits and may not solicit deposits by offering an effective yield
that exceeds by more than 75 basis points the prevailing effective yields on
insured deposits of comparable maturity in the institution's normal market
area or in the market area in which such deposits are being solicited.
Restrictions on Capital Distributions. The OTS has promulgated a regulation
governing capital distributions by savings associations, which include cash
dividends, stock redemptions or repurchases, cash-out mergers, interest
payments on certain convertible debt and other transactions charged to the
capital account of a savings association as a capital distribution. The
regulations establish a tiered system of regulation with the greatest
flexibility being afforded to well-capitalized institutions.
An institution that meets its fully phased-in capital requirements is
permitted to make capital distributions during a calendar year, without prior
OTS approval, of up to the greater of (i) 100% of its net income during the
calendar year, plus the amount that would reduce by not more than one-half its
"surplus capital ratio" at the beginning of the calendar year (the amount by
which the institution's actual capital exceeded its fully phased-in capital
requirement at that date) or (ii) 75% of its net income over the most recent
four-quarter period. An
75
<PAGE>
institution that meets its current minimum capital requirements but not its
fully phased-in capital requirements may make capital distributions, without
prior OTS approval, of up to 75% of its net income over the most recent four-
quarter period, as reduced by the amounts of any capital distributions
previously made during such period. An institution that does not meet its
minimum regulatory capital requirements prior to, or on a pro forma basis
after giving effect to, a proposed capital distribution, or that the OTS has
notified as needing more than normal supervision, is not authorized to make
any capital distributions unless it receives prior written approval from the
OTS or the distributions are in accordance with the express terms of an
approved capital plan.
The OTS has proposed an amendment to its capital distribution regulation to
conform to its PCA regulations by replacing the current "tiered" approach
summarized above with one that would allow institutions to make capital
distributions that would not result in the institution falling below the PCA
"adequately capitalized" capital category. Under this proposal, an institution
would be able to make a capital distribution (i) without notice or
application, if the institution is not held by a savings and loan holding
company and received a sufficiently favorable regulatory rating of 1 or 2,
(ii) by providing notice to the OTS if, after the capital distribution, the
institution would remain at least "adequately capitalized," or (iii) by
submitting an application to the OTS.
The OTS retains the authority to prohibit any capital distribution otherwise
authorized under its regulations if the OTS determines that the capital
distribution would constitute an unsafe or unsound practice. The regulations
also apply to direct and indirect distributions to affiliates, including those
occurring in connection with corporation reorganizations.
Affiliate Transactions. Under federal law and regulation, transactions
between a savings association and its affiliates are subject to quantitative
and qualitative restrictions. Affiliates of a savings association include,
among other entities, companies that control, are controlled by or are under
common control with the savings association. As a result, the Company and its
non-bank subsidiaries are affiliates of the Savings Banks.
Savings associations are restricted in their ability to engage in "covered
transactions" with their affiliates. In addition, covered transactions between
a savings association and an affiliate, as well as certain other transactions
with or benefiting an affiliate, must be on terms and conditions at least as
favorable to the savings association as those prevailing at the time for
comparable transactions with non-affiliated companies. Savings associations
are required to make and retain detailed records of transactions with
affiliates.
Notwithstanding the foregoing, a savings association is not permitted to
make a loan or extension of credit to any affiliate unless the affiliate is
engaged only in activities the FRB has determined to be permissible for bank
holding companies. Savings associations are prohibited from purchasing or
investing in securities issued by an affiliate, other than shares of a
subsidiary.
Savings associations are also subject to various limitations and reporting
requirements on loans to insiders. These limitations require, among other
things, that all loans or extensions of credit to insiders (generally
executive officers, directors or 10% stockholders of the institution) or their
"related interests" be made on substantially the same terms (including
interest rates and collateral) as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with the general public and not involve more than the normal risk of repayment
or present other unfavorable features.
Qualified Thrift Lender Test. All savings associations are required to meet
a QTL Test set forth in the HOLA and regulations of the OTS thereunder to
avoid certain restrictions on their operations. A savings association that
does not meet the QTL Test set forth in the HOLA and implementing regulations
must either convert to a bank charter or comply with the following
restrictions on its operations: (i) the association may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the association shall be restricted to those of a national bank;
(iii) the association shall not be eligible to obtain any advances from its
FHLB; and (iv) payment of dividends by the institution shall be subject to the
rules regarding payment of dividends by a national bank.
76
<PAGE>
Upon the expiration of three years from the date the association ceases to be
a QTL, it must cease any activity and not retain any investment not
permissible for a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations).
Historically, the QTL test has required that 65% of an institution's
"portfolio assets" (as defined) consist of certain housing and consumer-
related assets on a monthly basis in at least nine out of every 12 months. As
of September 30, 1996, the qualified thrift investments of the First Bank and
Girard were approximately 83.2% and 85.7%, respectively, of their portfolio
assets. Recently enacted legislation provides that certain education, small
business and consumer loans may be included as qualified thrift investments
for purposes of the QTL test.
Loans-to-One Borrower. Under applicable laws and regulations, the amount of
loans and extensions of credit which may be extended by a savings institution
such as the Savings Banks to any one borrower, including related entities,
generally may not exceed the greater of $500,000 or 15% of the unimpaired
capital and unimpaired surplus of the institution. Loans in an amount equal to
an additional 10% of unimpaired capital and unimpaired surplus also may be
made to a borrower if the loans are fully secured by readily marketable
securities. An institution's "unimpaired capital and unimpaired surplus"
includes, among other things, the amount of its core capital and supplementary
capital included in its total capital under OTS regulations.
As of September 30, 1996, First Bank's and Girard's unimpaired capital and
surplus amounted to $11.1 million and $26.7 million, respectively, resulting
in a general loans-to-one borrower limitation of $1.7 million and $4.0
million, respectively under applicable laws and regulations. See "Business--
Loan Portfolio."
COMMUNITY INVESTMENT AND CONSUMER PROTECTION LAWS
Truth in Lending. The Truth in Lending Act ("TILA") and Regulation Z
promulgated thereunder contain certain disclosure requirements designed to
provide consumers with uniform, understandable information with respect to the
terms and conditions of loans and credit transactions in order to give them
the ability to compare credit terms. TILA also guarantees consumers a three
day right to cancel certain credit transactions including loans of the type
originated by the Company and the Savings Banks. Management of the Company and
the Savings Banks believes that they are in compliance with TILA in all
material respects. If the Company and the Savings Banks were found not to be
in compliance with TILA, aggrieved borrowers could have the right to rescind
their loans and to demand, among other things, the return of finance charges
and fees paid to the Company.
Other Lending Laws. The Company is also required to comply with the Equal
Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors
from discriminating against applicants on certain prohibited bases, including
race, color, religion, national origin, sex, age or marital status. Regulation
B promulgated under ECOA restricts creditors from obtaining certain types of
information from loan applicants. Among other things, it also requires certain
disclosures by the lender regarding consumer rights and requires lenders to
advise applicants of the reasons for any credit denial. In instances where 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, as amended, requires lenders to supply
the applicant with the name and address of the reporting agency. In addition,
the Company is subject to the Fair Housing Act and regulations thereunder,
which broadly prohibit certain discriminatory practices in connection with the
Company's business. The Company is also subject to the Real Estate Settlement
Procedures Act of 1974, as amended, and the Home Mortgage Disclosure Act.
In addition, the Company is subject to various other Federal and state laws,
rules and regulations governing, among other things, the licensing of, and
procedures that must be followed by, mortgage lenders and services, and
disclosures that must be made to consumer borrowers. Failure to comply with
such laws, as well as with the laws described above, may result in civil and
criminal liability.
Community Reinvestment Act. Under the CRA, as implemented by OTS
regulations, a savings institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit
77
<PAGE>
needs of its entire community, including low- and moderate- income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings
institutions, to assess the institution's CRA rating and requires that the OTS
provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system. The four ratings are "outstanding
record of meeting community credit needs," "satisfactory record of meeting
community credit needs," "needs to improve record of meeting community credit
needs" and "substantial non-compliance in meeting community credit needs." An
institution's CRA rating is taken into account in determining whether to grant
charters, branches and other deposit facilities, relocations, mergers,
consolidations and acquisitions. Poor CRA performance maybe the basis for
denying an application. First Bank and Girard each received a "needs to
improve record of meeting community credit needs" rating during their
respective most recent OTS examinations.
TAXATION
FEDERAL TAXATION
The Company and its subsidiaries will file a consolidated federal income tax
return based on a calendar year. Consolidated returns have the effect of
eliminating inter-company transactions, including dividends, from the
computation of taxable income.
Savings institutions such as the Savings Banks, which meet certain
definitional tests primarily relating to their assets and the nature of their
businesses, are permitted to establish a reserve for bad debts and to make
annual additions to the reserve. These additions may, within specified formula
limits, be deducted in arriving at the Savings Banks' taxable income. For
purposes of computing the deductible addition to its bad debt reserve, the
Bank's loans are separated into "qualifying real property loans" (i.e.,
generally those loans secured by certain interests in real property) and all
other loans ("non-qualifying loans"). The deduction with respect to non-
qualifying loans must be computed under the experience method, while a
deduction with respect to qualifying loans may be computed using a percentage
based on actual loss experience or a percentage of taxable income.
Under the percentage of taxable income method, the bad debt deduction equals
8% of taxable income determined without regard to that deduction and with
certain adjustments. The availability of the percentage of taxable income
method has permitted a qualifying savings institution to be taxed at a lower
maximum effective federal income tax rate than that applicable to corporations
in general. This resulted generally in a maximum effective marginal federal
income tax rate payable by a qualifying savings institution fully able to use
the maximum deduction permitted under the percentage of taxable income method,
in the absence of other factors affecting taxable income, of 32.2% exclusive
of any minimum tax or environmental tax (as compared to 35% for corporations
generally). Any savings institution at least 60% of whose assets are
qualifying assets, as described in Section 7701(a)(19)(c) of the Code,
generally will be eligible for the full deduction of 8% of taxable income. As
of December 31, 1995, approximately 84.5% of the Girard's and 82.0% of First
Bank's assets were "qualifying assets" described in Section 7701(a)(19)(C) of
the Code. Girard and First Bank anticipate that at least 75% and 80%,
respectively of Girard's and First Bank's assets, respectively will continue
to be qualifying assets in the immediate future. If this ceases to be the
case, the Savings Banks may be required to restore its bad debt reserve to
taxable income in the future.
The amount of the bad debt deduction that a savings association may claim
with respect to additions to its reserve for bad debts under the percentage of
income method is subject to certain limitations. These limitations are not
expected to restrict the Bank from taking maximum advantage of the percentage
of taxable income method in the future, although there can be no assurances in
this regard.
To the extent (i) a savings association's reserve for losses on real
property loans under the percentage of taxable income method exceeds the
amount that would have been allowed under the experience method and (ii)
78
<PAGE>
a savings association makes distributions to stockholders (including
distributions in redemption, dissolution or liquidation) that are considered
to result in withdrawals from that excess bad debt reserve, the amounts
considered withdrawn will be included in the savings association's taxable
income. The amount that would be deemed withdrawn from such reserves upon such
distribution and which would be subject to taxation at the savings association
level at the normal corporate tax rate would be an amount equal to the amount
distributed plus the amount necessary to pay the corporate income tax with
respect to the withdrawal. Dividends will not be considered to result in
withdrawals from an association's bad debt reserves to the extent of current
or accumulated earnings and profits as calculated for federal income tax
purposes. Dividends in excess of a savings association's current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation will be considered to come
first from its bad debt reserve. The Savings Banks have no intention of paying
dividends or taking any other action which would result in recapture of its
bad debt reserves for tax purposes.
Recently enacted legislation repealed the special bad debt rules applicable
to savings associations for taxable years beginning after December 31, 1995.
Under the new provisions, savings associations will follow the same rules for
purposes of computing allowable bad debt deductions as banks. To the extent
the bad debt reserve of the savings association exceeds the allowable reserve
as computed under the rules applicable to banks, such excess will be subject
to recapture. There is an exception that, in general, grandfathers the balance
of the savings associations reserve balance as of December 31, 1987. Under the
newly enacted law, if a savings association converts to a bank or is merged
into a bank, the associations bad debt reserve will not be automatically
subject to recapture. Recapture of the grandfathered bad debt reserve would
still occur in the event of certain distributions as previously discussed.
In addition to regular income taxes, corporations may be subject to an
alternative minimum tax which is generally equal to 20% of alternative minimum
taxable income (taxable income, increased by tax preference items and adjusted
for certain regular tax items). The preference items generally applicable to
savings associations include (i) 100% of the excess of a savings association's
bad debt deduction computed under the percentage of taxable income method over
the amount that would have been allowable under the experience method and (ii)
an amount equal to 75% of the amount by which a savings association's adjusted
current earnings (alternative minimum taxable income computed without regard
to this preference, adjusted for certain items) exceeds its alternative
minimum taxable income without regard to this preference. Alternative minimum
tax paid can be credited against regular tax due in later years.
STATE TAXATION
For additional information regarding taxation, see Note 8 to the
Consolidated Financial Statements.
79
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company as of October 28, 1996.
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Andrew A. Wiederhorn....... 30 Chairman of the Board, Chief Executive Officer,
Secretary and Treasurer
Lawrence A. Mendelsohn..... 35 President and Director
Bo G. Aberg................ 48 Senior Vice President, European Operations
Donald J. Berchtold........ 51 Senior Vice President, Administration
Kenneth R. Kepp............ 41 Senior Vice President, Operations
Sheryl Anne Morehead....... 48 Senior Vice President, S&L Group and Chief
Executive Officer of the Savings Banks
Chris Tassos............... 39 Senior Vice President and Chief Financial
Officer
Phillip D. Vincent......... 42 Senior Vice President, Loan Servicing
Don H. Coleman............. 58 Director
Philip G. Forte............ 32 Director
David Dale-Johnson......... 49 Director
</TABLE>
All of the executive officers of the Company were elected at a meeting of
the Board of Directors held in October 1996. Their terms of office continue
until the next annual meeting of the Board of Directors and until their
successors shall have been elected and qualified.
Andrew A. Wiederhorn is the Chairman of the Board of Directors and Chief
Executive Officer of the Company. Mr. Wiederhorn founded the Private Companies
in 1987 and continues to serve as the Chief Executive Officer of the Private
Companies. Mr. Wiederhorn received his B.S. degree in Business Administration
from the University of Southern California.
Lawrence A. Mendelsohn is a director and the President of the Company. Since
February 1993 Mr. Mendelsohn has been the Executive Vice President of the
Private Companies. From January 1992 until February 1993 Mr. Mendelsohn was
Vice President, Principal and Head of Capital Markets for Emerging Markets of
Bankers Trust New York Corporation/BT Securities Corporation. From August 1987
until January 1992 Mr. Mendelsohn was the Vice President, Senior Options
Principal and Head of Proprietary Trading for Equities, Equity Options and
Distressed Debt for JP Morgan and Co./JP Morgan Securities. Mr. Mendelsohn
received an A.B. degree in Economics from the University of Chicago, an M.A.
degree in International Politics from the University of Texas, an M.S. degree
in Business Research from the University of Southern California and is a
Ph.D./ABD in Finance from the University of Southern California.
Bo G. Aberg is the Senior Vice President, European Operations of the
Company. From November 1994 to September 1996, Mr. Aberg was Chief Executive
Officer of Securum Holding B.V., a Kingdom of Sweden owned work-out company in
Europe. From September 1992 to November 1994, Mr. Aberg was Chief Executive
Officer of Securum Real Estate Group, Malmo, Sweden. From January 1982 to
September 1992 Mr. Aberg held several positions within the PK Group (a Swedish
banking group), and from September 1974 to January 1982 he was a Chartered
Accountant for Hagstroms Revisions Byra AB Sweden (now Ernst & Young). Mr.
Aberg received the equivalent of a B.S. degree in Economics (Ekonomexanon) and
an academic degree in Law (Jurkandexamen) both from the University of
Stockholm, Sweden.
Donald J. Berchtold is the Senior Vice President, Administration. From March
1992 until October 1996 Mr. Berchtold was the Senior Vice President,
Administration of the Private Companies. From February 1991
80
<PAGE>
until November 1992 he was a consultant to Entertainment Publications Inc.--
CUC International Inc. Mr. Berchtold received a BSc. degree in
Business/Finance and Marketing from Santa Clara University. Mr. Berchtold is
Mr. Wiederhorn's father-in-law by marriage.
Kenneth R. Kepp is the Senior Vice President, Operations. From November 1991
until October 1996 Mr. Kepp was the Senior Vice President--Operations of the
Private Companies. From June 1990 until November 1991 Mr. Kepp was the
Managing Director of Network Associates International, a consulting company to
the leasing industry. Mr. Kepp received a B.S. degree in Finance from Northern
Illinois University.
Sheryl Anne Morehead is the Senior Vice President, S&L Group of the Company
and Chief Executive Officer of the Savings Banks. From December 1993 until
October 1996, Ms. Morehead was the Chief Credit Officer/Chief Operating
Officer of First Los Angeles Bank/San Paulo Bank Group, a savings bank. From
August 1990 until December 1993, Ms. Morehead was the Chief Credit
Officer/Executive Vice President of First Federal Bank, a savings bank. Ms.
Morehead received a B.S. degree from Boston University and an M.B.A. degree
from Harvard Graduate School of Business.
Chris Tassos is the Senior Vice President and Chief Financial Officer of the
Company. Since August 1995 Mr. Tassos has been the Senior Vice President of
Finance of the Private Companies. From March 1992 until February 1995 he was
the Chief Financial Officer and/or Senior Vice President of Finance of Long
Beach Mortgage Company (formerly Long Beach Bank). Mr. Tassos received a B.A.
degree from California State University, Fullerton. From July 1979 until April
1984 and May 1985 until September 1990 Mr. Tassos was an auditor for Deloitte
& Touche LLP.
Phillip D. Vincent is Senior Vice President, Loan Servicing of the Company.
Mr. Vincent was Senior Vice President and Chief Administrative Officer of The
J.E. Robert Company, Inc., one of the largest real estate and mortgage
investment managers in the U.S. from April 1995 until July 1996, Senior Vice
President and Managing Officer of The J.E. Robert Company Inc. from June 1992
until September 1995. Mr. Vincent is a member of the American Institute of
Certified Public Accountants. Mr. Vincent received a B.S. degree in Finance
from Oklahoma State University.
Don H. Coleman is a director of the Company. Since March 1994 Mr. Coleman
has been the President of International Manufacturing and Licensing, Inc., a
subsidiary of the ICT Group, Inc., a supplier of wireless phone equipment
worldwide. From January 1988 until March 1994, Mr. Coleman was President of
Liquid Spring Corporation, a manufacturer of automobile components. From 1984
to 1986, Mr. Coleman was President of Clarion Corporation of America, a major
supplier of automotive sound systems and electronics. Mr. Coleman is a
director of ICT Group, Inc., and Fabricated Metals, Inc., a materials handling
equipment manufacturer. Mr. Coleman received a B.A. degree in Economics and an
M.B.A. degree from Stanford University.
Philip G. Forte is a director of the Company. Mr. Forte has been the
President of Wilshire Cellular, Inc., a cellular phone leasing company, since
June 1994. Wilshire Cellular, Inc. is not part of the Private Companies, nor
is it an affiliate of the Company. From March 1992 until June 1994, Mr. Forte
was the Vice President, Sales and Marketing of Vinyl Chem International, Inc.,
a textile chemical repair manufacturer. From September 1989 until March 1992
Mr. Forte was the Vice President, Sales and Marketing of Pacific Western
University. Mr. Forte received a B.S. degree in Business Administration from
the University of Southern California.
David Dale-Johnson is a director of the Company. Since 1988 Mr. Dale-Johnson
has been the Director, Program in Real Estate, School of Business
Administration, University of Southern California. Mr. Dale-Johnson is also a
consultant for several public and private companies and government agencies.
Mr. Dale-Johnson received his B.A. degree in Art History from the University
of British Columbia, M. Sc. degree in Business Administration from the
University of British Columbia and a Ph.D. degree in Business Administration
from the University of California, Berkeley.
81
<PAGE>
CERTAIN KEY EMPLOYEES
Stuart Adair is the Vice President, European Loan Acquisitions of WFC. Prior
to September 1996 he was the Vice President, Loan Acquisitions of the Private
Companies. Mr. Adair received a B.A. degree from the University of Washington.
Glenn J. Ohl is the Chief Financial Officer of WFC. From August 1995 until
October 1996 Mr. Ohl was the Senior Vice President and Corporate Treasurer of
CWM Mortgage Holdings, Inc., an affiliate of Countrywide Credit Industries
Inc., a residential financing company. From September 1992 until August 1995
Mr. Ohl was the Executive Vice President and Chief Financial Officer of ARCS
Mortgage, Inc., a financing company. Mr. Ohl received a B.A. degree from
Franklin and Marshall College and an M.B.A. degree from New York University.
Peter O'Kane is the Vice President, Loan Acquisitions. From May 1994 until
October 1996 Mr. O'Kane was the Vice President, Loan Acquisitions of the
Private Companies. From September 1992 until April 1994 Mr. O'Kane was an
Asset Manager, Investment Division of J.E. Robert Company, Inc. Mr. O'Kane
received a B.A. degree from the University of Washington.
Richard A. Papworth is the Chief Financial Officer of Girard and First Bank.
From May 1996 until August 1996 Mr. Papworth was the Chief Executive Officer
of Girard. From October 1995 until May 1996 Mr. Papworth was the Director of
Finance for Maintenance Warehouse America Corp., a national building
maintenance supply company. From October 1994 until October 1995 Mr. Papworth
was an Independent Financial Consultant. From July 1993 until October 1994 Mr.
Papworth was the Acting Chief Financial Officer and Treasurer of George Wimpey
Inc. and the Assistant Treasurer from April 1989 until July 1993. Mr. Papworth
received a B.S. degree in Accounting and a M.Acc. degree in Taxation from
Brigham Young University.
R. Scott Stevenson is the President of the Girard and First Bank. From June
1991 until October 1996 he was the President and Chief Executive Officer of
Girard. From January 1986 until June 1991 he held various positions at Girard
including Chief Operating Officer, Chief Financial Officer and a Loan Officer.
Mr. Stevenson received a B.S. degree in Accounting and an M.S. degree in
Taxation from Brigham Young University.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
Audit Committee. The Audit Committee, which consists of a majority of
independent directors who are not affiliated with the Principals ("Independent
Directors"), makes recommendations concerning the engagement of independent
public accountants, reviews with the independent public accountants the plans
and results of the audit engagement, approves professional services provided
by the independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and non-audit
fees and reviews the adequacy of the Company's internal accounting controls.
Messrs. Wiederhorn, Coleman and Dale-Johnson are the members of the Audit
Committee.
ELECTION OF DIRECTORS
Prior to the first annual meeting of the stockholders of the Company, the
Company's Board of Directors will be divided into three classes. Directors of
each class will be elected at the annual meeting of stockholders held in the
year in which the term for such class expires and will serve thereafter for
three years. No determination has been made as to which directors will be
members of each class.
COMPENSATION OF DIRECTORS
The Company intends to pay its directors who are not employees of the
Company a per meeting fee of $1,000 for each Directors' meeting and a per hour
fee for each committee meeting attended which is not on a regularly scheduled
meeting date. Under the Company's Stock Incentive Plan, each non-employee
director has been granted, effective as of the date on which the initial
public offering price is determined, a non-qualified option to purchase at the
initial public offering price a number of shares of Common Stock equal to
6,250 divided
82
<PAGE>
by the initial public offering price, and each new non-employee director upon
the date of his or her election or appointment will be granted a non-qualified
option to purchase at the fair market value on the date of grant a number of
shares of Common Stock equal to 6,250 divided by the fair market value on the
date of grant.
EXECUTIVE COMPENSATION
The following table shows compensation received by the Company's Chief
Executive Officer and the three other most highly paid executive officers for
the fiscal years ended December 31, 1995. There were no other executive
officers of the Company whose total annual salary and bonus exceeded $100,000
in 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
NAME AND
PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($)(1)
------------------ ---- ------------ -----------
<S> <C> <C> <C>
Andrew A. Wiederhorn........................... 1995 51,992(2) --
Chairman of the Board, Chief Executive
Officer, Secretary and Treasurer
Lawrence A. Mendelsohn ........................ 1995 68,293(2) --
President
Donald J. Berchtold ........................... 1995 174,451 44,260
Senior Vice President, Corporate
Development
Kenneth R. Kepp ............................... 1995 150,012 50,000
Senior Vice President, Operations
</TABLE>
- --------
(1) For the year ended December 31, 1995 the Chief Executive Officer and the
three other most highly paid executive officers derived their salaries
from the Private Companies taken as a whole and therefore salaries and
bonuses paid for the year do not necessarily reflect the amount of salary
and bonus attributable to work performed for WAC and the Savings Banks, if
any.
(2) Mr. Wiederhorn and Mr. Mendelsohn elected in the past to receive minimal
compensation to maintain capital in the Company and have received
shareholder loans from the Private Companies to fund their investment in
WAC and certain other expenses.
EMPLOYMENT AGREEMENTS
The Company has entered into substantially similar employment agreements,
effective November 1, 1996, with Andrew A. Wiederhorn ("Mr. Wiederhorn") (as
Chief Executive Officer) and Lawrence A. Mendelsohn ("Mr. Mendelsohn") (as
President) (each individually, an "Executive" and collectively, the
"Executives"). Each agreement provides for an initial three-year term which is
automatically renewable for successive two-year terms (the "Employment Term")
unless either party gives written notice to the other at least ninety days
prior to the expiration of the then Employment Term. During the Employment
Term, each Executive will be obligated to devote a significant portion of his
business time, energy, skill and efforts to the performance of his duties
under the agreement and shall faithfully serve the Company, subject to his
right to serve as an employee and/or board member of certain companies and to
manage his personal financial and legal affairs.
The agreement provides for an annual base salary of $833,333.33 for Mr.
Wiederhorn and $666,666.67 for Mr. Mendelsohn (which may be increased, but not
decreased, by the Compensation Committee of the Board of Directors) and an
annual bonus. The bonus payable to Mr. Wiederhorn and Mr. Mendelsohn will be
equal to 15% of the pre-tax profits of the Company in excess of the pre-tax
profits required to produce an after-tax 15% return on average equity for the
calendar year. Mr. Wiederhorn's and Mr. Mendelsohn's share of the bonus will
be two-thirds and one-third, respectively. The agreement also provides that
Mr. Wiederhorn and Mr. Mendelsohn may participate in the Company's Incentive
Stock Plan. See "--Stock Incentive Plan."
The agreement also provides that during the Employment Term and thereafter,
the Company will indemnify the Executive to the fullest extent permitted by
law, in connection with any claim against the Executive as a result of the
Executive serving as an officer or director of the Company or in any capacity
at the request of the Company in or with regard to any other entity, employee
benefit plan or enterprise. Following the Executive's
83
<PAGE>
termination of employment, the Company will continue to cover the Executive
even if the Executive has ceased to serve in such capacity.
If any payment to the Executive together with certain other amounts paid to
the Executive, exceeds certain threshold amounts and results from a change in
ownership as defined in Section 280G(b)(2) of the Code, the agreements provide
that the Executive will receive an additional amount to cover the federal
excise tax and any interest, penalties or additions to tax with respect
thereto on a "grossed up" basis.
The agreement may be terminated at any time by the Executive for Good Reason
or with or without Good Reason during the Change in Control Protection Period
(if a Change in Control occurs) or by the Company with or without Cause (as
each capitalized term is defined in the agreement).
If the Executive terminates his employment with the Company for Good Reason,
with or without Good Reason during the Change in Control Protection Period (if
a Change in Control occurs), the Executive is terminated without Cause, or the
Executive's employment terminates as a result of the Company giving notice of
nonextention of the Employment Term, he will receive severance pay (i) in an
amount equal to three times Base Salary in effect at termination and three
times the highest annual bonus paid or payable for any of the previous three
years, (ii) accelerated full vesting under all outstanding equity-based and
long-term incentive plans, (iii) any other amounts or benefits due under then
applicable employee benefit plans of the Company (in accordance with such
plan, policy or practice), (iv) three years of additional service credit that
the Executive would otherwise have been credited under any pension type
qualified or nonqualified pension plan, (v) three years of the maximum Company
contribution under any qualified or nonqualified 401(k) type plan and (vi)
continued medical benefits for three years. The agreement provides that
Executive will have no obligation to mitigate the Company's financial
obligations in the event of his termination due to death, disability,
termination for Good Reason, termination with or without Good Reason during
the Change in Control Protection Period or termination without Cause, and
there will be no offset against the Company's financial obligations for other
amounts earned by the Executive.
If termination is the result of Executive's death, the Company will pay to
the Executive (or his estate), an amount equal (i) any earned but not yet paid
compensation, (ii) a pro-rated bonus, (iii) any other amounts or benefits due
under then applicable employee benefit plans of the Company (in accordance
with such plan, policy or practice), (iv) payment on a monthly basis of 6
months of base salary to Executive's spouse or dependents and (v) continued
medical coverage for the Executive's spouse and dependents for three years. In
addition, the Executive will receive accelerated full vesting under all
outstanding equity-based and long-term incentive plans. If Executive's
employment is terminated by reason of disability, the Executive will be
entitled to receive payments and benefits to which his representatives would
be entitled in the event of his termination by reason of death, provided that
the payment of base salary will be reduced by any long-term disability
payments under any policy maintained by the Company.
INCENTIVE STOCK PLAN
The following is a summary of certain features of the Company's Incentive
Stock Plan (the "Stock Plan"). This summary is qualified by reference to the
Stock Plan itself. A copy of the Stock Plan is an exhibit to the Registration
Statement.
The Company's Board of Directors adopted the Stock Plan on October 28, 1996.
The Company's stockholders approved it on October 28, 1996. The purpose of the
Stock Plan is to enable the Company to attract, retain and motivate key
employees, directors and, on occasion, consultants, by providing them with
equity participation in the Company. Accordingly, the Stock Plan permits the
company to grant incentive stock options ("ISOs"), non-statutory stock options
("NSOs"), restricted stock and stock appreciation rights (collectively
"Awards") to employees, directors and consultants of the Company and
subsidiaries of the Company. The Stock Plan will terminate on October 28, 2006
unless terminated earlier by the Board of Directors.
84
<PAGE>
Administration of the Plan. The Stock Plan will be administered by the
Company's Board of Directors, a committee appointed by the board (the
"Committee") or a combination of the two. References below to the
"Administrator" are to the body that administers the plan. For the present,
the Board of Directors has delegated administration of the Stock Plan to a
committee consisting of David Dale-Johnson and Don Coleman, two of the
Company's non-employee directors.
Securities Subject to the Plan. During the ten-year term of the Stock Plan,
the Company may grant Awards for a maximum of 1,750,000 shares of Common Stock
subject to adjustment in the case of stock splits and similar events. No one
person may receive Awards covering more than a cumulative total of 900,000
shares of Common Stock under the Stock Plan.
Employee Options. Under the Stock Plan, the Company may grant ISOs (under
Section 422 of the Code) and NSOs. The option exercise price of both ISOs and
NSOs may not be less than the fair market value of the shares covered by the
option on the date the option is granted. However, the exercise price of ISOs
granted to holders of more than 10% of the Company's outstanding stock may not
be less than 110% of that fair market value. Options will not be transferable
other than by will or the laws of descent and distribution or, in the case of
NSOs, under qualified domestic relations orders.
The Administrator will select the persons to whom options will be granted,
the number of shares subject to each option and the other terms and conditions
of each option, but in all cases consistent with the Stock Plan. The Option
Agreement evidencing each option will specify whether the option is intended
to be an ISO or an NSO. The Administrator may provide that options will be
exercisable in full at grant or become exercisable over time in accordance
with a vesting schedule. Options must expire no later than ten years after
they are granted (five years in the case of ISOs granted to holders of more
than 10% of the Company's outstanding stock). The exercise price of options
will be payable in cash or, if the Administrator permits, by the optionee's
full recourse promissory note, the surrender of shares of the Common Stock
already owned by the optionee or the "netting" of stock covered by the option
(the surrender of a portion of the option in payment of the exercise price).
Options granted as ISOs will be intended to qualify for special tax status
under Section 422 of the Code. An optionee will not have taxable income upon
the grant or exercise of an ISO (although exercise will result in income for
purposes of the alternative minimum tax), and the Company will receive no
income tax deduction at grant or exercise. The optionee will be entitled to
long-term capital gain treatment upon the sale of the option shares if the
shares are held more than two years after the grant date and more than one
year after the shares are transferred to the optionee. If the shares are sold
within either period, the difference between the exercise price and the market
value at the exercise date (but not more than the actual gain on sale) may be
taxable as ordinary income. Any additional gain would be a capital gain. Any
capital gain would be long-term if the optionee held the shares more than one
year. The Company will receive no deduction in connection with ISOs, except to
the extent an employee recognizes taxable ordinary income upon disposition of
option shares.
Upon the grant of an NSO, an optionee will not recognize taxable income for
federal income tax purposes and the Company will not be entitled to any
federal income tax deduction. Upon the exercise of an NSO, the optionee
generally will recognize ordinary income in an amount equal to the excess of
the fair market value of the shares acquired at the time of exercise over the
exercise price. The Company will be entitled to a corresponding deduction.
Special rules may govern the timing of the recognition of income by optionees
subject to Section 16 of the Exchange Act.
Director Options. On the last trading day of each calendar quarter beginning
March 31, 1997, the Company will automatically grant each director who is not
also an employee of the Company or a subsidiary of the Company (a "non-
employee director") an NSO to purchase that number of shares of Common Stock
that equals $6,250 divided by the fair market value per share of Common Stock
(its market price) on the date of grant. The exercise price of these options
will be that fair market value. Each of these director options will be fully
exercisable beginning six months after the date of grant and will terminate
(unless sooner terminated under
85
<PAGE>
the terms of the Stock Plan) ten years after the date of grant. If such a
director ceases to be a member of the board for any reason other than death or
disability, these options will terminate on the first anniversary of the date
the director ceases to be a board member. If such a director dies or becomes
disabled while a member of the board, these options will terminate on the
second anniversary of the date the director dies or becomes disabled. Under
the Stock Plan, the Company could grant Awards to non-employee directors in
addition to these "automatic" quarterly option grants.
Restricted Stock. Under the Stock Plan, the Administrator may also grant
Awards of restricted shares of Common Stock. Each restricted stock Award would
specify the number of shares of Common Stock to be issued to the recipient,
the date of issuance, any consideration for such shares and the restrictions
imposed on the shares (including the conditions of release or lapse of such
restrictions). In general, shares subject to a restricted stock Award may not
be sold, assigned, transferred or pledged until the restrictions have lapsed
and rights to the shares have vested.
Stock Appreciation Rights. The Administrator may also grant Awards of stock
appreciation rights. A stock appreciation right entitles the holder to receive
from the Company, in cash or (if the Administrator so permits) Common Stock,
at the time of exercise, the excess of the fair market value at the date of
exercise of a share of Common Stock over a specified price fixed by the
Administrator in the Award, multiplied by the number of shares as to which the
right is being exercised. The specified price fixed by the Administrator will
not be less than the fair market value of shares of Common Stock at the date
the stock appreciation right was granted.
Terms and Conditions to Which All Awards Are Subject. If there is a stock
dividend, stock split, reverse stock split or reclassification of Common
Stock, appropriate adjustments will be made in the number and class of shares
of stock subject to the Stock Plan and each outstanding Award, and the
exercise price of each outstanding Award. Each such adjustment will be
determined by the Administrator in its sole discretion.
In addition, new Awards may be substituted for Awards previously granted, or
the Company's obligations respecting outstanding Awards may be assumed by an
employer corporation other than the Company, in connection with any merger,
consolidation or sale of substantial assets (but not a merger or consolidation
in which the Company is the continuing corporation which does not result in
any reclassification or exchange of the Common Stock). Further, in the event
of such a merger, consolidation or sale, the Administrator may decide to pay
cash to plan participants and terminate their Awards, or terminate their
Awards after giving them notice of the merger or other event to give them an
opportunity to exercise their Awards before the event.
Subject to the special rules described previously regarding the options to
be granted quarterly to non-employee directors, the Administrator will
establish the effect of employment termination on vested Awards.
Amendment and Termination. The Board of Directors at any time may amend or
terminate the Stock Plan. However, in general, amendments and termination
would not affect Awards previously granted. Certain amendments would be
subject to stockholder approval.
Initial Awards. As of the date of this preliminary Prospectus, the Company
had not granted any Awards. The day before the Commission declares the
Registration Statement effective, the Company will grant options under the
Stock Plan to Messrs. Wiederhorn and Mendelsohn. If, by that date, the
underwriters have not notified the Company that the underwriters will exercise
their over-allotment option, those options will cover 1,050,000 shares of
Common Stock for Messrs. Wiederhorn and Mendelsohn combined. If the
underwriters by that date have notified the Company that they will exercise
their over-allotment option in full, those options will cover a total of
1,083,750 shares of Common Stock. A partial exercise of the over-allotment
option will result in option amounts between 1,050,000 and 1,083,750 shares. A
portion of these options are intended to be ISOs. The balance will be NSOs.
The exercise price of the ISOs will be $ per share (110% of the initial
offering price to the public in the Common Stock Offering). The exercise price
for a portion of the NSOs will be $ per share (100% of the initial offering
price to the public in the Common Stock Offering). The remainder of the NSOs
will be at an exercise price of $ per share (125% of the initial offering
price to the public in the Common Stock Offering). Approximately 65.6% of the
NSOs will be priced at 100% of the initial offering price. All of these
options will be fully vested by January 2, 1997. The ISOs will have a five-
year term and the NSOs will have a ten-year term. The options will not
terminate earlier if the optionee ceases to be employed by the Company.
86
<PAGE>
The following table sets forth information concerning the options to be
granted to Messrs. Wiederhorn and Mendelsohn before the Registration Statement
becomes effective.
OPTIONS TO BE GRANTED AT CLOSING
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
PERCENT OF STOCK PRICE
NUMBER OF TOTAL APPRECIATION
SHARES OPTIONS FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM (3)
OPTIONS EMPLOYEES IN PRICES PER EXPIRATION ---------------------
NAME GRANTED FISCAL 1996 SHARE DATES 5% 10%
---- ---------- ------------ ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Andrew A. Wiederhorn.... 700,000(1) 67% $-- (2)
Lawrence A. Mendelsohn.. 350,000(4) 33% -- (2)
</TABLE>
- --------
(1) This figure will be 722,536 if the underwriters notify the Company, before
the Registration Statement becomes effective, that they will exercise
their over-allotment option in full.
(2) Five years after the closing of the Common Stock Offering for the ISOs
( shares for Mr. Wiederhorn and shares for Mr. Mendelsohn) and
ten years for the NSOs ( shares for Mr. Wiederhorn and shares
for Mr. Mendelsohn). If the options are increased as indicated in notes
(1) above and (4) below, the ISO figures become shares for Mr.
Wiederhorn and shares for Mr. Mendelsohn and the NSO figures become
shares for Mr. Wiederhorn and shares for Mr. Mendelsohn.
(3) These amounts represent hypothetical gains that could be achieved for the
options if they are exercised at the end of their terms. The assumed 5%
and 10% rates of stock price appreciation are mandated by rules of the
Commission. They do not represent the Company's estimate or projection of
future prices of the Common Stock.
(4) This figure will be 361,214 if the underwriters notify the Company, before
the Registration Statement becomes effective, that they will exercise
their over-allotment option in full.
The following table contains additional information regarding cumulative
activity under the Stock Plan based on the same assumptions used for the
previous table.
CUMULATIVE OPTION STATUS
<TABLE>
<CAPTION>
TOTAL OPTION VALUES
------------------------------------------------------
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED VALUE ---------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Andrew A. Wiederhorn.... 0 $ 0 700,000(2) 0 $ 0 --
Lawrence A. Mendelsohn.. 0 0 350,000(3) 0 0 --
</TABLE>
- --------
(1) By January 2, 1997.
(2) See note (1) to the previous table.
(3) See note (4) to the previous table.
Deductibility of Executive Compensation. Under Section 162(a) of the Code, a
corporation may deduct "a reasonable allowance for salaries or other
compensation for personal services actually rendered." However, Section 162(m)
generally limits the deduction for compensation paid to the chief executive
officer and certain other officers of a publicly-held corporation to $1
million in any taxable year. The corporation cannot deduct the compensation
paid to a covered officer in excess of $1 million.
In general, the excess of the fair market value of stock received on
exercise of Awards (other than ISOs) over the option exercise price is treated
as compensation for this purpose. Accordingly, the deduction for that excess
may be disallowed. However, this principle does not apply to "qualified
performance-based compensation." In addition, a special rule applies to
compensation paid under a plan that existed before the corporation became
publicly held. Options granted under the Stock Plan for a period of
approximately three and one-half years after the closing of the Common Stock
Offering will be intended to qualify under this special rule. In addition, the
Company may choose to cause options and other Awards granted after the Company
becomes publicly-held and which do not qualify under this special rule to
qualify for exemption from Section 162(m) as "qualified performance-based
compensation." However, there are no assurances that any or all Awards will
not be subject to the limitation of Section 162(m).
87
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the beneficial
ownership of Common Stock as of the date of this Prospectus by (a) each
stockholder known by the Company to be the beneficial owner of more than five
percent of the outstanding shares of Common Stock, (b) each director, (c) each
executive officer, and (d) all directors and executive officers as a group.
<TABLE>
<CAPTION>
OWNERSHIP PRIOR TO OFFERING OWNERSHIP AFTER OFFERING
------------------------------ ---------------------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF
BENEFICIAL OWNERS(1) OWNERSHIP CLASS OWNERSHIP CLASS(2)
-------------------- --------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Andrew A. Wiederhorn.... 3,617,127 65.77% 3,617,127 51.67%
Lawrence A. Mendelsohn.. 1,808,330 32.88% 1,808,330 25.83%
Bo G. Aberg............. -- -- -- --
Donald J. Berchtold..... -- -- -- --
Sheryl Anne Morehead.... -- -- -- --
Kenneth E. Kepp......... -- -- -- --
Chris Tassos............ -- -- -- --
Phillip D. Vincent...... -- -- -- --
Don H. Coleman.......... 11,222 .2% 11,222 .16%
Philip G. Forte......... -- -- -- --
David Dale-Johnson...... 11,222 .2% 11,222 .16%
All directors and execu-
tive officers as a
group (11 persons)..... 5,447,901 99.05% 5,447,901 77.82%
</TABLE>
- --------
(1) The address for each of the named officers and directors is c/o Wilshire
Financial Services Group Inc., 1776 SW Madison, Portland, Oregon 97205.
(2) Assumes no exercise of the Common Stock Underwriters' over-allotment
option.
Except as noted in the footnotes above (i) none of such shares is known by
the Company to be shares with respect to which such beneficial ownership and
(ii) the Corporation believes the beneficial holders listed above have sole
voting and investment power regarding the shares shown as being beneficially
owned by them.
88
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEASES
The Company leases office space for its corporate headquarters from Wilshire
Properties I, Incorporated, an Oregon corporation ("WPI"). Andrew A.
Wiederhorn and Lawrence A. Mendelsohn are the beneficial owners of WPI. The
lease agreement provides for an aggregate annual rent payment in 1997 of
approximately $90,000 and expires December 31, 2001. In addition to base rent
the Company is required to pay its proportionate share of operating expenses
incurred by WPI in connection with the operations of the building. The Savings
Banks lease approximately 8,000 sq. ft. of office space in two locations
pursuant to lease which provides for an aggregate annual rental payment in
1997 of approximately $96,000 and expires December 31, 1997.
STOCK TRANSACTIONS
Upon the closing of the Common Stock Offering and Notes Offering, certain
executive officers and directors will exchange 5.1% of the capital stock of
Girard, 5.1% of the capital stock of First Bank, and approximately 99% of the
capital stock of WAC (which itself owns 94.9% of the capital stock of Girard
and First Bank), for 5,447,901 shares of Common Stock of WFSG.
LOAN SERVICING AGREEMENT BETWEEN THE COMPANY, WFC AND WCC
The Company, WFC and WCC entered into a loan servicing agreement (the "Loan
Servicing Agreement") pursuant to which WCC will provide loan portfolio
management services, including billing, portfolio administration and
collection services for all Loans. WCC has also agreed to license its
proprietary computer software to the Company and WFC. Pursuant to the Loan
Servicing Agreement, the Company shall be required to pay a servicing fee
equal to market rates. WCC has agreed not to compete with or be engaged in the
same business as currently conducted by the Company.
After the second anniversary of the closing of the Common Stock Offering,
the Company will have the option to begin servicing its Loan Portfolios and
WCC's loans (the "Servicing Transfer"), provided that the Company or one of
its subsidiaries has obtained the appropriate licenses. Notwithstanding the
foregoing, the Company may request that the Servicing Transfer occur on an
earlier date, provided that the foregoing conditions are met. WCC, in its sole
discretion may refuse to effect the Servicing Transfer prior to the end of the
second year. The Servicing Transfer will occur automatically on the third
anniversary of the closing of the Common Stock Offering and Notes Offering.
After the Servicing Transfer WCC will permit the Company, subject to certain
conditions, to have access to its books, records and forms to ensure the
orderly transfer of the servicing. Following the Servicing Transfer, the fees
and costs to be paid by WCC for the servicing of its loans and the loans of
persons other than the Company shall be the Company's average costs for such
collection as specified in the Loan Servicing Agreement.
LOAN SERVICING AGREEMENT BETWEEN THE SAVINGS BANKS AND WCC
Girard and First Bank have each entered into loan servicing agreements for
performing loans with WCC pursuant to which WCC provides loan portfolio
management services, including billing, portfolio administration and
collection services for all loans owned, acquired or made by the Savings
Banks. WCC receives a fee equal to ten dollars per month for each loan
serviced. The loan servicing agreements are year-to-year and may be terminated
by the Savings Banks or WCC by giving notice at least sixty days prior to
renewal date.
The Savings Banks and WCC have also entered into loan servicing agreements
with respect to specific discounted Loan Portfolios. Pursuant to these loan
servicing agreements WCC provides loan portfolio management services,
including billing, portfolio administration and collection services for the
loans in the specified Loan Portfolios. To date, each of these loan servicing
agreements provides that WCC shall be entitled to an amount equal to (i) all
costs and expenses incurred by WCC for providing loan portfolio management
services, and (ii) an amount equal to twenty-five percent of the amount
collected on the specified Discounted
89
<PAGE>
Loan Portfolios (other than escrow payments, if any) which is in excess of the
initial payments made by the Savings Banks to acquire the Discounted Loan
Portfolios. Servicing fees for new Discounted Loan portfolio servicing
agreements will be chosen by the boards of directors of the Savings Banks
based upon fees charged by WCC in any other appropriate third-party servicing
agreement.
ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to the Administrative Services Agreement, WCC and its private
affiliates and the Company have agreed to provide, commencing with the
completion of the Common Stock Offering and the Notes Offering, certain
services to each other, including, among other things, certain financial
reporting functions, legal compliance, banking, risk management and
operational and strategic matters. The Administrative Services Agreement will
provide for the payment of a market rate plus reimbursement of any third party
expenses for any services rendered by one party for another. The initial term
of the Administrative Services Agreement will expire on December 31, 1997; it
will continue for successive one year renewal periods unless terminated by
either of the parties on not less than 90 days notice prior to the end of any
period. The parties to the Administrative Service Agreement have agreed to
indemnify each other against liability arising out of the willful misconduct
or gross negligence of the indemnifying party.
90
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following description of the Company's capital stock does not purport to
be complete and is qualified in its entirety by reference to (i) applicable
provisions of Delaware law, and (ii) the provisions of the Company's
Certificate of Incorporation and By-Laws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is part.
The authorized capital stock of the Company consists of (i) 10,000,000
shares of Preferred Stock, (ii) 50,000,000 shares of Common Stock. Upon
consummation of the Common Stock Offering and Notes Offering, 7,000,000 shares
of Common Stock and no shares of Preferred Stock will be outstanding. The
issued and outstanding shares of Common Stock assuming no exercise of the
Underwriter's overallotment option have been, and the shares of Common Stock
offered hereby will be, duly authorized, validly issued, fully paid and
nonassessable. In addition, 31,225 shares of Common Stock have been reserved
for issuance upon exercise of outstanding options and an additional 1,750,000
have been reserved for options eligible to be granted under the Stock
Incentive Plan. The following summary description of the Company's capital
stock is qualified in its entirety by reference to the Certificate of
Incorporation and Bylaws of the Company, copies of which have been filed as
Exhibits to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
Holders of shares of Common Stock shall be entitled to one vote per share on
all matters to be voted upon by the stockholders of the Company. Holders of
Common Stock casting a plurality of the votes of stockholders entitled to vote
in an election of directors may elect all of the directors. Shares of Common
Stock do not have cumulative voting rights with respect to the election of
directors. Immediately after the Common Stock Offering, certain executive
officers and directors will hold shares of Common Stock constituting
approximately 78% of the voting power of the outstanding Common Stock, which
will allow them to control all actions to be taken by the stockholders,
including the election of all directors to the Board of Directors. While such
executive officers and directors will have the voting power to control the
votes on any matter requiring stockholder approval, the Company intends to
submit all such matters to a vote of all stockholders, and to hold an Annual
Meeting of Stockholders. However, because the Company's Bylaws provide that
any action that can be taken at a meeting of the stockholders may be by
written consent in lieu of the meeting if the Company receives consents signed
by stockholders having a minimum number of votes that would be necessary to
approve the action at a meeting at which all shares entitled to vote on the
matter were present, such executive officers and directors may take all
actions required to be taken by the stockholders without providing the other
stockholders the opportunity to make nominations or raise other matters at a
meeting. See "Principal Stockholders" and "Risk Factors--Control of Current
Stockholders."
Holders of shares of Common Stock are entitled, in the event of liquidation,
dissolution or winding up of the affairs of the Company, to share ratably in
all assets remaining after payment of liabilities and preference applicable to
the Preferred Stock outstanding at the time. Holders of Common Stock do not
have any preemptive rights or rights to subscribe for additional securities of
the Company. Shares of Common Stock are not redeemable and there are no
sinking fund provisions.
Subject to preferences applicable to the Preferred Stock outstanding at the
time, holders of shares of Common stock are entitled to dividends if, when and
as declared by the Board of Directors from funds legally available therefor.
The Company currently intends to retain its earnings to support its future
growth strategy and does not anticipate paying dividends foreseeable future.
See "Dividend Policy." Under the Indenture, dividends on the Common Stock can
be paid only in certain circumstances and up to a maximum amount.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is The Bank of New
York. Its address is 101 Barclay St., New York, NY 10286, attn: Investor
Relations, 11E. Its telephone number is 800-524-4458 and its facsimile number
is 212-815-3201.
91
<PAGE>
UNDESIGNATED PREFERRED STOCK
Pursuant to the Certificate of Incorporation, the Board of Directors is
authorized (subject to any limitations prescribed by law and the Company's
Certificate of Incorporation or by the rules of Nasdaq or any stock exchange
on which the Common Stock may then be listed) to issue the Preferred Stock
from time to time in one or more series, which Preferred Stock shall be
preferred to the Common Stock as to dividends and distributions of assets of
the Company upon the voluntary or involuntary liquidation, dissolution or
winding up of the Company and shall have such designations, preferences,
rights, qualifications, limitations and restrictions as shall be provided by
the Board of Directors.
The issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
an adverse effect on holders of Common Stock, depending upon the rights of
such Preferred Stock, by delaying or preventing a change in control of the
Company, making removal of the present management of the Company more
difficult, or resulting in restrictions upon the payment of dividends or other
distributions to holders of Common Stock.
DESCRIPTION OF NOTES OFFERING
The following summary of the principal terms of the Notes does not purport
to be complete and is qualified in its entirety by reference to all of the
provisions of the Indenture governing the Notes and the Notes, copies of which
have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. Capitalized terms not otherwise defined herein have the
meanings specified in the Indenture.
The Notes will be limited in aggregate principal amount to $60 million ($69
million if the Notes Underwriter's over-allotment option is exercised in full)
and will mature on , 2003. The Notes will be unsecured obligations of the
Company. Interest on the Notes will accrue at a rate of % per annum and will
be payable in cash semi-annually in arrears on and of each year,
commencing , 1997.
On and after , 2001, the Notes will be redeemable at any time
at the option of the Company, in whole or in part, at specified redemption
prices together with accrued and unpaid interest to the date of redemption.
The Notes are not otherwise redeemable prior to , 2001 except that until
, 2001, the Company may redeem, at its option, up to 35% of the original
aggregate principal amount of the Notes at a redemption price equal to % of
the principal amount thereof, plus accrued and unpaid interest to the
redemption date, from the net proceeds of one or more private or public sales
of Qualified Capital Stock (as defined) if at least 65% of the original
aggregate principal amount of the Notes remains outstanding after such
redemption. Upon the occurrence of a Change in Control Event (as defined),
holders of the Notes will have the right to require the Company to repurchase
their Notes, in whole or in part, at a purchase price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest, if any,
to the repurchase date.
The Indenture governing the Notes will contain certain covenants, including
net worth and liquidity maintenance requirements, limitations on the
incurrence of indebtedness, transfers and issuances of stock of the banks, the
making of restricted payments (including restrictions on the payment of
dividends on the Common Stock), the imposition of certain payment restrictions
on subsidiaries, transactions with affiliates, the existence of liens, the
making of guarantees by subsidiaries, and on mergers and sales of assets.
The Common Stock Offering is conditioned upon the consummation of the Notes
Offering.
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Certificate of Incorporation authorizes the issuance of
50,000,000 shares of Common Stock. Upon completion of the Common Stock
Offering, there will be outstanding 7,000,000 shares of Common Stock (assuming
no exercise of the Underwriters' over-allotment option).
92
<PAGE>
The 1,500,000 shares of Common Stock to be sold in the Common Stock Offering
(1,725,000 shares if the Underwriters' over-allotment option is exercised in
full) will be available for resale in the public market without restriction or
further registration under the Securities Act, except for shares purchased by
affiliates of the Company (in general, any person who has a control
relationship with the Company), which shares will be subject to the resale
limitations of Rule 144. 5,500,000 presently outstanding shares of Common
Stock and the 1,081,225 shares of Common Stock issuable upon the exercise of
options that the Company has granted or agreed to grant will be "restricted
securities" within the meaning of Rule 144, and are eligible for sale in the
public market in compliance with Rule 144. Shortly after the date of this
Prospectus, the Company intends to file a registration statement on Form S-8
under the Securities Act registering approximately 1,750,000 shares of Common
Stock issuable upon the exercise of options granted or to be granted pursuant
to the Company's Stock Incentive Plan. Upon effectiveness of the registration
statement, shares issued to nonaffiliates upon the exercise of the options
generally will be freely tradeable without restriction or further registration
under the Securities Act. All officers and directors of the Company have
agreed, subject to certain exceptions, that they will not offer, sell or
otherwise dispose of any shares of Common Stock owned by them for a period of
180 days after the date of this Prospectus without the prior written consent
of the Representative of the Underwriters. The Company has agreed, subject to
certain exceptions, that it will not offer, sell or otherwise dispose of any
shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of the Representative of the
Underwriters.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act,
is entitled to sell, within any three-month period, a number of restricted
shares as to which at least two years have elapsed from the later of the
acquisition of such shares from the Company or an affiliate of the Company in
an amount that does not exceed the greater of (i) one percent of the then
outstanding shares of Common Stock (70,000 shares based upon 7,000,000 shares
to be outstanding immediately after the Common Stock Offering), or (ii) if the
Common Stock is quoted on Nasdaq or a stock exchange, the average weekly
trading volume of the Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain requirements as to
the manner of sale, notice, and the availability of current public information
about the Company. However, a person who is not deemed to have been an
affiliate of the Company during the 90 days preceding a sale by such person
and who has beneficially owned shares as to which at least three years has
elapsed form the later of the acquisition of such shares form the Company or
an affiliate of the Company is entitled to sell them without regard to the
volume, manner of sale, or notice requirements of Rule 144.
93
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement with
respect to the Common Stock Offering (the "Common Stock Underwriting
Agreement") among the Company and each of the underwriters named below (the
"Common Stock Underwriters"), for whom Friedman, Billings, Ramsey, & Co., Inc.
is acting as representative (the "Representative"), has severally agreed to
purchase from WFSG the aggregate number of shares of Common Stock set forth
opposite its name below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc.......................
---------
Total..................................................... 1,500,000
=========
</TABLE>
The Common Stock Underwriting Agreement provides that the obligations of the
Common Stock Underwriters are subject to certain conditions precedent,
including the completion of the Notes Offering, and that the Common Stock
Underwriters will purchase all of the Common Stock offered hereby if any such
Common Stock are purchased.
WFSG has been advised by the Representative that the Common Stock
Underwriters propose initially to offer the Common Stock to the public at the
initial public offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession not in excess of $
per share. The Common Stock Underwriters may allow, and such dealers may re-
allow, a discount not in excess of $ per share to certain other dealers.
The offering of the Common Stock is made for delivery when, as and if accepted
by the Common Stock Underwriters and is subject to prior sale and to the
Common Stock Underwriters' right to reject any order in whole or in part and
to withdraw, cancel, or modify the offer without notice. After the initial
public offering of the Common Stock, the offering price and other selling
terms may be changed by the Common Stock Underwriters.
WFSG has granted the Common Stock Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to an
aggregate of 225,000 additional shares of Common Stock at the initial public
offering price, less the underwriting discount, set forth on the cover page of
this Prospectus. The Common Stock Underwriters may exercise such option only
to cover over-allotments, if any, made in connection with the sale of shares
of Common Stock offered hereby. If purchased, the Common Stock Underwriters
will offer such additional shares of Common Stock on the same terms as the
1,500,000 shares of Common Stock are being offered. To the extent that the
Common Stock Underwriters exercise such option, each of the Common Stock
Underwriters will be obligated, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares of Common
Stock to be purchased by it shown in the above table bears to 1,500,000 and
WFSG will be obligated, pursuant to the option, to sell such shares of Common
Stock to the Common Stock Underwriters.
The Company has agreed to indemnify the Common Stock Underwriters against
certain liabilities including liabilities under the federal securities laws,
or to contribute to payments the Common Stock Underwriters' may be required to
make in respect thereof.
Prior to the Common Stock Offering, there has been no public market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock was determined by negotiations between the Company and the
Representative. Among the factors considered in such negotiations were the
history of, and prospects for the Company and the industry in which it
competes, an assessment of management, the Company's past and present
operations, its past and present earnings and the trend of such earnings, the
prospects for future earnings of the Company, the general condition of the
securities markets at the time of the Common Stock Offering and the market
prices of publicly-traded common stocks of comparable companies in recent
periods.
The Common Stock Underwriters do not intend to confirm sales to any accounts
over which they exercise discretionary authority.
94
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will is being passed on for
the Company by Proskauer Rose Goetz & Mendelsohn LLP, New York, New York.
Certain legal matters in connection with the Common Stock offered hereby will
be passed upon for the Common Stock Underwriters by Gibson, Dunn & Crutcher
LLP, Orange County, California.
EXPERTS
The audited consolidated financial statements of the Company and its
subsidiaries at and for the nine months ended September 30, 1996, and at
December 31, 1995 and 1994 and for the two years then ended, the audited
consolidated financial statements of Girard Savings Bank, F.S.B. and
Subsidiary for the period from January 1 through November 8, 1994, and the
audited combined financial statements of Wilshire Credit Corporation and
Affiliates at and for the nine months ended September 30, 1996 and at December
31, 1995 and 1994 and for the two years then ended, have been included herein
in reliance upon the reports of Deloitte & Touche LLP, independent auditors,
upon the authority of said firm as experts in auditing and accounting.
95
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
Independent Auditors' Report............................................ F-2
Consolidated Financial Statements:
Consolidated Statements of Financial Condition--September 30, 1996 and
December 31, 1995...................................................... F-3
Consolidated Statements of Operations--Nine Months Ended September 30,
1996 and
Years Ended December 31, 1995 and 1994 ................................ F-4
Consolidated Statements of Cash Flows--Nine Months Ended September 30,
1996 and
Years Ended December 31, 1995 and 1994................................. F-5
Consolidated Statements of Stockholders' Equity--Nine Months Ended
September 30, 1996
and Years Ended December 31, 1995 and 1994............................. F-7
Notes to Consolidated Financial Statements.............................. F-8
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
Independent Auditors' Report............................................ F-27
Consolidated Financial Statements:
Consolidated Statements of Operations for the Period from January 1,
1994 through
November 8, 1994....................................................... F-28
Consolidated Statements of Cash Flows for the Period from January 1,
1994 through
November 8, 1994....................................................... F-29
Notes to Consolidated Financial Statements.............................. F-30
WILSHIRE CREDIT CORPORATION AND AFFILIATES
Independent Auditors' Report............................................ F-33
Combined Financial Statements:
Combined Statements of Financial Condition--September 30, 1996 and
December 31, 1995...................................................... F-34
Combined Statements of Operations--Nine Months Ended September 30, 1996
and the
Years Ended December 31, 1995 and 1994 ................................ F-35
Combined Statements of Stockholders' Equity--Nine Months Ended September
30, 1996
and the Years Ended December 31, 1995 and 1994......................... F-36
Combined Statements of Cash Flows--Nine Months Ended September 30, 1996
and
the Years Ended December 31, 1995 and 1994............................. F-37
Notes to Combined Financial Statements.................................. F-39
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Wilshire Financial Services Group Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial
condition of Wilshire Financial Services Group Inc. and Subsidiaries (the
"Company") as of September 30, 1996 and December 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the nine months ended September 30, 1996 and for the years ended December 31,
1995 and 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 accompanying financial statements present fairly, in all
material respects, the financial position of Wilshire Financial Services Group
Inc. and Subsidiaries as of September 30, 1996 and December 31, 1995, and the
results of their operations and their cash flows for the nine months ended
September 30, 1996 and for the years ended December 31, 1995 and 1994, in
conformity with generally accepted accounting principles.
As discussed in Note 10 to the consolidated financial statements, the
Company's subsidiaries, First Bank of Beverly Hills, F.S.B. and Girard Savings
Bank, F.S.B., are operating under regulatory agreements with the Office of
Thrift Supervision that require them to meet certain prescribed requirements.
November 13, 1996 /s/ Deloitte & Touche LLP
Los Angeles, California
F-2
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks........................... $ 11,231 $ 3,382
Federal funds sold................................ 9,300 1,100
-------- --------
Total cash and cash equivalents................. 20,531 4,482
Mortgage-backed securities held to maturity, at
amortized cost (fair values: September 30, 1996,
$21,778; December 31, 1995, $12,873)............. 22,380 13,119
Mortgage-backed securities available for sale, at
fair value (amortized cost: September 30, 1996,
$6,652; December 31, 1995, $9,099)............... 6,483 9,083
Securities held to maturity, at amortized cost
(fair values:
September 30, 1996, $7,452; December 31, 1995,
$6,488).......................................... 7,425 6,470
Trading account securities........................ 7,092 --
Loans, net........................................ 177,280 258,827
Discounted loans, net............................. 3,419 13,347
Loans held for sale, net, at lower of cost or
market........................................... 260,804 18,597
Stock in Federal Home Loan Bank of San Francisco,
at cost.......................................... 2,911 1,421
Real estate owned, net............................ 2,514 4,964
Leasehold improvements and equipment, net......... 336 275
Due from affiliate................................ 8,357 4,514
Accrued interest receivable....................... 4,268 3,042
Prepaid expenses and other assets................. 3,887 1,724
Income taxes receivable, net...................... 5,422 1,589
-------- --------
TOTAL............................................... $533,109 $341,454
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits.......................................... $487,535 $303,524
Borrowings........................................ -- 13,000
Accounts payable and other liabilities............ 7,625 4,398
Subordinated debt................................. -- 11,000
Deferred credits.................................. 832 1,134
Minority interest in subsidiaries................. 277 600
Due to affiliates................................. 2,286 759
-------- --------
Total liabilities............................... 498,555 334,415
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock................................... -- --
Common stock...................................... 35,550 6,800
Retained earnings (accumulated deficit)........... (827) 255
Unrealized loss on available-for-sale securities,
net of tax....................................... (169) (16)
-------- --------
Total stockholders' equity...................... 34,554 7,039
-------- --------
TOTAL............................................... $533,109 $341,454
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, -----------------
1996 1995 1994
------------- ------- --------
(IN THOUSANDS, EXCEPT
PER SHARE INFORMATION)
<S> <C> <C> <C>
INTEREST INCOME:
Loans...................................... $31,686 $21,821 $ 7,923
Mortgage-backed securities................. 1,280 1,359 1,361
Securities and federal funds sold.......... 1,171 1,201 285
------- ------- --------
Total interest income.................... 34,137 24,381 9,569
------- ------- --------
INTEREST EXPENSE:
Deposits................................... 17,448 13,944 5,017
Borrowings................................. 2,144 537 440
------- ------- --------
Total interest expense................... 19,592 14,481 5,457
------- ------- --------
NET INTEREST INCOME.......................... 14,545 9,900 4,112
PROVISION FOR ESTIMATED LOSSES ON LOANS...... 15,751 4,266 2,173
------- ------- --------
NET INTEREST (LOSS) INCOME AFTER PROVISION
FOR ESTIMATED LOSSES ON LOANS............... (1,206) 5,634 1,939
------- ------- --------
OTHER INCOME (LOSS):
Bankcard income............................ 5,078 4,694 635
Bankcard processing expense................ (3,865) (3,462) (274)
Gain on sale of loans...................... 1,983 642 --
Loan fees and charges...................... 1,217 610 43
Trading account--unrealized gain........... 1,601 -- --
Gain on sale of mortgage-backed securities
available for sale........................ -- 14 54
Amortization of deferred credits........... 346 460 388
Other, net................................. 17 149 381
------- ------- --------
Total other income (loss)................ 6,377 3,107 1,227
------- ------- --------
OTHER EXPENSES:
Compensation and employee benefits......... 2,955 2,516 1,922
FDIC insurance premiums.................... 2,066 721 261
Occupancy.................................. 218 385 319
Professional services...................... 572 1,028 507
Data processing and equipment rentals...... 189 232 162
Real estate owned, net..................... 231 170 241
Loan service fees and expenses............. 3,522 1,958 242
Other general and administrative expenses.. 1,152 1,092 1,290
------- ------- --------
Total other expenses..................... 10,905 8,102 4,944
------- ------- --------
(LOSS) INCOME BEFORE INCOME TAX PROVISION.... (5,734) 639 (1,778)
INCOME TAX (BENEFIT) PROVISION............... (4,652) 47 (526)
------- ------- --------
NET (LOSS) INCOME............................ $(1,082) $ 592 $ (1,252)
======= ======= ========
(LOSS) EARNINGS PER SHARE.................... $(14.05) $ 25.09 $(135.43)
======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, -----------------
1996 1995 1994
------------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................... $ (1,082) $ 592 $(1,252)
Reconciliation of net (loss) income to net
cash (used in) provided by operating
activities:
Provision for estimated losses on loans... 15,751 4,266 2,173
Provision for real estate owned losses.... -- 598 100
Depreciation and amortization............. 116 241 121
Loss (gain) on sale of real estate owned.. 164 (97) 406
Gain from sale of mortgage-backed
securities available
for sale ................................ -- (14) (54)
Gain on sale of loans..................... (1,983) (642) --
Amortization of discounts and deferred
fees..................................... (2,126) (1,246) (600)
Amortization of deferred credits.......... (346) (460) (388)
FHLB stock dividend....................... (64) (40) (39)
Change in:
Trading account......................... (6,526) -- 489
Accrued interest receivable............. (1,226) (1,443) (238)
Prepaid expenses and other assets....... (2,163) (698) 483
Due from affiliates..................... (3,843) (452) (2,833)
Due to affiliates....................... 1,527 107 (210)
Current income taxes receivable......... 728 (396) 591
Deferred income taxes................... (4,561) (419) 111
Accounts payable and other liabilities.. 3,227 1,846 (474)
Minority interest....................... (323) 26 --
Other................................... 43 (180) --
-------- -------- -------
Net cash (used in) provided by
operating activities................. (2,687) 1,589 (1,614)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans........................... (227,632) (186,895) (41,561)
Loan repayments, net of originations........ 35,521 49,035 16,836
Proceeds from sale of loans................. 26,335 16,673 --
Purchase of mortgage-backed securities
available for sale......................... -- -- (10,655)
Proceeds from maturity of securities held to
maturity................................... 5,000 1,000 --
Purchase of mortgage-backed securities held
to maturity................................ (11,182) -- (4,198)
Repayments of mortgage-backed securities
held to maturity........................... 1,820 824 643
Proceeds from sale of mortgage-backed
securities available for sale.............. -- 1,496 3,963
Repayments of mortgage-backed securities
available for sale......................... 1,871 1,528 --
Purchases of securities and FHLB stock...... (7,344) (2,965) (105)
Proceeds from sale of FHLB stock............ -- 231 --
Proceeds from sale of real estate owned..... 5,763 5,254 569
Purchase of subsidiary net of cash and cash
equivalents................................ -- -- (346)
Purchases of leasehold improvements and
equipment.................................. (177) (349) (184)
-------- -------- -------
Net cash used in investing
activities........................... (170,025) (114,168) (35,038)
</TABLE>
See notes to consolidated financial statements. (continued)
F-5
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994
------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits...................... $ 184,011 $107,731 $ 26,181
Proceeds from issuance of common stock...... 17,750 -- 3,750
Issuance of subordinated debt............... -- 9,000 --
Proceeds from other borrowings.............. 308,109 77,419 41,677
Repayments of other borrowings.............. (321,109) (85,919) (30,285)
Issuance of preferred stock................. -- -- 1,000
--------- -------- --------
Net cash provided by (used in) financing
activities............................... 188,761 108,231 42,323
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 16,049 (4,348) 5,671
CASH AND CASH EQUIVALENTS:
Beginning of year........................... 4,482 8,830 3,159
--------- -------- --------
End of year................................. $ 20,531 $ 4,482 $ 8,830
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid (received) during the period for:
Interest.................................... $ 18,772 $ 13,833 $ 5,479
Income taxes................................ 216 365 110
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned acquired in
settlement of loans........................ 4,377 9,878 3,122
Loans to facilitate the sale of real estate
owned...................................... -- 367 2,352
NONCASH FINANCING ACTIVITIES:
Exchange of subordinated debt for common
stock...................................... 11,000 -- --
Exchange of preferred stock for subordinated
debt....................................... -- 2,000 --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON
RETAINED AVAILABLE-
PREFERRED STOCK COMMON STOCK EARNINGS FOR-SALE
------------------- -------------- (ACCUMULATED SECURITIES
SHARES AMOUNT SHARES AMOUNT DEFICIT) NET OF TAX TOTAL
---------- ------- ------ ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1994................... -- $ -- 6,644 $ 3,050 $ 915 $(159) $ 3,806
Net loss............... (1,252) (1,252)
Unrealized loss on
available-for-sale
securities--net of
tax................... (511) (511)
Issuance of stock...... 1,000,000 1,000 16,952 3,750 4,750
---------- ------- ------ ------- ------- ----- -------
BALANCE, December 31,
1994................... 1,000,000 1,000 23,596 6,800 (337) (670) 6,793
Net income............. 592 592
Unrealized gain on
available-for-sale
securities--net of
tax................... 654 654
Exchange of preferred
stock for
subordinated debt..... (1,000,000) (1,000) (1,000)
---------- ------- ------ ------- ------- ----- -------
BALANCE, December 31,
1995................... 23,596 6,800 255 (16) 7,039
Net loss............... (1,082) (1,082)
Unrealized loss on
available-for-sale
securities--net of tax
...................... (153) (153)
Exchange of
subordinated debt for
common stock.......... 29,142 11,000 11,000
Issuance of common
stock ................ 47,025 17,750 17,750
---------- ------- ------ ------- ------- ----- -------
BALANCE, September 30,
1996................... -- $ -- 99,763 $35,550 $ (827) $(169) $34,554
========== ======= ====== ======= ======= ===== =======
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--Wilshire Financial Services Group Inc. and
subsidiaries (the "Company") operate two savings banks (the "Banks") located
in Southern California and have administrative headquarters in Portland,
Oregon. The Banks are federally chartered savings institutions regulated by
the Office of Thrift Supervision ("OTS"). The Company's primary sources of
revenue are real estate and consumer loans acquired in purchase transactions,
mortgage-backed securities, loan securitization transactions, and merchant
bankcard operations.
Principles of Consolidation and Combination--Wilshire Financial Services
Group Inc. ("WFSG") was incorporated in 1996 to be the holding company for
Wilshire Acquisitions Corporation ("WAC"), which is the holding company for
the Banks. WFSG has had no historical operations other than those of WAC and
its subsidiaries, but has formed other subsidiaries that will conduct other
operations in the future.
On October 7, 1993, WAC acquired 94.9% of the common stock of First Bank of
Beverly Hills, F.S.B. ("FBBH") in a purchase accounting transaction. On
November 9, 1994, a newly-formed entity with ownership and management common
to WAC-Wilshire Acquisitions Corporation II ("WACII")--acquired 94.9% of the
common stock of Girard Savings Bank, F.S.B. and subsidiary ("GSB") in a
purchase accounting transaction.
Because WAC and WACII were under common control, the accompanying financial
statements are presented on a combined basis as of December 31, 1994 and for
the period from November 9 through December 31, 1994. On December 27, 1995,
WAC and WACII were merged and WAC was named as the surviving entity. Financial
information as of September 30, 1996 and December 31, 1995 and for the nine
months and year then ended, respectively, is presented on a consolidated or
combined basis and includes the accounts of WAC, FBBH and GSB. With respect to
all consolidated and combined financial information, intercompany transactions
and balances have been eliminated. For convenience, all the accompanying
financial statements are referred to as "consolidated".
The purchase prices of the Banks were less than the fair values of the net
assets acquired. As a result, the Company recorded deferred credits, or
negative goodwill, totaling $2,156. These credits are being amortized over
five years on a straight-line basis. The other material purchase accounting
adjustment relates to the carrying value of GSB loans; the difference between
the carrying value and the estimated fair value of the loans at the date of
acquisition is being amortized over the expected lives of the related loans.
Use of Estimates in the Preparation of the Consolidated Financial
Statements--The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amount of
income and expenses during the reporting period. Actual results could differ
from those estimates. Significant estimates include valuation allowances for
loans and real estate owned, merchant bankcard charge-back reserves and fair
values of certain financial instruments for which there is not an active
market.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and
cash equivalents include cash and due from banks and federal funds sold.
Securities and Mortgage-Backed Securities--The Company's securities
portfolios consist of mortgage-backed and other securities that are classified
as held-to-maturity, trading account and available-for-sale securities.
Securities are classified as held-to-maturity when management believes the
Company has the ability and the positive intent to hold the securities to
maturity. Securities classified as held-to-maturity are carried on
F-8
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
an historical cost basis, adjusted for the amortization of premiums and
accretion of discounts using a method that approximates the interest method.
Securities classified as trading account securities are residual interests in
loan securitization transactions initiated by the Company. Trading account
securities are carried at estimated fair value, and unrealized gains and
losses are recorded in current operations. Securities are classified as
available-for-sale when the Company intends to hold the securities for an
indefinite period of time, but not necessarily to maturity. Securities
classified as available-for-sale are reported at their fair values. Unrealized
holding gains and losses on securities available-for-sale are reported, net of
tax, as a separate component of stockholders' equity. Realized gains and
losses from the sales of available-for-sale securities are reported separately
in the consolidated statements of operations and are calculated using the
specific identification method.
Loans, Discounted Loans, Loans Held for Sale and Allowance for Loan Losses--
The Company's principal business involves acquiring loans, including loans
that are nonperforming when acquired. Acquired loans are generally purchased
in pools, or portfolios, for prices at or below face value (i.e., unpaid
principal balances plus accrued interest). Nonperforming loans are generally
acquired at deep discounts to face value and are classified as discounted
loans in the consolidated statements of financial condition. Loans that have
been identified as likely to be sold are classified as held-for-sale in the
consolidated statements of financial condition. Loans other than discounted
loans and loans held for sale are classified simply as loans.
Discounted loans are presented in the consolidated statements of financial
condition net of unamortized discount and the portion of the allowance for
loan losses established for those loans. When discounted loans are purchased,
discounts are segregated into (a) valuation allowances for estimated losses on
specific loans ("specific valuation allowances"), (b) valuation allowances for
the inherent risk of losses in the loan portfolio that have yet to be
specifically identified ("general valuation allowances") and (c) portions of
the discounts regarded as yield adjustments. The allocated specific and
general valuation allowances are included in the allowance for loan losses.
The allowance for loan losses is also increased by additional provisions for
losses that are recorded in current operations. The portion of purchase
discounts regarded as yield adjustments is accreted into income in proportion
to cash receipts of principal. Accrued interest on discounted loans is
recognized in income only when collected in cash.
Loans other than discounted loans are presented in the consolidated
statements of financial condition in substantially the same manner as
discounted loans except that discounts associated with purchased loans are
accreted into income using a method approximating the interest method, and
interest income is recognized on an accrual basis. That portion of the total
loan portfolio representing originated loans is carried net of unamortized
deferred origination fees. Deferred fees are recognized in interest income
over the terms of the loans using a method that approximates the interest
method.
Loans held for sale are presented at lower of cost or market value, and cost
is determined as described above depending on whether the loans held for sale
are discounted loans or other loans. If market value is less than cost, a
valuation allowance is recorded to reduce the carrying value. Gains or losses
on loans sold through securitization transactions are based on the difference
between the cash proceeds received on the certificates sold to outside
investors and the Company's cost basis allocated to such interests in the
loans. The percentage allocation of the loan pools' cost basis between the
portions sold and subordinated interests retained is based on the relative
fair values of those portions.
The Company evaluates commercial and multi-family real estate loans (whether
purchased or originated and whether classified as loans or discounted loans)
for impairment under SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures. Commercial and multi-family real
estate loans are considered to be impaired, for financial reporting purposes,
when it is probable that the Company will be unable to collect all
F-9
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
principal or interest when due. Specific valuation allowances are established,
either through allocations of purchase discount or through provisions for
losses, as described above, for impaired loans with estimated fair values that
are less than the face value of the loans. Fair values of impaired loans are
estimated based on the fair value of the real estate collateral.
The Company evaluates single-family real estate, consumer and other loans
for impairment on a pooled basis. These loans are considered to be smaller-
balance, homogeneous loans, and are evaluated on a portfolio basis considering
the projected net realizable value of the portfolio compared to the net
carrying value of the portfolio.
All specific and general valuation allowances established for loans and
discounted loans are recorded in the allowance for loan losses. The allowance
is decreased by the amount of loans charged off and is increased by recoveries
of previously charged-off loans. The allowance is maintained at a level
believed adequate by management to absorb potential losses in the total loan
portfolio. Management's determination of the adequacy of the allowance is
based on an evaluation of the portfolio, previous loan loss experience,
current economic conditions, volume, growth and composition of the portfolio
and other relevant factors.
Derivative Financial Instruments--Beginning in 1996, the Company utilizes
interest-rate swaps as a component of its interest-rate risk hedging strategy.
Swaps are matched against fixed-rate loans, effectively converting them to
variable-rate loans. Settlements with the counterparty to the swaps increase
or reduce loan interest income reported in the statements of operations.
Real Estate Owned--Real estate acquired in settlement of loans is originally
recorded at fair value less estimated costs to sell. Loan balances in excess
of fair value of the real estate acquired are charged against the allowance
for loan losses at the date of acquisition. Allowances are recorded to provide
for estimated declines in fair value subsequent to the date of acquisition.
Any subsequent operating expenses or income, as well as gains or losses on
disposition of such properties, are charged to current operations.
Leasehold Improvements and Equipment--Office leasehold improvements and
equipment are stated at cost, less accumulated depreciation and amortization,
computed on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever are shorter.
Income Taxes--The Company files consolidated federal income tax returns with
its subsidiaries. Deferred tax assets and liabilities represent the tax
effects, based on current tax law, of future deductible or taxable amounts
attributable to events that have been recognized in the financial statements.
A valuation allowance is recorded against deferred tax assets when there is
not presumptive evidence that it is more likely than not that the deferred tax
assets will be realized.
Bankcard Operations--Bankcard income includes merchant discounts and
transaction fees for processing Visa and Mastercard transactions. Bankcard
expense consists primarily of fees paid to the Company's third-party
processors and interchange fees paid to card-issuing banks. Other direct and
indirect costs of Bankcard operations are included in various other categories
of expenses and are not specifically allocated separately from other operating
expenses of the Company.
Capital Structure--In the accompanying consolidated statements of
stockholders' equity, shares of common stock issued and outstanding are
presented based on the actual number of shares issued by WAC, and the number
of shares issued by WACII adjusted to their WAC equivalents as determined when
the two entities merged in
F-10
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1995. As of September 30, 1996 and December 31, 1995, WAC has the following
types of authorized shares of stock:
50,000,000 shares of common, $0.01 par value
200,000,000 shares of preferred, $0.01 par value
Of the 200,000,000 shares of preferred stock authorized, 100,000,000 has
been designated as Series A. The Series A preferred stock has a $1 per share
liquidation preference and a dividend rate of $.14 per share per annum,
noncumulative. No cash dividends have been declared or paid on such stock at
any point when it has been outstanding.
Preferred stock issued and outstanding at December 31, 1994 consisted of
Series A preferred stock of WACII, which was exchanged for Series A preferred
stock of WAC in 1995, pursuant to the merger of the two companies. All common
stock of WACII was also exchanged in the merger. The preferred stock of a
subsidiary (FBBH) held by the majority stockholders of WAC as of December 31,
1994 was also exchanged for WAC Series A preferred in 1995. All of the WAC
Series A preferred was then exchanged for subordinated debt issued by the
majority stockholders. Effective January 1, 1996, all subordinated debt was
exchanged for WAC's common stock.
Subsequent to September 30, 1996, all outstanding common stock of WAC was
exchanged by WAC stockholders for common stock of WFSG, and all minority
interests in common stock of FBBH and GSB were exchanged for common stock of
WFSG. Outstanding shares of WFSG, prior to an initial public offering of
common stock (see Note 17), total 5,500,000.
Earnings Per Share is calculated based on the weighted average number of
shares of WAC common stock outstanding during the year giving effect to the
exercise of stock options using the treasury stock method if such effect is
not anti-dilutive. The weighted average number of shares outstanding for the
nine months ended September 30, 1996 and for the years ended 1995 and 1994 was
77,024, 23,596 and 9,245, respectively.
Recent Accounting Standards--In 1996, the Company adopted SFAS Nos. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of, SFAS No. 122, Accounting for Mortgage Servicing Rights, and
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 121 and 122
did not have a material effect on the Company's financial statements.
As permitted by SFAS No. 123, the Company did not adopt the provisions of
that statement relating to the accounting method used for stock options. The
Company will continue to use the intrinsic value method of accounting for its
stock options rather than the fair value method, and will make the disclosures
required by the statement (see Note 12).
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Financial Liabilities, is generally effective for relevant
transactions occurring after December 31, 1996, and must be applied
prospectively. Earlier application is not permitted. Based on the types of
transactions the Company has engaged in historically, the pronouncement is
expected to be relevant to similar future transactions and may affect both the
accounting for, and disclosures about, such transactions. Transactions
affected may include sales of loans, particularly sales affected through
securitization transactions, and repurchase agreements. The Company does not
currently service financial assets and does not expect to be immediately
affected by the provisions of SFAS No. 125 related to servicing. The Company
does not believe that the pronouncement would have had a material effect on
any transactions reflected in the accompanying financial statements, if its
provisions had been previously adopted.
Reclassifications--Certain amounts in the consolidated financial statements
for 1995 and 1994 have been reclassified to conform to the 1996 presentation.
F-11
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SECURITIES
The amortized cost, fair value and gross unrealized gains and losses on U.S.
Treasury notes and mortgage-backed securities as of September 30, 1996 and
December 31, 1995 are shown below. Fair value estimates were obtained from an
independent pricing service.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 1996 COST GAINS LOSSES VALUE
------------------ --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Available-for-sale mortgage-backed
securities........................ $ 6,652 $ -- $169 $ 6,483
======= ===== ==== =======
Held-to-maturity:
U.S. Treasury notes.............. 7,425 27 -- 7,452
Mortgage-backed securities....... 22,380 -- 602 21,778
------- ----- ---- -------
Total held-to-maturity......... $29,805 $ 27 $602 $29,230
======= ===== ==== =======
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C> <C> <C> <C>
Available-for-sale mortgage-backed
securities........................ $ 9,099 $ -- $ 16 $ 9,083
======= ===== ==== =======
Held-to-maturity:
U.S. Treasury notes.............. 6,470 22 4 6,488
Mortgage-backed securities....... 13,119 -- 246 12,873
------- ----- ---- -------
Total held-to-maturity......... $19,589 $ 22 $250 $19,361
======= ===== ==== =======
</TABLE>
The amortized cost and estimated fair value of securities held to maturity
other than mortgage-backed securities at September 30, 1996, and December 31,
1995 by contractual maturity, are as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
SEPTEMBER 30, 1996 COST VALUE
------------------ --------- ------
<S> <C> <C>
Due in one to five years................................... $7,425 $7,452
====== ======
DECEMBER 31, 1995
-----------------
Due in less than one year.................................. $4,970 $4,966
Due in one to five years................................... 1,500 1,522
------ ------
$6,470 $6,488
====== ======
</TABLE>
The Company receives payments on all mortgage-backed securities over periods
that are considerably shorter than the contractual maturities of the
securities, which range from 6 to 30 years.
At September 30, 1996, mortgage-backed securities with carrying values of
$22,779 and market values of approximately $22,247 were pledged to secure FHLB
borrowings, merchant bankcard transactions, certain guarantees related to a
loan securitization transaction and an interest-rate swap. There were no sales
of securities in the nine months ended September 30, 1996. Gross gains from
the sale of securities available for sale were $14 and $54 in the years ended
December 31, 1995, and 1994, respectively, and there were no gross losses in
these years. Of the total securities pledged, securities with fair values of
approximately $20,110 were delivered to, and are held in custody of, Bankers
Trust and the Federal Reserve Bank.
F-12
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. LOANS, DISCOUNTED LOANS AND LOANS HELD FOR SALE
The Company's loans comprise loans, discounted loans and loans held for
sale. Following is a summary of each loan category by type:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
LOANS
Real estate loans:
One to four units.............................. $ 49,047 $138,547
Over four units................................ 72,717 71,239
Commercial..................................... 58,361 50,749
Land........................................... 2,874 2,709
-------- --------
Total loans secured by real estate........... 182,999 263,244
Other loans...................................... 30,698 19,832
-------- --------
213,697 283,076
Less:
Allowance for loan losses...................... (32,519) (10,016)
Deferred loan fees............................. (196) (245)
Discount on purchased loans not included
in allowance for loan losses.................. (3,702) (13,988)
-------- --------
$177,280 $258,827
======== ========
DISCOUNTED LOANS
Real estate loans:
One to four units.............................. $ 9,561 $ 18,380
Commercial..................................... 482 863
-------- --------
Total loans secured by real estate........... 10,043 19,243
Other loans...................................... 724 967
-------- --------
10,767 20,210
Less:
Allowance for loan losses...................... (5,716) (3,855)
Discount on purchased loans not included in
allowance
for loan losses............................... (1,632) (3,008)
-------- --------
$ 3,419 $ 13,347
======== ========
LOANS HELD FOR SALE
Real estate loans:
One to four units.............................. $277,490 $ 33,497
Commercial..................................... 466
Land........................................... 194
-------- --------
Total loans secured by real estate........... 277,490 34,157
Other loans...................................... 12
-------- --------
277,490 34,169
Less allowances, discounts and deferred fees..... (16,686) (15,572)
-------- --------
$260,804 $ 18,597
======== ========
</TABLE>
F-13
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of September 30, 1996 and December 31, 1995, loans with adjustable rates
of interest were $317,087 and $265,702, respectively, and loans with fixed
rates of interest were $184,867 and $71,753, respectively. Adjustable-rate
loans are generally indexed to the FHLB's Eleventh District Cost of Funds
Index, LIBOR or Prime and are subject to limitations on the timing and extent
of adjustment. Most loans adjust within six months of changes in the index.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ----------------
1996 1995 1994
------------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year.................. $ 25,651 $ 7,701 $ 4,314
Loans charged off........................... (12,494) (5,404) (1,666)
Recoveries.................................. 1,424 81 71
Provision for loan losses................... 15,751 4,266 2,173
Allocations from purchased loan discounts... 15,972 19,007 2,809
-------- ------- -------
Balance, end of year........................ $ 46,304 $25,651 $ 7,701
======== ======= =======
</TABLE>
At September 30, 1996 and December 31, 1995, the Company had classified
loans totaling $18,811 and $14,241, respectively, as impaired and had recorded
specific valuation allowances to measure the impairments of those loans
totaling $5,445 and $4,155, respectively. At the same dates, the Company had
classified loans totaling $2,499 and $9,593, respectively, as impaired with no
recorded specific valuation allowances. The average unpaid principal balances
of impaired loans during the nine months ended September 30, 1996 and the year
ended December 31, 1995 were $21,254 and $24,204, respectively. Interest
income recognized on impaired loans during the same periods was $1,135 and
$1,631, respectively, based on cash payments. These amounts exclude
consideration of single-family residential and consumer loan pools evaluated
for impairment on a pooled basis.
Management estimates are required to determine the allowance for loan
losses. Estimation is also involved in determining the ultimate recoverability
of purchased loans and, consequently, the pricing of purchased loans and the
adequacy of purchased discounts to provide allowances for credit risk. These
estimates are inherently uncertain and depend on the outcome of future events.
Regulatory authorities have required substantial increases in the allowances
maintained by many banks in recognition of the inherent risk in the existing
economic environment. Although management believes the levels of the allowance
as of September 30, 1996 and December 31, 1995 are adequate to absorb losses
inherent in the loan portfolio, rising interest rates, various other economic
factors and regulatory requirements may result in increasing losses that
cannot reasonably be predicted at this date. Such losses may also result in
unanticipated erosion of the Banks' capital.
The Company has a geographic concentration of mortgage loans in Southern
California, which experienced declines in recent years. Substantially all
loans originated or acquired by FBBH and GSB prior to their acquisition by the
Company were collateralized by Southern California real estate. Performing
mortgage loans acquired subsequently have also been concentrated in Southern
California, but to a lesser degree, and the geographic diversification of the
portfolio is generally widening through loan acquisitions.
F-14
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. REAL ESTATE OWNED
Real estate owned consists of property obtained through foreclosure. In the
accompanying consolidated statements of financial condition, real estate owned
is presented net of allowances for estimated losses. Activity in the allowance
for estimated losses on real estate owned is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- ------
<S> <C> <C> <C>
Allowance for losses on real estate owned,
beginning of year.......................... $ 1,193 $ 123 $ 55
Charge-offs................................. (1,599) (82) (32)
Allocation of purchase discount............. 762 554
Provision for the year...................... 598 100
------- ------- -----
Allowance for losses on real estate owned,
end of year................................ $ 356 $ 1,193 $ 123
======= ======= =====
</TABLE>
5. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Leasehold improvements............................ $ 258 $ 299
Furniture and equipment........................... 877 718
------ ------
Total cost........................................ 1,135 1,017
Accumulated depreciation and amortization......... (799) (742)
------ ------
$ 336 $ 275
====== ======
</TABLE>
6. DEPOSITS
Deposits consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Passbook accounts................................. $ 371 $ 304
Money market accounts............................. 795 1,267
NOW/checking...................................... 6,103 5,111
Time deposits:
Less than $100.................................. 386,264 247,814
$100 or more.................................... 94,002 49,028
-------- --------
Total deposits.................................. $487,535 $303,524
======== ========
</TABLE>
A summary of time deposits by maturity at September 30, 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997 (including fourth quarter of 1996)........................... $381,378
1998.............................................................. 97,897
1999.............................................................. 991
--------
$480,266
========
</TABLE>
F-15
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. BORROWINGS AND SUBORDINATED DEBT
Borrowings at December 31, 1995 are repurchase agreements issued under a
master repurchase agreement with Bear Stearns Mortgage Capital Corp. Proceeds
from the agreements were used to acquire loan pools. The assets purchased by
Bear Stearns include the loans acquired by the Banks with the proceeds as well
as other assets. At December 31, 1995, the outstanding agreements were secured
by loans with unpaid principal balances of $54,210. Loans purchased by Bear
Stearns under the repurchase agreements are held in custody by a third party.
Following is information about borrowings under repurchase agreements:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, --------------
1996 1995 1994
------------- ------ ------
<S> <C> <C> <C>
Average balance during
the period............. $35,568 $1,000 $2,297
Highest amount outstand-
ing during the period.. 97,000 13,000 8,500
Average interest rate
during the period...... 6.8% 6.7% 5.8%
Average interest rate--
end of period.......... -- 6.7% 5.8%
</TABLE>
WAC's capitalization includes subordinated debt with majority
stockholders in amounts up to $50,000. Subordinated debt pays interest at
14% per annum, compounded quarterly, has no stated maturity, and represents
an unsecured general obligation of the Company. As of December 31, 1995,
borrowings under the subordinated debt agreement were $11,000. As stated in
Note 1, the Company's common stock was exchanged for the subordinated debt
effective January 1, 1996.
8. INCOME TAXES
The provisions for income tax (benefit) consist of the following:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED
1996 DECEMBER 31,
------------- --------------
1995 1994
------ ------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal..................................... $ (93) $ 434 $ (656)
State....................................... 2 32 19
------- ------ ------
(91) 466 (637)
------- ------ ------
Deferred tax expense (benefit):
Federal..................................... (3,081) (250) 90
State....................................... (1,480) (169) 21
------- ------ ------
(4,561) (419) 111
------- ------ ------
Total income tax provision (benefit).......... $(4,652) $ 47 $ (526)
======= ====== ======
</TABLE>
F-16
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The difference between the effective tax rate implicit in the consolidated
financial statements and the statutory federal income tax rate can be
attributed to the following:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, --------------
1996 1995 1994
------------- ------ ------
<S> <C> <C> <C>
Federal income tax provision at statutory
rate....................................... (34.0)% 35.0% (35.0)%
State taxes (benefit), net of federal tax
effect..................................... (11.1) 4.0
Valuation allowance......................... (29.2) (25.1) 8.8
Change in prior year estimate............... (5.2) (7.8)
Other....................................... (1.6) 1.3 (3.4)
----- ------ ------
Effective income tax rate................... (81.1)% 7.4% (29.6)%
===== ====== ======
</TABLE>
Deferred income taxes receivable (payable), which are included in income
taxes receivable, net in the consolidated statements of financial condition,
are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Deferred tax assets:
Purchase discounts.............................. $ 2,378 $ 1,349
Purchase accounting............................. 549 629
Depreciation.................................... 82 65
Provision for loan loss......................... 1,232 408
Net operating loss.............................. 2,661 170
Other........................................... 140 10
------- -------
Gross deferred tax assets..................... 7,042 2,631
------- -------
Deferred tax liabilities:
Partnership income.............................. (44) (44)
Deferred loan fees.............................. (207) (351)
FHLB stock dividends............................ (285) (242)
State taxes..................................... (620)
Unrealized gains on securities.................. (694)
Installment sales gain.......................... (344)
Other........................................... (118) (98)
------- -------
Gross deferred tax liability.................. (2,312) (735)
------- -------
Total deferred tax asset.......................... 4,730 1,896
Valuation allowance............................... -- (1,726)
------- -------
Net deferred tax asset............................ $ 4,730 $ 170
======= =======
</TABLE>
At September 30, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $761, $1,391 and $4,758 expiring
in the years 1997, 1998 and 1999, respectively, and net operating loss
carryforwards for state income tax purposes of $1,617 and $1,143 expiring in
2000 and 2001, respectively.
F-17
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK
Profit Sharing Plan--The Banks' employees participate in a defined
contribution profit sharing and 401(k) plan sponsored by companies included in
the Company's "control group." At the discretion of the Banks' Boards of
Directors, the Banks may elect to contribute to the plan based on profits of
the Banks or based on matching participants' contributions. For the year ended
December 31, 1995, the Banks contributed $28 to the plan. There have been no
contributions in 1996.
Lease Commitments--The following is a schedule by year of future minimum
rental payments:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997 (including fourth quarter of 1996)............................... $281
1998.................................................................. 166
1999.................................................................. 157
2000.................................................................. 52
2001.................................................................. 30
----
Total............................................................... $686
====
</TABLE>
Lease commitments include commitments to an affiliated company which require
annual lease payments of $52 through 2001.
Hedging Activity--In April 1996, the Banks entered into an interest-rate
swap with a $70,000 notional amount with Bear Stearns. The swap effectively
converts $70,000 of purchased fixed-rate loans to variable-rate loans. The
Banks pay 6.25% and receive a variable rate based on the one-month USD LIBOR
plus .225%. The swap matures in April 2001 and has a cancellation trigger when
the two-year constant maturity treasury equals or exceeds 9%. The notional
principal amount amortizes at a rate of 1.2532% each month. At September 30,
1996, the notional principal is $65,614.
Lending Commitments--At December 31, 1995, the Company had commitments to
extend credit of $793. The Company did not have any commitments to extend
credit at September 30, 1996. These commitments expose the Company to credit
risk in excess of amounts reflected in the consolidated financial statements.
The Company receives collateral to support loans and commitments to extend
credit for which collateral is deemed necessary. The most significant category
of collateral is certificates of deposit.
Litigation--The Company is a defendant in legal actions arising from
transactions conducted in the ordinary course of business. Management, after
consultation with legal counsel, believes the ultimate liability, if any,
arising from such actions will not materially affect the Company's financial
position.
Securitization Contingencies--A loan securitization in March 1996 involved
the sale of discounted nonperforming loans with carrying amounts of
approximately $18,600. The Banks are contingently liable for losses, if any,
that could arise if the collectibility of any securitized loan is
unenforceable solely due to the absence of original notes. In addition, the
Banks are contingently liable to pay the interest due on the senior securities
if the liquidation of the assets underlying the securities results in a
shortfall on any due date; any such shortfall paid by the Banks would be
reimbursable if liquidation proceeds were ultimately sufficient to cover the
interest. Management believes that it is not probable that any losses will be
incurred for these or other reasons involving the securitization.
10. REGULATORY MATTERS
Regulatory Agreement--On October 31, 1996, FBBH and GSB consented to
separate but similar Orders to Cease and Desist (the "Orders") issued by the
OTS. The Order issued to FBBH superseded a previously existing Supervisory
Agreement between FBBH and the OTS issued June 8, 1995.
F-18
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Orders require of both Banks that they not engage in unsafe and unsound
practices and that they maintain minimum capital ratios required of
institutions to be deemed "well-capitalized" (as that term is defined under
the regulatory framework for prompt corrective action). In addition, the
Orders require the Banks to (I) revise policies and procedures concerning (i)
internal asset reviews, (ii) the allowances for loan and lease losses, (iii)
loan purchases, (iv) internal audits and (v) hedging transactions; (II)
develop plans to augment the depth and expertise of the management teams;
(III) revise business plans; (IV) modify certain policies concerning the
accounting for loan discounts; (V) improve monitoring of (i) interest rate
risk, (ii) balance sheet classifications of certain assets (e.g., as held for
sale versus held to maturity) and (iii) compliance with laws and regulations
concerning transactions with affiliates; (VI) ensure compliance with the
proper servicing of adjustable rate mortgages and escrow accounts; and (VII)
enhance recordkeeping. In addition, the Banks may not increase their total
assets beyond certain specified levels. Also, FBBH will be required to correct
OTS-identified deficiencies in merchant bankcard operations. These
requirements will be accompanied by related requirements that the Banks submit
to the OTS, by certain specified dates, various policies, plans and reports on
other actions to comply with the Orders. In some cases, OTS approval of such
information will be required. The Banks are currently in process of addressing
these requirements. Management believes that the Banks are complying with
those requirements that have taken effect.
The Orders are enforceable by the OTS as written agreements under the
Federal Deposit Insurance Act. Therefore, failure to comply with the
requirements of the Orders could subject the Banks and their directors and
officers to further enforcement actions, including termination of Federal
Deposit Insurance Corporation insurance or civil money penalties.
Capital Requirements--The Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain actions by the regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Banks must meet specific capital
guidelines that involve quantitative measures of the Banks' assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Banks' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios of total tangible
capital, core capital and total capital to risk-weighted assets as those terms
are defined in OTS regulation. Under the regulatory framework for prompt
corrective action, quantitative and qualitative measures are used by the OTS
to determine whether an institution is categorized as "well capitalized,"
"adequately capitalized," "undercapitalized," or "significantly
undercapitalized." Certain regulatory actions are mandated by law, depending
on an institution's category. Quantitative measures include total capital to
risk-weighted assets, Tier 1 capital to risk-weighted assets, and Tier 1
capital to average assets, as those terms are defined in OTS regulation.
F-19
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Banks' actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
TO BE
CATEGORIZED AS "WELL-
CAPITALIZED", UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------- ------------------ ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- --------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1996
Total Capital to Risk-
Weighted Assets:
FBBH.................. $ 9,711 10.0% $ 7,760 . 8.0% $ 9,701 . 10.0%
GSB................... 30,297 11.0% 22,010 . 8.0% 27,513 . 10.0%
Tier 1 Capital to
Risk-Weighted
Assets:
FBBH.................. 8,434 8.7% Not Applicable 5,820 . 6.0%
GSB................... 26,739 9.7% Not Applicable 16,508 . 6.0%
Tier 1 Capital to
Average
Assets (Core Capital):
FBBH.................. 8,434 5.9% 5,706 . 4.0% 7,132 . 5.0%
GSB................... 26,739 7.0% 15,320 . 4.0% 19,150 . 5.0%
Tangible Capital:
FBBH.................. 8,434 6.0% 2,120 . 1.5% Not Applicable
GSB................... 26,739 6.8% 5,855 . 1.5% Not Applicable
DECEMBER 31, 1995
Total Capital to Risk-
Weighted
Assets:
FBBH.................. $ 9,820 9.8% $ 7,999 . 8.0% $ 9,998 . 10.0%
GSB................... 15,523 10.4% 11,973 . 8.0% 14,967 . 10.0%
Tier 1 Capital to
Risk-Weighted
Assets:
FBBH.................. 8,549 8.6% Not Applicable 5,999 . 6.0%
GSB................... 13,852 9.3% Not Applicable 8,980 . 6.0%
Tier 1 Capital to
Average
Assets (Core Capital):
FBBH.................. 8,549 6.4% 5,326 . 4.0% 6,657 . 5.0%
GSB................... 13,852 10.3% 5,398 . 4.0% 6,748 . 5.0%
Tangible Capital:
FBBH.................. 8,549 6.8% 3,075 . 1.5% Not Applicable
GSB................... 13,852 6.2% 2,066 . 1.5% Not Applicable
</TABLE>
As of September 30, 1996, the Banks' capital ratios were sufficient for them
to be categorized as "well capitalized" based solely on quantitative measures.
However, because of the Orders discussed above, each Bank can be categorized
by the OTS as no higher than "adequately capitalized." Because the Banks have
minimum regulatory capital requirements and the additional requirements under
the Orders discussed above, substantially all retained earnings of the Banks
are restricted as to distribution to stockholders.
At June 30, 1996, as a result of new legislation enacted to recapitalize the
SAIF deposit insurance fund, the Company accrued approximately $1.4 million
for a special assessment to be paid in the fourth quarter.
F-20
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. RELATED PARTY TRANSACTIONS
Substantially all loans are serviced by Wilshire Credit Corporation ("WCC"),
which is affiliated with the Company by common ownership. Management believes
that the terms of the servicing agreement are no less favorable to the Banks
than terms offered by other servicers. Due from affiliate in the accompanying
consolidated statements of financial condition represents the amount of loan
payments collected by WCC but not yet remitted to the Banks at that date. Loan
servicing fees and expenses shown in the consolidated statements of operations
were paid to WCC, and include reimbursements for direct expenses borne by WCC
on behalf of the Banks. Due to affiliates in the consolidated statements of
financial condition primarily comprises amounts owed to WCC for WAC operating
expenses paid by WCC. At September 30, 1996, due to affiliates also includes a
liability to WCC for a servicing fee with deferred payment terms.
12. STOCK OPTIONS
In 1994 and 1995, the Banks issued stock options for the benefit of certain
directors, executives and consultants. FBBH granted 19,447 and 23,161 options
in 1994 and 1995, respectively. GSB granted 69,724 options in 1995. All grants
were made with exercise prices at least equal to the book value of the
relevant bank's shares on the grant dates. Subsequent to September 30, 1996,
these stock options were converted into 31,225 options to purchase the stock
of WFSG. The options are exercisable at prices ranging from $5.58 to $14.90
per share no earlier than 60 days after the effective date of the initial
public offering of WFSG stock discussed in Note 17, and have remaining terms
of from two to three years. Their estimated fair value as of November 1, 1996
was $162; an amount no greater than this would have been reported as
compensation expense during 1994 and 1995 if the fair value method of
accounting discussed in SFAS No. 123 had been used to measure compensation
expense. Assuming that all grants were made in 1995, 1995 net income reported
in the consolidated statements of operations would have been $430 and earnings
per share would have been $18.22 if the fair value method of accounting for
the options had been used.
Pursuant to the initial public offering, the Company adopted a new Stock
Plan on November 1, 1996. Under the Stock Plan, the Company may grant options
and other awards not to exceed 1,750,000 shares of common stock over a ten-
year term. The options may be either incentive stock options or nonstatutory
stock options granted at exercise prices not less than 100% of the fair value
of WFSG common stock at the grant date (110% of fair value for incentive stock
options granted to persons holding over 10% of the Company's shares).
Restricted stock and stock appreciation rights may also be granted under the
Stock Plan.
The initial awards under the new Stock Plan are expected to be granted at
the date of the initial public offering. Options for approximately 1,050,000
to 1,083,750 will be granted to the Company's two largest stockholders. The
Stock Plan also provides that nonemployee Company directors will receive
automatic nonstatutory stock option grants. The number of shares granted to
nonemployee directors each quarter will be determined under a formula ($6
divided by the fair market value per share of WFSG common stock on each grant
date).
13. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
F-21
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and due from
banks.................. $ 11,231 $ 11,231
Federal funds sold...... 9,300 9,300
Mortgage-backed
securities held to
maturity............... 22,380 21,778
Mortgage-backed
securities available
for sale............... 6,483 6,483
Securities held to
maturity............... 7,425 7,452
Trading account
securities............. 7,092 7,092
Loans, net.............. 177,280 173,938
Discounted loans, net... 3,419 3,419
Loans held for sale,
net.................... 260,804 264,180
Federal Home Loan Bank
stock.................. 2,911 2,911
Liabilities:
Deposits................ 487,535 487,821
Borrowings.............. -- --
Off-Balance Sheet
Liabilities:
Interest-rate swap...... -- 714
<CAPTION>
DECEMBER 31, 1995
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and due from
banks.................. $ 3,382 $ 3,382
Federal funds sold...... 1,100 1,100
Mortgage-backed
securities held to
maturity............... 13,119 12,873
Mortgage-backed
securities available-
for-sale............... 9,083 9,083
Securities held to
maturity............... 6,470 6,488
Loans, discounted loans
and loans held for
sale, net.............. 290,771 295,747
Federal Home Loan Bank
stock.................. 1,421 1,421
Liabilities:
Deposits................ 304,020 307,177
Borrowings.............. 13,000 13,000
Subordinated debt....... 11,000 11,000
</TABLE>
The methods and assumptions used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate that value are
explained below:
Cash and Due From Banks and Federal Funds Sold--The carrying amounts
approximate fair values, due to the short-term nature of these instruments.
Securities and Mortgage-Backed Securities--The fair values of securities
are generally obtained from market bids for similar or identical
securities, or are obtained from independent security brokers or dealers.
Loans, Discounted Loans and Loans Held for Sale--It is not practicable to
estimate the fair value of discounted loans, which are predominately
nonperforming loans, due to uncertainties as to the nature, timing and
extent to which the loans will be either collected according to original
terms, restructured, or foreclosed upon. For other loans, fair values are
estimated for portfolios of loans with similar financial characteristics.
Loans are segregated by type, such as fixed and adjustable rate interest
terms. The fair values of fixed-rate mortgage loans are based on discounted
cash flows utilizing applicable risk-adjusted spreads relative to the
current pricing of similar fixed-rate loans as well as anticipated
prepayment schedules. The fair values of
F-22
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
adjustable-rate mortgage loans are based on discounted cash flows utilizing
discount rates that approximate the pricing of available mortgage-backed
securities having similar rate and repricing characteristics, as well as
anticipated prepayment schedules. No value adjustments have been made for
changes in credit within the loan portfolio. It is management's opinion
that the allowance for estimated loan losses pertaining to loans results in
a fair value adjustment of the credit risk of such loans.
Federal Home Loan Bank Stock--The carrying amounts approximate fair
values because the stock may be sold back to the Federal Home Loan Bank at
carrying value.
Deposits--The fair values of deposits are estimated based on the type of
deposit products. Demand accounts, which include passbook and transaction
accounts, are presumed to have equal book and fair values, since the
interest rates paid on these accounts are based on prevailing market rates.
The estimated fair values of time deposits are determined by discounting
the cash flows of settlements of deposits having similar maturities and
rates, utilizing a yield curve that approximates the prevailing rates
offered to depositors as of the reporting date.
Borrowings--The carrying amounts of repurchase agreements approximates
fair value due to the short-term nature of these instruments.
Subordinated Debt--The fair value of subordinated debt issued to
shareholders by WAC is assumed to be equal to carrying value because the
debt terms were negotiated with related parties and there is no market for
the debt at such terms with unrelated parties.
Off-Balance-Sheet Liabilities--The fair value of an interest-rate swap
(1996 only) is estimated at the net present value of the future payable,
based on the current spread, discounted at a current rate. Fair values of
off-balance sheet commitments to lend (1995 only) are estimated based on
deferred fees associated with such commitments, which are immaterial as of
the reporting date, and are therefore not presented.
The fair value estimates presented herein are based on pertinent information
available to management as of each reporting date. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1996 1996(1)
------------- -------- ---------
<S> <C> <C> <C>
Interest income.......................... $12,186 $12,407 $9,544
Interest expense......................... 7,572 7,046 4,974
Provision for estimated losses on loans.. 4,883 5,483 5,385
------- ------- ------
Net interest loss after provision for es-
timated losses on loans................. (269) (122) (815)
Non-interest income...................... 1,240 917 4,220
Non-interest expense..................... 5,398 2,625 2,882
------- ------- ------
(Loss) income before income taxes........ (4,427) (1,830) 523
Income tax benefit....................... 3,373 805 474
------- ------- ------
Net (loss) income........................ $(1,054) $(1,025) $ 997
======= ======= ======
(Loss) earnings per share................ $(10.57) $(13.05) $18.90
======= ======= ======
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Interest income............. $ 7,329 $ 6,173 $ 5,776 $5,103
Interest expense............ 4,070 3,704 3,573 3,134
Provision for estimated
losses on loans............ 1,045 1,020 1,028 1,173
------- ------- ------- ------
Net interest income (loss)
after provision for
estimated losses on loans.. 2,215 1,449 1,175 796
Non-interest income......... 373 1,684 556 494
Non-interest expense........ 2,855 2,096 1,664 1,487
------- ------- ------- ------
Income (loss) before income
taxes...................... (268) 1,037 67 (197)
Income tax (expense)
benefit.................... 21 (78) (4) 14
------- ------- ------- ------
Net income (loss)........... $ (247) $ 959 $ 63 $ (183)
======= ======= ======= ======
Earnings (loss) per share... $(10.47) $ 40.66 $ 2.63 $(7.73)
======= ======= ======= ======
<CAPTION>
QUARTERS ENDED
----------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1994 1994 1994 1994
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Interest income............. $ 3,861 $ 2,108 $ 1,669 $1,931
Interest expense............ 2,315 1,317 970 855
Provision for estimated
losses on loans............ 2,173 -- -- --
------- ------- ------- ------
Net interest (loss) income
after provision for
estimated losses on loans.. (627) 791 699 1,076
Non-interest income......... 641 336 78 172
Non-interest expense........ 1,929 1,255 1,017 743
------- ------- ------- ------
(Loss) income before income
taxes...................... (1,915) (128) (240) 505
Income tax benefit.......... 566 38 71 (149)
------- ------- ------- ------
Net (loss) income........... $(1,349) $ (90) $ (169) $ 356
======= ======= ======= ======
(Loss) earnings per share... $(79.41) $(13.57) $(25.43) $53.55
======= ======= ======= ======
</TABLE>
- --------
(1) The financial information for the quarter ended March 31, 1996 was
restated to account for residual interests in loans sold as securitization
transactions as trading account securities. The effect on quarterly earnings
was an increase of $1,601 or $30.36 per share.
15. PARENT COMPANY INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Cash.............................................. $ -- $ 1
Investments in Banks.............................. 35,310 18,777
Prepaid expenses and other assets................. 715 153
------- -------
$36,025 $18,931
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities............ $ 764 $ 317
Due to affiliates................................. 707 575
Subordinated debt to majority stockholders........ -- 11,000
------- -------
Total liabilities............................... 1,471 11,892
------- -------
Contributed and retained equity................... 34,554 7,039
------- -------
$36,025 $18,931
======= =======
</TABLE>
F-24
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------ -------
<S> <C> <C> <C>
Interest income............................. $ 2 $ 9 $ 24
Interest expense............................ 67 243 31
------- ------ -------
Net interest expense........................ (65) (234) (7)
Noninterest income.......................... 563 1,155 611
Noninterest expense......................... 125 363 156
------- ------ -------
Income before equity in earnings (loss) of
subsidiaries............................... 373 558 448
Equity in (loss) earnings of subsidiaries... (1,455) 34 (1,700)
------- ------ -------
Net (loss) income........................... $(1,082) $ 592 $(1,252)
======= ====== =======
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------ -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) income.......................... $(1,082) $ 592 $(1,252)
Adjustments to reconcile net income (loss)
to
net cash (used in) provided by operating
activities:
Amortization of purchase accounting
adjustments.............................. (783) (1,045) (488)
Equity in loss (earnings) of
subsidiaries............................. 1,455 (34) 1,700
Change in:
Prepaid expenses and other assets........ (562) 51 495
Accounts payable and other liabilities... 447 90 (111)
Due to affiliates........................ 132 (71) (29)
Other.................................... -- 33 --
------- ------ -------
Net cash (used in) provided by operating
activities............................. (393) (384) 315
------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net investment in subsidiaries............. (17,358) (9,000) (4,746)
------- ------ -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of capital stock.................. 17,750 -- 4,750
Issuance of subordinated debt.............. -- 9,000 --
Dividends from subsidiary.................. -- 65 --
------- ------ -------
Net cash provided by financing
activities............................. 17,750 9,065 4,750
------- ------ -------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS........................... (1) (319) 319
CASH:
Beginning of year.......................... 1 320 1
------- ------ -------
End of year................................ $ -- $ 1 $ 320
======= ====== =======
NONCASH FINANCING ACTIVITIES:
Conversion of capital stock to subordinated
debt...................................... $2,000
Conversion of subordinated debt to capital
stock..................................... $11,000
</TABLE>
F-25
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. PROFORMA INFORMATION CONCERNING ACQUISITIONS
As discussed in Note 1, during 1994 WACII acquired GSB in a purchase
accounting transaction. The results of GSB's operations are included in the
Company's consolidated financial statements subsequent to the date of
acquisition. The following proforma financial information shows the estimated
results of the Company's operations for the year ended December 31, 1994 as
though the GSB purchase had occurred as of the beginning of the year. The
proforma amounts are not necessarily indicative of what would have actually
occurred if the acquisition had occurred as of the beginning of the year.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Net interest income and non-interest revenue.................... $7,222
Net loss........................................................ (920)
Loss per share.................................................. (38.99)
</TABLE>
17. INITIAL PUBLIC OFFERINGS
WFSG is making initial public offerings (the "IPOs") of common stock and
debt, and has formed certain new subsidiaries to undertake the loan
acquisition and servicing businesses currently being conducted by WCC and
certain other affiliates of the Company. The loan acquisition activity, and
any other business activity, that may be conducted by WFSG's new subsidiaries
will be in addition to the activity already being performed by the Banks and
reflected in these consolidated financial statements on an historical basis.
The Company currently expects that the IPOs will be completed during 1996.
Certain business developments related to the IPOs that may be significant to
the operations of the Company are disclosed in other footnotes to these
consolidated financial statements.
18. SUBSEQUENT EVENTS--LOAN ACQUISITIONS AND SALES
In October and November 1996, GSB acquired approximately $279,000 in unpaid
principal amount of discounted residential mortgage loans, and committed to
acquire approximately $31,900 of additional discounted residential mortgage
loans in December. Management expects to sell, prior to December 31, 1996,
performing residential mortgage loans held for sale with market values
approximately equivalent to the purchase prices of the discounted loans.
Completion of the sales transactions by December 31, 1996 is necessary in
order for GSB to meet the growth restrictions imposed by its Order (see Note
10).
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Girard Savings Bank F.S.B.
San Diego, California
We have audited the accompanying consolidated statements of operations and
of cash flows of Girard Savings Bank F.S.B. and Subsidiary (the "Bank") for
the period from January 1, 1994 through November 8, 1994, the date of the
Bank's acquisition by Wilshire Acquisitions Corporation II. These consolidated
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides basis for our
opinion.
In our opinion, such consolidated statements of operations and of cash flows
present fairly, in all material respects, the results of operations and cash
flows of Girard Savings Bank F.S.B. and Subsidiary for the period from January
1, 1994 through November 18, 1994, in conformity with generally accepted
accounting principles.
March 10, 1995 /s/ Deloitte & Touche LLP
Los Angeles, California
F-27
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
INTEREST INCOME:
Loans................................................................ $5,577
Mortgage-backed securities........................................... 337
------
Total interest income.............................................. 5,914
------
INTEREST EXPENSE:
Deposits............................................................. 3,006
Borrowings........................................................... 292
------
Total interest expense............................................. 3,298
------
NET INTEREST INCOME.................................................... 2,616
PROVISION FOR ESTIMATED LOAN LOSSES.................................... 827
------
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOAN LOSSES.......... 1,789
------
OTHER LOSS, Service charges and other fees............................. (3)
------
OTHER EXPENSES:
Compensation and other employee benefits............................. 512
FDIC insurance premiums.............................................. 262
Depreciation and amortization........................................ 14
Amortization of excess of cost over net assets acquired.............. 993
Occupancy............................................................ 57
Professional services................................................ 338
Data processing...................................................... 54
Real estate owned, net............................................... 194
Other general and administrative..................................... 143
------
Total other expenses............................................... 2,567
------
LOSS BEFORE INCOME TAX PROVISION....................................... (781)
INCOME TAX PROVISION................................................... 156
------
NET LOSS............................................................... $ (937)
======
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (937)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation....................................................... 14
Amortization of excess of cost over net assets acquired............ 993
Amortization of deferred interest and fees......................... (56)
Provision for loan losses.......................................... 827
Provision for real estate losses................................... 97
Change in:
Accrued interest receivable....................................... (109)
Prepaid expenses and other assets................................. (52)
Income taxes receivable........................................... 921
Other liabilities................................................. 468
Deferred taxes.................................................... 212
--------
Net cash provided by operating activities........................ 2,378
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan repayments, net................................................ 5,503
Proceeds from the maturity of investments securities................ 3,497
Purchases of investment securities and FHLB stock................... (2,046)
Investment in real estate........................................... (107)
Proceeds from real estate sold...................................... 2,850
--------
Net cash provided by investing activities........................ 9,697
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits.............................................. (2,402)
Issuance of common stock............................................ 13
Proceeds from FHLB advances......................................... 12,000
Payments of FHLB advances........................................... (21,000)
--------
Net cash used in financing activities............................ (11,389)
--------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................ 686
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................... 2,903
--------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................. $ 3,589
========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Payments during the period for:
Interest........................................................... $ 3,300
NONCASH INVESTING ACTIVITIES:
Loans originated to finance the sale of foreclosed real estate...... 1,190
</TABLE>
See notes to consolidated financial statements.
F-29
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Girard Savings Bank F.S.B. and
subsidiary (the "Bank") are in accordance with generally accepted accounting
principles and conform to practices within the banking industry. A summary of
the significant accounting policies applied in the preparation of the
accompanying financial statements follows:
Principles of Consolidation--The consolidated financial statements include
the accounts of Girard Savings Bank F.S.B. and its wholly-owned subsidiary,
Girard Financial Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates. Significant estimates in the accompanying consolidated financial
statements include provisions for losses on loans and real estate owned.
Investment Securities--As of January 1, 1994, the Bank adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities. This
statement address the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments
in debt securities. Those investments are classified into three categories and
accounted for as follows: (i) debt securities which the enterprise has the
positive intent and ability to hold to maturity are classified as held-to-
maturity securities and reported at amortized cost; (ii) debt and equity
securities that are brought and held principally for the purpose of selling in
the near term are classified as trading securities and reported at fair value
with unrealized gains and losses included in earnings; and (iii) debt and
equity securities not classified as either held-to-maturity securities or
trading securities are classified as available-for-sale securities and
reported at fair value with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholders' equity, net of income
taxes. Prior to the adoption of SFAS No. 115, all investment securities were
classified as held for investment and valued at cost, adjusted for the
accretion of discounts and amortization of premiums which were recognized as
an adjustment to income. Subsequent to adoption, the Bank has classified all
of its investment securities as held to maturity and accounts for them in the
same manner.
Loans Receivable--Loans are reported at the principal amounts outstanding,
net of unearned income, net deferred loan origination fees and the allowance
for loan losses. Interest income is calculated using the simple interest
method. The recognition of interest income is discontinued when, in
management's judgment, the collection of interest is deemed to be unlikely.
Nonrefundable fees and direct costs associated with the origination of loans
are deferred and netted against outstanding loan balances. The net deferred
fees and costs recognized in interest income over the term of the loan using a
method that approximates the interest method. When recognized as interest
income, loan origination fees are included in revenues as interest on loans.
Discounts or premiums on acquired loans are accreted or amortized to
operations over the lives of the loans using a method that approximates the
level-yield method unless the loans are nonaccrual loans.
Provision and Allowance for Loan Losses--The allowance for loan losses is
maintained at a level believed adequate by management to absorb potential
losses in the loan portfolio. Management's determination of the adequacy of
the allowance is based on an evaluation of the portfolio, previous loan loss
experience, current economic conditions, volume, growth and composition of the
loan portfolio and other relevant factors. The
F-30
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
allowance is increased by provisions for loan losses charged against
operations and recoveries of previously charged off credits.
The accompanying financial statements require the use of management
estimates to calculate the allowance for loan losses. These estimates are
inherently uncertain and depend on the outcome of future events. Regulatory
authorities have required substantial increases in the allowance maintained by
many banks in recognition of the inherent risk in the existing economic
environment. The Bank's lending is concentrated in the Southern California
area and specifically on loans collateralized by income-producing properties
in that area. The area has recently experienced adverse economic conditions,
including declining real estate values. These factors have adversely affected
borrower's ability to repay loans. Additional decline in the local economy
and/or rising interest rates may result in increasing losses that cannot
reasonably be predicted at this date. Such losses may also result in
unanticipated erosion of the Bank's capital.
Leasehold Improvements and Equipment--Office leasehold improvements and
equipment are stated at cost, less accumulated depreciation and amortization,
computed on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever are shorter.
Real Estate Owned--Real estate acquired in settlement of loans is stated at
the lower of cost of fair value less estimated cost to sell. Loan balances in
excess of fair value of the real estate acquired are charged against the
allowance for loan losses at the date of acquisition. Any subsequent operating
expense or income, reduction in estimated values, and gains or losses on
disposition of such properties are charged to current operations.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and
cash equivalents include cash and due from banks, federal funds sold and
certificates of deposit with original maturities of three months or less.
2. SUBSEQUENT EVENT
Acquisition and Recapitalization--On November 9, 1994, pursuant to a stock
purchase agreement between Wilshire Acquisitions Corporation II ("WACII"),
Girard Savings Bank F.S.B., (the "Bank"), Girard Financial Corporation, the
stockholders of the Bank, and RT Holdings, Inc., WACII purchased 4,218,210
shares of the Bank's common stock held by the stockholders for $3,559. In
addition, the Bank issued and sold to WACII nonvoting preferred stock for
$1,000. WACII now owns 94.9% of the Bank's outstanding shares of common stock
and 100% of the Bank's outstanding preferred stock.
Prior to acquisition, the Bank wrote off $920 in goodwill associated with a
prior acquisition that otherwise would have been amortized over the next 14
years. Such goodwill was deemed to be impaired due to the cessation of
significant activity of the acquired business and disposition of its assets.
In addition, the Bank incurred additional legal and professional expenses of
approximately $256 related to its sale.
3. INCOME TAX PROVISION
The provision for income taxes consists of the following:
<TABLE>
<S> <C>
Current:
Federal income tax benefit.......................................... $(61)
State income taxes.................................................. 5
----
Total current benefit............................................. (56)
----
Deferred:
Federal income taxes................................................ 212
----
Total income tax provisions....................................... $156
====
</TABLE>
F-31
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The principal temporary differences creating deferred taxes are related to
FHLB stock dividends, discounts on purchased loans, the allowance for loan
losses, deferred loan fees, and partnership income, which are taxable or
deductible in different years for tax and financial reporting purposes.
The difference between the effective tax rate implicit in the consolidated
statements of operations and the statutory income tax rate can be attributed
to the following:
<TABLE>
<S> <C>
Federal income tax benefit at statutory rate............................ (35.0%)
Nondeductible goodwill.................................................. 41.2
Valuation allowance..................................................... 7.6
Other................................................................... 6.2
-----
Effective income tax benefit rate....................................... 20.0%
=====
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Profit Sharing Plan--Subsequent to the acquisition by WACII, the Bank's
employees began to participate in a defined contribution profit sharing and
401(k) plan sponsored by companies in the Wilshire Financial Services Group
"control group". At the discretion of the Bank's Board of Directors, the Bank
may elect to contribute to the plan based on profits of the Bank or based on
matching participants' contributions.
Lease Commitments--At November 8, 1994, there are no operating leases with
initial or remaining noncancellable lease terms in excess of one year.
Total rent expense from an operating lease was approximately $59 in 1994.
The lease provides that the Bank pay taxes, maintenance, insurance and certain
other operating expenses applicable to the leased premises in excess of a
predetermined base, in addition to the minimum monthly payments.
Lending Commitments--At November 8, 1994, the Bank had no outstanding
commitments to fund loans and no obligations under standby letters of credit
or other off-balance-sheet items with credit risk.
Litigation--The Bank is a defendant in legal actions arising from
transactions conducted in the ordinary course of business. Management, after
consultation with legal counsel, believes the ultimate liability, if any,
arising from such actions will not materially affect the Bank's financial
position.
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Wilshire Credit Corporation and Affiliates
Portland, Oregon:
We have audited the accompanying combined statements of financial condition
of Wilshire Credit Corporation and Affiliates (the "Corporations") as of
September 30, 1996 and December 31, 1995, and the related combined statements
of operations, stockholders' equity and cash flows for the nine months ended
September 30, 1996 and for the years ended December 31, 1995 and 1994. These
combined financial statements are the responsibility of the Corporations'
management. Our responsibility is to express an opinion on these 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, such combined financial statements present fairly, in all
material respects, the combined financial position of Wilshire Credit
Corporation and Affiliates as of September 30, 1996 and December 31, 1995, and
the combined results of their operations and their cash flows for the nine
months ended September 30, 1996 and for the years ended December 31, 1995 and
1994, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
November 13, 1996
Los Angeles, California
F-33
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS........................... $ 6,638 $ 3,577
SECURITIES:
Trading account................................... 11,818 --
Available for sale, at fair value (cost: $7,039
and $2,486 in 1996
and 1995, respectively).......................... 7,049 2,486
Held to maturity, at amortized cost (fair value:
$12,785 and $4,643 in 1996
and 1995, respectively).......................... 12,771 4,643
LOANS:
Loans, net........................................ -- 121,420
Discounted loans, net............................. 4,824 19,352
Loans held for sale, net, at lower of cost or
market........................................... 112,939 --
Discounted loans held for sale, net, at lower of
cost or market................................... 168,957 33,267
Commercial notes receivable....................... 10,811 9,261
OTHER RECEIVABLES................................... 2,935 1,769
DUE FROM AFFILIATES, Net............................ 2,473 759
PROPERTY, Net....................................... 8,953 6,717
OTHER ASSETS........................................ 3,000 3,122
-------- --------
TOTAL............................................... $353,168 $206,373
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Participating interests in loans and securities... $143,424 $150,298
Borrowings........................................ 243,239 70,165
Capital lease obligations......................... 1,445 1,126
Due to affiliates................................. 8,431 3,698
Accounts payable and accrued liabilities.......... 7,592 4,887
-------- --------
Total liabilities............................... 404,131 230,174
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock...................................... 524 524
Retained earnings (accumulated deficit)........... (3,943) 78
Distributions to stockholders..................... (47,554) (24,403)
Unrealized gains on available-for-sale
securities....................................... 10 --
-------- --------
Total stockholders' equity (deficit)............ (50,963) (23,801)
-------- --------
TOTAL............................................... $353,168 $206,373
======== ========
</TABLE>
See notes to combined financial statements.
F-34
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ----------------
1996 1995 1994
------------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Servicing fees............................... $ 6,041 $ 9,739 $ 3,339
Interest and dividend income................. 6,718 5,124 1,667
Gain on sale of loans........................ 935 43 465
Rent and finance lease income................ 607 625 192
Other revenues (expense)..................... 72 (194) 133
------- ------- -------
Total revenues............................. 14,373 15,337 5,796
------- ------- -------
EXPENSES:
Compensation and benefits.................... 5,090 6,605 3,834
Interest expense............................. 9,116 3,789 894
Travel....................................... 1,032 1,233 177
Depreciation and amortization................ 766 504 208
Professional services........................ 537 898 311
Portfolio servicing expense.................. 281 52 32
Rent......................................... 105 254 217
Telephone.................................... 189 349 262
Postage...................................... 120 143 206
Advertising.................................. 150 82 33
Other general and administrative............. 1,008 909 684
------- ------- -------
Total expense.............................. 18,394 14,818 6,858
------- ------- -------
NET (LOSS) INCOME.............................. $(4,021) $ 519 $(1,062)
======= ======= =======
</TABLE>
See notes to combined financial statements.
F-35
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED GAINS
ON AVAILABLE-
COMMON RETAINED DISTRIBUTIONS TO FOR-SALE
STOCK EARNINGS SHAREHOLDERS SECURITIES TOTAL
------ -------- ---------------- ---------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1994................... $524 $ 1,599 $ (4,584) $-- $ (2,461)
Net loss.............. -- (1,062) -- -- (1,062)
Distributions to
shareholders......... -- -- (7,576) -- (7,576)
---- ------- -------- ---- --------
BALANCE, DECEMBER 31,
1994................... 524 537 (12,160) -- (11,099)
Net income............ -- 519 -- -- 519
Distributions to
shareholders......... -- -- (12,243) -- (12,243)
Dividends............. -- (978) -- -- (978)
---- ------- -------- ---- --------
BALANCE, DECEMBER 31,
1995................... 524 78 (24,403) -- (23,801)
Net loss.............. -- (4,021) -- -- (4,021)
Distributions to
shareholders......... -- -- (23,151) -- (23,151)
Unrealized gain on se-
curities
available-for-sale... -- -- -- 10 10
---- ------- -------- ---- --------
BALANCE, SEPTEMBER 30,
1996................... $524 $(3,943) $(47,554) $ 10 $(50,963)
==== ======= ======== ==== ========
</TABLE>
See notes to combined financial statements.
F-36
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994
------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ (4,021) $ 519 $ (1,061)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Gain on sale of loans..................... (935) (43) (465)
Valuation adjustment--loans held for
sale..................................... -- -- 254
Interest capitalized on commercial notes.. (1,550) (581) --
Depreciation and amortization............. 524 343 179
Change in:
Trading securities...................... (11,818) -- --
Security purchased under agreement to
resell................................. -- 24,938 (24,938)
Other receivables....................... (1,166) 530 (756)
Due from affiliates..................... (1,714) (386) (373)
Other assets............................ 122 (1,912) (1,126)
Due to affiliates....................... 4,733 185 2,770
Accounts payable and accrued
liabilities............................ 2,705 1,931 1,926
Security sold but not yet purchased..... -- (24,738) 24,738
Other................................... -- 38 --
-------- -------- --------
Net cash provided by (used in)
operating activities................. (13,130) 345 1,148
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of held-to-maturity securities.... (8,371) (4,160) (851)
Proceeds from maturities of held-to-maturity
securities................................. 243 368 --
Purchase of available-for-sale securities... (5,377) (2,602) --
Proceeds from maturities of available-for-
sale securities............................ 824 116 --
Acquisitions and originations of loans...... (258,771) (168,558) (240,881)
Proceeds from sale of loans................. 120,707 109,034 8,420
Receipts of principal on loans.............. 26,330 137,642 39,179
Origination of commercial notes receivable.. -- (7,680) (1,000)
Purchase of property........................ (2,248) (5,339) (219)
-------- -------- --------
Net cash provided by (used in)
investing activities................. (126,663) 58,828 (195,352)
-------- -------- --------
</TABLE>
See notes to combined financial statements.
F-37
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, -------------------
1996 1995 1994
------------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from participating interests..... $ -- $ 47,261 $179,938
Payments of principal to participating
interests................................ (6,874) (102,234) (36,564)
Proceeds from borrowings.................. 224,968 73,091 63,278
Principal payments of borrowings.......... (51,894) (63,867) (3,050)
Principal payments on capital leases...... (195) (125) (59)
Cash dividends paid ...................... -- (978) --
Other distributions to stockholders....... (23,151) (12,243) (7,576)
--------- --------- --------
Net cash provided by (used in) financing
activities............................. 142,854 (59,155) 195,967
--------- --------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS... 3,061 18 1,763
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR....................................... 3,577 3,559 1,796
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...... $ 6,638 $ 3,577 $ 3,559
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Interest paid............................. $ 8,734 $ 3,121 $ 359
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Purchases of property through capital
leases................................... $ 514 $ -- $ 101
</TABLE>
See notes to combined financial statements.
F-38
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
YEARS ENDED DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Combination--The combined financial statements of Wilshire Credit
Corporation and Affiliates (the "Corporations") include the accounts of the
following companies:
<TABLE>
<CAPTION>
COMPANY IDENTIFIER
------- ----------
<S> <C>
Wilshire Credit Corporation....................................... WCC
Wilshire Leasing Limited.......................................... WLL
Wilshire Properties I, Inc. ...................................... WP-I
Wilshire Properties II, Inc. ..................................... WP-II
Portland Servicing Corporation.................................... PSC
Wilshire Securities Corporation................................... WS
Wilshire Funding Corporation 1994-1............................... WF-4-1
Wilshire Funding Corporation 1995-1............................... WF-5-1
Wilshire Funding Corporation 1995-2............................... WF-5-2
Wilshire Funding Corporation 1995-3 .............................. WF-5-3
Wilshire Funding Corporation 1996-1............................... WF-6-1
Wilshire Consumer Receivables Funding Corporation, LLC............ WCRFC
Wilshire Manufactured Housing Funding Company, LLC................ WMHFC
Wilshire Mortgage Funding Company, LLC............................ WMF
WMFC, LLC......................................................... WMFC
Wilshire Funding Company, LLC..................................... WF
</TABLE>
All of the above companies are under common ownership and management. All
significant intercompany balances and transactions have been eliminated in
combination.
Nature of the Business--The Corporations acquire and service performing and
nonperforming (discounted) loan portfolios and mortgage-backed securities.
Funding for loan portfolio and mortgage-backed securities acquisitions is
provided principally by third-party investors who hold participating interests
in cash flows from specified portfolios and securities, generally on a
nonrecourse basis, or who lend to the Corporations with specified portfolios
and securities as collateral.
WLL operates under the name of Portland Cellular, providing cellular
telephone transmission for its customer base. Portland Cellular also provides
phones to certain of its customers under operating leases.
WP-I operates the Corporations' headquarters facilities, which were acquired
under a capital lease with a bargain purchase option.
WP-II owns and manages two commercial real estate properties located in
Oregon.
WS was formed for the purpose of engaging in broker/dealer activities, but
has had no significant activity.
WF-4-1, WF-5-1, WF-5-2, WF-5-3 and WF-6-1 were formed primarily for the
purpose of acquiring and securitizing various loan portfolios.
WCRFC, WMHFC and WMF were formed for the purpose of funding three
securitizations during 1995: a $25,464 consumer loan-backed bond, a $30,757
manufactured housing-backed bond, and a $64,753 mortgage-backed bond,
respectively.
F-39
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
WMFC is the holding company for WF which, was formed for the purpose of
acquiring and originating residential home mortgages.
Cash and Cash Equivalents--The Corporations consider all highly liquid
investments with maturities of three months or less, when purchased, to be
cash equivalents. Cash and cash equivalents consist primarily of cash in
accounts with banks and brokers and in money market funds.
Use of Estimates in the Preparation of the Combined Financial Statements--
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Securities--Securities consist primarily of B-class pass-through mortgage
and other asset-backed securities which were either purchased at discounts or
represent residual interests in loans previously securitized by the
Corporations, and U.S. Treasury securities. Until the third quarter of 1996,
all securities were classified as held-to-maturity based on management's
intent and the Corporations' ability to hold them to maturity, and differences
between cost and fair value of the securities were immaterial. In the third
quarter of 1996, purchases of B-class mortgage-backed securities were
increased significantly. In connection with that activity, management
reevaluated its intentions with respect to the various types of securities
held, and the securities portfolio was segregated into three components, as
follows:
Held-to-Maturity--U.S. Treasury securities are pledged for certain
borrowings and are classified as held-to-maturity based on the ability and
intent to hold them to maturity for that purpose. These securities are
carried at amortized cost.
Trading--B-class and other securities representing retained interests in
loans securitized by the Corporations are classified as trading securities.
These securities are carried at fair value, and changes in unrealized gains
or losses are recorded in the combined statements of operations.
Available-for-Sale--B-class mortgage-backed securities purchased from
third parties are classified as available-for-sale. These securities are
carried at fair value, and changes in unrealized gains or losses are
recorded in a separate stockholders' equity account in the combined balance
sheets. The available-for-sale classification also includes an equity
security-preferred stock of a privately-held company that does not have a
readily determinable fair value, and for which fair value is assumed to
approximate cost.
When the securities held prior to the third quarter of 1996 were transferred
from the held-to-maturity portfolio to the available-for-sale and trading
portfolios during the third quarter, they were transferred at their fair
values, which were not materially different than amortized cost.
Loans--The Corporations' principal business involves acquiring loans, and to
a significantly lesser extent, originating them. Acquired loans are generally
purchased in pools, or portfolios, for prices at or below face value (i.e.,
unpaid principal balances plus accrued interest). Nonperforming and
underperforming loan portfolios are generally acquired at deep discounts to
face value and are classified as discounted loans in the combined statements
of financial condition. Loans that have been identified as likely to be sold
are classified as held-for-sale in the combined statements of financial
condition. Loans other than discounted loans and loans held-for-sale are
classified simply as loans.
Discounted loans are presented in the combined statements of financial
condition inclusive of accrued interest (purchased interest and subsequently
accrued interest) and net of unamortized discount. Discounted loans are
accounted for on a portfolio basis, generally using the cost recovery method.
The full extent of cash that will
F-40
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
ultimately be collected on a specific discounted loan portfolio is subject to
substantial uncertainty. Collections may be realized in various ways, such as
negotiations with debtors resulting in resumption of payments under original
or restructured terms, significant collections on one or a relatively few
loans in a portfolio of many loans, legal judgments against debtors, or
repossession and sale of collateral. Discounts are not accreted into income
until the Corporations' initial net investment in the portfolio is fully
recovered, except in the case of certain portfolios for which collections are
more certain. For most portfolios, accretion is determined in proportion to
cash receipts of principal relative to the total principal in the portfolios.
.
Loans other than discounted loans are presented in the combined statements
of financial condition in the same manner as discounted loans except that
discounts associated with purchased loans are accreted into income using a
method approximating the interest method, and interest is recognized on an
accrual basis.
Loans held-for-sale are presented at lower of cost or market value, and cost
is determined as described above depending on whether the loans held-for-sale
are discounted loans or other loans. If market value is less than cost, a
valuation allowance is recorded to reduce the carrying value.
Commercial notes receivable comprise three originated loans to an
unaffiliated corporation and its operating subsidiary. The loans are presented
at cost, plus accrued compound interest capitalized in accordance with the
terms of the loans. Interest on the loans is collectible in cash based on a
formula relating to the earnings of the borrowers. The loans mature in August
2000.
The Corporations do not evaluate individual loans, except for commercial
notes receivable, for impairment under SFAS No. 114, "Accounting for
Impairment of a Loan," because acquisition decisions and certain other loan
management decisions are made on the basis of the value of each portfolio as a
unit rather than on the basis of the value of specific loans. Also, a
substantial majority of the loans purchased have small balances relative to
the total portfolio and are homogeneous by type within each portfolio.
Impairment is evaluated on a portfolio basis considering the projected net
realizable value of the portfolio compared to the net carrying value of the
portfolio. Credit risk related to each portfolio as a whole is one factor
considered by management in determining the purchase price for the portfolio;
therefore unaccreted discounts are assumed to provide a sufficient valuation
allowance for credit risk unless management's analysis indicates otherwise. As
of September 30, 1996 and December 31, 1995, no allowance for loan losses has
been provided in the financial statements. Specific loans are charged off,
with corresponding charges to loan discounts, when management determines they
are uncollectible. A substantial portion of the total discounted loan
portfolio consists of nonperforming and restructured loans. It is not
practicable to estimate the additional income that might have been recognized
had these loans performed under their original terms.
Interest Income Recognition--Interest is accrued on both loans and
discounted loans in accordance with their legal terms. However, to the extent
there is a participation agreement associated with a loan portfolio, the
liability to the participant is increased by the amount of interest accrued.
To the extent that the Corporations have a nonparticipated interest in a
discounted loan portfolio, interest income recognition is deferred and the
loan discount account is increased by the amount of interest accrued. To the
extent that the Corporations have a nonparticipated interest in commercial
notes receivable and in a loan portfolio other than a discounted loan
portfolio, interest income is recognized as the interest is accrued.
Other Receivables--Other receivables consist primarily of certain direct
costs associated with collections of specific loans. The costs are generally
reimbursable by participants in the loan portfolios, or are charged to the
borrowers.
Due from and Due to Affiliates--Due from affiliates primarily consists of
amounts advanced for certain operating expenses to a savings and loan holding
company affiliated with the Corporations by common ownership and control. At
September 30, 1996, due from affiliates includes servicing fees, for which
payment was deferred, owed to the Corporations from one of the subsidiaries of
the savings and loan holding company.
F-41
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Due to affiliates primarily consists of loan payments collected by the
Corporations as servicer but not yet remitted to the two subsidiaries of the
bank holding company affiliate. These assets and liabilities are reflected at
cost, and do not bear interest.
Rental Income and Finance Lease Income--Rental income and finance lease
income is derived from operating leases on commercial real estate and from
cellular and portable telephone rentals.
Property--Property is stated at cost less accumulated depreciation.
Depreciation is determined using the straight-line method over the estimated
useful lives of the related assets.
Participating Interests in Loans and Securities--Participation liabilities
represent amounts invested by third parties for an interest in cash flows from
loan portfolios and mortgage-backed securities, net of the cash flows already
remitted to the participants. Participants share credit risks and certain
other risks associated with the assets that provide the source of repayment
and potential income to the participants. If cash flows from specific assets
proved to be insufficient to provide participants recovery of their initial
investments or expected income on such investments, the Corporations'
liability would be reduced without recourse. Included in participation
liabilities as of September 30, 1996 and December 31, 1995 are $6,520 and
$5,605, respectively, representing amounts collected from borrowers but not
yet remitted to participants.
Agreements with participants generally provide that, in exchange for the
Corporations' servicing of assets, the Corporations retain a specified portion
of portfolio cash flows allocable to the participants' investment in addition
to cash flows relating to the Corporations' direct investment, if any. The
Corporations' retained portion of cash flows allocable to participants'
interests is recognized when received as servicing fee income. The
Corporations' retained portion generally increases after the point at which
participants have recouped their initial investments.
Financial Instruments--The Corporations enter into transactions involving
financial instruments both for speculative trading purposes and for hedging
purposes.
Premiums received or paid for writing or purchasing puts and calls for
trading purposes are recorded as liabilities or assets representing the market
value of the options. The liabilities or assets are subsequently marked to
market at each balance sheet date, and unrealized as well as realized gains
and losses are recorded in periodic income.
Forward sales and short sales of securities and certain options and futures
contracts are designated as hedges against future fluctuations in the market
value of loans held for sale resulting from changes in interest rates. Changes
in the market value of these instruments are deferred as adjustments to the
cost basis of the hedged loans and thus are recognized in connection with the
ultimate sale of such loans.
Income Taxes--Each of the companies whose operations are reflected in these
combined financial statements are Subchapter S corporations for income tax
purposes. Taxable income of the companies is passed through directly to the
stockholders and is not taxed at the corporate level.
Earnings per Share--Earnings per share data is omitted because each company
in the combined group has an independent capital structure, and varying
numbers of outstanding shares of stock.
Reclassification--Certain amounts in the combined financial statements and
related footnote disclosures for 1995 and 1994 were reclassified to conform to
the 1996 presentation. These reclassifications do not materially affect the
presentation.
F-42
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2.SECURITIES
Securities consist of the following at September 30, 1996 and December 31,
1995:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
1996
Available-for-sale securities:
Mortgage-backed securities........ $ 4,553 $ 30 $ 20 $ 4,563
Equity securities................. 2,486 -- -- 2,486
------- ---- ---- -------
Total available-for-sale........ $ 7,039 $ 30 $ 20 $ 7,049
======= ==== ==== =======
Held-to-maturity--
U.S. Treasury Securities.......... $12,771 $-- $-- $12,785
======= ==== ==== =======
1995
Available-for-sale--
Equity securities................. $ 2,486 $-- $-- $ 2,486
======= ==== ==== =======
Held-to-maturity--
U.S. Treasury Securities.......... $ 4,643 $-- $-- $ 4,643
======= ==== ==== =======
</TABLE>
The Company receives payments on mortgage-backed securities over periods
that are considerably shorter than the contractual maturities of the
securities, which range from 13 to 30 years. U.S. Treasury maturities held at
September 30, 1996 mature within one year.
There were no sales of securities in the nine months ended September 30,
1996 or the years ended December 31, 1995 and 1994.
At September 30, 1996, all U.S. Treasury securities are pledged for certain
borrowings. Substantially all other securities collateralize other borrowings
and participating interests reflected as liabilities in the combined
statements of financial condition.
3.LOANS
Loans, discounted loans and loans held for sale are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Loans at amortized cost:
Gross unpaid principal......................... $ 140,272
Gross accrued interest......................... 3,054
Discount....................................... (21,906)
---------
Loans, net..................................... $ 121,420
=========
Discounted loans, at cost:
Gross unpaid principal......................... $ 280,104 $ 341,269
Gross accrued interest......................... 234,562 221,394
Discount....................................... (509,842) (543,311)
--------- ---------
Discounted loans, net.......................... $ 4,824 $ 19,352
========= =========
</TABLE>
F-43
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Loans held for sale, at cost which is lower than
market:
Gross unpaid principal........................ $131,182
Gross accrued interest........................ 4,719
Discounts and deferred hedging gains, or
losses net of premiums....................... (22,962)
--------
Loans held for sale, net...................... $112,939
========
Discounted loans held for sale, at cost which is
lower than market:
Gross unpaid principal........................ $210,657 $69,818
Gross accrued interest........................ 27,336 13,573
Discount and deferred hedging gains, or losses
net of premiums.............................. (69,036) (50,124)
-------- -------
Discounted loans held for sale, net........... $168,957 $33,267
======== =======
</TABLE>
Loans other than discounted loans consist primarily of loans secured by real
estate, of which approximately 50% are single family residential properties.
Discounted loans and discounted loans held for sale comprised both real estate
secured (approximately 35%) and consumer loans (approximately 65% based on
gross unpaid principal balances at September 30, 1996). Approximately 20% of
loans are to borrowers in the northeastern U.S. and approximately 15% of loans
are to borrowers in California. The remainder are to borrowers in diverse
geographical areas.
Substantially all loans collateralize participating interests and
borrowings.
4.PROPERTY
Property consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Land.............................................. $2,550 $1,763
Buildings......................................... 5,971 4,701
Vehicles.......................................... 48 48
Furniture and equipment........................... 1,223 812
------ ------
Total........................................... 9,792 7,324
Less accumulated depreciation..................... 839 607
------ ------
Property, net..................................... $8,953 $6,717
====== ======
</TABLE>
Land and buildings comprise the Corporations' headquarters, which secure a
capital lease obligation (see Note 6), and two commercial real estate
projects, which collateralize certain borrowings (see Note 5).
The following table summarizes future minimum rental income under
noncancelable operating leases as of September 30, 1996:
<TABLE>
<S> <C>
1996.................................................................... $127
1997.................................................................... 322
1998.................................................................... 110
1999.................................................................... 116
2000.................................................................... 117
Thereafter.............................................................. 25
----
$817
====
</TABLE>
F-44
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. BORROWINGS
The Corporations have various borrowing agreements, most of which are
collateralized by loans and securities. These borrowings have either (a)
repayment terms tied to cash receipts of the related collateral or (b)
borrowing bases tied to the relative value of the collateral. Except certain
borrowings (mortgages) secured by investment real estate, the borrowings do
not have fixed repayment schedules. Following is a summary of borrowings by
major type, showing their outstanding balances, interest rates and final
maturity dates. Unless otherwise noted, the borrowings are secured by
substantially all of the Corporations' unparticipated interest in loans and
securities and/or the agreed-upon value of the servicing income to be derived
from participated interests. Interest is payable at least monthly on
substantially all borrowings.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Reverse repurchase agreements with rates ranging
from 5.6% to LIBOR plus .75-2.5%, maturing
October 1996................................... $ 85,795 $ 5,918
Borrowings with fixed rates of 12-12.5%,
maturing beginning in 1998, renewable at the
Corporations' option until 2005-6.............. 81,085 38,996
Mortgage-backed bonds issued to third parties
with rates ranging from LIBOR plus .5-5.5% (11%
cap), maturing in 2001......................... 50,381
Warehouse line for loan originations at LIBOR
plus 1.5%...................................... 12,374
Borrowings with rates of prime plus 5% and LIBOR
plus 4%, maturing in 1998-1999................. 3,542 13,447
Borrowings due on demand, interest at prime
plus........................................... 3,500 3,500
Other loan-secured borrowings................... 2,750
Borrowings secured by investment real estate
with fixed rates from 9.75-10.63%, payable
monthly and maturing in 1998 and 2005.......... 5,345 4,477
Related-party borrowings........................ 1,217 1,077
-------- -------
Total borrowings................................ $243,239 $70,165
======== =======
</TABLE>
The mortgage-backed bonds shown above were issued in a securitization
involving the Corporations' loans which was accounted for as a financing
transaction rather than as a sale of loans due to the extent of the
Corporations' residual interests in the transaction.
Maturities of long-term borrowings (mortgages on investment real estate) are
as follows:
<TABLE>
<S> <C>
1997 (including fourth quarter of 1996).............................. $ 110
1998................................................................. 80
1999................................................................. 1,195
2000................................................................. 95
2001................................................................. 940
Thereafter........................................................... 2,925
------
$5,345
======
</TABLE>
Following is information about the Corporations' borrowings under reverse
repurchase agreements during the nine months ended September 30, 1996:
<TABLE>
<S> <C>
Average balance outstanding during the period.......................... $19,397
Highest balance outstanding during the period.......................... 85,685
Average interest rate during the period................................ 5,68%
Average interest rate at the end of the period......................... 7.36%
</TABLE>
F-45
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Related party borrowings are borrowings from a trust managed on behalf of
the Corporations' majority stockholder and a relative of the majority
shareholder. During the nine months ended September 30, 1996 and the years
ended December 31, 1995 and 1994, the Corporations recognized interest expense
of $129, $153 and $200, respectively.
As of September 30, 1996, the Corporations have written borrowing
commitments from various third parties totaling $350 million, of which
approximately $82 million has been drawn and is included in borrowings above.
In addition, the Corporations have unwritten commitments totaling an
additional $150 million, of which approximately $5 million has been drawn and
is included in borrowings above. Of the total commitments, $300 million is in
the form of repurchase facilities, $100 million is in the form of a warehouse
facility, and $100 million is in the form of a term loan. Pursuant to a
reorganization of the Corporations and other commonly controlled entities (see
Note 14), management expects that undrawn amounts of these borrowing
commitments will be transferred to subsidiaries of Wilshire Financial Services
Group, Inc. ("WFSG") upon the effective date of WFSG's initial public offering
of common stock and debt.
6. CAPITAL LEASE OBLIGATIONS
The Corporations have purchased various assets, including its headquarters
facility and certain automobiles and equipment, under capital leases. Future
minimum lease payments for capital leases as of September 30, 1996 are as
follows:
<TABLE>
<S> <C>
1996................................................................. $ 962
1997................................................................. 156
1998................................................................. 121
1999................................................................. 113
2000................................................................. 109
Thereafter........................................................... 62
------
Total.............................................................. 1,523
Less amount representing interest.................................. 78
------
Capital lease obligation.......................................... $1,445
======
</TABLE>
7. FINANCIAL INSTRUMENTS
The Corporations are parties to financial instruments with off-balance-sheet
risk in the normal course of business, primarily for the purposes of reducing
exposure to fluctuations in interest rates and changes in the market value of
loans held for sale ("hedging activities") and, prior to 1996, for purposes of
realizing short-term profits ("trading activities"). These financial
instruments include short sales and forward sales of U.S. Treasury securities
and short and long positions in option contracts and interest rate futures
contracts of durations similar to the fixed rate loans held for sale that are
being hedged. These instruments involve, to varying degrees, interest-rate
risk in excess of the amount recognized in the consolidated statements of
financial condition. The contract or notional amounts of these instruments
reflect the extent of the Corporations' involvement in particular classes of
financial instruments. The counterparties to these instruments are well-known
international broker-dealers and the Corporations do not believe there is
significant credit risk associated with the instruments.
Substantially all activities in the aforementioned financial instruments
during the nine months ended September 30, 1996 were hedging activities. At
September 30, 1996, the Corporations had futures and options positions
(primarily short positions) with notional amounts totalling $26,400 and
$12,400, respectively, and net deferred hedging losses totalling $193.
F-46
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Substantially all activities in the aforementioned financial instruments
during the year ended December 31, 1995 were trading activities. At December
31, 1995, the Corporations had futures and options positions (primarily short
positions) with notional amounts totalling $3,122 and $10,603, respectively,
and fair market values of $57. During the year ended December 31, 1995, the
average fair values of these financial instruments were not material. Trading
gains and losses are included in other revenues in the combined statements of
operations
The purchase or sale of options and futures contracts bears a high degree of
market risk, subject to fluctuations in market values, rates or currencies in
the instruments underlying the contracts. The potential market loss on options
and futures are generally substantially in excess of the premium paid or
received. The options and futures transactions entered into by the
Corporations require cash margin deposits with the broker. As of September 30,
1996 and December 31, 1995, such margin requirements were $326 and $96,
respectively.
8. OPERATING LEASES
The Corporations maintain certain noncancelable operating leases on real
property and other assets, which expire through 1999. Future minimum lease
payments on such noncancelable operating leases as of September 30, 1996 are
as follows:
<TABLE>
<S> <C>
1996.................................................................. $ 362
1997.................................................................. 1,448
1998.................................................................. 1,415
1999.................................................................. 1,357
2000.................................................................. 113
------
$4,695
======
</TABLE>
The management fee portion of the annual lease payment for a corporate jet
of $401 is subject to escalation on January 1 of each year based on the
percentage change in the Consumer Price Index during the immediately preceding
year.
9. LOAN SERVICING
Loans serviced for others, except for participated loans acquired in the
name of WCC, are not included in the combined statements of financial
condition. The Corporations perform servicing for two affiliated savings banks
as well as other unrelated parties. The unpaid principal balances of loans
serviced for others are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Related parties................................... $501,954 $337,455
Others............................................ 13,537 18,417
-------- --------
Total........................................... $515,491 $355,872
======== ========
</TABLE>
At September 30, 1996 and December 31, 1995, WCC, in connection with the
foregoing loan servicing and in connection with WCC-owned and participated
loans, had made escrow payments in excess of amounts collected, which are
included in other receivables.
10. COMMITMENTS AND CONTINGENCIES
Profit-Sharing Plan--The Corporations' employees participate in a defined
contribution profit-sharing and 401(k) plan. At the discretion of the
Corporations' Boards of Directors, they may elect to contribute to the plan
F-47
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
based on profits of the Corporations or based on matching participants'
contributions. During 1996 and 1995, the Corporations contributed $97 and $46,
respectively, to the plan.
Litigation--The Corporations are defendants in legal actions arising from
transactions conducted in the ordinary course of business. Management, after
consultation with legal counsel, believes the ultimate liability, if any,
arising from such actions will not materially affect the Corporations'
financial position.
Loan Purchase Commitments--At September 30, 1996, the Corporations were
committed to purchase $9,323 of loans for $9,323. The Corporations also had a
commitment from a participating investor to provide funding for the purchases.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimates
presented herein are not necessarily indicative of the amounts the
Corporations could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts. The methods and assumptions used to
estimate the fair value of each class of financial instrument for which it is
practicable to estimate that value are explained below:
Cash and Cash Equivalents--The carrying amounts reported in the combined
statements of financial condition for cash and cash equivalents approximate
their fair values.
Securities--Fair values of U.S. Treasury securities included in the held-to-
maturity classification are based on quoted market prices. Fair values of B-
class mortgage-backed securities included in the trading account and the
available-for-sale classification, including both purchased securities and
residual interests in loan securitization transactions initiated by the
Corporations, are estimated by management based on data provided by an
independent pricing service, considering current interest rates, prepayments
and other relevant factors. It is not practicable to estimate the fair value
of preferred stock of a closely-held corporation included in the available-
for-sale classification.
Loans--It is not practicable to estimate the fair value of discounted loans
(including discounted loans held for sale), which are predominantly non
performing loans, due to uncertainties as to the nature, timing and extent to
which the loans will be either collected according to original terms,
restructured, or foreclosed upon. The fair values of loans and loans held for
sale other than discounted loans and commercial notes using applicable risk-
adjusted spreads relative to the current pricing of similar loans as well as
anticipated prepayments. No value adjustments have been made for changes in
credit risk within the loan portfolios. It is management's opinion that the
allowance for estimated loan losses pertaining to loans results in a fair
value adjustment of the credit risk of such loans. It is not practicable to
estimate the fair value of commercial notes receivable. These loans were
extended in a leveraged buyout transaction and bear interest at rates from 15-
20%. The loans are repayable based on formulas tied to the earnings of the
borrower, and mature in 2001.
Participating Interests in Loans and Securities--It is not practicable to
estimate the fair values of participating interests in loans and securities.
These liabilities are payable from the cash flows generated by the related
loans and securities, less the Corporations' retained servicing fees, which
include a profit participation element. The fair values of the liabilities are
therefore linked to the fair values of the related securities and loans,
including discounted loans for which fair values are not reasonably estimable.
Borrowings--Information pertinent to an evaluation of the fair value of
borrowings is included in Note 5. Fair value is assumed to approximate the
face amount outstanding because the principal borrowings have variable
interest rates and generally mature as the loan collateral is collected or are
repayable on demand.
F-48
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Off-Balance-Sheet Items--The fair value of options and futures used for
hedging purposes are based on quoted market prices.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents.............................. $ 6,638 $ 6,638
Securities:
Trading securities................................... 11,818 11,818
Available for sale securities........................ 7,039 7,049
Held to maturity securities.......................... 12,771 12,785
Loans:
Discounted loans, net................................ 4,824 4,824
Loans held for sale, net............................. 112,939 131,763
Discounted loans held for sale, net.................. 168,957 168,957
Commercial notes..................................... 10,811 10,811
Liabilities:
Participating interests in loans and securities........ 143,424 143,424
Borrowings............................................. 243,239 243,239
Off-balance-sheet items:
Options -- (39)
Futures -- (152)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents.............................. $ 3,577 $ 3,577
Securities:
Available for sale securities........................ 2,486 2,486
Held to maturity securities.......................... 4,643 4,643
Loans:
Loans, net........................................... 121,420 121,420
Discounted loans, net................................ 19,352 19,352
Discount loans held for sale, net.................... 33,267 33,267
Commercial notes..................................... 9,261 9,261
Liabilities:
Participating interests in loans and securities........ 150,298 150,298
Borrowings............................................. 70,165 70,165
Off-balance-sheet items:
Options -- 8
Futures -- 46
</TABLE>
12. SUBSEQUENT EVENTS--REORGANIZATION OF THE CORPORATIONS
WFSG is affiliated with the Corporations by common ownership and control,
and owns the two banks for which the Corporations service loans. WFSG is
making an initial public offering ("IPO") of common stock and debt, and has
formed certain new subsidiaries to undertake the loan acquisition and
servicing businesses currently being conducted by the Corporations. At the
effective date of WFSG's IPO, the Corporations will cease to acquire loans or
otherwise to compete with WFSG. The Corporations will continue to hold their
existing assets, and will continue to service loans for their own account and
for WFSG and its subsidiaries for a period of approximately two to three
years, when it is expected that WFSG's servicing subsidiary will have obtained
the necessary licenses to assume the servicing business from the Corporations.
F-49
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the IPO and reorganization of the Corporations, and subsequent
to September 30, 1996, the Corporations will transfer certain rights they have
to future servicing income from a participation agreement with a third party.
The servicing rights, which have no recorded basis in the statements of
financial condition of the Corporations as of September 30, 1996, are the
rights to varying percentages of cash flows from the collection or liquidation
of loans and B-class mortgage-backed securities with principal balances
totalling approximately $269,862 as of September 30, 1996.
Management expects that support for existing commitments of the Corporations
subsequent to the reorganization will be derived from a combination of the
following: continued collection and liquidation of existing loans and
securities; servicing income for the period during which the Corporations
continue to conduct the servicing business; operating income from properties
leased to WFSG and its subsidiaries and to third parties; stockholder loans,
which are indirectly supported by the stockholders' interests in WFSG; and,
potentially, other transactions or businesses that the Corporations might
elect to pursue.
F-50
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, IMPLY
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFOR-
MATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATES AS OF WHICH
SUCH INFORMATION IS GIVEN.
----------------
TABLE OF CONTENTS
----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 11
The Company.............................................................. 19
Recent Developments...................................................... 20
Wilshire Credit Corporation.............................................. 22
Use of Proceeds.......................................................... 26
Dividend Policy.......................................................... 26
Dilution................................................................. 27
Capitalization........................................................... 28
Selected Financial Information........................................... 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 33
Business................................................................. 49
Regulation............................................................... 70
Taxation................................................................. 79
Management............................................................... 81
Principal Stockholders................................................... 89
Certain Relationships and Related Transactions........................... 90
Description of Capital Stock............................................. 92
Description of Notes Offering............................................ 93
Shares Eligible for Future Sale.......................................... 93
Underwriting............................................................. 95
Legal Matters............................................................ 96
Experts.................................................................. 96
Index to Financial Statements............................................ F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,500,000 SHARES OF COMMON STOCK
------------------------
WILLSHIRE
Financial Services Group
------------------------
----------------
PROSPECTUS
----------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 18, 1996
PROSPECTUS
$60,000,000
WILSHIRE
Financial Services Group
% NOTES DUE 2003
-----------
This Prospectus relates to the offering by Wilshire Financial Services Group
Inc., a Delaware corporation ("WFSG" and together with its subsidiaries, the
"Company") of $60 million principal amount of its % Notes due 2003 (the
"Notes") of WFSG (the "Notes Offering"). Interest on the Notes will be payable
semiannually in arrears on and of each year, commencing
. On and after , 2001, the Notes will be
redeemable at any time at the option of the Company, in whole or in part, at
the redemption prices set forth herein. The Notes are not otherwise redeemable
prior to , 2001 except that until , 2001, the Company may redeem, at
its option, up to 35% of the original aggregate principal amount of the Notes
at a redemption price equal to % of the principal amount thereof, plus
accrued and unpaid interest to the redemption date, from the net proceeds of
one or more private or public sales of Qualified Capital Stock (as defined
herein) if at least 65% of the original aggregate principal amount of the Notes
remains outstanding after such redemption. Upon the occurrence of a Change in
Control Event (as defined herein), holders of the Notes will have the right to
require the Company to repurchase their Notes, in whole or in part, at a
purchase price equal to % of the aggregate principal amount thereof, plus
accrued and unpaid interest, if any, to the repurchase date. See "Description
of Notes."
The Notes will be general unsecured obligations of WFSG. Because WFSG is a
holding company that currently conducts substantially all of its operations
through its subsidiaries, the Notes will be effectively subordinate to the
claims of creditors of the subsidiaries. There is no established trading market
for the Notes and WFSG does not intend to apply for a listing of the Notes on
any national securities exchange or on Nasdaq.
In addition, WFSG is concurrently offering 1,500,000 shares of common stock,
par value $.01 per share (the "Common Stock") of WFSG (the "Common Stock
Offering"). The Common Stock Offering and the Notes Offering are each
conditioned on the completion of the other offering.
THE NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING AT PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED CAREFULLY BY PROSPECTIVE PURCHASERS OF THE NOTES OFFERED HEREBY.
-----------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND
ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
("FDIC"), ANY OTHER GOVERNMENTAL AGENCY OR OTHERWISE.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), FDIC, THE OFFICE OF THRIFT SUPERVISION ("OTS") OR
ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, FDIC, OTS OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) THE COMPANY(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note................................. % % %
Total (4)................................ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1)Plus accrued interest, if any, from the date of issuance.
(2) See "Underwriting" for information relating to the indemnification of the
Underwriter.
(3) Before deducting expenses payable by the Company estimated to be
$ .
(4) WFSG has granted the Notes Underwriter an option, exercisable within 30
days of the date hereof, to purchase from WFSG up to $9,000,000 of
additional Notes solely to cover over-allotments, if any. To the extent the
option is exercised, WFSG will offer additional Notes to the public at the
Price to Public shown above. If the option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to the Company will be
$ , $ , and $ , respectively. See "Underwriting."
The Notes are offered subject to receipt and acceptance by the Underwriter,
to prior sale and to the Underwriter's right to reject any order in whole or
in part and to withdraw, cancel or modify the offer without notice. It is
expected that delivery of the Notes will be made at the offices of Friedman,
Billings, Ramsey & Co., Inc., Arlington, Virginia, the Underwriter, or in
book-entry form through the facilities of The Depository Trust Company on or
about , 1996.
-----------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1996.
<PAGE>
IN CONNECTION WITH THE COMMON STOCK OFFERING AND THE NOTES OFFERING, THE
UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN
THE MARKET PRICE OF SUCH SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
NASDAQ NATIONAL MARKET, IN THE OVER THE COUNTER MARKET, OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
WFSG has filed with the Securities and Exchange Commission (the
"Commission") via the Electronic Data Gathering Analysis and Retrieval System
("EDGAR") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act") with respect to the Common Stock
Offering and the Notes Offering. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which have been omitted as permitted by
the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance where such contract or other
document is an exhibit to the Registration Statement, reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement, each statement being qualified in all respects by such
reference. As a result of the filing of the Registration Statement with the
Commission, WFSG will become subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will be required to file reports and other information
with the Commission. WFSG intends to furnish its stockholders annual reports
containing audited financial statements and an opinion thereon expressed by
WFSG's independent auditors as well as quarterly reports for the first three
quarters of each fiscal year containing unaudited financial statements. Copies
of the Registration Statement, including all exhibits thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60601 upon payment of prescribed rates. The
Commission also maintains a web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants, including WFSG. The Company has applied for quotation of the
Common Stock on Nasdaq. If the Common Stock is quoted on Nasdaq, reports,
proxy and information statements and other information regarding the Company
will be available for inspection at the National Association of Securities
Dealers, Inc. (the "NASD"), 1735 K Street, N.W., Washington, D.C. 20006.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information contained in this Prospectus assumes no exercise of the
Underwriters' over-allotment option to purchase additional shares of Common
Stock. Unless the context otherwise requires, all references to the Company
herein shall be deemed to include the Company and its subsidiaries. Unless
otherwise indicated, all information in this Prospectus assumes that no
outstanding stock options are exercised. The information contained in this
Prospectus gives effect to certain transactions to be consummated prior to or
simultaneously with the closing of the Common Stock Offering and the Notes
Offering.
THE COMPANY
GENERAL
Wilshire Financial Services Group Inc. ("WFSG" and, together with its
subsidiaries, the "Company") is a newly formed financial services holding
company for certain companies and businesses previously held as a part of, and
operated by, the Wilshire group of companies (the "Private Companies") pursuant
to a reorganization of the Private Companies (the "Reorganization"). The
Company will engage in a wide variety of financial activities, including the
acquisition, origination, ownership and securitization of loan portfolios
("Loan Portfolios"), banking and non-traditional bankcard processing.
HISTORICAL STRUCTURE
Prior to the Reorganization, the Private Companies operated principally
through two separate companies: (i) Wilshire Credit Corporation ("WCC"), which
conducted a substantial portion of the loan acquisition activities of and all
of the loan servicing for the Private Companies; and (ii) Wilshire Acquisitions
Corporation ("WAC"), the holding company for two federally-chartered savings
banks, First Bank of Beverly Hills, F.S.B. ("First Bank"), and Girard Savings
Bank, F.S.B. ("Girard" and together with First Bank, the "Savings Banks"). WCC
commenced Loan Portfolio acquisitions in 1990 funded primarily by lines of
credit and joint ventures with institutional partners. Through October 21,
1996, the Private Companies had purchased or committed to purchase
approximately 409 Loan Portfolios, aggregating $2.4 billion in principal
amount. In addition, at September 30, 1996 WCC serviced $1.4 billion of loans.
WCC's income has been principally derived from ownership and servicing of, and
profit participations in, Loan Portfolios.
In the early 1990's, WCC acquired loans primarily from the Federal Deposit
Insurance Corporation ("FDIC") and the Resolution Trust Corporation (the
"RTC"), generally in auctions of pools of loans acquired from financial
institutions which failed during the late 1980's and early 1990's. Although
governmental agencies such as the FDIC and the Department of Housing and Urban
Development ("HUD") continue to be potential sources of loans, the amount of
loans sold by such agencies has substantially declined. In recent years, the
Private Companies purchased loans primarily from various private sector
sellers, such as banks, savings institutions, mortgage companies and insurance
companies.
Andrew A. Wiederhorn and Lawrence A. Mendelsohn, the principal owners of the
Private Companies (the "Principals"), purchased First Bank and Girard through
WAC in October 1993 and November 1994, respectively, using funds loaned to them
by WCC (the "Shareholder Loans"). The Savings Banks were acquired to provide a
deposit-based funding source for the loan purchase activities of the Private
Companies. Both Savings Banks were acquired at substantial discounts to their
respective book values, reflecting the poor quality of their assets and, in the
case of First Bank, an expected imminent regulatory takeover. WAC has increased
assets from $230.6 million at December 31, 1994 to $533.1 million at September
30, 1996 primarily through the acquisition of Loan Portfolios.
3
<PAGE>
The Principals have injected approximately $30 million into WAC since the
acquisition of the Savings Banks to fund substantial asset growth and to
maintain required capital levels given the substantial reserves taken on loans
acquired as part of the acquisition of the Savings Banks (the "Inherited
Loans") and approximately $24.5 million of sub-prime auto loans acquired in the
fourth quarter of 1995 and the first quarter of 1996 (the "Sub-Prime Auto
Loans"). As a result of the high level of loan loss reserves required in 1996,
and other regulatory concerns regarding the management of the Savings Banks and
other matters, the Office of Thrift Supervision (the "OTS"), on October 31,
1996 increased the level of regulatory supervision and imposed cease-and-desist
orders (the "Orders") on and restricted further growth of assets at both
Savings Banks. The Company recently has hired additional management for the
Savings Banks and taken other steps to address these regulatory concerns, but
the Company will not be able to use the Savings Banks for growth until the
Orders are lifted or modified. See "Risk Factors--Results of Regulatory
Examinations; Imposition of Cease and Desist Orders."
REORGANIZED STRUCTURE
Following the Reorganization, WFSG will be the holding company for WAC, the
Savings Banks, Wilshire Funding Corporation, a company formed to pursue loan
acquisition and loan origination businesses similar to WCC following the Common
Stock Offering and the Notes Offering ("WFC"), and Wilshire Servicing
Corporation, a company formed to engage in the loan servicing business
following the receipt of necessary licenses ("WSC"). The Company intends to
build on the expertise of the Private Companies and aggressively pursue the
acquisition of Loan Portfolios. The Company evaluates Loan Portfolios based on
anticipated future cash flows, available funding sources and minimum expected
returns on equity. The Company will seek to identify niche areas primarily
within the real estate loan market where it believes its funding flexibility,
experienced personnel and its proprietary software and U.S. mortgage loan
database give it a competitive advantage in pricing and purchasing Loan
Portfolios. The aggregate principal amount of the loans acquired by the Private
Companies during the nine months ended September 30, 1996 and the years ended
December 31, 1995, 1994 and 1993 was approximately $501.4 million, $337.4
million, $388.5 million and $333.8 million, respectively. As of September 30,
1996, the Company had $533.1 million of assets and stockholders' equity of
$34.6 million.
After giving effect to the Reorganization, the organizational structure of
the Company will be as follows:
Wilshire Financial Services Group Inc.
Wilshire Funding Corporation
European Operations
Special Purpose Entities**
Wilshire Servicing Corporation*
Wilshire Acquisitions Corporation
First Bank of Beverly Hills, F.S.B.
Girard Savings Bank, F.S.B.
- --------
*Expected to commence servicing activities in 2-3 years following receipt of
necessary licenses.
**Entities to be formed for financings and to complete securitizations.
4
<PAGE>
In the Reorganization, WCC will not become a subsidiary of WFSG or transfer
any assets or liabilities to the Company. WCC is not being included in the new
public entity due to certain tax considerations and to allow WCC to retain
sufficient assets and servicing rights to retire the Shareholder Loans. See
"The Company--The Reorganization." WCC will cease to acquire new product or
servicing for its own account, but will continue to service and liquidate its
existing portfolio. New loan acquisitions and originations will be conducted by
WFC. For a period of two to three years after the closing of the Common Stock
Offering and Notes Offering while WSC is in the process of obtaining the
relevant licensing approvals for its servicing activities, WCC will continue to
service loans for the Company at a market rate. Following such period, WSC will
commence servicing loans for the Company and WCC. See "Certain Relationships
and Related Transactions." In addition, WCC and the Principals have agreed not
to compete with the Company with respect to the acquisition of Loan Portfolios.
BUSINESS ACTIVITIES
Business Strategy. The Company's strategy is to aggressively pursue Loan
Portfolio acquisitions where it believes it can receive acceptable rates of
return on invested capital and effectively utilize leverage. Key elements of
this strategy include:
. Significant Growth in Loan Portfolio Investments. During the last four
years, the Private Companies have developed expertise in the business of
acquiring Loan Portfolios, including residential mortgage loans,
manufactured housing loans, second lien loans, commercial real estate
loans, multi-family residential loans, commercial and business loans,
boat loans and other consumer loans, and Subordinate Securities (as
defined herein). The Company expects to utilize its available funding
sources to aggressively pursue Loan Portfolio acquisitions in the United
States and Western Europe, a substantial portion of which are expected
to be non-performing Loan Portfolios purchased at a discount
("Discounted Loans"). In addition, the Company expects to increase its
purchases of commercial real estate loans.
. Utilization of Varied Funding Sources. The Company, in addition to
deposits at the Savings Banks, will have extensive funding sources
available for investment and lending activities from investment banking
firms and institutional investors, including secured term loans,
warehouse lines of credit, and repurchase facilities. As of the closing
of the Common Stock Offering and the Notes Offering, certain existing
undrawn lines of credit ($413.3 million as of September 30, 1996) of the
Private Companies will be transferred to the Company. Amounts currently
drawn under such lines of credit by the Private Companies ($86.7 million
as of September 30, 1996) will be transferred to the Company once such
amounts are repaid by the Private Companies. Substantially all of the
Company's Loan Portfolio investments are expected to utilize borrowed
funds, minimizing the Company's equity investment to the extent
possible. Since the Private Companies' initial use of securitization in
1995 through September 30, 1996, the Private Companies have issued
$368.7 million of securities through two publicly underwritten and three
privately placed securitizations, including securitizations of non-
performing and sub-performing mortgage loans, manufactured housing
loans, consumer loans and conventional and non-conforming mortgage
loans. The Company expects to securitize its Loan Portfolios when
advantageous.
. Expansion into European Markets. The Company recently decided to expand
its loan acquisition and servicing activities to encompass the United
Kingdom and France with a view towards future expansion in Western
Europe. Management is in discussions with a major U.S. investment
banking company regarding the formation of a joint venture for
conducting servicing activities in the United Kingdom. The Company is
also considering either establishing its own servicing operation,
acquiring an already existing entity or entering into a joint venture
with a company already active in France. Management believes that
conditions in the French real estate market and, to a lesser degree, in
the United Kingdom real estate market are similar to conditions in the
United States real estate market in
5
<PAGE>
the late 1980's and early 1990's and that there may be opportunities to
acquire Loan Portfolios at favorable prices. In addition, management
believes that there is a demand in the European market for U.S.-style
servicing with its automated systems, detailed investor reporting and
aggressive servicing and work-out approaches.
. Capitalize on Servicing Expertise. The Company believes that WCC's loan
servicing experience, its highly trained servicing personnel and its
investment in proprietary software have allowed the Private Companies to
effectively value and price Loan Portfolios. As of September 30, 1996,
WCC was servicing more than $1.4 billion principal amount of loans,
including $502.0 million for the Savings Banks. For a period of two to
three years after the closing of the Common Stock Offering and the Notes
Offering, while the Company is in the process of obtaining the relevant
licensing approvals for its servicing activities, WCC will continue to
service loans for the Company generally at a market rate. Accordingly,
the Company does not expect any significant servicing income until it
commences servicing loans for its own account in two to three years.
. Growth of Non-Traditional Bankcard Processing Operations. The Company
plans to continue development of its non-traditional bankcard processing
operations, which generate revenues through merchant discounts and
processing fees for Visa (R) and Mastercard (R) transactions. The
Company's bankcard processing operations focus on certain high-risk
market niches, principally mail order/telephone order and audio-text
where the Company believes it obtains higher returns on processing
transactions. Revenues from the bankcard operation, which was commenced
in the third quarter of 1994, have demonstrated strong growth increasing
from $0.6 million in 1994 to $4.7 million in 1995 and to $5.1 million
during the nine months ended September 30, 1996. Management believes
that there are opportunities to expand this business using the Company's
existing infrastructure.
. Development of Wholesale Origination Network. In late 1995, the Private
Companies launched a mortgage conduit program for the purchase of newly-
originated residential mortgage and manufactured housing loans on a
nationwide basis through correspondents. Originations to date have been
modest. While the Company is obtaining necessary licensing, WCC will
continue to originate residential mortgage loans for the Company's
account through its correspondent relationships and will then transfer
the newly originated loans at acquisition cost to the Company.
Currently, this program focuses on the origination of in park
manufactured housing loans and conforming and non-conforming first and
second lien mortgage loans. The Company is in the process of launching
two new programs for loans to good-credit borrowers.
6
<PAGE>
THE COMMON STOCK OFFERING
Common Stock Offered.... 1,500,000 shares (plus up to 225,000 shares subject
to the Underwriters' over-allotment option).
Common Stock
outstanding (after the
Common Stock
Offering)...............
7,000,000 shares (plus up to 225,000 shares subject
to the Underwriters' over-allotment option).
Dividend Policy......... The Company intends to retain its earnings to support
its future growth strategy and does not anticipate
paying cash dividends on the Common Stock in the
foreseeable future. See "Dividend Policy."
Reserved Nasdaq WFSG.
symbol..................
Use of Proceeds.........
The net proceeds from the Common Stock Offering and
the Notes Offering are expected to be used by the
Company to support leveraged acquisitions of Loan
Portfolios and for other general corporate purposes,
including expansion into Western Europe.
THE NOTES OFFERING
Concurrently with the Common Stock Offering, the Company is separately
offering $60 million principal amount of Notes (plus up to $9 million of Notes
subject to the Notes Underwriters' over-allotment option), which will mature on
, 2003. The Notes will be general unsecured obligations of the Company.
Interest on the Notes will accrue at the rate of % per annum and will be
payable semi-annually in arrears on and of each year commencing on
, 1997. For information regarding the anticipated use of proceeds from the
Notes Offering by the Company and the Notes generally, see "Use of Proceeds"
and "Description of Notes Offering."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered carefully by prospective investors of the Common Stock offered
hereby.
7
<PAGE>
THE NOTES OFFERING
Amount offered..............
$60 million aggregate principal amount (plus up
to $9 million subject to an over-allotment
option).
Maturity date............... , 2003.
Interest payment dates...... and of each year
commencing , 1997.
Optional redemption......... The Notes will be redeemable at the option of
WFSG, in whole or in part, at any time on or
after , 2001 at the redemption
prices set forth herein, plus accrued and unpaid
interest, if any, to the redemption date.
Capital stock redemption.... Until , 2001, the Company may redeem, as
its option, up to 35% of the original aggregate
principal amount of the Notes at % of the
principal amount thereof, plus accrued and unpaid
interest, if any, to the redemption date, from
the net proceeds of one or more public or private
sales of Qualified Capital Stock (as defined
herein) if at least 65% of the original aggregate
principal amount of the Notes remains outstanding
after such redemption and if such redemption
occurs within 60 days after the closing of any
such public or private sale. See "Description of
Notes--Optional Redemption."
Mandatory redemption........ None.
Ranking..................... The Notes will be general unsecured obligations
of WFSG. Because WFSG is a holding company that
currently conducts substantially all of its
operations through its subsidiaries, including
the Savings Banks, the right of WFSG (and
therefore the right of WFSG's creditors and
stockholders) to participate in any distribution
of the assets or earnings of any subsidiary is
subject to the prior claims of creditors of such
subsidiaries, including any claims of WFSG as a
creditor to the extent such claims may be
recognized. As a result, the Notes will be
effectively subordinate to the claims of
creditors of WFSG's subsidiaries.
Change of control...........
Upon a Change of Control Event (as defined
herein), holders of the Notes will have the
option to require the Company to repurchase all
outstanding Notes at 101% of their principal
amount, plus accrued interest to the date of
repurchase. A "Change of Control Event," as
defined in the Indenture pursuant to which the
Notes will be issued, includes the following
events, among others: the acquisition by any
person or group (other than the Existing
Principal Stockholders (as defined) of the
Company) of more than 40% of the Company's voting
stock; a merger, consolidation or other business
combination between the Company and another
person in which more than 40% of the voting stock
of the surviving or transferee company is owned
by persons other than the Existing Principal
Stockholders (as
8
<PAGE>
defined) of the Company or a change in a majority
of the directors on the Board of Directors of the
Company within a two-year period which is not
approved by the incumbent directors. There can be
no assurance that the Company will have the funds
available to repurchase the Notes in the event of
a Change of Control Event.
Certain covenants...........
The Indenture pursuant to which the Notes will be
issued will contain certain covenants that, among
other things, require the Company to maintain
certain levels of Consolidated Net Worth and
liquid assets, limit the ability of the Company
and its subsidiaries to incur certain
indebtedness (not including secured indebtedness
used to acquire or refinance the acquisition of
loans or other financial assets), pay dividends
or make other distributions, engage in
transactions with affiliates, dispose of
subsidiaries, create certain liens and guarantees
with respect to pari passu or junior indebtedness
and enter into any arrangement that would impose
certain restrictions on the ability of
subsidiaries to make dividend and other payments
to the Company. The Indenture also will restrict
the Company's ability to merge, consolidate or
sell all of its assets. See "Description of
Notes--Certain Covenants."
Use of proceeds.............
The net proceeds from the Notes Offering and the
Common Stock Offering are expected to be used by
the Company to support leveraged acquisitions of
Loan Portfolios and for other general corporate
purposes, including expansion into Western
Europe.
THE COMMON STOCK OFFERING
Concurrently with the Notes Offering, the Company is separately offering an
aggregate of 1,500,000 shares of Common Stock (plus up to 225,000 shares
pursuant to the Common Stock underwriters' over-allotment option) in the Common
Stock Offering. The Notes Offering and the Common Stock Offering are each
conditioned on the completion of the other.
In connection with the Common Stock Offering, the Common Stock has been
approved for listing on the Nasdaq National Market under the symbol "WFSG."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered carefully by prospective purchasers of the Notes offered hereby.
9
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following tables present Summary Consolidated Financial Information for
the Company at the dates and for the periods indicated. The historical income
statement and balance sheet data at and for the nine month period ended
September 30, 1996 and the years ended December 31, 1995 and 1994 have been
derived from the audited consolidated financial statements of the Company
included elsewhere in this Prospectus (the "Audited Financial Statements").
On October 7, 1993, WAC acquired 94.9% of the common stock of First Bank in a
purchase accounting transaction. On November 9, 1994, a newly-formed entity
with ownership and management common to WAC-Wilshire Acquisitions Corporation
II ("WACII") acquired 94.9% of the common stock of Girard in a purchase
accounting transactions.
Because WAC and WACII were under common control, the accompanying financial
statements are presented on a combined basis as of December 31, 1994 and for
the period from November 9 through December 31, 1994. On December 27, 1995, WAC
and WACII were merged and WAC was named as the surviving entity. Financial
information as of September 30, 1996 and December 31, 1995 and for the nine
months and year then ended, respectively, is presented on a consolidated basis
and includes the accounts of WAC, First Bank, and Girard. With respect to all
consolidated and combined financial information, intercompany transactions and
balances have been eliminated. For convenience, all the accompanying financial
statements are referred to as "consolidated".
The historical income statement and data presented for the nine months ended
September 30, 1995 has been derived from unaudited consolidated financial
statements (the "Unaudited Financial Statements" and, together with the Audited
Financial Statements, the "Consolidated Financial Statements") and include all
adjustments, consisting only of normal recurring accruals, which the Company
considers necessary for a fair presentation of the Company's results of
operations for these periods. Operating results for the nine months ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for any other interim period of the entire year ending December 31,
1996. The Summary Consolidated Financial Information should be read in
conjunction with, and is qualified in its entirety by reference to, the
Consolidated Financial Statements and related notes as set forth elsewhere
herein.
10
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------- -----------------
1996 1995 1995 1994
------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income........ $34,137 $17,052 $24,381 $ 9,569
Total interest expense....... 19,592 10,411 14,481 5,457
------- ------- ------- --------
Net interest income.......... 14,545 6,641 9,900 4,112
Provision for estimated
losses on loans............. 15,751 3,221 4,266 2,173
------- ------- ------- --------
Net interest income (loss)
after provision for esti-
mated losses on loans....... (1,206) 3,420 5,634 1,939
Other income (loss):
Bankcard income(1)........... 5,078 3,202 4,694 635
Bankcard processing expense.. (3,865) (2,408) (3,462) (274)
Other, net................... 5,164 1,940 1,875 866
------- ------- ------- --------
Total other income (loss).. 6,377 2,734 3,107 1,227
Other expenses:
Other general and administra-
tive expenses............... 10,905 5,247 8,102 4,944
------- ------- ------- --------
(Loss) income before income
tax provision............... (5,734) 907 639 (1,778)
Income tax (benefit) provi-
sion........................ (4,652) 68 47 (526)
------- ------- ------- --------
Net (loss) income ........... $(1,082) $ 839 $ 592 $ (1,252)
======= ======= ======= ========
(Loss) earnings per share.... $(14.05) $ 35.56 $ 25.09 $(135.43)
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1996 1995 1994
------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.............................. $ 533,109 $ 341,454 $ 230,636
Loan portfolio, net(2).................... 177,280 258,827 179,377
Discounted loan portfolio:
Total loans.............................. 10,767 20,210 2,995
Unaccreted discount...................... (1,632) (3,008) (470)
Allowance for loan losses................ (5,716) (3,855) (431)
Discounted loans, net.................... 3,419 13,347 2,094
Loans held for sale, net, at lower of cost
or market(3)............................. 260,804 18,597 --
Real estate owned, net.................... 2,514 4,964 1,208
Deposits, net............................. 487,535 303,524 196,289
Borrowings................................ -- 13,000 21,500
Stockholders' equity(4)................... 34,554 7,039 6,793
</TABLE>
- --------
(1) The Company began its bankcard operations in 1994.
(2) Does not include Discounted Loans.
(3) Loans held for sale increased due to the Company's intent to sell
approximately $277.5 million of single-family residential loans in the
fourth quarter of 1996.
(4) Effective January 1, 1996, $11.0 million of Common Stock was issued in
exchange for Subordinated Debt. Subsequently, an additional $17.8 million
of Common Stock was issued for cash.
11
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- ------
<S> <C> <C> <C>
FINANCIAL RATIOS AND OTHER DATA:
Return on average assets..................... (.22)% .24% (.92)%
Return on average equity..................... (3.09)% 8.65% (31.03)%
Average interest rate on total loans......... 9.39% 9.57% 7.65%
Average equity to average assets............. 7.24% 2.72% 2.96%
Net interest spread(5)....................... 3.15% 3.08% 2.85%
Net interest margin(6)....................... 3.88% 3.72% 3.04%
Ratio of earnings to fixed charges(7):
Including interest on deposits.............. .71 1.04 .67
Excluding interest on deposits.............. (1.67) 2.19 (3.04)
Non-performing loans to loans at end of
period(2)................................... 9.11% 4.46% 5.95%
Allowance for loan losses to total loans at
end of period............................... 9.2% 7.6% 3.9%
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
LOAN ORIGINATIONS(8)......................... $ 2,280 $ 8,748 $4,345
LOAN ACQUISITION DATA(8):
Loans:
Single-family residential................... 221,581(9) 121,883 36,462
Multi-family residential.................... -- -- 61,247
Commercial and other mortgage loans......... -- 2,126 31,091
Consumer and other loans(10)................ 18,742 11,012 10,847
Discounted Loans............................. -- (11) 55,995 3,624
LOANS SOLD(8)................................ 27,965(9) 16,673 --
</TABLE>
- --------
(5) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by total average
earnings assets.
(7) The ratios of earnings to fixed charges were computed by dividing (x)
income from continuing operations before income taxes, extraordinary gains
and cumulative effect of a change in accounting principle plus fixed
charges by (y) fixed charges. Fixed charges represent total interest
expense, including and excluding interest on deposits, as applicable, as
well as the interest component of rental expense. Earnings for the nine
months ended September 30, 1996 and the year ended December 31, 1994 were
inadequate to cover fixed charges by $5,734 and $1,778, respectively.
(8) Unpaid principal balances.
(9) The Company currently expects that Girard will sell certain single-family
residential loans to WFC which in turn is expected to securitize such
loans. See "Recent Developments."
(10) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(11) Girard recently purchased or committed to purchase approximately $272
million unpaid principal amount of discounted residential mortgage loans.
See "Recent Developments."
12
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors, as
well as the other information contained in this Prospectus, before deciding to
make an investment in the Notes.
LIMITED SOURCES FOR PAYMENTS ON NOTES
As a holding company, the ability of the WFSG to make payments of interest
and principal on the Notes will depend primarily on the receipt of dividends
or other distributions from its subsidiaries as well as any cash reserves and
other liquid assets held by WFSG and any proceeds from any subsequent
securities offering or other financing. There are various regulatory
restrictions on the ability of the Savings Banks to pay dividends or make
other distributions. See "Regulations--The Savings Banks--Restrictions on
Capital Distributions" and "Affiliate Transactions." In light of the
foregoing, there can be no assurance that WFSG would have sufficient funds
available to repurchase any Notes that Noteholders may elect to tender upon
the occurrence of a Change of Control Event, or to repay the principal and
accrued interest of the Notes if the maturity of the Notes were to be
accelerated upon the occurrence of an Event of Default under the Indenture.
AMOUNT OF SECURED DEBT; STRUCTURAL SUBORDINATION
The Notes will be unsecured obligations of WFSG and will rank pari passu in
right of payment with all existing and future unsecured indebtedness that is
not by its terms, expressly subordinated in right of payment to the Notes. Any
current and future secured indebtedness of WFSG will have priority over the
Notes with respect to assets pledged as collateral therefor. The Indenture
permits WFSG to grant liens to secure additional indebtedness permitted by the
Indenture so long as such indebtedness is pari passu or junior in right to the
Notes and permits subsidiaries of WFSG to grant liens to secure pari passu or
junior indebtedness of the subsidiaries in certain circumstances. The Company
and its Subsidiaries will be able to grant security interests in Loan
Portfolios to the parties providing financing for such acquisitions. See
"Description of the Notes--Certain Covenants--Limitations on Indebtedness" and
"--Limitations on Liens."
In addition, substantially all of the operations of the Company are
conducted through subsidiaries and therefore the Company is dependent on the
cash flow of its subsidiaries to meet its debt obligations, including its
obligations under the Notes. Because WFSG is a holding company that currently
conducts substantially all of its operations through its subsidiaries, the
right of WFSG to participate in any distribution of assets of the
subsidiaries, including the Savings Banks, upon their liquidation or
reorganization or otherwise (and thus the ability of Holders of the Notes to
benefit indirectly from such distribution) are subject to the prior claims of
creditors of the subsidiaries, including, in the case of the Savings Banks, to
the claims of depositors of the Savings Banks. Claims on WFSG's subsidiaries
by creditors, other than WFSG, include substantial obligations with respect to
deposit liabilities and other borrowings. At September 30, 1996, the Company's
subsidiaries had liabilities aggregating $496.0 million (primarily consisting
of $487.5 million of deposit liabilities), all of which constituted
indebtedness permitted under the Indenture.
ABSENCE OF A PRIOR MARKET FOR THE NOTES
The Company does not intend to apply for listing of the Notes on any
national securities exchange or for quotation of the Notes through Nasdaq.
Although the Underwriter for the Notes Offering has indicated its intention to
make a market in the Notes following consummation of the Notes Offering, it is
not obligated to do so and any market-making activities with respect to the
Notes may be discontinued at any time without prior notice. There can be no
assurance as to liquidity of the trading markets for the Notes or as to the
prices at which the Notes may trade in such market or that an active public
market for the Notes will develop or be maintained.
RECENT LOSSES; NO ASSURANCE AS TO CONSISTENCY OF RESULTS OF OPERATIONS
Recent Losses. The Company reported a net loss of approximately $1.1 million
for the nine months ended September 30, 1996, principally due to provisions
for estimated losses on the Sub-Prime Auto Loans ($8.6
13
<PAGE>
million) and the Inherited Loans ($4.8 million). A $1.4 million charge for the
Savings Association Insurance Fund (the "SAIF") special assessment also
contributed to the year-to-date loss. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Regulation--The Savings
Banks--Recapitalization of SAIF."
Consistency of Results of Operations. The results of operations of the
Company may be significantly affected by required provisions for estimated loan
losses, the timing and size of such provisions, variations in the volume of the
Company's loan acquisitions, the volume of loans resolved, the differences
between the Company's cost of funds and the average interest rates of the
acquired loans, the effectiveness of the Company's hedging strategies, the
interest rate for Senior Securities (as defined herein) issued in
securitizations, and the timing and size of securitizations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Since the Company is not acquiring the assets and liabilities of WCC nor its
servicing income, its result of operations in the short term following the
closing of the Common Stock Offering in the Reorganization and the Notes
Offering principally will be determined by the results of operations of the
Savings Banks. Additionally, it is expected that the management of the Company
will take approximately six months or more to fully utilize (through leverage)
the proceeds of the Common Stock Offering and the Notes Offering.
RESULTS OF REGULATORY EXAMINATIONS; IMPOSITION OF CEASE-AND-DESIST ORDERS
Recent Regulatory Examinations. Following examinations of the Savings Banks
and WAC by the OTS in 1994, 1995 and 1996, the OTS issued Reports of
Examination that were critical of the Savings Banks and WAC in a number of
respects. These regulatory concerns initially resulted in the OTS requiring
First Bank to enter into a Supervisory Agreement on June 8, 1995. The
Supervisory Agreement required First Bank to take actions to achieve compliance
with certain laws and regulations and safe and sound practices and to (a)
develop plans and procedures concerning (i) reduction of non-performing assets,
(ii) internal asset review, (iii) asset monitoring, (iv) appraisals, (v) loan
underwriting, (vi) loan purchases; (b) enhance recordkeeping; (c) develop
requirements to ensure that the servicing of loans by WCC is satisfactory; and
(d) maintain its separate corporate existence. In addition, the Supervisory
Agreement required First Bank to maintain certain minimum capital ratios and
prohibited First Bank from increasing total assets beyond specified levels and
acquiring non-performing assets without the prior written consent of the
Assistant Regional Director of the OTS-West Region.
Imposition of Cease-and-Desist Orders. In July 1996, the OTS advised First
Bank that it had not fully complied with the terms of the Supervisory Agreement
and that both Savings Banks had failed in a number of respects to address
regulatory concerns raised in the 1994 and 1995 examination reports. The OTS
also expressed continuing concerns regarding the adequacy of management of
First Bank in light of its business activities. As a result of these issues,
the OTS replaced the Supervisory Agreement with a Cease and Desist Order,
effective October 31, 1996. Given the similar nature of Girard's business
activities, the OTS has also issued a Cease and Desist Order to Girard similar
to the Order issued to First Bank. The issuance of a cease and desist order is
generally evidence of an increased level of regulatory concern regarding the
subject institution.
The Orders require that both Savings Banks not engage in unsafe and unsound
practices and that they maintain minimum capital ratios as of December 31, 1996
required of institutions to be deemed "well-capitalized" (as that term is
defined under the regulatory framework for prompt corrective action). The
Orders also require the Savings Banks to: (a) revise policies and procedures
concerning (i) internal asset reviews, (ii) the allowances for loan and lease
losses, (iii) loan purchases, (iv) internal audits and (v) hedging
transactions; (b) develop plans to augment the depth and expertise of the
management teams; (c) revise business plans; (d) modify certain policies
concerning the accounting for loan discounts; (e) improve monitoring of (i)
interest rate risk, (ii) asset classifications (e.g., as held for sale versus
held to maturity) and (iii) compliance with laws and regulations concerning
transactions with affiliates; (f) ensure compliance with the proper servicing
of adjustable-rate mortgages and escrow accounts; (g) ensure servicer
correction of OTS-identified deficiencies in information systems; and (h)
enhance recordkeeping. In addition, First Bank is required to correct OTS-
identified deficiencies
14
<PAGE>
in its merchant bankcard processing operations. These requirements are
accompanied by related requirements that the Savings Banks submit to the OTS,
by certain specified dates, various policies, plans and reports on other
actions to comply with the Orders. In some cases, OTS approval of such
information is required.
Management believes that the Savings Banks are complying with those
requirements of the Orders that have taken effect immediately. In addition, the
Savings Banks have implemented several actions to address the other
requirements of the Orders, including (i) hiring a new chief executive officer
for the Savings Banks, (ii) engaging a "big six" accounting firm to review
management's implementation of corrective actions required by the OTS, (iii)
increasing the size of the internal asset review department, and (iv) revising
internal asset review policies. The Company is also in the process of hiring a
manager to complete the development and implementation of an effective asset
review system.
The Orders are enforceable by the OTS as written agreements under the Federal
Deposit Insurance Act. Therefore, failure to comply with the requirements of
the Orders could subject the Savings Banks and their directors and officers to
further enforcement actions, including termination of FDIC insurance or civil
money penalties. There can be no assurances that the OTS will approve the
required submissions by the Savings Banks without modifications. Additionally
there can be no assurances that the OTS will not impose further restrictions on
the Savings Banks.
AGGRESSIVE EXPANSION STRATEGY; IMPACT OF OTS GROWTH RESTRICTIONS
Significant Growth in Recent Periods. The Company, primarily through Girard,
has had rapid growth during 1995 and the first nine months of 1996. The Savings
Banks' deposits increased from $196.3 million at December 31, 1994 to $487.5
million at September 30, 1996. More than 73% of Girard's total loan portfolio
was acquired in the five quarters ended September 30, 1996.
Impact of OTS Growth Restrictions. Since June 30, 1995, First Bank has had
limited ability to increase deposits due to the provisions of an OTS
Supervisory Agreement which prohibited First Bank from increasing assets above
specified levels. Accordingly, the Company's asset growth has principally been
financed through the raising of deposits at Girard. However, due to the
issuance of the Orders, the Company will not be able to utilize the Savings
Banks as vehicles for growth until and unless the Orders are lifted or
modified. The Orders prohibit First Bank and Girard from increasing their total
assets, as measured at the end of each calendar quarter, in excess of $145
million and $408 million, respectively, plus total net interest credited on
deposit liabilities.
No Assurances of Expansion. A substantial amount of the net proceeds from the
Common Stock Offering and the Notes Offering will be invested by the Company to
support future expansion and growth of its lending activities and loan
acquisition and servicing activities. There can be no assurance that the
Company will be able to increase these activities in a manner which is
consistent with management's business strategy and objectives or otherwise
successfully expand its operations.
Impact of Growth on Asset Quality. Part of the Company's business strategy is
to aggressively pursue the acquisition of Loan Portfolios, a substantial
portion of which are expected to be Loan Portfolios purchased at a discount.
Additionally, the Company may decide to purchase loans with respect to which
the Company does not have any prior loan acquisition experience. A substantial
increase in the Company's total loan portfolio or the purchase of new
categories of loans may increase the risk of loss on acquired loans and could
have an adverse affect on the Company's results of operations.
RISK OF ADDITIONAL PROVISIONS FOR ESTIMATED LOSSES ON LOANS
Inherited Loans. In connection with the Company's acquisition of First Bank
in 1993 and Girard in 1994 the Company acquired a substantial volume of
impaired loans which required the Savings Banks to establish allowances for
loan losses. For the nine months ended September 30, 1996 and for each of the
years ended December 31, 1995, 1994, and 1993 First Bank was required to
increase its allowances for loan losses with
15
<PAGE>
respect to the Inherited Loans by $2.2 million, $2.6 million, $1.1 million and
$1.1 million, respectively. For the nine months ended September 30, 1996 and
for each of the years ended December 31, 1995 and 1994, Girard was required to
increase its allowances for loan losses with respect to the Inherited Loans by
$2.6 million, $0.9 million, $1.1 million, respectively.
Sub-Prime Auto Loan Portfolio. In the fourth quarter of 1995 and the first
quarter of 1996, the Savings Banks acquired approximately $24.5 million of Sub-
Prime Auto Loans. Under OTS regulations, the Savings Banks have been required
to write off as a loss all auto loans in excess of 120 days delinquent,
notwithstanding that the Savings Banks retain rights in the cars as collateral.
The aggregate portfolio of Sub-Prime Auto Loans purchased is approximately
3,000 loans, approximately 50.7% of which have become greater than 30 days
delinquent. The Savings Banks established reserves aggregating $8.6 million
during the nine months ended September 30, 1996, including a 10% reserve on
such loans which are current. As a result of the repossession of the collateral
securing the loans, the Savings Banks now hold approximately 317 cars as
assets, which they plan to sell as soon as practicable. The cars are not
carried as assets on the Company's balance sheet since the loans were written
off in full.
Future Provisions; OTS Review. Although the Company believes its allowances
for loan losses are now adequate, no assurance can be given that future events
will not require significant additional provisions for loan losses, for the
Inherited Loans, Sub-Prime Auto Loans or otherwise at the Savings Banks. Future
additions to these allowances may be required by the OTS, which periodically
reviews the Savings Banks' allowances for losses and the carrying value of
assets. Increases in the Company's or the Savings Banks' provisions for losses
on loans would adversely affect the Company's results of operations and could
result in losses in future periods. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
MAINTENANCE OF CAPITAL AT SAVINGS BANKS
The Orders require both Savings Banks to maintain "well-capitalized" status
as measured at the end of each calendar quarter commencing December 31, 1996.
The Principals have injected approximately $30 million into WAC since the
acquisitions of the Savings Banks to fund the substantial asset growth and to
maintain required capital levels given reserves taken on the Inherited Loans
and the Sub-Prime Auto Loans.
Failure to comply with the Orders could have significant adverse consequences
to the Savings Banks. To the extent that either or both of the Savings Banks
incur future losses, including losses as a result of required additional loan
loss provisions, the Company may be required to inject additional capital into
the Savings Banks to maintain compliance with the Orders, whether or not such
capital can more effectively be utilized for other operations of the Company.
Such additional capital contributions may have the effect of reducing or
eliminating the Company's overall net income or requiring the Company to obtain
additional debt or equity capital.
OTS regulations permit the OTS to impose higher capital requirements on a
savings bank if it determines that the capital level is or may become
inadequate in view of such bank's circumstances. In making such determination,
the OTS can take into account a number of factors, including the savings bank's
loan portfolio quality, recent operating losses or anticipated losses, the
condition of its holding company and whether the savings bank is receiving
special supervisory attention, among other matters. Should the OTS impose an
individual minimum capital requirement on either of the Savings Banks, the
Company would be required to inject additional capital into such Savings Bank,
whether or not such usage of capital is optimal for the Company.
EXTENSIVE USE OF FINANCIAL LEVERAGE
The Company's acquisitions of Loan Portfolios through WFC are expected to be
highly leveraged with full recourse to the Company. Performing Loan Portfolios
acquired by WCC were generally financed approximately 95% with borrowed funds
and non-performing Loan Portfolios generally were financed approximately 90%
with borrowed funds. While the highly leveraged nature of the Company's Loan
Portfolios can offer the opportunity for increased rates of return on equity,
it involves a greater degree of risk and relatively smaller declines in the
16
<PAGE>
value of a Loan Portfolio can reduce or eliminate the Company's capital
invested in such Loan Portfolio. In addition, such declines can result in
margin calls (i.e., demands by the Company's lenders for additional cash or
assets as security for their lending) which can have an adverse impact on the
Company's liquidity and capital resources. The high degree of leverage on the
Company's Loan Portfolios also may make the Company more vulnerable to a
downturn in business, real estate values or the economy generally. An increase
in market interest rates or a decline in the value of the collateral may have
an adverse effect on the ability of the Company to satisfy its loan obligations
and could therefore have a material adverse effect on the Company's results of
operations. The Company's aggressive expansion strategy may result in the need
for additional debt and/or equity financing in the future. Any additional debt
financing could increase the Company's leverage over current levels.
DISCOUNTED LOAN ACQUISITION ACTIVITIES
Since 1993, WCC has aggressively sought to increase its discounted loan
portfolio. As of September 30, 1996, WCC's discounted loan portfolio included
$490.8 million gross unpaid principal balances of Discounted Loans. The Company
currently expects to continue to aggressively acquire non-performing loan
portfolios. Although management of the Company has been actively involved in
the acquisition of loans since 1991, the acquisition of non-performing
("discounted loans") and under-performing loans involves uncertainties and
risks, including without limitation the risk that the discount on the loans
acquired may not be sufficient to profitably resolve the loans and the risk
concerning the ability to continue to acquire the desired amount and type of
discounted loans. Any Discounted Loans become real estate owned when the
Company forecloses on the collateral properties. The value of real estate owned
properties can be significantly affected by the economies and markets for real
estate in which they are located and require the establishment of provisions
for losses to ensure that they are carried at the lower of cost or fair value,
less estimated costs to dispose of the properties. In addition, there can be no
assurance that in the future the Company's real estate owned will not have
environmental problems which could materially adversely affect the Company's
financial condition or operations. See "Business--Asset Quality--Real Estate
Owned."
DEPENDENCE ON WILSHIRE CREDIT CORPORATION
Following the closing of the Common Stock Offering and the Notes Offering,
the Company will not have the necessary licenses to conduct loan origination
and loan servicing activities directly. Until necessary licenses are obtained,
the Company will rely upon WCC to conduct loan origination and loan servicing
activities for the Company pursuant to certain agreements with WCC. See
"Certain Relationships and Related Transactions."
DEPENDENCE ON KEY PERSONNEL; MANAGEMENT GROWTH
The Company's growth and development to date have been largely dependent upon
the services of Andrew A. Wiederhorn, Chief Executive Officer of the Company
and Lawrence A. Mendelsohn, President of the Company. Although the Company has
been able to attract and retain other qualified management personnel, the loss
of either Andrew Wiederhorn's or Lawrence Mendelsohn's services for any reason
could have a material adverse effect on the Company. The Company has entered
into employment agreements with each of Messrs. Wiederhorn and Mendelsohn,
which contain non-competition agreements. See "Management-- Employment
Agreements." The Company also maintains "key man" life insurance on the lives
of Messrs. Wiederhorn and Mendelsohn.
The Company has undergone a period of significant growth, and further
expansion may significantly strain the Company's management, financial and
other resources. There is no assurance that the Company can manage its growth
effectively or that the Company will be able to attract and retain the
necessary personnel to meet its business objectives. If the Company is unable
to manage its growth effectively, the Company's business, operating results and
financial condition could be materially and adversely affected.
17
<PAGE>
RISKS RELATED TO FUNDING SOURCES
General. The Company will fund the loans that it originates or purchases
through borrowings under warehouse and repurchase financing facilities with
certain national investment banking firms, brokered and wholesale deposits,
secured term loans and internally generated funds. To the extent that the
Company is not successful in maintaining or replacing its existing financing
sources, it would have to curtail its loan acquisition activities or sell
loans, which may have an adverse effect on the Company's business, results of
operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Risks Related to Reliance on Wholesale and Brokered Deposits. Though the
Company as a whole has other sources of funding, the Savings Banks currently
use brokered and wholesale deposits as a significant source of funds. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Funding Sources."
The Savings Banks' funding strategy has been to offer deposit rates above those
customarily offered by banks and savings and loans in its market. Because the
Savings Banks compete for deposits primarily on the basis of rates, the Savings
Banks could experience difficulties in attracting deposits to fund their
operations if they could not continue to offer deposit rates at levels above
those of other banks and savings institutions. In addition, such funding
sources, when compared to retail deposits attracted through a branch network,
are generally more sensitive to changes in interest rates and volatility in the
capital markets and are more likely to be compared by the investor to competing
investments.
NO PRIOR EXPERIENCE WITH INTERNATIONAL OPERATIONS; START-UP PERIOD
The Company is expanding its activities internationally. Neither the Company
nor the Private Companies has previously conducted operations outside the
United States. Risks inherent in the Company's international business
activities generally include unexpected changes in regulatory requirements,
heightened risks of political and economic instability, difficulties in
managing international operations, potentially adverse tax consequences,
enhanced accounting and control expenses and the burden of complying with a
wide variety of foreign laws. There can be no assurance that one or more of
these factors will not have a materially adverse effect on the Company's
European operations. Since the Company's financial statements are stated in
U.S. Dollars, and since not all the Company's expenses are incurred in U.S.
Dollars, the Company's operations may be affected by fluctuations in currency
exchange rates.
The Company's international expansion will require significant capital which
will initially result in losses for such operations. As a result, the Company
does not expect its European operations to make a significant contribution to
revenues or income in the near term.
HIGH-RISK NON-TRADITIONAL BANKCARD PROCESSING ACTIVITIES
There is a higher risk of consumer charge-backs associated with non-
traditional mail order, telephone order and audiotext bankcard processing
activities because the consumer is not physically present at the time of the
transaction. Management attempts to minimize this risk through due diligence
and merchant reserves.
RISKS RELATED TO CHANGING ECONOMIC CONDITIONS AND CHANGES IN INTEREST RATES
Effect of Changing Economic Conditions. The success of the Company is
dependent to a certain extent upon the general economic conditions in the
geographic areas in which it conducts substantial business activities. Adverse
changes in national economic conditions or in the economic conditions of
regions in which the Company conducts substantial business or their real estate
markets likely would impair the ability of the Company to collect loans and
would otherwise have an adverse effect on its business, including the demand
for new loans, the ability of customers to repay loans and the value of its
collateral. Moreover, earthquakes and other natural disasters could have
similar effects.
18
<PAGE>
Effects of Changes in Interest Rates. The Company's operating results depend
to a large extent on its net interest income, which is the difference between
the interest income earned on interest-earning assets plus accreted purchase
discount and the interest expense incurred in connection with its interest-
bearing liabilities. Changes in the general level of interest rates can affect
the Company's net interest income by affecting the spread between the Company's
interest-earning assets and interest-bearing liabilities, as well as, among
other things, the ability of the Company to originate and purchase loans; the
value of the Company's interest-earning assets and its ability to realize gains
from the sale of such assets; the average life of the Company's interest-
earning assets; and the Savings Banks' ability to obtain deposits in
competition with other available investment alternatives. Interest rates are
highly sensitive to many factors, including governmental monetary policies,
domestic and international economic and political conditions and other factors
beyond the control of the Company. The Company actively monitors its assets and
liabilities and employs a hedging strategy which seeks to limit the effects of
changes in interest rates on its operations. An effective hedging strategy is
complex and no hedging strategy can completely insulate the Company from
interest rate risks. The nature and timing of and the counter-party to a
hedging transaction may impact the effectiveness of hedging strategies. Poorly
designed strategies or improperly executed transactions may increase rather
than mitigate the risk. In addition, hedging involves transaction and other
costs, and such costs could increase as the period covered by the hedging
protection increases or in periods of rising or fluctuating interest rates.
Therefore, the Company may be prevented from effectively hedging its interest
rate risks, which could have a material adverse effect on the Company's results
of operations.
CONCENTRATION IN THE STATE OF CALIFORNIA
At September 30, 1996, approximately 54.9% of the Company's total loan
portfolio was in the state of California, which from time to time, including
recently, has experienced adverse economic conditions, including a decline in
real estate values. These factors have adversely affected borrowers' ability to
repay loans. Additional declines in the local economy, rising interest rates
and regulatory requirements could have a material adverse effect on the
Company's result of operations. The concentration of the Company's total loan
portfolio is expected to change in the near future. See "Recent Developments."
REGULATION
General. The Company, as a savings and loan holding company, and the Savings
Banks, as federally-chartered savings associations, are subject to extensive
regulation and supervision, which is intended primarily for the protection of
depositors. See "Regulation." The OTS is the primary federal banking regulator
of the Company and the Savings Banks. The Savings Banks are also subject to
supervision by the FDIC, and the FDIC has "back up" authority to take
enforcement action against the Savings Banks if the OTS fails to take such
action after a recommendation by the FDIC.
Activities Limitations. The Company is currently classified as a multiple
savings and loan holding company under applicable law as a result of its
ownership of the two Savings Banks, First Bank and Girard. A savings and loan
holding company which has only one insured financial institution subsidiary
(known as a "unitary" savings and loan holding company) and which subsidiary
qualifies as a qualified thrift lender (as defined herein) generally has the
broadest authority to engage in various types of business activities with
little to no restrictions on its activities, except that historically savings
and loan holding companies have not been permitted to acquire or be acquired by
an entity engaged in securities underwriting or market making. Multiple savings
and loan holding companies are subject to activities limitations. In general, a
multiple savings and loan holding company (or subsidiary thereof that is not an
insured institution) may not commence or continue for more than a limited
period of time after becoming a multiple savings and loan holding company (or a
subsidiary thereof), any business activity other than (i) furnishing or
performing management services for a subsidiary insured institution; (ii)
conducting an insurance agency or an escrow business; (iii) holding, managing
or liquidating assets owned by or acquired from a subsidiary insured
institution; (iv) holding or managing properties used or occupied by a
subsidiary insured institution; (v) acting as trustee under deeds of trust;
(vi) those activities previously directly authorized by the OTS by regulation
as of March 5, 1987 to be engaged in by multiple
19
<PAGE>
savings and loan holding companies; or (vii) subject to prior approval of the
OTS, those activities authorized by the Federal Reserve Board (the "FRB") as
permissible investment for bank holding companies. The Company is currently
unable to merge First Bank and Girard, thereby becoming a unitary savings and
loan holding company subject to fewer activities restrictions, until certain
regulatory concerns regarding the Savings Banks are resolved. There can be no
assurance that the Company will be able to merge the Savings Banks.
LIMITATIONS ON STOCK OWNERSHIP
With certain limited exceptions, federal regulations prohibit a person or
company or a group of persons deemed to be acting in concert from, directly or
indirectly, acquiring more than 10% of any class of voting stock of the Company
or obtaining the ability to control in any manner the election of the directors
or otherwise direct the management or policies of a savings and loan holding
company or a savings institution, without prior notice or application to and
approval of the OTS.
COMPETITION
The businesses in which the Company is engaged generally are highly
competitive. Many of the Company's competitors are significantly larger than
the Company and have access to greater capital and other resources. The
acquisition of loans is particularly capital-intensive and is typically based
on competitive bidding.
CONTROL OF CURRENT STOCKHOLDERS
Upon completion of the Common Stock Offering and assuming the Underwriters'
over-allotment option is not exercised, certain executive officers and
directors of the Company will have approximately 78% of the combined voting
power of all outstanding shares of Common Stock of the Company. As a result,
these stockholders, acting together, would be able to effectively control
virtually all matters requiring approval by the stockholders of the Company.
This voting control may have the effect of discouraging offers to acquire the
Company because the consummation of any such acquisition would require the
consent of Andrew A. Wiederhorn and Lawrence A. Mendelsohn.
20
<PAGE>
THE COMPANY
GENERAL
WFSG was recently formed as a financial services holding company for a group
of companies previously held as a part of, and operated by, the Private
Companies. The Company will engage in a wide variety of financial activities,
including the acquisition, origination, ownership and securitization of Loan
Portfolios, banking and non-traditional bankcard processing. The Company, as a
savings and loan holding company, is subject to regulation by the OTS.
Prior to the Reorganization, the Private Companies operated principally
through two separate companies: (i) WCC, which conducted the servicing and a
portion of the loan acquisition activities; and (ii) WAC, the holding company
for the Savings Banks. The Savings Banks are subject to regulation by the OTS,
as their chartering authority, and by the FDIC as a result of their membership
in the SAIF, which insures the Savings Banks' deposits up to the maximum
extent permitted by law. The Savings Banks are also members of the Federal
Home Loan Bank ("FHLB") of San Francisco, one of 12 regional banks which
comprise the FHLB system.
The Private Companies began in 1987 as an equipment leasing company
primarily involved in leasing cellular phones. WCC was formed in May 1989 to
manage the Private Companies' activities in the loan and lease servicing
business and to service a third party's heavy industrial equipment leasing
portfolio which consisted of leases of containers, railroad cars and other
similar equipment. During the early 1990s, the Private Companies sought to
take advantage of the general decline in asset quality of financial
institutions in many areas of the country and the large number of failed
savings institutions during this period by acquiring Loan Portfolios from the
RTC, the FDIC and private sellers such as banks, thrifts, finance companies
and leasing companies and selling participations in such Loan Portfolios to
institutional investors while retaining the servicing rights and a
participation in the overall return on such Loan Portfolios. The Principals
purchased First Bank and Girard through WAC in October 1993 and November 1994,
respectively, using funds loaned to them by WCC. The Savings Banks were
acquired to provide a deposit-based funding source for the loan purchase
activities of the Private Companies. Both of the Savings Banks were acquired
at substantial discounts to their respective book values, reflecting the poor
quality of their assets and, in the case of First Bank, an expected imminent
regulatory takeover. More recently, the Company decided to expand its loan
acquisitions and servicing activities to encompass the United Kingdom and
France with a view towards future expansion in Western Europe. See "Business--
European Operations."
THE REORGANIZATION
Following the Reorganization, the Company will be the holding company for
WAC and the Savings Banks and its other subsidiaries will include WFC, a
company formed to continue the loan acquisition and loan origination
businesses of the Private Companies following the Common Stock Offering and
the Notes Offering, and WSC, a company formed to continue the loan servicing
business of the Private Companies following the receipt of necessary licenses.
In the Reorganization, WCC will not become a subsidiary of the Company or
transfer any assets or liabilities to the Company. WCC is not being included
in the new public entity due to certain tax considerations and to allow WCC to
retain sufficient assets and servicing rights to retire the Shareholder Loans.
WCC will cease to acquire new product or servicing for its own account, but
will continue to service and liquidate its existing portfolio. New loan
acquisitions and originations will be conducted by WFC. For a period of two to
three years after the closing of the Common Stock Offering and the Notes
Offering, while WSC is in the process of obtaining the relevant licensing
approvals for its servicing activities, WCC will continue to service loans for
the Company at market rates. Following such period, WSC will commence
servicing loans for the Company and WCC. See "Certain Relationships and
Related Transactions." In addition, WCC and the Principals have agreed not to
compete with the Company with respect to the acquisition of Loan Portfolios.
The Company's executive offices are located at 1776 SW Madison St.,
Portland, Oregon 97205, and the telephone number of its executive offices is
(503) 223-5600 and its facsimile number is (503) 223-8799.
21
<PAGE>
RECENT DEVELOPMENTS
LOAN ACQUISITIONS
During October 1996, the Private Companies have acquired or committed to
acquire four Loan Portfolios aggregating $311.0 million principal amount, all
of which were or will be acquired by the Savings Banks.
In October 1996, Girard committed to purchase approximately $240.8 million
unpaid principal amount of discounted residential mortgage loans offered by
Citicorp North America Inc. and Citibank N.A. in a sealed bid auction (the
"Citicorp Portfolio"). Such transaction settled on November 1, 1996 (the
"Settlement Date"). Girard made a concurrent sale of approximately $38.8
million unpaid principal amount of the Citicorp Portfolio to an unaffiliated
third party on the Settlement Date resulting in a gain. The remainder of the
purchase price to Citicorp was financed by Girard under a master repurchase
agreement with Bear Stearns Mortgage Capital Corporation ("BSMCC") pursuant to
which BSMCC has purchased certain performing and non-performing mortgage loans
and Girard has simultaneously agreed to repurchase such loans on a specified
date. The Company currently expects that Girard will repay such financing by
selling certain performing residential mortgage loans to WFC, which in turn is
expected to securitize such loans.
In October 1996, Girard acquired approximately $38.2 million in unpaid
principal amount of discounted residential mortgage loans from a successful
bidder in an auction conducted by HUD. Girard also agreed to acquire in
December 1996 approximately $31.9 million in unpaid principal amount of
discounted residential mortgage loans to be sold by a successful bidder in an
auction conducted by HUD.
As a result, on completion of such series of transactions, Girard will have
purchased approximately $272 million of unpaid principal balance discounted
residential mortgage loans and sold an equivalent market value of performing
residential mortgage loans. Although the Orders prohibit Girard from
increasing its total assets above $408 million, the amount of total assets is
only measured on a quarterly basis. Therefore, Girard may increase its assets
so long as at the end of a quarter the assets are not in excess of the amount
specified by the OTS.
WFC has also agreed to acquire approximately $106 million unpaid principal
amount of home equity loans, second lien mortgages, consumer loans and
Subordinate Securities (the "Institutional Portfolio") from a major
institutional investor (the "Institutional Investor") at a discount. The
settlement of this transaction is expected to occur in the first quarter of
1997. WCC receives a small percentage of the initial cash flow and a portion
of the profits as a servicing fee, which servicing fee will be assigned by WCC
to WSC prior to the sale of the Institutional Portfolio to WFC.
ACQUISITION OF SERVICING RIGHTS
In October 1996, Girard committed to acquire the servicing rights to a
portfolio of approximately $292 million unpaid principal amount of residential
mortgage loans offered by Merrill Lynch Credit Corporation through a
competitive bid (the "Merrill Portfolio") and the servicing transfer is
expected to be completed in the fourth quarter of 1996. Girard is expected to
retain WCC as a subservicer of the Merrill Portfolio at below-market rates.
EUROPEAN EXPANSION
The Company has agreed in principal with a major U.S. investment bank (the
"J.V. Partner") to form a joint venture to service residential mortgage loans
in the United Kingdom. Under the preliminary terms of the proposed joint
venture, the Company would acquire a 50% interest in a United Kingdom
servicing company (the "U.K. Servicer") for a nominal amount. The Company and
the J.V. Partner would each appoint three directors, and the Company would
manage the day-to-day operations of the U.K. Servicer. Each of the Company and
the J.V. Partner are expected to agree to use the U.K. Servicer to service any
U.K. residential mortgage loans acquired by such party or mortgage loans
included in securitizations placed by the J.V. Partner to the extent that
seller of such loans does not retain servicing. At September 30, 1996, the
U.K. Servicer serviced approximately (Pounds)500 million principal amount of
loans (or approximately 9,000 loans). The Company is currently negotiating the
definitive terms of the joint venture with the J.V. Partner and expects that
definitive documents will be executed in the fourth quarter of 1996 or the
first quarter of 1997. There can be no assurance, however, that this joint
venture will be completed, or as to the terms on which it may be completed.
22
<PAGE>
WILSHIRE CREDIT CORPORATION
WCC'S LOAN ACTIVITY
Since the Company has and will be engaged in the loan acquisition and
origination businesses similar to those conducted by WCC, this section
contains certain information with respect to loans serviced, acquired or
originated by WCC to assist investors in evaluating the Company's ability to
engage in these activities on an ongoing basis. These loans (including
servicing rights) are not owned by the Company and investors in the Common
Stock or the Notes will have no right or claim to such assets. The financial
statements of WCC are included as an appendix since the Company will carry on
certain similar business operations with some of the same management as WCC.
However, the Company does not believe that the historical results of
operations of WCC are representative of future results of operations of the
Company or WFC. In addition, there can be no assurance that the results of
operations of WCC will be indicative of future performance or that the Company
will be able to acquire, originate and service mortgage loans to the same
extent as WCC.
ACTIVITY IN WCC'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
1996 1995 1994 1993
------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
LOAN ACQUISITION AND ORIGINATION
DATA:
Loan purchases and originations:
Single-family residential.......... $ 143,581 $ 5,742 $ 57,832 $ 1,059
Multi-family residential........... -- 983 667 --
Commercial and other mortgage
loans............................. 3,915 2,671 39,002 1,964
Consumer and other................. 45 14,223 101,890 39,330
---------- -------- -------- --------
Total............................ 147,541 23,619 199,391 42,353
Discounted loan purchases:
Single-family residential.......... 92,444 36,653 26,342 95
Multi-family residential........... 1,158 4,773 1,392 191
Commercial and other mortgage
loans............................. 16,598 22,252 8,087 4,322
Consumer and other................. 1,030 50,345 5,669 284,663
---------- -------- -------- --------
Total............................ 111,230 114,023 41,490 289,271
---------- -------- -------- --------
Total loan acquisitions and
originations........................ $ 258,771 $137,642 $240,881 $331,624
========== ======== ======== ========
LOANS SOLD........................... $ 138,429 $133,500 $ 9,000 $ --
LOANS SERVICED-END OF PERIOD......... $1,418,507 $894,649 $889,585 $606,122
</TABLE>
23
<PAGE>
The following table sets forth the composition of WCC's total gross loan
portfolio at the end of the periods indicated.
COMPOSITION OF WCC'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------------------------
1996 1995 1994 1993
------------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan Portfolio:
Single-family residential...... $ 72,425 $ 60,951 $ 138,063 $ 197
Multi-family residential....... 1,838 2,196 721 --
Commercial and other mortgage
loans......................... 26,079 25,277 36,276 242
Consumer and other............. 30,841 51,848 96,980 50,563
--------- --------- --------- --------
Loan Portfolio............... 131,183 140,272 272,040 51,002
Discounted Loan Portfolio:
Single-family residential...... 112,972 79,636 19,939 68
Multi-family residential....... 6,265 8,835 699 135
Commercial and other mortgage
loans......................... 58,027 60,736 8,905 2,008
Consumer and other............. 313,496 261,880 324,358 453,693
--------- --------- --------- --------
Discounted Loan Portfolio.... 490,760 411,087 353,901 455,904
Accrued Interest................. 266,617 238,021 210,050 210,667
Unaccreted discount (1).......... (601,840) (615,341) (583,870) (658,946)
--------- --------- --------- --------
Total Loan Portfolio, net ....... $ 286,720 $ 174,039 $ 252,121 $ 58,627
========= ========= ========= ========
</TABLE>
- --------
(1) Includes unaccreted discount for principal and accrued interest.
WCC'S FINANCIAL INFORMATION
General. The following tables present Summary Combined Financial Information
for WCC and affiliates at the dates and for the periods indicated. The
historical income statement and balance sheet data at and for the nine months
ended September 30, 1996 and the years ended December 31, 1995, 1994 and 1993
have been derived from the audited combined financial statements of WCC and
affiliates included elsewhere in this Prospectus (the "WCC Audited Financial
Statements").
Operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for any other
interim period or the entire year ending December 31, 1996. The Summary
Consolidated Financial Information should be read in conjunction with, and is
qualified in its entirety by reference to, the WCC Financial Statements and
related notes as set forth elsewhere herein.
Management believes that WCC's historical financial information is not
directly relevant in evaluating the Company's current business or results of
operations because (i) the servicing revenues of WCC--its primary source of
revenues--are significantly different from the servicing revenues that the
Company may generate in the future, (ii) the public investors will acquire no
interest in the historical assets or liabilities of WCC and the earnings on
such assets are substantially different from that which might be expected for
the Company, and (iii) the Company is not expected to generate significant
servicing revenues for at least two years.
24
<PAGE>
Significant Differences in Servicing Revenues. The servicing revenues
expected to be derived by the Company in the future are expected to be a fixed
rate per performing loan on the principal amount of such loan or a specified
dollar amount per month and a fixed rate as a percentage of the principal
amount or cash flow for a non-performing loan, in each case consistent with
standard industry practice. Servicing revenues generated by WCC in the past
are very different from those expected to be generated by the Company since a
substantial percentage of loans owned and serviced by WCC were participated
out to third party investors pursuant to participation agreements. These
participation agreements provided that WCC would generally receive 5-10% of
cash flow from each asset until the investors had received their capital and
thereafter WCC was generally entitled to receive 15-35% of the cash flow.
Accordingly, WCC's servicing revenues included an element of profit
participation which is not expected to be present in a typical servicing
arrangement for the Company and WCC's servicing revenues would be expected to
be higher than the servicing revenues expected to be generated by the Company
in the future.
No Transfer of Historical Assets and Liabilities. As part of the
Reorganization, the public investors will acquire no interest in the
historical assets or liabilities of WCC, nor in any income to be derived from
those assets or expense associated with those liabilities. As mentioned above,
the most significant assets on the WCC balance sheet are the loans subject to
participation agreements, which agreements have a significant impact on WCC's
rights to such assets and the income stream generated by such assets. It is
currently anticipated that the Company will seek to acquire assets outright
and not engage in participation agreements (in order to obtain all of the
benefit (and risk) of such assets).
Timing of Servicing Revenues. Following the completion of the Common Stock
Offering and the Notes Offering, WCC would service at market rates any loans
acquired by the Company for at least two years following the offering and
possibly longer (up to three years). Accordingly, the Company would have a
servicing expense (the fee payable to WCC) during such period and WCC would
generate the profits associated with such servicing (the servicing fee less
the cost of servicing).
<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
WCC SELECTED FINANCIAL 1996 1995 1994 1993
INFORMATION ------------- -------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Servicing fees.................. $ 6,041 $ 9,739 $ 3,339 $1,356
Interest and dividend income.... 6,718 5,124 1,667 560
Other revenues.................. 1,542 668 657 4,509
Compensation and other general
and administrative expenses.... (9,278) (11,029) (5,964) (4,509)
Interest expense................ (9,116) (3,789) (894) (339)
Other........................... 72 (194) 133 --
-------- -------- -------- ------
Net income (loss)............... $ (4,021) $ 519 $ (1,062) $1,577
======== ======== ======== ======
BALANCE SHEET DATA:
Total assets.................... $353,168 $206,373 $288,004
Loan portfolio, net............. -- 121,420 125,942
Discounted Loan portfolio, net.. 4,824 19,352 17,188
Loans held for sale, at lower of
cost or market................. 281,896 33,267 108,991
Participation liabilities....... 143,424 150,298 205,331
Borrowings...................... 243,239 70,165 60,941
Stockholders' equity (deficit).. (50,963) (23,801) (11,099)
</TABLE>
25
<PAGE>
Servicing Fees and Income from Investments in Loans and Securities. WCC's
servicing fees decreased by $1.7 million, and income from investments in loans
and securities increased by $3.8 million, during the nine months ended
September 30, 1996 (annualized basis) compared to the year ended December 31,
1995. These changes are related to a shift between mid-1995 and mid-1996 to a
strategy of acquiring more loan portfolios for WCC's own account rather than
acquiring loans with participation funding. Participation arrangements entail
greater servicing income, whereas direct ownership in loans entails more
interest income.
Other Revenues. Other revenues are derived from various sources including
rental income from commercial properties and gains on sales of loans. Total
other revenues increased during the first nine months of 1996 compared to the
year ended December 31, 1995 due to the sale of loans which resulted in a gain
of approximately $0.9 million.
General and Administrative Expense. WCC's general and administrative expense
increased by approximately $1.3 million during the nine months ended September
30, 1996 (annualized basis) compared to the year ended December 31, 1995 as a
result of the increased cost in acquiring and servicing a greater number of
loan portfolios.
Interest Expense. WCC's interest expense increased by approximately $8.4
million during the nine months ended September 30, 1996 (annualized basis)
compared to the year ended December 31, 1995 as a result of increased
borrowings to acquire loan portfolios and to fund shareholder loans to
capitalize the Savings Banks.
Performing and Discounted Loans. WCC's loans increased by approximately
$112.7 million during the nine months ended September 30, 1996 as a result of
the Company's business strategy of aggressively acquiring loan portfolios of
discounted loans and performing mortgage loans.
Participations. Participations decreased by approximately $6.9 million
during the nine months ended September 30, 1996 primarily as a result of
securitization of portfolios or the resolution of outstanding loans and
decreased reliance on participation funding for acquiring loan portfolios.
Borrowings. Borrowings increased by approximately $173.1 million during the
nine months ended September 30, 1996 as a result of WCC securitizing certain
loans (accounted for as a financing), acquiring more loan portfolios for WCC's
own account rather than acquiring loans with participation funding, and
distributions to shareholders.
Stockholders' Equity. Stockholders' equity decreased by approximately $27.2
million during the nine months ended September 30, 1996 primarily as a result
of distributions to shareholders, primarily for the purpose of adding capital
to affiliated banks to fund growth and for other purposes.
26
<PAGE>
USE OF PROCEEDS
Net proceeds to be received by the Company from the Notes Offering currently
are estimated to be approximately $ million after deducting the underwriting
discount and estimated offering expenses payable by the Company ($ , if the
Notes Underwriters' overallotment option is exercised in full). Net proceeds
to be received by the Company from the Common Stock Offering currently are
estimated to be $ million after deducting the underwriting discount and
estimated offering expenses payable by the Company ($ , if the Common Stock
Underwriters' over-allotment option is exercised in full).
The portion of such net proceeds retained by the Company will be available
for leveraged acquisitions of Loan Portfolios and for general corporate
purposes, including expansion into Western Europe. Such net proceeds will give
the Company increased flexibility in conducting the business in which it is
engaged, including the acquisition and resolution of Discounted Loans and
other loans.
27
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996 and as adjusted as of that date to give effect to (i) the
Common Stock Offering and the Notes Offering and the application of the net
proceeds therefrom as described under "Use of Proceeds"; (ii) no exercise of
any over-allotment option; and (iii) the Reorganization pursuant to which
certain of companies in the Private Companies became subsidiaries of the
Company. This information below should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto which are included
elsewhere herein. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Use of Proceeds" and "Management--
Executive Compensation" and "--Incentive Stock Plan."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED
---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Repurchase agreements.............................. $ -- $ --
Long-term debt:
% Notes due 2003.................................. -- 60,000
---------- -----------
Total.......................................... -- 60,000
---------- -----------
Stockholders' equity:
Preferred Stock, par value $0.01 per share;
10,000,000 shares authorized; no shares outstand-
ing............................................... -- --
Common Stock, par value $0.01 per share; 50,000,000
shares authorized; 5,500,000 shares issued and
outstanding (actual); 7,000,000 shares issued and
outstanding (as adjusted) for the Common Stock Of-
fering(1)......................................... 35,550 50,690
Retained earnings (accumulated deficit)............ (827) (827)
Unrealized gain on available for sale securities... (169) (169)
---------- -----------
Total stockholders' equity..................... 34,554 50,694
---------- -----------
Total capitalization........................... $ 34,554 $ 110,694
========== ===========
Savings Banks' Regulatory Capital:
Regulatory capital ratios of First Bank
Tangible capital................................. 6.0% 6.0%
Core capital..................................... 5.9% 5.9%
Total capital to risk-weighted assets............ 10.0% 10.0%
Regulatory capital ratios of Girard
Tangible capital................................. 6.8% 6.8%
Core capital..................................... 7.0% 7.0%
Total capital to risk-weighted assets............ 11.0% 11.0%
</TABLE>
- --------
(1) Excludes shares of Common Stock issuable upon the exercise of options. See
"Management--Incentive Stock Plan--Options to be Granted at Closing."
28
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables present Selected Financial Information for the Company
at the dates and for the periods indicated. The historical income statement
and balance sheet data at and for the nine months ended September 30, 1996 and
the years ended December 31, 1995 and 1994 have been derived from the Audited
Consolidated Financial Statements included elsewhere in this Prospectus.
On October 7, 1993, WAC acquired 94.9% of the common stock of First Bank in
a purchase accounting transaction. On November 9, 1994, a newly-formed entity
with ownership and management common to WAC, Wilshire Acquisitions Corporation
II ("WACII") acquired 94.9% of the common stock of Girard in a purchase
accounting transaction.
Because WAC and WACII were under common control, the accompanying financial
statements are presented on a combined basis as of December 31, 1994 and for
the period from November 9 through December 31, 1994. On December 27, 1995,
WAC and WACII were merged and WAC was named as the surviving entity. Financial
information as of September 30, 1996 and December 31, 1995 and for the nine
months and year then ended, respectively, is presented on a consolidated basis
and includes the accounts of WAC, First Bank, and Girard. With respect to all
consolidated and combined financial information, intercompany transactions and
balances have been eliminated. For convenience, all the accompanying financial
statements are referred to as "consolidated".
The historical income statement and data presented for the nine months ended
September 30, 1995 has been derived from unaudited consolidated financial
statements (the "Unaudited Financial Statements" and, together with the
Audited Financial Statements, the "Consolidated Financial Statements") and
include all adjustments, consisting only of normal recurring accruals, which
the Company considers necessary for a fair presentations to the Company's
results of operations for these periods. Operating results for the nine months
ended September 30, 1996 are not necessarily indicative of the results that
may be expected for any other interim period or the entire year ending
December 31, 1996. The Summary Consolidated Financial Information should be
read in conjunction with, and is qualified in its entirety by reference to,
the Consolidated Financial Statements and related notes as set forth elsewhere
herein.
29
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ------------------
1996 1995 1995 1994
-------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest Income:
Loans..................... $ 31,686 $ 15,224 $ 21,821 $ 7,923
Mortgage-backed
securities............... 1,280 1,099 1,359 1,361
Investments and federal
funds sold............... 1,171 729 1,201 285
-------- -------- -------- --------
Total interest income..... 34,137 17,052 24,381 9,569
-------- -------- -------- --------
Interest expense:
Deposits.................. 17,448 9,979 13,944 5,017
Borrowings................ 2,144 432 537 440
-------- -------- -------- --------
Total interest expense.... 19,592 10,411 14,481 5,457
-------- -------- -------- --------
Net interest income........ 14,545 6,641 9,900 4,112
Provision for estimated
losses on loans........... 15,751 3,221 4,266 2,173
-------- -------- -------- --------
Net interest (loss) income
after provision for
estimated losses on
loans..................... (1,206) 3,420 5,634 1,939
-------- -------- -------- --------
Other Income:
Bankcard income(1)........ 5,078 3,202 4,694 635
Bankcard processing
expense.................. (3,865) (2,408) (3,462) (274)
Gain on sale of loans..... 1,983 981 642 --
Loan fees and charges..... 1,217 522 610 43
Trading account--
unrealized gain.......... 1,601 -- -- --
Gain on sale of mortgage-
backed securities
available for sale....... -- -- 14 54
Amortization of deferred
credits.................. 346 346 460 388
Other, net................ 17 91 149 381
-------- -------- -------- --------
Total other income........ 6,377 2,734 3,107 1,227
-------- -------- -------- --------
Other Expenses:
Compensation and employee
benefits................. 2,955 1,716 2,516 1,922
FDIC insurance premiums... 2,066 444 721 261
Occupancy................. 218 221 385 319
Professional services..... 572 461 1,028 507
Data processing and
equipment rentals........ 189 146 232 162
Real estate owned, net.... 231 46 170 241
Loan service fees and
expenses................. 3,522 1,015 1,958 242
Other general and
administrative expenses.. 1,152 1,198 1,092 1,290
-------- -------- -------- --------
Total other expenses...... 10,905 5,247 8,102 4,944
-------- -------- -------- --------
(Loss) income before income
tax (benefit) provision... (5,734) 907 639 (1,778)
Income tax (benefit)
provision................. (4,652) 68 47 (526)
-------- -------- -------- --------
Net (loss) income.......... $ (1,082) $ 839 $ 592 $ (1,252)
======== ======== ======== ========
(Loss) earnings per
share(2).................. $ (14.05) $ 35.56 $ 25.09 $(135.43)
======== ======== ======== ========
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994
------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................. $533,109 $341,454 $230,636
Cash and due from banks...................... 11,231 3,382 4,880
Federal funds sold........................... 9,300 1,100 3,950
Trading account securities................... 7,092 -- --
Investment securities held to maturity, at
amortized cost.............................. 7,425 6,470 4,505
Mortgage-backed securities available for
sale, at fair value......................... 6,483 9,083 10,943
Mortgage-backed securities held to maturity,
at amortized cost........................... 22,380 13,119 14,439
Loan portfolio, net(3)....................... 177,280 258,827 179,377
Discounted loan portfolio:
Total loans................................. 10,767 20,210 2,995
Unaccreted discount......................... (1,632) (3,008) (470)
Allowance for loan losses................... (5,716) (3,855) (431)
Discounted loans, net....................... 3,419 13,347 2,094
Loans held for sale, net, at lower of cost or
market...................................... 260,804 18,597 --
Stock in FHLB of San Francisco, at cost...... 2,911 1,421 1,612
Real estate owned, net....................... 2,514 4,964 1,208
Leasehold improvements and equipment......... 336 275 167
Due from affiliate(4)........................ 8,357 4,514 4,062
Accrued interest receivable.................. 4,268 3,042 1,599
Prepaid expenses and other assets............ 3,887 1,724 1,026
Income taxes receivable, net................. 5,422 1,589 774
Deposits..................................... 487,535 303,524 196,289
Borrowings................................... -- 13,000 21,500
Due to affiliates(5)......................... 2,286 759 652
Deferred credits(6).......................... 832 1,134 1,772
Subordinated debt(7)......................... -- 11,000 --
Minority interest............................ 277 600 574
Preferred stock in subsidiary held by oth-
ers......................................... -- -- 1,000
Accounts payable and other liabilities....... 7,625 4,398 2,056
Stockholders' equity(7)...................... 34,554 7,039 6,793
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
NINE MONTHS
ENDED
SEPTEMBER 30,
1996 1995 1994
------------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FINANCIAL RATIOS AND OTHER DATA:
Return on average assets....................... (.22)% .24% (.92)%
Return on average equity....................... (3.09)% 8.65% (31.03)%
Average interest rate on total loans........... 9.39 % 9.57% 7.65 %
Average equity to average assets............... 7.24 % 2.72% 2.96 %
Net interest spread(8)......................... 3.15 % 3.08% 2.85 %
Net interest margin(9)......................... 3.88 % 3.72% 3.04 %
Ratio of earnings to fixed charges(10)(11):
Including interest on deposits................ .71 1.04 .67
Excluding interest on deposits................ (1.67) 2.19 (3.04)
Non-performing loans to loans at end of
period(3)..................................... 9.11 % 4.46% 5.95 %
Allowance for loan losses to total loans at end
of period..................................... 9.2 % 7.6% 3.9 %
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- -------
<S> <C> <C> <C>
LOAN ORIGINATIONS............................... $ 2,280 $ 8,748 $ 4,345
LOAN ACQUISITION DATA:
Loan Portfolio:
Single-family residential...................... 221,581(12) 121,883 36,462
Multi-family residential....................... -- -- 61,247
Commercial and other mortgage loans............ -- 2,126 31,091
Consumer and other loans(13)................... 18,742 11,012 10,847
Discounted Loans:
Single-family residential...................... -- (14) 49,662 1,542
Multi-family residential....................... -- (14) 96 --
Commercial and other mortgage loans............ -- 869 1,843
Consumer and other loans....................... -- 5,368 239
LOANS SOLD...................................... 27,965 16,673 --
</TABLE>
- --------
(1) The Company began its bankcard operations in 1994.
(2) (Loss) earnings per share amounts are based on weighted average number of
shares outstanding of WAC during the applicable periods. See Note 1 in
the Company's Consolidated Financial Statements. The capital structure of
WAC is substantially different from that of WFSG, which did not exist at
or prior to September 30, 1996. There were no dividend payments on common
stock by WAC during any periods presented.
(3) This item does not include Discounted Loans.
(4) Due from affiliate consists of amounts received by WCC from mortgagors on
loans it is servicing for the Company and has not yet transferred to the
Company.
(5) Due to affiliates primarily consists of amounts owed to WCC for WAC
operating expenses paid by WCC.
(6) Deferred credits represent negative goodwill--the excess of the net fair
values of the Savings Banks' assets and liabilities over the purchases
prices paid by WAC for the Savings Banks.
(7) Effective January 1, 1996, $11.0 million of Common Stock was issued in
exchange for subordinated debt. Subsequently, an additional $17.8 million
of Common Stock was issued for cash.
(8) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(9) Net interest margin represents net interest income divided by total
average earning assets.
(10) The ratios of earnings to fixed charges were computed by dividing (x)
income from continuing operations before income taxes, extraordinary
gains and cumulative effect of a change in accounting principle plus
fixed charges by (y) fixed charges. Fixed charges represent total
interest expense, including and excluding interest on deposits, as
applicable, as well as the interest component of rental expense. Earnings
for the nine months ended September 30, 1996 and the year ended December
31, 1994 were inadequate to cover fixed charges by $5,734 and $1,778,
respectively.
(11) Pro forma ratio of earnings to fixed charges for the nine months ended
September 30, 1996 and the year ended December 31, 1995 were .67 and .65,
respectively.
(12) The Company currently expects that Girard will sell certain single-family
residential loans to WFC which in turn is expected to securitize such
loans. See "Recent Developments."
(13) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(14) Girard has purchased or committed to purchase approximately $272 million
unpaid principal amount of discounted residential mortgage loans. See
"Recent Developments."
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Selected
Financial Information and the Consolidated Financial Statements of the Company
and the notes thereto included elsewhere in this Prospectus.
OVERVIEW
The Company's net interest income has increased substantially during the
last three years primarily due to the growth in the Company's total loan
portfolio resulting from the Company's strategy of aggressively acquiring Loan
Portfolios and by the acquisition of First Bank in 1993 and Girard in 1994.
The Company's total loan portfolio, net as of September 30, 1996 and December
31, 1995 and 1994 was $441.5 million, $290.8 million and $181.5 million,
respectively. Net interest income for the nine month period ended September
30, 1996 and for the years ended December 31, 1995 and 1994 was $14.5 million,
$9.9 million and $4.1 million, respectively.
The Company has reported net losses and reduced net income in recent periods
primarily as a result of significant additions to the Company's provision for
estimated losses on loans, primarily Inherited Loans and Sub-Prime Auto Loans.
The Company reported a net loss of approximately $1.1 million for the nine
months ended September 30, 1996, compared to net income in the similar prior
year period of $0.8 million. The Company reported net income of $0.6 million
for the fiscal year ended December 31, 1995 compared to a loss in calendar
1994 of $1.3 million.
The Company's net losses during the first nine months of fiscal year 1996
and the fiscal year 1994 and lower net income in fiscal year 1995 resulted
primarily from provisions for losses on loans. Provisions for loan losses
totaled approximately $15.8 million in the first nine months of 1996, $4.3
million for the year ended December 31, 1995 and $2.2 million in 1994. These
loss provisions resulted primarily from deterioration in the Company's
Inherited Loans and Sub-Prime Auto Loans. These loss provisions reflect the
poor quality of the assets of the Savings Banks at the time they were acquired
by the Company and loan loss provisions taken with respect to Sub-Prime Auto
Loans. Following the addition of approximately $4.5 million of reserves taken
in the third quarter of 1996, allowances for Sub-Prime Auto Loans as a
percentage of the unpaid principal balances were 52.3% at September 30, 1996.
PRINCIPAL SOURCES OF REVENUE
The principal component of the Company's revenues is interest income, with
lesser contributions from gains on securitizations and income from bankcard
processing operations. The following table sets forth the components of the
Company's revenues for the periods indicated:
SOURCES OF REVENUE
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- ---------------
1996 1995 1995 1994
-------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income.......................... $34,137 $17,052 $24,381 $ 9,569
Gains on sale of loans................... 1,983 981 642 --
Bankcard income.......................... 5,078 3,202 4,694 635
Other, net(1)............................ 3,181 959 1,233 866
-------- -------- ------- -------
Total revenue.......................... $44,379 $22,194 $30,950 $11,070
======== ======== ======= =======
</TABLE>
- --------
(1) Other consists primarily of loan fees and charges, the amortization of
negative goodwill and unrealized gain on trading securities.
Net Interest Income. The operations of the Company are substantially
dependent on its net interest income, which is the difference between the
interest income received plus accreted purchase discount from its assets and
33
<PAGE>
the interest expense paid on its interest-bearing liabilities. Net interest
income is affected by the relative amount of interest-earning assets and
interest-bearing liabilities, the degree of mismatch in the maturity and
repricing characteristics of its interest-earning assets and interest-bearing
liabilities and timing of receipt of purchased principal discount. With
respect to the Company's Discounted Loan portfolio, the Company treats
accreted discount on Discounted Loans as interest for accounting purposes.
The following table sets forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resultant average yields, the interest expense associated with interest-
bearing liabilities, expressed in dollars and rates, and the net interest
spread and net interest margin. Information is based on quarterly balances
during the indicated periods.
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED -----------------------------------------------------------
SEPTEMBER 30, 1996 1995 1994
-------------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE(1) BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
-------- -------- ------------- -------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Assets:
Mortgage-backed
securities............. $ 28,934 $ 1,280 5.90% $ 24,054 $ 1,359 5.65% $ 23,515 $1,361 5.79%
Loan portfolio(2)....... 449,947 31,686 9.39 227,970 21,821 9.57 103,583 7,923 7.65
Investment securities
and other.............. 21,242 1,171 7.35 14,216 1,201 8.45 7,969 285 3.58
-------- ------- -------- ------- -------- ------
Total interest-earning
assets, interest
income................. 500,123 34,137 9.10 266,240 24,381 9.16 135,067 9,569 7.08
Non-interest earning
cash................... 5,218 -- -- 1,868 -- -- 2,053 -- --
Allowance for loan
losses and unaccreted
discount............... (50,732) -- -- (31,845) -- -- (8,595) -- --
Other assets............ 29,225 -- -- 15,277 -- -- 7,646 -- --
-------- ------- -------- ------- -------- ------
Total assets........... $483,834 $34,137 $251,540 $24,381 $136,171 $9,569
======== ======= ======== ======= ======== ======
Average Liabilities and
Stockholders' Equity:
Interest-bearing
deposits............... $405,549 $17,448 5.74 $231,555 $13,944 6.02 $118,277 $5,017 4.24
FHLB advances........... 1,778 105 7.87 1,381 104 7.53 5,916 228 3.85
Subordinated debentures
and other interest-
bearing obligations.... 31,697 2,039 8.58 5,383 433 8.04 4,757 212 4.46
-------- ------- -------- ------- -------- ------
Total interest-bearing
liabilities, interest
expense............... 439,024 19,592 5.95 238,319 14,481 6.08 128,950 5,457 4.23
Non-interest bearing
deposits............... 2,202 -- -- 2,196 -- -- 1,537 -- --
Escrow deposits......... 225 -- -- 106 -- -- 74 -- --
Other liabilities....... 7,364 -- -- 4,077 -- -- 1,582 -- --
-------- ------- -------- ------- -------- ------
Total liabilities...... 448,815 19,592 244,698 14,481 132,143 5,457
Stockholders' equity.... 35,019 -- -- 6,842 -- -- 4,028 -- --
-------- ------- -------- ------- -------- ------
Total liabilities and
stockholders' equity.. $483,834 $19,592 $251,540 $14,481 $136,171 $5,457
======== ======= ======== ======= ======== ======
Net interest income..... $14,545 $ 9,900 $4,112
Net interest spread..... 3.15 3.08 2.85
Net interest margin..... 3.88 3.72 3.04
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 113.9% 111.7% 104.7%
======== ======== ========
</TABLE>
- --------
(1) Presented on an annualized basis.
(2) The average balances of the loan portfolio include Discounted Loans and
non-performing loans, interest on which is recognized on a cash basis.
34
<PAGE>
The following table describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (i)
changes in volume (change in volume multiplied by prior rate), (ii) changes in
rate (change in rate multiplied by prior volume) and (iii) total change in
rate and volume. Changes attributable to both volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996 VS. YEAR ENDED DECEMBER 31,
YEAR ENDED ------------------------------------------------
DECEMBER 31, 1995 1995 VS. 1994 1994 VS. 1993
------------------------- ----------------------- -----------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
------------------------- ----------------------- -----------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL RATE VOLUME TOTAL
------ -------- ------- ------ ------- ------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Mortgage-backed
securities............ $ (14) $ (65) $ (79) $ (37) $ 35 $ (2) $ 168 $ 975 $1,143
Loan portfolio......... (197) 10,062 9,865 2,405 11,493 13,898 60 6,480 6,540
Investment securities
and other............. 11 (41) (30) 581 335 916 (112) 344 232
------ -------- ------- ------ ------- ------- ------- ------ ------
Total interest-earning
assets................ (200) 9,956 9,756 2,949 11,863 14,812 116 7,799 7,915
Interest-Bearing Liabil-
ities:
Interest-bearing depos-
its................... (236) 3,740 3,504 2,723 6,204 8,927 1,368 2,885 4,253
FHLB advances.......... -- 1 1 (626) 502 (124) -- 228 228
Other interest-bearing
obligations........... 22 1,584 1,606 191 30 221 146 (19) 127
------ -------- ------- ------ ------- ------- ------- ------ ------
Total interest-bearing
liabilities........... (214) 5,325 5,111 2,288 6,736 9,024 1,514 3,094 4,608
------ -------- ------- ------ ------- ------- ------- ------ ------
Increase (decrease) in
net interest income.... $ 14 $ 4,631 $ 4,645 $ 661 $ 5,127 $ 5,788 $(1,398) $4,705 $3,307
====== ======== ======= ====== ======= ======= ======= ====== ======
</TABLE>
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1996
VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1995
NET INTEREST INCOME
The Company's net interest income increased by approximately $7.9 million or
118.9% during the nine months ended September 30, 1996, as compared to the
same period in the prior year. This increase resulted from an approximately
$17.1 million or 100.2% increase to interest income due to an approximately
$239.1 million or 91.6% increase in average interest-earning assets from
period to period. The increase in interest income was offset in part by an
approximately $9.2 million or 88.2% increase in interest expense due to an
approximately $216.8 million or 97.6% increase in average interest-bearing
liabilities, primarily certificates of deposit, and, to a lesser extent, a 21
basis point increase in the weighted average rate paid on interest-bearing
liabilities.
The increase in interest income during the nine months ended September 30,
1996, as compared to the same period in the prior year, reflects substantial
increases in the average balances of the loan portfolio. The Company's
business strategy currently contemplates continued strong growth in its total
loan portfolio, with a particular emphasis on increasing its Discounted Loan
portfolio. For information on the growth in the Company's total loan
portfolio, including its Discounted Loan portfolio, see "--Changes in
Financial Condition" below.
The average balance of the Company's interest-bearing liabilities increased
$216.8 million or 97.6% during the nine months ended September 30, 1996, as
compared to the same period in the prior year, as a result of the Savings
Banks' financing of growth of interest-bearing assets. As of the closing of
the Common Stock Offering, the Company will have extensive funding sources
available for investment and lending activities. See "Business--Funding
Sources."
35
<PAGE>
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
Provisions for losses on loans are charged to operations to maintain an
allowance for losses on each of the loan portfolio and the Discounted Loan
portfolio at a level which management considers adequate based upon an
evaluation of known and inherent risks in such loan portfolio and the
Discounted Loan portfolio, historical loss experience, current economic
conditions and other relevant factors. See "Business--Asset Quality--
Allowances for Loan Losses" for a discussion of management's methods of
estimating loan loss provisions.
The Company recorded provisions for estimated losses on loans totalling
approximately $15.8 million for the nine months ended September 30, 1996, as
compared to approximately $3.2 million for the comparable period in the prior
year, an increase of 389.0%. The following table sets forth the Company's
provision for estimated losses on loans for the nine months ended September
30, 1996:
<TABLE>
<CAPTION>
% OF
PROVISIONS TOTAL
---------- ------
(IN THOUSANDS)
<S> <C> <C>
Inherited Loans.......................................... $ 4,774 30.3%
Sub-Prime Auto Loans..................................... 8,583 54.5%
Other Purchased Loans.................................... 2,394 15.2%
------- ------
Total provision for estimated losses on loans............ $15,751 100.0%
======= ======
</TABLE>
Approximately $6.1 million of the increase in the provisions from 1995 to
1996 was made after discussions between the OTS and the Savings Banks
concerning the appropriate provision for the Sub-Prime Auto Loans acquired by
the Savings Banks in the fourth quarter of 1995 and the first quarter of 1996.
The Company also made a provision of approximately $4.8 million in the nine
months ended September 30, 1996 related to Inherited Loans owned by First Bank
or Girard at the time the Savings Banks were acquired by the Company. Both
Savings Banks were acquired at substantial discounts to their respective book
values, reflecting the poor quality of their assets.
Although management attempts to utilize its best judgment in providing for
possible loan losses, changing economic and business conditions, fluctuations
in local markets for real estate, future changes in non-performing asset
trends, large movements in market interest rates or other factors could affect
the Company's future provisions for loan losses. In addition, the OTS, as an
integral part of its examination process, periodically reviews the adequacy of
the Bank's allowances for losses on loans and Discounted Loans and such agency
may require the Company to recognize changes to such allowances for losses
based on its judgment about information available to it at the time of
examination.
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOSSES ON LOANS
The Company's net interest income (loss) after provision for estimated
losses on loans decreased 135.3% to a loss of approximately $(1.2) million for
the nine months ended September 30, 1996 from income of approximately $3.4
million for the same period in 1995. This decrease was due to the substantial
increase in provisions for estimated losses on loans.
36
<PAGE>
OTHER INCOME
The Company's other income was approximately $6.4 million for the nine months
ended September 30, 1996 compared to approximately $2.7 million for the same
period in the prior year, an increase of 133.3%. This increase was primarily
attributable to revenue growth in the Company's bankcard operation and from
gains on the sale of loans. The components of the Company's non-interest income
are reflected in the following table:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other income:
Bankcard income................................ $ 5,078 $ 3,202
Bankcard processing expense.................... (3,865) (2,408)
Gain on sale of loans.......................... 1,983 981
Loan fees and charges.......................... 1,217 522
Amortization of deferred credits............... 346 346
Trading account-unrealized gain................ 1,601 --
Other, net..................................... 17 91
----------- -----------
Total other income........................... $ 6,377 $ 2,734
=========== ===========
</TABLE>
Bankcard Income and Processing Expense. The increase in other income for the
nine months ended September 30, 1996 was due in part to an increase of
approximately $1.9 million in bankcard income, from approximately $3.2 million
for the nine months ended September 30, 1995 to approximately $5.1 million for
the nine months ended September 30, 1996. The large increase in income from the
Company's bankcard operations was primarily due to the development of a number
of new accounts. Bankcard processing expense increased by approximately $1.5
million from approximately $2.4 million for the nine months ended September 30,
1995 to approximately $3.9 million for the nine months ended September 30,
1996. This increase resulted primarily from an increase in bankcard processing
due to growth in merchant transactions evidenced by the growth in bankcard
income.
Gains on Sale of Loans. The increase in other income in 1996 was also due in
part to an increase of approximately $1.0 million in gains on sales of loans,
from $1.0 million for the nine months ended September 30, 1995 to approximately
$2.0 million for the nine months ended September 30, 1996. This increase was
due to gains from the securitization of approximately $33.1 million of non-
performing and sub-performing mortgage loans and real estate owned.
Gains or losses on Loan Portfolios sold through securitization transactions
are based on the difference between the cash proceeds received on the
certificates sold to outside investors (the "Senior Securities") and the
Company's cost basis allocated to the Senior Securities. The Company's cost
basis in Loan Portfolios sold is allocated between the Senior Securities and
the Subordinate Securities retained by the Company based on the relative fair
values of the two types of securities. The cost basis of the loans securitized
is determined by their acquisition cost (for purchased loans) or net carrying
value (for originated loans). The Company carries Subordinate Securities at
fair value. As such, the carrying value of these securities is impacted by
changes in market interest rates and prepayment and loss experiences of these
and similar securities. The Company determines the fair value of the
Subordinate Securities utilizing prepayment and credit loss assumptions
appropriate for each particular securitization. The range of values
attributable to the factors used in determining fair value is broad.
Accordingly, the Company's estimate of fair value is subjective.
Other income also includes loan fees and charges (e.g. late fees, commitment
fees). Loan fees and charges increased approximately $0.7 million, from
approximately $0.5 million for the nine months ended September 30, 1995 to
approximately $1.2 million for the nine months ended September 30, 1996. The
increase was primarily due to an increase in loan volume.
37
<PAGE>
OTHER EXPENSE
The Company's other expenses totalled approximately $10.9 million for the
nine months ended September 30, 1996 compared to approximately $5.2 million for
the nine months ended September 30, 1995, an increase of 107.8%.
Loan Service Fees and Expenses. The largest component of other expenses in
1996 was loan service fees and expense which increased by approximately $2.5
million from approximately $1.0 million for the nine months ended September 30,
1995 to approximately $3.5 million for the nine months ended September 30,
1996. Loan servicing fees and charges are paid to WCC and include (a) "normal"
servicing fees, and (b) collection-related expenses incurred directly by WCC
and reimbursed by the Company. Servicing fees for Discounted Loans have been
based on a percentage of cash flows collected. Therefore, when Discounted Loans
are sold, servicing fees increase substantially. The Savings Banks' volume of
loans being serviced by WCC, and particularly the volume of Discounted Loans,
increased substantially during 1996 compared to 1995 resulting from substantial
growth in the Savings Banks' total loan portfolio. Also, due to a
securitization of non-performing loans (primarily Discounted Loans) in March
1996, higher fees associated with the accelerated cash flows to the Savings
Banks were paid to WCC in the first quarter. These factors accounted for the
increase in servicing fees and charges in the nine months ended September 30,
1996 compared to the same period in 1995.
Compensation and Employee Benefits. Other expense relating to compensation
and employee benefits also increased from approximately $1.7 million for the
nine months ended September 30, 1995 to approximately $3.0 million for the nine
months ended September 30, 1996, an increase of approximately $1.3 million (or
72.2%). The increase in compensation and employee benefits during this period
reflected normal salary adjustments and an increase in the average number of
full-time equivalent employees from 37 for the nine months ended September 30,
1995 to 48 for the nine months ended September 30, 1996, reflecting the
expansion of business activities, particularly loan acquisition activities and
the growth of non-traditional bankcard activities. In addition, the Bank's
administrative offices were relocated to Portland, Oregon in August 1996 which
resulted in approximately $0.7 million of additional employee compensation.
FDIC Insurance Premiums. FDIC insurance premiums increased from approximately
$0.4 million for the nine months ended September 30, 1995 to approximately $2.1
million for the nine months ended September 30, 1996, an increase of
approximately $1.7 million (or 365.3%), as a result of growth in deposits
outstanding and the SAIF special assessment.
INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit) amounted to a benefit of approximately $4.7
million during the nine months ended September 30, 1996 compared to a provision
of less than $0.1 million during the nine months ended September 30, 1995. This
increase was due primarily to assessment of the valuation allowances against
deferred tax assets. The Company's effective tax rate amounted to (81.1%) and
7.5% during the nine months ended September 30, 1996 and 1995, respectively.
Differences in the Company's effective tax rates in recent periods compared to
combined Federal and State statutory rates were primarily attributable to
changes in assessments of the realization of deferred tax assets. Exclusive of
such amounts, the Company's effective tax rate amounted to (41%) and 41% during
the nine months ended September 30, 1996 and 1995, respectively.
38
<PAGE>
RESULTS OF OPERATIONS--1995 COMPARED TO 1994
NET INTEREST INCOME
The Company's net interest income was $9.9 million for fiscal year 1995
compared to $4.1 million for the fiscal year 1994, an increase of 140.8%. The
components of the Company's net interest income for these fiscal years are
discussed below.
Interest Income. The Company's interest income was approximately $24.4
million for fiscal year 1995 compared to $9.6 million for fiscal year 1994, an
increase of 154.8%. The increase in the Company's interest income from 1994 to
1995 was due primarily to an increase in interest received on loans from $7.9
million in 1994 to $21.8 million in 1995. The increase in interest received on
loans was a result of an increase in the gross principal amount of the
Company's total loan portfolio from $198.6 million in 1994 to $337.5 million in
1995, an increase of 69.9%. The Savings Banks made substantial acquisitions of
Discounted Loans in June 1995 and performing single-family loans in the fourth
quarter of 1995. In addition, the Company acquired Girard in November 1994 and,
as a result, the Company's 1994 results of operations only reflect two months
of Girard's operations while 1995 results reflect a full year of operations by
Girard. In addition, the average rate earned by the Company on its interest-
bearing assets increased from 7.08% in 1994 to 9.16% in 1995.
Interest Expense. The Company's interest expense was approximately $14.5
million for fiscal year 1995 compared to approximately $5.5 million in fiscal
year 1994, an increase of 165.4%. The increase in interest expense from 1994 to
1995 was due primarily to an increase in average certificates of deposit
outstanding from approximately $118.3 million in 1994 to approximately $231.6
million in 1995 (an increase of 104.4%), which occurred in order to fund the
growth of the loan portfolio noted above. In addition, interest expense
increased due to the inclusion of Girard's results of operations for the full
year ending December 31, 1995, compared to fiscal year 1994 which only
reflected two months of Girard's operations. In addition, the average interest
rate on the Company's borrowings increased from 4.23% to 6.08% from 1994 to
1995.
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
In connection with its provision for estimated losses on loans the Company
recorded an expense totalling approximately $4.3 million for fiscal year 1995
compared to approximately $2.2 million for fiscal year 1994, an increase of
96.3%.
The increase in the provisions from 1994 to 1995 was primarily attributable
to higher provisions related to the Inherited Loans and having a full year of
Girard's operations presented in 1995. The increase in the provisions from 1994
to 1995 was also to a lesser degree attributable to the earthquake in Southern
California in January 1994, which affected delinquency and collateral values in
1995. For a discussion of the Company's methods for establishing provisions for
loan losses, see "Business--Asset Quality--Allowances for Loan Losses."
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOSSES ON LOANS
The Company's net interest income after provision for estimated losses on
loans increased 190.6% to approximately $5.6 million for fiscal year 1995 from
approximately $1.9 million for fiscal year 1994.
39
<PAGE>
OTHER INCOME
The Company's other income was approximately $3.1 million for fiscal year
1995 compared to approximately $1.2 million for fiscal year 1994, an increase
of 153.2%. This increase was primarily attributable to growth in the Company's
bankcard operation and gains from the sale of loans. The components of the
Company's non-interest income are reflected in the following table:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other Income:
Bankcard income.................................... $ 4,694 $ 635
Bankcard processing expense........................ (3,462) (274)
Gain on sale of loans.............................. 642 --
Loan fees and charges.............................. 610 43
Gain on sale of mortgage-backed securities avail-
able for sale..................................... 14 54
Amortization of deferred credits................... 460 388
Other, net......................................... 149 381
----------- -----------
Total other income............................... $ 3,107 $ 1,227
=========== ===========
</TABLE>
The increase in other income in 1995 was due primarily to an increase of
approximately $4.1 million in bankcard income, from approximately $0.6 million
for fiscal year 1994 to approximately $4.7 million for fiscal year 1995. The
large increase in income from the Company's bankcard operations reflects a full
year of bankcard operations in 1995 compared to a partial year for 1994, since
bankcard operations commenced in mid-1994. Bankcard processing expense
increased by approximately $3.2 million from approximately $0.3 million for
fiscal year 1994 to approximately $3.5 million for fiscal year 1995. The
increase in bankcard processing expense was primarily the result of the same
factors. The increase in other income in 1995 was also due in part to
approximately $0.6 million in gains on sales of loans in fiscal year 1995 from
no gains on sales of loans for fiscal 1994. This increase was due to gains from
the 1995 sale of approximately $7.9 million of mortgage loans into a
securitization. The increase in other income in 1995 was also due in part to an
increase of approximately $0.6 million in loan fees and charges, from less than
$0.1 million in 1994 to approximately $0.6 million in 1995. The increases in
loan fees and charges are primarily attributable to an increase in the average
Loan Portfolio from $103.6 million in 1994 to $228.0 million in 1995, an
increase of 120.1%.
OTHER EXPENSE
The Company's other expense totalled approximately $8.1 million for fiscal
year 1995 compared to approximately $4.9 million for fiscal year 1994, an
increase of 63.9%. The largest component of other expense was loan service fees
and expenses which increased by approximately $1.8 million from approximately
$0.2 million in fiscal year 1994 to $2.0 million in fiscal year 1995. This
increase resulted from the substantially higher volume of loans being serviced
in 1995, including a full year of operations of Girard, and the purchase of a
portfolio of Discounted Loans in June 1995 which was serviced at higher fees.
All of the key items of other expense (including loan service fees and
expenses, compensation and employee benefits, FDIC insurance premiums and
professional services) showed an increase from 1994 to 1995 except for real
estate owned (net) and other general and administrative expenses. This increase
was primarily attributable to growth in the Savings Banks.
Other expense relating to compensation and employee benefits increased from
approximately $1.9 million in 1994 to approximately $2.5 million in 1995, an
increase of $0.6 million (or 30.9%), primarily as a result of an increase in
the average number of full-time equivalent employees from 31 in 1994 to 44 in
1995 (including an entire year's compensation expenses for Girard in 1995).
FDIC insurance premiums increased from $0.3 million in 1994 to $0.7 million
in 1995, an increase of approximately $0.4 million (or 176.2%), as a result of
growth in certificates of deposit outstanding. Other
40
<PAGE>
expense relating to professional services also increased from approximately
$0.5 million in 1994 to approximately $1.0 million in 1995 primarily as a
result of legal and accounting expenses incurred in connection with a proposed
acquisition of another savings bank in 1995, which was not completed due to a
failure of the principals ultimately to agree on terms.
These increases in other expense were partially offset by a small decrease
in expenses related to real estate owned (net). Other expenses related to real
estate owned (net) were approximately $0.2 million in fiscal year 1994 and
$0.2 million in fiscal year 1995. Other general and administrative expenses
decreased from approximately $1.3 million in 1994 to approximately $1.1
million in 1995, a decrease of 15.3%.
INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit) amounted to an expense of less than $0.1
million in 1995 compared to a benefit of approximately $0.5 million for 1994.
The Company's effective tax rate amounted to 7.4% and (29.6)% during 1995 and
1994, respectively. Differences in the Company's effective tax rates in recent
periods compared to combined Federal and State statutory rates were primarily
attributable to changes in assessments of the realization of deferred tax
assets. Exclusive of such amounts, the Company's effective tax rate amounted
to 41% and (41)% during 1995 and 1994, respectively. For additional
information regarding the Company's income tax provisions and tax rates and
information regarding net operating loss carryforwards of the Company, see
Note 8 to the Consolidated Financial Statements.
41
<PAGE>
CHANGES IN FINANCIAL CONDITION
The following table sets forth certain information relating to the Company's
assets and liabilities at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------
1996 1995 1994
------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents..................... $ 20,531 $ 4,482 $ 8,830
Trading account securities.................... 7,092 -- --
Securities held to maturity, at amortized
cost......................................... 7,425 6,470 4,505
Mortgage-backed securities available for sale,
at fair value................................ 6,483 9,083 10,943
Mortgage-backed securities held to maturity,
at amortized cost............................ 22,380 13,119 14,439
Loans receivable, net......................... 177,280 258,827 181,471
Discounted loans net.......................... 3,419 13,347 --
Loans held for sale, at lower of cost or mar-
ket.......................................... 260,804 18,597 --
Stock in Federal Home Loan Bank of San Fran-
cisco, at cost............................... 2,911 1,421 1,612
Real estate owned, net........................ 2,514 4,964 1,208
Leasehold improvements and equipment, net..... 336 275 167
Due from affiliate............................ 8,357 4,514 4,062
Accrued interest receivable................... 4,268 3,042 1,599
Prepaid expenses and other assets............. 3,887 1,724 1,026
Income taxes receivable, net.................. 5,422 1,589 774
-------- -------- --------
Total Assets................................ $533,109 $341,454 $230,636
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits...................................... $487,535 $303,524 $196,289
Borrowings.................................... -- 13,000 21,500
Accounts payable and other liabilities........ 7,625 4,398 2,056
Subordinated debt............................. -- 11,000 --
Preferred stock in subsidiary held by others.. -- -- 1,000
Deferred credits.............................. 832 1,134 1,772
Minority interest in subsidiaries............. 277 600 574
Due from affiliates........................... 2,286 759 652
-------- -------- --------
Total liabilities........................... 498,555 334,415 223,843
Stockholders' Equity.......................... 34,554 7,039 6,793
-------- -------- --------
Total Liabilities and Stockholders' Equity.. $533,109 $341,454 $230,636
======== ======== ========
</TABLE>
Mortgage-Backed and Other Securities. The Company's mortgage-backed
securities available for sale and trading account securities increased $4.4
million during the nine months ended September 30, 1996 primarily as a result
of purchasing certain subordinated bonds associated with the sale of
Discounted Loans. Investment securities and mortgage-backed securities held to
maturity increased by approximately $1.0 million and $9.3 million,
respectively, during the nine months ended September 30, 1996. United States
Treasury securities are generally held for the purpose of meeting regulatory
liquidity requirements. As the amount of deposits and borrowings increases,
the regulatory liquidity requirement increases proportionately. The increase
in mortgage-backed securities held to maturity resulted primarily from
purchases of GNMA adjustable-rate mortgage securities to secure certain
representations and warranties under a mortgage loan securitization and for
collateral securing an interest-rate swap contract.
42
<PAGE>
Loans Receivable, Net. Since 1994, the Company has emphasized the
acquisition of traditional performing mortgage loans as well as under-
performing and non-performing loans which generally are purchased at a
discount to both unpaid principal amount of the loan and the estimated value
of the property securing the loan. As a result, the average balance of the
Company's Total Loan Portfolio has increased significantly since 1993 as
illustrated by the following table:
AVERAGE BALANCE OF THE COMPANY'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, ---------------------------
1996 1995 1994 1993
----------------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan Portfolio:
Single-family residen-
tial..................... $288,243 $ 93,350 $ 31,414 $20,254
Multi-family residential.. 74,131 70,631 36,089 25,567
Commercial and other mort-
gage loans............... 57,899 53,852 33,163 26,396
Consumer and other........ 29,675 10,137 2,917 383
-------- -------- -------- -------
Total loans............. 449,947 227,970 103,583 72,600
Unaccreted discount....... (17,281) (10,254) (4,086) (988)
Allowance for loan loss-
es....................... (33,451) (21,591) (4,509) (4,314)
-------- -------- -------- -------
$399,215 $196,125 $ 94,988 $67,298
======== ======== ======== =======
</TABLE>
The Company's total loan portfolio, net of discounts and allowances,
increased by approximately $150.7 million during the nine months ended
September 30, 1996 primarily as a result of the Company's business strategy of
aggressively acquiring loan portfolios of Discounted Loans and other mortgage
loans. The Company's total loan portfolio, net of discounts and allowances,
increased by approximately $109.3 million during 1995 primarily as a result of
the Company's loan purchase strategy. Included in the amount of increases in
the Company's total loan portfolio in the nine months ended September 30, 1996
and the year ended December 31, 1995 are a decrease of $26.2 million and an
increase of $29.3 million, respectively, in the net carrying amount of
Discounted Loans. The increase in 1995 reflected the initial implementation of
the Discounted Loan acquisition strategy. The decrease in the first six months
of 1996 reflected paydowns and other resolutions of some of the loans, and the
sale of most of the Discounted Loans in a securitization transaction completed
in March 1996.
Loans Held For Sale. The Company's loans held for sale increased by $243.3
million during the nine months ended September 30,1996 due to the Company's
intent to sell approximately $277.5 million of single-family residential loans
in the fourth quarter of 1996.
Real Estate Owned, Net. Real estate owned, net consists almost entirely of
properties acquired by foreclosure or deed-in-lieu thereof on loans in the
Company's total loan portfolio. Real estate owned decreased by approximately
$2.5 million or 49.4% during the nine months ended September 30, 1996 as a
result of the securitization of certain real estate owned and other resolution
activities. The approximately $3.8 million increase in the Company's net real
estate owned during 1995 primarily reflects increases in real estate owned
related to the Company's Discounted Loan portfolio, which reflects the growth
in the Company's Discounted Loan acquisition and resolution activities in
recent periods.
The Company actively manages its real estate owned. During the nine months
ended September 30, 1996, the Company sold 57 properties of real estate owned
related to its total loan portfolio with a carrying value of approximately
$6.6 million. During 1995, the Company sold 17 properties of real estate owned
related to its total loan portfolio with a carrying value of approximately
$5.5 million, as compared to the sale of properties of real estate owned
related to its total loan portfolio with carrying values of approximately $3.3
million during 1994.
43
<PAGE>
Due from Affiliate. Due from affiliate increased by approximately $3.8
million or 85.1% during the nine months ended September 30, 1996 primarily as
a result of growth in loan portfolios. The balance in the account as of any
month-end reflects the lag between receipts of loan payments by WCC, as
servicer, and payment to the Company. Due from affiliate increased by
approximately $0.5 million during 1995 for the same reason.
Deposits. Deposits increased by approximately $184.0 million or 60.6% during
the nine months ended September 30, 1996 primarily as a result of the
Company's strategy to increase deposits to permit the Savings Banks to acquire
loan portfolios. Deposits increased by approximately $107.2 million during
1995 primarily for the same reason.
Borrowings. Borrowings decreased by approximately $13.0 million during 1996
as a result of replacing short-term borrowings with longer term deposits.
Subordinated Debt. Subordinated debt decreased by approximately $11.0
million during the nine months ended September 30, 1996 because on January 1,
1996, the subordinated debt was exchanged for common stock.
Stockholders' Equity. Stockholders' equity increased by $27.5 million during
the nine months ended September 30, 1996 primarily as a result of the exchange
of $11.0 million of outstanding subordinated debt for common stock and the
infusion of approximately $17.8 million to support growth and maintain
required regulatory capital ratios at the Savings Banks. Stockholders' equity
increased during 1995 primarily as a result of the Company's net income during
the period.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude of
the repricing of assets and liabilities. It is the objective of the Company to
attempt to control risks associated with interest rate movements. In general,
management's strategy is to limit the Company's exposure to earnings
variations and variations in the value of assets and liabilities as interest
rates change over time. The Company's asset and liability management strategy
is formulated and monitored by the asset and liability committees for the
Company and the Savings Banks (the "Asset and Liability Committees") which
meet regularly to review, among other things, the sensitivity of the Company's
assets and liabilities to interest rate changes the book and market values of
assets and liabilities, unrealized gains and losses, including those
attributable to hedging transactions, purchase and securitization activity,
and maturities of investments and borrowings. The Asset and Liability
Committees coordinate with the Savings Banks' boards of directors and the
Company's investment committees with respect to overall asset and liability
composition.
Since most of the Company's assets and liabilities reprice relatively
frequently, the Company's gap tends to be relatively easy to manage and the
Company's interest rate risk analysis focuses less on managing the overall gap
and more on ensuring that individual Loan Portfolios are properly hedged. In
hedging the interest rate exposure of a fixed-rate or lagging-index asset that
is held for sale, the Company creates a hedge which matches the principal
amortization of such asset against the maturity of the Company's liabilities
generally by entering into short sales or forward sales of U.S. Treasury
securities, U.S. agency mortgage-backed securities or interest rate futures
contracts. This results in market gains or losses on hedging instruments, in
response to interest rate increases or decreases, respectively, which
approximate the amount of the corresponding market losses or gains,
respectively, on loans being hedged. The Company evaluates the interest rate
sensitivity of each Loan Portfolio and decides whether to hedge the interest
rate exposure of a particular portfolio. In general, the Company tends to
hedge its fixed-rate Loan Portfolios. The Company generally does not hedge the
interest rate risk associated with holding non-lagging index adjustable-rate
mortgages pending their sale or securitization due to the decreased
significance of such risk.
The Asset and Liability Committees are authorized to utilize a wide variety
of off-balance sheet financial techniques to assist them in the management of
interest rate risk. These techniques include interest rate swap agreements,
pursuant to which the parties exchange the difference between fixed-rate and
floating-rate interest
44
<PAGE>
payments on a specified principal amount (referred to as the "notional
amount") for a specified period without the exchange of the underlying
principal amount. Interest rate swap agreements are utilized by the Company to
protect against the narrowing of the interest spread between fixed rate loans
and associated liabilities funding those loans. The Company had approximately
$65.6 million notional principal amount of interest rate swap agreements
outstanding at September 30, 1996, which had the effect of decreasing the
Company's net interest income by approximately $0.1 million during the nine
months ended September 30, 1996. For additional information see Note 7 to the
Consolidated Financial Statements. There was no significant hedging activity
in 1995.
In addition, as required by OTS regulations, the Asset and Liability
Committees also regularly review interest rate risk by forecasting the impact
of alternative interest rate environments on net interest income and market
value of portfolio equity ("MVPE"), which is defined as the net present value
of an institution's existing assets, liabilities and off-balance sheet
instruments, and evaluating such impacts against the maximum potential changes
in net interest income and MVPE that is authorized by the Boards of Directors
of the Savings Banks. In addition, at June 30, 1996, management estimates
based upon the MVPE analysis prepared by the OTS that the estimated percentage
change in the Company's MVPE over the ensuing four-quarter period as a result
of a 200 basis point increase or decrease in interest rates would be an
approximate 15% decrease or 6% increase, respectively. The following table
highlights the interest rate sensitivity of MVPE of a change in rates from 0
to 400 basis points ("bp").
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
AT JUNE 30, 1996
<TABLE>
<CAPTION>
Net Portfolio Value
Change in --------------------------
Rates Amount $ Change % Change
<S> <C> <C> <C>
+400bp $42,628 $(22,944) -35%
+300bp 49,563 (16,009) -24%
+200bp 55,986 (9,586) -15%
+100bp 61,464 (4,108) -6%
0bp 65,572 --
-100bp 68,312 2,740 4%
-200bp 69,521 3,949 6%
-300bp 69,923 4,351 7%
-400bp 70,738 5,166 8%
</TABLE>
Management of the Company believes that the assumptions (including pre-
payment assumptions) used by it to evaluate the vulnerability of the Company's
operations to changes in interest rates approximate actual experience and
considers them reasonable; however, the interest rate sensitivity of the
Company's assets and liabilities and the estimated effects of changes in
interest rates on the Company's net interest income and MVPE could vary
substantially if different assumptions were used or actual experience differs
from the historical experience on which they are based.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the measurement of the Company's ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, purchase loans, purchase Discounted Loans, fund lending
activities and for general business purposes. The Company's sources of cash
flow include certificates of deposit, securitizations, net interest income and
borrowings under its warehouse and repurchase financing facilities and from
institutional investors and other lenders. In addition, the Savings Banks
obtain funding through FHLB advances.
The Company's liquidity is actively managed on a daily basis, monitored
regularly by the Asset and Liability Committees and reviewed periodically by
the Board of Directors. This process is intended to ensure the maintenance of
sufficient funds to meet the needs of the Company, including adequate cash
flows for off-balance sheet instruments.
45
<PAGE>
Sources of liquidity include wholesale and brokered certificates of deposit.
As of September 30, 1996, the Company had approximately $480.3 million of
certificates of deposit. As of September 30, 1996, scheduled maturities of
certificates of deposit during the 15 months ending December 31, 1997 and
thereafter amounted to approximately $381.4 million and approximately $98.9
million, respectively. Brokered and other wholesale deposits generally are
more responsive to changes in interest rates than core deposits and, thus, are
more likely to be withdrawn by the investor upon maturity as changes in
interest rates and other factors are perceived by investors to make other
investments more attractive. However, management of the Company believes that
it can adjust the rates paid on certificates of deposit to retain deposits in
changing interest rate environments and that brokered and other wholesale
deposits can be both a relatively cost-effective and stable source of funds.
As of September 30, 1996, the Company's sources of borrowing included Master
Repurchase Agreements between each of the Savings Banks and Bear Stearns
Mortgage Capital Corporation as to which the parties have orally agreed that
approximately $210 million in aggregate would be available for the purchase of
loans. On closing of the Common Stock Offering and Notes Offering, the amounts
available to the Private Companies under a $100 million warehouse lending
agreement (the "Warehouse Financing Facility") with Prudential Securities
Realty Funding Corp. and certain repurchase arrangements will be made
available to the Company or one of its subsidiaries, including $150 million
under a repurchase agreement with First Boston Mortgage Capital Corporation.
Such Repurchase Agreement will be increased to $250 million upon transfer to
WFC. See "Business--Funding Sources."
Sources of borrowings also include FHLB advances, which are required to be
secured by single-family and/or multi-family residential loans or other
acceptable collateral, and reverse repurchase agreements. As of September 30,
1996, the Company had no FHLB advances outstanding, and was eligible to borrow
up to an aggregate of $11.6 million from the FHLB of San Francisco and had
$2.0 million of single-family residential loans, approximately $16.6 million
of multi-family residential loans and $2.6 million of commercial loans which
were pledged as security for such advances. At the same date, the Company had
a contractual relationship with the FHLB of San Francisco pursuant to which it
could obtain funds from reverse repurchase agreements and had $7.6 million of
unencumbered investment securities and mortgage-backed and related securities
which could be used to secure such borrowings.
The Company's uses of cash include the funding of loan purchases and
origination, payment of interest expenses, repayment of loans, funding of
initial over-collateralization requirements for securitizations, operating and
administrative expenses, income taxes and capital expenditures. Capital
expenditures were immaterial for the nine months ended September 30, 1996 and
the years ended December 31, 1995, and 1994. In addition to commitments to
extend credit, the Company is party to various off-balance sheet financial
instruments in the normal course of business to manage its interest rate risk.
See "--Asset and Liability Management" above and Note 7 to the Consolidated
Financial Statements.
The Company conducts business with a variety of financial institutions and
other companies in the normal course of business, including counterparties to
its off-balance sheet financial instruments. The Company is subject to
potential financial loss if the counterparty is unable to complete an agreed
upon transaction. The Company seeks to limit counterparty risk through
financial analysis and other monitoring procedures.
Adequate credit facilities and other sources of funding, including the
ability of the Company to securitize loans, are essential to the continuation
of the Company's ability to purchase and originate loans, and acquire
Subordinate Securities. During the first nine months of 1996, and fiscal years
1995 and 1994, the Company used cash in the approximate amounts of $227.6
million, $186.9 million, and $41.6 million, respectively, for new loan
purchases. During the first nine months of 1996 and fiscal year 1995, the
Company received cash from the securitization of loans of approximately, $26.3
million and $16.7 million, respectively.
After utilizing available working capital, deposits and any securitization
proceeds, the Company borrows money to fund its loan purchases and
originations. During the first nine months of 1996, and fiscal years 1995 and
1994, the Company used borrowings under various repurchase arrangements and
FHLB advances in the
46
<PAGE>
approximate amounts of $308.1 million, $77.4 million and $41.7 million,
respectively, for new loan purchases and origination. The Company's business
plan generally calls for using a high degree of leverage in acquiring Loan
Portfolios. With respect to Loan Portfolios of Discounted Loans and performing
loans, the Company generally seeks to fund 90% and 95%, respectively, of the
market value of such Loan Portfolios with borrowed money. See "Risk Factors--
Extensive Use of Financial Leverage." The Company draws on a number of sources
to obtain such funds including certificates of deposit and repurchase
arrangements with Wall Street investment banks. As of the closing of the
Common Stock Offering and the Notes Offering, certain existing lines of credit
will be transferred to the Company. See "Business--Funding Sources."
The Company believes that cash flow from operations, the net proceeds of the
Common Stock Offering and the Notes Offering, the proceeds of certificates of
deposit, the availability under the warehouse financing facility and other
borrowings, and the net proceeds from securitizations will be sufficient to
fund operating needs, commitments and capital expenditures.
The Savings Banks are required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of U.S.
Government, federal agency and other investments having maturities of five
years or less. Current OTS regulations require that a savings association
maintain liquid assets of not less than 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity
requirements. First Bank's liquidity, as measured for regulatory purposes,
amounted to 9.0% as of September 30, 1996 and averaged 11.4%, 9.1%, and 8.0%
during the nine months ended September 30, 1996 and the years ended December
31, 1995 and 1994, respectively. Girard's liquidity, as measured for
regulatory purposes, amounted to 6.4% as of September 30, 1996 and averaged
6.4%, 11.2%, and 8.5% during the nine months ended September 30, 1996, the
year ended December 31, 1995, and the quarter ended December 31, 1994,
respectively.
REGULATORY CAPITAL REQUIREMENTS
Federally-insured savings associations such as the Banks are required to
maintain minimum levels of regulatory capital. These standards generally must
be as stringent as the comparable capital requirements imposed on national
banks. The OTS also is authorized to impose capital requirements in excess of
these standards on individual associations on a case-by-case basis. Under the
Orders, the Savings Banks are required to be "well-capitalized" as of December
31, 1996. See "Regulation--Imposition of Cease and Desist Orders."
47
<PAGE>
The following table sets forth the regulatory capital ratios of the Savings
Banks at September 30, 1996.
REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
TO BE
CATEGORIZED
AS "WELL
CAPITALIZED"
OTS MINIMUM UNDER OTS
ACTUAL REQUIREMENTS EXCESS REGULATIONS EXCESS
------------- ------------ ------------- ------------ ------------
AMOUNT RATIO RATIO AMOUNT RATIO RATIO AMOUNT RATIO
------- ----- ------------ ------- ----- ------------ ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible Capital:
First Bank............. $ 8,434 6.0% 1.5% $ 6,314 4.5% N.A. N.A. N.A.
Girard................. 26,739 6.8% 1.5% 20,884 5.3% N.A. N.A. N.A.
Tier 1 Capital to Aver-
age Assets:
First Bank............. 8,434 5.9% 4.0% 2,728 1.9% 5.0% $1,302 0.9%
Girard................. 26,739 7.0% 4.0% 11,419 3.0% 5.0% 7,589 2.0%
Tier 1 Capital to Risk-
Weighted Assets:
First Bank............. 8,434 8.7% N.A. N.A. N.A. 6.0% 2,614 2.7%
Girard................. 26,739 9.7% N.A. N.A. N.A. 6.0% 10,231 3.7%
Total Risk-Based Capital
to Risk-Weighted As-
sets:
First Bank............. 9,711 10.0% 8.0% 1,951 2.0% 10% 10 0.0%
Girard................. 30,297 11.0% 8.0% 8,287 3.0% 10% 2,784 1.0%
</TABLE>
In August 1993, the OTS promulgated regulations which incorporate an
interest rate risk component into the OTS' risk-based capital requirements,
and in August 1995 the OTS postponed the effectiveness of this regulation
after having previously deferred the effective date several times. Because
only institutions whose measured interest rate risk exceeds certain parameters
will be subject to the interest rate risk capital requirement, management of
the Company does not believe that this regulation will increase the Savings
Banks' risk-based regulatory capital requirement if it becomes effective in
its current form. For additional information relating to regulatory capital
requirements, see "Regulation--The Savings Banks--Regulatory Capital
Requirements" and Note 10 to the Consolidated Financial Statements.
48
<PAGE>
BUSINESS
This Prospectus contains certain information with respect to loans serviced,
acquired or originated by WCC to assist investors in evaluating the Company's
ability to engage in these activities on an ongoing basis. These loans are not
owned by the Company and investors in the Common Stock or the Notes will have
no right or claim to such assets. In addition, there can be no assurance that
the Company will be able to acquire, originate and service mortgage loans to
the same extent as WCC.
GENERAL
WFSG is a newly formed financial services holding company for certain
companies and businesses previously held as part of, and operated by, the
Private Companies. The Company will engage in a wide variety of financial
activities, including the acquisition, origination, ownership and
securitization of Loan Portfolios, banking and non-traditional merchant credit
card processing.
BUSINESS ACTIVITIES
Business Strategy. The Company's strategy is to aggressively pursue Loan
Portfolio acquisitions where it believes it can receive acceptable rates of
return on invested capital and effectively utilize leverage. Key elements of
this strategy include:
. significant growth in Loan Portfolio investments;
. utilize varied funding sources;
. expansion into European markets;
. utilize servicing expertise;
. growth of non-traditional bankcard processing operations; and
. develop wholesale origination network.
LOAN ACQUISITIONS
General. During the last four years, the Private Companies have developed
expertise in the business of acquiring Loan Portfolios, including residential
mortgage loans, manufactured housing loans, second lien loans, commercial real
estate loans, multi-family residential loans, commercial and business loans,
boat loans, other consumer loans and Subordinate Securities. The aggregate
principal amount of the loans acquired by the Private Companies during the
nine months ended September 30, 1996 and the years ended December 31, 1995,
1994 and 1993 was $501.4 million, $337.4 million, $388.5 million and $333.8
million, respectively, including $242.6 million, $191.0 million, $143.3
million, and $2.2 million, respectively, by the Savings Banks.
In the early 1990's, WCC acquired loans primarily from the FDIC and the RTC,
primarily in auctions of pools of loans acquired from financial institutions
which failed during the late 1980s and early 1990s. Although governmental
agencies, such as the FDIC and HUD, continue to be potential sources of loans,
the amount of loans sold by such agencies has substantially declined. In
recent years, the Private Companies purchased loans from various private
sector sellers, such as banks, savings institutions, mortgage companies and
insurance companies. Whether because a financial institution desires to reduce
overhead costs, is not staffed to handle large volumes of Loan Portfolios or
simply does not want to distract management and personnel with the intensive
and time-consuming job of servicing Loan Portfolios, many financial
institutions now recognize that outside contractors often are better staffed
to manage and service Loan Portfolios. These financial institutions include
multi-national, money center, super-regional and regional banking institutions
as well as mortgage companies and insurance companies. Moreover, many
financial institutions have embraced the concept of packaging and selling Loan
Portfolios to investors as a means of disposing of non-performing and under-
performing loans and improving a financial institution's balance sheet.
Consolidations within the banking industry have reinforced this
49
<PAGE>
trend. Additionally, management believes that there is a market for management
and resolution services for delinquent, sub-performing and non-performing
loans.
The Company intends to build on the expertise of the Private Companies and
aggressively pursue Loan Portfolio acquisitions in the United States and
Europe, a substantial portion of which are expected to be Discounted Loans. In
addition, the Company expects to increase its purchases of commercial real
estate loans above existing levels. The Company believes it can significantly
increase its acquisition activities without a commensurate increase in
operating costs.
The Company will seek to identify niche areas primarily within the real
estate loan market where it believes its funding flexibility, experienced
personnel and its proprietary software and U.S. mortgage loan database give it
a competitive advantage in pricing and purchasing Loan Portfolios. Areas in
which the Company views itself as having a competitive advantage include (i)
under-performing, non-performing and charged-off loans which generally are
purchased at substantial discount to both the unpaid principal amount of the
loan and the estimated value of the properties securing the loans; (ii) single
family and multi-family loan portfolios which do not comply with Federal
National Mortgage Association (the "FNMA") or Federal Home Loan Mortgage
Corporation (the "FHLMC") guidelines or may not meet preset securitization
guidelines for certain mortgage loan conduit programs; (iii) manufactured
housing loans; (iv) home equity or second lien loans; and (v) to a lesser
degree, consumer and other loans.
Loan Acquisition Procedures. Loans generally are acquired in pools ("Loan
Portfolios") from a wide variety of sources, including private sellers such as
banks, thrifts, finance companies, leasing companies, mortgage companies and
governmental agencies. The Company expects to obtain information on available
Loan Portfolios from several sources, such as referrals from Loan Portfolio
sellers with whom the Private Companies have transacted business in the past
and from co-investors who seek the Company's participation in Loan Portfolio
purchases. Management of the Company has developed relationships with banks,
finance companies, mortgage companies and institutional investment banks which
management believes will be a continuing source of information on available
Loan Portfolios.
Loan Portfolios generally are acquired through competitive bids in which
there is often substantial competition or negotiated transactions. The
competition for larger Loan Portfolios is generally more intense. In addition
to bidding on and often acquiring large Loan Portfolios, the Company and the
Private Companies have often acquired small Loan Portfolios where competition
is less. The average size of the Loan Portfolios acquired by the Company was
$9.3 million for the first nine months of 1996 and $3.8 million for the year
ended December 31, 1995. The Company believes that its funding flexibility,
experienced personnel, proprietary software and mortgage loan database provide
the Company with a competitive advantage in pricing and ultimately purchasing
Loan Portfolios.
Prior to making an offer to purchase a Loan Portfolio, the Company's
employees who specialize in the analysis of loans will conduct an extensive
investigation and evaluation of the individual loans in the Loan Portfolio.
This examination typically consists of analyzing the information made
available by the Loan Portfolio seller (generally, the respective credit and
collateral files for the loans), reviewing other relevant material that may be
available (including tax records), and analyzing the underlying collateral
(including consulting the Company's United States mortgage loan database which
contains among other things, listings of property values and loan loss
experience in local markets for similar assets, obtaining value opinions from
third parties and, in some cases, conducting site inspections). The Company
also will review information on the local economy and real estate markets
(including the amount of time required to foreclose on real property) in the
area in which the loan collateral is located.
The Company's senior acquisition personnel who conduct the due diligence on
the Loan Portfolio will determine the amount to be offered by the Company to
acquire the Loan Portfolio by using a proprietary modeling system which
focuses on, among other things, the anticipated recovery amount, timing, type
and quality of the servicing transfer and cost of the resolution of the loans.
With respect to Discounted Loans and
50
<PAGE>
with certain other loans as well, the amount that will be offered by the
Company will generally be at a discount from both the stated value of the loan
and the value of the underlying collateral which the Company estimates is
sufficient to generate an acceptable return on its investment. The Company's
Investment Committee which consists of senior management and the senior
acquisition personnel that conducted the due diligence on the Loan Portfolio
will review the due diligence file and make a final determination as to the
amount of the offer. Loan acquisition decisions at the Savings Banks are made
by their respective boards of directors.
The Private Companies originally funded their acquisitions of loans by
selling participations in the Loan Portfolios to institutional investors while
retaining the servicing rights and a participation in the overall return on
such portfolios. In 1994 and 1995, the Private Companies began acquiring loans
for their own portfolio. Such acquisitions were funded either by warehouse or
repurchase financing facilities, certificates of deposit, other borrowings, or
internal cash flow. The Private Companies' securitizations of loans in the
secondary market provided an additional source of funds for such acquisitions.
LOAN PORTFOLIO
General. The Company's total loan portfolio currently includes residential
mortgage loans, multi-family residential loans, commercial real estate loans,
manufactured housing loans, commercial and business loans, auto loans, boat
loans and other consumer loans. As of September 30, 1996, the Company's total
loan portfolio, net of unaccreted discount and allowance for loan losses
amounted to $441.5 million. The Company expects to utilize its available
funding sources to continue to aggressively expand its loan portfolio through
the acquisition of Loan Portfolios from government agencies and private sector
entities and through its mortgage conduit program. As part of the
Reorganization, WCC will continue to originate mortgage loans for the Company,
during the period of time that the Company is obtaining the necessary licenses
to conduct the mortgage conduit program. See "--Loan Origination."
The Company expects to securitize its Loan Portfolios when advantageous. The
Company may also from time to time engage in whole loan sales or determine to
hold loans until maturity. Loans not presented as held for sale in the Audited
Consolidated Financial Statements are expected to be held to maturity.
51
<PAGE>
Activity in the Company's Loan Portfolio.
The following table sets forth the activity in the gross principal amount of
the Company's total loan portfolio during the periods indicated, excluding
activity in the allowance for loan losses, deferred fees and unaccreted
discount on purchased loans.
ACTIVITY IN THE COMPANY'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS ENDED DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994(1)
---------------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period..... $337,455 $198,588 $ 74,045
Originations:
Single-family residential........ 1,906 3,508 1,478
Multi-family residential......... 374 1,180 252
Commercial and other mortgage
loans........................... -- 4,060 2,615
Consumer and other loans......... -- -- --
-------- -------- --------
Total loans originated......... 2,280 8,748 4,345
Loan Purchases(3):
Single-family residential........ 221,581 121,883 36,462
Multi-family residential......... -- -- 61,247
Commercial and other mortgage
loans........................... -- 2,126 31,091
Consumer and other loans(2)...... 18,742 11,012 10,847
-------- -------- --------
Total loans purchased.......... 240,323 135,021 139,647
Discounted Loan Purchases:
Single-family residential........ -- 49,662 1,542
Multi-family residential......... -- 96 --
Commercial and other mortgage
loans........................... -- 869 1,843
Consumer and other loans......... -- 5,368 239
-------- -------- --------
Total Discounted Loans pur-
chased........................ -- 55,995 3,624
Sales.............................. (27,965) (16,673) --
Principal repayments, net of capi-
talized interest.................. (37,789) (27,464) (14,813)
Transfer to real estate owned and
other............................. (12,350) (16,760) (8,260)
-------- -------- --------
Net increase (decrease) in loans... 164,499 138,867 124,543
-------- -------- --------
Balance at end of period........... $501,954 $337,455 $198,588
======== ======== ========
</TABLE>
- --------
(1) Includes as purchases $90.6 million aggregate principal amount of loans
held by Girard on the date that it was acquired by WACII.
(2) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(3) Excludes Discounted Loans.
52
<PAGE>
Composition of Total Loan Portfolio. As of September 30, 1996, the Company's
total loan portfolio, net of unaccreted discount, deferred fees and allowance
for loan losses, amounted to $441.5 million or 83.6% of the Company's total
assets. The following table sets forth the composition of the Company's total
loan portfolio by type of loan at the dates indicated.
COMPOSITION OF THE COMPANY'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ---------------------------
1996 1995 1994 1993
------------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
LOAN PORTFOLIO:
Single-family residential....... $324,910(2) $139,566 $ 53,095 $20,657
Multi-family residential........ 72,717 71,239 77,884 26,076
Commercial real estate.......... 61,235 53,458 57,881 26,921
Consumer and other.............. 30,698 19,753 6,733 391
-------- -------- -------- -------
Loan portfolio.................... 489,560 284,016 195,593 74,045
Unaccreted discount and deferred
fees............................. (12,400) (14,362) (8,946) (988)
Valuation allowance............... (40,086) (10,237) (7,270) (4,314)
-------- -------- -------- -------
Loan portfolio, net............... $437,074 $259,417 $179,377 $68,743
======== ======== ======== =======
DISCOUNTED LOAN PORTFOLIO:
Single-family residential....... $ 11,188(3) $ 50,937 $ 348 $ --
Multi-family residential........ -- (3) -- -- --
Commercial real estate.......... 482 1,523 432 --
Consumer and other.............. 724 979 2,215 --
-------- -------- -------- -------
Discounted Loan portfolio......... 12,394 53,439 2,995 --
Unaccreted discount and deferred
fees............................. (1,747) (6,671) (470) --
Valuation allowance(1)............ (6,218) (15,414) (431) --
-------- -------- -------- -------
Discounted Loan portfolio, net.... $ 4,429 $ 31,354 $ 2,094 $ --
======== ======== ======== =======
</TABLE>
- --------
(1) For discussion of the valuation allowance allocation for purchase
discount, see "--Asset Quality--Allowances for Losses."
(2) The Company currently expects that Girard will sell certain single-family
residential loans to WFC which in turn is expected to securitize such
loans. See "Recent Developments."
(3) Girard has purchased or committed to purchase approximately $272 million
unpaid principal amount of discounted residential mortgage loans. See
"Recent Developments."
The real properties which secure the Company's mortgage loans are located
throughout the United States. As of September 30, 1996, the five states with
the greatest concentration of properties securing the Company's loans were
California, New York, New Jersey, Florida and Texas, which had $274.2 million,
$32.8 million, $21.9 million, $17.4 million and $10.8 million principal amount
of loans, respectively. The real properties which secure the Company's
Discounted Loans are located throughout the United States. As of September 30,
1996, the five states with the greatest concentration of properties securing
the Company's Discounted Loans were Massachusetts, Connecticut, California,
Texas and New Jersey, which had $3.8 million, $3.1 million, $1.2 million, $1.1
million and $.9 million principal amount of loans, respectively. The Company
believes that the broad distribution of the real property in its Discounted
Loan portfolio reduces the risks associated with concentrating such loans in
limited geographic areas. The geographic concentration of the Company's
Discounted Loan portfolio is expected to change with the acquisition of the
Citicorp Portfolio, which is concentrated in New York and New Jersey. See
"Recent Developments."
53
<PAGE>
Contractual Principal Repayments. The following table sets forth certain
information as of September 30, 1996 regarding the dollar amount of loans
maturing in the Company's loan portfolio (excluding Discounted Loans) based on
their contractual terms to maturity and includes scheduled payments but not
potential prepayments, as well as the dollar amount of loans which have fixed
or adjustable interest rates. Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one
year or less. Loan balances have not been reduced for undisbursed loan
proceeds, unearned discounts and the allowance for loan losses.
MATURITY OF THE COMPANY'S LOAN PORTFOLIO(1)
<TABLE>
<CAPTION>
MATURING IN
-------------------------------------------------------
ONE YEAR AFTER ONE YEAR AFTER FIVE YEARS AFTER
OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS TEN YEARS
-------- ------------------ ----------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Single-family residen-
tial................... $ 6,999 $23,385 $15,681 $278,845
Multi-family residen-
tial................... 16,226 26,205 15,943 14,343
Commercial and other
mortgage loans......... 18,025 25,288 14,130 3,792
Consumer and other
loans.................. 6,019 23,589 370 720
Interest rate terms on
amounts due after one
year:
Fixed................. -- 47,317 12,415 98,277
Adjustable............ -- 51,150 33,709 199,423
</TABLE>
- --------
(1) Excludes Discounted Loans.
Scheduled contractual principal repayments do not reflect the actual
maturities of loans because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses. The average life of mortgage loans,
particularly fixed-rate loans, tends to increase when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgages are substantially higher
than current mortgage loan rates.
LOAN ORIGINATION
General. In late 1995, the Private Companies launched a mortgage conduit
program for the purchase of newly-originated residential mortgage loans on a
nationwide basis through correspondents. From the launch of the program in the
fourth quarter of 1995 through September 30, 1996, the Private Companies
purchased or committed to purchase under its mortgage conduit program
approximately $5.9 million principal amount of manufactured housing loans and
$18.0 million principal amount of first and second lien mortgage loans. While
the Company is obtaining necessary regulatory approvals, WCC will continue to
originate residential mortgage loans for the Company's account through its
correspondent relationships and will then transfer the newly originated loans
to the Company. The Company will simultaneously provide the funding for the
newly originated residential mortgage loans. Although WCC will be originating
mortgage loans for the Company's account while the Company obtains necessary
licenses, the mortgage conduit program will be conducted by the Company.
The mortgage conduit program currently focuses on the origination of
manufactured housing loans, and conforming and non-conforming first and
related second lien mortgage loans. All borrowers and the collateral must meet
the Company's credit underwriting guidelines. The Company believes that the
higher risk generally associated with non-agency borrowers is partially offset
by the Company's strong credit underwriting guidelines and the better pricing
associated with these loans. The Company is in the process of launching two
new programs for loans to good credit borrowers. The Company expects to
further expand the mortgage conduit program as it identifies market niches in
the mortgage lending market where the Company believes it has a competitive
advantage.
54
<PAGE>
The Company expects to securitize loans that it originates when
advantageous. The Company may also from time to time sell whole loans or
determine to hold loans until maturity. Loans not presented as held for sale
in the Audited Consolidated Financial Statements are expected to be held to
maturity.
Correspondent Relationships. Mortgage loans are currently acquired by WCC
through its correspondent relationships with mortgage banking firms and other
financial services companies. WCC has entered into mortgage loan purchase
agreements with each such correspondent which require specified minimum levels
of experience in origination of non-conventional mortgage loans and provide
representations, warranties and buy-back provisions identical to the
representations and warranties required of the Private Companies for the
securitization of their own loans. Correspondent institutions originate loans
based on guidelines provided by the Company and currently sell the loans to
WCC on a servicing-released basis. As of October 1996, WCC had approximately
seventy-eight approved correspondents. The Company's current strategy is to
continue to solidify and expand the correspondent relationships, which are
subject to a thorough due diligence and approval process to ensure quality
sources of new business.
Underwriting. The Company has adopted guidelines that set forth the specific
lending requirements of the Company as they relate to the processing,
underwriting, property appraisal, closing, funding and delivery of loans to
borrowers. While the Company is in the process of obtaining necessary
licenses, WCC will conduct the underwriting process for the Company. Once a
correspondent has completed its underwriting process it will submit the
initial loan application to WCC. Upon receipt of an application, WCC's
underwriting department will review the application and perform its own
underwriting. Evaluations of initial loan applications will be conducted by
WCC's employees who specialize in the analysis of loans, often with further
specialization based on geographic or collateral specific factors. Initial
loan applications are reviewed for completeness, accuracy, and compliance with
the Company's underwriting criteria and governmental regulations. The
Company's underwriting criteria focuses on debt-to-income ratios, loan-to-
value ratios, current credit reports of potential borrowers, property
appraisals and a potential borrower's job history. As part of the underwriting
process the Company requires an additional field review appraisal of the
collateral to be conducted by an approved third party at the correspondent's
expense.
Loans which clearly conform to the Company's underwriting guidelines are
approved by the underwriting department. Loans which clearly do not conform
are rejected and returned to the correspondent. Loans that present certain
underwriting issues may be returned to correspondents requesting changes or
may be forward to underwriting managers for approval. Variations from the
Company's underwriting guidelines must be approved by an appropriate officer
of the Company.
EUROPEAN OPERATIONS
The Company recently decided to expand its loan acquisition and servicing
activities to encompass the United Kingdom and France with a view towards
future expansion in Western Europe. The Company's expansion strategy involves
understanding each new market's regulatory requirements and tailoring the
Company's acquisitions and servicing to comply with such requirements and
identifying and training management and employees to run the Company's
European operations. Management is in discussions with a major U.S. investment
banking company regarding the formation of a joint venture for continuing and
expanding the servicing activities of a company located in the United Kingdom.
See "Recent Developments." The Company is also considering either establishing
its own servicing operation, acquiring an already existing entity or entering
into a joint venture with a company already active in France. Management
believes that conditions in the French real estate market and, to a lesser
degree, in the United Kingdom real estate market are similar to conditions in
the United States real estate market in the late 1980's and early 1990's and
there may be opportunities to acquire Loan Portfolios at favorable prices. In
addition, management believes that there is a demand in the European market
for U.S.-style servicing with its automated systems and detailed investor
reporting and aggressive servicing and work-out approaches.
55
<PAGE>
FUNDING SOURCES
General. The Company, in addition to deposits at the Savings Bank, will have
extensive funding sources available for investment and lending activities from
investment banking firms and institutional investors, including secured term
loans, warehouse lines of credit, repurchase facilities and sales of
participation interests in Loan Portfolios. Substantially all of the Company's
Loan Portfolio investments are expected to utilize borrowed funds, minimizing
the Company's equity investment to the extent possible. Management of the
Company closely monitors rates and terms of competing sources of funds on a
regular basis and generally utilizes the source which is the most cost
effective. Following the Common Stock Offering and Notes Offering, the Company
will continue to rely on these sources of capital, in addition to the proceeds
of the Common Stock Offering and Notes Offering, to finance its operations. As
of the closing of the Common Stock Offering and Notes Offering, certain
existing undrawn lines of credit ($413.3 million as of September 30, 1996)
will be transferred to the Company. Amounts currently drawn under the lines of
credit by the Private Companies ($86.7 million as of September 30, 1996) will
be transferred to the Company as such amounts are repaid by the Private
Companies.
Deposits. The primary source of deposits for the Savings Banks currently is
"wholesale" certificates of deposit. To a lesser extent the Savings Banks
obtain brokered certificates of deposit from national investment banking firms
which pursuant to agreements with the Savings Banks, solicit funds from their
customers for deposit with the banks. As of September 30, 1996, $154.6 million
or 31% of the Savings Banks' total deposits were brokered and $325.6 million
or 67% were wholesale deposits. Wholesale deposits generally are obtained on
more economically attractive terms to the Savings Banks than brokered
deposits.
The Savings Banks' funding strategy has been to offer deposit rates above
those customarily offered by banks and savings and loans in its markets. The
Savings Banks have been able to pursue this strategy because the general and
administrative costs associated with operating the Savings Banks is
significantly lower than traditional banks and savings institutions with
branch office networks. The Savings Banks have generally accumulated deposits
by participating in deposit rate surveys which list the Savings Banks among
the higher rate paying insured institutions, and periodically advertising in
various local market newspapers and other media. However, because the Savings
Banks compete for deposits primarily on the basis of rates, the Savings Banks
could experience difficulties in attracting deposits if they could not
continue to offer deposit rates at levels above those of other banks and
savings institutions. The Orders issued by the OTS currently prohibit the
Savings Banks from increasing their total assets above specified levels. See
"Risk Factors--Results of Regulatory Examinations--Imposition of Cease and
Desist Orders."
56
<PAGE>
The following table sets forth information relating to the Company's
deposits at the dates indicated.
THE COMPANY'S DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------------------------------------
1996 1995 1994 1993
------------------ ------------------ ------------------ -----------------
AMOUNT AVG. RATE AMOUNT AVG. RATE AMOUNT AVG. RATE AMOUNT AVG. RATE
-------- --------- -------- --------- -------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
checking accounts...... $ 5,192 0.00% $ 3,532 0.00% $ 3,045 0.00% $ -- -- %
NOW and money market
checking accounts...... 1,706 1.82 2,846 2.99 3,170 3.28 3,633 2.96
Saving accounts......... 371 2.10 304 2.38 215 2.25 194 2.50
Certificates of depos-
it..................... 480,266 5.89 296,842 6.15 189,859 5.48 80,994 3.86
-------- ---- -------- ---- -------- ---- ------- ----
Total deposits......... $487,535 5.81% $303,524 6.04% $196,298 5.35% $84,821 3.83%
======== ==== ======== ==== ======== ==== ======= ====
</TABLE>
The following table sets forth by various interest rate categories the
certificates of deposit in the Company at September 30, 1996.
INTEREST RATE CATEGORIES FOR THE COMPANY'S CERTIFICATES OF DEPOSIT
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
3.50% or less...................................... $ 1,070
3.51-4.50.......................................... 46
4.51-5.50.......................................... 50,126
5.51-6.50.......................................... 409,925
6.51-7.50.......................................... 16,232
7.51-8.50.......................................... 2,867
--------
Total............................................ $480,266
========
</TABLE>
The following table sets forth the amount and maturities of the certificates
of deposit in the Company as of September 30, 1996.
MATURITIES OF THE COMPANY'S CERTIFICATES OF DEPOSIT
<TABLE>
<CAPTION>
ORIGINAL MATURITY IN MONTHS
-------------------------------
12 OR LESS 13 TO 26 37 OR MORE
---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balances Maturing in 3
Months or Less.......... $145,202 $ 6,394 $ 0
Weighted Avg............ 5.74% 6.57% 0.0%
Balances Maturing in 4 to
12 Months............... $236,176 $36,866 $446
Weighted Avg............ 5.89% 6.32% 6.67%
Balances Maturing in 13
to 36 Months............ -- $54,637 $497
Weighted Avg............ 6.07% 6.98%
Balances Maturing in 37
or More Months.......... -- -- $ 48
Weighted Avg............ 2.76%
</TABLE>
As of September 30, 1996, the Company had $13.2 million of certificates of
deposit in amounts greater than $100,000 maturing as follows: $4.6 million
within three months; $2.5 million over three months through six months; $4.1
million over six months through 12 months; and $2.0 million thereafter.
57
<PAGE>
Borrowings. The following table sets forth information relating to the
Company's borrowings and other interest-bearing obligations at the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------
1996 1995 1994 1993
------------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB Advances............................. $ 0 $ -- $13,000 $ --
Reverse Repurchase Agreements............. 0 13,000 8,500 6,608
--- ------- ------- ------
Total................................... $0 $13,000 $21,500 $6,608
=== ======= ======= ======
</TABLE>
The following table sets forth certain information related to the Company's
short-term borrowings having average balances during the period of greater
than 30% of stockholders' equity at the end of the period. During each
reported period, FHLB advances and repurchase agreements are the only
categories for borrowings meeting this criteria. Averages determined by
utilizing month-end balances.
SHORT-TERM BORROWINGS OF THE COMPANY
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED
AT OR FOR THE DECEMBER 31,
NINE MONTHS ENDED ------------------------
SEPTEMBER 30, 1996 1995 1994 1993
------------------ ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB advances:....................
Average amount outstanding dur-
ing the period................. $ 2,396 $ 1,381 $ 5,916 $ --
Maximum month-end balance out-
standing during the period..... $11,000 $ 8,000 $13,000 $ --
Weighted average rate:
During the period............. 5.80% 7.53% 3.85% --
At end of period.............. -- -- 4.33% --
Repurchase agreements:
Average amount outstanding dur-
ing the period................. $35,721 $ 4,122 $ 4,757 $4,507
Maximum month-end balance out-
standing during the period..... $97,000 $14,950 $11,377 $6,654
Weighted average rate:
During the period............. 6.83% 5.62% 4.44% 7.54%
At end of period.............. 0.0% 6.70% 5.81% 3.35%
</TABLE>
The Company, in addition to deposits at the Savings Banks, will have
extensive funding sources available for investment and lending activities. The
following table sets forth the Company's post-Reorganization lending
arrangements and amounts utilized by the Company and the Private Companies as
of September 30, 1996.
<TABLE>
<CAPTION>
CURRENT BORROWER AFTER
LENDER BORROWER REORGANIZATION AMOUNT UTILIZED(2)
------ -------------------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
COMMITTED FACILITIES:
CS First Boston
Mortgage Capital
Corporation........... Private Companies(1) WFC $250 million(5) $67,012
Prudential Securities
Realty Funding
Corp. ................ Private Companies(1) WFC(4) $100 million $12,374
UNCOMMITTED FACILI-
TIES(3):
Bear Stearns Mortgage
Capital Corporation... First Bank First Bank $ 10 million --
Bear Stearns Mortgage
Capital
Corporation........... Girard Girard $200 million --
Bear, Stearns Interna- Private Companies(1) WFC(4) $100 million $ 1,673
tional (U.K.).........
CS First Boston Corpo-
ration
(Hong Kong) Limited... Private Companies(1) WFC(4) $ 50 million $ 2,912
------------
TOTAL AMOUNT............ $710 million
============
</TABLE>
58
<PAGE>
- --------
(1) On the closing of the Common Stock Offering and the Notes Offering,
existing lines of credit will be transferred to the Company or a wholly
owned Subsidiary of the Company.
(2) Amounts currently drawn under the lines of credit by the Private Companies
will be transferred to the Company as they become available.
(3) Though agreements governing such commitments do not specify a minimum or
maximum amount available, the parties have agreed that such agreements may
be used up to the specified amount. Any such agreement may be modified at
any time.
(4) These facilities will be transferred to a wholly owned subsidiary of WFC.
(5) Amount will be increased to $250 million upon transfer to WFC.
Repurchase Facilities. Each of First Bank and Girard entered into a Master
Repurchase Agreement with Bear Stearns Mortgage Capital Corporation ("BSMCC").
Pursuant to these agreements, the parties may enter into transactions in which
First Bank or Girard agrees to transfer to BSMCC mortgage loans or other
financial instruments against the transfer of funds by BSMCC, with a
simultaneous agreement by BSMCC to retransfer such assets at a date certain or
on demand, against the transfer of the borrowed funds by First Bank and
Girard, as the case may be. Though such master repurchase agreements do not
specify a maximum amount available under such agreements, the parties have
currently agreed that such agreement may be used for up to $210 million of
acquisitions in the aggregate. These agreements enable First Bank and/or
Girard to purchase Loan Portfolios with immediate financing from BSMCC which
can then be repaid as First Bank and/or Girard increases its deposits. See "--
Deposits" for a discussion of certain limitations on the ability of the
Savings Banks to increase deposits.
In 1996, the Private Companies entered into a master repurchase agreement
with CS First Boston Mortgage Capital Corporation ("FBMCC") pursuant to which
FBMCC has agreed to lend up to $150 million to the Private Companies for the
purchase of portfolios of performing and non-performing mortgage loans.
Pursuant to the agreement, The First Boston Corporation may generally
participate in the securitization of any loans acquired with any funds lent by
FBMCC and will be repaid out of the proceeds of any such structured
transaction. This facility will be increased to $250 million as part of the
transfer to WFC.
In 1996, the Private Companies entered into a master repurchase agreement
with an affiliate of Bear, Stearns & Co., Inc. pursuant to which such
affiliate may lend money to the Private Companies for the purchase of
portfolios of Subordinate Securities. Though such master repurchase agreement
does not specify a maximum amount available under such agreement, the parties
have currently agreed that such agreement may be used for up to $100 million
of acquisitions. Pursuant to the agreement, Bear, Stearns & Co., Inc. may
generally participate in the securitization of any portfolio of Subordinate
Securities acquired with any funds lent by such affiliate and will be repaid
out of the proceeds of any such structured transaction.
In 1996, the Private Companies entered into a master repurchase agreement
with CS First Boston (Hong Kong) Limited pursuant to which such affiliate may
lend money to the Private Companies for the purchase of portfolios of
Subordinate Securities. Though such master repurchase agreement does not
specify a maximum amount available under such agreement, the parties have
currently agreed that such agreement may be used for up to $50 million of
acquisitions. Pursuant to the agreement, The First Boston Corporation may
generally participate in the securitization of any portfolio of Subordinate
Securities acquired with any funds lent by CS First Boston (Hong Kong) Limited
and will be repaid out of the proceeds of any such structured transaction.
Warehouse Facilities. The Private Companies have a secured warehouse
financing facility (the "Warehouse Financing Facility") with Prudential
Securities Realty Funding Corp. ("Prudential Securities") of up to $100
million for the origination or purchase of residential first and second lien
mortgage loans. Pursuant to the agreement, Prudential Securities may generally
participate in the securitization of the mortgage loans acquired with any
funds lent by Prudential Securities and will be repaid out of the proceeds of
any such structured transaction.
FHLB Advances. The Savings Banks obtain advances from the FHLB of San
Francisco upon the security of certain of its assets, including FHLB stock,
provided certain standards related to the creditworthiness of the Savings
Banks have been met. FHLB advances are available to member financial
institutions such as the Savings Banks for investment and lending activities
and other general business purposes. FHLB advances are made
59
<PAGE>
pursuant to several different credit programs, each of which has its own
interest rate, which may be fixed or adjustable, and a range of maturities.
Securitizations. Since the Private Companies's initial use of securitization
in 1995 through September 1996, the Private Companies have issued $368.7
million of securities through two publicly underwritten and three privately
placed securitizations, including non-performing and sub-performing mortgage
loans, manufactured housing loans, consumer loans and conventional and non-
conforming loans. Securitizations are expected to allow the Company to
increase its loan acquisition and origination volume, reduce the risks
associated with interest rate fluctuations and provide access to longer term
funding sources. The Company currently intends to complete securitizations
either through private placements or in public offerings when advantageous.
The Company is currently in the process of securitizing a pool of consumer
receivables and expects to securitize a portfolio of non-performing and under-
performing assets in the near future.
In a securitization, a company will generally transfer a pool of loans to a
separate entity (a "Special Purpose Entity") in exchange for subordinate
securities ("Subordinate Securities") in the Special Purpose Entity and cash,
which constitutes the proceeds of Senior Securities issued by the Special
Purpose Entity. The cash generally will be used to repay borrowings used to
finance the pool of loans that were acquired by the company. Generally, the
holders of the Senior Securities are entitled to receive scheduled principal
collected on the pool of securitized loans and interest at the pass-through
interest rate on the certificate balance. The Subordinate Securities represent
the subordinated right to receive cash flows from the pool of securitized
loans after payment of the required amounts to the holders of the Senior
Securities and the costs associated with the securitization.
The Company may arrange for credit enhancement for a transaction to achieve
an improved credit rating on the Senior Securities issued if this improves the
level of profitability for such transaction. This credit enhancement may take
the form of an insurance and indemnity policy, insuring the holders of the
Senior Securities of timely payment of the scheduled pass-through interest and
principal. In addition, the pooling and servicing agreements that govern the
distribution of cash flows from the loan pool included in the transaction
typically require over-collateralization as an additional means of credit
enhancement. Over-collateralization may in some cases also require an initial
deposit, the sale of loans at less than par or retention in the Special
Purpose Entity of collections from the pool until a specified over-
collateralization amount has been attained. This retention of excess cash flow
creates a faster amortization of the scheduled balance of the Senior
Securities than the amortization of the principal balance of the securitized
loan pool. The purpose of the over-collateralization is to provide a source of
payment in the event of higher than anticipated credit losses. Losses
resulting from defaults by borrowers on the payment of principal or interest
on the loans in a securitized loan pool will reduce the over-collateralization
to the extent that funds are available and may result in a reduction in the
value of the Subordinate Securities.
The Company intends to retain the servicing rights to the loans it
securitizes and WCC will initially service such loans on the Company's behalf.
See "--Servicing Relationships." In addition, the Company may, in the future,
consider using Subordinated Securities that it purchases or acquires pursuant
to a securitization in a structured transaction, including a securitization.
SERVICING RELATIONSHIPS
The Company believes that WCC's loan servicing experience, its highly
trained servicing personnel and its proprietary software and U.S. mortgage
loan database has allowed the Private Companies to more effectively value and
price Loan Portfolios. As of September 30, 1996, WCC was servicing
approximately $1.4 billion principal amount of loans, including approximately
$502.0 million for the Savings Banks.
The Company, WFC and WCC will enter into a loan servicing agreement (the
"Loan Servicing Agreement") pursuant to which WCC will provide loan portfolio
management services, including billing, portfolio administration and
collection services for all loans owned, acquired or made by the Company or
its affiliates (including new third party servicing) (the "Loans"). Pursuant
to the Loan Servicing Agreement, the Company shall be required to pay a
servicing fee equal to a market rate. WCC has also agreed to license its
60
<PAGE>
proprietary computer software to the Company and WFC. WCC has agreed not to
compete with or be engaged in the same business as currently conducted by the
Company.
After the second anniversary of the closing of the Common Stock Offering,
the Company will have the option to begin servicing its Loan Portfolios and
WCC's loans and assume certain assets and liabilities of WCC relating thereto
(the "Servicing Transfer"), provided that, the Company or one of its
subsidiaries has obtained the appropriate regulatory approvals.
Notwithstanding the foregoing, the Company may request that the Servicing
Transfer occur on an earlier date, provided that the foregoing conditions are
met. WCC, in its sole discretion may refuse to effect the Servicing Transfer
prior to the end of the second year. The Servicing Transfer will occur
automatically on the third anniversary of the closing of the Common Stock
Offering, unless prohibited by applicable law. After the Servicing Transfer
WCC will permit the Company, subject to certain conditions, to have access to
its books, records and forms to ensure the orderly transfer of the servicing.
The fees and costs to be paid by WCC for the servicing of its loans shall be
the Company's average costs for such collection as specified in the Loan
Servicing Agreement.
Girard and First Bank have each entered into loan servicing agreements for
performing loans with WCC pursuant to which WCC provides loan portfolio
management services, including billing, portfolio administration and
collection services for all loans owned, acquired or made by the Savings
Banks. WCC receives a fee equal to ten dollars per month for each performing
loan serviced (which the Company believes is a below-market rate). The loan
servicing agreements are year-to-year and may be terminated by the Savings
Banks or WCC by giving notice at least sixty days prior to renewal date. It is
anticipated that the Savings Banks will terminate their agreements with WCC
once WCC's servicing operations have been transferred to WSC. At such time the
Savings Banks would enter into an agreement with WSC pursuant to which WSC
would service the mortgage loans and other assets of the Savings Banks.
The Savings Banks and WCC have also entered into loan servicing agreements
with respect to specific Discounted Loan portfolios. Pursuant to these loan
servicing agreements WCC provides loan portfolio management services,
including billing, portfolio administration and collection services for the
loans in the specified Discounted Loan portfolios. To date each of these loan
servicing agreements provides that WCC shall be entitled to an amount equal to
(i) all costs and expenses incurred by WCC for providing loan portfolio
management services, and (ii) an amount equal to twenty-five percent of the
amount collected on the specified Discounted Loan portfolios (other than
escrow payments, if any) which is excess of the initial payments made by the
Savings Banks to acquire the Discounted Loan portfolios. Due to the OTS
requirements, servicing fees for new Discounted Loan portfolios will be chosen
by the board of directors of the Savings Banks based upon fees charged by WCC
in any other appropriate third party servicing agreement on a portfolio basis.
WCC's servicing staff has extensive experience in servicing all types of
financial assets and over the years the Private Companies have developed clear
cut servicing procedures designed to effectively service and if necessary
liquidate a loan. The system, which is able to service a variety of loans,
provides WCC with, among other things, payment-processing, cashiering,
collection and reporting functions.
In addition, the servicing system and procedures are structured to deal
specifically with problem assets and discounted loans and to maximize in a
timely manner cash recovery on each loan in a Loan Portfolio. If a loan
becomes delinquent or once a non-performing loan is acquired, WCC enters
information with respect to each loan that is acquired in its computer system.
WCC then attempts to resolve each loan in accordance with specified procedures
as expeditiously as possible. The various resolution alternatives generally
include the following: (i) the borrower brings the loan current in accordance
with original or modified terms, (ii) the borrower repays the loan or a
negotiated amount of the loan, (iii) the borrower agrees to deed the property
to WCC in lieu of foreclosure, and (iv) WCC forecloses on the loan and the
property is acquired at the foreclosure sale either by a third party or by the
WCC. The general goal of WCC's asset resolution process is to maximize in a
timely manner cash recovery on each loan.
Under the Orders, the Savings Banks can terminate WCC's servicing agreement
if WCC fails to complete a comprehensive audit of the Savings Banks'
adjustable rate mortgages serviced by WCC, fails to correct certain
information system items, or fails to deliver certain statements to borrowers.
61
<PAGE>
NON-TRADITIONAL BANKCARD PROCESSING OPERATIONS
The Company plans to continue development of its non-traditional bankcard
processing operations, which generate revenues through merchant discounts and
processing fees for Visa and Mastercard transactions. The Company's bankcard
processing operations focus on certain high-risk market niches, principally
mail order/telephone order and audio-text where the Company believes it
obtains higher returns on processing transactions. Revenues from the bankcard
operation which commenced in the third quarter have demonstrated strong growth
increasing from $0.6 million in 1994 to $4.7 million in 1995 and to $5.1
million during the nine months ended September 30, 1996. Management believes
that there are opportunities to expand this business using its existing
infrastructure.
ASSET QUALITY
The Company, like all financial institutions, is exposed to certain credit
risks related to the value of the collateral that secures its loans and the
ability of borrowers to repay their loans. Management of the Company closely
monitors the Company's loan and investment portfolios and the Company's real
estate owned for potential problems on a periodic basis and reports to the
Board of Directors at regularly scheduled meetings.
Non-Performing Loans. It is the Company's policy to establish an allowance
for uncollectible interest on loans in its loan portfolio (excluding
discounted loans) which are past due 90 days or more and to place such loans
on non-accrual status. The Company does not accrue interest on Discounted
Loans (unless such loan later becomes performing). Loans also may be placed on
non-accrual status when, in the judgment of management, the probability of
collection of interest is deemed to be insufficient to warrant further
accrual. When a loan is placed on non-accrual status, previously accrued but
unpaid interest is reversed by a charge to interest income.
The following table sets forth certain information relating to the Company's
non-performing loans in its loan portfolio at the dates indicated.
NON-PERFORMING LOANS IN THE COMPANY'S LOAN PORTFOLIO(1)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------------
1996 1995 1994 1993
------------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-performing loans:
Single-family residential........... $31,112 $10,996 $ 5,554 $1,285
Multi-family residential............ 1,583 270 1,471 379
Commercial real estate and land..... 7,301 910 4,207 5,354
Consumer and other loans............ 4,586 503 400 175
------- ------- ------- ------
Total............................. $44,582 $12,679 $11,632 $7,193
======= ======= ======= ======
Non-performing loans as a percentage
of:
Total loans(2)...................... 9.11% 4.46% 5.95% 9.71%
Total assets........................ 8.36% 3.71% 5.04% 7.27%
Allowance for loan losses as a per-
centage of:
Total loans(2)...................... 8.19% 3.60% 3.72% 5.83%
Non-performing loans................ 89.92% 80.74% 62.50% 59.97%
</TABLE>
- --------
(1) This table does not include Discounted Loans although a substantial
portion of such loans are non-performing.
(2) Total loans is exclusive of Discounted Loans, undisbursed loan proceeds,
unaccreted discount and allowance for loan losses. For information
relating to the Company's Discounted Loan portfolio, see "--Loan
Portfolio."
Real Estate Owned. Properties acquired through foreclosure or by deed-in-
lieu thereof are valued at the lower of cost or fair value. Properties
included in the Company's real estate owned are periodically re-evaluated to
determine that they are being carried at the lower of cost or fair value less
estimated costs to sell. Holding and
62
<PAGE>
maintenance costs related to properties are recorded as expenses in the period
incurred. Deficiencies resulting from valuation adjustments to real estate
owned subsequent to acquisition are recognized as a valuation allowance.
Subsequent increases related to the valuation of real estate owned are
reflected as a reduction in the valuation allowance, but not below zero.
Increases and decreases in the valuation allowance are charged or credited to
income, respectively.
The following table sets forth certain information relating to the Company's
real estate owned (by source of acquisition) at the dates indicated.
REAL ESTATE OWNED BY THE COMPANY
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------
1996 1995 1994 1993
------------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Discounted loan portfolio:
Single-family residential.............. $ 663(1) $ 3,226 $ -- $ --
Multi-family residential............... -- -- -- --
Commercial and other mortgage loans.... 290 66 -- --
------ ------- ------ ------
Total................................ 953 3,292 -- --
Loan portfolio:
Singe-family residential............... 787 1,676 613 764
Multi-family residential............... 275 611 254 --
Commercial and other mortgage loans.... 855 578 464 328
------ ------- ------ ------
Total Portfolio...................... 1,917 2,865 1,331 1,092
Total................................ 2,870 6,157 1,331 1.092
Allowance for total losses............... (356) (1,193) (123) (55)
------ ------- ------ ------
Real estate owned, net................... $2,514 $ 4,964 $1,208 $1,037
====== ======= ====== ======
</TABLE>
- --------
(1) The differences between the balance at December 31, 1995 and September 30,
1996 reflects the securitization of certain single-family residential
loans and properties.
The following table sets forth certain geographical information as of
September 30, 1996 related to the Company's real estate owned attributable to
the Company's total loan portfolio.
REAL ESTATE OWNED ATTRIBUTABLE TO THE COMPANY'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
MULTI-FAMILY
RESIDENTIAL AND
SINGLE FAMILY RESIDENTIAL COMMERCIAL REAL ESTATE
----------------------------- --------------------------
NO. OF NO. OF
AMOUNT PROPERTIES AMOUNT PROPERTIES
-------------- -------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
California............. $399 10 $1,130 4
Connecticut............ 366 5 91 1
Texas.................. 325 10 29 5
New Jersey............. -- -- 170 1
New York............... 101 1 -- --
Other.................. 259 18 -- --
-------------- ----------- ------------ ---------
Total................ $1,450 44 $1,420 11
============== =========== ============ =========
</TABLE>
63
<PAGE>
Classified Assets. OTS regulations require that each insured savings
association classify its assets on a regular basis. In addition, in connection
with examinations of insured associations, OTS examiners have authority to
identify problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: "substandard," "doubtful"
and "loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that
the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable, and there is a
high possibility of loss. An asset classified loss is considered uncollectible
and of such little value that continuance as an asset of the institution is
not warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified loss,
the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss or
charge off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital.
Excluding assets which have been classified loss and fully reserved by the
Savings Banks, the Savings Banks' classified assets as of September 30, 1996
consisted of $63.5 million of assets classified as substandard and $3.1
million of assets classified as doubtful. The substandard and doubtful asset
classifications include $2.8 million and $3.1 million of Discounted Loans,
respectively. In addition, at the same date, $41.6 million of assets were
designated as special mention, which includes $10.9 million of Sub-Prime Auto
Loans.
Allowances for Losses. The Company maintains an allowance for loan losses at
a level believed adequate by management to absorb potential losses in the loan
portfolio. The allowance is increased by provisions for loan losses charged
against operations, recoveries of previously charged off credits, and
allocations of discounts on purchased loans, and is decreased by charge-offs.
Loans are charged off when they are deemed to be uncollectible, or in the case
of automobile and other consumer loans, when payments are delinquent by more
than 120 days.
The Company uses its internal asset review system to identify and evaluate
impaired loans and to classify loans as special mention, substandard,
doubtful, loss. These terms correspond to varying degrees of risk that the
loans will not be collected in part or in full. The Company's policy is to
evaluate smaller-balance, homogenous pools of loans for impairment on a pooled
basis. These are primarily single-family residential and automobile and other
consumer loans. All other loans, whether Discounted Loans or other loans, are
evaluated for impairment on a loan-by-loan basis. All loans are subject to
potential classification as special mention, substandard, doubtful, or loss.
The frequency at which a specific loan is subjected to internal asset review
depends on the type and size of the loan and the presence or absence of other
risk factors, such as delinquency and changes in collateral values.
The allowance for loan losses comprises specific valuation allowances
established for impaired loans and for certain other classified loans, and
general valuation allowances. Specific valuation allowances are based on the
estimated fair value of the collateral for impaired or troubled collateral
dependent loans, in most cases. General valuation allowances are based on
management's periodic analyses of the composition of the loan portfolio,
delinquencies, loan classifications, historical loss experience, peer group
data, OTS guidelines, economic factors and other relevant information. These
estimation techniques apply to allowances established for both loans and
Discounted Loans.
When the Company increases the allowance for loan losses related to loans
other than Discounted Loans, it records a corresponding increase to the
provision for loan losses in the statement of operations. For Discounted
Loans, increases to the allowance for loan losses are recorded shortly after
each acquisition of a pool by
64
<PAGE>
allocating a portion of the purchase discount deemed to be associated with
measurable credit risk. The allocation is based on the analyses of specific
and general valuation allowances discussed above. Amounts allocated to the
allowance for loan losses from purchase discounts do not increase the
provision for loan losses recorded in the statement of operations; rather they
decrease the amounts of the purchase discounts that are accreted into the
interest income over the lives of the loans. If, after the initial allocation
of the purchase discount to the allowance for loan losses, management
subsequently identifies the need for additional allowances against Discounted
Loans, the additional allowances are established through charges to the
provision for loan losses.
Accretion of purchase discounts (excluding amounts allocated to the
allowance for loan losses) and interest income on Discounted Loans are
recorded based on cash receipts. The same income recognition policies apply to
loans other than Discounted Loans when they are deemed to be non-performing,
generally when they are 90 days or more delinquent.
The Private Companies acquired the Savings Banks at substantial discounts to
their respective book values, reflecting the poor quality of their assets and
in the case of First Bank, an expected imminent regulatory takeover. As part
of the acquisition, the Company acquired a substantial volume of impaired
loans, which required the Savings Banks to establish allowances for loan
losses. In addition, the OTS, as part of its examination process, periodically
reviews the Savings Banks' allowances for losses and the carrying values of
assets.
First Bank and Girard increased their allowances for loan losses with
respect to the Inherited Loans by $4.8 million through September 30, 1996. In
the fourth quarter of 1995 and the first quarter of 1996, the Savings Banks
acquired approximately $24.5 million of Sub-Prime Auto Loans. Under OTS
regulations the Savings Banks have been required to write-off all auto loans
in excess of 120 days delinquent, notwithstanding that the Savings Banks
retain the cars as collateral. The aggregate portfolio of Sub-Prime Auto Loans
purchased is approximately 3,000 loans, approximately 65.9% of which have
become delinquent. The Savings Banks have established reserves aggregating
$8.6 million through the third quarter of 1996, including a 10% reserve on
such loans which are current.
In the third quarter of 1996, the Company established $4.5 million of
reserves for the Sub-Prime Auto Loans so that as of September 30, 1996
reserves have been provided for all loans in excess of 60 days delinquent.
Although the Company believes its allowances for loan losses are now adequate,
future additions to these allowances, in the form of provisions for losses on
loans, may be necessary due to changes in economic conditions, increases in
the size of the Company's loan portfolio and the performance of the loan
portfolio. The following table sets forth the Company's provision for
estimated losses on loans, net of recoveries, for the nine months ended
September 30, 1996.
<TABLE>
<CAPTION>
% OF
PROVISIONS TOTAL
------------- ----------
(DOLLARS IN THOUSANDS)
------------------------
<S> <C> <C>
Inherited Loans.................................. $ 4,774 30.3%
Sub-Prime Auto Loans............................. 8,583 54.5%
Other Purchased Loans............................ 2,394 15.2%
----------- ----------
Total provision for estimated losses on loans.... $ 15,751 100.0%
=========== ==========
</TABLE>
65
<PAGE>
The following table sets forth the breakdown of the Company's allowances for
losses on the Company's loan portfolio and Discounted Loan portfolio by
category of loan and the percentage of loans in each category to total loans
in the respective portfolios at the dates indicated. The Company's allowances
for losses includes purchased discount.
COMPANY'S TOTAL ALLOWANCES FOR LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------
1996 1995 1994
------------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan portfolio:
Real estate.......................... $34,824 $ 9,830 $ 6,883
Non-real estate...................... 5,261 407 322
Discounted Loan portfolio............ 6,219(1) 15,414 496
------- ------------ -----------
Total Allowances................... $46,304 $ 25,651 $ 7,701
======= ============ ===========
</TABLE>
- --------
(1)The difference between the balance at December 31, 1995 and September 30,
1996 reflects a securitization.
The following table sets forth an analysis of activity in the allowance for
losses relating to the Company's total loan portfolio during the periods
indicated.
ACTIVITY IN COMPANY'S ALLOWANCES FOR LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------
1996 1995 1994
------------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period... $25,651 $ 7,701 $ 4,314
Provision for loan losses...... 15,751 4,266 2,173
Allocation from purchased loan
discounts..................... 15,972 19,007 2,809
Charge-offs:
Real estate.................. 10,394 5,096 1,620
Non-real estate.............. 2,100 308 46
------- ------------ -----------
Total charge-offs............ 12,494 5,404 1,666
Recoveries:
Real estate.................. 1,361 81 71
Non-real estate.............. 63 -- --
------- ------------ -----------
Total Recoveries............. 1,424 81 71
------- ------------ -----------
Net (charge-offs) recoveries... (11,070) (5,323) (1,595)
------- ------------ -----------
Balance, end of period......... $46,304 $ 25,651 $ 7,701
======= ============ ===========
Net (charge-offs) recoveries as
a percentage of average loan
portfolio..................... (2.5)% (2.2)% (1.4)%
</TABLE>
66
<PAGE>
Delinquency. The table below sets forth the delinquency status of the
Company's loan portfolio (excluding Discounted Loans) at each of the dates
indicated.
DELINQUENCY IN THE COMPANY'S LOAN PORTFOLIO(1)
<TABLE>
<CAPTION>
DECEMBER 31,
NINE MONTHS ENDED -------------------------------------
SEPTEMBER 30, 1996 1995 1994
------------------ ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF
BALANCE PORTFOLIO BALANCE PORTFOLIO BALANCE PORTFOLIO
------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Period of Delinquency:
30-59 days............ $17,956 3.7% $ 3,726 1.3% $ 4,513 2.4%
60-89 days............ 10,577 2.2 3,037 1.1 2,202 1.1
90 days or more(2).... 44,582 9.1 12,679 4.5 11,632 6.1
------- ---- ------- --- ------- ---
Total loans delin-
quent.............. $73,115 15.0% $19,442 6.9% $18,347 9.6%
======= ======= =======
</TABLE>
- --------
(1) This table excludes Discounted Loans.
(2) All loans delinquent 90 days or more were on nonaccrual status.
(3) Increase is primarily due to Inherited Loans, Sub-Prime Auto Loans and
purchased sub-performing residential loans.
INVESTMENT ACTIVITIES
Investment Securities. Investment securities consist primarily of U.S.
Government securities and required investment in FHLB stock.
The following table sets forth the Company's investment securities available
for sale and held for investment at the dates indicated:
THE COMPANY'S INVESTMENT SECURITIES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, DECEMBER 31,
------------- -----------------------
1996 1995 1994 1993
------------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities.......... $ 6,483 $ 9,083 $10,943 $ 6,632
Held to maturity
U.S. Government securities.......... 7,425 6,470 4,505 --
Mortgage-backed securities.......... 22,380 13,119 14,439 14,787
FHLB stock(1)....................... 2,911 1,421 1,612 564
------- ------- ------- -------
Total............................. 32,716 21,010 20,556 15,351
------- ------- ------- -------
Total investment securities......... $39,199 $30,093 $31,499 $21,983
======= ======= ======= =======
</TABLE>
- --------
(1) As a member of the FHLB of San Francisco, the Savings Banks are required
to purchase and maintain stock in the FHLB of San Francisco in an amount
equal to at least 1% of its aggregate unpaid residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each
year or 3% of borrowings, whichever is greater.
PROPERTIES
The Company's corporate headquarters are located in Portland, Oregon, where
the Company leases approximately 5,000 square feet of office space from a
corporation which is beneficially owned by Andrew A. Wiederhorn and Lawrence
A. Mendelsohn. See "Certain Relationships and Related Transactions." The
Savings Banks also rent approximately 8,000 sq. ft. of office space in two
locations in Portland, Oregon from a corporation which is beneficially owned
by Messrs. Wiederhorn and Mendelsohn. See "Certain Relationships and Related
Transactions." Girard leases its branch office in La Jolla, California
pursuant to a lease expiring May 31, 1997. First Bank leases its branch office
in Beverly Hills, California and office space for its merchant bankcard
operations in Calabasas, California pursuant to leases expiring February 29,
2000 and November 30,
67
<PAGE>
1999, respectively. The Company also leases office space in London, England
pursuant to a month-to-month lease. The Company believes its facilities are
both suitable and adequate for its current business purposes.
COMPUTER SYSTEMS AND OTHER EQUIPMENT
The Company believes that its use of information technology is a key factor
in achieving a competitive advantage in acquiring Loan Portfolios, minimizing
operating costs and increasing overall profitability. The Company uses
proprietary software which was developed over a period of years by the Private
Companies. In addition to standard industry software applications, the Private
Companies have internally developed fully integrated proprietary applications
designed to provide decision support and automation of portfolio tracking and
reporting. The Company's systems have significant additional capacity for
expansion without commensurate cost increases.
The proprietary software packages developed for asset resolution use
advanced financial models to support the resolution strategy, as well as track
performance against specified timeliness for each procedure. The system
permits immediate access to pertinent loan information and the automatic
preparation of letters and notices to borrowers. The Company also maintains a
centralized data warehouse.
EMPLOYEES
As of September 30, 1996, the Savings Banks had 46 employees. As of the
closing of the Common Stock Offering and the Notes Offering the Company and
its subsidiaries are expected to have approximately 80 full-time and shared
employees in the United States and 6 employees in the United Kingdom. The
employees are not represented by a collective bargaining agreement, and
management believes that it has good relations with its employees.
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings occurring in the
ordinary course of business which management of the Company believes will not
have a material adverse effect on the financial condition or operations of the
Company.
ENVIRONMENTAL MATTERS
To date, the Company has not been required to perform any investigation or
clean-up activities, nor has it been subject to any environmental claims.
There can be no assurance, however, that this will remain the case in the
future.
In the course of its business, the Company has acquired and may acquire in
the future, properties securing loans that are in default. Although to date
the Company primarily lends to owners of and purchases loans secured by
residential properties, there is a risk that the Company could be required to
investigate and clean-up hazardous or toxic substances or chemical releases at
such properties after acquisition by the Company, and may be held liable to a
governmental entity or to third parties for property damage, personal injury
and investigation and clean-up costs incurred by such parties in connection
with the contamination. In addition, the owner or former owners of a
contaminated site may be subject to common law claims by third parties based
on damages and costs resulting from environmental contamination emanating from
such property.
COMPETITION
The Company's competition in the financial services business includes
mortgage banking companies, mortgage brokers, commercial banks, credit unions,
thrift institutions, credit card issuers and finance companies. Many of these
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than the Company. Competition in loan
markets can take many forms including convenience in obtaining a loan,
customer service, marketing and distribution channels, amount and term of the
loan, loan origination fees, and interest rates. The Company believes that it
is able to compete on the basis of providing
68
<PAGE>
prompt and responsive service and its ability to analyze and purchase
performing, sub-performing and discounted loans secured by varied collateral.
The Company also faces competition in its discounted loan acquisition
activities. Discounted loans are generally acquired in auctions or competitive
bid circumstances. Although many of the Company's competitors have access to
greater capital and have other advantages, the Company believes that it has a
competitive advantage relative to many of its competitors as a result of its
experience in servicing and resolving troubled loans, its large investment in
proprietary software, technology and other resources which are necessary to
conduct its business, and the strategic relationships and contacts which it
has developed in connection with these activities.
69
<PAGE>
REGULATION
Financial institutions and their holding companies are extensively regulated
under federal and state laws. As a result, the business, financial condition
and prospects of the Savings Banks and the Company can be materially affected
not only by management decisions and general economic conditions, but also by
applicable statutes and regulations and other regulatory pronouncements and
policies promulgated by regulatory agencies with jurisdiction over the Savings
Banks and the Company, such as the OTS and the FDIC. The effect of such
statutes, regulations and other pronouncements and policies can be
significant, cannot be predicted with a high degree of certainty and can
change over time. Moreover, such statutes, regulations and other
pronouncements and policies are intended to protect depositors and the
insurance funds administered by the FDIC, and not stockholders or holders of
indebtedness which is not insured by the FDIC.
The enforcement powers available to federal banking regulators is
substantial and includes, among other things, the ability to assess civil
monetary penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and institution-
affiliated parties, as defined. In general, these enforcement actions must be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with regulatory
authorities.
The following discussion and other references to and descriptions of the
regulation of financial institutions contained herein constitute brief
summaries thereof as in effect on the date of this Prospectus. This discussion
is not intended to constitute and does not purport to be a complete statement
of all legal restrictions and requirements applicable to the Company and the
Savings Banks and all such descriptions are qualified in their entirety by
reference to applicable statutes, regulations and other regulatory
pronouncements.
Recent Regulatory Examinations. Following examinations of the Savings Banks
and WAC by the OTS in 1994, 1995 and 1996, the OTS issued Reports of
Examination that were critical of the Savings Banks and WAC in a number of
respects. These regulatory concerns initially resulted in the OTS requiring
First Bank to enter into a Supervisory Agreement on June 8, 1995. The
Supervisory Agreement required First Bank to (a) develop plans and procedures
concerning (i) reduction of non-performing assets, (ii) internal asset review,
(iii) asset monitoring, (iv) appraisals, (v) loan underwriting, (vi) loan
purchases; (b) enhance recordkeeping; (c) develop requirements to ensure that
the servicing of loans by WCC is satisfactory; and (d) maintain its separate
corporate existence. In addition, the Supervisory Agreement required First
Bank to maintain certain minimum capital ratios and prohibited First Bank from
increasing total assets beyond specified levels and acquiring non-performing
assets without the prior written consent of the Assistant Regional Director of
the OTS--West Region.
Imposition of Cease-and-Desist Orders. In July 1996, the OTS advised First
Bank that it had not fully complied with the terms of the Supervisory
Agreement and that both Savings Banks had failed in a number of respects to
address regulatory concerns raised in the 1994 and 1995 examination reports.
The OTS also expressed continuing concerns regarding the adequacy of
management of First Bank in light of its business activities. As a result of
these issues, the OTS replaced the Supervisory Agreement with a Cease and
Desist Order, effective October 31, 1996. Given the similar nature of Girard's
business activities, the OTS has also issued a Cease and Desist Order to
Girard similar to the Order issued to First Bank, also effective October 31,
1996. The issuance of a cease and desist order is generally evidence of an
increased level of regulatory concern regarding the subject institution.
The Orders require that both Savings Banks not engage in unsafe and unsound
practices and that they maintain minimum capital ratios as of December 31,
1996 required of institutions to be deemed "well- capitalized" under OTS
regulations. The Orders further require that the Savings Banks appropriately
risk-weight their assets and off-balance sheet items pursuant to OTS
regulations and establish and thereafter maintain internal controls sufficient
to ensure the accuracy and integrity of the calculation of their regulatory
capital ratios. The Orders also require the Savings Banks to: (a) revise
policies and procedures concerning (i) internal asset reviews, (ii) the
allowances for loan and lease losses, (iii) loan purchases, (iv) internal
audits and (v) hedging transactions;
70
<PAGE>
(b) develop plans to augment the depth and expertise of the management teams;
(c) revise business plans; (d) modify certain policies concerning the
accounting for loan discounts; (e) improve monitoring of (i) interest rate
risk, (ii) asset classifications (e.g., as held for sale versus held to
maturity) and (iii) compliance with laws and regulations concerning
transactions with affiliates; (f) ensure compliance with the proper servicing
of adjustable-rate mortgages and escrow accounts; (g) ensure servicer
correction of OTS-identified deficiencies in information systems; and
(h) enhance recordkeeping. In addition, First Bank is required to correct OTS-
identified deficiencies in its merchant bankcard processing operations. These
requirements are accompanied by related requirements that the Savings Banks
submit to the OTS, by certain specified dates, various policies, plans and
reports on other actions to comply with the Orders. In some cases, OTS
approval of such information is required.
Specifically, among other things, the Orders require that the Savings Banks
revise and submit to the OTS their internal asset review policies and
procedures (the "IAR Policies") to provide guidance on identifying and
classifying troubled, collateral dependent loans under OTS regulatory guidance
and, for purposes of ensuring the independence of the internal asset review
process, to require that loan underwriting, servicing and purchasing functions
be generally segregated from the credit review function. In addition, the
Orders require the Savings Banks to develop, implement and maintain an
effective internal asset review system that provides for adequate internal
controls to ensure that management timely reviews and classifies assets under
the IAR Policies.
The Orders also require the Savings Banks to revise and submit to the OTS
their policies and procedures for allowances for loan and lease losses (the
"ALLL Policies") regarding the factors considered in setting loan loss
allowances and to provide adequate internal controls to ensure that management
and the Savings Banks comply with the revised ALLL Policies. Under the Orders,
when the Savings Banks report quarterly to the OTS on their progress in
implementing the ALLL Policies, the Savings Banks must also submit their
reserve analyses for the preceding calendar quarter.
The Orders also require that the Savings Banks revise and submit to the OTS
their loan purchase policies and procedures (the "Loan Purchase Policies") to
provide specific guidance on due diligence scope and sampling, assign
personnel to oversee due diligence activities and require such personnel to
ensure that all diligence is completed in accordance with the Loan Purchase
Policies and to provide specific guidance regarding the use and reliance on
broker price opinions. Under the Orders, the Savings Banks are directed to
establish and maintain sufficient internal controls to confirm that loan data
for all purchased loans meet certain minimum standards set by the Savings
Banks and to identify loan documentation deficiencies prior to purchase.
The Orders require that the Savings Banks submit to the OTS an amended
accounting policy that requires management to establish and adhere to
appropriate guidance and procedures for the amortization of discounts on
Discounted Loans, to establish appropriate reserves on Discounted Loans prior
to recognizing the yield adjustment on such loans into income and to
demonstrate the accuracy of the yield adjustment component of the discount.
In connection with the requirements of the Orders regarding asset liability
management, the Savings Banks are required to submit to the OTS a hedging
policy that fully complies with relevant accounting guidance and that
establishes written guidelines to ensure the Savings Banks document their
hedging strategy. In addition, the Savings Banks are required to submit to the
OTS a plan to develop or obtain internal expertise and resources necessary to
measure, monitor and model the Savings Banks' interest rate risk.
The Orders provide that the Savings Banks must submit a plan detailing how
WCC will complete a comprehensive audit of certain of its servicing activities
for the Savings Banks and take such action to ensure that WCC fully implements
the results of such audit. Further, the Orders require that the Savings Banks
take corrective actions specified, and adhere to the controls developed, in
the audit.
71
<PAGE>
Management believes that the Savings Banks are complying with those
requirements of the Orders that have taken effect immediately. In addition,
the Savings Banks have implemented several actions to address the other
requirements of the Orders, including (i) hiring a new chief executive officer
for the Savings Banks, (ii) engaging Arthur Andersen LLP to review
management's implementation of corrective actions required by the OTS,
(iii) increasing the size of the internal asset review department, and (iv)
revising the internal asset review policy. The Company is also in the process
of hiring a manager to complete the development and implementation of an
effective internal asset review system.
The Orders are enforceable by the OTS as written agreements under the
Federal Deposit Insurance Act. Therefore, failure to comply with the
requirements of the Orders could subject the Savings Banks and their directors
and officers to further enforcement actions, including termination of FDIC
insurance or civil money penalties. There can be no assurances that the OTS
will approve the required submissions by the Savings Banks without further
modification or will not impose further restrictions on the Savings Banks.
OTS Growth Restrictions. Since June 30, 1995, First Bank has had limited
ability to increase deposits due to the provisions of an OTS Supervisory
Agreement which prohibited First Bank from increasing assets above specified
levels. Accordingly, the Company's asset growth has principally been financed
through the raising of deposits at Girard. However, due to the issuance of the
Orders, the Company will not be able to utilize the Savings Banks as vehicles
for growth until and unless the Orders are lifted or modified. The Orders
prohibit First Bank and Girard from increasing their total assets, as measured
at the end of each calendar quarter, above $145 million and $408 million,
respectively, unless such increase is an amount that represents the total net
interest credited on deposit liabilities earned during that quarter plus any
increase permitted under the Orders in prior quarters.
SAVINGS AND LOAN HOLDING COMPANIES
The Company is a savings and loan holding company that is regulated and
subject to examination by the OTS. The activities of savings and loan holding
companies are governed by the provisions of the Home Owners' Loan Act, as
amended (the "HOLA"). Pursuant to the HOLA, a savings and loan holding company
may not (i) acquire control of a savings association or savings and loan
holding company without prior OTS approval; (ii) acquire, except with prior
OTS approval, by process of merger, consolidation, or purchase of assets of
another savings association or savings and loan holding company, all or
substantially all of the assets of any such association or holding company; or
(iii) acquire, by purchase or otherwise, more than 5% of the voting shares of
a savings association that is not a subsidiary, or of a savings and loan
holding company that is not a subsidiary. In considering whether to grant
approval for any such transaction, the OTS will take into consideration a
number of factors, including the competitive effects of the transaction, the
financial and managerial resources and future prospects of the holding company
and the institution involved, and the compliance records of such subsidiaries
with the Community Reinvestment Act ("CRA").
Federal law empowers the Director of the OTS to take substantive action when
he determines that there is reasonable cause to believe that the continuation
by a savings and loan holding company of any particular activity constitutes a
serious risk to the financial safety, soundness or stability of a savings and
loan holding company's subsidiary savings institutions. In addition, the
Director of the OTS has oversight authority with respect to all holding
company affiliates. Specifically, the Director of the OTS may, as necessary
(i) limit the payment of dividends by the savings institutions; (ii) limit
transactions between the savings institutions, the holding company and the
subsidiaries or affiliates of either; or (iii) limit any activities of the
savings institutions that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the savings
institutions. Any such limits would be issued in the form of a directive
having the legal effect of a cease and desist order.
Activities Limitations--The Company is currently classified as a multiple
savings and loan holding company under applicable law as a result of its
ownership of the two Savings Banks, First Bank and Girard. A savings and loan
holding company which has only one insured institution subsidiary (known as a
"unitary" savings and loan holding company) and which subsidiary qualifies as
a qualified thrift lender ("QTL"), described below,
72
<PAGE>
generally has the broadest authority to engage in various types of business
activities with few restrictions on its activities, except that historically
savings and loan holding companies have not been permitted to acquire or be
acquired by an entity engaged in securities underwriting or market making. A
holding company that owns two or more financial institutions, such as the
Company, or whose sole subsidiary fails to meet the QTL test is subject to the
activities limitations applicable to multiple savings and loan holding
companies. In general, a multiple savings and loan holding company (or
subsidiary thereof that is not an insured institution) may not commence or
continue for more than a limited period of time after becoming a multiple
savings and loan holding company (or a subsidiary thereof), any business
activity other than (i) furnishing or performing management services for a
subsidiary insured institution; (ii) conducting an insurance agency or an
escrow business; (iii) holding, managing or liquidating assets owned by or
acquired from a subsidiary insured institution; (iv) holding or managing
properties used or occupied by a subsidiary insured institution; (v) acting as
trustee under deeds of trust; (vi) those activities previously directly
authorized by the OTS by regulation as of March 5, 1987 to be engaged in by
multiple savings and loan holding companies; or (vii) subject to prior
approval of the OTS, those activities authorized by the FRB as permissible
investment for bank holding companies.
Restrictions on Transactions with the Savings Banks--The Savings Banks are
subject to restrictions in their dealings with the Company and the Company's
non-bank subsidiaries under HOLA and certain provisions of the Federal Reserve
Act ("FRA") that are made applicable to savings institutions by HOLA and OTS
regulations.
A savings institution's transactions with its affiliates are subject to
limitations set forth in the HOLA and OTS regulations, which incorporate
Sections 23A, 23B, 22(g) and 22(h) of the FRA and Regulation O adopted by the
FRB. Under Section 23A, an "affiliate" of an institution is defined generally
as (i) any company that controls the institution and any other company that is
controlled by the company that controls the institution, (ii) any company that
is controlled by the shareholders who control the institution or any company
that controls the institution or (iii) any company that is determined by
regulation or order to have a relationship with the institution (or any
subsidiary or affiliate of the institution) such that "covered transactions"
with the company may be affected by the relationship to the detriment of the
institution. "Control" is determined to exist if a percentage stock ownership
test is met or if there is control over the election of directors or the
management or policies of the company or institution. "Covered transactions"
generally include loans or extensions of credit to an affiliate, purchases of
securities issued by an affiliate, purchases of assets from an affiliate
(except as may be exempted by order or regulation), and certain other
transactions.
THE SAVINGS BANKS
General. The Savings Banks are federally-chartered savings banks organized
under HOLA. As such, the Savings Banks are subject to regulation, supervision
and examination by the OTS. The deposit accounts of the Savings Banks are
insured up to applicable limits by the FDIC through the SAIF and, as a result,
the Savings Banks also are subject to regulation, supervision and examination
by the FDIC.
The business and affairs of the Savings Banks are regulated in a variety of
ways. Regulations apply to, among other things, insurance of deposit accounts,
capital ratios, payment of dividends, liquidity requirements, the nature and
amount of the investments that the Savings Banks may make, transactions with
affiliates, community and consumer lending laws, internal policies and
controls, reporting by and examination of the Savings Banks and changes in
control of the Savings Banks.
Regulatory Capital Requirements. Federally-insured savings associations are
required to maintain minimum levels of regulatory capital. These standards
generally must be as stringent as the comparable capital requirements imposed
on national banks. The OTS also is authorized to impose capital requirements
in excess of these standards on individual associations on a case-by-case
basis. The Orders require that both Savings Banks maintain minimum capital
ratios required of institutions to be deemed "well-capitalized" commencing
December 31, 1996.
73
<PAGE>
Federally-insured savings associations are subject to three capital
requirements: a tangible capital requirement, a core or leverage capital
requirement and a risk-based capital requirement. All savings associations
currently are required to maintain tangible capital of at least 1.5% of
adjusted total assets (as defined in the regulations), core capital equal to
3% of adjusted total assets and total capital (a combination of core and
supplementary capital) equal to 8% of risk-weighted assets. For these
purposes, tangible capital is core capital less all intangibles other than
qualifying mortgage servicing rights. Since neither Savings Bank had
intangibles at September 30, 1996, tangible Capital was the same as core
Capital for both Savings Banks. Core capital includes common stockholders'
equity, non-cumulative perpetual preferred stock and related surplus' minority
interests in the equity accounts of fully consolidated subsidiaries and
certain non-withdrawable accounts and pledged deposits.
A savings association is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital included does not exceed the savings association's core capital.
Supplementary capital consists of certain capital instruments that do not
qualify as core capital, including subordinated debt which meets specified
requirements, subject to certain limitations, and loan and lease loss general
valuation allowances. General valuation allowances can generally be included
up to 1.25% of risk-weighted assets. In determining the required amount of
risk-based capital, total assets, including certain off-balance sheet items,
are multiplied by a risk weight based on the risks inherent in the type of
assets. The risk weights assigned by the OTS for principal categories of
assets currently range from 0% to 100%, depending on the type of asset.
OTS policy imposes a limitation on the amount of net deferred tax assets
under SFAS No. 109 that may be included in regulatory capital. (Net deferred
tax assets represent deferred tax assets, reduced by any valuation allowances,
in excess of deferred tax liabilities.) Application of the limit depends on
the possible sources of taxable income available to an institution to realize
deferred tax assets. Deferred tax assets that can be realized from the
following generally are not limited to taxes paid in prior carryback years and
future reversals of existing taxable temporary differences. To the extent that
the realization of deferred tax assets depends on an institution's future
taxable income (exclusive of reversing temporary differences and
carryforwards), or its tax-planning strategies, such deferred tax assets are
limited for regulatory capital purposes to the lesser of the amount that can
be realized within one year of the quarter-end report date or 10% of core
capital. The foregoing considerations did not affect the calculation of the
Savings Banks' regulatory capital as of September 30, 1996.
The OTS promulgated a regulation that requires that an interest-rate ("IRR")
risk component be included in the risk-based capital regulation. However, the
effective date of the interest-rate risk component has been delayed. Under the
rule, an institution with a greater than specified level of interest rate risk
is subject to a deduction of its interest rate risk component from total
capital for purposes of calculating the risk-based capital requirement. As a
result, such an institution would be required to maintain additional capital
in order to comply with the risk-based capital requirement. Had the interest-
rate risk component been in effect at June 30, 1996, the Savings Banks'
capital ratios would not have been affected by this rule.
Insurance of Accounts. As an FDIC-insured institution, the Savings Banks are
required to pay deposit insurance premiums to the SAIF as administered by the
FDIC. The SAIF maintains a fund to insure deposits of savings institutions,
including the Savings Banks. The SAIF also maintains a fund to insure the
deposits of institutions, such as the Savings Banks, that were previously
insured by the Federal Savings and Loan Insurance Corporation ("FSLIC"). The
SAIF historically has had three major obligations: to fund losses associated
with the failure of institutions with SAIF-insured deposits; to increase the
SAIF's reserves to 1.25% of insured deposits; and to make interest payments on
debt incurred to provide funds to the FSLIC (the "FICO debt"). Under current
FDIC regulations, institutions are assigned to one of three capital groups
based on the level of an institution's capital, "well-capitalized,"
"adequately capitalized," or "undercapitalized," which are defined in the same
manner as in the regulations establishing the prompt corrective action system,
as discussed below. These three groups are then divided into three subgroups
which are based on supervisory evaluations by the
74
<PAGE>
institution's primary federal banking regulator, resulting in nine assessment
classifications. Deposit insurance premium assessment rates currently range
from .23% for well capitalized institutions with only a few supervisory
concerns to .31% for undercapitalized institutions with substantial
supervisory concerns.
Recently proposed FDIC regulations would reduce future semi-annual SAIF
assessments for savings institutions such as the Savings Banks. The proposed
reduced assessment schedule would reduce rates to .18% for well capitalized
with only a few minor supervisory concerns to .27% for undercapitalized
institutions with substantial supervisory concerns for the period October 1,
1996 through December 31, 1996 and thereafter to .0% to .27%, respectively. In
addition, savings institutions such as the Savings Banks will pay an
additional .0645% in semi-annual premiums to cover costs of the FICO debt.
Recapitalization of SAIF. The SAIF, due to the large number of failed
savings institutions in the late 1980's and early 1990's, has been unable to
attain the statutorily-required reserve ratio of 1.25% of insured deposits.
Legislation enacted on September 30, 1996, provides for a special assessment
to be collected no later than 60 days after the date of enactment based on
deposits held as of March 31, 1995, at a rate sufficient to provide the SAIF
with reserves equal to 1.25% of total deposits. The FDIC currently estimates
that the special assessment rate will be 65.7 basis points. Based on the
Savings Banks' deposits as of March 31, 1995, the one-time special assessment
at 67.5 basis points resulted in the Savings Banks' incurring a pre-tax charge
of approximately $1.4 million.
The law also provides that the SAIF and the Bank Insurance Fund ("BIF") BIF
shall be merged on January 1, 1999, provided that all savings associations
have converted to banks by that date, but does not provide legislation to
implement such a conversion. The law further provides that between January 1,
1997, and December 31, 1999 (or the date the last savings association ceases
to exist, whichever is earlier), the interest costs for FICO debt will be
shared by SAIF and BIF assessments, with SAIF institutions paying about 60% of
the dollar amount and BIF institutions paying about 40% of the dollar amount.
If the BIF and SAIF have not merged by January 1, 2000, these FICO interest
costs will be assessed pro rata, with all insured institutions paying the same
rate. The law also includes a provision intended to limit "deposit shifting"
from a SAIF-insured institution to a BIF-insured affiliate.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Savings Banks, if it determines after a hearing
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 by an
agreement with the FDIC. It also may suspend deposit insurance temporarily
during the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is terminated,
the accounts at the institution at the time of the termination, less
subsequent withdrawals shall continue to be insured for a period of six months
to two years, as determined by the FDIC. Management is aware of no existing
circumstances which would result in termination of the Savings Banks' deposit
insurance.
Prompt Corrective Action. Federal law provides the federal banking
regulators with broad power to take "prompt corrective action" to resolve the
problems of undercapitalized institutions. The extent of the regulators'
powers depends on whether the institution in question is "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." Under regulations adopted by the federal
banking regulators, an institution shall be deemed to be (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or more, has
a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage
capital ratio of 5.0% or more and is not subject to specified requirements to
meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized," (iii)
75
<PAGE>
"undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier
I leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total risk-
based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio
that is less than 3.0% or a Tier I leverage capital ratio that is less than
3.00%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to adjusted total assets that is equal to or less than 2.0.% The
regulations also permit the appropriate federal banking regulator to downgrade
an institution to the next lower category (provided that a significantly
undercapitalized institution may not be downgraded to critically
undercapitalized) if the regulator determines (i) after notice and opportunity
for hearing or response, that the institution is in an unsafe or unsound
condition or (ii) that the institution has received (and not corrected) a
less-than-satisfactory rating for any of the categories of asset quality,
management, earnings or liquidity in its most recent exam. As of September 30,
1996, the Savings Banks were "well capitalized" institutions under the prompt
corrective action regulations of the OTS.
Depending upon the capital category to which an institution is assigned, the
regulators' corrective powers, many of which are mandatory in certain
circumstances, include prohibition on capital distributions; prohibition on
payment of management fees to controlling persons; requiring the submission of
a capital restoration plan; placing limits on asset growth; limiting
acquisitions, branching or new lines of business; requiring the institution to
issue additional capital stock (including additional voting stock) or to be
acquired; restricting transactions with affiliates; restricting the interest
rates that the institution may pay on deposits; ordering a new election of
directors of the institution; requiring that senior executive officers or
directors be dismissed; prohibiting the institution from accepting deposits
from correspondent banks; requiring the institution to divest certain
subsidiaries; prohibiting the payment of principal or interest on subordinated
debt; and, ultimately, appointing a receiver for the institution.
Brokered Deposits. Under applicable laws and regulations, an insured
depository institution may be restricted in obtaining, directly or indirectly,
funds by or through any "deposit broker," as defined, for deposit into one or
more deposit accounts at the institution. The term "deposit broker" generally
includes any person engaged in the business of placing deposits, or
facilitating the placement of deposits, of third parties with insured
depository institutions or the business of placing deposits with insured
depository institutions for the purpose of selling interests in those deposits
to third parties. Under FDIC regulations, well-capitalized institutions are
not subject to any brokered deposit limitations, while adequately capitalized
institutions are able to accept, renew or roll over brokered deposits only (i)
with a waiver from the FDIC and (ii) subject to the limitation that they do
not pay an effective yield on any such deposit which exceeds by more than (a)
75 basis points the effective yield paid on deposits of comparable size and
maturity in such institution's normal market area for deposits accepted in its
normal market area or (b) by 120% for retail deposits and 130% for wholesale
deposits, respectively, of the current yield on comparable maturity U.S.
treasury obligations for deposits accepted outside the institution's normal
market area. Undercapitalized institutions are not permitted to accept
brokered deposits and may not solicit deposits by offering an effective yield
that exceeds by more than 75 basis points the prevailing effective yields on
insured deposits of comparable maturity in the institution's normal market
area or in the market area in which such deposits are being solicited.
Restrictions on Capital Distributions. The OTS has promulgated a regulation
governing capital distributions by savings associations, which include cash
dividends, stock redemptions or repurchases, cash-out mergers, interest
payments on certain convertible debt and other transactions charged to the
capital account of a savings association as a capital distribution. The
regulations establish a tiered system of regulation with the greatest
flexibility being afforded to well-capitalized institutions.
An institution that meets its fully phased-in capital requirements is
permitted to make capital distributions during a calendar year, without prior
OTS approval, of up to the greater of (i) 100% of its net income during the
calendar year, plus the amount that would reduce by not more than one-half its
"surplus capital ratio" at the beginning of the calendar year (the amount by
which the institution's actual capital exceeded its fully phased-in capital
requirement at that date) or (ii) 75% of its net income over the most recent
four-quarter period. An
76
<PAGE>
institution that meets its current minimum capital requirements but not its
fully phased-in capital requirements may make capital distributions, without
prior OTS approval, of up to 75% of its net income over the most recent four-
quarter period, as reduced by the amounts of any capital distributions
previously made during such period. An institution that does not meet its
minimum regulatory capital requirements prior to, or on a pro forma basis
after giving effect to, a proposed capital distribution, or that the OTS has
notified as needing more than normal supervision, is not authorized to make
any capital distributions unless it receives prior written approval from the
OTS or the distributions are in accordance with the express terms of an
approved capital plan.
The OTS has proposed an amendment to its capital distribution regulation to
conform to its PCA regulations by replacing the current "tiered" approach
summarized above with one that would allow institutions to make capital
distributions that would not result in the institution falling below the PCA
"adequately capitalized" capital category. Under this proposal, an institution
would be able to make a capital distribution (i) without notice or
application, if the institution is not held by a savings and loan holding
company and received a sufficiently favorable regulatory rating of 1 or 2,
(ii) by providing notice to the OTS if, after the capital distribution, the
institution would remain at least "adequately capitalized," or (iii) by
submitting an application to the OTS.
The OTS retains the authority to prohibit any capital distribution otherwise
authorized under its regulations if the OTS determines that the capital
distribution would constitute an unsafe or unsound practice. The regulations
also apply to direct and indirect distributions to affiliates, including those
occurring in connection with corporation reorganizations.
Affiliate Transactions. Under federal law and regulation, transactions
between a savings association and its affiliates are subject to quantitative
and qualitative restrictions. Affiliates of a savings association include,
among other entities, companies that control, are controlled by or are under
common control with the savings association. As a result, the Company and its
non-bank subsidiaries are affiliates of the Savings Banks.
Savings associations are restricted in their ability to engage in "covered
transactions" with their affiliates. In addition, covered transactions between
a savings association and an affiliate, as well as certain other transactions
with or benefiting an affiliate, must be on terms and conditions at least as
favorable to the savings association as those prevailing at the time for
comparable transactions with non-affiliated companies. Savings associations
are required to make and retain detailed records of transactions with
affiliates.
Notwithstanding the foregoing, a savings association is not permitted to
make a loan or extension of credit to any affiliate unless the affiliate is
engaged only in activities the FRB has determined to be permissible for bank
holding companies. Savings associations are prohibited from purchasing or
investing in securities issued by an affiliate, other than shares of a
subsidiary.
Savings associations are also subject to various limitations and reporting
requirements on loans to insiders. These limitations require, among other
things, that all loans or extensions of credit to insiders (generally
executive officers, directors or 10% stockholders of the institution) or their
"related interests" be made on substantially the same terms (including
interest rates and collateral) as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with the general public and not involve more than the normal risk of repayment
or present other unfavorable features.
Qualified Thrift Lender Test. All savings associations are required to meet
a QTL Test set forth in the HOLA and regulations of the OTS thereunder to
avoid certain restrictions on their operations. A savings association that
does not meet the QTL Test set forth in the HOLA and implementing regulations
must either convert to a bank charter or comply with the following
restrictions on its operations: (i) the association may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the association shall be restricted to those of a national bank;
(iii) the association shall not be eligible to obtain any advances from its
FHLB; and (iv) payment of dividends by the institution shall be subject to the
rules regarding payment of dividends by a national bank.
77
<PAGE>
Upon the expiration of three years from the date the association ceases to be
a QTL, it must cease any activity and not retain any investment not
permissible for a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations).
Historically, the QTL test has required that 65% of an institution's
"portfolio assets" (as defined) consist of certain housing and consumer-
related assets on a monthly basis in at least nine out of every 12 months. As
of September 30, 1996, the qualified thrift investments of the First Bank and
Girard were approximately 83.2% and 85.7%, respectively, of their portfolio
assets. Recently enacted legislation provides that certain education, small
business and consumer loans may be included as qualified thrift investments
for purposes of the QTL test.
Loans-to-One Borrower. Under applicable laws and regulations, the amount of
loans and extensions of credit which may be extended by a savings institution
such as the Savings Banks to any one borrower, including related entities,
generally may not exceed the greater of $500,000 or 15% of the unimpaired
capital and unimpaired surplus of the institution. Loans in an amount equal to
an additional 10% of unimpaired capital and unimpaired surplus also may be
made to a borrower if the loans are fully secured by readily marketable
securities. An institution's "unimpaired capital and unimpaired surplus"
includes, among other things, the amount of its core capital and supplementary
capital included in its total capital under OTS regulations.
As of September 30, 1996, First Bank's and Girard's unimpaired capital and
surplus amounted to $11.1 million and $26.7 million, respectively, resulting
in a general loans-to-one borrower limitation of $1.7 million and $4.0
million, respectively under applicable laws and regulations. See "Business--
Loan Portfolio."
COMMUNITY INVESTMENT AND CONSUMER PROTECTION LAWS
Truth in Lending. The Truth in Lending Act ("TILA") and Regulation Z
promulgated thereunder contain certain disclosure requirements designed to
provide consumers with uniform, understandable information with respect to the
terms and conditions of loans and credit transactions in order to give them
the ability to compare credit terms. TILA also guarantees consumers a three
day right to cancel certain credit transactions including loans of the type
originated by the Company and the Savings Banks. Management of the Company and
the Savings Banks believes that they are in compliance with TILA in all
material respects. If the Company and the Savings Banks were found not to be
in compliance with TILA, aggrieved borrowers could have the right to rescind
their loans and to demand, among other things, the return of finance charges
and fees paid to the Company.
Other Lending Laws. The Company is also required to comply with the Equal
Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors
from discriminating against applicants on certain prohibited bases, including
race, color, religion, national origin, sex, age or marital status. Regulation
B promulgated under ECOA restricts creditors from obtaining certain types of
information from loan applicants. Among other things, it also requires certain
disclosures by the lender regarding consumer rights and requires lenders to
advise applicants of the reasons for any credit denial. In instances where 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, as amended, requires lenders to supply
the applicant with the name and address of the reporting agency. In addition,
the Company is subject to the Fair Housing Act and regulations thereunder,
which broadly prohibit certain discriminatory practices in connection with the
Company's business. The Company is also subject to the Real Estate Settlement
Procedures Act of 1974, as amended, and the Home Mortgage Disclosure Act.
In addition, the Company is subject to various other Federal and state laws,
rules and regulations governing, among other things, the licensing of, and
procedures that must be followed by, mortgage lenders and services, and
disclosures that must be made to consumer borrowers. Failure to comply with
such laws, as well as with the laws described above, may result in civil and
criminal liability.
Community Reinvestment Act. Under the CRA, as implemented by OTS
regulations, a savings institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit
78
<PAGE>
needs of its entire community, including low- and moderate- income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings
institutions, to assess the institution's CRA rating and requires that the OTS
provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system. The four ratings are "outstanding
record of meeting community credit needs," "satisfactory record of meeting
community credit needs," "needs to improve record of meeting community credit
needs" and "substantial non-compliance in meeting community credit needs." An
institution's CRA rating is taken into account in determining whether to grant
charters, branches and other deposit facilities, relocations, mergers,
consolidations and acquisitions. Poor CRA performance maybe the basis for
denying an application. First Bank and Girard each received a "needs to
improve record of meeting community credit needs" rating during their
respective most recent OTS examinations.
TAXATION
FEDERAL TAXATION
The Company and its subsidiaries will file a consolidated federal income tax
return based on a calendar year. Consolidated returns have the effect of
eliminating inter-company transactions, including dividends, from the
computation of taxable income.
Savings institutions such as the Savings Banks, which meet certain
definitional tests primarily relating to their assets and the nature of their
businesses, are permitted to establish a reserve for bad debts and to make
annual additions to the reserve. These additions may, within specified formula
limits, be deducted in arriving at the Savings Banks' taxable income. For
purposes of computing the deductible addition to its bad debt reserve, the
Bank's loans are separated into "qualifying real property loans" (i.e.,
generally those loans secured by certain interests in real property) and all
other loans ("non-qualifying loans"). The deduction with respect to non-
qualifying loans must be computed under the experience method, while a
deduction with respect to qualifying loans may be computed using a percentage
based on actual loss experience or a percentage of taxable income.
Under the percentage of taxable income method, the bad debt deduction equals
8% of taxable income determined without regard to that deduction and with
certain adjustments. The availability of the percentage of taxable income
method has permitted a qualifying savings institution to be taxed at a lower
maximum effective federal income tax rate than that applicable to corporations
in general. This resulted generally in a maximum effective marginal federal
income tax rate payable by a qualifying savings institution fully able to use
the maximum deduction permitted under the percentage of taxable income method,
in the absence of other factors affecting taxable income, of 32.2% exclusive
of any minimum tax or environmental tax (as compared to 35% for corporations
generally). Any savings institution at least 60% of whose assets are
qualifying assets, as described in Section 7701(a)(19)(c) of the Code,
generally will be eligible for the full deduction of 8% of taxable income. As
of December 31, 1995, approximately 84.5% of the Girard's and 82.0% of First
Bank's assets were "qualifying assets" described in Section 7701(a)(19)(C) of
the Code. Girard and First Bank anticipate that at least 75% and 80%,
respectively of Girard's and First Bank's assets, respectively will continue
to be qualifying assets in the immediate future. If this ceases to be the
case, the Savings Banks may be required to restore its bad debt reserve to
taxable income in the future.
The amount of the bad debt deduction that a savings association may claim
with respect to additions to its reserve for bad debts under the percentage of
income method is subject to certain limitations. These limitations are not
expected to restrict the Bank from taking maximum advantage of the percentage
of taxable income method in the future, although there can be no assurances in
this regard.
To the extent (i) a savings association's reserve for losses on real
property loans under the percentage of taxable income method exceeds the
amount that would have been allowed under the experience method and (ii)
79
<PAGE>
a savings association makes distributions to stockholders (including
distributions in redemption, dissolution or liquidation) that are considered
to result in withdrawals from that excess bad debt reserve, the amounts
considered withdrawn will be included in the savings association's taxable
income. The amount that would be deemed withdrawn from such reserves upon such
distribution and which would be subject to taxation at the savings association
level at the normal corporate tax rate would be an amount equal to the amount
distributed plus the amount necessary to pay the corporate income tax with
respect to the withdrawal. Dividends will not be considered to result in
withdrawals from an association's bad debt reserves to the extent of current
or accumulated earnings and profits as calculated for federal income tax
purposes. Dividends in excess of a savings association's current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation will be considered to come
first from its bad debt reserve. The Savings Banks have no intention of paying
dividends or taking any other action which would result in recapture of its
bad debt reserves for tax purposes.
Recently enacted legislation repealed the special bad debt rules applicable
to savings associations for taxable years beginning after December 31, 1995.
Under the new provisions, savings associations will follow the same rules for
purposes of computing allowable bad debt deductions as banks. To the extent
the bad debt reserve of the savings association exceeds the allowable reserve
as computed under the rules applicable to banks, such excess will be subject
to recapture. There is an exception that, in general, grandfathers the balance
of the savings associations reserve balance as of December 31, 1987. Under the
newly enacted law, if a savings association converts to a bank or is merged
into a bank, the associations bad debt reserve will not be automatically
subject to recapture. Recapture of the grandfathered bad debt reserve would
still occur in the event of certain distributions as previously discussed.
In addition to regular income taxes, corporations may be subject to an
alternative minimum tax which is generally equal to 20% of alternative minimum
taxable income (taxable income, increased by tax preference items and adjusted
for certain regular tax items). The preference items generally applicable to
savings associations include (i) 100% of the excess of a savings association's
bad debt deduction computed under the percentage of taxable income method over
the amount that would have been allowable under the experience method and (ii)
an amount equal to 75% of the amount by which a savings association's adjusted
current earnings (alternative minimum taxable income computed without regard
to this preference, adjusted for certain items) exceeds its alternative
minimum taxable income without regard to this preference. Alternative minimum
tax paid can be credited against regular tax due in later years.
STATE TAXATION
For additional information regarding taxation, see Note 8 to the
Consolidated Financial Statements.
80
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company as of October 28, 1996.
<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
Andrew A. Wiederhorn....... 30 Chairman of the Board, Chief Executive Officer,
Secretary and Treasurer
Lawrence A. Mendelsohn..... 35 President and Director
Bo G. Aberg................ 48 Senior Vice President, European Operations
Donald J. Berchtold........ 51 Senior Vice President, Administration
Kenneth R. Kepp............ 41 Senior Vice President, Operations
Sheryl Anne Morehead....... 48 Senior Vice President, S&L Group and Chief
Executive Officer of the Savings Banks
Chris Tassos............... 39 Senior Vice President and Chief Financial
Officer
Phillip D. Vincent......... 42 Senior Vice President, Loan Servicing
Don H. Coleman............. 58 Director
Philip G. Forte............ 32 Director
David Dale-Johnson......... 49 Director
</TABLE>
All of the executive officers of the Company were elected at a meeting of
the Board of Directors held in October 1996. Their terms of office continue
until the next annual meeting of the Board of Directors and until their
successors shall have been elected and qualified.
Andrew A. Wiederhorn is the Chairman of the Board of Directors and Chief
Executive Officer of the Company. Mr. Wiederhorn founded the Private Companies
in 1987 and continues to serve as the Chief Executive Officer of the Private
Companies. Mr. Wiederhorn received his B.S. degree in Business Administration
from the University of Southern California.
Lawrence A. Mendelsohn is a director and the President of the Company. Since
February 1993 Mr. Mendelsohn has been the Executive Vice President of the
Private Companies. From January 1992 until February 1993 Mr. Mendelsohn was
Vice President, Principal and Head of Capital Markets for Emerging Markets of
Bankers Trust New York Corporation/BT Securities Corporation. From August 1987
until January 1992 Mr. Mendelsohn was the Vice President, Senior Options
Principal and Head of Proprietary Trading for Equities, Equity Options and
Distressed Debt for JP Morgan and Co./JP Morgan Securities. Mr. Mendelsohn
received an A.B. degree in Economics from the University of Chicago, an M.A.
degree in International Politics from the University of Texas, an M.S. degree
in Business Research from the University of Southern California and is a
Ph.D./ABD in Finance from the University of Southern California.
Bo G. Aberg is the Senior Vice President, European Operations of the
Company. From November 1994 to September 1996, Mr. Aberg was Chief Executive
Officer of Securum Holding B.V., a Kingdom of Sweden owned work-out company in
Europe. From September 1992 to November 1994, Mr. Aberg was Chief Executive
Officer of Securum Real Estate Group, Malmo, Sweden. From January 1982 to
September 1992 Mr. Aberg held several positions within the PK Group (a Swedish
banking group), and from September 1974 to January 1982 he was a Chartered
Accountant for Hagstroms Revisions Byra AB Sweden (now Ernst & Young). Mr.
Aberg received the equivalent of a B.S. degree in Economics (Ekonomexanon) and
an academic degree in Law (Jurkandexamen) both from the University of
Stockholm, Sweden.
Donald J. Berchtold is the Senior Vice President, Administration. From March
1992 until October 1996 Mr. Berchtold was the Senior Vice President,
Administration of the Private Companies. From February 1991
81
<PAGE>
until November 1992 he was a consultant to Entertainment Publications Inc.--
CUC International Inc. Mr. Berchtold received a BSc. degree in
Business/Finance and Marketing from Santa Clara University. Mr. Berchtold is
Mr. Wiederhorn's father-in-law by marriage.
Kenneth R. Kepp is the Senior Vice President, Operations. From November 1991
until October 1996 Mr. Kepp was the Senior Vice President--Operations of the
Private Companies. From June 1990 until November 1991 Mr. Kepp was the
Managing Director of Network Associates International, a consulting company to
the leasing industry. Mr. Kepp received a B.S. degree in Finance from Northern
Illinois University.
Sheryl Anne Morehead is the Senior Vice President, S&L Group of the Company
and Chief Executive Officer of the Savings Banks. From December 1993 until
October 1996, Ms. Morehead was the Chief Credit Officer/Chief Operating
Officer of First Los Angeles Bank/San Paulo Bank Group, a savings bank. From
August 1990 until December 1993, Ms. Morehead was the Chief Credit
Officer/Executive Vice President of First Federal Bank, a savings bank. Ms.
Morehead received a B.S. degree from Boston University and an M.B.A. degree
from Harvard Graduate School of Business.
Chris Tassos is the Senior Vice President and Chief Financial Officer of the
Company. Since August 1995 Mr. Tassos has been the Senior Vice President of
Finance of the Private Companies. From March 1992 until February 1995 he was
the Chief Financial Officer and/or Senior Vice President of Finance of Long
Beach Mortgage Company (formerly Long Beach Bank). Mr. Tassos received a B.A.
degree from California State University, Fullerton. From July 1979 until April
1984 and May 1985 until September 1990 Mr. Tassos was an auditor for Deloitte
& Touche LLP.
Phillip D. Vincent is Senior Vice President, Loan Servicing of the Company.
Mr. Vincent was Senior Vice President and Chief Administrative Officer of The
J.E. Robert Company, Inc., one of the largest real estate and mortgage
investment managers in the U.S. from April 1995 until July 1996, Senior Vice
President and Managing Officer of The J.E. Robert Company Inc. from June 1992
until September 1995. Mr. Vincent is a member of the American Institute of
Certified Public Accountants. Mr. Vincent received a B.S. degree in Finance
from Oklahoma State University.
Don H. Coleman is a director of the Company. Since March 1994 Mr. Coleman
has been the President of International Manufacturing and Licensing, Inc., a
subsidiary of the ICT Group, Inc., a supplier of wireless phone equipment
worldwide. From January 1988 until March 1994, Mr. Coleman was President of
Liquid Spring Corporation, a manufacturer of automobile components. From 1984
to 1986, Mr. Coleman was President of Clarion Corporation of America, a major
supplier of automotive sound systems and electronics. Mr. Coleman is a
director of ICT Group, Inc., and Fabricated Metals, Inc., a materials handling
equipment manufacturer. Mr. Coleman received a B.A. degree in Economics and an
M.B.A. degree from Stanford University.
Philip G. Forte is a director of the Company. Mr. Forte has been the
President of Wilshire Cellular, Inc., a cellular phone leasing company, since
June 1994. Wilshire Cellular, Inc. is not part of the Private Companies, nor
is it an affiliate of the Company. From March 1992 until June 1994, Mr. Forte
was the Vice President, Sales and Marketing of Vinyl Chem International, Inc.,
a textile chemical repair manufacturer. From September 1989 until March 1992
Mr. Forte was the Vice President, Sales and Marketing of Pacific Western
University. Mr. Forte received a B.S. degree in Business Administration from
the University of Southern California.
David Dale-Johnson is a director of the Company. Since 1988 Mr. Dale-Johnson
has been the Director, Program in Real Estate, School of Business
Administration, University of Southern California. Mr. Dale-Johnson is also a
consultant for several public and private companies and government agencies.
Mr. Dale-Johnson received his B.A. degree in Art History from the University
of British Columbia, M. Sc. degree in Business Administration from the
University of British Columbia and a Ph.D. degree in Business Administration
from the University of California, Berkeley.
82
<PAGE>
CERTAIN KEY EMPLOYEES
Stuart Adair is the Vice President, European Loan Acquisitions of WFC. Prior
to September 1996 he was the Vice President, Loan Acquisitions of the Private
Companies. Mr. Adair received a B.A. degree from the University of Washington.
Glenn J. Ohl is the Chief Financial Officer of WFC. From August 1995 until
October 1996 Mr. Ohl was the Senior Vice President and Corporate Treasurer of
CWM Mortgage Holdings, Inc., an affiliate of Countrywide Credit Industries
Inc., a residential financing company. From September 1992 until August 1995
Mr. Ohl was the Executive Vice President and Chief Financial Officer of ARCS
Mortgage, Inc., a financing company. Mr. Ohl received a B.A. degree from
Franklin and Marshall College and an M.B.A. degree from New York University.
Peter O'Kane is the Vice President, Loan Acquisitions. From May 1994 until
October 1996 Mr. O'Kane was the Vice President, Loan Acquisitions of the
Private Companies. From September 1992 until April 1994 Mr. O'Kane was an
Asset Manager, Investment Division of J.E. Robert Company, Inc. Mr. O'Kane
received a B.A. degree from the University of Washington.
Richard A. Papworth is the Chief Financial Officer of Girard and First Bank.
From May 1996 until August 1996 Mr. Papworth was the Chief Executive Officer
of Girard. From October 1995 until May 1996 Mr. Papworth was the Director of
Finance for Maintenance Warehouse America Corp., a national building
maintenance supply company. From October 1994 until October 1995 Mr. Papworth
was an Independent Financial Consultant. From July 1993 until October 1994 Mr.
Papworth was the Acting Chief Financial Officer and Treasurer of George Wimpey
Inc. and the Assistant Treasurer from April 1989 until July 1993. Mr. Papworth
received a B.S. degree in Accounting and a M.Acc. degree in Taxation from
Brigham Young University.
R. Scott Stevenson is the President of the Girard and First Bank. From June
1991 until October 1996 he was the President and Chief Executive Officer of
Girard. From January 1986 until June 1991 he held various positions at Girard
including Chief Operating Officer, Chief Financial Officer and a Loan Officer.
Mr. Stevenson received a B.S. degree in Accounting and an M.S. degree in
Taxation from Brigham Young University.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
Audit Committee. The Audit Committee, which consists of a majority of
independent directors who are not affiliated with the Principals ("Independent
Directors"), makes recommendations concerning the engagement of independent
public accountants, reviews with the independent public accountants the plans
and results of the audit engagement, approves professional services provided
by the independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and non-audit
fees and reviews the adequacy of the Company's internal accounting controls.
Messrs. Wiederhorn, Coleman and Dale-Johnson are the members of the Audit
Committee.
ELECTION OF DIRECTORS
Prior to the first annual meeting of the stockholders of the Company, the
Company's Board of Directors will be divided into three classes. Directors of
each class will be elected at the annual meeting of stockholders held in the
year in which the term for such class expires and will serve thereafter for
three years. No determination has been made as to which directors will be
members of each class.
COMPENSATION OF DIRECTORS
The Company intends to pay its directors who are not employees of the
Company a per meeting fee of $1,000 for each Directors' meeting and a per hour
fee for each committee meeting attended which is not on a regularly scheduled
meeting date. Under the Company's Stock Incentive Plan, each non-employee
director has been granted, effective as of the date on which the initial
public offering price is determined, a non-qualified option to purchase at the
initial public offering price a number of shares of Common Stock equal to
6,250 divided
83
<PAGE>
by the initial public offering price, and each new non-employee director upon
the date of his or her election or appointment will be granted a non-qualified
option to purchase at the fair market value on the date of grant a number of
shares of Common Stock equal to 6,250 divided by the fair market value on the
date of grant.
EXECUTIVE COMPENSATION
The following table shows compensation received by the Company's Chief
Executive Officer and the three other most highly paid executive officers for
the fiscal years ended December 31, 1995. There were no other executive
officers of the Company whose total annual salary and bonus exceeded $100,000
in 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
NAME AND
PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($)(1)
------------------ ---- ------------ -----------
<S> <C> <C> <C>
Andrew A. Wiederhorn........................... 1995 51,992(2) --
Chairman of the Board, Chief Executive
Officer, Secretary and Treasurer
Lawrence A. Mendelsohn ........................ 1995 68,293(2) --
President
Donald J. Berchtold ........................... 1995 174,451 44,260
Senior Vice President, Corporate
Development
Kenneth R. Kepp ............................... 1995 150,012 50,000
Senior Vice President, Operations
</TABLE>
- --------
(1) For the year ended December 31, 1995 the Chief Executive Officer and the
three other most highly paid executive officers derived their salaries
from the Private Companies taken as a whole and therefore salaries and
bonuses paid for the year do not necessarily reflect the amount of salary
and bonus attributable to work performed for WAC and the Savings Banks, if
any.
(2) Mr. Wiederhorn and Mr. Mendelsohn elected in the past to receive minimal
compensation to maintain capital in the Company and have received
shareholder loans from the Private Companies to fund their investment in
WAC and certain other expenses.
EMPLOYMENT AGREEMENTS
The Company has entered into substantially similar employment agreements,
effective November 1, 1996, with Andrew A. Wiederhorn ("Mr. Wiederhorn") (as
Chief Executive Officer) and Lawrence A. Mendelsohn ("Mr. Mendelsohn") (as
President) (each individually, an "Executive" and collectively, the
"Executives"). Each agreement provides for an initial three-year term which is
automatically renewable for successive two-year terms (the "Employment Term")
unless either party gives written notice to the other at least ninety days
prior to the expiration of the then Employment Term. During the Employment
Term, each Executive will be obligated to devote a significant portion of his
business time, energy, skill and efforts to the performance of his duties
under the agreement and shall faithfully serve the Company, subject to his
right to serve as an employee and/or board member of certain companies and to
manage his personal financial and legal affairs.
The agreement provides for an annual base salary of $833,333.33 for Mr.
Wiederhorn and $666,666.67 for Mr. Mendelsohn (which may be increased, but not
decreased, by the Compensation Committee of the Board of Directors) and an
annual bonus. The bonus payable to Mr. Wiederhorn and Mr. Mendelsohn will be
equal to 15% of the pre-tax profits of the Company in excess of the pre-tax
profits required to produce an after-tax 15% return on average equity for the
calendar year. Mr. Wiederhorn's and Mr. Mendelsohn's share of the bonus will
be two-thirds and one-third, respectively. The agreement also provides that
Mr. Wiederhorn and Mr. Mendelsohn may participate in the Company's Incentive
Stock Plan. See "--Stock Incentive Plan."
The agreement also provides that during the Employment Term and thereafter,
the Company will indemnify the Executive to the fullest extent permitted by
law, in connection with any claim against the Executive as a result of the
Executive serving as an officer or director of the Company or in any capacity
at the request of the Company in or with regard to any other entity, employee
benefit plan or enterprise. Following the Executive's
84
<PAGE>
termination of employment, the Company will continue to cover the Executive
even if the Executive has ceased to serve in such capacity.
If any payment to the Executive together with certain other amounts paid to
the Executive, exceeds certain threshold amounts and results from a change in
ownership as defined in Section 280G(b)(2) of the Code, the agreements provide
that the Executive will receive an additional amount to cover the federal
excise tax and any interest, penalties or additions to tax with respect
thereto on a "grossed up" basis.
The agreement may be terminated at any time by the Executive for Good Reason
or with or without Good Reason during the Change in Control Protection Period
(if a Change in Control occurs) or by the Company with or without Cause (as
each capitalized term is defined in the agreement).
If the Executive terminates his employment with the Company for Good Reason,
with or without Good Reason during the Change in Control Protection Period (if
a Change in Control occurs), the Executive is terminated without Cause, or the
Executive's employment terminates as a result of the Company giving notice of
nonextention of the Employment Term, he will receive severance pay (i) in an
amount equal to three times Base Salary in effect at termination and three
times the highest annual bonus paid or payable for any of the previous three
years, (ii) accelerated full vesting under all outstanding equity-based and
long-term incentive plans, (iii) any other amounts or benefits due under then
applicable employee benefit plans of the Company (in accordance with such
plan, policy or practice), (iv) three years of additional service credit that
the Executive would otherwise have been credited under any pension type
qualified or nonqualified pension plan, (v) three years of the maximum Company
contribution under any qualified or nonqualified 401(k) type plan and (vi)
continued medical benefits for three years. The agreement provides that
Executive will have no obligation to mitigate the Company's financial
obligations in the event of his termination due to death, disability,
termination for Good Reason, termination with or without Good Reason during
the Change in Control Protection Period or termination without Cause, and
there will be no offset against the Company's financial obligations for other
amounts earned by the Executive.
If termination is the result of Executive's death, the Company will pay to
the Executive (or his estate), an amount equal (i) any earned but not yet paid
compensation, (ii) a pro-rated bonus, (iii) any other amounts or benefits due
under then applicable employee benefit plans of the Company (in accordance
with such plan, policy or practice), (iv) payment on a monthly basis of 6
months of base salary to Executive's spouse or dependents and (v) continued
medical coverage for the Executive's spouse and dependents for three years. In
addition, the Executive will receive accelerated full vesting under all
outstanding equity-based and long-term incentive plans. If Executive's
employment is terminated by reason of disability, the Executive will be
entitled to receive payments and benefits to which his representatives would
be entitled in the event of his termination by reason of death, provided that
the payment of base salary will be reduced by any long-term disability
payments under any policy maintained by the Company.
INCENTIVE STOCK PLAN
The following is a summary of certain features of the Company's Incentive
Stock Plan (the "Stock Plan"). This summary is qualified by reference to the
Stock Plan itself. A copy of the Stock Plan is an exhibit to the Registration
Statement.
The Company's Board of Directors adopted the Stock Plan on October 28, 1996.
The Company's stockholders approved it on October 28, 1996. The purpose of the
Stock Plan is to enable the Company to attract, retain and motivate key
employees, directors and, on occasion, consultants, by providing them with
equity participation in the Company. Accordingly, the Stock Plan permits the
company to grant incentive stock options ("ISOs"), non-statutory stock options
("NSOs"), restricted stock and stock appreciation rights (collectively
"Awards") to employees, directors and consultants of the Company and
subsidiaries of the Company. The Stock Plan will terminate on October 28, 2006
unless terminated earlier by the Board of Directors.
85
<PAGE>
Administration of the Plan. The Stock Plan will be administered by the
Company's Board of Directors, a committee appointed by the board (the
"Committee") or a combination of the two. References below to the
"Administrator" are to the body that administers the plan. For the present,
the Board of Directors has delegated administration of the Stock Plan to a
committee consisting of David Dale-Johnson and Don Coleman, two of the
Company's non-employee directors.
Securities Subject to the Plan. During the ten-year term of the Stock Plan,
the Company may grant Awards for a maximum of 1,750,000 shares of Common Stock
subject to adjustment in the case of stock splits and similar events. No one
person may receive Awards covering more than a cumulative total of 900,000
shares of Common Stock under the Stock Plan.
Employee Options. Under the Stock Plan, the Company may grant ISOs (under
Section 422 of the Code) and NSOs. The option exercise price of both ISOs and
NSOs may not be less than the fair market value of the shares covered by the
option on the date the option is granted. However, the exercise price of ISOs
granted to holders of more than 10% of the Company's outstanding stock may not
be less than 110% of that fair market value. Options will not be transferable
other than by will or the laws of descent and distribution or, in the case of
NSOs, under qualified domestic relations orders.
The Administrator will select the persons to whom options will be granted,
the number of shares subject to each option and the other terms and conditions
of each option, but in all cases consistent with the Stock Plan. The Option
Agreement evidencing each option will specify whether the option is intended
to be an ISO or an NSO. The Administrator may provide that options will be
exercisable in full at grant or become exercisable over time in accordance
with a vesting schedule. Options must expire no later than ten years after
they are granted (five years in the case of ISOs granted to holders of more
than 10% of the Company's outstanding stock). The exercise price of options
will be payable in cash or, if the Administrator permits, by the optionee's
full recourse promissory note, the surrender of shares of the Common Stock
already owned by the optionee or the "netting" of stock covered by the option
(the surrender of a portion of the option in payment of the exercise price).
Options granted as ISOs will be intended to qualify for special tax status
under Section 422 of the Code. An optionee will not have taxable income upon
the grant or exercise of an ISO (although exercise will result in income for
purposes of the alternative minimum tax), and the Company will receive no
income tax deduction at grant or exercise. The optionee will be entitled to
long-term capital gain treatment upon the sale of the option shares if the
shares are held more than two years after the grant date and more than one
year after the shares are transferred to the optionee. If the shares are sold
within either period, the difference between the exercise price and the market
value at the exercise date (but not more than the actual gain on sale) may be
taxable as ordinary income. Any additional gain would be a capital gain. Any
capital gain would be long-term if the optionee held the shares more than one
year. The Company will receive no deduction in connection with ISOs, except to
the extent an employee recognizes taxable ordinary income upon disposition of
option shares.
Upon the grant of an NSO, an optionee will not recognize taxable income for
federal income tax purposes and the Company will not be entitled to any
federal income tax deduction. Upon the exercise of an NSO, the optionee
generally will recognize ordinary income in an amount equal to the excess of
the fair market value of the shares acquired at the time of exercise over the
exercise price. The Company will be entitled to a corresponding deduction.
Special rules may govern the timing of the recognition of income by optionees
subject to Section 16 of the Exchange Act.
Director Options. On the last trading day of each calendar quarter beginning
March 31, 1997, the Company will automatically grant each director who is not
also an employee of the Company or a subsidiary of the Company (a "non-
employee director") an NSO to purchase that number of shares of Common Stock
that equals $6,250 divided by the fair market value per share of Common Stock
(its market price) on the date of grant. The exercise price of these options
will be that fair market value. Each of these director options will be fully
exercisable beginning six months after the date of grant and will terminate
(unless sooner terminated under
86
<PAGE>
the terms of the Stock Plan) ten years after the date of grant. If such a
director ceases to be a member of the board for any reason other than death or
disability, these options will terminate on the first anniversary of the date
the director ceases to be a board member. If such a director dies or becomes
disabled while a member of the board, these options will terminate on the
second anniversary of the date the director dies or becomes disabled. Under
the Stock Plan, the Company could grant Awards to non-employee directors in
addition to these "automatic" quarterly option grants.
Restricted Stock. Under the Stock Plan, the Administrator may also grant
Awards of restricted shares of Common Stock. Each restricted stock Award would
specify the number of shares of Common Stock to be issued to the recipient,
the date of issuance, any consideration for such shares and the restrictions
imposed on the shares (including the conditions of release or lapse of such
restrictions). In general, shares subject to a restricted stock Award may not
be sold, assigned, transferred or pledged until the restrictions have lapsed
and rights to the shares have vested.
Stock Appreciation Rights. The Administrator may also grant Awards of stock
appreciation rights. A stock appreciation right entitles the holder to receive
from the Company, in cash or (if the Administrator so permits) Common Stock,
at the time of exercise, the excess of the fair market value at the date of
exercise of a share of Common Stock over a specified price fixed by the
Administrator in the Award, multiplied by the number of shares as to which the
right is being exercised. The specified price fixed by the Administrator will
not be less than the fair market value of shares of Common Stock at the date
the stock appreciation right was granted.
Terms and Conditions to Which All Awards Are Subject. If there is a stock
dividend, stock split, reverse stock split or reclassification of Common
Stock, appropriate adjustments will be made in the number and class of shares
of stock subject to the Stock Plan and each outstanding Award, and the
exercise price of each outstanding Award. Each such adjustment will be
determined by the Administrator in its sole discretion.
In addition, new Awards may be substituted for Awards previously granted, or
the Company's obligations respecting outstanding Awards may be assumed by an
employer corporation other than the Company, in connection with any merger,
consolidation or sale of substantial assets (but not a merger or consolidation
in which the Company is the continuing corporation which does not result in
any reclassification or exchange of the Common Stock). Further, in the event
of such a merger, consolidation or sale, the Administrator may decide to pay
cash to plan participants and terminate their Awards, or terminate their
Awards after giving them notice of the merger or other event to give them an
opportunity to exercise their Awards before the event.
Subject to the special rules described previously regarding the options to
be granted quarterly to non-employee directors, the Administrator will
establish the effect of employment termination on vested Awards.
Amendment and Termination. The Board of Directors at any time may amend or
terminate the Stock Plan. However, in general, amendments and termination
would not affect Awards previously granted. Certain amendments would be
subject to stockholder approval.
Initial Awards. As of the date of this preliminary Prospectus, the Company
had not granted any Awards. The day before the Commission declares the
Registration Statement effective, the Company will grant options under the
Stock Plan to Messrs. Wiederhorn and Mendelsohn. If, by that date, the
underwriters have not notified the Company that the underwriters will exercise
their over-allotment option, those options will cover 1,050,000 shares of
Common Stock for Messrs. Wiederhorn and Mendelsohn combined. If the
underwriters by that date have notified the Company that they will exercise
their over-allotment option in full, those options will cover a total of
1,083,750 shares of Common Stock. A partial exercise of the over-allotment
option will result in option amounts between 1,050,000 and 1,083,750 shares. A
portion of these options are intended to be ISOs. The balance will be NSOs.
The exercise price of the ISOs will be $ per share (110% of the initial
offering price to the public in the Common Stock Offering). The exercise price
for a portion of the NSOs will be $ per share (100% of the initial offering
price to the public in the Common Stock Offering). The remainder of the NSOs
will be at an exercise price of $ per share (125% of the initial offering
price to the public in the Common Stock Offering). Approximately 65.6% of the
NSOs will be priced at 100% of the initial offering price. All of these
options will be fully vested by January 2, 1997. The ISOs will have a five-
year term and the NSOs will have a ten-year term. The options will not
terminate earlier if the optionee ceases to be employed by the Company.
87
<PAGE>
The following table sets forth information concerning the options to be
granted to Messrs. Wiederhorn and Mendelsohn before the Registration Statement
becomes effective.
OPTIONS TO BE GRANTED AT CLOSING
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
PERCENT OF STOCK PRICE
NUMBER OF TOTAL APPRECIATION
SHARES OPTIONS FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM (3)
OPTIONS EMPLOYEES IN PRICES PER EXPIRATION ---------------------
NAME GRANTED FISCAL 1996 SHARE DATES 5% 10%
---- ---------- ------------ ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Andrew A. Wiederhorn.... 700,000(1) 67% $-- (2)
Lawrence A. Mendelsohn.. 350,000(4) 33% -- (2)
</TABLE>
- --------
(1) This figure will be 722,536 if the underwriters notify the Company, before
the Registration Statement becomes effective, that they will exercise
their over-allotment option in full.
(2) Five years after the closing of the Common Stock Offering for the ISOs
( shares for Mr. Wiederhorn and shares for Mr. Mendelsohn) and
ten years for the NSOs ( shares for Mr. Wiederhorn and shares
for Mr. Mendelsohn). If the options are increased as indicated in notes
(1) above and (4) below, the ISO figures become shares for Mr.
Wiederhorn and shares for Mr. Mendelsohn and the NSO figures become
shares for Mr. Wiederhorn and shares for Mr. Mendelsohn.
(3) These amounts represent hypothetical gains that could be achieved for the
options if they are exercised at the end of their terms. The assumed 5%
and 10% rates of stock price appreciation are mandated by rules of the
Commission. They do not represent the Company's estimate or projection of
future prices of the Common Stock.
(4) This figure will be 361,214 if the underwriters notify the Company, before
the Registration Statement becomes effective, that they will exercise
their over-allotment option in full.
The following table contains additional information regarding cumulative
activity under the Stock Plan based on the same assumptions used for the
previous table.
CUMULATIVE OPTION STATUS
<TABLE>
<CAPTION>
TOTAL OPTION VALUES
------------------------------------------------------
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED VALUE ---------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Andrew A. Wiederhorn.... 0 $ 0 700,000(2) 0 $ 0 --
Lawrence A. Mendelsohn.. 0 0 350,000(3) 0 0 --
</TABLE>
- --------
(1) By January 2, 1997.
(2) See note (1) to the previous table.
(3) See note (4) to the previous table.
Deductibility of Executive Compensation. Under Section 162(a) of the Code, a
corporation may deduct "a reasonable allowance for salaries or other
compensation for personal services actually rendered." However, Section 162(m)
generally limits the deduction for compensation paid to the chief executive
officer and certain other officers of a publicly-held corporation to $1
million in any taxable year. The corporation cannot deduct the compensation
paid to a covered officer in excess of $1 million.
In general, the excess of the fair market value of stock received on
exercise of Awards (other than ISOs) over the option exercise price is treated
as compensation for this purpose. Accordingly, the deduction for that excess
may be disallowed. However, this principle does not apply to "qualified
performance-based compensation." In addition, a special rule applies to
compensation paid under a plan that existed before the corporation became
publicly held. Options granted under the Stock Plan for a period of
approximately three and one-half years after the closing of the Common Stock
Offering will be intended to qualify under this special rule. In addition, the
Company may choose to cause options and other Awards granted after the Company
becomes publicly-held and which do not qualify under this special rule to
qualify for exemption from Section 162(m) as "qualified performance-based
compensation." However, there are no assurances that any or all Awards will
not be subject to the limitation of Section 162(m).
88
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the beneficial
ownership of Common Stock as of the date of this Prospectus by (a) each
stockholder known by the Company to be the beneficial owner of more than five
percent of the outstanding shares of Common Stock, (b) each director, (c) each
executive officer, and (d) all directors and executive officers as a group.
<TABLE>
<CAPTION>
OWNERSHIP PRIOR TO OFFERING OWNERSHIP AFTER OFFERING
------------------------------ ---------------------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF
BENEFICIAL OWNERS(1) OWNERSHIP CLASS OWNERSHIP CLASS(2)
-------------------- --------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Andrew A. Wiederhorn.... 3,617,127 65.77% 3,617,127 51.67%
Lawrence A. Mendelsohn.. 1,808,330 32.88% 1,808,330 25.83%
Bo G. Aberg............. -- -- -- --
Donald J. Berchtold..... -- -- -- --
Sheryl Anne Morehead.... -- -- -- --
Kenneth E. Kepp......... -- -- -- --
Chris Tassos............ -- -- -- --
Phillip D. Vincent...... -- -- -- --
Don H. Coleman.......... 11,222 .2% 11,222 .16%
Philip G. Forte......... -- -- -- --
David Dale-Johnson...... 11,222 .2% 11,222 .16%
All directors and execu-
tive officers as a
group (11 persons)..... 5,447,901 99.05% 5,447,901 77.82%
</TABLE>
- --------
(1) The address for each of the named officers and directors is c/o Wilshire
Financial Services Group Inc., 1776 SW Madison, Portland, Oregon 97205.
(2) Assumes no exercise of the Common Stock Underwriters' over-allotment
option.
Except as noted in the footnotes above (i) none of such shares is known by
the Company to be shares with respect to which such beneficial ownership and
(ii) the Corporation believes the beneficial holders listed above have sole
voting and investment power regarding the shares shown as being beneficially
owned by them.
89
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEASES
The Company leases office space for its corporate headquarters from Wilshire
Properties I, Incorporated, an Oregon corporation ("WPI"). Andrew A.
Wiederhorn and Lawrence A. Mendelsohn are the beneficial owners of WPI. The
lease agreement provides for an aggregate annual rent payment in 1997 of
approximately $90,000 and expires December 31, 2001. In addition to base rent
the Company is required to pay its proportionate share of operating expenses
incurred by WPI in connection with the operations of the building. The Savings
Banks lease approximately 8,000 sq. ft. of office space in two locations
pursuant to lease which provides for an aggregate annual rental payment in
1997 of approximately $96,000 and expires December 31, 1997.
STOCK TRANSACTIONS
Upon the closing of the Common Stock Offering and Notes Offering, certain
executive officers and directors will exchange 5.1% of the capital stock of
Girard, 5.1% of the capital stock of First Bank, and approximately 99% of the
capital stock of WAC (which itself owns 94.9% of the capital stock of Girard
and First Bank), for 5,447,901 shares of Common Stock of WFSG.
LOAN SERVICING AGREEMENT BETWEEN THE COMPANY, WFC AND WCC
The Company, WFC and WCC entered into a loan servicing agreement (the "Loan
Servicing Agreement") pursuant to which WCC will provide loan portfolio
management services, including billing, portfolio administration and
collection services for all Loans. WCC has also agreed to license its
proprietary computer software to the Company and WFC. Pursuant to the Loan
Servicing Agreement, the Company shall be required to pay a servicing fee
equal to market rates. WCC has agreed not to compete with or be engaged in the
same business as currently conducted by the Company.
After the second anniversary of the closing of the Common Stock Offering,
the Company will have the option to begin servicing its Loan Portfolios and
WCC's loans (the "Servicing Transfer"), provided that the Company or one of
its subsidiaries has obtained the appropriate licenses. Notwithstanding the
foregoing, the Company may request that the Servicing Transfer occur on an
earlier date, provided that the foregoing conditions are met. WCC, in its sole
discretion may refuse to effect the Servicing Transfer prior to the end of the
second year. The Servicing Transfer will occur automatically on the third
anniversary of the closing of the Common Stock Offering and Notes Offering.
After the Servicing Transfer WCC will permit the Company, subject to certain
conditions, to have access to its books, records and forms to ensure the
orderly transfer of the servicing. Following the Servicing Transfer, the fees
and costs to be paid by WCC for the servicing of its loans and the loans of
persons other than the Company shall be the Company's average costs for such
collection as specified in the Loan Servicing Agreement.
LOAN SERVICING AGREEMENT BETWEEN THE SAVINGS BANKS AND WCC
Girard and First Bank have each entered into loan servicing agreements for
performing loans with WCC pursuant to which WCC provides loan portfolio
management services, including billing, portfolio administration and
collection services for all loans owned, acquired or made by the Savings
Banks. WCC receives a fee equal to ten dollars per month for each loan
serviced. The loan servicing agreements are year-to-year and may be terminated
by the Savings Banks or WCC by giving notice at least sixty days prior to
renewal date.
The Savings Banks and WCC have also entered into loan servicing agreements
with respect to specific discounted Loan Portfolios. Pursuant to these loan
servicing agreements WCC provides loan portfolio management services,
including billing, portfolio administration and collection services for the
loans in the specified Loan Portfolios. To date, each of these loan servicing
agreements provides that WCC shall be entitled to an amount equal to (i) all
costs and expenses incurred by WCC for providing loan portfolio management
services, and (ii) an amount equal to twenty-five percent of the amount
collected on the specified Discounted
90
<PAGE>
Loan Portfolios (other than escrow payments, if any) which is in excess of the
initial payments made by the Savings Banks to acquire the Discounted Loan
Portfolios. Servicing fees for new Discounted Loan portfolio servicing
agreements will be chosen by the boards of directors of the Savings Banks
based upon fees charged by WCC in any other appropriate third-party servicing
agreement.
ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to the Administrative Services Agreement, WCC and its private
affiliates and the Company have agreed to provide, commencing with the
completion of the Common Stock Offering and the Notes Offering, certain
services to each other, including, among other things, certain financial
reporting functions, legal compliance, banking, risk management and
operational and strategic matters. The Administrative Services Agreement will
provide for the payment of a market rate plus reimbursement of any third party
expenses for any services rendered by one party for another. The initial term
of the Administrative Services Agreement will expire on December 31, 1997; it
will continue for successive one year renewal periods unless terminated by
either of the parties on not less than 90 days notice prior to the end of any
period. The parties to the Administrative Service Agreement have agreed to
indemnify each other against liability arising out of the willful misconduct
or gross negligence of the indemnifying party.
91
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to an Indenture (the "Indenture") between
WFSG and Bankers Trust Company N.A., as trustee (the "Trustee"), a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The summary of certain provisions of the Indenture set
forth below do not purport to be complete and are qualified in their entirety
by reference to all of the provisions of the Indenture and the Notes.
Capitalized terms not otherwise defined herein have the meanings specified in
the Indenture. Whenever sections or defined terms of the Indenture are
referred to, such sections or defined terms are hereby incorporated herein by
such reference.
The Notes will be limited in aggregate original principal amount to $60
million (plus up to $9,000,000 subject to the Notes Underwriter's over-
allotment option). The Notes will mature on , 2003 (the "Stated
Maturity"). The Notes will rank pari passu with all other general unsecured
obligations of the Company and will be issued in book-entry form only in
denominations of $1,000 and integral multiples in excess thereof.
The Notes will bear interest from the date of their initial issuance, at the
rate per annum set forth on the cover page of this Prospectus, payable semi-
annually in arrears on and of each year (each an
"Interest Payment Date"), commencing , 1997, to the holders of
record at the close of business on the or
(whether or not a business day), as the case may be, next preceding such
Interest Payment Date (each, a "Regular Record Date"). Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
The Notes are not savings accounts or deposits and are not insured by the
FDIC or by the United States or any agency or fund thereof. The Notes will not
be secured by the assets of WFSG or any of its Subsidiaries, including the
Savings Banks, or otherwise and will not have the benefit of a sinking fund
for the retirement of principal or interest. Because WFSG is a holding company
that currently conducts substantially all of its operations through its
Subsidiaries, the right of WFSG to participate in any distribution of assets
of the Subsidiaries, including the Savings Banks, upon their liquidation or
reorganization or otherwise (and thus the ability of Holders of the Notes to
benefit indirectly from such distribution) are subject to the prior claims of
creditors of the Subsidiaries, including, in the case of the Savings Banks, to
the claims of depositors of the Savings Banks. Claims on WFSG's Subsidiaries
by creditors, other than WFSG, include substantial obligations with respect to
deposit liabilities and other borrowings. Additionally, distributions to WFSG
by the Savings Banks, whether in liquidation, reorganization or otherwise,
will be subject to regulatory restrictions and, under certain circumstances,
may be prohibited. See "Regulation--The Savings Banks--Restrictions on Capital
Distributions" and "--Affiliate Transactions."
GLOBAL NOTES, DELIVERY AND FORM
The Notes offered hereby will be represented by one or more Global Notes
deposited with the Depositary, and will trade in the Depositary's Same-Day
Funds Settlement System ("SDFS System") until maturity. The Notes will not be
exchangeable for certificated notes, except in the circumstances described
below.
The Depository Trust Company, New York, New York ("DTC"), will be the
initial Depositary with respect to the Notes. DTC has advised the Company and
the Underwriters that it is a limited-purpose trust company organized under
the laws of the State of New York, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical
movement of securities certificates. DTC's participants include securities
brokers and dealers (including the Underwriters), banks, trust companies,
clearing corporations and certain other organizations, some of whom
92
<PAGE>
(and/or their representatives) own DTC. Access to DTC's book-entry system is
also available to others, such as banks, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly. Persons who are not participants may beneficially own
securities held by DTC only through participants.
Upon the issuance of the Notes represented by the Global Notes, the
Depositary will credit, on its book-entry registration and transfer system,
the principal amount of the Notes represented by the Global Notes to the
accounts of participants. Ownership of beneficial interests in the Global
Notes will be limited to participants or persons that hold interests through
participants. Ownership of beneficial interests in the Notes will be shown on,
and the transfer of that ownership will be effected only through, records
maintained by the Depositary (with respect to interests of participants in the
Depositary), or by participants in the Depositary or persons that may hold
interests through such participants (with respect to persons other than
participants in the Depositary). The laws of some states require that certain
purchasers of securities take physical delivery of such securities in
definitive form. Such limitations and such laws may impair the ability of
holders of the Notes to transfer beneficial interests in the Global Notes.
So long as the Depositary for the Global Notes, or its nominee, is the
registered owner of the Global Notes, the Depositary or its nominee, as the
case may be, will be considered the sole owner or holder of the Notes
represented by the Global Notes for all purposes under the Indenture. Except
as provided below, owners of beneficial interests in the Notes represented by
the Global Notes will not receive or be entitled to receive physical delivery
of such Notes in definitive form and will not be considered the owners or
holders thereof under the Indenture.
So long as the Notes are represented by a Global Note, payments of principal
and interest on the Notes will be made by the Company through the Trustee to
the Depositary or its nominee, as the case may be, as the registered owner of
the Global Notes representing the Notes. Neither the Company nor the Trustee
will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests of
such Global Notes or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests. The Company expects that the
Depositary, upon receipt of any payment of principal or interest in respect of
the Global Notes representing the Notes, will credit the accounts of the
related participants with payment in amounts proportionate to their respective
holdings in principal amount of beneficial interests in such Global Notes as
shown on the records of the Depositary. The Company also expects that payments
by participants to owners of beneficial interests in such Global Notes will be
governed by standing customer instructions and customary practices, as is now
the case with securities held for the accounts of customers in bearer form or
registered in "street name," and will be the responsibility of such
participants.
If the Depositary is at any time unwilling, ineligible or unable to continue
as Depositary under the Indenture and a successor Depositary is not appointed
in respect thereof within 90 days, the Company will issue definitive Notes in
exchange for the Notes represented by the Global Notes. In addition, the
Company may at any time and in its sole discretion determine to discontinue
use of the Global Notes and, in such event, will issue definitive securities
in exchange for the securities represented by the Global Notes. Notes so
issued will be issued in registered form only, in denominations of $1,000 and
integral multiples thereof, without coupons.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made in immediately available funds. All
payments of principal and interest on the Notes will be made by WFSG in
immediately available funds. The Notes will trade in the Depositary's SDFS
System until maturity, and, therefore, the Depositary will require secondary
trading activity in the Notes to be settled in immediately available funds.
OPTIONAL REDEMPTION
The Notes may not be redeemed prior to , 2001 except as described
below. On or after such date, the Notes may be redeemed, in whole or in part,
at the following redemption prices (expressed as a percentage
93
<PAGE>
of the principal amount) plus accrued and unpaid interest to (but excluding)
the redemption date, if redeemed during the 12-month period beginning
, of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001 %
2002 %
</TABLE>
In addition, the Company may redeem, at its option, up to 35% of the
original aggregate principal amount of the Notes at any time and from time to
time until , 2001, with the Net Cash Proceeds received by the Company
from one or more public or private sales of Qualified Capital Stock at a
redemption price of % of the principal amount of the Notes redeemed,
plus accrued and unpaid interest thereon; provided, however, that at least 65%
of the original aggregate principal amount of Notes must remain outstanding
after each such redemption, and provided further, that such redemption must
occur within 60 days after the closing date of any such public or private sale
of Qualified Capital Stock.
If at any time fewer than all of the Notes then outstanding are to be
redeemed, the Trustee shall select the Notes or portions thereof to be
redeemed pro rata, by lot or by any other method the Trustee shall deem fair
and reasonable. Notes in denominations larger than $1,000 may be redeemed in
part in integral multiples of $1,000. Notice of redemption will be mailed to
each Holder of Notes to be redeemed at such Holder's registered address at
least 30, but not more than 60, days before the redemption date. On or after
the redemption date, interest will cease to accrue on Notes or portions
thereof called for redemption.
In addition to permitted redemptions, the Company may from time to time
purchase the Notes in the open market, in private transactions or otherwise,
as permitted by applicable law.
NO SINKING FUND OR MANDATORY REDEMPTION
The Notes will not be entitled to the benefit of any sinking fund or
mandatory redemption.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
Net Worth Maintenance. Upon closing of the Common Stock Offering and the
Notes Offering and at all times thereafter, the Company shall maintain
Consolidated Net Worth, determined at the end of each fiscal quarter, equal to
(i) $40 million plus (ii) the cumulative amount equal to twenty-five percent
(25%) of the Consolidated Net Income (but not loss), if any, of the Company
and its Subsidiaries for each fiscal quarter commencing with the quarter
ending March 31, 1997.
Limitations on Indebtedness.
(a) WFSG shall not incur, directly or indirectly, any Indebtedness or
issue any Disqualified Capital Stock; provided, however, that WFSG may
incur Indebtedness or Disqualified Capital Stock if, on the date of such
incurrence and after giving effect thereto, (i) no Default or Event of
Default has occurred and is continuing or would result therefrom and (ii)
the Leverage Ratio does not exceed 2.0 to 1.0.
(b) The Company will not create, incur, issue, assume, guarantee or
otherwise in any manner become directly or indirectly liable for or with
respect to, or otherwise permit to exist, any Junior Indebtedness (other
than Acquired Indebtedness) unless the Stated Maturity of principal (or any
required repurchase, redemption, defeasance or sinking fund payments) of
such Junior Indebtedness is after the final Stated Maturity of principal of
the Notes.
(c) The Savings Banks will not, and will not permit any of their
Subsidiaries to, create or incur any Indebtedness or issue any Preferred
Stock that in either case would qualify as regulatory capital for the
94
<PAGE>
Savings Banks under 12 C.F.R. Part 567 or any successor regulation, except
to WFSG or its Subsidiaries or to the extent that after giving effect to
the creation or incurrence of such Indebtedness or the issuance of such
Preferred Stock the total of the Savings Banks' aggregate Indebtedness and
Preferred Stock that qualifies as capital under 12 C.F.R. Part 567 does not
exceed 65% of the Savings Banks' aggregate tangible common equity.
(d) The Indenture will provide that the Company will not permit any
Subsidiary to, directly or indirectly, incur any Indebtedness or issue any
Disqualified Capital Stock.
(e) The foregoing provisions shall not apply to:
(1) Permitted Acquisition Indebtedness of the Company and its
Subsidiaries;
(2) Permitted Repurchase Facilities of the Company and its
Subsidiaries;
(3) Guarantees by the Company of (1) and (2);
(4) Intercompany Indebtedness between the Company and any of its
Subsidiaries;
(5) Incurrence by the Company of its obligations under the Notes;
(6) Non-Recourse Indebtedness of the Company and its Subsidiaries;
(7) Securities issued in a securitization by a Securitization Entity
formed by or on behalf of the Company or its Subsidiaries, regardless
of whether such securities are treated as indebtedness for tax
purposes, provided that neither the Company nor any Subsidiary (other
than the Securitization Entity formed solely for the purpose of such
securitization) is directly or indirectly liable as a guarantor or
otherwise (excluding the provision of Credit Support) for such
securities or obligations of the Securitization Entity;
(8) Deposit liabilities of any insured depository Subsidiary;
(9) Unsecured Indebtedness of the Savings Banks having an initial
term to maturity in excess of one year, provided, however, that such
Indebtedness shall be considered to be Indebtedness of WFSG for the
purpose of the Leverage Ratio;
(10) Unsecured working capital loans of Subsidiaries, not to exceed
$5.0 million in the aggregate, provided, however, that such
Indebtedness shall be considered to be Indebtedness of WFSG for the
purpose of the Leverage Ratio;
(11) Acquired Indebtedness of Subsidiaries, provided, however, that
such Acquired Indebtedness shall be considered to be Indebtedness of
WFSG for the purpose of the Leverage Ratio;
(12) Indebtedness secured by Permitted Liens; or
(13) Hedging Obligations directly related to: (i) Indebtedness
permitted to be incurred by the Company or its Subsidiaries pursuant to
the Indenture; (ii) loans held by the Company or its Subsidiaries
pending sale; or (iii) loans with respect to which the Company or any
Subsidiary has an outstanding purchase offer or commitment, financing
commitment or security interest.
(f) For purposes of determining compliance with the foregoing covenant:
(i) in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described above, the Company, in good
faith, will classify such item of Indebtedness and be required to include
the amount and type of such Indebtedness in one of the above clauses; and
(ii) an item of Indebtedness may be divided and classified in more than one
of the types of Indebtedness described above.
Liquidity Maintenance. WFSG shall, at all times when the Notes are not rated
in an investment grade category by one or more nationally recognized
statistical rating organizations, maintain Liquid Assets with a value equal to
at least 100% of the required interest payments due on the Notes on the next
two succeeding semi-annual Interest Payment Dates. Liquid Assets of a
Subsidiary (other than the Savings Banks or other depository institution
Subsidiary) may be included in such calculation only to the extent that such
Liquid Assets may at such time be distributed to WFSG without restriction or
notice to any Person. Such Liquid Assets shall not be the subject of any
pledge, Lien, encumbrance or charge of any kind and shall not be used as
collateral or security for Indebtedness for borrowed money or otherwise of the
Company or its Subsidiaries nor may such Liquid Assets be used as reserves for
any self-insurance maintained by the Company.
95
<PAGE>
Limitations on Restricted Payments. The Company will not, and will not
permit any Subsidiary to, directly or indirectly, make any Restricted Payment
if, at the time of such Restricted Payment or after giving effect thereto,
(a) a Default or Event of Default shall have occurred and be continuing; or
(b) either Savings Bank would fail to meet any of the Regulatory Capital
Requirements; or
(c) the Company would fail to maintain sufficient Liquid Assets to comply
with the terms of the covenant described above under "Liquidity Maintenance";
or
(d) the aggregate amount of all Restricted Payments (the amount of such
payments, if other than in cash, having been determined in good faith by the
relevant Board of Directors, whose determination shall be conclusive and
evidenced by a Board resolution filed with the Trustee) declared and made
after the issue date of the Notes would exceed the sum of
(i) 25% of the aggregate Consolidated Net Income (or, if such
Consolidated Net Income is a deficit, 100% of such deficit) of the Company
accrued on a cumulative basis during the period beginning on the first day
of the fiscal quarter during which the issue date of the Notes occurred and
ending on the last day of the Company's last fiscal quarter ending prior to
the date of such proposed Restricted Payment, plus
(ii) the aggregate Net Cash Proceeds received by the Company as capital
contributions (other than from a Subsidiary) after the issue date of the
Notes, plus
(iii) the aggregate Net Cash Proceeds and the Fair Market Value of
property not constituting Net Cash Proceeds received by the Company from
the issuance or sale (other than to a Subsidiary) of Qualified Capital
Stock after the issue date of the Notes; plus
(iv) 100% of the amount of any Indebtedness of the Company or a
Subsidiary that is issued after the issue date of the Notes that is
thereafter converted into or exchanged for Qualified Capital Stock of the
Company; or
(e) the Unsecured Debt Coverage Ratio for the Company for the most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date of such Restricted Payment is less
than 2.00 to 1.00, determined after giving effect to such Restricted Payment;
provided, however, that the foregoing provisions will not prevent (x) the
payment of a dividend within 60 days after the date of its declaration if at
the date of declaration such payment was permitted by the foregoing
provisions, or (y) any Permitted Payment, or (z) tax sharing payments by the
Company or any of its Subsidiaries pursuant to the existing tax sharing
agreement among the Company and its Subsidiaries (or any subsequently adopted
tax sharing agreement the terms of which are not materially less favorable in
the aggregate to the Company than the terms of such existing tax sharing
agreement).
Limitations on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any of its
Subsidiaries (other than a Securitization Entity) to, create, assume or
otherwise cause or suffer to exist or to become effective any consensual
encumbrance or restriction on the ability of any such Subsidiary to
(a) pay any dividends or make any other distribution on its Capital Stock;
(b) make payments in respect of any Indebtedness owed to the Company or any
other Subsidiary; or
(c) make loans or advances to the Company or any Subsidiary or to guarantee
Indebtedness of the Company or any other Subsidiary;
other than, in the case of (a), (b) and (c),
(1) restrictions imposed by applicable law or regulation or by the OTS or
FDIC;
(2) restrictions existing under agreements in effect on the date of the
Indenture;
96
<PAGE>
(3) consensual encumbrances or restrictions binding upon any Person at
the time such Person becomes a Subsidiary of the Company so long as such
encumbrances or restrictions are not created, incurred or assumed in
contemplation of such Person becoming a Subsidiary;
(4) restrictions with respect to a Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially
all the assets (which term may include the Capital Stock) of such
Subsidiary;
(5) restrictions on the transfer of assets which are subject to Liens;
(6) restrictions existing under agreements evidencing Permitted
Acquisition Indebtedness or Permitted Repurchase Facilities of any
Subsidiary that is formed for the sole purpose of acquiring or holding a
portfolio of assets, if such Indebtedness (i) is made without recourse to,
and with no cross-collateralization (which shall not include Guarantees),
against the assets of, the Company or any other Subsidiary, and (ii) upon
complete or partial liquidation of which the Indebtedness must be
correspondingly repaid in whole or in part, as the case may be; and
(7) restrictions existing under any agreement that refinances or replaces
any of the agreements containing the restrictions in clauses (2), (3) and
(6); provided that the terms and conditions of any such restrictions are
not less favorable to the Holders than those under the agreement evidencing
or relating to the Indebtedness refinanced.
Limitations on Transactions with Affiliates. The Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, enter into any
transaction or series of related transactions (including without limitation,
the sale, purchase, exchange or lease of assets, property or services) with
any Affiliate of the Company (except that the Company and any of its
Subsidiaries may enter into any transaction or series of related transactions
with any Subsidiary of the Company without limitation under this covenant)
unless: (i) such transactions or series of related transactions is on terms
that are no less favorable to the Company or such Subsidiary, as the case may
be, than would be available in a comparable transaction in an arm's length
dealing with a Person that is not such an Affiliate or, in the absence of such
a comparable transaction, on terms that the relevant Board of Directors
determines in good faith would be offered to a Person that is not an
Affiliate; (ii) with respect to any transaction or series of related
transactions involving aggregate payments in excess of $500,000, the Company
delivers an officers' certificate to the Trustee certifying that such
transaction or series of transactions complies with clause (i) above and has
been approved by a majority of the Disinterested Directors of the relevant
Board of Directors of the Company or such Subsidiary, as the case may be; and
(iii) with respect to any transaction or series of related transaction
involving aggregate payments in excess of $2,500,000, or in the event that no
members of the Board of Directors are Disinterested Directors with respect to
any transaction or series of transactions included in clause (ii), (x) in the
case of a transaction involving real property, the aggregate rental or sale
price of such real property shall be the fair market sale or rental value of
such real property as determined in a written opinion by a nationally
recognized expert with experience in appraising the terms and conditions of
the type of transaction or series of transactions for which approval is
required and (y) in all other cases, the Company delivers to the Trustee a
written opinion of a nationally recognized expert with experience in
appraising the terms and conditions of the type of transaction or series of
transactions for which approval is required to the effect that the transaction
or series of transactions are fair to the Company or such Subsidiary from a
financial point of view. The limitations set forth in this paragraph will not
apply to (i) transactions entered into pursuant to any agreement already in
effect on the date of the Indenture and any renewals or extensions thereof not
involving modifications materially adverse to the Company or any Subsidiary,
(ii) normal banking relationships with an Affiliate on an arms' length basis,
(iii) any employment agreement, stock option, employee benefit,
indemnification, compensation, business expense reimbursement or other
employment-related agreement, arrangement or plan entered into by the Company
or any of its Subsidiaries which agreement, arrangement or plan was adopted by
the Board of Directors of the Company or such Subsidiary (including a majority
of the Disinterested Directors), as the case may be, (iv) residential
mortgage, credit card and other consumer loans to an Affiliate who is an
officer, director or employee of the Company or any of its Subsidiaries and
which comply with the applicable provisions of 12 U.S.C. Section 1468(b) and
any rules and regulations of the OTS thereunder, (v) any Restricted Payment or
Permitted Payment, (vi) any transaction or
97
<PAGE>
series of transactions in which the total amount involved does not exceed
$125,000, (vii) purchases on or before March 31, 1997 of loan portfolios
acquired by an Affiliate after July 31, 1996 where the purchase price does not
exceed the lower of two current independent bids for the loan portfolios or
(viii) services rendered and obligations incurred by the Company or any of its
Subsidiaries pursuant to existing agreements or agreements between the Company
and/or any of its Subsidiaries and WCC and/or Affiliates of WCC entered into
in connection with the closing of the Common Stock Offering and the Notes
Offering.
Limitations on Liens and Guarantees. WFSG will not create, assume, incur or
suffer to exist any Lien (other than a Permitted Lien) upon any of the
Company's assets (including the Capital Stock of any Subsidiary) as security
for Indebtedness, without effectively providing that the Notes will be equally
and ratably secured with (or prior to) such Indebtedness.
In addition, the Company will not permit any Subsidiary of the Company,
directly or indirectly, to guarantee or assume, or subject any of its assets
to a Lien (other than a Permitted Lien) to secure, any Pari Passu Indebtedness
or Junior Indebtedness unless (i) such Subsidiary simultaneously executes and
delivers a supplemental indenture to the Indenture providing for a guarantee
of, or pledge of assets to secure, the Notes by such Subsidiary on terms at
least as favorable to the Holders of the Notes as such guarantee or security
interest in such assets is to the holders of such Pari Passu Indebtedness or
Junior Indebtedness, except that in the event of a guarantee or security
interest in such assets with respect to (x) Pari Passu Indebtedness, the
guarantee or security interest in such assets under the supplemental indenture
shall be made pari passu to the guarantee or security interest in such assets
with respect to such Pari Passu Indebtedness or (y) Junior Indebtedness, any
such guarantee or security interest in such assets with respect to such Junior
Indebtedness shall be subordinated to such Subsidiary's guarantee or security
interest in such assets with respect to the Notes to the same extent as such
Junior Indebtedness is subordinated to the Notes and (ii) such Subsidiary
waives and will not in any manner whatsoever claim, or take the benefit or
advantage of, any rights of reimbursement, indemnity or subrogation or any
other rights against the Company or any other Subsidiary of the Company as a
result of any payment by such Subsidiary under its guarantees.
Offer to Purchase upon a Change of Control. If a Change of Control Event
shall occur at any time, then each Holder will have the right to require the
Company to repurchase such Holder's Notes (pursuant to an offer made to all
Holders), in whole or in part, in integral multiples of $1,000 at a purchase
price in cash equal to 101% of the principal amount of such Notes, plus
accrued and unpaid interest, if any, to the date of repurchase. There can be
no assurance that the Company will have the funds available to repurchase the
Notes in the event of a Change of Control Event.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the
repurchase of the Notes upon the occurrence of a Change of Control Event. To
the extent that the provisions of any securities laws or regulations conflict
with the provisions of the Indenture, the Company will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations described in the Indenture by virtue thereof.
Additional Covenants. The Indenture will also contain covenants with respect
to, among other things, the following matters: (i) payment of principal,
premium and interest; (ii) maintenance of corporate existence; (iii) payment
of taxes and other claims; (iv) maintenance of properties; and (v) maintenance
of insurance.
MERGER AND CONSOLIDATION
The Indenture will provide that the Company may not, in a single transaction
or a series of transactions, consolidate with or merge into any other Person
or sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its assets to any Person or group of affiliated Persons
unless (a) either (i) the Company shall be the continuing entity, or (ii) the
Person (if other than the Company) formed by such consolidation or into which
the Company is merged or the Person that acquires by sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all
of the assets of the Company (the "Surviving Entity") is organized
98
<PAGE>
under the laws of the United States or a state thereof or the District of
Columbia and such Surviving Entity assumes by supplemental indenture, executed
and delivered to the Trustee in form reasonably satisfactory to the Trustee,
all obligations of the Company on the Notes and under the Indenture, (b)
immediately after giving effect to such transaction or series of transactions,
no Default or Event of Default shall have occurred and be continuing, (c) the
Company or the Surviving Entity, as applicable, could incur at least $1.00 of
additional Indebtedness without violating the Leverage Ratio described above
under "Limitation on Indebtedness" and (d) the Company or the Surviving
Entity, as applicable, shall have delivered, or caused to be delivered, to the
Trustee, in form and substance reasonably satisfactory to the Trustee, an
officers' certificate and an opinion of counsel, each to the effect that such
consolidation, merger, sale, assignment, conveyance, transfer, lease or other
disposition and the supplemental indenture in respect thereto comply with the
Indenture and that all conditions precedent provided for relating to such
transaction have been complied with.
MODIFICATION OF THE INDENTURE; WAIVER OF COVENANTS
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of greater than 50% in aggregate
principal amount of the Notes then outstanding; provided, however, that no
such modification or amendment may, without the consent of the Holder of each
outstanding Note affected thereby, (i) change the Stated Maturity of the
principal of, or any installment of principal of or interest on, any Note or
reduce the principal amount thereof, premium, if any, or the rate of interest
thereon, or change the coin or currency in which any Note or any premium or
the interest thereon is payable or impair the right to institute suit for the
enforcement of any such payment after the Stated Maturity thereof; (ii) reduce
the percentage in principal amount of the outstanding Notes, the consent of
whose Holders is required for any such amendment or modification, or the
consent of whose Holders is required for any waiver; (iii) modify any of the
provisions relating to supplemental indentures requiring the consent of
Holders or relating to the waiver of past defaults or relating to the waiver
of certain covenants, except to increase the percentage in principal amount of
outstanding Notes required for such action or to provide that certain other
provisions of the Indenture may not be modified or waived without the consent
of the Holder of each Note affected thereby; or (iv) waive a default in
payment with respect to any Note (other than a default in payment that is due
solely because of acceleration of the maturity of the Notes).
Notwithstanding the foregoing, without the consent of any Holders of the
Notes, the Company and the Trustee may modify or amend the Indenture (i) to
evidence the succession of another Person to the Company and the assumption by
any such successor of the covenants of the Company in the Indenture and in the
Notes in accordance with the "Merger and Consolidation" provisions of the
Indenture; (ii) to add any additional Events of Default, to add to the
covenants of the Company for the benefit of the Holders of the Notes, or to
surrender any right or power herein conferred upon the Company in the
Indenture or in the Notes; (iii) to cure any ambiguity, to correct or
supplement any provision in the Indenture which may be defective or
inconsistent with any other provision in the Indenture or in the Notes,
provided that any such action shall not adversely affect in any material
respect the interests of any Holder of any Note; (iv) to secure the Notes or
add a guarantor under the Indenture pursuant to the provisions of the covenant
on "Limitations on Liens and Guarantees" described above; (v) to evidence and
provide the acceptance of the appointment of a successor Trustee under the
Indenture; or (vi) to make any other provisions with respect to matters or
questions arising under the Indenture or the Notes, provided that such
provisions shall not adversely affect in any material respect the interests of
any Holder of any Note.
The Holders of greater than 50% in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
EVENTS OF DEFAULT
An Event of Default will be defined in the Indenture to include:
(i) failure by the Company to pay interest on any Note when due and
payable, if such failure continues for a period of 30 days;
99
<PAGE>
(ii) failure by the Company to pay the principal on any Note when due and
payable at maturity or upon redemption, acceleration or otherwise;
(iii) failure by the Company to comply with any other agreement or
covenant contained in the Indenture if such failure continues for a period
of 30 days after notice to the Company by the Trustee or to the Company and
the Trustee by the Holders of at least 25% in principal amount of the Notes
then outstanding;
(iv) indebtedness of the Company or any Subsidiary of the Company is not
paid within any applicable grace period after final maturity or in the
event that final maturity is accelerated because of a default and, in
either case, the total amount of such indebtedness unpaid or accelerated is
equal to or greater than 5% of the Company's Consolidated Net Worth;
(v) failure by, as the case may be, either or both of the Savings Banks
to comply with any of their Regulatory Capital Requirements; provided, that
an Event of Default under this clause (v) shall not be deemed to have
occurred (a) during the 60 day period following the first day on which
either or both of the Savings Banks, as the case may be, fails or fail to
comply with any of their Regulatory Capital Requirements, if within such 60
day period the Savings Bank or the Savings Banks files or file a capital
plan with the OTS, (b) during the 90 day period following the initial
submission of a capital plan to the OTS by either or both of the Savings
Banks, as the case may be (or, if the OTS notifies the Savings Bank or
Savings Banks in writing that it needs a longer period of time to determine
whether to approve such capital plan or plans, such longer period as is so
specified by the OTS), unless prior to such date the OTS shall have
notified the Savings Bank or Savings Banks of its determination not to
approve such capital plan or plans, or (c) during the period that the
Savings Bank is, or the Savings Banks are, as the case may be, operating in
material compliance with a capital plan or plans approved by the OTS;
(vi) occurrence of certain events of bankruptcy or insolvency of the
Company or either of the Savings Banks; and
(vii) existence of one or more judgments against the Company or either of
the Savings Banks or any of their Subsidiaries in excess of 5% of the
Company's Consolidated Net Worth, either individually or in the aggregate,
which remain undischarged 60 days after all rights to directly review such
judgment, whether by appeal or writ, have been exhausted or have expired.
The Company will covenant in the Indenture to file annually with the Trustee
a statement regarding compliance by the Company with the terms of the
Indenture and specifying any defaults of which the signers may have knowledge.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of not less than 25% in principal amount of the Notes then outstanding may
declare all the Notes to be immediately due and payable by notice to the
Company (and to the Trustee if given by the Holders). Under certain
circumstances, the Holders of a majority in principal amount of the Notes then
outstanding may rescind such a declaration.
PROVISION OF REPORTS
The Company will furnish to the Holders of Notes, upon request, whether or
not required by the rules and regulations of the Commission, (i) all quarterly
and annual financial information that would be required to be contained in a
filing with the Commission on Form 10-Q and Form 10-K if the Company was
required to file such forms, including a "Management's Discussion and Analysis
of Financial Condition and Results of Operations" that describes the financial
condition and results of operations of the Company and its Subsidiaries, and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants, and (ii) all reports that would be required
to be filed with the Commission on Form 8-K if the Company were required to
file such reports.
100
<PAGE>
DEFEASANCE OR COVENANT DEFEASANCE OF THE INDENTURE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of any of its Subsidiaries with respect to the
outstanding Notes discharged ("defeasance"). Such defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, except for the rights of Holders of
outstanding Notes to receive payments in respect of the principal of, premium,
if any, and interest on such Notes when such payments are due and certain
provisions of the Indenture with respect to the registration and transfer of
the Notes. In addition, the Company may, at its option and at any time, elect
to have its obligations and the obligations of any of its Subsidiaries with
respect to certain covenants described in the Indenture released ("covenant
defeasance") and thereafter any failure to comply with such covenants shall
not constitute a Default or an Event of Default. In the event of a covenant
defeasance, certain other events (not including prepayment, bankruptcy,
receivership or insolvency events) described under "Events of Default" will no
longer constitute a Default or an Event of Default with respect to the Notes.
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of Notes, cash in United States Dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof
(collectively, the "trust fund"), in such amounts as will be sufficient
(without considering any reinvestment of amounts earned on such U.S.
Government Obligations), in the opinion of a nationally recognized firm of
independent public accountants, to pay and discharge interest on the
outstanding Notes as it becomes due and to pay and discharge the principal of
and premium, if any, on the outstanding Notes at redemption or maturity; (ii)
in the case of defeasance, the Company must deliver to the Trustee an opinion
of independent counsel in the United States stating that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel in the United States shall confirm that,
the Holders of the outstanding Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such defeasance had not
occurred; (iii) in the case of covenant defeasance, the Company must deliver
to the Trustee an opinion of independent counsel in the United States to the
effect that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such covenant
defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
covenant defeasance had not occurred; (iv) no Default or Event of Default may
have occurred and be continuing on the date of such deposit and after giving
effect thereto; (v) such defeasance or covenant defeasance may not cause the
Trustee for the Notes to have a conflicting interest with respect to any
securities of the Company; (vi) such defeasance or covenant defeasance may not
result in a breach or violation of, or constitute a Default under, the
Indenture or any material agreement or instrument to which the Company is a
party or by which it is bound; (vii) the Company must deliver to the Trustee
an opinion of independent counsel in the United States to the effect that the
trust fund will not be subject to the effect of any applicable bankruptcy,
insolvency, receivership, conservatorship, reorganization or similar laws
affecting creditors' rights generally (including, without limitation,
fraudulent and avoidable transfers); (viii) the Company must deliver to the
Trustee an officers' certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of the Notes over the other
creditors of the Company or with the intent of defeating, hindering, delaying
or defrauding creditors of the Company; (ix) no event or condition may exist
that would prevent the Company from making payments of the principal of,
premium, if any, and interest on the Notes, on the date of such deposit; and
(x) the Company must deliver to the Trustee an officers' certificate and an
opinion of independent counsel in the United States, each stating that all
conditions precedent relating to either the defeasance or the covenant
defeasance, as the case may be, have been complied with.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes, as expressly
provided for in the Indenture) as to all outstanding Notes when (i) either (a)
all the Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Notes which have been
101
<PAGE>
replaced or paid) have been delivered to the Trustee for cancellation or (b)
all Notes not theretofore delivered to the Trustee for cancellation have
become due and payable, or will become due and payable or are to be called for
redemption within one year, and the Company has irrevocably deposited or
caused to be deposited with the Trustee funds in an amount sufficient to pay
and discharge the entire Indebtedness on the Notes not theretofore delivered
to the Trustee for cancellation, for principal of, and premium, if any, and
interest on the Notes to the date of deposit together with irrevocable
instructions to the Trustee from the Company directing the Trustee to apply
such funds to the payment thereof at maturity or redemption, as the case may
be; (ii) the Company has paid all other sums payable under the Indenture by
the Company; and (iii) the Company has delivered to the Trustee an officers'
certificate and an opinion of counsel each stating that all conditions
precedent under the Indenture relating to the satisfaction and discharge of
the Indenture have been complied with.
TRUSTEE
Bankers Trust Company N.A., the Trustee under the Indenture, may from time
to time enter into ordinary correspondent and other banking relationships with
the Company. The address of the principal corporate trust office of the
Trustee is 4 Albany Street, New York, NY 10006.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a person (i) existing at the
time such Person becomes a Subsidiary of or is merged with or into any other
Person or (ii) assumed in connection with the acquisition of assets from such
Person, in each case, other than Indebtedness incurred in connection with, or
in contemplation of, such Person becoming a Subsidiary of such other Person or
such acquisition. Acquired Indebtedness shall be deemed to be incurred on the
date of the related acquisition of assets from such Person or the date such
Person becomes a Subsidiary of or is merged with or into such other Person.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly Controlling or Controlled by or under direct or
indirect common Control with such specified Person and any legal or beneficial
owner, directly or indirectly, of 20% or more of the Voting Stock of such
specified Person. Notwithstanding the foregoing, no Securitization Entity
shall be deemed an Affiliate of the Company.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the
sum of the products of (a) the number of years from the date of determination
to the date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment by
(ii) the sum of all such principal payments.
"Capital Lease Obligation" of any Person means any obligations of such
Person under any capital lease for real or personal property which, in
accordance with GAAP, is required to be recorded as a capitalized lease
obligation; and, for the purpose of the Indenture, the amount of such
obligation at any date shall be the capitalized amount thereof at such date,
determined in accordance with GAAP.
"Capital Stock" in any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents or interests
in (however designated) capital stock in such Person, including, with respect
to a corporation, common stock, Preferred Stock and other corporate stock and,
with respect to a partnership, partnership interests, whether general or
limited, and any rights (other than debt securities convertible into corporate
stock, partnership interests or other capital stock), warrants or options
exchangeable for or convertible into such corporate stock, partnership
interests or other capital stock.
"Change of Control Event" means an event or series of events by which
(a) any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act), other than the Existing Principal Stockholders,
is or becomes after the date of issuance of the Notes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act as in
effect on the date of the Indenture), of more than 40% of the total voting
power of all Voting Stock of the Company then outstanding;
102
<PAGE>
(b) (1) another corporation merges into the Company or the Company
consolidates with or merges into any other corporation, or
(2) the Company conveys, transfers or leases all or substantially all its
assets to any person or group, in one transaction or a series of
transactions other than any conveyance, transfer or lease between the
Company and a Wholly-Owned Subsidiary of the Company,
in each case, with the effect that a person or group, other than the Existing
Principal Stockholders, is or becomes the beneficial owner of more than 40% of
the total voting power of all Voting Stock of the surviving or transferee
corporation of such transaction or series of transactions;
(c) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Company's Board of Directors, or
whose nomination for election by the Company's shareholders was approved by
a vote of a majority of the Directors then still in office who were either
directors at the beginning of such period or whose election or nomination
for election was previously so approved, cease for any reason to constitute
a majority of the Directors then in office; or
(d) the shareholders of the Company shall approve any plan or proposal
for the liquidation or dissolution of the Company.
"Consolidated Depreciation and Amortization Expense" means with respect to
any Person for any period, the total amount of depreciation and amortization
expense of such Person for such period on a consolidated basis and otherwise
determined in accordance with GAAP.
"Consolidated EBITDA" means, with respect to any Person for any period, the
Consolidated Net Income (Loss) of such Person for such period plus (a)
provision for taxes based on income or profits of such Person for such period
deducted in computing Consolidated Net Income (Loss) plus (b) Consolidated
Interest Expense of such Person for such period, plus (c) Consolidated
Depreciation and Amortization Expense of such Person for such period to the
extent such depreciation and amortization were deducted in computing
Consolidated Net Income (Loss), plus (d) without duplication, any other non-
cash charges reducing Consolidated Net Income (Loss) of such Person for such
period less (e) without duplication, non-cash items increasing Consolidated
Net Income (Loss) of such Person for such period in each case, on a
consolidated basis for such Person in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any period, the sum
of: (a) consolidated interest expense of such Person for such period, other
than interest expense on deposits, Permitted Acquisition Indebtedness and
Permitted Repurchase Facilities, whether paid or accrued (except to the extent
accrued in a prior period), to the extent such expense was deducted in
computing Consolidated Net Income (Loss) (including amortization of original
issue discount, non-cash interest payments and the interest component of
Capitalized Lease Obligations, excluding amortization of deferred financing
fees) and (b) consolidated capitalized interest of such Person for such
period, whether paid or accrued, to the extent such expense was deducted in
computing Consolidated Net Income (Loss).
"Consolidated Net Income (Loss)" of any Person means, for any period, the
consolidated net income (or loss) of such Person and its consolidated
Subsidiaries for such period as determined in accordance with GAAP, adjusted,
to the extent included in calculating such net income (loss), by excluding,
without duplication, (i) the portion of net income (or loss) of any other
Person (other than any of such Person's consolidated Subsidiaries) in which
such Person or any of its Subsidiaries has an ownership interest, except to
the extent of the amount of dividends or other distributions actually paid to
such Person or its consolidated Subsidiaries in cash by such other Person
during such period, (ii) net income (or loss) of any Person combined with such
Person or any of its Subsidiaries on a "pooling of interests" basis
attributable to any period prior to the date of combination, (iii) any gain or
loss, net of taxes, realized upon the termination of any employee pension
benefit plan and (iv) solely for the purpose of determining Consolidated Net
Income (Loss) in connection with the calculation of Restricted Payments
permitted to be made hereunder, the net income of any consolidated Subsidiary
of such Person to the extent that the declaration or payment of dividends or
similar distributions by that Subsidiary of that income is
103
<PAGE>
not at the time permitted, directly or indirectly, by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulations applicable to that Subsidiary or its
shareholders; provided that, upon the termination or expiration of such
dividend or distribution restrictions, the portion of net income (or loss) of
such consolidated Subsidiary allocable to such Person and previously excluded
shall be added to the Consolidated Net Income (Loss) of such Person to the
extent of the amount of dividends or other distributions available to be paid
to such Person in cash by such Subsidiary.
"Consolidated Net Worth" of any Person and its Subsidiaries mean as of the
date of determination all amounts that would be included under stockholders'
equity on a consolidated balance sheet of such Person and its Subsidiaries
determined in accordance with GAAP.
"Control" when used with respect to any specified Person means the power to
direct the management and policies of such Person directly or indirectly,
whether through ownership of voting securities (or pledge of voting securities
if the pledgee thereof may on the date of determination exercise or control
the exercise of the voting rights of the owner of such voting securities), by
contract or otherwise; and the terms "to Control," "Controlling" and
"Controlled" have meanings correlative to the foregoing.
"Credit Support" means credit support designed to enhance the likelihood of
payment on securities issued in connection with a securitization of loans or
other assets which are generally funded with the proceeds of such
securitization, including without limitation subordination of certain classes
of securities, insurance policies, representations and warranties, reserve
funds, liquidity reserves, lost- and missing- note reserves and letters of
credit.
"Currency Agreement" means, with respect to any Person, any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"Default" means an event or condition the occurrence of which would, with
the lapse of time or the giving of notice or both, become an Event of Default.
"Disqualified Capital Stock" means any Capital Stock which, by its terms (or
by the terms of any security into which it is convertible or exchangeable), or
upon the happening of any event, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or redeemable at the
option of the holder thereof, in whole or in part on, or prior to, or is
exchangeable for debt securities of the Company or its Subsidiaries prior to,
the final Stated Maturity of principal of the Notes; provided that only the
amount of such Capital Stock that is redeemable prior to the Stated Maturity
of principal of the Notes shall be deemed to be Disqualified Capital Stock.
"Disinterested Director" of any Person means, with respect to any
transaction or series of related transactions, a member of the board of
directors of such Person who does not have any material direct or indirect
financial interest in or with respect to such transaction or series of related
transactions.
"Existing Principal Stockholders" means, individually or collectively,
Andrew A. Wiederhorn and Lawrence A. Mendelsohn and their respective estates,
spouses, heirs, ancestors, lineal descendants and legatees and legal
representatives of any of the foregoing and the trustee of any bona fide trust
of which one or more of the foregoing are the trustees or the majority
beneficiaries, and any entity of which any of the foregoing, individually or
collectively, beneficially owns more than 50% of the Voting Stock thereof.
"Fair Market Value" means, with respect to any asset, the price which could
be negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing buyer, neither of which is under compulsion to
complete the transaction; provided, however, that the Fair Market Value of any
asset or assets shall be determined by the Board of Directors of the Company,
acting in good faith, and shall be evidenced by a resolution of such Board of
Directors delivered to the Trustee.
"Fixed Charges" means, with respect to any Person for any period, the sum of
(i) Consolidated Interest Expense of such Person for such period, and (ii) the
product of (A) all cash dividend payments on any series of Preferred Stock or
Disqualified Capital Stock of such Person or its Subsidiaries for such period,
and (B) a fraction, the numerator of which is one and the denominator of which
is one minus the then-current combined
104
<PAGE>
federal, state and local statutory tax rate of such Person, expressed as a
decimal, in each case on a consolidated basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles.
"Guaranteed Indebtedness" of any Person means, without duplication, all
Indebtedness of any other Person guaranteed directly or indirectly in any
manner by such Person, or in effect guaranteed directly or indirectly by such
person through an agreement (i) to pay or purchase such Indebtedness or to
advance or supply funds for the payment or purchase of such Indebtedness, (ii)
to purchase, sell or lease (as lessee or lessor) property, or to purchase or
sell services, primarily for the purpose of enabling the debtor to make
payment of such Indebtedness or to assure the holder of such Indebtedness
against loss, (iii) to supply funds to, or in any other manner invest in, the
debtor (including any agreement to pay for property or services without
requiring that such property be received or such services be rendered), (iv)
to maintain working capital or equity capital of the debtor, or otherwise to
maintain the net worth, solvency or other financial condition of the debtor,
or (v) otherwise to assure a creditor with respect to Indebtedness against
loss; provided that the term shall not include endorsements for collection of
deposit, in either case in the ordinary course of business.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holders" means the registered holders of the Notes.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and other
accrued current liabilities arising in the ordinary course of business, but
including, without limitation, all obligations, contingent or otherwise, of
such Person in connection with any letters of credit issued under letter of
credit facilities, and in connection with any agreement by such Person to
purchase, redeem, exchange, convert or otherwise acquire for value any Capital
Stock of such Person now or hereafter outstanding, (ii) all obligations of
such Person evidenced by bonds, notes, debentures or other similar
instruments, (iii) all indebtedness of such Person created or arising under
any conditional sale or other title retention agreement with respect to
property acquired by such Person, but excluding trade payables arising in the
ordinary course of business, (iv) all obligations under interest rate
agreements of such Person, (v) all Capital Lease Obligations of such Person,
(vi) all Indebtedness referred to in clauses (i) through (v) above of other
Persons and all dividends payable by other Persons, the payment of which is
secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any Lien, upon or with
respect to property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or
become liable for the payment of such Indebtedness (the amount of such
obligations being deemed to be the lesser of the value of such property or
asset or the amount of the obligations so secured), (vii) all guarantees by
such Person of Guaranteed Indebtedness, (viii) all Disqualified Capital Stock
(valued at the greater of book value and voluntary or involuntary maximum
fixed repurchase price plus accrued and unpaid dividends) of such Person, and
(ix) any amendment, supplement, modification, deferral, renewal, extension,
refunding or refinancing or any liability of the types referred to in clauses
(i) through (viii) above. For purposes hereof, (x) the "maximum fixed
repurchase price" of any Disqualified Capital Stock which does not have a
fixed repurchase price shall be calculated in accordance with the terms of
such Disqualified Capital Stock as if such Disqualified Capital Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by,
the fair market value of such Disqualified Capital Stock, such fair market
value is to be determined in good faith by the board of directors (or any duly
authorized committee thereof) of the issuer of such Disqualified Capital
Stock, and (y) Indebtedness is deemed to be incurred pursuant to a revolving
credit facility each time an advance is made thereunder.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement, repurchase agreement, futures contract or other financial
agreement or arrangement designed to protect the Company or any Subsidiary
against fluctuations in interest rates.
"Junior Indebtedness" means any Indebtedness of the Company subordinated in
right of payment of either principal, premium (if any) or interest thereon to
the Notes.
105
<PAGE>
"Leverage Ratio" as of any date of determination means the ratio of (i) the
aggregate amount of all Indebtedness and Disqualified Capital Stock of the
Company, excluding (A) Indebtedness and Guarantees thereof permitted to be
incurred pursuant to clauses (e) (1), (2), (3), (6) and (7) of "Certain
Covenants--Limitation on Indebtedness," (B) Hedging Obligations permitted to
be incurred pursuant to clause (e)(13) of the covenant described under
"Certain Covenants--Limitation on Indebtedness" and (C) Junior Indebtedness of
the Company to (ii) the Consolidated Net Worth of the Company.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
security interest, hypothecation or other encumbrance upon or with respect to
any property of any kind, real or personal, movable or immovable, now owned or
hereafter acquired.
"Liquid Assets" shall include: (i) cash; (ii) any of the following
instruments that have a remaining term to maturity not in excess of 90 days
from the determination date: (a) repurchase agreements on obligations of, or
are guaranteed as to timely receipt of principal and interest by, the United
States or any agency or instrumentality thereof when such obligations are
backed by the full faith and credit of the United States provided that the
party agreeing to repurchase such obligations is a primary dealer in U.S.
government securities, (b) federal funds and deposit accounts, including but
not limited to certificates of deposit, time deposits and bankers' acceptances
of any U.S. depository institution or trust company incorporated under the
laws of the United States or any state, provided that the debt of such
depository institution or trust company at the date of acquisition thereof has
been rated by Standard & Poor's Corporation in the highest short-term rating
category or has an equivalent rating from another nationally recognized rating
agency, or (c) commercial paper of any corporation incorporated under the laws
of the United States or any state thereof that on the date of acquisition is
rated investment grade by Standard & Poor's Corporation or has an equivalent
rating from another nationally recognized rating agency; (iii) any debt
instrument which is an obligation of, or is guaranteed as to the receipt of
principal and interest by the United States, its agencies or any U.S.
government sponsored enterprise, or (iv) any mortgage-backed or mortgage-
related security issued by the United States, its agencies, or any U.S.
government sponsored enterprise which the payment of principal and interest
from the mortgages underlying such securities will be passed through to the
holder thereof and which such security has a remaining weighted average
maturity of 15 years or less. Notwithstanding the foregoing, Liquid Assets
shall not include any debt instruments, securities or collateralized mortgage
obligations (real estate mortgage investment conduits) that would be
classified as a "High-Risk Mortgage Security" pursuant to the policy statement
adopted by the Federal Financial Institutions Examination Counsel on February
10, 1992, as reflected in Volume I of the Federal Reserve Report Service, Part
3-1562.
"Net Cash Proceeds" means, with respect to any issuance or sale of Capital
Stock, or options, warrants or rights to purchase Capital Stock, or debt
securities or Capital Stock that have been converted into or exchanged for
Capital Stock, or any capital contribution in respect of Capital Stock, as
referred to under "Certain Covenants, Limitation on Restricted Payments," the
proceeds of such issuance or sale or capital contribution in the form of cash
or cash equivalents, including payments in respect of deferred payment
obligations when received in the form of, or stock or other assets when
disposed for, cash or cash equivalents (except to the extent that such
obligations are financed or sold with recourse to the Company or any
Subsidiary of the Company), net of attorney's fees, accountant's fees and
brokerage, consulting, underwriting and other fees and expenses actually
incurred in connection with such issuance or sale or capital contribution and
net of taxes paid or payable by the Company as a result thereof.
"Non-Recourse Indebtedness" is defined to mean, with respect to any Person,
Indebtedness of such Person for which (i) the sole recourse for collection of
principal and interest on such Indebtedness is against the specific assets
identified in the instruments evidencing or securing such Indebtedness, (ii)
such assets were acquired with the proceeds of such Indebtedness or such
Indebtedness was incurred concurrently with the acquisition of such
assets; and (iii) no other assets (other than Credit Support) of such Person
or of any other Person may be realized upon or in collection of principal or
interest on such Indebtedness.
"Pari Passu Indebtedness" means any Indebtedness of the Company that is pari
passu in right of payment of principal, premium (if any) and interest thereon
to the Notes.
"Permitted Liens" is defined to mean (i) Liens for taxes, assessments,
governmental charges or claims that are being contested in good faith by
appropriate legal proceedings instituted and diligently conducted and for
which a reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have
106
<PAGE>
been made; (ii) statutory Liens of landlords and carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen or other similar Liens imposed by
law and arising in the ordinary course of business and with respect to amounts
not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made, (iii) Liens incurred or deposits
made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security; (iv)
Liens incurred or deposits made to secure the performance of tenders, bids,
leases, statutory or regulatory obligations, surety and appeal bonds, progress
payments, development obligations, government contracts, performance and
return-of-money bonds and other obligations of a similar nature, in each case
incurred in the ordinary course of business (exclusive of obligations for the
payment of borrowed money or otherwise constituting a liability in accordance
with GAAP); (v) with respect to property of the Company or any Subsidiary,
Liens granted on such property or assets in favor of the Person from whom the
Company or such Subsidiary acquired such property or assets which Liens secure
the payment of a contingent portion of the purchase price of such property so
long as such Liens are granted and such arrangement is entered into in the
ordinary course of business of the Company; (vi) attachment or judgment Liens
not giving rise to a Default or Event of Default and which are being contested
in good faith by appropriate proceedings; (vii) easements, rights-of-way,
restrictions, homeowners association assessments and similar charges or
encumbrances that do not materially interfere with the ordinary course of
business of the Company or any of its Subsidiaries; (viii) zoning
restrictions, licenses, restrictions on the use of real property or minor
irregularities in title thereto, which do not materially impair the use of
such property in the ordinary course of business of the Company or any
Subsidiary or the value of such real property for the purpose of such
business; (ix) Liens in favor of the Company or any Subsidiary that is a
Wholly Owned Subsidiary of the Company; (x) Liens existing on the Closing
Date; (xi) Liens securing Non-Recourse Indebtedness of the Company or a
Subsidiary thereof; (xii) Liens with respect to the property or assets of the
Company or a Subsidiary securing Indebtedness permitted to be incurred
pursuant to clauses (e)(1), (2), (3), (6) and (7) of "Certain Covenants--
Limitations on Indebtedness"; (xiii) Liens granted after the Closing Date on
any assets or Capital Stock of the Company or its Subsidiaries created in
favor of the Holders; (xiv) Liens with respect to the property or assets of a
Subsidiary granted by such Subsidiary to the Company to secure Indebtedness
owing to the Company; (xv) Liens securing Indebtedness which is incurred to
refinance Permitted Indebtedness, provided that such Liens constitute
Permitted Liens under this clause (xv) only to the extent that they do not
extend to or cover any property or assets of the Company or any Subsidiary
other than the property or assets securing the Indebtedness being refinanced;
(xvi) leases or subleases granted to others not materially interfering with
the ordinary course of business of the Company or any of its Subsidiaries;
(xvii) other Liens securing obligations not exceeding $1,000,000; and (xviii)
Liens securing Hedging Obligations of the Company or such Subsidiary so long
as such Hedging Obligations relate to Indebtedness that is, and is permitted
under the Indenture to be, secured by a Lien on the same property securing
such Hedging Obligations.
"Permitted Payment" means, so long as no Default or Event of Default is
continuing,
(a) the purchase, redemption, defeasance or other acquisition or retirement
for value of any Capital Stock of the Company or any Affiliate (other than a
Wholly-Owned Subsidiary, which is unrestricted) of the Company, Junior
Indebtedness or Pari Passu Indebtedness in exchange for (including any such
exchange pursuant to the exercise of a conversion right or privilege where, in
connection therewith, cash is paid in lieu of the issuance of fractional
shares or scrip), or out of the Net Cash Proceeds or Fair Market Value of
property not constituting Net Cash Proceeds of, a substantially concurrent
issue and sale (other than to a Subsidiary of the Company or to an employee
benefit plan of the Company or any of its Subsidiaries) of Qualified Capital
Stock of the Company; provided that the Net Cash Proceeds or Fair Market Value
of such property received by the Company from the issuance of such shares of
Qualified Capital Stock, to the extent so utilized, shall be excluded from
clause (c)(iii) of the covenant described under "Covenants, Limitation on
Restricted Payments" above; and
(b) the repurchase, redemption, defeasance or other acquisition or
retirement for value of any Junior Indebtedness or Pari Passu Indebtedness in
exchange for, or out of the Net Cash Proceeds of, a substantially concurrent
issue and sale (other than to a Subsidiary of the Company) of new Indebtedness
to the Company (such
107
<PAGE>
a transaction, a "refinancing"); provided, that any such new Indebtedness of
the Company (i) shall be in a principal amount that does not exceed an amount
equal to the sum of (A) the principal amount of the Indebtedness so refinanced
less any discount from the face amount of such Indebtedness to be refinanced
expected to be deducted from the amount payable to the holders of such
Indebtedness in connection with such refinancing, (B) the amount of any
premium expected to be paid in connection with such refinancing pursuant to
the terms of the Junior Indebtedness or Pari Passu Indebtedness refinanced or
the amount of any premium reasonably determined by the Company as necessary to
accomplish such refinancing by means of a tender offer, privately negotiated
repurchase or otherwise and (C) the amount of legal, accounting, printing and
other similar expenses of the Company incurred in connection with such
refinancing; provided, further, that for purposes of this clause (i), the
principal amount of any Indebtedness shall be deemed to mean the principal
amount thereof or, if such Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount as of the date of determination; (ii)
(A) if such refinanced Indebtedness has an Average Life to Stated Maturity
shorter than that of the Notes or a final Stated Maturity earlier than the
final Stated Maturity of the Notes, such new Indebtedness shall have an
Average Life to Stated Maturity no shorter than the Average Life to Stated
Maturity of such refinanced Indebtedness and a final Stated Maturity no
earlier than the final Stated Maturity of such refinanced Indebtedness or (B)
in all other cases each Stated Maturity of principal (or any required
repurchase, redemption, defeasance or sinking fund payments) of such new
Indebtedness shall be after the final Stated Maturity of principal of the
Notes; and (iii) is (A) made expressly subordinated to or pari passu with the
Notes to substantially the same extent as the Indebtedness being refinanced or
(B) expressly subordinate to such refinanced Indebtedness.
"Permitted Repurchase Facilities" includes purchase and sale facilities
pursuant to which the Company or a Subsidiary sells loans, real estate owned
or other financial assets to a financial institution or other entity and
agrees to repurchase such loans, real estate owned or financial assets.
"Permitted Acquisition Indebtedness" means any secured funding arrangement
with a financial institution or other lender to the extent (and only to the
extent) funding thereunder is used exclusively to finance or refinance the
purchase or origination of loans, real estate owned or other financial assets
by the Company or a Subsidiary.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivisions thereof.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary liquidation or dissolution of such Person, over Capital Stock of any
other class in such Person.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Disqualified Capital Stock.
"Regulatory Capital Requirements" means the minimum amount of capital
required to meet each of the industry-wide regulatory capital requirements
applicable to the Savings Banks pursuant to 12 U.S.C. Section 1464(t) and 12
C.F.R. Section 567 (and any amendment to either thereof) or any successor law
or regulation, or such higher amount of capital as either Savings Bank,
respectively, is required to maintain in order to meet any individual minimum
capital standard applicable to the Savings Bank pursuant to 12 U.S.C. Section
1464(s) and 12 C.F.R. Section 567.3 or to comply with any enforcement action,
including but not limited to the Orders, issued pursuant to 12 U.S.C. Section
1818(b) (and any amendment to any of the foregoing) or any successor law or
regulation.
"Restricted Payment" means
(a) the declaration, payment or setting apart of any funds for the payment
of any dividend on, or making of any distribution to holders of, the Capital
Stock of the Company or any Subsidiary of the Company (other than
108
<PAGE>
(i) dividends or distributions in Qualified Capital Stock of the Company and
(ii) dividends or distributions payable on or in respect of any class or
series of Capital Stock of a Subsidiary of the Company as long as the Company
receives at least its pro rata share of such dividends or distributions in
accordance with its ownership interests in such class or series of Capital
Stock);
(b) the purchase, redemption or other acquisition or retirement for value,
directly or indirectly, of any Capital Stock of the Company or any Affiliate
of the Company (other than a Wholly-Owned Subsidiary, and other than the
purchase from a non-Affiliate of the Company of Capital Stock of any joint
venture or other Person which is an Affiliate of the Company solely because of
the Company's direct or indirect ownership of 20% or more of the Voting Stock
of such joint venture or other Person); or
(c) The making of any principal payments on, or repurchase, redemption,
defeasance, retirement or other acquisition for value, directly or indirectly,
of any Junior Indebtedness or Pari Passu Indebtedness, prior to any Stated
Maturity of principal or scheduled redemption or defeasance of, or any
scheduled sinking fund payment on, such Junior Indebtedness or Pari Passu
Indebtedness.
"Securitization Entity" means any pooling arrangement or entity formed or
originated for the purpose of holding, and/or issuing securities representing
interests in, one or more pools of mortgages, leases, credit card receivables,
home equity loan receivables, automobile loans, leases or installment sales
contracts, other consumer receivables, real estate owned or other financial
assets of the Company or any Subsidiary, and shall include, without
limitation, any partnership, limited liability company, liquidating trust,
grantor trust, owner trust, real estate mortgage investment conduit, real
estate investment trust or collateralized bond obligation.
"Significant Subsidiary" means, with respect to any Person, any consolidated
Subsidiary of such Person for which the net income of such Subsidiary was more
than 25% of the Consolidated Net Income of such Person in both of the two
prior fiscal years.
"Stated Maturity" when used with respect to any Indebtedness (including,
without limitation, the Notes) means the dates specified in the instrument
governing such Indebtedness as the fixed dates on which any principal amount
of such Indebtedness is due and payable (including, without limitation, by
reason of any required redemption, purchase, defeasance or sinking fund
payment) and, when used with respect to any installment of interest on
Indebtedness, means the date on which such installment is due and payable.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of Voting
Stock thereof is at the time owned or controlled, directly or indirectly, by
such Person or one or more of the other Subsidiaries of such Person or a
combination thereof.
"Unsecured Debt Coverage Ratio" means, with respect to any Person for any
period, the ratio of Consolidated EBITDA of such Person for such period to the
Fixed Charges of such Person for such period. In the event that the Company
incurs, assumes, guarantees or redeems any Indebtedness (including any
Indebtedness which constitutes Acquired Indebtedness) subsequent to the
commencement of the period for which the Unsecured Debt Coverage Ratio is
being calculated but prior to the event for which the calculation of the
Unsecured Debt Coverage Ratio is made (the "Calculation Date"), then the
Unsecured Debt Coverage Ratio shall be calculated giving pro forma effect to
such incurrence, assumption, guarantee or redemption of Indebtedness, as if
the same had occurred at the beginning of the applicable four-quarter period,
including an assumption of investment returns at the rate equal to the higher
of the six-month Treasury bill rate or six-month LIBOR at the beginning of
such four-quarter period. For purposes of making the computation referred to
above, investments in the equity of, or other acquisitions or dispositions,
which constitute all or substantially all of an operating unit of a business
and discontinued operations (as determined in accordance with GAAP) that have
been made by the Company or any of its Subsidiaries, including all mergers,
consolidations and dispositions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be calculated on a pro forma basis assuming that all such investments,
acquisitions, dispositions, discontinued operations, mergers and
consolidations (and the reduction of any associated fixed charge obligations
109
<PAGE>
and the change in Consolidated EBITDA resulting therefrom) had occurred on the
first day of the four-quarter period. If since the beginning of such period
any Person (that subsequently became a Subsidiary or was merged with or into
the Company or any Subsidiary since the beginning of such period) shall have
made any investment in the equity of, or other acquisition or disposition,
which constitutes all or substantially all of an operating unit of a business,
discontinued operation, merger or consolidation that would have required
adjustment pursuant to this definition, then the Unsecured Debt Coverage Ratio
shall be calculated giving pro forma effect thereto for such period as if such
investment, acquisition, disposition, discontinued operation, merger or
consolidation had occurred at the beginning of the applicable four-quarter
period. For purposes of this definition, whenever pro forma effect is to be
given to a transaction, the pro forma calculations shall be made in good faith
by a responsible financial or accounting officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest on such Indebtedness shall be calculated as if the rate
in effect on the Calculation Date had been the applicable rate for the entire
period. Interest on a Capital Lease Obligation shall be deemed to accrue at an
interest rate reasonably determined by a responsible financial or accounting
officer of the Company to be the rate of interest implicit in such Capital
Lease Obligation in accordance with GAAP. Interest on Indebtedness that may
optionally be determined at an interest rate based upon a factor of a prime or
similar rate, a eurocurrency interbank offered rate, or other rate, shall be
deemed to have been based upon the rate actually chosen, or, if none, then
based upon such optional rate chosen as the Company may designate.
"Voting Stock" means Capital Stock of the class or classes of which the
holders have (i) in respect of a corporation, the general voting power under
ordinary circumstances to elect at least a majority of the board of directors,
managers or trustees of such corporation (irrespective of whether or not at
the time Capital Stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency) or (ii) in respect
of a partnership, the general voting power under ordinary circumstances to
elect the board of directors or other governing board of such partnership or
of the Person which is a general partner of such partnership.
"Wholly-Owned Subsidiary" means a Subsidiary all of the Capital Stock of
which (other than directors' qualifying shares) is owned by the Company or
another Wholly-Owned Subsidiary.
110
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement with
respect to the Notes Offering (the "Notes Underwriting Agreement") between
WFSG and Friedman, Billings, Ramsey & Co., Inc. (the "Notes Underwriter"),
WFSG has agreed to sell and the Notes Underwriter has agreed to purchase from
WFSG the aggregate principal amount of Notes offered hereby.
The Notes Underwriting Agreement provides that, subject to the terms and
conditions set forth therein (including the completion of the Common Stock
Offering), the Notes Underwriter will purchase all of the Notes offered hereby
if any such Notes are purchased.
The Notes Underwriter proposes to offer the Notes directly to the public at
the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of % of the principal amount. The Notes Underwriter may allow, and
such dealers may reallow, a concession not in excess of % of the principal
amount on sales to certain other dealers. The offering of the Notes is made
for delivery when, as and if accepted by the Notes Underwriter and is subject
to prior sale and to withdrawal, cancellation or modification of the offer
without notice. The Notes Underwriter reserves the right to reject any order,
in whole or in part, for the purchase of Notes. After the initial public
offering of the Notes, the offering price and other selling terms may be
changed by the Notes Underwriter.
The Notes Underwriter does not intend to confirm sales to any account over
which it exercises discretionary authority.
The Company has agreed to indemnify the Notes Underwriter against certain
liabilities, including liabilities under the federal securities laws, or to
contribute to payments that the Notes Underwriter may be required to make in
respect thereof.
LEGAL MATTERS
The legality of the Notes offered hereby will is being passed on for the
Company by Proskauer Rose Goetz & Mendelsohn LLP, New York, New York. Certain
legal matters in connection with the Notes offered hereby will be passed upon
for the Notes Underwriter by Gibson, Dunn & Crutcher LLP, Orange County,
California.
EXPERTS
The audited consolidated financial statements of the Company and its
subsidiaries at and for the nine months ended September 30, 1996 and at
December 31, 1995 and 1994, and for the years then ended, the audited
consolidated financial statements of Girard Savings Bank, F.S.B. and
Subsidiary for the period from January 1 through November 8, 1994, and the
audited combined financial statements of Wilshire Credit Corporation and
Affiliates as of December 31, 1995 and 1994 and for the years ended December
31, 1995 and 1994 included herein and elsewhere in the Registration Statement
have been included herein and elsewhere in the Registration Statement in
reliance upon the reports of Deloitte & Touche LLP, independent auditors, upon
the authority of said firm as experts in auditing and accounting.
111
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
Independent Auditors' Report............................................ F-2
Consolidated Financial Statements:
Consolidated Statements of Financial Condition--September 30, 1996 and
December 31, 1995...................................................... F-3
Consolidated Statements of Operations--Nine Months Ended September 30,
1996 and
Years Ended December 31, 1995 and 1994 ................................ F-4
Consolidated Statements of Cash Flows--Nine Months Ended September 30,
1996 and
Years Ended December 31, 1995 and 1994................................. F-5
Consolidated Statements of Stockholders' Equity--Nine Months Ended
September 30, 1996
and Years Ended December 31, 1995 and 1994............................. F-7
Notes to Consolidated Financial Statements.............................. F-8
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
Independent Auditors' Report............................................ F-27
Consolidated Financial Statements:
Consolidated Statements of Operations for the Period from January 1,
1994 through
November 8, 1994....................................................... F-28
Consolidated Statements of Cash Flows for the Period from January 1,
1994 through
November 8, 1994....................................................... F-29
Notes to Consolidated Financial Statements.............................. F-30
WILSHIRE CREDIT CORPORATION AND AFFILIATES
Independent Auditors' Report............................................ F-33
Combined Financial Statements:
Combined Statements of Financial Condition--September 30, 1996 and
December 31, 1995...................................................... F-34
Combined Statements of Operations--Nine Months Ended September 30, 1996
and the
Years Ended December 31, 1995 and 1994 ................................ F-35
Combined Statements of Stockholders' Equity--Nine Months Ended September
30, 1996
and the Years Ended December 31, 1995 and 1994......................... F-36
Combined Statements of Cash Flows--Nine Months Ended September 30, 1996
and
the Years Ended December 31, 1995 and 1994............................. F-37
Notes to Combined Financial Statements.................................. F-39
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Wilshire Financial Services Group Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial
condition of Wilshire Financial Services Group Inc. and Subsidiaries (the
"Company") as of September 30, 1996 and December 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the nine months ended September 30, 1996 and for the years ended December 31,
1995 and 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 accompanying financial statements present fairly, in all
material respects, the financial position of Wilshire Financial Services Group
Inc. and Subsidiaries as of September 30, 1996 and December 31, 1995, and the
results of their operations and their cash flows for the nine months ended
September 30, 1996 and for the years ended December 31, 1995 and 1994, in
conformity with generally accepted accounting principles.
As discussed in Note 10 to the consolidated financial statements, the
Company's subsidiaries, First Bank of Beverly Hills, F.S.B. and Girard Savings
Bank, F.S.B., are operating under regulatory agreements with the Office of
Thrift Supervision that require them to meet certain prescribed requirements.
November 13, 1996 /s/ Deloitte & Touche LLP
Los Angeles, California
F-2
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks........................... $ 11,231 $ 3,382
Federal funds sold................................ 9,300 1,100
-------- --------
Total cash and cash equivalents................. 20,531 4,482
Mortgage-backed securities held to maturity, at
amortized cost (fair values: September 30, 1996,
$21,778; December 31, 1995, $12,873)............. 22,380 13,119
Mortgage-backed securities available for sale, at
fair value (amortized cost: September 30, 1996,
$6,652; December 31, 1995, $9,099)............... 6,483 9,083
Securities held to maturity, at amortized cost
(fair values:
September 30, 1996, $7,452; December 31, 1995,
$6,488).......................................... 7,425 6,470
Trading account securities........................ 7,092 --
Loans, net........................................ 177,280 258,827
Discounted loans, net............................. 3,419 13,347
Loans held for sale, net, at lower of cost or
market........................................... 260,804 18,597
Stock in Federal Home Loan Bank of San Francisco,
at cost.......................................... 2,911 1,421
Real estate owned, net............................ 2,514 4,964
Leasehold improvements and equipment, net......... 336 275
Due from affiliate................................ 8,357 4,514
Accrued interest receivable....................... 4,268 3,042
Prepaid expenses and other assets................. 3,887 1,724
Income taxes receivable, net...................... 5,422 1,589
-------- --------
TOTAL............................................... $533,109 $341,454
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits.......................................... $487,535 $303,524
Borrowings........................................ -- 13,000
Accounts payable and other liabilities............ 7,625 4,398
Subordinated debt................................. -- 11,000
Deferred credits.................................. 832 1,134
Minority interest in subsidiaries................. 277 600
Due to affiliates................................. 2,286 759
-------- --------
Total liabilities............................... 498,555 334,415
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock................................... -- --
Common stock...................................... 35,550 6,800
Retained earnings (accumulated deficit)........... (827) 255
Unrealized loss on available-for-sale securities,
net of tax....................................... (169) (16)
-------- --------
Total stockholders' equity...................... 34,554 7,039
-------- --------
TOTAL............................................... $533,109 $341,454
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, -----------------
1996 1995 1994
------------- ------- --------
(IN THOUSANDS, EXCEPT
PER SHARE INFORMATION)
<S> <C> <C> <C>
INTEREST INCOME:
Loans...................................... $31,686 $21,821 $ 7,923
Mortgage-backed securities................. 1,280 1,359 1,361
Securities and federal funds sold.......... 1,171 1,201 285
------- ------- --------
Total interest income.................... 34,137 24,381 9,569
------- ------- --------
INTEREST EXPENSE:
Deposits................................... 17,448 13,944 5,017
Borrowings................................. 2,144 537 440
------- ------- --------
Total interest expense................... 19,592 14,481 5,457
------- ------- --------
NET INTEREST INCOME.......................... 14,545 9,900 4,112
PROVISION FOR ESTIMATED LOSSES ON LOANS...... 15,751 4,266 2,173
------- ------- --------
NET INTEREST (LOSS) INCOME AFTER PROVISION
FOR ESTIMATED LOSSES ON LOANS............... (1,206) 5,634 1,939
------- ------- --------
OTHER INCOME (LOSS):
Bankcard income............................ 5,078 4,694 635
Bankcard processing expense................ (3,865) (3,462) (274)
Gain on sale of loans...................... 1,983 642 --
Loan fees and charges...................... 1,217 610 43
Trading account--unrealized gain........... 1,601 -- --
Gain on sale of mortgage-backed securities
available for sale........................ -- 14 54
Amortization of deferred credits........... 346 460 388
Other, net................................. 17 149 381
------- ------- --------
Total other income (loss)................ 6,377 3,107 1,227
------- ------- --------
OTHER EXPENSES:
Compensation and employee benefits......... 2,955 2,516 1,922
FDIC insurance premiums.................... 2,066 721 261
Occupancy.................................. 218 385 319
Professional services...................... 572 1,028 507
Data processing and equipment rentals...... 189 232 162
Real estate owned, net..................... 231 170 241
Loan service fees and expenses............. 3,522 1,958 242
Other general and administrative expenses.. 1,152 1,092 1,290
------- ------- --------
Total other expenses..................... 10,905 8,102 4,944
------- ------- --------
(LOSS) INCOME BEFORE INCOME TAX PROVISION.... (5,734) 639 (1,778)
INCOME TAX (BENEFIT) PROVISION............... (4,652) 47 (526)
------- ------- --------
NET (LOSS) INCOME............................ $(1,082) $ 592 $ (1,252)
======= ======= ========
(LOSS) EARNINGS PER SHARE.................... $(14.05) $ 25.09 $(135.43)
======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, -----------------
1996 1995 1994
------------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................... $ (1,082) $ 592 $(1,252)
Reconciliation of net (loss) income to net
cash (used in) provided by operating
activities:
Provision for estimated losses on loans... 15,751 4,266 2,173
Provision for real estate owned losses.... -- 598 100
Depreciation and amortization............. 116 241 121
Loss (gain) on sale of real estate owned.. 164 (97) 406
Gain from sale of mortgage-backed
securities available
for sale ................................ -- (14) (54)
Gain on sale of loans..................... (1,983) (642) --
Amortization of discounts and deferred
fees..................................... (2,126) (1,246) (600)
Amortization of deferred credits.......... (346) (460) (388)
FHLB stock dividend....................... (64) (40) (39)
Change in:
Trading account......................... (6,526) -- 489
Accrued interest receivable............. (1,226) (1,443) (238)
Prepaid expenses and other assets....... (2,163) (698) 483
Due from affiliates..................... (3,843) (452) (2,833)
Due to affiliates....................... 1,527 107 (210)
Current income taxes receivable......... 728 (396) 591
Deferred income taxes................... (4,561) (419) 111
Accounts payable and other liabilities.. 3,227 1,846 (474)
Minority interest....................... (323) 26 --
Other................................... 43 (180) --
-------- -------- -------
Net cash (used in) provided by
operating activities................. (2,687) 1,589 (1,614)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans........................... (227,632) (186,895) (41,561)
Loan repayments, net of originations........ 35,521 49,035 16,836
Proceeds from sale of loans................. 26,335 16,673 --
Purchase of mortgage-backed securities
available for sale......................... -- -- (10,655)
Proceeds from maturity of securities held to
maturity................................... 5,000 1,000 --
Purchase of mortgage-backed securities held
to maturity................................ (11,182) -- (4,198)
Repayments of mortgage-backed securities
held to maturity........................... 1,820 824 643
Proceeds from sale of mortgage-backed
securities available for sale.............. -- 1,496 3,963
Repayments of mortgage-backed securities
available for sale......................... 1,871 1,528 --
Purchases of securities and FHLB stock...... (7,344) (2,965) (105)
Proceeds from sale of FHLB stock............ -- 231 --
Proceeds from sale of real estate owned..... 5,763 5,254 569
Purchase of subsidiary net of cash and cash
equivalents................................ -- -- (346)
Purchases of leasehold improvements and
equipment.................................. (177) (349) (184)
-------- -------- -------
Net cash used in investing
activities........................... (170,025) (114,168) (35,038)
</TABLE>
See notes to consolidated financial statements. (continued)
F-5
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994
------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits...................... $ 184,011 $107,731 $ 26,181
Proceeds from issuance of common stock...... 17,750 -- 3,750
Issuance of subordinated debt............... -- 9,000 --
Proceeds from other borrowings.............. 308,109 77,419 41,677
Repayments of other borrowings.............. (321,109) (85,919) (30,285)
Issuance of preferred stock................. -- -- 1,000
--------- -------- --------
Net cash provided by (used in) financing
activities............................... 188,761 108,231 42,323
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 16,049 (4,348) 5,671
CASH AND CASH EQUIVALENTS:
Beginning of year........................... 4,482 8,830 3,159
--------- -------- --------
End of year................................. $ 20,531 $ 4,482 $ 8,830
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid (received) during the period for:
Interest.................................... $ 18,772 $ 13,833 $ 5,479
Income taxes................................ 216 365 110
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned acquired in
settlement of loans........................ 4,377 9,878 3,122
Loans to facilitate the sale of real estate
owned...................................... -- 367 2,352
NONCASH FINANCING ACTIVITIES:
Exchange of subordinated debt for common
stock...................................... 11,000 -- --
Exchange of preferred stock for subordinated
debt....................................... -- 2,000 --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON
RETAINED AVAILABLE-
PREFERRED STOCK COMMON STOCK EARNINGS FOR-SALE
------------------- -------------- (ACCUMULATED SECURITIES
SHARES AMOUNT SHARES AMOUNT DEFICIT) NET OF TAX TOTAL
---------- ------- ------ ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1994................... -- $ -- 6,644 $ 3,050 $ 915 $(159) $ 3,806
Net loss............... (1,252) (1,252)
Unrealized loss on
available-for-sale
securities--net of
tax................... (511) (511)
Issuance of stock...... 1,000,000 1,000 16,952 3,750 4,750
---------- ------- ------ ------- ------- ----- -------
BALANCE, December 31,
1994................... 1,000,000 1,000 23,596 6,800 (337) (670) 6,793
Net income............. 592 592
Unrealized gain on
available-for-sale
securities--net of
tax................... 654 654
Exchange of preferred
stock for
subordinated debt..... (1,000,000) (1,000) (1,000)
---------- ------- ------ ------- ------- ----- -------
BALANCE, December 31,
1995................... 23,596 6,800 255 (16) 7,039
Net loss............... (1,082) (1,082)
Unrealized loss on
available-for-sale
securities--net of tax
...................... (153) (153)
Exchange of
subordinated debt for
common stock.......... 29,142 11,000 11,000
Issuance of common
stock ................ 47,025 17,750 17,750
---------- ------- ------ ------- ------- ----- -------
BALANCE, September 30,
1996................... -- $ -- 99,763 $35,550 $ (827) $(169) $34,554
========== ======= ====== ======= ======= ===== =======
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--Wilshire Financial Services Group Inc. and
subsidiaries (the "Company") operate two savings banks (the "Banks") located
in Southern California and have administrative headquarters in Portland,
Oregon. The Banks are federally chartered savings institutions regulated by
the Office of Thrift Supervision ("OTS"). The Company's primary sources of
revenue are real estate and consumer loans acquired in purchase transactions,
mortgage-backed securities, loan securitization transactions, and merchant
bankcard operations.
Principles of Consolidation and Combination--Wilshire Financial Services
Group Inc. ("WFSG") was incorporated in 1996 to be the holding company for
Wilshire Acquisitions Corporation ("WAC"), which is the holding company for
the Banks. WFSG has had no historical operations other than those of WAC and
its subsidiaries, but has formed other subsidiaries that will conduct other
operations in the future.
On October 7, 1993, WAC acquired 94.9% of the common stock of First Bank of
Beverly Hills, F.S.B. ("FBBH") in a purchase accounting transaction. On
November 9, 1994, a newly-formed entity with ownership and management common
to WAC-Wilshire Acquisitions Corporation II ("WACII")--acquired 94.9% of the
common stock of Girard Savings Bank, F.S.B. and subsidiary ("GSB") in a
purchase accounting transaction.
Because WAC and WACII were under common control, the accompanying financial
statements are presented on a combined basis as of December 31, 1994 and for
the period from November 9 through December 31, 1994. On December 27, 1995,
WAC and WACII were merged and WAC was named as the surviving entity. Financial
information as of September 30, 1996 and December 31, 1995 and for the nine
months and year then ended, respectively, is presented on a consolidated or
combined basis and includes the accounts of WAC, FBBH and GSB. With respect to
all consolidated and combined financial information, intercompany transactions
and balances have been eliminated. For convenience, all the accompanying
financial statements are referred to as "consolidated".
The purchase prices of the Banks were less than the fair values of the net
assets acquired. As a result, the Company recorded deferred credits, or
negative goodwill, totaling $2,156. These credits are being amortized over
five years on a straight-line basis. The other material purchase accounting
adjustment relates to the carrying value of GSB loans; the difference between
the carrying value and the estimated fair value of the loans at the date of
acquisition is being amortized over the expected lives of the related loans.
Use of Estimates in the Preparation of the Consolidated Financial
Statements--The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amount of
income and expenses during the reporting period. Actual results could differ
from those estimates. Significant estimates include valuation allowances for
loans and real estate owned, merchant bankcard charge-back reserves and fair
values of certain financial instruments for which there is not an active
market.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and
cash equivalents include cash and due from banks and federal funds sold.
Securities and Mortgage-Backed Securities--The Company's securities
portfolios consist of mortgage-backed and other securities that are classified
as held-to-maturity, trading account and available-for-sale securities.
Securities are classified as held-to-maturity when management believes the
Company has the ability and the positive intent to hold the securities to
maturity. Securities classified as held-to-maturity are carried on
F-8
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
an historical cost basis, adjusted for the amortization of premiums and
accretion of discounts using a method that approximates the interest method.
Securities classified as trading account securities are residual interests in
loan securitization transactions initiated by the Company. Trading account
securities are carried at estimated fair value, and unrealized gains and
losses are recorded in current operations. Securities are classified as
available-for-sale when the Company intends to hold the securities for an
indefinite period of time, but not necessarily to maturity. Securities
classified as available-for-sale are reported at their fair values. Unrealized
holding gains and losses on securities available-for-sale are reported, net of
tax, as a separate component of stockholders' equity. Realized gains and
losses from the sales of available-for-sale securities are reported separately
in the consolidated statements of operations and are calculated using the
specific identification method.
Loans, Discounted Loans, Loans Held for Sale and Allowance for Loan Losses--
The Company's principal business involves acquiring loans, including loans
that are nonperforming when acquired. Acquired loans are generally purchased
in pools, or portfolios, for prices at or below face value (i.e., unpaid
principal balances plus accrued interest). Nonperforming loans are generally
acquired at deep discounts to face value and are classified as discounted
loans in the consolidated statements of financial condition. Loans that have
been identified as likely to be sold are classified as held-for-sale in the
consolidated statements of financial condition. Loans other than discounted
loans and loans held for sale are classified simply as loans.
Discounted loans are presented in the consolidated statements of financial
condition net of unamortized discount and the portion of the allowance for
loan losses established for those loans. When discounted loans are purchased,
discounts are segregated into (a) valuation allowances for estimated losses on
specific loans ("specific valuation allowances"), (b) valuation allowances for
the inherent risk of losses in the loan portfolio that have yet to be
specifically identified ("general valuation allowances") and (c) portions of
the discounts regarded as yield adjustments. The allocated specific and
general valuation allowances are included in the allowance for loan losses.
The allowance for loan losses is also increased by additional provisions for
losses that are recorded in current operations. The portion of purchase
discounts regarded as yield adjustments is accreted into income in proportion
to cash receipts of principal. Accrued interest on discounted loans is
recognized in income only when collected in cash.
Loans other than discounted loans are presented in the consolidated
statements of financial condition in substantially the same manner as
discounted loans except that discounts associated with purchased loans are
accreted into income using a method approximating the interest method, and
interest income is recognized on an accrual basis. That portion of the total
loan portfolio representing originated loans is carried net of unamortized
deferred origination fees. Deferred fees are recognized in interest income
over the terms of the loans using a method that approximates the interest
method.
Loans held for sale are presented at lower of cost or market value, and cost
is determined as described above depending on whether the loans held for sale
are discounted loans or other loans. If market value is less than cost, a
valuation allowance is recorded to reduce the carrying value. Gains or losses
on loans sold through securitization transactions are based on the difference
between the cash proceeds received on the certificates sold to outside
investors and the Company's cost basis allocated to such interests in the
loans. The percentage allocation of the loan pools' cost basis between the
portions sold and subordinated interests retained is based on the relative
fair values of those portions.
The Company evaluates commercial and multi-family real estate loans (whether
purchased or originated and whether classified as loans or discounted loans)
for impairment under SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures. Commercial and multi-family real
estate loans are considered to be impaired, for financial reporting purposes,
when it is probable that the Company will be unable to collect all
F-9
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
principal or interest when due. Specific valuation allowances are established,
either through allocations of purchase discount or through provisions for
losses, as described above, for impaired loans with estimated fair values that
are less than the face value of the loans. Fair values of impaired loans are
estimated based on the fair value of the real estate collateral.
The Company evaluates single-family real estate, consumer and other loans
for impairment on a pooled basis. These loans are considered to be smaller-
balance, homogeneous loans, and are evaluated on a portfolio basis considering
the projected net realizable value of the portfolio compared to the net
carrying value of the portfolio.
All specific and general valuation allowances established for loans and
discounted loans are recorded in the allowance for loan losses. The allowance
is decreased by the amount of loans charged off and is increased by recoveries
of previously charged-off loans. The allowance is maintained at a level
believed adequate by management to absorb potential losses in the total loan
portfolio. Management's determination of the adequacy of the allowance is
based on an evaluation of the portfolio, previous loan loss experience,
current economic conditions, volume, growth and composition of the portfolio
and other relevant factors.
Derivative Financial Instruments--Beginning in 1996, the Company utilizes
interest-rate swaps as a component of its interest-rate risk hedging strategy.
Swaps are matched against fixed-rate loans, effectively converting them to
variable-rate loans. Settlements with the counterparty to the swaps increase
or reduce loan interest income reported in the statements of operations.
Real Estate Owned--Real estate acquired in settlement of loans is originally
recorded at fair value less estimated costs to sell. Loan balances in excess
of fair value of the real estate acquired are charged against the allowance
for loan losses at the date of acquisition. Allowances are recorded to provide
for estimated declines in fair value subsequent to the date of acquisition.
Any subsequent operating expenses or income, as well as gains or losses on
disposition of such properties, are charged to current operations.
Leasehold Improvements and Equipment--Office leasehold improvements and
equipment are stated at cost, less accumulated depreciation and amortization,
computed on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever are shorter.
Income Taxes--The Company files consolidated federal income tax returns with
its subsidiaries. Deferred tax assets and liabilities represent the tax
effects, based on current tax law, of future deductible or taxable amounts
attributable to events that have been recognized in the financial statements.
A valuation allowance is recorded against deferred tax assets when there is
not presumptive evidence that it is more likely than not that the deferred tax
assets will be realized.
Bankcard Operations--Bankcard income includes merchant discounts and
transaction fees for processing Visa and Mastercard transactions. Bankcard
expense consists primarily of fees paid to the Company's third-party
processors and interchange fees paid to card-issuing banks. Other direct and
indirect costs of Bankcard operations are included in various other categories
of expenses and are not specifically allocated separately from other operating
expenses of the Company.
Capital Structure--In the accompanying consolidated statements of
stockholders' equity, shares of common stock issued and outstanding are
presented based on the actual number of shares issued by WAC, and the number
of shares issued by WACII adjusted to their WAC equivalents as determined when
the two entities merged in
F-10
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1995. As of September 30, 1996 and December 31, 1995, WAC has the following
types of authorized shares of stock:
50,000,000 shares of common, $0.01 par value
200,000,000 shares of preferred, $0.01 par value
Of the 200,000,000 shares of preferred stock authorized, 100,000,000 has
been designated as Series A. The Series A preferred stock has a $1 per share
liquidation preference and a dividend rate of $.14 per share per annum,
noncumulative. No cash dividends have been declared or paid on such stock at
any point when it has been outstanding.
Preferred stock issued and outstanding at December 31, 1994 consisted of
Series A preferred stock of WACII, which was exchanged for Series A preferred
stock of WAC in 1995, pursuant to the merger of the two companies. All common
stock of WACII was also exchanged in the merger. The preferred stock of a
subsidiary (FBBH) held by the majority stockholders of WAC as of December 31,
1994 was also exchanged for WAC Series A preferred in 1995. All of the WAC
Series A preferred was then exchanged for subordinated debt issued by the
majority stockholders. Effective January 1, 1996, all subordinated debt was
exchanged for WAC's common stock.
Subsequent to September 30, 1996, all outstanding common stock of WAC was
exchanged by WAC stockholders for common stock of WFSG, and all minority
interests in common stock of FBBH and GSB were exchanged for common stock of
WFSG. Outstanding shares of WFSG, prior to an initial public offering of
common stock (see Note 17), total 5,500,000.
Earnings Per Share is calculated based on the weighted average number of
shares of WAC common stock outstanding during the year giving effect to the
exercise of stock options using the treasury stock method if such effect is
not anti-dilutive. The weighted average number of shares outstanding for the
nine months ended September 30, 1996 and for the years ended 1995 and 1994 was
77,024, 23,596 and 9,245, respectively.
Recent Accounting Standards--In 1996, the Company adopted SFAS Nos. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of, SFAS No. 122, Accounting for Mortgage Servicing Rights, and
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 121 and 122
did not have a material effect on the Company's financial statements.
As permitted by SFAS No. 123, the Company did not adopt the provisions of
that statement relating to the accounting method used for stock options. The
Company will continue to use the intrinsic value method of accounting for its
stock options rather than the fair value method, and will make the disclosures
required by the statement (see Note 12).
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Financial Liabilities, is generally effective for relevant
transactions occurring after December 31, 1996, and must be applied
prospectively. Earlier application is not permitted. Based on the types of
transactions the Company has engaged in historically, the pronouncement is
expected to be relevant to similar future transactions and may affect both the
accounting for, and disclosures about, such transactions. Transactions
affected may include sales of loans, particularly sales affected through
securitization transactions, and repurchase agreements. The Company does not
currently service financial assets and does not expect to be immediately
affected by the provisions of SFAS No. 125 related to servicing. The Company
does not believe that the pronouncement would have had a material effect on
any transactions reflected in the accompanying financial statements, if its
provisions had been previously adopted.
Reclassifications--Certain amounts in the consolidated financial statements
for 1995 and 1994 have been reclassified to conform to the 1996 presentation.
F-11
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SECURITIES
The amortized cost, fair value and gross unrealized gains and losses on U.S.
Treasury notes and mortgage-backed securities as of September 30, 1996 and
December 31, 1995 are shown below. Fair value estimates were obtained from an
independent pricing service.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 1996 COST GAINS LOSSES VALUE
------------------ --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Available-for-sale mortgage-backed
securities........................ $ 6,652 $ -- $169 $ 6,483
======= ===== ==== =======
Held-to-maturity:
U.S. Treasury notes.............. 7,425 27 -- 7,452
Mortgage-backed securities....... 22,380 -- 602 21,778
------- ----- ---- -------
Total held-to-maturity......... $29,805 $ 27 $602 $29,230
======= ===== ==== =======
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C> <C> <C> <C>
Available-for-sale mortgage-backed
securities........................ $ 9,099 $ -- $ 16 $ 9,083
======= ===== ==== =======
Held-to-maturity:
U.S. Treasury notes.............. 6,470 22 4 6,488
Mortgage-backed securities....... 13,119 -- 246 12,873
------- ----- ---- -------
Total held-to-maturity......... $19,589 $ 22 $250 $19,361
======= ===== ==== =======
</TABLE>
The amortized cost and estimated fair value of securities held to maturity
other than mortgage-backed securities at September 30, 1996, and December 31,
1995 by contractual maturity, are as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
SEPTEMBER 30, 1996 COST VALUE
------------------ --------- ------
<S> <C> <C>
Due in one to five years................................... $7,425 $7,452
====== ======
DECEMBER 31, 1995
-----------------
Due in less than one year.................................. $4,970 $4,966
Due in one to five years................................... 1,500 1,522
------ ------
$6,470 $6,488
====== ======
</TABLE>
The Company receives payments on all mortgage-backed securities over periods
that are considerably shorter than the contractual maturities of the
securities, which range from 6 to 30 years.
At September 30, 1996, mortgage-backed securities with carrying values of
$22,779 and market values of approximately $22,247 were pledged to secure FHLB
borrowings, merchant bankcard transactions, certain guarantees related to a
loan securitization transaction and an interest-rate swap. There were no sales
of securities in the nine months ended September 30, 1996. Gross gains from
the sale of securities available for sale were $14 and $54 in the years ended
December 31, 1995, and 1994, respectively, and there were no gross losses in
these years. Of the total securities pledged, securities with fair values of
approximately $20,110 were delivered to, and are held in custody of, Bankers
Trust and the Federal Reserve Bank.
F-12
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. LOANS, DISCOUNTED LOANS AND LOANS HELD FOR SALE
The Company's loans comprise loans, discounted loans and loans held for
sale. Following is a summary of each loan category by type:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
LOANS
Real estate loans:
One to four units.............................. $ 49,047 $138,547
Over four units................................ 72,717 71,239
Commercial..................................... 58,361 50,749
Land........................................... 2,874 2,709
-------- --------
Total loans secured by real estate........... 182,999 263,244
Other loans...................................... 30,698 19,832
-------- --------
213,697 283,076
Less:
Allowance for loan losses...................... (32,519) (10,016)
Deferred loan fees............................. (196) (245)
Discount on purchased loans not included
in allowance for loan losses.................. (3,702) (13,988)
-------- --------
$177,280 $258,827
======== ========
DISCOUNTED LOANS
Real estate loans:
One to four units.............................. $ 9,561 $ 18,380
Commercial..................................... 482 863
-------- --------
Total loans secured by real estate........... 10,043 19,243
Other loans...................................... 724 967
-------- --------
10,767 20,210
Less:
Allowance for loan losses...................... (5,716) (3,855)
Discount on purchased loans not included in
allowance
for loan losses............................... (1,632) (3,008)
-------- --------
$ 3,419 $ 13,347
======== ========
LOANS HELD FOR SALE
Real estate loans:
One to four units.............................. $277,490 $ 33,497
Commercial..................................... 466
Land........................................... 194
-------- --------
Total loans secured by real estate........... 277,490 34,157
Other loans...................................... 12
-------- --------
277,490 34,169
Less allowances, discounts and deferred fees..... (16,686) (15,572)
-------- --------
$260,804 $ 18,597
======== ========
</TABLE>
F-13
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of September 30, 1996 and December 31, 1995, loans with adjustable rates
of interest were $317,087 and $265,702, respectively, and loans with fixed
rates of interest were $184,867 and $71,753, respectively. Adjustable-rate
loans are generally indexed to the FHLB's Eleventh District Cost of Funds
Index, LIBOR or Prime and are subject to limitations on the timing and extent
of adjustment. Most loans adjust within six months of changes in the index.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ----------------
1996 1995 1994
------------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year.................. $ 25,651 $ 7,701 $ 4,314
Loans charged off........................... (12,494) (5,404) (1,666)
Recoveries.................................. 1,424 81 71
Provision for loan losses................... 15,751 4,266 2,173
Allocations from purchased loan discounts... 15,972 19,007 2,809
-------- ------- -------
Balance, end of year........................ $ 46,304 $25,651 $ 7,701
======== ======= =======
</TABLE>
At September 30, 1996 and December 31, 1995, the Company had classified
loans totaling $18,811 and $14,241, respectively, as impaired and had recorded
specific valuation allowances to measure the impairments of those loans
totaling $5,445 and $4,155, respectively. At the same dates, the Company had
classified loans totaling $2,499 and $9,593, respectively, as impaired with no
recorded specific valuation allowances. The average unpaid principal balances
of impaired loans during the nine months ended September 30, 1996 and the year
ended December 31, 1995 were $21,254 and $24,204, respectively. Interest
income recognized on impaired loans during the same periods was $1,135 and
$1,631, respectively, based on cash payments. These amounts exclude
consideration of single-family residential and consumer loan pools evaluated
for impairment on a pooled basis.
Management estimates are required to determine the allowance for loan
losses. Estimation is also involved in determining the ultimate recoverability
of purchased loans and, consequently, the pricing of purchased loans and the
adequacy of purchased discounts to provide allowances for credit risk. These
estimates are inherently uncertain and depend on the outcome of future events.
Regulatory authorities have required substantial increases in the allowances
maintained by many banks in recognition of the inherent risk in the existing
economic environment. Although management believes the levels of the allowance
as of September 30, 1996 and December 31, 1995 are adequate to absorb losses
inherent in the loan portfolio, rising interest rates, various other economic
factors and regulatory requirements may result in increasing losses that
cannot reasonably be predicted at this date. Such losses may also result in
unanticipated erosion of the Banks' capital.
The Company has a geographic concentration of mortgage loans in Southern
California, which experienced declines in recent years. Substantially all
loans originated or acquired by FBBH and GSB prior to their acquisition by the
Company were collateralized by Southern California real estate. Performing
mortgage loans acquired subsequently have also been concentrated in Southern
California, but to a lesser degree, and the geographic diversification of the
portfolio is generally widening through loan acquisitions.
F-14
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. REAL ESTATE OWNED
Real estate owned consists of property obtained through foreclosure. In the
accompanying consolidated statements of financial condition, real estate owned
is presented net of allowances for estimated losses. Activity in the allowance
for estimated losses on real estate owned is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- ------
<S> <C> <C> <C>
Allowance for losses on real estate owned,
beginning of year.......................... $ 1,193 $ 123 $ 55
Charge-offs................................. (1,599) (82) (32)
Allocation of purchase discount............. 762 554
Provision for the year...................... 598 100
------- ------- -----
Allowance for losses on real estate owned,
end of year................................ $ 356 $ 1,193 $ 123
======= ======= =====
</TABLE>
5. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Leasehold improvements............................ $ 258 $ 299
Furniture and equipment........................... 877 718
------ ------
Total cost........................................ 1,135 1,017
Accumulated depreciation and amortization......... (799) (742)
------ ------
$ 336 $ 275
====== ======
</TABLE>
6. DEPOSITS
Deposits consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Passbook accounts................................. $ 371 $ 304
Money market accounts............................. 795 1,267
NOW/checking...................................... 6,103 5,111
Time deposits:
Less than $100.................................. 386,264 247,814
$100 or more.................................... 94,002 49,028
-------- --------
Total deposits.................................. $487,535 $303,524
======== ========
</TABLE>
A summary of time deposits by maturity at September 30, 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997 (including fourth quarter of 1996)........................... $381,378
1998.............................................................. 97,897
1999.............................................................. 991
--------
$480,266
========
</TABLE>
F-15
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. BORROWINGS AND SUBORDINATED DEBT
Borrowings at December 31, 1995 are repurchase agreements issued under a
master repurchase agreement with Bear Stearns Mortgage Capital Corp. Proceeds
from the agreements were used to acquire loan pools. The assets purchased by
Bear Stearns include the loans acquired by the Banks with the proceeds as well
as other assets. At December 31, 1995, the outstanding agreements were secured
by loans with unpaid principal balances of $54,210. Loans purchased by Bear
Stearns under the repurchase agreements are held in custody by a third party.
Following is information about borrowings under repurchase agreements:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, --------------
1996 1995 1994
------------- ------ ------
<S> <C> <C> <C>
Average balance during
the period............. $35,568 $1,000 $2,297
Highest amount outstand-
ing during the period.. 97,000 13,000 8,500
Average interest rate
during the period...... 6.8% 6.7% 5.8%
Average interest rate--
end of period.......... -- 6.7% 5.8%
</TABLE>
WAC's capitalization includes subordinated debt with majority
stockholders in amounts up to $50,000. Subordinated debt pays interest at
14% per annum, compounded quarterly, has no stated maturity, and represents
an unsecured general obligation of the Company. As of December 31, 1995,
borrowings under the subordinated debt agreement were $11,000. As stated in
Note 1, the Company's common stock was exchanged for the subordinated debt
effective January 1, 1996.
8. INCOME TAXES
The provisions for income tax (benefit) consist of the following:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED
1996 DECEMBER 31,
------------- --------------
1995 1994
------ ------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal..................................... $ (93) $ 434 $ (656)
State....................................... 2 32 19
------- ------ ------
(91) 466 (637)
------- ------ ------
Deferred tax expense (benefit):
Federal..................................... (3,081) (250) 90
State....................................... (1,480) (169) 21
------- ------ ------
(4,561) (419) 111
------- ------ ------
Total income tax provision (benefit).......... $(4,652) $ 47 $ (526)
======= ====== ======
</TABLE>
F-16
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The difference between the effective tax rate implicit in the consolidated
financial statements and the statutory federal income tax rate can be
attributed to the following:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, --------------
1996 1995 1994
------------- ------ ------
<S> <C> <C> <C>
Federal income tax provision at statutory
rate....................................... (34.0)% 35.0% (35.0)%
State taxes (benefit), net of federal tax
effect..................................... (11.1) 4.0
Valuation allowance......................... (29.2) (25.1) 8.8
Change in prior year estimate............... (5.2) (7.8)
Other....................................... (1.6) 1.3 (3.4)
----- ------ ------
Effective income tax rate................... (81.1)% 7.4% (29.6)%
===== ====== ======
</TABLE>
Deferred income taxes receivable (payable), which are included in income
taxes receivable, net in the consolidated statements of financial condition,
are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Deferred tax assets:
Purchase discounts.............................. $ 2,378 $ 1,349
Purchase accounting............................. 549 629
Depreciation.................................... 82 65
Provision for loan loss......................... 1,232 408
Net operating loss.............................. 2,661 170
Other........................................... 140 10
------- -------
Gross deferred tax assets..................... 7,042 2,631
------- -------
Deferred tax liabilities:
Partnership income.............................. (44) (44)
Deferred loan fees.............................. (207) (351)
FHLB stock dividends............................ (285) (242)
State taxes..................................... (620)
Unrealized gains on securities.................. (694)
Installment sales gain.......................... (344)
Other........................................... (118) (98)
------- -------
Gross deferred tax liability.................. (2,312) (735)
------- -------
Total deferred tax asset.......................... 4,730 1,896
Valuation allowance............................... -- (1,726)
------- -------
Net deferred tax asset............................ $ 4,730 $ 170
======= =======
</TABLE>
At September 30, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $761, $1,391 and $4,758 expiring
in the years 1997, 1998 and 1999, respectively, and net operating loss
carryforwards for state income tax purposes of $1,617 and $1,143 expiring in
2000 and 2001, respectively.
F-17
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK
Profit Sharing Plan--The Banks' employees participate in a defined
contribution profit sharing and 401(k) plan sponsored by companies included in
the Company's "control group." At the discretion of the Banks' Boards of
Directors, the Banks may elect to contribute to the plan based on profits of
the Banks or based on matching participants' contributions. For the year ended
December 31, 1995, the Banks contributed $28 to the plan. There have been no
contributions in 1996.
Lease Commitments--The following is a schedule by year of future minimum
rental payments:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1997 (including fourth quarter of 1996)............................... $281
1998.................................................................. 166
1999.................................................................. 157
2000.................................................................. 52
2001.................................................................. 30
----
Total............................................................... $686
====
</TABLE>
Lease commitments include commitments to an affiliated company which require
annual lease payments of $52 through 2001.
Hedging Activity--In April 1996, the Banks entered into an interest-rate
swap with a $70,000 notional amount with Bear Stearns. The swap effectively
converts $70,000 of purchased fixed-rate loans to variable-rate loans. The
Banks pay 6.25% and receive a variable rate based on the one-month USD LIBOR
plus .225%. The swap matures in April 2001 and has a cancellation trigger when
the two-year constant maturity treasury equals or exceeds 9%. The notional
principal amount amortizes at a rate of 1.2532% each month. At September 30,
1996, the notional principal is $65,614.
Lending Commitments--At December 31, 1995, the Company had commitments to
extend credit of $793. The Company did not have any commitments to extend
credit at September 30, 1996. These commitments expose the Company to credit
risk in excess of amounts reflected in the consolidated financial statements.
The Company receives collateral to support loans and commitments to extend
credit for which collateral is deemed necessary. The most significant category
of collateral is certificates of deposit.
Litigation--The Company is a defendant in legal actions arising from
transactions conducted in the ordinary course of business. Management, after
consultation with legal counsel, believes the ultimate liability, if any,
arising from such actions will not materially affect the Company's financial
position.
Securitization Contingencies--A loan securitization in March 1996 involved
the sale of discounted nonperforming loans with carrying amounts of
approximately $18,600. The Banks are contingently liable for losses, if any,
that could arise if the collectibility of any securitized loan is
unenforceable solely due to the absence of original notes. In addition, the
Banks are contingently liable to pay the interest due on the senior securities
if the liquidation of the assets underlying the securities results in a
shortfall on any due date; any such shortfall paid by the Banks would be
reimbursable if liquidation proceeds were ultimately sufficient to cover the
interest. Management believes that it is not probable that any losses will be
incurred for these or other reasons involving the securitization.
10. REGULATORY MATTERS
Regulatory Agreement--On October 31, 1996, FBBH and GSB consented to
separate but similar Orders to Cease and Desist (the "Orders") issued by the
OTS. The Order issued to FBBH superseded a previously existing Supervisory
Agreement between FBBH and the OTS issued June 8, 1995.
F-18
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Orders require of both Banks that they not engage in unsafe and unsound
practices and that they maintain minimum capital ratios required of
institutions to be deemed "well-capitalized" (as that term is defined under
the regulatory framework for prompt corrective action). In addition, the
Orders require the Banks to (I) revise policies and procedures concerning (i)
internal asset reviews, (ii) the allowances for loan and lease losses, (iii)
loan purchases, (iv) internal audits and (v) hedging transactions; (II)
develop plans to augment the depth and expertise of the management teams;
(III) revise business plans; (IV) modify certain policies concerning the
accounting for loan discounts; (V) improve monitoring of (i) interest rate
risk, (ii) balance sheet classifications of certain assets (e.g., as held for
sale versus held to maturity) and (iii) compliance with laws and regulations
concerning transactions with affiliates; (VI) ensure compliance with the
proper servicing of adjustable rate mortgages and escrow accounts; and (VII)
enhance recordkeeping. In addition, the Banks may not increase their total
assets beyond certain specified levels. Also, FBBH will be required to correct
OTS-identified deficiencies in merchant bankcard operations. These
requirements will be accompanied by related requirements that the Banks submit
to the OTS, by certain specified dates, various policies, plans and reports on
other actions to comply with the Orders. In some cases, OTS approval of such
information will be required. The Banks are currently in process of addressing
these requirements. Management believes that the Banks are complying with
those requirements that have taken effect.
The Orders are enforceable by the OTS as written agreements under the
Federal Deposit Insurance Act. Therefore, failure to comply with the
requirements of the Orders could subject the Banks and their directors and
officers to further enforcement actions, including termination of Federal
Deposit Insurance Corporation insurance or civil money penalties.
Capital Requirements--The Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain actions by the regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Banks must meet specific capital
guidelines that involve quantitative measures of the Banks' assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Banks' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios of total tangible
capital, core capital and total capital to risk-weighted assets as those terms
are defined in OTS regulation. Under the regulatory framework for prompt
corrective action, quantitative and qualitative measures are used by the OTS
to determine whether an institution is categorized as "well capitalized,"
"adequately capitalized," "undercapitalized," or "significantly
undercapitalized." Certain regulatory actions are mandated by law, depending
on an institution's category. Quantitative measures include total capital to
risk-weighted assets, Tier 1 capital to risk-weighted assets, and Tier 1
capital to average assets, as those terms are defined in OTS regulation.
F-19
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Banks' actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
TO BE
CATEGORIZED AS "WELL-
CAPITALIZED", UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------- ------------------ ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- --------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1996
Total Capital to Risk-
Weighted Assets:
FBBH.................. $ 9,711 10.0% $ 7,760 ^ 8.0% $ 9,701 ^ 10.0%
GSB................... 30,297 11.0% 22,010 ^ 8.0% 27,513 ^ 10.0%
Tier 1 Capital to
Risk-Weighted
Assets:
FBBH.................. 8,434 8.7% Not Applicable 5,820 ^ 6.0%
GSB................... 26,739 9.7% Not Applicable 16,508 ^ 6.0%
Tier 1 Capital to
Average
Assets (Core Capital):
FBBH.................. 8,434 5.9% 5,706 ^ 4.0% 7,132 ^ 5.0%
GSB................... 26,739 7.0% 15,320 ^ 4.0% 19,150 ^ 5.0%
Tangible Capital:
FBBH.................. 8,434 6.0% 2,120 ^ 1.5% Not Applicable
GSB................... 26,739 6.8% 5,855 ^ 1.5% Not Applicable
DECEMBER 31, 1995
Total Capital to Risk-
Weighted
Assets:
FBBH.................. $ 9,820 9.8% $ 7,999 ^ 8.0% $ 9,998 ^ 10.0%
GSB................... 15,523 10.4% 11,973 ^ 8.0% 14,967 ^ 10.0%
Tier 1 Capital to
Risk-Weighted
Assets:
FBBH.................. 8,549 8.6% Not Applicable 5,999 ^ 6.0%
GSB................... 13,852 9.3% Not Applicable 8,980 ^ 6.0%
Tier 1 Capital to
Average
Assets (Core Capital):
FBBH.................. 8,549 6.4% 5,326 ^ 4.0% 6,657 ^ 5.0%
GSB................... 13,852 10.3% 5,398 ^ 4.0% 6,748 ^ 5.0%
Tangible Capital:
FBBH.................. 8,549 6.8% 3,075 ^ 1.5% Not Applicable
GSB................... 13,852 6.2% 2,066 ^ 1.5% Not Applicable
</TABLE>
As of September 30, 1996, the Banks' capital ratios were sufficient for them
to be categorized as "well capitalized" based solely on quantitative measures.
However, because of the Orders discussed above, each Bank can be categorized
by the OTS as no higher than "adequately capitalized." Because the Banks have
minimum regulatory capital requirements and the additional requirements under
the Orders discussed above, substantially all retained earnings of the Banks
are restricted as to distribution to stockholders.
At June 30, 1996, as a result of new legislation enacted to recapitalize the
SAIF deposit insurance fund, the Company accrued approximately $1.4 million
for a special assessment to be paid in the fourth quarter.
F-20
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. RELATED PARTY TRANSACTIONS
Substantially all loans are serviced by Wilshire Credit Corporation ("WCC"),
which is affiliated with the Company by common ownership. Management believes
that the terms of the servicing agreement are no less favorable to the Banks
than terms offered by other servicers. Due from affiliate in the accompanying
consolidated statements of financial condition represents the amount of loan
payments collected by WCC but not yet remitted to the Banks at that date. Loan
servicing fees and expenses shown in the consolidated statements of operations
were paid to WCC, and include reimbursements for direct expenses borne by WCC
on behalf of the Banks. Due to affiliates in the consolidated statements of
financial condition primarily comprises amounts owed to WCC for WAC operating
expenses paid by WCC. At September 30, 1996, due to affiliates also includes a
liability to WCC for a servicing fee with deferred payment terms.
12. STOCK OPTIONS
In 1994 and 1995, the Banks issued stock options for the benefit of certain
directors, executives and consultants. FBBH granted 19,447 and 23,161 options
in 1994 and 1995, respectively. GSB granted 69,724 options in 1995. All grants
were made with exercise prices at least equal to the book value of the
relevant bank's shares on the grant dates. Subsequent to September 30, 1996,
these stock options were converted into 31,225 options to purchase the stock
of WFSG. The options are exercisable at prices ranging from $5.58 to $14.90
per share no earlier than 60 days after the effective date of the initial
public offering of WFSG stock discussed in Note 17, and have remaining terms
of from two to three years. Their estimated fair value as of November 1, 1996
was $162; an amount no greater than this would have been reported as
compensation expense during 1994 and 1995 if the fair value method of
accounting discussed in SFAS No. 123 had been used to measure compensation
expense. Assuming that all grants were made in 1995, 1995 net income reported
in the consolidated statements of operations would have been $430 and earnings
per share would have been $18.22 if the fair value method of accounting for
the options had been used.
Pursuant to the initial public offering, the Company adopted a new Stock
Plan on November 1, 1996. Under the Stock Plan, the Company may grant options
and other awards not to exceed 1,750,000 shares of common stock over a ten-
year term. The options may be either incentive stock options or nonstatutory
stock options granted at exercise prices not less than 100% of the fair value
of WFSG common stock at the grant date (110% of fair value for incentive stock
options granted to persons holding over 10% of the Company's shares).
Restricted stock and stock appreciation rights may also be granted under the
Stock Plan.
The initial awards under the new Stock Plan are expected to be granted at
the date of the initial public offering. Options for approximately 1,050,000
to 1,083,750 will be granted to the Company's two largest stockholders. The
Stock Plan also provides that nonemployee Company directors will receive
automatic nonstatutory stock option grants. The number of shares granted to
nonemployee directors each quarter will be determined under a formula ($6
divided by the fair market value per share of WFSG common stock on each grant
date).
13. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
F-21
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and due from
banks.................. $ 11,231 $ 11,231
Federal funds sold...... 9,300 9,300
Mortgage-backed
securities held to
maturity............... 22,380 21,778
Mortgage-backed
securities available
for sale............... 6,483 6,483
Securities held to
maturity............... 7,425 7,452
Trading account
securities............. 7,092 7,092
Loans, net.............. 177,280 173,938
Discounted loans, net... 3,419 3,419
Loans held for sale,
net.................... 260,804 264,180
Federal Home Loan Bank
stock.................. 2,911 2,911
Liabilities:
Deposits................ 487,535 487,821
Borrowings.............. -- --
Off-Balance Sheet
Liabilities:
Interest-rate swap...... -- 714
<CAPTION>
DECEMBER 31, 1995
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and due from
banks.................. $ 3,382 $ 3,382
Federal funds sold...... 1,100 1,100
Mortgage-backed
securities held to
maturity............... 13,119 12,873
Mortgage-backed
securities available-
for-sale............... 9,083 9,083
Securities held to
maturity............... 6,470 6,488
Loans, discounted loans
and loans held for
sale, net.............. 290,771 295,747
Federal Home Loan Bank
stock.................. 1,421 1,421
Liabilities:
Deposits................ 304,020 307,177
Borrowings.............. 13,000 13,000
Subordinated debt....... 11,000 11,000
</TABLE>
The methods and assumptions used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate that value are
explained below:
Cash and Due From Banks and Federal Funds Sold--The carrying amounts
approximate fair values, due to the short-term nature of these instruments.
Securities and Mortgage-Backed Securities--The fair values of securities
are generally obtained from market bids for similar or identical
securities, or are obtained from independent security brokers or dealers.
Loans, Discounted Loans and Loans Held for Sale--It is not practicable to
estimate the fair value of discounted loans, which are predominately
nonperforming loans, due to uncertainties as to the nature, timing and
extent to which the loans will be either collected according to original
terms, restructured, or foreclosed upon. For other loans, fair values are
estimated for portfolios of loans with similar financial characteristics.
Loans are segregated by type, such as fixed and adjustable rate interest
terms. The fair values of fixed-rate mortgage loans are based on discounted
cash flows utilizing applicable risk-adjusted spreads relative to the
current pricing of similar fixed-rate loans as well as anticipated
prepayment schedules. The fair values of
F-22
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
adjustable-rate mortgage loans are based on discounted cash flows utilizing
discount rates that approximate the pricing of available mortgage-backed
securities having similar rate and repricing characteristics, as well as
anticipated prepayment schedules. No value adjustments have been made for
changes in credit within the loan portfolio. It is management's opinion
that the allowance for estimated loan losses pertaining to loans results in
a fair value adjustment of the credit risk of such loans.
Federal Home Loan Bank Stock--The carrying amounts approximate fair
values because the stock may be sold back to the Federal Home Loan Bank at
carrying value.
Deposits--The fair values of deposits are estimated based on the type of
deposit products. Demand accounts, which include passbook and transaction
accounts, are presumed to have equal book and fair values, since the
interest rates paid on these accounts are based on prevailing market rates.
The estimated fair values of time deposits are determined by discounting
the cash flows of settlements of deposits having similar maturities and
rates, utilizing a yield curve that approximates the prevailing rates
offered to depositors as of the reporting date.
Borrowings--The carrying amounts of repurchase agreements approximates
fair value due to the short-term nature of these instruments.
Subordinated Debt--The fair value of subordinated debt issued to
shareholders by WAC is assumed to be equal to carrying value because the
debt terms were negotiated with related parties and there is no market for
the debt at such terms with unrelated parties.
Off-Balance-Sheet Liabilities--The fair value of an interest-rate swap
(1996 only) is estimated at the net present value of the future payable,
based on the current spread, discounted at a current rate. Fair values of
off-balance sheet commitments to lend (1995 only) are estimated based on
deferred fees associated with such commitments, which are immaterial as of
the reporting date, and are therefore not presented.
The fair value estimates presented herein are based on pertinent information
available to management as of each reporting date. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1996 1996(1)
------------- -------- ---------
<S> <C> <C> <C>
Interest income.......................... $12,186 $12,407 $9,544
Interest expense......................... 7,572 7,046 4,974
Provision for estimated losses on loans.. 4,883 5,483 5,385
------- ------- ------
Net interest loss after provision for es-
timated losses on loans................. (269) (122) (815)
Non-interest income...................... 1,240 917 4,220
Non-interest expense..................... 5,398 2,625 2,882
------- ------- ------
(Loss) income before income taxes........ (4,427) (1,830) 523
Income tax benefit....................... 3,373 805 474
------- ------- ------
Net (loss) income........................ $(1,054) $(1,025) $ 997
======= ======= ======
(Loss) earnings per share................ $(10.57) $(13.05) $18.90
======= ======= ======
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Interest income............. $ 7,329 $ 6,173 $ 5,776 $5,103
Interest expense............ 4,070 3,704 3,573 3,134
Provision for estimated
losses on loans............ 1,045 1,020 1,028 1,173
------- ------- ------- ------
Net interest income (loss)
after provision for
estimated losses on loans.. 2,215 1,449 1,175 796
Non-interest income......... 373 1,684 556 494
Non-interest expense........ 2,855 2,096 1,664 1,487
------- ------- ------- ------
Income (loss) before income
taxes...................... (268) 1,037 67 (197)
Income tax (expense)
benefit.................... 21 (78) (4) 14
------- ------- ------- ------
Net income (loss)........... $ (247) $ 959 $ 63 $ (183)
======= ======= ======= ======
Earnings (loss) per share... $(10.47) $ 40.66 $ 2.63 $(7.73)
======= ======= ======= ======
<CAPTION>
QUARTERS ENDED
----------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1994 1994 1994 1994
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Interest income............. $ 3,861 $ 2,108 $ 1,669 $1,931
Interest expense............ 2,315 1,317 970 855
Provision for estimated
losses on loans............ 2,173 -- -- --
------- ------- ------- ------
Net interest (loss) income
after provision for
estimated losses on loans.. (627) 791 699 1,076
Non-interest income......... 641 336 78 172
Non-interest expense........ 1,929 1,255 1,017 743
------- ------- ------- ------
(Loss) income before income
taxes...................... (1,915) (128) (240) 505
Income tax benefit.......... 566 38 71 (149)
------- ------- ------- ------
Net (loss) income........... $(1,349) $ (90) $ (169) $ 356
======= ======= ======= ======
(Loss) earnings per share... $(79.41) $(13.57) $(25.43) $53.55
======= ======= ======= ======
</TABLE>
- --------
(1) The financial information for the quarter ended March 31, 1996 was
restated to account for residual interests in loans sold as securitization
transactions as trading account securities. The effect on quarterly earnings
was an increase of $1,601 or $30.36 per share.
15. PARENT COMPANY INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Cash.............................................. $ -- $ 1
Investments in Banks.............................. 35,310 18,777
Prepaid expenses and other assets................. 715 153
------- -------
$36,025 $18,931
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities............ $ 764 $ 317
Due to affiliates................................. 707 575
Subordinated debt to majority stockholders........ -- 11,000
------- -------
Total liabilities............................... 1,471 11,892
------- -------
Contributed and retained equity................... 34,554 7,039
------- -------
$36,025 $18,931
======= =======
</TABLE>
F-24
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------ -------
<S> <C> <C> <C>
Interest income............................. $ 2 $ 9 $ 24
Interest expense............................ 67 243 31
------- ------ -------
Net interest expense........................ (65) (234) (7)
Noninterest income.......................... 563 1,155 611
Noninterest expense......................... 125 363 156
------- ------ -------
Income before equity in earnings (loss) of
subsidiaries............................... 373 558 448
Equity in (loss) earnings of subsidiaries... (1,455) 34 (1,700)
------- ------ -------
Net (loss) income........................... $(1,082) $ 592 $(1,252)
======= ====== =======
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------ -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) income.......................... $(1,082) $ 592 $(1,252)
Adjustments to reconcile net income (loss)
to
net cash (used in) provided by operating
activities:
Amortization of purchase accounting
adjustments.............................. (783) (1,045) (488)
Equity in loss (earnings) of
subsidiaries............................. 1,455 (34) 1,700
Change in:
Prepaid expenses and other assets........ (562) 51 495
Accounts payable and other liabilities... 447 90 (111)
Due to affiliates........................ 132 (71) (29)
Other.................................... -- 33 --
------- ------ -------
Net cash (used in) provided by operating
activities............................. (393) (384) 315
------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net investment in subsidiaries............. (17,358) (9,000) (4,746)
------- ------ -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of capital stock.................. 17,750 -- 4,750
Issuance of subordinated debt.............. -- 9,000 --
Dividends from subsidiary.................. -- 65 --
------- ------ -------
Net cash provided by financing
activities............................. 17,750 9,065 4,750
------- ------ -------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS........................... (1) (319) 319
CASH:
Beginning of year.......................... 1 320 1
------- ------ -------
End of year................................ $ -- $ 1 $ 320
======= ====== =======
NONCASH FINANCING ACTIVITIES:
Conversion of capital stock to subordinated
debt...................................... $2,000
Conversion of subordinated debt to capital
stock..................................... $11,000
</TABLE>
F-25
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. PROFORMA INFORMATION CONCERNING ACQUISITIONS
As discussed in Note 1, during 1994 WACII acquired GSB in a purchase
accounting transaction. The results of GSB's operations are included in the
Company's consolidated financial statements subsequent to the date of
acquisition. The following proforma financial information shows the estimated
results of the Company's operations for the year ended December 31, 1994 as
though the GSB purchase had occurred as of the beginning of the year. The
proforma amounts are not necessarily indicative of what would have actually
occurred if the acquisition had occurred as of the beginning of the year.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
------------
<S> <C>
Net interest income and non-interest revenue.................... $7,222
Net loss........................................................ (920)
Loss per share.................................................. (38.99)
</TABLE>
17. INITIAL PUBLIC OFFERINGS
WFSG is making initial public offerings (the "IPOs") of common stock and
debt, and has formed certain new subsidiaries to undertake the loan
acquisition and servicing businesses currently being conducted by WCC and
certain other affiliates of the Company. The loan acquisition activity, and
any other business activity, that may be conducted by WFSG's new subsidiaries
will be in addition to the activity already being performed by the Banks and
reflected in these consolidated financial statements on an historical basis.
The Company currently expects that the IPOs will be completed during 1996.
Certain business developments related to the IPOs that may be significant to
the operations of the Company are disclosed in other footnotes to these
consolidated financial statements.
18. SUBSEQUENT EVENTS--LOAN ACQUISITIONS AND SALES
In October and November 1996, GSB acquired approximately $279,000 in unpaid
principal amount of discounted residential mortgage loans, and committed to
acquire approximately $31,900 of additional discounted residential mortgage
loans in December. Management expects to sell, prior to December 31, 1996,
performing residential mortgage loans held for sale with market values
approximately equivalent to the purchase prices of the discounted loans.
Completion of the sales transactions by December 31, 1996 is necessary in
order for GSB to meet the growth restrictions imposed by its Order (see Note
10).
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Girard Savings Bank F.S.B.
San Diego, California
We have audited the accompanying consolidated statements of operations and
of cash flows of Girard Savings Bank F.S.B. and Subsidiary (the "Bank") for
the period from January 1, 1994 through November 8, 1994, the date of the
Bank's acquisition by Wilshire Acquisitions Corporation II. These consolidated
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides basis for our
opinion.
In our opinion, such consolidated statements of operations and of cash flows
present fairly, in all material respects, the results of operations and cash
flows of Girard Savings Bank F.S.B. and Subsidiary for the period from January
1, 1994 through November 18, 1994, in conformity with generally accepted
accounting principles.
March 10, 1995 /s/ Deloitte & Touche LLP
Los Angeles, California
F-27
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
INTEREST INCOME:
Loans................................................................ $5,577
Mortgage-backed securities........................................... 337
------
Total interest income.............................................. 5,914
------
INTEREST EXPENSE:
Deposits............................................................. 3,006
Borrowings........................................................... 292
------
Total interest expense............................................. 3,298
------
NET INTEREST INCOME.................................................... 2,616
PROVISION FOR ESTIMATED LOAN LOSSES.................................... 827
------
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOAN LOSSES.......... 1,789
------
OTHER LOSS, Service charges and other fees............................. (3)
------
OTHER EXPENSES:
Compensation and other employee benefits............................. 512
FDIC insurance premiums.............................................. 262
Depreciation and amortization........................................ 14
Amortization of excess of cost over net assets acquired.............. 993
Occupancy............................................................ 57
Professional services................................................ 338
Data processing...................................................... 54
Real estate owned, net............................................... 194
Other general and administrative..................................... 143
------
Total other expenses............................................... 2,567
------
LOSS BEFORE INCOME TAX PROVISION....................................... (781)
INCOME TAX PROVISION................................................... 156
------
NET LOSS............................................................... $ (937)
======
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (937)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation....................................................... 14
Amortization of excess of cost over net assets acquired............ 993
Amortization of deferred interest and fees......................... (56)
Provision for loan losses.......................................... 827
Provision for real estate losses................................... 97
Change in:
Accrued interest receivable....................................... (109)
Prepaid expenses and other assets................................. (52)
Income taxes receivable........................................... 921
Other liabilities................................................. 468
Deferred taxes.................................................... 212
--------
Net cash provided by operating activities........................ 2,378
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan repayments, net................................................ 5,503
Proceeds from the maturity of investments securities................ 3,497
Purchases of investment securities and FHLB stock................... (2,046)
Investment in real estate........................................... (107)
Proceeds from real estate sold...................................... 2,850
--------
Net cash provided by investing activities........................ 9,697
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits.............................................. (2,402)
Issuance of common stock............................................ 13
Proceeds from FHLB advances......................................... 12,000
Payments of FHLB advances........................................... (21,000)
--------
Net cash used in financing activities............................ (11,389)
--------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................ 686
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................... 2,903
--------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................. $ 3,589
========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Payments during the period for:
Interest........................................................... $ 3,300
NONCASH INVESTING ACTIVITIES:
Loans originated to finance the sale of foreclosed real estate...... 1,190
</TABLE>
See notes to consolidated financial statements.
F-29
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Girard Savings Bank F.S.B. and
subsidiary (the "Bank") are in accordance with generally accepted accounting
principles and conform to practices within the banking industry. A summary of
the significant accounting policies applied in the preparation of the
accompanying financial statements follows:
Principles of Consolidation--The consolidated financial statements include
the accounts of Girard Savings Bank F.S.B. and its wholly-owned subsidiary,
Girard Financial Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates. Significant estimates in the accompanying consolidated financial
statements include provisions for losses on loans and real estate owned.
Investment Securities--As of January 1, 1994, the Bank adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities. This
statement address the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments
in debt securities. Those investments are classified into three categories and
accounted for as follows: (i) debt securities which the enterprise has the
positive intent and ability to hold to maturity are classified as held-to-
maturity securities and reported at amortized cost; (ii) debt and equity
securities that are brought and held principally for the purpose of selling in
the near term are classified as trading securities and reported at fair value
with unrealized gains and losses included in earnings; and (iii) debt and
equity securities not classified as either held-to-maturity securities or
trading securities are classified as available-for-sale securities and
reported at fair value with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholders' equity, net of income
taxes. Prior to the adoption of SFAS No. 115, all investment securities were
classified as held for investment and valued at cost, adjusted for the
accretion of discounts and amortization of premiums which were recognized as
an adjustment to income. Subsequent to adoption, the Bank has classified all
of its investment securities as held to maturity and accounts for them in the
same manner.
Loans Receivable--Loans are reported at the principal amounts outstanding,
net of unearned income, net deferred loan origination fees and the allowance
for loan losses. Interest income is calculated using the simple interest
method. The recognition of interest income is discontinued when, in
management's judgment, the collection of interest is deemed to be unlikely.
Nonrefundable fees and direct costs associated with the origination of loans
are deferred and netted against outstanding loan balances. The net deferred
fees and costs recognized in interest income over the term of the loan using a
method that approximates the interest method. When recognized as interest
income, loan origination fees are included in revenues as interest on loans.
Discounts or premiums on acquired loans are accreted or amortized to
operations over the lives of the loans using a method that approximates the
level-yield method unless the loans are nonaccrual loans.
Provision and Allowance for Loan Losses--The allowance for loan losses is
maintained at a level believed adequate by management to absorb potential
losses in the loan portfolio. Management's determination of the adequacy of
the allowance is based on an evaluation of the portfolio, previous loan loss
experience, current economic conditions, volume, growth and composition of the
loan portfolio and other relevant factors. The
F-30
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
allowance is increased by provisions for loan losses charged against
operations and recoveries of previously charged off credits.
The accompanying financial statements require the use of management
estimates to calculate the allowance for loan losses. These estimates are
inherently uncertain and depend on the outcome of future events. Regulatory
authorities have required substantial increases in the allowance maintained by
many banks in recognition of the inherent risk in the existing economic
environment. The Bank's lending is concentrated in the Southern California
area and specifically on loans collateralized by income-producing properties
in that area. The area has recently experienced adverse economic conditions,
including declining real estate values. These factors have adversely affected
borrower's ability to repay loans. Additional decline in the local economy
and/or rising interest rates may result in increasing losses that cannot
reasonably be predicted at this date. Such losses may also result in
unanticipated erosion of the Bank's capital.
Leasehold Improvements and Equipment--Office leasehold improvements and
equipment are stated at cost, less accumulated depreciation and amortization,
computed on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever are shorter.
Real Estate Owned--Real estate acquired in settlement of loans is stated at
the lower of cost of fair value less estimated cost to sell. Loan balances in
excess of fair value of the real estate acquired are charged against the
allowance for loan losses at the date of acquisition. Any subsequent operating
expense or income, reduction in estimated values, and gains or losses on
disposition of such properties are charged to current operations.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and
cash equivalents include cash and due from banks, federal funds sold and
certificates of deposit with original maturities of three months or less.
2. SUBSEQUENT EVENT
Acquisition and Recapitalization--On November 9, 1994, pursuant to a stock
purchase agreement between Wilshire Acquisitions Corporation II ("WACII"),
Girard Savings Bank F.S.B., (the "Bank"), Girard Financial Corporation, the
stockholders of the Bank, and RT Holdings, Inc., WACII purchased 4,218,210
shares of the Bank's common stock held by the stockholders for $3,559. In
addition, the Bank issued and sold to WACII nonvoting preferred stock for
$1,000. WACII now owns 94.9% of the Bank's outstanding shares of common stock
and 100% of the Bank's outstanding preferred stock.
Prior to acquisition, the Bank wrote off $920 in goodwill associated with a
prior acquisition that otherwise would have been amortized over the next 14
years. Such goodwill was deemed to be impaired due to the cessation of
significant activity of the acquired business and disposition of its assets.
In addition, the Bank incurred additional legal and professional expenses of
approximately $256 related to its sale.
3. INCOME TAX PROVISION
The provision for income taxes consists of the following:
<TABLE>
<S> <C>
Current:
Federal income tax benefit.......................................... $(61)
State income taxes.................................................. 5
----
Total current benefit............................................. (56)
----
Deferred:
Federal income taxes................................................ 212
----
Total income tax provisions....................................... $156
====
</TABLE>
F-31
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The principal temporary differences creating deferred taxes are related to
FHLB stock dividends, discounts on purchased loans, the allowance for loan
losses, deferred loan fees, and partnership income, which are taxable or
deductible in different years for tax and financial reporting purposes.
The difference between the effective tax rate implicit in the consolidated
statements of operations and the statutory income tax rate can be attributed
to the following:
<TABLE>
<S> <C>
Federal income tax benefit at statutory rate............................ (35.0%)
Nondeductible goodwill.................................................. 41.2
Valuation allowance..................................................... 7.6
Other................................................................... 6.2
-----
Effective income tax benefit rate....................................... 20.0%
=====
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Profit Sharing Plan--Subsequent to the acquisition by WACII, the Bank's
employees began to participate in a defined contribution profit sharing and
401(k) plan sponsored by companies in the Wilshire Financial Services Group
"control group". At the discretion of the Bank's Board of Directors, the Bank
may elect to contribute to the plan based on profits of the Bank or based on
matching participants' contributions.
Lease Commitments--At November 8, 1994, there are no operating leases with
initial or remaining noncancellable lease terms in excess of one year.
Total rent expense from an operating lease was approximately $59 in 1994.
The lease provides that the Bank pay taxes, maintenance, insurance and certain
other operating expenses applicable to the leased premises in excess of a
predetermined base, in addition to the minimum monthly payments.
Lending Commitments--At November 8, 1994, the Bank had no outstanding
commitments to fund loans and no obligations under standby letters of credit
or other off-balance-sheet items with credit risk.
Litigation--The Bank is a defendant in legal actions arising from
transactions conducted in the ordinary course of business. Management, after
consultation with legal counsel, believes the ultimate liability, if any,
arising from such actions will not materially affect the Bank's financial
position.
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Wilshire Credit Corporation and Affiliates
Portland, Oregon:
We have audited the accompanying combined statements of financial condition
of Wilshire Credit Corporation and Affiliates (the "Corporations") as of
September 30, 1996 and December 31, 1995, and the related combined statements
of operations, stockholders' equity and cash flows for the nine months ended
September 30, 1996 and for the years ended December 31, 1995 and 1994. These
combined financial statements are the responsibility of the Corporations'
management. Our responsibility is to express an opinion on these 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, such combined financial statements present fairly, in all
material respects, the combined financial position of Wilshire Credit
Corporation and Affiliates as of September 30, 1996 and December 31, 1995, and
the combined results of their operations and their cash flows for the nine
months ended September 30, 1996 and for the years ended December 31, 1995 and
1994, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
November 13, 1996
Los Angeles, California
F-33
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS........................... $ 6,638 $ 3,577
SECURITIES:
Trading account................................... 11,818 --
Available for sale, at fair value (cost: $7,039
and $2,486 in 1996
and 1995, respectively).......................... 7,049 2,486
Held to maturity, at amortized cost (fair value:
$12,785 and $4,643 in 1996
and 1995, respectively).......................... 12,771 4,643
LOANS:
Loans, net........................................ -- 121,420
Discounted loans, net............................. 4,824 19,352
Loans held for sale, net, at lower of cost or
market........................................... 112,939 --
Discounted loans held for sale, net, at lower of
cost or market................................... 168,957 33,267
Commercial notes receivable....................... 10,811 9,261
OTHER RECEIVABLES................................... 2,935 1,769
DUE FROM AFFILIATES, Net............................ 2,473 759
PROPERTY, Net....................................... 8,953 6,717
OTHER ASSETS........................................ 3,000 3,122
-------- --------
TOTAL............................................... $353,168 $206,373
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Participating interests in loans and securities... $143,424 $150,298
Borrowings........................................ 243,239 70,165
Capital lease obligations......................... 1,445 1,126
Due to affiliates................................. 8,431 3,698
Accounts payable and accrued liabilities.......... 7,592 4,887
-------- --------
Total liabilities............................... 404,131 230,174
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock...................................... 524 524
Retained earnings (accumulated deficit)........... (3,943) 78
Distributions to stockholders..................... (47,554) (24,403)
Unrealized gains on available-for-sale
securities....................................... 10 --
-------- --------
Total stockholders' equity (deficit)............ (50,963) (23,801)
-------- --------
TOTAL............................................... $353,168 $206,373
======== ========
</TABLE>
See notes to combined financial statements.
F-34
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ----------------
1996 1995 1994
------------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Servicing fees............................... $ 6,041 $ 9,739 $ 3,339
Interest and dividend income................. 6,718 5,124 1,667
Gain on sale of loans........................ 935 43 465
Rent and finance lease income................ 607 625 192
Other revenues (expense)..................... 72 (194) 133
------- ------- -------
Total revenues............................. 14,373 15,337 5,796
------- ------- -------
EXPENSES:
Compensation and benefits.................... 5,090 6,605 3,834
Interest expense............................. 9,116 3,789 894
Travel....................................... 1,032 1,233 177
Depreciation and amortization................ 766 504 208
Professional services........................ 537 898 311
Portfolio servicing expense.................. 281 52 32
Rent......................................... 105 254 217
Telephone.................................... 189 349 262
Postage...................................... 120 143 206
Advertising.................................. 150 82 33
Other general and administrative............. 1,008 909 684
------- ------- -------
Total expense.............................. 18,394 14,818 6,858
------- ------- -------
NET (LOSS) INCOME.............................. $(4,021) $ 519 $(1,062)
======= ======= =======
</TABLE>
See notes to combined financial statements.
F-35
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED GAINS
ON AVAILABLE-
COMMON RETAINED DISTRIBUTIONS TO FOR-SALE
STOCK EARNINGS SHAREHOLDERS SECURITIES TOTAL
------ -------- ---------------- ---------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1994................... $524 $ 1,599 $ (4,584) $-- $ (2,461)
Net loss.............. -- (1,062) -- -- (1,062)
Distributions to
shareholders......... -- -- (7,576) -- (7,576)
---- ------- -------- ---- --------
BALANCE, DECEMBER 31,
1994................... 524 537 (12,160) -- (11,099)
Net income............ -- 519 -- -- 519
Distributions to
shareholders......... -- -- (12,243) -- (12,243)
Dividends............. -- (978) -- -- (978)
---- ------- -------- ---- --------
BALANCE, DECEMBER 31,
1995................... 524 78 (24,403) -- (23,801)
Net loss.............. -- (4,021) -- -- (4,021)
Distributions to
shareholders......... -- -- (23,151) -- (23,151)
Unrealized gain on se-
curities
available-for-sale... -- -- -- 10 10
---- ------- -------- ---- --------
BALANCE, SEPTEMBER 30,
1996................... $524 $(3,943) $(47,554) $ 10 $(50,963)
==== ======= ======== ==== ========
</TABLE>
See notes to combined financial statements.
F-36
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ------------------
1996 1995 1994
------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ (4,021) $ 519 $ (1,061)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Gain on sale of loans..................... (935) (43) (465)
Valuation adjustment--loans held for
sale..................................... -- -- 254
Interest capitalized on commercial notes.. (1,550) (581) --
Depreciation and amortization............. 524 343 179
Change in:
Trading securities...................... (11,818) -- --
Security purchased under agreement to
resell................................. -- 24,938 (24,938)
Other receivables....................... (1,166) 530 (756)
Due from affiliates..................... (1,714) (386) (373)
Other assets............................ 122 (1,912) (1,126)
Due to affiliates....................... 4,733 185 2,770
Accounts payable and accrued
liabilities............................ 2,705 1,931 1,926
Security sold but not yet purchased..... -- (24,738) 24,738
Other................................... -- 38 --
-------- -------- --------
Net cash provided by (used in)
operating activities................. (13,130) 345 1,148
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of held-to-maturity securities.... (8,371) (4,160) (851)
Proceeds from maturities of held-to-maturity
securities................................. 243 368 --
Purchase of available-for-sale securities... (5,377) (2,602) --
Proceeds from maturities of available-for-
sale securities............................ 824 116 --
Acquisitions and originations of loans...... (258,771) (168,558) (240,881)
Proceeds from sale of loans................. 120,707 109,034 8,420
Receipts of principal on loans.............. 26,330 137,642 39,179
Origination of commercial notes receivable.. -- (7,680) (1,000)
Purchase of property........................ (2,248) (5,339) (219)
-------- -------- --------
Net cash provided by (used in)
investing activities................. (126,663) 58,828 (195,352)
-------- -------- --------
</TABLE>
See notes to combined financial statements.
F-37
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, -------------------
1996 1995 1994
------------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from participating interests..... $ -- $ 47,261 $179,938
Payments of principal to participating
interests................................ (6,874) (102,234) (36,564)
Proceeds from borrowings.................. 224,968 73,091 63,278
Principal payments of borrowings.......... (51,894) (63,867) (3,050)
Principal payments on capital leases...... (195) (125) (59)
Cash dividends paid ...................... -- (978) --
Other distributions to stockholders....... (23,151) (12,243) (7,576)
--------- --------- --------
Net cash provided by (used in) financing
activities............................. 142,854 (59,155) 195,967
--------- --------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS... 3,061 18 1,763
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR....................................... 3,577 3,559 1,796
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...... $ 6,638 $ 3,577 $ 3,559
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Interest paid............................. $ 8,734 $ 3,121 $ 359
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Purchases of property through capital
leases................................... $ 514 $ -- $ 101
</TABLE>
See notes to combined financial statements.
F-38
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
YEARS ENDED DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Combination--The combined financial statements of Wilshire Credit
Corporation and Affiliates (the "Corporations") include the accounts of the
following companies:
<TABLE>
<CAPTION>
COMPANY IDENTIFIER
------- ----------
<S> <C>
Wilshire Credit Corporation....................................... WCC
Wilshire Leasing Limited.......................................... WLL
Wilshire Properties I, Inc. ...................................... WP-I
Wilshire Properties II, Inc. ..................................... WP-II
Portland Servicing Corporation.................................... PSC
Wilshire Securities Corporation................................... WS
Wilshire Funding Corporation 1994-1............................... WF-4-1
Wilshire Funding Corporation 1995-1............................... WF-5-1
Wilshire Funding Corporation 1995-2............................... WF-5-2
Wilshire Funding Corporation 1995-3 .............................. WF-5-3
Wilshire Funding Corporation 1996-1............................... WF-6-1
Wilshire Consumer Receivables Funding Corporation, LLC............ WCRFC
Wilshire Manufactured Housing Funding Company, LLC................ WMHFC
Wilshire Mortgage Funding Company, LLC............................ WMF
WMFC, LLC......................................................... WMFC
Wilshire Funding Company, LLC..................................... WF
</TABLE>
All of the above companies are under common ownership and management. All
significant intercompany balances and transactions have been eliminated in
combination.
Nature of the Business--The Corporations acquire and service performing and
nonperforming (discounted) loan portfolios and mortgage-backed securities.
Funding for loan portfolio and mortgage-backed securities acquisitions is
provided principally by third-party investors who hold participating interests
in cash flows from specified portfolios and securities, generally on a
nonrecourse basis, or who lend to the Corporations with specified portfolios
and securities as collateral.
WLL operates under the name of Portland Cellular, providing cellular
telephone transmission for its customer base. Portland Cellular also provides
phones to certain of its customers under operating leases.
WP-I operates the Corporations' headquarters facilities, which were acquired
under a capital lease with a bargain purchase option.
WP-II owns and manages two commercial real estate properties located in
Oregon.
WS was formed for the purpose of engaging in broker/dealer activities, but
has had no significant activity.
WF-4-1, WF-5-1, WF-5-2, WF-5-3 and WF-6-1 were formed primarily for the
purpose of acquiring and securitizing various loan portfolios.
WCRFC, WMHFC and WMF were formed for the purpose of funding three
securitizations during 1995: a $25,464 consumer loan-backed bond, a $30,757
manufactured housing-backed bond, and a $64,753 mortgage-backed bond,
respectively.
F-39
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
WMFC is the holding company for WF which, was formed for the purpose of
acquiring and originating residential home mortgages.
Cash and Cash Equivalents--The Corporations consider all highly liquid
investments with maturities of three months or less, when purchased, to be
cash equivalents. Cash and cash equivalents consist primarily of cash in
accounts with banks and brokers and in money market funds.
Use of Estimates in the Preparation of the Combined Financial Statements--
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Securities--Securities consist primarily of B-class pass-through mortgage
and other asset-backed securities which were either purchased at discounts or
represent residual interests in loans previously securitized by the
Corporations, and U.S. Treasury securities. Until the third quarter of 1996,
all securities were classified as held-to-maturity based on management's
intent and the Corporations' ability to hold them to maturity, and differences
between cost and fair value of the securities were immaterial. In the third
quarter of 1996, purchases of B-class mortgage-backed securities were
increased significantly. In connection with that activity, management
reevaluated its intentions with respect to the various types of securities
held, and the securities portfolio was segregated into three components, as
follows:
Held-to-Maturity--U.S. Treasury securities are pledged for certain
borrowings and are classified as held-to-maturity based on the ability and
intent to hold them to maturity for that purpose. These securities are
carried at amortized cost.
Trading--B-class and other securities representing retained interests in
loans securitized by the Corporations are classified as trading securities.
These securities are carried at fair value, and changes in unrealized gains
or losses are recorded in the combined statements of operations.
Available-for-Sale--B-class mortgage-backed securities purchased from
third parties are classified as available-for-sale. These securities are
carried at fair value, and changes in unrealized gains or losses are
recorded in a separate stockholders' equity account in the combined balance
sheets. The available-for-sale classification also includes an equity
security-preferred stock of a privately-held company that does not have a
readily determinable fair value, and for which fair value is assumed to
approximate cost.
When the securities held prior to the third quarter of 1996 were transferred
from the held-to-maturity portfolio to the available-for-sale and trading
portfolios during the third quarter, they were transferred at their fair
values, which were not materially different than amortized cost.
Loans--The Corporations' principal business involves acquiring loans, and to
a significantly lesser extent, originating them. Acquired loans are generally
purchased in pools, or portfolios, for prices at or below face value (i.e.,
unpaid principal balances plus accrued interest). Nonperforming and
underperforming loan portfolios are generally acquired at deep discounts to
face value and are classified as discounted loans in the combined statements
of financial condition. Loans that have been identified as likely to be sold
are classified as held-for-sale in the combined statements of financial
condition. Loans other than discounted loans and loans held-for-sale are
classified simply as loans.
Discounted loans are presented in the combined statements of financial
condition inclusive of accrued interest (purchased interest and subsequently
accrued interest) and net of unamortized discount. Discounted loans are
accounted for on a portfolio basis, generally using the cost recovery method.
The full extent of cash that will
F-40
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
ultimately be collected on a specific discounted loan portfolio is subject to
substantial uncertainty. Collections may be realized in various ways, such as
negotiations with debtors resulting in resumption of payments under original
or restructured terms, significant collections on one or a relatively few
loans in a portfolio of many loans, legal judgments against debtors, or
repossession and sale of collateral. Discounts are not accreted into income
until the Corporations' initial net investment in the portfolio is fully
recovered, except in the case of certain portfolios for which collections are
more certain. For most portfolios, accretion is determined in proportion to
cash receipts of principal relative to the total principal in the portfolios.
.
Loans other than discounted loans are presented in the combined statements
of financial condition in the same manner as discounted loans except that
discounts associated with purchased loans are accreted into income using a
method approximating the interest method, and interest is recognized on an
accrual basis.
Loans held-for-sale are presented at lower of cost or market value, and cost
is determined as described above depending on whether the loans held-for-sale
are discounted loans or other loans. If market value is less than cost, a
valuation allowance is recorded to reduce the carrying value.
Commercial notes receivable comprise three originated loans to an
unaffiliated corporation and its operating subsidiary. The loans are presented
at cost, plus accrued compound interest capitalized in accordance with the
terms of the loans. Interest on the loans is collectible in cash based on a
formula relating to the earnings of the borrowers. The loans mature in August
2000.
The Corporations do not evaluate individual loans, except for commercial
notes receivable, for impairment under SFAS No. 114, "Accounting for
Impairment of a Loan," because acquisition decisions and certain other loan
management decisions are made on the basis of the value of each portfolio as a
unit rather than on the basis of the value of specific loans. Also, a
substantial majority of the loans purchased have small balances relative to
the total portfolio and are homogeneous by type within each portfolio.
Impairment is evaluated on a portfolio basis considering the projected net
realizable value of the portfolio compared to the net carrying value of the
portfolio. Credit risk related to each portfolio as a whole is one factor
considered by management in determining the purchase price for the portfolio;
therefore unaccreted discounts are assumed to provide a sufficient valuation
allowance for credit risk unless management's analysis indicates otherwise. As
of September 30, 1996 and December 31, 1995, no allowance for loan losses has
been provided in the financial statements. Specific loans are charged off,
with corresponding charges to loan discounts, when management determines they
are uncollectible. A substantial portion of the total discounted loan
portfolio consists of nonperforming and restructured loans. It is not
practicable to estimate the additional income that might have been recognized
had these loans performed under their original terms.
Interest Income Recognition--Interest is accrued on both loans and
discounted loans in accordance with their legal terms. However, to the extent
there is a participation agreement associated with a loan portfolio, the
liability to the participant is increased by the amount of interest accrued.
To the extent that the Corporations have a nonparticipated interest in a
discounted loan portfolio, interest income recognition is deferred and the
loan discount account is increased by the amount of interest accrued. To the
extent that the Corporations have a nonparticipated interest in commercial
notes receivable and in a loan portfolio other than a discounted loan
portfolio, interest income is recognized as the interest is accrued.
Other Receivables--Other receivables consist primarily of certain direct
costs associated with collections of specific loans. The costs are generally
reimbursable by participants in the loan portfolios, or are charged to the
borrowers.
Due from and Due to Affiliates--Due from affiliates primarily consists of
amounts advanced for certain operating expenses to a savings and loan holding
company affiliated with the Corporations by common ownership and control. At
September 30, 1996, due from affiliates includes servicing fees, for which
payment was deferred, owed to the Corporations from one of the subsidiaries of
the savings and loan holding company.
F-41
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Due to affiliates primarily consists of loan payments collected by the
Corporations as servicer but not yet remitted to the two subsidiaries of the
bank holding company affiliate. These assets and liabilities are reflected at
cost, and do not bear interest.
Rental Income and Finance Lease Income--Rental income and finance lease
income is derived from operating leases on commercial real estate and from
cellular and portable telephone rentals.
Property--Property is stated at cost less accumulated depreciation.
Depreciation is determined using the straight-line method over the estimated
useful lives of the related assets.
Participating Interests in Loans and Securities--Participation liabilities
represent amounts invested by third parties for an interest in cash flows from
loan portfolios and mortgage-backed securities, net of the cash flows already
remitted to the participants. Participants share credit risks and certain
other risks associated with the assets that provide the source of repayment
and potential income to the participants. If cash flows from specific assets
proved to be insufficient to provide participants recovery of their initial
investments or expected income on such investments, the Corporations'
liability would be reduced without recourse. Included in participation
liabilities as of September 30, 1996 and December 31, 1995 are $6,520 and
$5,605, respectively, representing amounts collected from borrowers but not
yet remitted to participants.
Agreements with participants generally provide that, in exchange for the
Corporations' servicing of assets, the Corporations retain a specified portion
of portfolio cash flows allocable to the participants' investment in addition
to cash flows relating to the Corporations' direct investment, if any. The
Corporations' retained portion of cash flows allocable to participants'
interests is recognized when received as servicing fee income. The
Corporations' retained portion generally increases after the point at which
participants have recouped their initial investments.
Financial Instruments--The Corporations enter into transactions involving
financial instruments both for speculative trading purposes and for hedging
purposes.
Premiums received or paid for writing or purchasing puts and calls for
trading purposes are recorded as liabilities or assets representing the market
value of the options. The liabilities or assets are subsequently marked to
market at each balance sheet date, and unrealized as well as realized gains
and losses are recorded in periodic income.
Forward sales and short sales of securities and certain options and futures
contracts are designated as hedges against future fluctuations in the market
value of loans held for sale resulting from changes in interest rates. Changes
in the market value of these instruments are deferred as adjustments to the
cost basis of the hedged loans and thus are recognized in connection with the
ultimate sale of such loans.
Income Taxes--Each of the companies whose operations are reflected in these
combined financial statements are Subchapter S corporations for income tax
purposes. Taxable income of the companies is passed through directly to the
stockholders and is not taxed at the corporate level.
Earnings per Share--Earnings per share data is omitted because each company
in the combined group has an independent capital structure, and varying
numbers of outstanding shares of stock.
Reclassification--Certain amounts in the combined financial statements and
related footnote disclosures for 1995 and 1994 were reclassified to conform to
the 1996 presentation. These reclassifications do not materially affect the
presentation.
F-42
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2.SECURITIES
Securities consist of the following at September 30, 1996 and December 31,
1995:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
1996
Available-for-sale securities:
Mortgage-backed securities........ $ 4,553 $ 30 $ 20 $ 4,563
Equity securities................. 2,486 -- -- 2,486
------- ---- ---- -------
Total available-for-sale........ $ 7,039 $ 30 $ 20 $ 7,049
======= ==== ==== =======
Held-to-maturity--
U.S. Treasury Securities.......... $12,771 $-- $-- $12,785
======= ==== ==== =======
1995
Available-for-sale--
Equity securities................. $ 2,486 $-- $-- $ 2,486
======= ==== ==== =======
Held-to-maturity--
U.S. Treasury Securities.......... $ 4,643 $-- $-- $ 4,643
======= ==== ==== =======
</TABLE>
The Company receives payments on mortgage-backed securities over periods
that are considerably shorter than the contractual maturities of the
securities, which range from 13 to 30 years. U.S. Treasury maturities held at
September 30, 1996 mature within one year.
There were no sales of securities in the nine months ended September 30,
1996 or the years ended December 31, 1995 and 1994.
At September 30, 1996, all U.S. Treasury securities are pledged for certain
borrowings. Substantially all other securities collateralize other borrowings
and participating interests reflected as liabilities in the combined
statements of financial condition.
3.LOANS
Loans, discounted loans and loans held for sale are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Loans at amortized cost:
Gross unpaid principal......................... $ 140,272
Gross accrued interest......................... 3,054
Discount....................................... (21,906)
---------
Loans, net..................................... $ 121,420
=========
Discounted loans, at cost:
Gross unpaid principal......................... $ 280,104 $ 341,269
Gross accrued interest......................... 234,562 221,394
Discount....................................... (509,842) (543,311)
--------- ---------
Discounted loans, net.......................... $ 4,824 $ 19,352
========= =========
</TABLE>
F-43
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Loans held for sale, at cost which is lower than
market:
Gross unpaid principal........................ $131,182
Gross accrued interest........................ 4,719
Discounts and deferred hedging gains, or
losses net of premiums....................... (22,962)
--------
Loans held for sale, net...................... $112,939
========
Discounted loans held for sale, at cost which is
lower than market:
Gross unpaid principal........................ $210,657 $69,818
Gross accrued interest........................ 27,336 13,573
Discount and deferred hedging gains, or losses
net of premiums.............................. (69,036) (50,124)
-------- -------
Discounted loans held for sale, net........... $168,957 $33,267
======== =======
</TABLE>
Loans other than discounted loans consist primarily of loans secured by real
estate, of which approximately 50% are single family residential properties.
Discounted loans and discounted loans held for sale comprised both real estate
secured (approximately 35%) and consumer loans (approximately 65% based on
gross unpaid principal balances at September 30, 1996). Approximately 20% of
loans are to borrowers in the northeastern U.S. and approximately 15% of loans
are to borrowers in California. The remainder are to borrowers in diverse
geographical areas.
Substantially all loans collateralize participating interests and
borrowings.
4.PROPERTY
Property consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Land.............................................. $2,550 $1,763
Buildings......................................... 5,971 4,701
Vehicles.......................................... 48 48
Furniture and equipment........................... 1,223 812
------ ------
Total........................................... 9,792 7,324
Less accumulated depreciation..................... 839 607
------ ------
Property, net..................................... $8,953 $6,717
====== ======
</TABLE>
Land and buildings comprise the Corporations' headquarters, which secure a
capital lease obligation (see Note 6), and two commercial real estate
projects, which collateralize certain borrowings (see Note 5).
The following table summarizes future minimum rental income under
noncancelable operating leases as of September 30, 1996:
<TABLE>
<S> <C>
1996.................................................................... $127
1997.................................................................... 322
1998.................................................................... 110
1999.................................................................... 116
2000.................................................................... 117
Thereafter.............................................................. 25
----
$817
====
</TABLE>
F-44
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. BORROWINGS
The Corporations have various borrowing agreements, most of which are
collateralized by loans and securities. These borrowings have either (a)
repayment terms tied to cash receipts of the related collateral or (b)
borrowing bases tied to the relative value of the collateral. Except certain
borrowings (mortgages) secured by investment real estate, the borrowings do
not have fixed repayment schedules. Following is a summary of borrowings by
major type, showing their outstanding balances, interest rates and final
maturity dates. Unless otherwise noted, the borrowings are secured by
substantially all of the Corporations' unparticipated interest in loans and
securities and/or the agreed-upon value of the servicing income to be derived
from participated interests. Interest is payable at least monthly on
substantially all borrowings.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Reverse repurchase agreements with rates ranging
from 5.6% to LIBOR plus .75-2.5%, maturing
October 1996................................... $ 85,795 $ 5,918
Borrowings with fixed rates of 12-12.5%,
maturing beginning in 1998, renewable at the
Corporations' option until 2005-6.............. 81,085 38,996
Mortgage-backed bonds issued to third parties
with rates ranging from LIBOR plus .5-5.5% (11%
cap), maturing in 2001......................... 50,381
Warehouse line for loan originations at LIBOR
plus 1.5%...................................... 12,374
Borrowings with rates of prime plus 5% and LIBOR
plus 4%, maturing in 1998-1999................. 3,542 13,447
Borrowings due on demand, interest at prime
plus........................................... 3,500 3,500
Other loan-secured borrowings................... 2,750
Borrowings secured by investment real estate
with fixed rates from 9.75-10.63%, payable
monthly and maturing in 1998 and 2005.......... 5,345 4,477
Related-party borrowings........................ 1,217 1,077
-------- -------
Total borrowings................................ $243,239 $70,165
======== =======
</TABLE>
The mortgage-backed bonds shown above were issued in a securitization
involving the Corporations' loans which was accounted for as a financing
transaction rather than as a sale of loans due to the extent of the
Corporations' residual interests in the transaction.
Maturities of long-term borrowings (mortgages on investment real estate) are
as follows:
<TABLE>
<S> <C>
1997 (including fourth quarter of 1996).............................. $ 110
1998................................................................. 80
1999................................................................. 1,195
2000................................................................. 95
2001................................................................. 940
Thereafter........................................................... 2,925
------
$5,345
======
</TABLE>
Following is information about the Corporations' borrowings under reverse
repurchase agreements during the nine months ended September 30, 1996:
<TABLE>
<S> <C>
Average balance outstanding during the period.......................... $19,397
Highest balance outstanding during the period.......................... 85,685
Average interest rate during the period................................ 5,68%
Average interest rate at the end of the period......................... 7.36%
</TABLE>
F-45
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Related party borrowings are borrowings from a trust managed on behalf of
the Corporations' majority stockholder and a relative of the majority
shareholder. During the nine months ended September 30, 1996 and the years
ended December 31, 1995 and 1994, the Corporations recognized interest expense
of $129, $153 and $200, respectively.
As of September 30, 1996, the Corporations have written borrowing
commitments from various third parties totaling $350 million, of which
approximately $82 million has been drawn and is included in borrowings above.
In addition, the Corporations have unwritten commitments totaling an
additional $150 million, of which approximately $5 million has been drawn and
is included in borrowings above. Of the total commitments, $300 million is in
the form of repurchase facilities, $100 million is in the form of a warehouse
facility, and $100 million is in the form of a term loan. Pursuant to a
reorganization of the Corporations and other commonly controlled entities (see
Note 14), management expects that undrawn amounts of these borrowing
commitments will be transferred to subsidiaries of Wilshire Financial Services
Group, Inc. ("WFSG") upon the effective date of WFSG's initial public offering
of common stock and debt.
6. CAPITAL LEASE OBLIGATIONS
The Corporations have purchased various assets, including its headquarters
facility and certain automobiles and equipment, under capital leases. Future
minimum lease payments for capital leases as of September 30, 1996 are as
follows:
<TABLE>
<S> <C>
1996................................................................. $ 962
1997................................................................. 156
1998................................................................. 121
1999................................................................. 113
2000................................................................. 109
Thereafter........................................................... 62
------
Total.............................................................. 1,523
Less amount representing interest.................................. 78
------
Capital lease obligation.......................................... $1,445
======
</TABLE>
7. FINANCIAL INSTRUMENTS
The Corporations are parties to financial instruments with off-balance-sheet
risk in the normal course of business, primarily for the purposes of reducing
exposure to fluctuations in interest rates and changes in the market value of
loans held for sale ("hedging activities") and, prior to 1996, for purposes of
realizing short-term profits ("trading activities"). These financial
instruments include short sales and forward sales of U.S. Treasury securities
and short and long positions in option contracts and interest rate futures
contracts of durations similar to the fixed rate loans held for sale that are
being hedged. These instruments involve, to varying degrees, interest-rate
risk in excess of the amount recognized in the consolidated statements of
financial condition. The contract or notional amounts of these instruments
reflect the extent of the Corporations' involvement in particular classes of
financial instruments. The counterparties to these instruments are well-known
international broker-dealers and the Corporations do not believe there is
significant credit risk associated with the instruments.
Substantially all activities in the aforementioned financial instruments
during the nine months ended September 30, 1996 were hedging activities. At
September 30, 1996, the Corporations had futures and options positions
(primarily short positions) with notional amounts totalling $26,400 and
$12,400, respectively, and net deferred hedging losses totalling $193.
F-46
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Substantially all activities in the aforementioned financial instruments
during the year ended December 31, 1995 were trading activities. At December
31, 1995, the Corporations had futures and options positions (primarily short
positions) with notional amounts totalling $3,122 and $10,603, respectively,
and fair market values of $57. During the year ended December 31, 1995, the
average fair values of these financial instruments were not material. Trading
gains and losses are included in other revenues in the combined statements of
operations
The purchase or sale of options and futures contracts bears a high degree of
market risk, subject to fluctuations in market values, rates or currencies in
the instruments underlying the contracts. The potential market loss on options
and futures are generally substantially in excess of the premium paid or
received. The options and futures transactions entered into by the
Corporations require cash margin deposits with the broker. As of September 30,
1996 and December 31, 1995, such margin requirements were $326 and $96,
respectively.
8. OPERATING LEASES
The Corporations maintain certain noncancelable operating leases on real
property and other assets, which expire through 1999. Future minimum lease
payments on such noncancelable operating leases as of September 30, 1996 are
as follows:
<TABLE>
<S> <C>
1996.................................................................. $ 362
1997.................................................................. 1,448
1998.................................................................. 1,415
1999.................................................................. 1,357
2000.................................................................. 113
------
$4,695
======
</TABLE>
The management fee portion of the annual lease payment for a corporate jet
of $401 is subject to escalation on January 1 of each year based on the
percentage change in the Consumer Price Index during the immediately preceding
year.
9. LOAN SERVICING
Loans serviced for others, except for participated loans acquired in the
name of WCC, are not included in the combined statements of financial
condition. The Corporations perform servicing for two affiliated savings banks
as well as other unrelated parties. The unpaid principal balances of loans
serviced for others are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Related parties................................... $501,954 $337,455
Others............................................ 13,537 18,417
-------- --------
Total........................................... $515,491 $355,872
======== ========
</TABLE>
At September 30, 1996 and December 31, 1995, WCC, in connection with the
foregoing loan servicing and in connection with WCC-owned and participated
loans, had made escrow payments in excess of amounts collected, which are
included in other receivables.
10. COMMITMENTS AND CONTINGENCIES
Profit-Sharing Plan--The Corporations' employees participate in a defined
contribution profit-sharing and 401(k) plan. At the discretion of the
Corporations' Boards of Directors, they may elect to contribute to the plan
F-47
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
based on profits of the Corporations or based on matching participants'
contributions. During 1996 and 1995, the Corporations contributed $97 and $46,
respectively, to the plan.
Litigation--The Corporations are defendants in legal actions arising from
transactions conducted in the ordinary course of business. Management, after
consultation with legal counsel, believes the ultimate liability, if any,
arising from such actions will not materially affect the Corporations'
financial position.
Loan Purchase Commitments--At September 30, 1996, the Corporations were
committed to purchase $9,323 of loans for $9,323. The Corporations also had a
commitment from a participating investor to provide funding for the purchases.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimates
presented herein are not necessarily indicative of the amounts the
Corporations could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts. The methods and assumptions used to
estimate the fair value of each class of financial instrument for which it is
practicable to estimate that value are explained below:
Cash and Cash Equivalents--The carrying amounts reported in the combined
statements of financial condition for cash and cash equivalents approximate
their fair values.
Securities--Fair values of U.S. Treasury securities included in the held-to-
maturity classification are based on quoted market prices. Fair values of B-
class mortgage-backed securities included in the trading account and the
available-for-sale classification, including both purchased securities and
residual interests in loan securitization transactions initiated by the
Corporations, are estimated by management based on data provided by an
independent pricing service, considering current interest rates, prepayments
and other relevant factors. It is not practicable to estimate the fair value
of preferred stock of a closely-held corporation included in the available-
for-sale classification.
Loans--It is not practicable to estimate the fair value of discounted loans
(including discounted loans held for sale), which are predominantly non
performing loans, due to uncertainties as to the nature, timing and extent to
which the loans will be either collected according to original terms,
restructured, or foreclosed upon. The fair values of loans and loans held for
sale other than discounted loans and commercial notes using applicable risk-
adjusted spreads relative to the current pricing of similar loans as well as
anticipated prepayments. No value adjustments have been made for changes in
credit risk within the loan portfolios. It is management's opinion that the
allowance for estimated loan losses pertaining to loans results in a fair
value adjustment of the credit risk of such loans. It is not practicable to
estimate the fair value of commercial notes receivable. These loans were
extended in a leveraged buyout transaction and bear interest at rates from 15-
20%. The loans are repayable based on formulas tied to the earnings of the
borrower, and mature in 2001.
Participating Interests in Loans and Securities--It is not practicable to
estimate the fair values of participating interests in loans and securities.
These liabilities are payable from the cash flows generated by the related
loans and securities, less the Corporations' retained servicing fees, which
include a profit participation element. The fair values of the liabilities are
therefore linked to the fair values of the related securities and loans,
including discounted loans for which fair values are not reasonably estimable.
Borrowings--Information pertinent to an evaluation of the fair value of
borrowings is included in Note 5. Fair value is assumed to approximate the
face amount outstanding because the principal borrowings have variable
interest rates and generally mature as the loan collateral is collected or are
repayable on demand.
F-48
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Off-Balance-Sheet Items--The fair value of options and futures used for
hedging purposes are based on quoted market prices.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents.............................. $ 6,638 $ 6,638
Securities:
Trading securities................................... 11,818 11,818
Available for sale securities........................ 7,039 7,049
Held to maturity securities.......................... 12,771 12,785
Loans:
Discounted loans, net................................ 4,824 4,824
Loans held for sale, net............................. 112,939 131,763
Discounted loans held for sale, net.................. 168,957 168,957
Commercial notes..................................... 10,811 10,811
Liabilities:
Participating interests in loans and securities........ 143,424 143,424
Borrowings............................................. 243,239 243,239
Off-balance-sheet items:
Options -- (39)
Futures -- (152)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents.............................. $ 3,577 $ 3,577
Securities:
Available for sale securities........................ 2,486 2,486
Held to maturity securities.......................... 4,643 4,643
Loans:
Loans, net........................................... 121,420 121,420
Discounted loans, net................................ 19,352 19,352
Discount loans held for sale, net.................... 33,267 33,267
Commercial notes..................................... 9,261 9,261
Liabilities:
Participating interests in loans and securities........ 150,298 150,298
Borrowings............................................. 70,165 70,165
Off-balance-sheet items:
Options -- 8
Futures -- 46
</TABLE>
12. SUBSEQUENT EVENTS--REORGANIZATION OF THE CORPORATIONS
WFSG is affiliated with the Corporations by common ownership and control,
and owns the two banks for which the Corporations service loans. WFSG is
making an initial public offering ("IPO") of common stock and debt, and has
formed certain new subsidiaries to undertake the loan acquisition and
servicing businesses currently being conducted by the Corporations. At the
effective date of WFSG's IPO, the Corporations will cease to acquire loans or
otherwise to compete with WFSG. The Corporations will continue to hold their
existing assets, and will continue to service loans for their own account and
for WFSG and its subsidiaries for a period of approximately two to three
years, when it is expected that WFSG's servicing subsidiary will have obtained
the necessary licenses to assume the servicing business from the Corporations.
F-49
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the IPO and reorganization of the Corporations, and subsequent
to September 30, 1996, the Corporations will transfer certain rights they have
to future servicing income from a participation agreement with a third party.
The servicing rights, which have no recorded basis in the statements of
financial condition of the Corporations as of September 30, 1996, are the
rights to varying percentages of cash flows from the collection or liquidation
of loans and B-class mortgage-backed securities with principal balances
totalling approximately $269,862 as of September 30, 1996.
Management expects that support for existing commitments of the Corporations
subsequent to the reorganization will be derived from a combination of the
following: continued collection and liquidation of existing loans and
securities; servicing income for the period during which the Corporations
continue to conduct the servicing business; operating income from properties
leased to WFSG and its subsidiaries and to third parties; stockholder loans,
which are indirectly supported by the stockholders' interests in WFSG; and,
potentially, other transactions or businesses that the Corporations might
elect to pursue.
F-50
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, IMPLY
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFOR-
MATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATES AS OF WHICH
SUCH INFORMATION IS GIVEN.
---------------
TABLE OF CONTENTS
---------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 11
The Company.............................................................. 19
Recent Developments...................................................... 20
Wilshire Credit Corporation.............................................. 22
Use of Proceeds.......................................................... 23
Capitalization........................................................... 25
Selected Financial Information........................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 30
Business................................................................. 51
Regulation............................................................... 73
Taxation................................................................. 81
Management............................................................... 83
Principal Stockholders................................................... 91
Certain Relationships and Related Transactions........................... 92
Description of Capital Stock............................................. 94
Description of Notes Offering............................................ 95
Underwriting............................................................. 97
Legal Matters............................................................ 98
Experts.................................................................. 98
Index to Financial Statements............................................ F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE NOTES OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$60,000,000
WILSHIRE
Financial Services Group
% NOTES DUE 2003
---------------
PROSPECTUS
---------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LC962980.025
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemized statement of all estimated
expenses in connection with the registration, offering and sale of the
securities being registered hereby other than underwriting discounts and
commissions.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 27,181
NASD and NASDAQ fees............................................ 44,000
Accounting fees and expenses.................................... *
Legal fees and expenses......................................... *
Blue sky fees and expenses (including counsel fees)............. *
Printing and engraving expenses................................. 75,000
Transfer agent's fees........................................... 10,000
Miscellaneous expenses.......................................... 125,000
--------
Total....................................................... $ *
========
</TABLE>
- --------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article NINTH of the Registrant's Certificate of Incorporation provides that
the Registrant shall indemnify to the fullest extent not prohibited by law any
current or former director or officer of the Registrant and may indemnify to
the fullest extent not prohibited by law any current or former employee or
agent of the Registrant who is made, or threatened to be made, a party to an
action, suit or proceeding, whether civil, criminal, administrative,
investigative or other (including and action, suit or proceeding by or in the
right of the Registrant), by reason of the fact that such person is or was a
director, officer, employee or agent of the Registrant or a fiduciary of any
employee benefit plan of the Registrant, or serves or served at the request of
the Registrant as a director, officer, employee or agent, or as a fiduciary of
an employee benefit plan, of another corporation, partnership, joint venture,
trust or other enterprise. The Registrant shall pay for or reimburse the
reasonable expenses incurred by such current of former director or officer and
may pay for or reimburse the reasonable expenses incurred by any such current
of former employee or agent in such proceeding in advance of the final
disposition of the proceeding if the person sets forth in writing (i) the
person's good faith belief that the person is entitled to indemnification and
(ii) the person's agreement to repay all advances if it is ultimately
determined that the person is not entitled to indemnification pursuant to the
Certificate of Incorporation. Article EIGHTH of the Registrant's Certificate
of Incorporation provides that no director of the Registrant shall be liable
for monetary damages for breach of fiduciary duty as a director. The
Registrant also provides its directors and officers coverage under a
director's and officer's liability insurance policy.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the formation of the Company on October 28, 1996, the
Company sold two shares of Common Stock to Andrew A. Wiederhorn and one share
of Common Stock to Lawrence A. Mendelsohn at a purchase price of $5.00 per
share, pursuant to an exemption from registration under Section 4(2) of the
Securities Act.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
*1.1 Form of Underwriting Agreement relating to the Common Stock
*1.2 Form of Underwriting Agreement relating to the Notes
+3.1 Certificate of Incorporation
**3.2 By-laws
*4.2 Form of Indenture, dated as of , 1996 among Wilshire
Financial Services Group Inc. and
*4.3 Form of Notes (included in Exhibit 4.2)
5.1 Opinion of Proskauer Rose Goetz & Mendelsohn LLP
10.1 Form of Employment Agreement dated November 15, 1996 among the
Company and Andrew A. Wiederhorn
10.2 Form of Employment Agreement dated November 15, 1996 among the
Company and Lawrence A. Mendelsohn
10.3 Incentive Stock Plan
10.11 Cease and Desist Order
10.12 Form of Servicing Agreement dated as of November 15, 1996 among
Wilshire Credit Corporation and Wilshire Financial Services
Group
+10.13 Master Repurchase Agreement dated as of July 29, 1996 among
Wilshire Credit Corporation and CS First Boston Capital
Corporation
+10.14 Additional Supplemental Terms to Master Repurchase Agreement,
dated as of July 29, 1996 between CS First Boston Mortgage
Capital Corp. and Wilshire Credit Corporation
+10.15 Interim Warehouse & Security Agreement, dated as of December 1,
1995, between Wilshire Funding Company, L.L.C. and Prudential
Securities Realty Funding Corp
+10.16 Amendment to Interim Warehouse and Security Agreement dated
June 28, 1996 between Wilshire Funding Company, L.L.C. and
Prudential Securities Realty Funding Corp
+10.17 Amendment No. 2 to Interim Warehouse and Security Agreement
dated September 27, 1996 between Wilshire Funding Company,
L.L.C. and Prudential Securities Realty Funding Corp
+10.18 Master Repurchase Agreement between First Bank of Beverly
Hills, F.S.B. and Bear Stearns Mortgage Capital Corporation
dated as of May 22, 1996
+10.19 Supplemental Terms and Conditions dated as of May 22, 1996
among First Bank of Beverly Hills, F.S.B. and Bear Stearns
Mortgage Capital Corporation
10.20 Master Repurchase Agreement between Girard Savings Bank FSB and
Bear Stearns Mortgage Capital Corporation dated as of December
22, 1995
10.21 Master Repurchase Agreement dated as of November 15, 1996
between CS First Boston Mortgage Capital Corp. and Wilshire
Funding Corp.
10.22 Interim Warehouse and Security Agreement by and between
Prudential Securities Credit Corporation and WMFC 1997-2, Inc.
dated as of November 15, 1996
**11 Statement regarding earnings per share
**12 Statement regarding the computation of the ratio of earnings to
fixed charges
+21.1 Subsidiaries
23.1 Consent of Proskauer Rose Goetz & Mendelsohn LLP (included in
Exhibit 5.1)
**23.2 Consent of Deloitte & Touche LLP
**23.3 Consent of Deloitte & Touche LLP
+23.4 Consent of KPMG Peat Marwick LLP
+24 Power of Attorney (see page II-4)
25 Form T-1
**27 Financial Data Schedule
</TABLE>
- --------
*To be filed by amendment.
+Previously filed.
**Refiled herewith.
II-2
<PAGE>
(b) Financial Statement Schedules:
The Financial Statement Schedules have been omitted because the information
required is not applicable or is included in the financial statements or notes
thereto. Columns omitted from schedules filed are omitted because the
information is not applicable.
ITEM 17. UNDERTAKINGS.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance on Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of the securities at the time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the Company
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Portland and the State of Oregon, on
this 14th day of November, 1996.
Wilshire Financial Services Group
Inc.
/s/ Andrew A. Wiederhorn
By: _________________________________
Andrew A. Wiederhorn Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment No.
1 to the Registration Statement has been signed by the following persons in
their capacities on November 14, 1996.
SIGNATURE TITLE
/s/ Andrew A. Wiederhorn Chairman of the Board, Chief
- ------------------------------------- Executive Officer, Secretary and
ANDREW A. WIEDERHORN Treasurer (Principal Executive
Officer)
/s/ Lawrence A. Mendelsohn
- ------------------------------------- President and Director
LAWRENCE A. MENDELSOHN
Director
*
- -------------------------------------
DONALD H. COLEMAN
Director
*
- -------------------------------------
DAVID DALE-JOHNSON
Director
*
- -------------------------------------
PHILIP G. FORTE
/s/ Chris Tassos Senior Vice President and Chief
- ------------------------------------- Financial Officer (Principal
CHRIS TASSOS Accounting and Financial Officer)
/s/ Lawrence A. Mendelsohn
----------------------------------
*By:
LAWRENCE A. MENDELSOHN ATTORNEY-IN-
FACT
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE
EXHIBITS NO. DESCRIPTION ----
<C> <S> <C>
*1.1 Form of Underwriting Agreement relating to the Common
Stock
*1.2 Form of Underwriting Agreement relating to the Notes
+3.1 Certificate of Incorporation
**3.2 By-laws
*4.2 Form of Indenture, dated as of , 1996 among Wilshire
Financial Services Group Inc. and
*4.3 Form of Notes (included in Exhibit 4.2)
5.1 Opinion of Proskauer Rose Goetz & Mendelsohn LLP
10.1 Form of Employment Agreement dated November 15, 1996 among
the Company and Andrew A. Wiederhorn
10.2 Form of Employment Agreement dated November 15, 1996 among
the Company and Lawrence A. Mendelsohn
10.3 Incentive Stock Plan
10.11 Cease and Desist Order
10.12 Form of Servicing Agreement dated as of November 15, 1996
among Wilshire Credit Corporation and Wilshire Financial
Services Group
+10.13 Master Repurchase Agreement dated as of July 29, 1996
among Wilshire Credit Corporation and CS First Boston
Capital Corporation
+10.14 Additional Supplemental Terms to Master Repurchase
Agreement, dated as of July 29, 1996 between CS First
Boston Mortgage Capital Corp. and Wilshire Credit
Corporation
+10.15 Interim Warehouse & Security Agreement, dated as of
December 1, 1995, between Wilshire Funding Company,
L.L.C. and Prudential Securities Realty Funding Corp
+10.16 Amendment to Interim Warehouse and Security Agreement
dated June 28, 1996 between Wilshire Funding Company,
L.L.C. and Prudential Securities Realty Funding Corp
+10.17 Amendment No. 2 to Interim Warehouse and Security
Agreement dated September 27, 1996 between Wilshire
Funding Company, L.L.C. and Prudential Securities Realty
Funding Corp
+10.18 Master Repurchase Agreement between First Bank of Beverly
Hills, F.S.B. and Bear Stearns Mortgage Capital
Corporation dated as of May 22, 1996
+10.19 Supplemental Terms and Conditions dated as of May 22, 1996
among First Bank of Beverly Hills, F.S.B. and Bear
Stearns Mortgage Capital Corporation
10.20 Master Repurchase Agreement between Girard Savings Bank
FSB and Bear Stearns Mortgage Capital Corporation dated
as of December 22, 1995
10.21 Master Repurchase Agreement dated as of November 15, 1996
between CS First Boston Mortgage Capital Corp. and
Wilshire Funding Corp.
10.22 Interim Warehouse and Security Agreement by and between
Prudential Securities Credit Corporation and WMFC 1997-2,
Inc. dated as of November 15, 1996
**11 Statement regarding earnings per share
**12 Statement regarding the computation of the ratio of
earnings to fixed charges
+21.1 Subsidiaries
23.1 Consent of Proskauer Rose Goetz & Mendelsohn LLP (included
in Exhibit 5.1)
**23.2 Consent of Deloitte & Touche LLP
**23.3 Consent of Deloitte & Touche LLP
+23.4 Consent of KPMG Peat Marwick LLP
+24 Power of Attorney (see page II-4)
25 Form T-1
**27 Financial Data Schedule
</TABLE>
- --------
*To be filed by amendment.
+Previously filed.
**Refiled herewith.
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
WILSHIRE FINANCIAL SERVICES GROUP INC.
ARTICLE I
STOCKHOLDERS MEETINGS AND VOTING
1.1 Annual Meeting. The annual meeting of the stockholders shall be
--------------
held on the second Monday in May of each year at 10:00 a.m., unless a different
date or time is fixed by the Board of Directors and stated in the notice of the
meeting. Failure to hold an annual meeting on the stated date shall not affect
the validity of any corporate action.
1.2 Special Meetings. Special meetings of the stockholders, for any
----------------
purposes, unless otherwise prescribed by statute, may be called by the Chairman
of the Board or the Board of Directors and shall be called by the Chairman of
the Board upon the written demand of the holders of not less than one-fourth of
all the votes entitled to be cast on any issue proposed to be considered at the
meeting. The demand shall describe the purposes for which the meeting is to be
held and shall be signed, dated and delivered to the Secretary.
1.3 Place of Meetings. Meetings of the stockholders shall be held at
-----------------
any place in or out of Delaware designated by the Board of Directors. If a
meeting place is not designated by the Board of Directors, the meeting shall be
held at the Corporation's principal office.
1.4 Notice of Meetings. Written or printed notice stating the date,
------------------
time and place of the stockholders meeting and, in the case of a special meeting
or a meeting for which special notice is required by law, the purposes for which
the meeting is called, shall be delivered by the Corporation to each stockholder
entitled to vote at the meeting and, if required by law, to any other
stockholders entitled to receive notice, not earlier than 60 days or less than
10 days before the meeting date. Notice shall be deemed given at the time it is
(a) personally delivered to the recipient, (b) deposited in the mail or
delivered to a common carrier or courier with regularly scheduled deliveries
with first-class postage or delivery charges prepaid, addressed to the
stockholder's address shown in the Corporation's stockholder records, or (c)
actually transmitted to the recipient using electronic means.
1.5 Waiver of Notice. A stockholder may at any time any notice required
----------------
by law, these Bylaws or the Certificate of Incorporation. The waiver shall be in
writing, be signed by the stockholder entitled to the notice and be delivered to
the Corporation for inclusion in the minutes for filing with the corporate
records. A stockholder's attendance at a meeting waives objection to (i) lack of
notice or defective notice of the meeting, unless the
<PAGE>
stockholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting, and (ii) consideration of a particular
matter at the meeting that is not within the purposes described in the meeting
notice, unless the stockholder objects to considering the matter when it is
presented.
1.6 Fixing of Record Date. In order that the corporation may
---------------------
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors and which
record date: (1) in the case of determination of stockholders entitled to vote
at any meeting of stockholders or adjournment thereof, shall, unless otherwise
required by law, not be more than sixty nor less than ten days before the date
of such meeting; (2) in the case of determination of stockholders entitled to
express consent to corporate action in writing without a meeting, shall not be
more than ten days from the date upon which the resolution fixing the record
date is adopted by the Board of Directors; and (3) in the case of any other
action, shall not be more than sixty days prior to such other action. If no
record date is fixed: (1) the record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held; (2) the record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting
when no prior action of the Board of Directors is required by law, shall be the
first date on which is signed written consent setting forth the action taken or
proposed to be taken is delivered to the Corporation in accordance with
applicable law, or, if prior action by the Board of Directors is required by
law, shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action; and (3) the record
date for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
1.7 Stockholders List for Meeting. After a record date for a meeting
-----------------------------
is fixed, the Corporation shall prepare an alphabetical list of all stockholders
entitled to notice of the stockholders meeting. The list shall be arranged by
voting group and, with each voting group, by class or series of shares, and it
shall show the address of and number of shares held by each stockholder. The
stockholders list shall be available for inspection by any stockholder, upon
proper demand as may be required by law, beginning two business days after
notice of the meeting is given and continuing through the meeting, at the
Corporation's principal office or at a place identified in the meeting notice in
the city where the meeting will be held. The Corporation shall make the
stockholders list available at the meeting, and
2
<PAGE>
any stockholder or the stockholder's agent or attorney shall be entitled to
inspect the list at any time during the meeting or any adjournment. Refusal or
failure to prepare or make available the stockholders list does not affect the
validity of action taken at the meeting.
1.8 Quorum; Adjournment.
-------------------
(1) Shares entitled to vote as a separate voting group may take
action on a matter at a meeting only if a quorum of those shares exists with
respect to that matter. A majority of the votes entitled to be case on the
matter by the voting group constitutes a quorum of that voting group for action
on that matter.
(2) A majority of votes represented at the meeting, although less
than a quorum, may adjourn the meeting from time to time to a different time and
place without further notice to any stockholder of any adjournment, except that
notice is required if a new record date is or must be set for the adjourned
meeting. At an adjourned meeting at which a quorum is present, any business may
be transacted that might have been transacted at the meeting originally held.
(3) Once a share is represented for any purpose at a meeting, it
shall be present for quorum purposes for the remainder of the meeting and for
any adjournment of that meeting unless a new record date is or must be set for
the adjourned meeting. A new record date must be set if the meeting is adjourned
to a date more than 30 days after the date fixed for the original meeting.
1.9 Voting Requirements; Action Without Meeting.
-------------------------------------------
(1) If a quorum exists, action on a matter, other than the
election of directors, by a voting group is approved if the votes cast within
the voting group favoring the action exceed the votes cast opposing the action
unless a greater number of affirmative votes is required by law or the
Certificate of Incorporation and except as provided in Section 1.9(2). Unless
otherwise provided in the Certificate of Incorporation, directors are elected by
a plurality of the votes cast by the shares entitled to vote in the election at
a meeting at which a quorum is present.
(2) The provisions set forth in Section 2.2, below, and in this
Section 1.9(2) may not be amended, altered, changed or repealed in any respect
unless such action is approved by the affirmative vote of the holders of not
less than two-thirds of the outstanding shares of Common Stock and the
outstanding shares of Preferred Stock entitled to vote on each matter on which
the holders of record of Common Stock shall be entitled to vote, such Common
Stock and Preferred Stock voting together and not by separate classes.
(3) Action required or permitted by law to be taken at a
stockholders meeting may be taken without a meeting, without prior notice and
without a vote by the written consent of the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
such action at a meeting at which all shares
3
<PAGE>
entitled to vote thereon were present. The action must be evidenced by one or
more written consents describing the action taken, signed by all the
stockholders entitled to vote on the action and delivered to the Secretary for
inclusion in the minutes for filing with the corporate records. Stockholder
action taken by written consent is effective when the last stockholder signs the
consent, unless the consent specifies an earlier or later effective date.
1.10 Proxies. A stockholder may vote shares in person or by proxy. A
-------
stockholder may appoint a proxy by signing an appointment form either personally
or by the stockholder's attorney-in-fact. An appointment of a proxy is
effective when received by the Secretary or other officer of the Corporation
authorized to tabulate votes. An appointment is valid for 11 months unless a
different period is provided in the appointment form. An appointment is
revocable by the stockholder unless the appointment form conspicuously states
that it is irrevocable and the appointment is coupled with an interest that has
not been extinguished.
1.11 Meeting by Telephone Conference. Stockholders may participate
-------------------------------
in an annual or special meeting by, or conduct the meeting through, use of any
means of communications by which all stockholders participating may
simultaneously hear each other or communicate with each other during the
meeting, except that no meeting for which a written notice is sent to
stockholders may be conducted by this means unless the notice states that
participation in this manner is permitted and describes how any stockholder
desiring to participate in this manner may notify the Corporation. Participation
in a meeting by this means shall constitute presence in person at the meeting.
1.12 Proper Business for Stockholders' Meeting. To be properly
-----------------------------------------
brought before the meeting, business must be either (i) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the Board
of Directors, (ii) otherwise properly brought before a meeting by or at the
direction of the Board of Directors, or (iii) otherwise properly brought before
the meeting by a stockholder. In addition to any other applicable requirements
contained in the Certificate of Incorporation, these bylaws, or under law, for
business to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive office of the Corporation not
less than 50 days nor more than 75 days prior to the meeting; provided, however,
-------- -------
that in the event that less than 65 days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the annual meeting was mailed or such public disclosure was made, whichever
first occurs. A stockholder's notice to the Secretary shall set forth (i) one or
more matters appropriate for stockholder action that the stockholder proposes to
bring before the meeting, (ii) a brief description of the matters desired to be
brought before the meeting and the reasons for conducting such business at the
meeting, (iii) the name and record address of the stockholder, (iv) the class
and number of shares of the Corporation that the stockholder owns or is entitled
to vote and (v) any material interest of the stockholder in such matters.
Notwithstanding anything in these bylaws to the
4
<PAGE>
contrary, no business shall be conducted at the annual meeting except in
accordance with the procedure set forth in this Section 1.12; provided, however,
-------- -------
that nothing in this Section 1.12 shall be deemed to preclude discussion by any
stockholder of any business properly brought before the annual meeting. The
Chairman of the Board, or the President in the absence of the Chairman of the
Board, shall, if the facts warrant, determine and declare to the meeting that
the business was not properly brought before the meeting in accordance with the
provisions of this Section 1.12 and if the Chairman of the Board, or the
President in the absence of the Chairman of the Board, should so determine,
shall so declare to the meeting any such business not properly brought before
the meeting shall not be transacted.
1.13 Stockholder Nomination of Directors.
-----------------------------------
(1) Not less than 50 days nor more than 75 days prior to the
date of any annual meeting of stockholders, any stockholder who intends to make
a nomination at the annual meeting shall deliver a notice to the Secretary of
the Corporation setting forth (i) as to each nominee whom the stockholder
proposes to nominate for election or reelection as a director, (a) the name,
age, business address and residence address of the nominee, (b) the principal
occupation or employment of the nominee, (c) the class and number of shares of
capital stock of the Corporation that are beneficially owned by the nominee of
shares of capital stock of the Corporation that are beneficially owned by the
nominee and (d) any other information concerning the nominee that would be
required, under the rules of the Securities and Exchange Commission, in a proxy
statement soliciting proxies for the election of such nominee; and (ii) as to
the stockholder giving the notice, (a) the name and record address of the
stockholder and (b) the class and number of shares of capital stock of the
Corporation that are beneficially owned by the stockholder; provided, however,
-------- -------
that in the event that less than 65 days' notice or prior public disclosure of
the date of the annual meeting is given or made to stockholders, notice by the
stockholder to be timely must be so delivered not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made, whichever first
occurs. Such notice shall include a signed consent to serve as a director of
the Corporation, if elected, of each such nominee. The Corporation may require
any proposed nominee to furnish such other information as may reasonably be
required by the Corporation to determine the eligibility of such proposed
nominee to serve as a director of the Corporation.
(2) Any stockholder who intends to make a nomination at any
special meeting of stockholders held for the purpose of electing directors shall
deliver a timely notice to the Secretary of the Corporation setting forth (i) as
to each nominee whom the stockholder proposes to nominate for election or
reelection as a director, (a) the name, age, business address and residence
address of the nominee, (b) the principal occupation or employment of the
nominee, (c) the class and number of shares of capital stock of the Corporation
that are beneficially owned by the nominee of shares of capital stock of the
Corporation that are beneficially owned by the nominee and (d) any other
information concerning the nominee that would be required, under the rules of
the Securities and Exchange Commission, in a proxy statement soliciting proxies
for the election of such nominee; and (ii) as to the stockholder giving the
notice, (a) the name and record address of the
5
<PAGE>
stockholder and (b) the class and number of shares of capital stock of the
Corporation that are beneficially owned by the stockholder. To be timely for
these purposes, such notice must be given (i) if given by the stockholder (or
any of the stockholders) who or that made a demand for a meeting pursuant to
which such meeting is to be held, concurrently with the delivery of such demand,
and (ii) otherwise, not later than the close of business on the 10th day
following the date on which the notice of the special meeting was mailed. Such
notice shall include a signed consent to serve as a director of the Corporation,
if elected, of each such nominee. The Corporation may require any proposed
nominee to furnish such other information as may reasonably be required by the
Corporation to determine the eligibility of such proposed nominee to serve as
a director of the Corporation.
(3) The Chairman of the Board, or the President in the absence of
the Chairman of the Board, shall, if the facts warrant, determine and declare
that a nominee was not properly nominated in accordance with the provisions of
this Section 1.13 and if the Chairman of the Board, or the President in the
absence of the Chairman of the Board, should so determine, shall so declare to
the meeting any such nominee shall not be considered by stockholders.
ARTICLE II
BOARD OF DIRECTORS
2.1 Duties of Board of Directors. All corporate powers of the
----------------------------
Corporation shall be exercised by or under the authority of its Board of
Directors; the business and affairs of the Corporation shall be managed under
the direction of its Board of Directors.
2.2 Number, Term and Qualification. The number of directors of the
------------------------------
Corporation shall be five. The directors shall be divided into three classes,
designated Class I, Class II and Class III. Class I shall consist of one
director, Class II shall consist of two directors, and Class III shall consist
of two directors. The term of the initial Class I director shall terminate on
the date of the 1997 annual meeting of stockholders; the term of the initial
Class II directors shall terminate on the date of the 1998 annual meeting of
stockholders and the term of the initial Class III directors shall terminate of
the date of the 1999 annual meeting of stockholders. At each annual meeting of
stockholders beginning in 1997, successors to the class of directors whose term
expires at that annual meeting shall be elected for a three-year term. Directors
shall hold office until the annual meeting for the year in which their terms
expire and until their successors shall be elected and shall qualify, subject,
however, to prior death, resignation, retirement, disqualification or removal
from office. Any vacancy on the Board of Directors, however resulting, may be
filled by the affirmative vote of a majority of the remaining directors then in
office, even if less than a quorum. Any director elected to fill a vacancy shall
hold office only until the next election of directors by the stockholders.
Directors need not be residents of the State of Delaware or stockholders of the
Corporation.
6
<PAGE>
2.3 Regular Meetings. A regular meeting of the Board of Directors
----------------
shall be held without notice other than this Bylaw immediately after, and at the
same place as, the annual meeting of stockholders. The Board of Directors may
provide by resolution the time and place for the holding of additional regular
meetings in or out of Delaware without notice other than the resolution.
2.4 Special Meetings. Special meeting of the Board of Directors may be
----------------
called by or at the request of the Chief Executive Officer or any two directors.
The person or persons authorized to call special meetings of the Board of
Directors may fix any place in or out of Delaware as the place for holding any
special meeting of the Board of Directors called by them.
2.5 Notice. Notice of the date, time, and place of any special
------
meeting of the Board of Directors shall be given at least 24 hours prior to the
meeting by notice communicated in person, by telephone, telegraph, teletype,
facsimile, electronic mail, other form of wire or wireless communication, mail
or private carrier. If written, notice shall be effective at the earliest of (a)
when received, (b) three days after its deposit in the United States mail, as
evidenced by the postmark, if mailed postpaid and correctly addressed, or (c) on
the date shown on the return receipt, if sent by registered or certified mail,
return receipt requested and the receipt is signed by or on behalf of the
addressee. Notice by all other means shall be deemed effective when received by
or on behalf of the director. Notice of any regular or special meeting need not
describe the purposes of the meeting unless required by law or the Certification
of Incorporation.
2.6 Waiver of Notice. A director may at any time waive any notice
----------------
required by law, these Bylaws or the Certificate of Incorporation. Except as set
forth below, the waiver must be in writing, be signed by the director entitled
to the notice, specify the meeting for which notice is waived and be filed with
the minutes or corporate records. A director's attendance at or participation in
a meeting waives any required notice to the director of the meeting unless the
director at the beginning of the meeting, or promptly upon the director's
arrival, objects to holding the meeting or transacting business at the meeting
and does not thereafter vote for or assent to action taken at the meeting.
2.7 Quorum. A majority of the number of directors set forth in
------
Section 2.2 of these Bylaws shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors. If less than a quorum is
present at the meeting, a majority of the directors present may adjourn the
meeting from time to time without further notice.
2.8 Manner of Acting. The act of the majority of the directors
----------------
present at a meeting at which quorum is present shall be the act of the Board of
Directors, unless a different number is provided by law, the Certificate of
Incorporation or these Bylaws.
2.9 Meeting by Telephone Conference; Action Without Meeting.
-------------------------------------------------------
7
<PAGE>
(1) Directors may participate in a regular or special meeting by,
or conduct the meeting through, use of any means of communications by which all
directors participating may simultaneously hear each other or communicate with
each other during the meeting. Participation in a meeting by this means shall
constitute presence in person at the meeting.
(2) Any action that is required or permitted to be taken at a
meeting of the Board of Directors may be taken without a meeting if one or more
written consents describing the action taken are signed by all of the directors
entitled to vote on the matter and included in the minutes or filed with the
corporate records reflecting the action taken. The action shall be effective
when the last director signs the consent, unless the consent specifies an
earlier or later date.
2.10 Vacancies. Any vacancy on the Board of Directors, including
---------
a vacancy resulting from an increase in the number of directors, may be filled
by the stockholders, the Board of Directors, the remaining directors if less
than a quorum (by the vote of a majority thereof) or by a sole remaining
director. Any vacancy not filled by the directors shall be filled by election at
an annual meeting or at a special meeting of the stockholders called for that
purpose. A vacancy that will occur at a specified later date, by reason of a
resignation or otherwise, may be filled before the vacancy occurs, but the new
director may not take office until the vacancy occurs.
2.11 Compensation. By resolution of the Board of Directors, the
------------
directors may be paid reasonable compensation for services as directors and
their expenses of attending meeting of the Board of Directors.
2.12 Presumption of Assent. A director who is present at a meeting of
---------------------
the Board of Directors or a committee of the Board of Directors shall be deemed
to have assented to the action taken at the meeting unless (a) the director's
dissent or abstention from the action is entered in the minutes of the meeting,
(b) the director delivers a written notice of dissent or abstention to the
action to the presiding officer of the meeting before any adjournment or to the
Corporation immediately after the adjournment of the meeting or (c) the director
objects at the beginning of the meeting or promptly upon the director's arrival
to the holding of the meeting or transacting business at the meeting. The right
to dissent or abstain is not available to a director who voted in favor of the
action.
2.13 Removal. The stockholders may remove one or more directors with
-------
cause, only if such removal is approved by a vote of the holders of two-thirds
of the votes entitled to be cast on the matter, at a meeting called expressly
for that purpose.
2.14 Resignation. Any director may resign by delivering written
-----------
notice to the Board of Directors, its chairperson of the Corporation. Unless the
notice specifies a later effective date, a resignation notice shall be effective
upon the earlier of (a) receipt, (b) five days after its deposit in the United
States mails, if mailed postpaid and correctly addressed, or (c) on the date
shown on the return receipt, if sent by registered or certified mail, return
8
<PAGE>
receipt requested, and the receipt is signed by the addressee. Once delivered, a
resignation notice is irrevocable unless revocation is permitted by the Board of
Directors.
ARTICLE III
COMMITTEES OF THE BOARD
3.1 Committees. The Board of Directors may create one or more
----------
committees and appoint members of the Board of Directors to serve on them. Each
committee shall have two or more members. The creation of a committee and the
appointment of members to it must be approved by a majority of all directors in
office when action is taken. Subject to any limitation imposed by the Board of
Directors or by law, each committee may exercise all the authority of the Board
of Directors in the management of the Corporation. A committee may not take any
action that a committee is prohibited from taking by the Delaware General
Corporation Law.
3.2 Changes of Size and Function. Subject to the provisions of law,
----------------------------
the Board of Directors shall have the power at any time to change the number of
committee members, fill committee vacancies, change any committee members and
change the functions and terminate the existence of a committee.
3.3 Conduct of Meetings. Each committee shall conduct its meetings in
-------------------
accordance with the applicable provisions of these Bylaws relating to meetings
and action without meetings of the Board of Directors. Each committee shall
adopt any further rules regarding its conduct, keep minutes and other records
and appoint subcommittees and assistants as it deemed appropriate.
3.4 Compensation. By resolution of the Board of Directors, committee
------------
members may be paid reasonable compensation for services on committees and their
expenses of attending committee meetings.
ARTICLE IV
OFFICER
4.1 Appointment. The Board of Directors at its first meeting following
-----------
its election each year shall appoint a Chairman of the Board of Directors
("Chairman of the Board"), President and a Secretary. The Board of Directors or
the Chairman of the Board may appoint any other officers, assistant officers and
agents. Any two or more offices may be held by the same person.
9
<PAGE>
4.2 Compensation. The Corporation may pay its officers reasonable
------------
compensation for their services as fixed from time to time by the Board of
Directors or by the Chairman of the Board with respect to officers appointed by
the Chairman of the Board.
4.3 Term. The term of office of all officers commences upon their
----
appointment and continues until their successors are appointed or until their
resignation or removal.
4.4 Removal. Any officer or agent appointed by the Board of Directors
-------
or the Chairman of the Board may be removed by the Board of Directors at any
time with or without cause. Any officer or agent appointed by the Chairman of
the Board may be removed by the Chairman of the Board at any time with or
without cause.
4.5 Chairman of the Board/Chief Executive Officer. The Chairman of the
---------------------------------------------
Board shall be the chief executive officer of the Corporation and subject to the
control of the Board of Directors, shall in general supervise and control all of
the business and affairs of the Corporation. The Chairman of the Board may
execute in behalf of the Corporation all agreements, contracts, stock
certificates, and other instruments. The Chairman of the Board shall from time
to time report to the Board of Directors all matters within the Chairman of the
Board's knowledge which should be brought to the attention of the Board of
Directors. The Chairman of the Board shall vote all shares of stock in other
corporations owned by the Corporation, and shall be empowered to execute
proxies, waivers of notice, consents and other instruments in the name of the
Corporation with respect to such stock. The Chairman of the Board shall preside
at all meetings of the Board of Directors and shall perform any duties and
responsibilities prescribed from time to time by the Board of Directors.
4.6 President. The President shall be the chief operating officer of
---------
the Corporation and shall supervise the operations of the Corporation subject to
the discretion of the Board of Directors and the Chairman of the Board. The
President shall have any other duties and responsibilities prescribed by the
Board of Directors.
4.7 Vice Presidents. Each Vice President shall perform duties and
---------------
responsibilities prescribed by the Board of Directors or the Chairman of the
Board. The Board of Directors or the Chairman of the Board may confer a special
title upon a Vice President.
4.8 Secretary.
---------
(1) The Secretary shall record and keep the minutes of all
meetings of the directors and stockholders in one or more books provided for
that purpose and perform any duties prescribed by the Board of Directors or the
Chairman of the Board.
(2) Any assistant secretary shall have the duties prescribed from
time to time by the Board of Directors, the Chairman of the Board or the
Secretary. In the absence or disability of the Secretary, the Secretary's duties
shall be performed by an assistant secretary.
10
<PAGE>
4.9 Treasurer. The Treasurer, if that office is filled, shall have
---------
charge and custody and be responsible for all funds and securities of the
Corporation and shall have other duties as prescribed from time to time by the
Board of Directors or the Chairman of the Board.
ARTICLE V
INDEMNIFICATION
5.1 Right to Indemnification. The Corporation shall indemnify to the
------------------------
fullest extent not prohibited by law any current or former director or officer
of the Corporation, and may indemnify to the fullest extent not prohibited by
law any current or former employee or agent of the Corporation, who is made, or
threatened to be made, a party to an action, suit or proceeding, whether civil,
criminal, administrative, investigative or other (including an action, suit or
proceeding by or in the right of the Corporation) by reason of the fact that
such person is or was a director, officer, employee, or agent of the Corporation
or a fiduciary within the meaning of the Employee Retirement Income Security Act
of 1974 with respect to any employee benefit plan of the Corporation, or serves
or served at the request of the Corporation as a director, officer, employee or
agent, or as a fiduciary of an employee benefit plan, of another corporation,
partnership, joint venture, trust or other enterprise. The Corporation shall
pay for or reimburse the reasonable expenses incurred by any such current or
former director or officer, and may pay for or reimburse the reasonable expenses
incurred by and such current or former employee or agent, in any such proceeding
in advance of the final disposition of the proceeding if the person sets forth
in writing (i) the person's good faith belief that the person is entitled to
indemnification under this Article and (ii) the person's agreement to repay all
advances if it is ultimately determined that the person is not entitled to
indemnification. No amendment to these Bylaws that limits the Corporation's
obligation to indemnify any person shall have any effect on such obligation for
any act or omission that occurs prior to the later to occur of the effective
date of the amendment or the date notice of the amendment is given to the
person. This Article shall not be deemed exclusive of any other provisions for
indemnification or advancement of expenses of directors, officers, employees,
agents and fiduciaries that may be included in the Certificate of Incorporation
or any statute, agreement, general or specific action of the Board of Directors,
vote of stockholders or other document or arrangement.
5.2 Claims. If a claim for indemnification or payment of expenses under
------
this Article is not paid in full within sixty days after a written claim
therefor has been received by the Corporation, the claimant may file suit to
recover the unpaid amount of such claim and, if successful in whole or in part,
shall be entitled to be paid the expense of prosecuting such claim. In any such
action the Corporation shall have the burden of proving that the claimant was
not entitled to the requested indemnification or payment of expenses under
applicable law.
11
<PAGE>
5.3 Other Indemnification. The Corporation's obligation, if any, to
---------------------
indemnify any person who was or is serving at its request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, enterprise or nonprofit entity shall be reduced by any amount such person
may collect as indemnification from such other corporation, partnership, joint
venture, trust, enterprise or nonprofit enterprise.
ARTICLE VI
ISSUANCE OF SHARES
6.1 Adequacy of Consideration. Before the Corporation issues shares,
-------------------------
the Board of Directors shall determine that the consideration received or to be
received for the shares to be issued is adequate. The authorization by the
Board of Directors of the issuance of shares for stated consideration shall
evidence a determination by the Board that such consideration is adequate.
6.2 Certificates for Shares.
-----------------------
(1) Certificates representing shares of the Corporation shall be
in any form determined by the Board of Directors consistent with the
requirements of the Delaware General Corporation Law and these Bylaws. The
certificates shall be signed, either manually or in facsimile, by the Chairman
or Vice Chairman of the Board, the President or a Vice President and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary,
and may be sealed with the seal of the Corporation, if any, or a facsimile
thereof. All certificates for shares shall be consecutively numbered or
otherwise identified. The signatures of officers upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent or any
assistant transfer agent or registered by a registrar, other than the
Corporation itself or an employee of the Corporation.
(2) Every certificate for shares of stock that are subject to any
restriction on transfer or registration of transfer pursuant to the Certificate
of Incorporation, the Bylaws, securities laws, a stockholders agreement or any
agreement to which the Corporation is a party shall have conspicuously noted on
the face or back of the certificate either the full text of the restriction or a
statement of the existence of the restriction and that the Corporation retains a
copy of the full text. Every certificate issued when the Corporation is
authorized to issue more than one class or series within a class of shares shall
set forth on its face or back either (a) a summary of the designations, relative
rights, preferences and limitations of the shares of each class and the
variations in rights, preferences and limitations for each series authorized to
be issued and the authority of the Board of Directors to determine variations
for future series or (b) a statement of the existence of those designations,
relative rights, preferences and limitations and a statement that the
Corporation will furnish a copy thereof to the holder of the certificate upon
written request and without charge.
12
<PAGE>
(3) All certificates surrendered to the Corporation for transfer
shall be canceled. The Corporation shall not issue a new certificate for
previously issued shares until the former certificate or certificates for those
shares are surrendered and canceled; except that in case of a lost, destroyed or
mutilated certificate, a new certificate may be issued on terms prescribed by
the Board of Directors.
6.3 Transfer Agent and Registrar. The Board of Directors may from
----------------------------
time to time appoint one or more transfer agents and one or more registrars for
the shares of the Corporation, with powers and duties determined by the Board of
Directors.
6.4 Officer Ceasing to Act. If the person who signed a share
----------------------
certificate, either manually or in facsimile, no longer holds office when the
certificate is issued, the certificate is nevertheless valid.
ARTICLE VII
CONTRACTS, LOANS, CHECKS AND OTHER INSTRUMENTS
7.1 Contracts. Except as otherwise provided by law, the Board of
---------
Directors may authorize any officers or agents to execute and deliver any
contract or other instrument in the name of and on behalf of the Corporation,
and this authority may be general or confined to specific instances.
7.2 Loans. The Corporation shall not borrow money and no evidence of
-----
indebtedness shall be issued in its name unless authorized by the Board of
Directors. This authority may be general or confined to specific instances.
7.3 Checks, Drafts, Etc. All checks, drafts or other orders for the
--------------------
payment of money and notes or other evidences of indebtedness issued in the name
of the Corporation shall be signed in the manner and by the officers or agents
of the Corporation designated by the Board of Directors.
7.4 Deposits. All funds of the Corporation not otherwise employed
--------
shall be deposited to the credit of the Corporation in those banks, trust
companies or other depositaries as the Board of Directors or officers of the
Corporation designated by the Board of Directors select, or be invested as
authorized by the Board of Directors.
13
<PAGE>
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.1 Severability. A determination that any provision of these Bylaws
------------
is for any reason inapplicable, invalid, illegal or otherwise ineffective shall
not affect or invalidate any other provision of these Bylaws.
8.2 Amendments. These Bylaws may be amended or repealed and new Bylaws
----------
may be adopted by the Board of Directors or the stockholders of the Corporation.
14
<PAGE>
EXHIBIT 5.1
November 15, 1996
Wilshire Financial Services Group Inc.
1776 SW Madison Street
Portland, OR 97205
Ladies and Gentlemen:
You have requested our opinion in connection with the filing by Wilshire
Financial Services Group Inc., a Delaware corporation (the "Company"), with the
Securities and Exchange Commission of a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act of 1933 (the "Securities
Act") with respect to 1,725,000 shares of common stock, par value $.01 per
share, of the Company (the "Shares") and $50 million aggregate principal amount
of Notes due 2003 (the "Notes").
We have examined such records, documents and other instruments as we have
deemed relevant and necessary as a basis for the opinions hereinafter set forth.
We have also assumed without investigation the authenticity of any document
submitted to us as an original, the conformity to originals of any document
submitted to us as a copy, the authenticity of the originals of such latter
documents, the genuineness of all signatures and the legal capacity of natural
persons signing such documents.
Based on the foregoing, and in reliance thereon, we are of the opinion
that:
1. The Shares (to the extent issued and sold by the Company) have been
duly authorized and, when issued and delivered in accordance with the
underwriting agreement as described in the Registration Statement, will be
legally issued, fully paid and non-assessable; and
2. The Notes to be offered and issued by the Company have been duly
authorized and, when executed and authenticated in accordance with the terms of
the Indenture between the Company and Bankers Trust Company, as trustee,
substantially in the form filed as an exhibit to the Registration Statement,
pursuant to which they will be issued, and upon delivery against payment
therefor, will be validly issued and constitute binding obligations of the
Company, except as the enforceability thereof may be limited by
<PAGE>
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium, or
similar laws affecting creditors' rights generally or by general equitable
principles.
We are admitted to the bar of the State of New York, and we express no
opinion as to the laws of any jurisdiction other than the laws of the State of
New York, the General Corporation Law of the State of Delaware, and the laws of
the United States of America.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus contained in the Registration Statement. In so
doing, we do not admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act or the rules and regulations of
the Securities and Exchange Commission thereunder.
Very truly yours,
/S/ PROSKAUER ROSE GOETZ &
MENDELSOHN LLP
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of November 15, 1996, by and between
Wilshire Financial Services Group Inc. (the "Company"), with its principal
office at 1776 SW Madison Street, Portland, Oregon 97205 and Andrew A.
Wiederhorn, residing at 4311 SW Greenleaf Drive, Portland, Oregon 97221 (the
"Executive").
W I T N E S S E T H:
-------------------
WHEREAS, Executive is currently employed as the Chief Executive Officer of
the Company and is also a director of the Company; and
WHEREAS, the Company and Executive desire to enter into this agreement (the
"Agreement") to set forth terms of Executive's employment by the Company.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the parties
agree as follows:
1. Term of Employment. Except for earlier termination as provided in
------------------
Section 7 hereof, Executive's employment under this Agreement shall be for a
three (3) year term (the "Employment Term") commencing on the closing date for
the Company's initial public offering (the "Commencement Date"). Subject to
Section 7 hereof, the Employment Term shall be automatically extended for
additional terms of successive two (2) year periods unless the Company or
Executive gives written notice of the termination of Executive's employment
hereunder at least ninety (90) days prior to the expiration of the then current
Employment Term.
2. Positions. (a) Executive shall serve as Chief Executive Officer of
---------
the Company. It is the intention of the parties that during the Employment Term,
Executive shall also serve on the Board of Directors of the Company (the
"Board") as Chairman without additional compensation. During the term of this
Agreement, the Company shall recommend the Executive for election as a director.
(b) Executive shall report directly to the Board or other managing body of
the Company and shall have such duties and authority, consistent with his
position as Chief Executive Officer of the Company, as shall be determined from
time to time by the Board, provided that Executive shall have authority
comparable to that of chief executive officers of United States public companies
that are similar in size and business to the Company.
(c) During the Employment Term, Executive shall devote substantially all
of his business time, energy, skill and efforts to the performance of his duties
and responsibilities
<PAGE>
hereunder; provided, however, that Executive shall be allowed to (i) serve as a
director and an employee or consultant of privately held companies (including,
but not limited to, Wilshire Credit Corporation and its privately held
affiliates); (ii) serve as a director of other companies; (iii) engage in
charitable activities; and (iv) manage his personal financial and legal affairs.
3. Base Salary. During the Employment Term, the Company shall pay
-----------
Executive a base salary at the annual rate of not less than $833,333.33. Base
salary shall be payable in accordance with the usual payroll practices of the
Company. Executive's Base Salary shall be subject to annual review by the Board
in February of each year and may be increased, but not decreased, from time to
time upon recommendation of the Compensation Committee of the Board (the
"Committee"). The base salary determined as aforesaid from time to time shall
constitute "Base Salary" for purposes of this Agreement.
4. Incentive Compensation. (a) Bonus. For each fiscal year or portion
---------------------- -----
thereof during the Employment Term, Executive shall be entitled to an annual
bonus payable in cash or property (a "Bonus") equal to two-thirds (2/3rds) of
the following amount: fifteen percent (15%) of the Company's pre-tax income
which is in excess of the pre-tax income required to produce a 15% return on
average equity on an after tax basis (each as determined in accordance with
generally accepted accounting principles and reflected in the Company's audited
financial statements) for the relevant calender year; provided that such
--------
difference shall be determined prior to subtracting any Bonus payable hereunder.
Such annual bonus shall be payable in January of each year following the year
for which the bonus is payable (based on interim numbers for such year) and, if
necessary, shall be adjusted for any subsequent amendments to the Company's
financial statements following completion of the year end audit. Following the
initial Employment Term, such Bonus shall be subject to shareholder approval as
and to the extent required by Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code").
(b) Options. The Executive shall also be entitled to participate in the
-------
Company's Incentive Stock Plan (the "Incentive Stock Plan") and receive
nonqualified, incentive or other options ("Options") to purchase shares of the
Company's common stock (the "Common Stock") under the Incentive Stock Plan as
determined by the Committee from time to time provided that the Incentive Stock
Plan is approved by the shareholders of the Company to the extent required by
Section 162(m) of the Code. Notwithstanding the foregoing, the Company may
recommend to the Committee that the Executive be granted Options under a plan
other than the Incentive Stock Plan provided that such other plan contains terms
and conditions which are substantially similar to the terms and conditions of
the Incentive Stock Plan, and further provided, that such other plan is approved
by the shareholders of the Company to the extent required by Section 162(m) of
the Code.
(c) Other Compensation. The Company may, upon recommendation of the
------------------
Committee, award to the Executive such other bonuses and compensation as it
deems appropriate and reasonable.
5. Employee Benefits and Vacation. (a) During the Employment Term,
------------------------------
Executive shall be entitled to (i) participate in all pension, retirement,
savings, welfare and other employee benefit plans and arrangements, including,
without limitation, any nonqualified deferred compensation plans, maintained by
the Company from time to time for the benefit of the senior
2
<PAGE>
executives of the Company in accordance with their respective terms as in effect
from time to time, (ii) a luxury automobile reasonably satisfactory to the
Executive and the Company (including, without limitation, reimbursement by the
Company of the costs of maintaining and operating such automobile), (iii)
reasonable use of Company-provided aircraft transportation for business-related
and personal travel, and (iv) the employment of a daycare provider for
Executive's dependents (with the daycare provider's salary paid by the Company
directly to the daycare provider net of any applicable federal or state
employment tax of which such taxes shall be withheld and remitted by the Company
to the appropriate taxing authorities and which salary shall not exceed
comparable salaries for such services). Executive acknowledges that the
aforementioned items will be includible as compensation for income tax purposes
to the extent required by applicable law. To the extent permitted under
applicable law, the Company shall not treat as compensation to Executive fringes
and perquisites provided to Executive or the items under Section 6 below.
(b) During the Employment Term, Executive shall be entitled to vacation
each year in accordance with the Company's policies in effect from time to time,
but in no event less than five (5) weeks paid vacation per calendar year. The
Executive shall also be entitled to such periods of sick leave as is customarily
provided by the Company for its senior executive employees.
6. Business Expenses. The Company shall also reimburse Executive for the
-----------------
travel, entertainment and other business expenses incurred by Executive in the
performance of his duties hereunder, in accordance with the Company's policies
as in effect from time to time.
7. Termination. (a) The employment of Executive under this Agreement
-----------
shall terminate upon the occurrence of any of the following events:
(i) the death of the Executive;
(ii) the termination of the Executive's employment by the
Company due to the Executive's Disability pursuant to Section 7(b)
hereof;
(iii) the termination of the Executive's employment by the
Executive for Good Reason pursuant to Section 7(c) hereof;
(iv) the termination of the Executive's employment by the
Company without Cause;
(v) the termination of employment by the Executive without
Good Reason upon sixty (60) days prior written notice;
(vi) the termination of employment by the Executive for any
reason during the period commencing on the date of a Change in Control
and ending on the day immediately prior to the second anniversary of
the Change in Control (the "Change in Control Protection Period");
3
<PAGE>
(vii) the termination of the Executive's employment by the
Company for Cause pursuant to Section 7(e); or
(viii) the retirement of the Executive by the Company at or
after his sixty-fifth birthday to the extent such termination is
specifically permitted as a stated exception from applicable federal
and state age discrimination laws based on position and retirement
benefits.
(b) Disability. If, by reason of the same or related physical or
----------
mental reasons, Executive is unable to carry out Executive's material duties
pursuant to this Agreement for more than six (6) months in any twelve (12)
consecutive month period (a "Disability"), the Company may terminate Executive's
employment for Disability upon thirty (30) days prior written notice, by a
notice of Disability termination, at any time thereafter during such twelve (12)
month period in which Executive is unable to carry out his duties as a result of
the same or related physical or mental illness. Such termination shall not be
effective if Executive returns to the full time performance of his material
duties within such thirty (30) day notice period.
(c) Termination for Good Reason. A Termination for Good Reason means
---------------------------
a termination by Executive by written notice given within sixty (60) days after
the occurrence of the Good Reason event. For purposes of this Agreement, "Good
Reason" shall mean the occurrence or failure to cause the occurrence, as the
case may be, without Executive's express written consent, of any of the
following circumstances, unless such circumstances are fully corrected prior to
the date of termination specified in the Notice of Termination for Good Reason
(as defined in Section 7(d) hereof): (i) any material diminution of Executive's
positions, duties or responsibilities hereunder (except in each case in
connection with the termination of Executive's employment for Cause or
Disability or as a result of Executive's death, or temporarily as a result of
Executive's illness or other absence), or the assignment to Executive of duties
or responsibilities that are inconsistent with Executive's position as Chief
Executive Officer; (ii) removal of the Executive from, or the non reelection of
the Executive to, the positions with the Company specified herein; (iii) a
relocation of the Company's principal United States executive offices to a
location more than fifty (50) miles from Portland, Oregon, or a relocation of
Executive away from such principal United States executive office; (iv) a
failure by the Company (A) to continue any bonus plan, program or arrangement in
which Executive is entitled to participate (the "Bonus Plans"), provided that
any such Bonus Plans may be modified at the Company's discretion from time to
time but shall be deemed terminated if (x) any such plan does not remain
substantially in the form in effect prior to such modification and (y) if plans
providing Executive with substantially similar benefits are not substituted
therefor ("Substitute Plans"), or (B) to continue Executive as a participant in
the Bonus Plans and Substitute Plans on at least the same basis as to potential
amount of the bonus and substantially the same level of criteria for
achievability thereof as Executive participated in immediately prior to any
change in such plans or awards, in accordance with the Bonus Plans and the
Substitute Plans; (v) any material breach by the Company of any material
provision of this Agreement; (vi) executive's removal from or failure to be
reelected to the Board; (vii) a failure of any successor to the Company to
assume in a writing delivered to Executive upon the assignee becoming such, the
obligations of the Company hereunder; or (viii) a failure of the Committee
4
<PAGE>
to grant the Executive an award of Options in accordance with Sections 4(b)
hereof, unless the applicable circumstances under (i) through (vii) are fully
corrected prior to the date of termination specified in the notice of
termination for Good Reason.
(d) Notice of Termination for Good Reason. A notice of termination
-------------------------------------
for Good Reason shall mean a notice that shall indicate the specific termination
provision in Section 7(c) relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination for Good
Reason. The failure by Executive to set forth in the notice of termination for
Good Reason any facts or circumstances which contribute to the showing of Good
Reason shall not waive any right of Executive hereunder or preclude Executive
from asserting such fact or circumstance in enforcing his rights hereunder. The
notice of termination for Good Reason shall provide for a date of termination
not less than fifteen (15) nor more than sixty (60) days after the date such
notice of termination for Good Reason is given.
(e) Cause. Subject to the notification provisions of Section 7(f)
-----
below, Executive's employment hereunder may be terminated by the Company for
Cause. For purposes of this Agreement, the term "Cause" shall be limited to (i)
willful misconduct by Executive with regard to the Company or its business which
has a material adverse effect on the Company; (ii) the refusal of Executive to
follow the proper written direction of the Board, provided that the foregoing
refusal shall not be "Cause" if Executive in good faith believes that such
direction is illegal, unethical or immoral and promptly so notifies the Board;
(iii) the Executive being convicted of a felony (other than a felony involving a
traffic offense); (iv) the breach by Executive of any fiduciary duty owed by
Executive to the Company which has a material adverse effect on the Company; or
(v) Executive's material fraud with regard to the Company.
(f) Notice of Termination for Cause. A notice of termination for
-------------------------------
Cause shall mean a notice that shall indicate the specific termination provision
in Section 7(e) relied upon and shall set forth in reasonable detail the facts
and circumstances which provide a basis for termination for Cause. Further, a
notice of termination for Cause shall be required to include a copy of a
resolution duly adopted by at least two-thirds of the entire membership of the
Board at a meeting of the Board which was called for the purpose of considering
such termination and which Executive and his representative had the right to
attend and address the Board, finding that, in the good faith opinion of the
Board, Executive engaged in conduct set forth in the definition of Cause herein
and specifying the particulars thereof in reasonable detail. The date of
termination for a termination for Cause shall be the date indicated in the
notice of termination. Any purported termination for Cause which is held by a
court not to have been based on the grounds set forth in this Agreement or not
to have followed the procedures set forth in this Agreement shall be deemed a
termination by the Company without Cause.
8. Consequences of Termination of Employment. (a) Death. If
----------------------------------------- -----
Executive's employment is terminated during the Employment Term by reason of
Executive's death, the employment period under this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement except for: (i) any compensation earned but not yet paid, including
without limitation, any declared but unpaid bonus, any amount of Base Salary or
deferred compensation accrued or earned but unpaid, any accrued vacation pay
payable
5
<PAGE>
pursuant to the Company's policies and any unreimbursed business expenses
payable pursuant to Section 6 which amounts shall be promptly paid in a lump sum
to Executive's estate; (ii) the product of (x) the target annual bonus for the
fiscal year of the Executive's death, multiplied by (y) a fraction, the
numerator of which is the number of days of the current fiscal year during which
the Executive was employed by the Company, and the denominator of which is 365,
which bonus shall be paid when bonuses for such period are paid to the other
executives; (iii) subject to Section 4(b) hereof, full accelerated vesting under
all outstanding equity-based and long-term incentive plans (with options
remaining outstanding as provided under the applicable stock option plan and a
pro rata payment under any long term incentive plans based on actual coverage
under such plans at the time payments normally would be made under such plans);
(iv) subject to Section 10 hereof, any other amounts or benefits owing to
Executive under the then applicable employee benefit plans or policies of the
Company, which shall be paid in accordance with such plans or policies; (v)
payment on a monthly basis of six (6) months of Executive's Base Salary on the
date of death, which shall be paid to Executive's spouse, or if she shall
predecease him, then to Executive's children (or their guardian if one is
appointed) in equal shares; and (vi) payment of the Executive's spouse's and
dependents' COBRA coverage premiums to the extent, and so long as, they remain
eligible for COBRA coverage, but in no event more than three (3) years. Section
12 hereof shall also continue to apply.
(b) Disability. If Executive's employment is terminated by reason of
----------
Executive's Disability, Executive shall be entitled to receive the payments and
benefits to which his representatives would be entitled in the event of a
termination of employment by reason of his death, provided that the payment of
Base Salary shall be reduced by the projected amount Executive would receive
under any long-term disability policy or program maintained by the Company
during the twelve (12) month period during which Base Salary is being paid.
Section 12 hereof shall also continue to apply.
(c) Termination by Executive for Good Reason or for any reason during
-----------------------------------------------------------------
the Change in Control Protection Period or Termination by the Company without
- -----------------------------------------------------------------------------
Cause or Nonextension of the Term by the Company. If (i) outside of the Change
- ------------------------------------------------
in Control Protection Period, Executive terminates his employment hereunder for
Good Reason during the Employment Term, (ii) a Change in Control occurs and
during the Change in Control Protection Period Executive terminates his
employment for any reason, (iii) Executive's employment with the Company is
terminated by the Company without Cause, or (iv) Executive's employment with the
Company terminates as a result of the Company giving notice of nonextension of
the Employment Term pursuant to Section 1 hereof, Executive shall be entitled to
receive: (A) in a lump sum within ten (10) business days after such termination
(i) three (3) times Executive's Base Salary in effect of the date of
termination, (ii) three (3) times the highest annual bonus paid or payable to
Executive for any of the previous three (3) completed fiscal years by the
Company and its predecessors, (iii) any unreimbursed business expenses payable
pursuant to Section 6, and (iv) any Base Salary, Bonus, vacation pay or other
deferred compensation accrued or earned under law or in accordance with the
Company's policies but not yet paid at the date of termination; (B) subject to
Section 4(b) hereof, accelerated full vesting under all outstanding equity-based
and long-term incentive plans with Options remaining outstanding as provided
under the applicable stock option plan and a pro rata payment under any long
term incentive plans
6
<PAGE>
based on actual coverage under such plans payment being made at the time
payments would normally be made under such plans; (C) subject to Section 10
hereof, any other amounts or benefits due Executive under the then applicable
employee benefit plans of the Company as shall be determined and paid in
accordance with such plans, policies and practices; (D) three (3) years of
additional service and compensation credit (at his then compensation level) for
pension purposes under any defined benefit type qualified or nonqualified
pension plan or arrangement of the Company, measured from the date of
termination of employment and not credited to the extent that Executive is
otherwise entitled to such credit during such three (3) year period, which
payments shall be made through and in accordance with the terms of the
nonqualified defined benefit pension arrangement if any then exists, or, if not,
in an actuarially equivalent lump sum (using the actuarial factors then applying
in the Company's defined benefit plan covering Executive); (E) three (3) years
of the maximum Company contribution (assuming Executive deferred the maximum
amount and continued to earn his then current salary) measured from the date of
termination under any type of qualified or nonqualified 401(k) plan (payable at
the end of each such year); and (F) payment by the Company of the premiums for
the Executive (except in the case of death) and his spouse's and dependents'
health coverage for three (3) years under the Company's health plans which cover
the senior executives of the Company or materially similar benefits. Payments
under (F) above may, at the discretion of the Company, be made by continuing
participation of Executive in the plan as a terminee, by paying the applicable
COBRA premium for Executive and his spouse and dependents, or by covering
Executive and his spouse and dependents under substitute arrangements, provided
that, to the extent Executive incurs tax that he would not have incurred as an
active employee as a result of the aforementioned coverage or the benefits
provided thereunder, Executive shall receive from the Company an additional
payment in the amount necessary so that he will have no additional cost for
receiving such items or any additional payment. In the circumstances described
in each of (i) through (iv) above, Section 12 hereof shall also continue to
apply.
(d) Termination for Cause or Voluntary Resignation without Good Reason
------------------------------------------------------------------
or Retirement. If Executive's employment hereunder is terminated: (i) by the
- -------------
Company for Cause, (ii) by Executive without Good Reason outside of the Change
in Control Protection Period, or (iii) by the Company pursuant to Section
7(a)(viii) hereof, the Executive shall be entitled to receive only his Base
Salary through the date of termination, any earned but unpaid bonus, and any
unreimbursed business expenses payable pursuant to Section 6. Subject to
Section 4(b) hereof, all other benefits (including, without limitation, Options)
due Executive following such termination of employment shall be determined in
accordance with the plans, policies and practices of the Company.
9. Non-Competition. (a) Executive acknowledges that the Company
---------------
will suffer substantial damage, which would be difficult to ascertain, if
Executive shall enter into Competition, as defined below, with the Company and
that it is necessary for the Company to be protected by the prohibition against
Competition set forth herein.
(b) During the period of his actual employment by the Company and for
one (1) year thereafter, Executive will not enter into Competition with the
Company or its affiliated entities. Competition shall mean participating
directly in the day-to-day direct supervision or
7
<PAGE>
operations of a U.S. business which competes with, or is engaged, in the same
business as currently conducted by the Company; provided that Competition shall
--------
not include the items referred to in the proviso to Section 2(c).
(c) During Executive's Employment Term with the Company and for one
(1) year thereafter, the Executive shall not, without the express written
authorization of the Company, directly or indirectly (i) recruit, solicit or
induce any nonclerical employees of the Company or its affiliates to terminate
their employment with, or otherwise cease their relationship with, the Company
or its affiliates, or (ii) solicit or assist any third party in soliciting any
clients or customers of the Company or its affiliates.
(d) In the event of a breach or threatened breach of this Section 9,
Executive acknowledges that the Company will be caused irreparable injury and
that money damages may not be an adequate remedy and agree that the Company
shall be entitled to injunctive relief (in addition to its other remedies at
law) to have the provisions of this Section 9 enforced. If any restriction set
forth with regard to Competition is found by any court of competent
jurisdiction, or an arbitrator, to be unenforceable because it extends for too
long a period of time or over too great a range of activities or in too broad a
geographic area, it shall be interpreted to extend over the maximum period of
time, range of activities or geographic area as to which it may be enforceable.
10. No Mitigation; No Set-Off. In the event of any termination
--- -------------------------
of employment under Section 8, Executive shall be under no obligation to seek
other employment and there shall be no offset against any amounts due Executive
under this Agreement on account of any remuneration attributable to any
subsequent employment that Executive may obtain. Any amounts due under Section
8 are in the nature of severance payments, or liquidated damages, or both, and
are not in the nature of a penalty. Such amounts are inclusive, and in lieu of,
any amounts payable under any other salary continuation or cash severance
arrangement of the Company and to the extent paid or provided under any other
such arrangement shall be offset from the amount due hereunder.
11. Change in Control. For purposes of this Agreement, the term
-----------------
"Change in Control" shall mean (i) any "person" as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than the
Company, any trustee or other fiduciary holding securities under any employee
benefit plan of the Company, or any company owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as their
ownership of common stock of the Company), becoming the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing twenty-five percent (25%) or more of the
combined voting power of the Company's then outstanding securities; (ii) during
any period of two (2) consecutive years, individuals who at the beginning of
such period constitute the Board, and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (i), (iii), or (iv) of this paragraph
or a director whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule 14a-11
promulgated under the Act) or other actual or threatened
8
<PAGE>
solicitation of proxies or consents by or on behalf of a person other than a
member of the Board) whose election by the Board or nomination for election by
the Company's shareholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning of the
two (2) year period or whose election or nomination for election was previously
so approved, cease for any reason to constitute at least a majority of the
Board; (iii) the merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than fifty percent (50%) of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation;
provided, however, that a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no person
(other than those covered in the exceptions in (i) above) acquires more than
twenty-five percent (25%) of the combined voting power of the Company's then
outstanding securities shall not constitute a Change in Control; or (iv)
approval by the shareholders of the Company of a plan of complete liquidation of
the Company or the closing of the sale or disposition by the Company of all or
substantially all of the Company's assets other than the sale of all or
substantially all of the assets of the Company to a person or persons who
beneficially own, directly or indirectly, at least fifty percent (50%) or more
of the combined voting power of the outstanding voting securities of the Company
at the time of the sale.
12. Indemnification. (a) The Company agrees that if Executive is
---------------
made a party to or threatened to be made a party to any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he is or was a director or officer of
the Company, or is or was serving at the request of the Company as a director,
officer, member, employee, fiduciary or agent of another corporation or of a
partnership, joint venture, trust, other enterprise or non-profit organization,
including, without limitation, service with respect to employee benefit plans,
whether or not the basis of such Proceeding is alleged action in an official
capacity as a director, officer, member, employee, fiduciary or agent while
serving as a director, officer, member, employee, fiduciary or agent, he shall
be indemnified and held harmless by the applicable company to the fullest extent
authorized by Delaware law, as the same exists or may hereafter be amended,
against all Expenses incurred or suffered by Executive in connection therewith,
and such indemnification shall continue as to Executive even if Executive has
ceased to be an officer, director, member, fiduciary or agent, or is no longer
employed by the company, and shall inure to the benefit of his heirs, executors
and administrators.
(b) As used in this Agreement, the term "Expenses" shall include,
without limitation, damages, losses, judgments, liabilities, fines, penalties,
excise taxes, settlements and costs, attorneys' fees, accountants' fees, and
disbursements and costs of attachment or similar bonds, investigations, and any
expenses of establishing a right to indemnification under this Agreement.
(c) Expenses incurred by Executive in connection with any Proceeding
shall be paid by the Company in advance upon request of Executive and the giving
by the Executive of any undertakings required by applicable law.
9
<PAGE>
(d) Executive shall give the Company notice of any claim made against
him for which indemnity will or could be sought under this Agreement. In
addition, Executive shall give the Company such information and cooperation as
it may reasonably require and as shall be within Executive's power and at such
times and places as are reasonably convenient for Executive.
(e) With respect to any Proceeding as to which Executive notifies the
Company of the commencement thereof:
(i) The Company will be entitled to participate therein at its
own expense; and
(ii) Except as otherwise provided below, to the extent that it
may wish, the Company jointly with any other indemnifying party similarly
notified will be entitled to assume the defense thereof, with counsel
reasonably satisfactory to Executive. Executive also shall have the right
to employ his own counsel in such action, suit or proceeding and the fees
and expenses of such counsel shall be at the expense of the Company.
(f) The Company shall not be liable to indemnify Executive under this
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent. The Company shall not settle any action or claim
in any manner which would impose any penalty or limitation on Executive without
Executive's written consent. Neither the company nor Executive will
unreasonably withhold or delay their consent to any proposed settlement.
(g) The right to indemnification and the payment of expenses incurred
in defending a Proceeding in advance of its final disposition conferred in this
Section 12 shall not be exclusive of any other right which Executive may have or
hereafter may acquire under any statute, provision of the certificate of
incorporation or by-laws of the Company, agreement, vote of stockholders or
disinterested directors or otherwise.
(h) The Company hereunder agrees to obtain officer and director
liability insurance policies covering Executive and shall maintain at all times
following the Commencement Date and during the Employment Term coverage under
such policies in the aggregate with regard to all officers and directors,
including Executive, of an amount not less than $10 million.
13. Special Tax Provision. (a) Anything in this Agreement to the
---------------------
contrary notwithstanding, in the event that any amount or benefit paid, payable,
or to be paid, or distributed, distributable, or to be distributed to or with
respect to Executive by the Company (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Company, any
person whose actions result in a change of ownership or effective control
covered by Code Section 280G(b)(2) or any person affiliated with the Company or
such person) as a result of a change in ownership or effective control of the
Company or a direct or indirect parent thereof (or the assets of any of the
foregoing) covered by Code Section 280G(b)(2)
10
<PAGE>
(collectively, the "Covered Payments") is or becomes subject to the excise tax
imposed by or under Section 4999 of the Code (or any similar tax that may
hereafter be imposed), and/or any interest, penalties or additions to tax, with
respect to such excise tax (such excise tax, together with such interest
penalties and additions to tax, is hereinafter collectively referred to as the
"Excise Tax"), the Company shall pay to Executive an additional amount (the "Tax
Reimbursement Payment") such that after payment by Executive of all taxes
(including, without limitation, any interest or penalties and any Excise Tax
imposed on or attributable to the Tax Reimbursement Payment itself), Executive
retains an amount of the Tax Reimbursement Payment equal to the sum of (i) the
amount of the Excise Tax imposed upon the Covered Payments, and (ii) without
duplication, an amount equal to the product of (A) any deductions disallowed for
federal, state or local income tax purposes because of the inclusion of the Tax
Reimbursement Payment in Executive's adjusted gross income, and (B) the highest
applicable marginal rate of federal, state or local income taxation,
respectively, for the calendar year in which the Tax Reimbursement Payment is
made or is to be made. The intent of this Section 13 is that (a) the Executive,
after paying his federal, state and local income tax and payroll taxes, will be
in the same position as if he was not subject to the Excise Tax under Section
4999 of the Code and did not receive the extra payments pursuant to this Section
13 and this Section 13 shall be interpreted accordingly.
(b) Except as otherwise provided in Section 13(a), for purposes of
determining whether any of the Covered Payments will be subject to the Excise
Tax and the amount of such Excise Tax, (i) such Covered Payments will be treated
as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code)
and such payments in excess of the Code Section 280G(b)(3) "base amount" shall
be treated as subject to the Excise Tax, unless, and except to the extent that,
the Company's independent certified public accountants appointed prior to the
change in ownership covered by Code Section 280G(b)(2) or legal counsel
(reasonably acceptable to Executive) appointed by such public accountants (or,
if the public accountants decline such appointment and decline appointing such
legal counsel, such independent certified public accountants as promptly
mutually agreed on in good faith by the Company and the Executive) (the
"Accountant"), deliver a written opinion to Executive, reasonably satisfactory
to Executive's legal counsel, that Executive has a reasonable basis to claim
that the Covered Payments (in whole or in part) (A) do not constitute "parachute
payments", (B) represent reasonable compensation for services actually rendered
(within the meaning of Section 280G(b)(4) of the Code) in excess of the "base
amount" allocable to such reasonable compensation, or (C) such "parachute
payments" are otherwise not subject to such Excise Tax (with appropriate legal
authority, detailed analysis and explanation provided therein by the
Accountants); and (ii) the value of any Covered Payments which are non-cash
benefits or deferred payments or benefits shall be determined by the Accountant
in accordance with the principles of Section 280G of the Code.
(c) For purposes of determining the amount of the Tax Reimbursement
Payment, Executive shall be deemed: (i) to pay federal, state and/or local
income taxes at the highest applicable marginal rate of income taxation for the
calendar year in which the Tax Reimbursement Payment is made or is to be made,
and (ii) to have otherwise allowable deductions for federal, state and local
income tax purposes at least equal to those disallowed due to the inclusion of
the Tax Reimbursement Payment in Executive's adjusted gross income.
11
<PAGE>
(d) (i) (A) In the event that prior to the time the Executive has
filed any of his tax returns for the calendar year in which the change in
ownership event covered by Code Section 280G(b)(2) occurred, the Accountant
determines, for any reason whatever, the correct amount of the Tax Reimbursement
Payment to be less than the amount determined at the time the Tax Reimbursement
Payment was made, the Executive shall repay to the Company, at the time that the
amount of such reduction in Tax Reimbursement Payment is determined by the
Accountant, the portion of the prior Tax Reimbursement Payment attributable to
such reduction (including the portion of the Tax Reimbursement Payment
attributable to the Excise Tax and federal, state and local income tax imposed
on the portion of the Tax Reimbursement Payment being repaid by the Executive,
using the assumptions and methodology utilized to calculate the Tax
Reimbursement Payment (unless manifestly erroneous)), plus interest on the
amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the
Code.
(B) In the event that the determination set forth in (A) above is made
by the Accountant after the filing by the Executive of any of his tax returns
for the calendar year in which the change in ownership event covered by Code
Section 280G(b)(2) occurred but prior to one (1) year after the occurrence of
such change in ownership, the Executive shall file at the request of the Company
an amended tax return in accordance with the Accountant's determination, but no
portion of the Tax Reimbursement Payment shall be required to be refunded to the
Company until actual refund or credit of such portion has been made to the
Executive, and interest payable to the Company shall not exceed the interest
received or credited to the Executive by such tax authority for the period it
held such portion (less any tax the Executive must pay on such interest and
which he is unable to deduct as a result of payment of the refund).
(C) In the event the Executive receives a refund pursuant to (B) above
and repays such amount to the Company, the Executive shall thereafter file for
refunds or credits by reason of the repayments to the Company. Executive and
the Company shall mutually agree upon the course of action, if any, to be
pursued (which shall be at the expense of the Company) if Executive's claim for
such refund or credit is denied.
(D) The Executive and the Company shall mutually agree upon the course
of action, if any, to be pursued (which shall be at the expense of the Company)
if the Executive's claim for refund or credit is denied.
(ii) In the event that the Excise Tax is later determined by the
Accountants or the Internal Revenue Service to exceed the amount taken into
account hereunder at the time the Tax Reimbursement Payment is made (including
by reason of any payment the existence or amount of which cannot be determined
at the time of the Tax Reimbursement Payment), the Company shall make an
additional Tax Reimbursement Payment in respect of such excess (plus any
interest, penalties or additions to tax payable with respect to such excess)
once the amount of such excess is finally determined.
(iii) In the event of any controversy with the Internal Revenue
Service (or other taxing authority) under this Section 13, subject to subpart
(i)(D) above, the Executive
12
<PAGE>
shall permit the Company to control issues related to this Section 13 (at its
expense), provided that such issues do not potentially materially adversely
affect the Executive, but the Executive shall control any other issues. In the
event the issues are interrelated, the Executive and the Company shall in good
faith cooperate so as not to jeopardize resolution of either issue, but if the
parties cannot agree Executive shall make the final determination with regard to
the issues. In the event of any conference with any taxing authority as to the
Excise Tax or associated income taxes, the Executive shall permit the
representative of the Company to accompany him and the Executive and his
representative shall cooperate with the Company and its representative.
(iv) With regard to any initial filing for a refund or any other
action required pursuant to this Section 13 (other than by mutual agreement) or,
if not required, agreed to by the Company and the Executive, the Executive shall
cooperate fully with the Company, provided that the foregoing shall not apply to
actions that are provided herein to be at the sole discretion of the Executive.
(e) The Tax Reimbursement Payment, or any portion thereof, payable by
the Company shall be paid not later than the fifth day following the
determination by the Accountant, and any payment made after such fifth day shall
bear interest at the rate provided in Code Section 1274(b)(2)(B). The Company
shall use its best efforts to cause the Accountant to promptly deliver the
initial determination required hereunder and, if not delivered, within ninety
(90) days after the change in ownership event covered by Section 280G(b)(2) of
the Code, the Company shall pay the Executive the Tax Reimbursement Payment set
forth in an opinion from counsel recognized as knowledgeable in the relevant
areas selected by the Executive, and reasonably acceptable to the Company,
within five (5) days after delivery of such opinion. In accordance with Section
16(g), the Company may withhold from the Tax Reimbursement Payment and deposit
into applicable taxing authorities such amounts as are required to be withheld
by applicable law. To the extent that Executive is required to pay estimated or
other taxes on amounts received by Executive beyond any withheld amounts,
Executive shall promptly make such payments. The amount of such payment shall
be subject to later adjustment in accordance with the determination of the
Accountant as provided herein.
(f) The Company shall be responsible for all charges of the Accountant
and if (e) is applicable the reasonable charges for the opinion given by
Executive's counsel.
(g) The Company and the Executive shall mutually agree on and
promulgate further guidelines in accordance with this Section 13 to the extent,
if any, necessary to effect the reversal of excessive or shortfall Tax
Reimbursement Payments. The foregoing shall not in any way be inconsistent with
Section 13(d)(i)(D) hereof.
14. Legal and Other Fees and Expenses. In the event that a claim for
---------------------------------
payment or benefits under this Agreement is disputed, the Company shall pay all
reasonable attorney, accountant and other professional fees and reasonable
expenses incurred by Executive in pursuing such claim, unless the claim by the
Executive is found to be frivolous by any court or arbitrator.
13
<PAGE>
15. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration
conducted in the City of Portland in the State of Oregon under the Commercial
Arbitration Rules then prevailing of the American Arbitration Association and
such submission shall request the American Arbitration Association to: (i)
appoint an arbitrator experienced and knowledgeable concerning the matter then
in dispute; (ii) require the testimony to be transcribed; (iii) require the
award to be accompanied by findings of fact and the statement for reasons for
the decision; and (iv) request the matter to be handled by and in accordance
with the expedited procedures provided for in the Commercial Arbitration Rules.
The determination of the arbitrators, which shall be based upon a de novo
interpretation of this Agreement, shall be final and binding and judgment may be
entered on the arbitrators' award in any court having jurisdiction. All costs
of the American Arbitration Association and the arbitrator shall be borne by the
Company.
16. Miscellaneous.
-------------
(a) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Oregon without reference to
principles of conflicts of laws.
(b) Entire Agreement/Amendments. This Agreement and the instruments
---------------------------
contemplated herein, contain the entire understanding of the parties with
respect to the employment of Executive by the Company from and after the
Commencement Date and supersedes any prior agreements, whether written or
otherwise, between the Company and Executive. There are no restrictions,
agreements, promises, warranties, covenants or undertakings between the parties
with respect to the subject matter herein other than those expressly set forth
herein and therein. This Agreement may not be altered, modified, or amended
except by written instrument signed by the parties hereto.
(c) No Waiver. The failure of a party to insist upon strict adherence
---------
to any term of this Agreement on any occasion shall not be considered a waiver
of such party's rights or deprive such party of the right thereafter to insist
upon strict adherence to that term or any other term of this Agreement. Any
such waiver must be in writing and signed by Executive or an authorized officer
of the Company, as the case may be.
(d) Assignment. This Agreement shall not be assignable by Executive.
----------
This Agreement shall be assignable, with the consent of the Executive, by the
Company only to an acquiror of all or substantially all of the assets of the
Company, provided such acquiror promptly assumes all of the obligations
hereunder of the Company in a writing delivered to the Executive and otherwise
complies with the provisions hereof with regard to such assumption.
(e) Successors; Binding Agreement; Third Party Beneficiaries. This
--------------------------------------------------------
Agreement shall inure to the benefit of and be binding upon parties hereto and
their personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees legatees and permitted assignees of the parties
hereto. If the Executive dies while any amount would still be payable hereunder
if the Executive had continued to live, all such amounts, unless otherwise
14
<PAGE>
provided herein, shall be paid in accordance with the terms of the Agreement to
the personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees, legatees and permitted assignees of the parties
hereto.
(f) Communications. For the purpose of this Agreement, notices and
--------------
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given (i) when faxed or delivered, and (ii)
two business days after being mailed by United States registered or certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the initial page of this Agreement, provided that all
notices to the Company shall be directed to the attention of Lawrence Mendelsohn
of the Company, or to such other address as any party may have furnished to the
other in writing in accordance herewith. Notice of change of address shall be
effective only upon receipt.
(g) Withholding Taxes. The Company may withhold from any and all
-----------------
amounts payable under this Agreement such federal, state and local taxes as may
be required to be withheld pursuant to any applicable law or regulation.
(h) Survivorship. The respective rights and obligations of the
------------
parties hereunder shall survive any termination of Executive's employment.
(i) Counterparts. This Agreement may be signed in counterparts, each
------------
of which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
(j) Headings. The headings of the sections contained in this
--------
Agreement are for convenience only and shall not be deemed to control or affect
the meaning or construction of any provision of this Agreement.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
WILSHIRE FINANCIAL SERVICES GROUP INC.
By:
----------------------------------
Name:
Title:
--------------------------------------
Andrew A. Wiederhorn
16
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of November 15, 1996, by and between
Wilshire Financial Services Group Inc. (the "Company"), with its principal
office at 1776 SW Madison Street, Portland, Oregon 97205 and Lawrence A.
Mendelsohn, residing at 4428 SW Eleanor Lane, Portland, Oregon 97221 (the
"Executive").
W I T N E S S E T H:
-------------------
WHEREAS, Executive is currently employed as the President of the Company
and is also a director of the Company; and
WHEREAS, the Company and Executive desire to enter into this agreement (the
"Agreement") to set forth terms of Executive's employment by the Company.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the parties
agree as follows:
1. Term of Employment. Except for earlier termination as provided in
------------------
Section 7 hereof, Executive's employment under this Agreement shall be for a
three (3) year term (the "Employment Term") commencing on the closing date for
the Company's initial public offering (the "Commencement Date"). Subject to
Section 7 hereof, the Employment Term shall be automatically extended for
additional terms of successive two (2) year periods unless the Company or
Executive gives written notice of the termination of Executive's employment
hereunder at least ninety (90) days prior to the expiration of the then current
Employment Term.
2. Positions. (a) Executive shall serve as President of the Company. It
---------
is the intention of the parties that during the Employment Term, Executive shall
also serve on the Board of Directors of the Company (the "Board") without
additional compensation. During the term of this Agreement, the Company shall
recommend the Executive for election as a director.
(b) Executive shall report directly to the Board or other managing body of
the Company and shall have such duties and authority, consistent with his
position as President of the Company, as shall be determined from time to time
by the Board, provided that Executive shall have authority comparable to that of
chief executive officers of United States public companies that are similar in
size and business to the Company.
(c) During the Employment Term, Executive shall devote substantially all
of his business time, energy, skill and efforts to the performance of his duties
and responsibilities hereunder; provided, however, that Executive shall be
allowed to (i) serve as a director and an employee or
<PAGE>
consultant of privately held companies (including, but not limited to, Wilshire
Credit Corporation and its privately held affiliates); (ii) serve as a director
of other companies; (iii) engage in charitable activities; and (iv) manage his
personal financial and legal affairs.
3. Base Salary. During the Employment Term, the Company shall pay
-----------
Executive a base salary at the annual rate of not less than $666,666.67. Base
salary shall be payable in accordance with the usual payroll practices of the
Company. Executive's Base Salary shall be subject to annual review by the Board
in February of each year and may be increased, but not decreased, from time to
time upon recommendation of the Compensation Committee of the Board (the
"Committee"). The base salary determined as aforesaid from time to time shall
constitute "Base Salary" for purposes of this Agreement.
4. Incentive Compensation. (a) Bonus. For each fiscal year or portion
---------------------- -----
thereof during the Employment Term, Executive shall be entitled to an annual
bonus payable in cash or property (a "Bonus") equal to one-third (1/3rd) of the
following amount: fifteen percent (15%) of the Company's pre-tax income which is
in excess of the pre-tax income required to produce a 15% return on average
equity on an after tax basis (each as determined in accordance with generally
accepted accounting principles and reflected in the Company's audited financial
statements) for the relevant calender year; provided that such difference shall
--------
be determined prior to subtracting any Bonus payable hereunder. Such annual
bonus shall be payable in January of each year following the year for which the
bonus is payable (based on interim numbers for such year) and, if necessary,
shall be adjusted for any subsequent amendments to the Company's financial
statements following completion of the year end audit. Following the initial
Employment Term, such Bonus shall be subject to shareholder approval as and to
the extent required by Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code").
(b) Options. The Executive shall also be entitled to participate in the
-------
Company's Incentive Stock Plan (the "Incentive Stock Plan") and receive
nonqualified, incentive or other options ("Options") to purchase shares of the
Company's common stock (the "Common Stock") under the Incentive Stock Plan as
determined by the Committee from time to time provided that the Incentive Stock
Plan is approved by the shareholders of the Company to the extent required by
Section 162(m) of the Code. Notwithstanding the foregoing, the Company may
recommend to the Committee that the Executive be granted Options under a plan
other than the Incentive Stock Plan provided that such other plan contains terms
and conditions which are substantially similar to the terms and conditions of
the Incentive Stock Plan, and further provided, that such other plan is approved
by the shareholders of the Company to the extent required by Section 162(m) of
the Code.
(c) Other Compensation. The Company may, upon recommendation of the
------------------
Committee, award to the Executive such other bonuses and compensation as it
deems appropriate and reasonable.
5. Employee Benefits and Vacation. (a) During the Employment Term,
------------------------------
Executive shall be entitled to (i) participate in all pension, retirement,
savings, welfare and other employee benefit plans and arrangements, including,
without limitation, any nonqualified deferred compensation plans, maintained by
the Company from time to time for the benefit of the senior executives of the
Company in accordance with their respective terms as in effect from time to
2
<PAGE>
time, (ii) a luxury automobile reasonably satisfactory to the Executive and the
Company (including, without limitation, reimbursement by the Company of the
costs of maintaining and operating such automobile), (iii) reasonable use of
Company-provided aircraft transportation for business-related and personal
travel, and (iv) the employment of a daycare provider for Executive's dependents
(with the daycare provider's salary paid by the Company directly to the daycare
provider net of any applicable federal or state employment tax of which such
taxes shall be withheld and remitted by the Company to the appropriate taxing
authorities and which salary shall not exceed comparable salaries for such
services). Executive acknowledges that the aforementioned items will be
includible as compensation for income tax purposes to the extent required by
applicable law. To the extent permitted under applicable law, the Company shall
not treat as compensation to Executive fringes and perquisites provided to
Executive or the items under Section 6 below.
(b) During the Employment Term, Executive shall be entitled to vacation
each year in accordance with the Company's policies in effect from time to time,
but in no event less than five (5) weeks paid vacation per calendar year. The
Executive shall also be entitled to such periods of sick leave as is customarily
provided by the Company for its senior executive employees.
6. Business Expenses. The Company shall also reimburse Executive for the
-----------------
travel, entertainment and other business expenses incurred by Executive in the
performance of his duties hereunder, in accordance with the Company's policies
as in effect from time to time.
7. Termination. (a) The employment of Executive under this Agreement
-----------
shall terminate upon the occurrence of any of the following events:
(i) the death of the Executive;
(ii) the termination of the Executive's employment by the
Company due to the Executive's Disability pursuant to Section 7(b)
hereof;
(iii) the termination of the Executive's employment by the
Executive for Good Reason pursuant to Section 7(c) hereof;
(iv) the termination of the Executive's employment by the
Company without Cause;
(v) the termination of employment by the Executive without
Good Reason upon sixty (60) days prior written notice;
(vi) the termination of employment by the Executive for any
reason during the period commencing on the date of a Change in Control
and ending on the day immediately prior to the second anniversary of
the Change in Control (the "Change in Control Protection Period");
3
<PAGE>
(vii) the termination of the Executive's employment by the
Company for Cause pursuant to Section 7(e); or
(viii) the retirement of the Executive by the Company at or
after his sixty-fifth birthday to the extent such termination is
specifically permitted as a stated exception from applicable federal
and state age discrimination laws based on position and retirement
benefits.
(b) Disability. If, by reason of the same or related physical or
----------
mental reasons, Executive is unable to carry out Executive's material duties
pursuant to this Agreement for more than six (6) months in any twelve (12)
consecutive month period (a "Disability"), the Company may terminate Executive's
employment for Disability upon thirty (30) days prior written notice, by a
notice of Disability termination, at any time thereafter during such twelve (12)
month period in which Executive is unable to carry out his duties as a result of
the same or related physical or mental illness. Such termination shall not be
effective if Executive returns to the full time performance of his material
duties within such thirty (30) day notice period.
(c) Termination for Good Reason. A Termination for Good Reason means
---------------------------
a termination by Executive by written notice given within sixty (60) days after
the occurrence of the Good Reason event. For purposes of this Agreement, "Good
Reason" shall mean the occurrence or failure to cause the occurrence, as the
case may be, without Executive's express written consent, of any of the
following circumstances, unless such circumstances are fully corrected prior to
the date of termination specified in the Notice of Termination for Good Reason
(as defined in Section 7(d) hereof): (i) any material diminution of Executive's
positions, duties or responsibilities hereunder (except in each case in
connection with the termination of Executive's employment for Cause or
Disability or as a result of Executive's death, or temporarily as a result of
Executive's illness or other absence), or the assignment to Executive of duties
or responsibilities that are inconsistent with Executive's position as
President; (ii) removal of the Executive from, or the non reelection of the
Executive to, the positions with the Company specified herein; (iii) a
relocation of the Company's principal United States executive offices to a
location more than fifty (50) miles from Portland, Oregon, or a relocation of
Executive away from such principal United States executive office; (iv) a
failure by the Company (A) to continue any bonus plan, program or arrangement in
which Executive is entitled to participate (the "Bonus Plans"), provided that
any such Bonus Plans may be modified at the Company's discretion from time to
time but shall be deemed terminated if (x) any such plan does not remain
substantially in the form in effect prior to such modification and (y) if plans
providing Executive with substantially similar benefits are not substituted
therefor ("Substitute Plans"), or (B) to continue Executive as a participant in
the Bonus Plans and Substitute Plans on at least the same basis as to potential
amount of the bonus and substantially the same level of criteria for
achievability thereof as Executive participated in immediately prior to any
change in such plans or awards, in accordance with the Bonus Plans and the
Substitute Plans; (v) any material breach by the Company of any material
provision of this Agreement; (vi) executive's removal from or failure to be
reelected to the Board; (vii) a failure of any successor to the Company to
assume in a writing delivered to Executive upon the assignee becoming such, the
obligations of the Company hereunder; or (viii) a failure of the Committee to
grant the Executive an award of
4
<PAGE>
Options in accordance with Sections 4(b) hereof, unless the applicable
circumstances under (i) through (vii) are fully corrected prior to the date of
termination specified in the notice of termination for Good Reason.
(d) Notice of Termination for Good Reason. A notice of termination
-------------------------------------
for Good Reason shall mean a notice that shall indicate the specific termination
provision in Section 7(c) relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination for Good
Reason. The failure by Executive to set forth in the notice of termination for
Good Reason any facts or circumstances which contribute to the showing of Good
Reason shall not waive any right of Executive hereunder or preclude Executive
from asserting such fact or circumstance in enforcing his rights hereunder. The
notice of termination for Good Reason shall provide for a date of termination
not less than fifteen (15) nor more than sixty (60) days after the date such
notice of termination for Good Reason is given.
(e) Cause. Subject to the notification provisions of Section 7(f)
-----
below, Executive's employment hereunder may be terminated by the Company for
Cause. For purposes of this Agreement, the term "Cause" shall be limited to (i)
willful misconduct by Executive with regard to the Company or its business which
has a material adverse effect on the Company; (ii) the refusal of Executive to
follow the proper written direction of the Board, provided that the foregoing
refusal shall not be "Cause" if Executive in good faith believes that such
direction is illegal, unethical or immoral and promptly so notifies the Board;
(iii) the Executive being convicted of a felony (other than a felony involving a
traffic offense); (iv) the breach by Executive of any fiduciary duty owed by
Executive to the Company which has a material adverse effect on the Company; or
(v) Executive's material fraud with regard to the Company.
(f) Notice of Termination for Cause. A notice of termination for
-------------------------------
Cause shall mean a notice that shall indicate the specific termination provision
in Section 7(e) relied upon and shall set forth in reasonable detail the facts
and circumstances which provide a basis for termination for Cause. Further, a
notice of termination for Cause shall be required to include a copy of a
resolution duly adopted by at least two-thirds of the entire membership of the
Board at a meeting of the Board which was called for the purpose of considering
such termination and which Executive and his representative had the right to
attend and address the Board, finding that, in the good faith opinion of the
Board, Executive engaged in conduct set forth in the definition of Cause herein
and specifying the particulars thereof in reasonable detail. The date of
termination for a termination for Cause shall be the date indicated in the
notice of termination. Any purported termination for Cause which is held by a
court not to have been based on the grounds set forth in this Agreement or not
to have followed the procedures set forth in this Agreement shall be deemed a
termination by the Company without Cause.
8. Consequences of Termination of Employment. (a) Death. If
----------------------------------------- -----
Executive's employment is terminated during the Employment Term by reason of
Executive's death, the employment period under this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement except for: (i) any compensation earned but not yet paid, including
without limitation, any declared but unpaid bonus, any amount of Base Salary or
deferred compensation accrued or earned but unpaid, any accrued vacation pay
payable
5
<PAGE>
pursuant to the Company's policies and any unreimbursed business expenses
payable pursuant to Section 6 which amounts shall be promptly paid in a lump sum
to Executive's estate; (ii) the product of (x) the target annual bonus for the
fiscal year of the Executive's death, multiplied by (y) a fraction, the
numerator of which is the number of days of the current fiscal year during which
the Executive was employed by the Company, and the denominator of which is 365,
which bonus shall be paid when bonuses for such period are paid to the other
executives; (iii) subject to Section 4(b) hereof, full accelerated vesting under
all outstanding equity-based and long-term incentive plans (with options
remaining outstanding as provided under the applicable stock option plan and a
pro rata payment under any long term incentive plans based on actual coverage
under such plans at the time payments normally would be made under such plans);
(iv) subject to Section 10 hereof, any other amounts or benefits owing to
Executive under the then applicable employee benefit plans or policies of the
Company, which shall be paid in accordance with such plans or policies; (v)
payment on a monthly basis of six (6) months of Executive's Base Salary on the
date of death, which shall be paid to Executive's spouse, or if she shall
predecease him, then to Executive's children (or their guardian if one is
appointed) in equal shares; and (vi) payment of the Executive's spouse's and
dependents' COBRA coverage premiums to the extent, and so long as, they remain
eligible for COBRA coverage, but in no event more than three (3) years. Section
12 hereof shall also continue to apply.
(b) Disability. If Executive's employment is terminated by reason of
----------
Executive's Disability, Executive shall be entitled to receive the payments and
benefits to which his representatives would be entitled in the event of a
termination of employment by reason of his death, provided that the payment of
Base Salary shall be reduced by the projected amount Executive would receive
under any long-term disability policy or program maintained by the Company
during the twelve (12) month period during which Base Salary is being paid.
Section 12 hereof shall also continue to apply.
(c) Termination by Executive for Good Reason or for any reason during
-----------------------------------------------------------------
the Change in Control Protection Period or Termination by the Company without
- -----------------------------------------------------------------------------
Cause or Nonextension of the Term by the Company. If (i) outside of the Change
- ------------------------------------------------
in Control Protection Period, Executive terminates his employment hereunder for
Good Reason during the Employment Term, (ii) a Change in Control occurs and
during the Change in Control Protection Period Executive terminates his
employment for any reason, (iii) Executive's employment with the Company is
terminated by the Company without Cause, or (iv) Executive's employment with the
Company terminates as a result of the Company giving notice of nonextension of
the Employment Term pursuant to Section 1 hereof, Executive shall be entitled to
receive: (A) in a lump sum within ten (10) business days after such termination
(i) three (3) times Executive's Base Salary in effect of the date of
termination, (ii) three (3) times the highest annual bonus paid or payable to
Executive for any of the previous three (3) completed fiscal years by the
Company and its predecessors, (iii) any unreimbursed business expenses payable
pursuant to Section 6, and (iv) any Base Salary, Bonus, vacation pay or other
deferred compensation accrued or earned under law or in accordance with the
Company's policies but not yet paid at the date of termination; (B) subject to
Section 4(b) hereof, accelerated full vesting under all outstanding equity-based
and long-term incentive plans with Options remaining outstanding as provided
under the applicable stock option plan and a pro rata payment under any long
term incentive plans
6
<PAGE>
based on actual coverage under such plans payment being made at the time
payments would normally be made under such plans; (C) subject to Section 10
hereof, any other amounts or benefits due Executive under the then applicable
employee benefit plans of the Company as shall be determined and paid in
accordance with such plans, policies and practices; (D) three (3) years of
additional service and compensation credit (at his then compensation level) for
pension purposes under any defined benefit type qualified or nonqualified
pension plan or arrangement of the Company, measured from the date of
termination of employment and not credited to the extent that Executive is
otherwise entitled to such credit during such three (3) year period, which
payments shall be made through and in accordance with the terms of the
nonqualified defined benefit pension arrangement if any then exists, or, if not,
in an actuarially equivalent lump sum (using the actuarial factors then applying
in the Company's defined benefit plan covering Executive); (E) three (3) years
of the maximum Company contribution (assuming Executive deferred the maximum
amount and continued to earn his then current salary) measured from the date of
termination under any type of qualified or nonqualified 401(k) plan (payable at
the end of each such year); and (F) payment by the Company of the premiums for
the Executive (except in the case of death) and his spouse's and dependents'
health coverage for three (3) years under the Company's health plans which cover
the senior executives of the Company or materially similar benefits. Payments
under (F) above may, at the discretion of the Company, be made by continuing
participation of Executive in the plan as a terminee, by paying the applicable
COBRA premium for Executive and his spouse and dependents, or by covering
Executive and his spouse and dependents under substitute arrangements, provided
that, to the extent Executive incurs tax that he would not have incurred as an
active employee as a result of the aforementioned coverage or the benefits
provided thereunder, Executive shall receive from the Company an additional
payment in the amount necessary so that he will have no additional cost for
receiving such items or any additional payment. In the circumstances described
in each of (i) through (iv) above, Section 12 hereof shall also continue to
apply.
(d) Termination for Cause or Voluntary Resignation without Good Reason
------------------------------------------------------------------
or Retirement. If Executive's employment hereunder is terminated: (i) by the
- -------------
Company for Cause, (ii) by Executive without Good Reason outside of the Change
in Control Protection Period, or (iii) by the Company pursuant to Section
7(a)(viii) hereof, the Executive shall be entitled to receive only his Base
Salary through the date of termination, any earned but unpaid bonus, and any
unreimbursed business expenses payable pursuant to Section 6. Subject to
Section 4(b) hereof, all other benefits (including, without limitation, Options)
due Executive following such termination of employment shall be determined in
accordance with the plans, policies and practices of the Company.
9. Non-Competition. (a) Executive acknowledges that the Company
---------------
will suffer substantial damage, which would be difficult to ascertain, if
Executive shall enter into Competition, as defined below, with the Company and
that it is necessary for the Company to be protected by the prohibition against
Competition set forth herein.
(b) During the period of his actual employment by the Company and for
one (1) year thereafter, Executive will not enter into Competition with the
Company or its affiliated entities. Competition shall mean participating
directly in the day-to-day direct supervision or
7
<PAGE>
operations of a U.S. business which competes with, or is engaged, in the same
business as currently conducted by the Company; provided that Competition shall
--------
not include the items referred to in the proviso to Section 2(c).
(c) During Executive's Employment Term with the Company and for one
(1) year thereafter, the Executive shall not, without the express written
authorization of the Company, directly or indirectly (i) recruit, solicit or
induce any nonclerical employees of the Company or its affiliates to terminate
their employment with, or otherwise cease their relationship with, the Company
or its affiliates, or (ii) solicit or assist any third party in soliciting any
clients or customers of the Company or its affiliates.
(d) In the event of a breach or threatened breach of this Section 9,
Executive acknowledges that the Company will be caused irreparable injury and
that money damages may not be an adequate remedy and agree that the Company
shall be entitled to injunctive relief (in addition to its other remedies at
law) to have the provisions of this Section 9 enforced. If any restriction set
forth with regard to Competition is found by any court of competent
jurisdiction, or an arbitrator, to be unenforceable because it extends for too
long a period of time or over too great a range of activities or in too broad a
geographic area, it shall be interpreted to extend over the maximum period of
time, range of activities or geographic area as to which it may be enforceable.
10. No Mitigation; No Set-Off. In the event of any termination
--- -------------------------
of employment under Section 8, Executive shall be under no obligation to seek
other employment and there shall be no offset against any amounts due Executive
under this Agreement on account of any remuneration attributable to any
subsequent employment that Executive may obtain. Any amounts due under Section
8 are in the nature of severance payments, or liquidated damages, or both, and
are not in the nature of a penalty. Such amounts are inclusive, and in lieu of,
any amounts payable under any other salary continuation or cash severance
arrangement of the Company and to the extent paid or provided under any other
such arrangement shall be offset from the amount due hereunder.
11. Change in Control. For purposes of this Agreement, the term
-----------------
"Change in Control" shall mean (i) any "person" as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934 ("Act") (other than the
Company, any trustee or other fiduciary holding securities under any employee
benefit plan of the Company, or any company owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as their
ownership of common stock of the Company), becoming the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing twenty-five percent (25%) or more of the
combined voting power of the Company's then outstanding securities; (ii) during
any period of two (2) consecutive years, individuals who at the beginning of
such period constitute the Board, and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in clause (i), (iii), or (iv) of this paragraph
or a director whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule 14a-11
promulgated under the Act) or other actual or threatened
8
<PAGE>
solicitation of proxies or consents by or on behalf of a person other than a
member of the Board) whose election by the Board or nomination for election by
the Company's shareholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning of the
two (2) year period or whose election or nomination for election was previously
so approved, cease for any reason to constitute at least a majority of the
Board; (iii) the merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than fifty percent (50%) of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation;
provided, however, that a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no person
(other than those covered in the exceptions in (i) above) acquires more than
twenty-five percent (25%) of the combined voting power of the Company's then
outstanding securities shall not constitute a Change in Control; or (iv)
approval by the shareholders of the Company of a plan of complete liquidation of
the Company or the closing of the sale or disposition by the Company of all or
substantially all of the Company's assets other than the sale of all or
substantially all of the assets of the Company to a person or persons who
beneficially own, directly or indirectly, at least fifty percent (50%) or more
of the combined voting power of the outstanding voting securities of the Company
at the time of the sale.
12. Indemnification. (a) The Company agrees that if Executive is
---------------
made a party to or threatened to be made a party to any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he is or was a director or officer of
the Company, or is or was serving at the request of the Company as a director,
officer, member, employee, fiduciary or agent of another corporation or of a
partnership, joint venture, trust, other enterprise or non-profit organization,
including, without limitation, service with respect to employee benefit plans,
whether or not the basis of such Proceeding is alleged action in an official
capacity as a director, officer, member, employee, fiduciary or agent while
serving as a director, officer, member, employee, fiduciary or agent, he shall
be indemnified and held harmless by the applicable company to the fullest extent
authorized by Delaware law, as the same exists or may hereafter be amended,
against all Expenses incurred or suffered by Executive in connection therewith,
and such indemnification shall continue as to Executive even if Executive has
ceased to be an officer, director, member, fiduciary or agent, or is no longer
employed by the company, and shall inure to the benefit of his heirs, executors
and administrators.
(b) As used in this Agreement, the term "Expenses" shall include,
without limitation, damages, losses, judgments, liabilities, fines, penalties,
excise taxes, settlements and costs, attorneys' fees, accountants' fees, and
disbursements and costs of attachment or similar bonds, investigations, and any
expenses of establishing a right to indemnification under this Agreement.
(c) Expenses incurred by Executive in connection with any Proceeding
shall be paid by the Company in advance upon request of Executive and the giving
by the Executive of any undertakings required by applicable law.
9
<PAGE>
(d) Executive shall give the Company notice of any claim made against
him for which indemnity will or could be sought under this Agreement. In
addition, Executive shall give the Company such information and cooperation as
it may reasonably require and as shall be within Executive's power and at such
times and places as are reasonably convenient for Executive.
(e) With respect to any Proceeding as to which Executive notifies the
Company of the commencement thereof:
(i) The Company will be entitled to participate therein at its
own expense; and
(ii) Except as otherwise provided below, to the extent that it
may wish, the Company jointly with any other indemnifying party similarly
notified will be entitled to assume the defense thereof, with counsel
reasonably satisfactory to Executive. Executive also shall have the right
to employ his own counsel in such action, suit or proceeding and the fees
and expenses of such counsel shall be at the expense of the Company.
(f) The Company shall not be liable to indemnify Executive under this
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent. The Company shall not settle any action or claim
in any manner which would impose any penalty or limitation on Executive without
Executive's written consent. Neither the company nor Executive will
unreasonably withhold or delay their consent to any proposed settlement.
(g) The right to indemnification and the payment of expenses incurred
in defending a Proceeding in advance of its final disposition conferred in this
Section 12 shall not be exclusive of any other right which Executive may have or
hereafter may acquire under any statute, provision of the certificate of
incorporation or by-laws of the Company, agreement, vote of stockholders or
disinterested directors or otherwise.
(h) The Company hereunder agrees to obtain officer and director
liability insurance policies covering Executive and shall maintain at all times
following the Commencement Date and during the Employment Term coverage under
such policies in the aggregate with regard to all officers and directors,
including Executive, of an amount not less than $10 million.
13. Special Tax Provision. (a) Anything in this Agreement to the
---------------------
contrary notwithstanding, in the event that any amount or benefit paid, payable,
or to be paid, or distributed, distributable, or to be distributed to or with
respect to Executive by the Company (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Company, any
person whose actions result in a change of ownership or effective control
covered by Code Section 280G(b)(2) or any person affiliated with the Company or
such person) as a result of a change in ownership or effective control of the
Company or a direct or indirect parent thereof (or the assets of any of the
foregoing) covered by Code Section 280G(b)(2)
10
<PAGE>
(collectively, the "Covered Payments") is or becomes subject to the excise tax
imposed by or under Section 4999 of the Code (or any similar tax that may
hereafter be imposed), and/or any interest, penalties or additions to tax, with
respect to such excise tax (such excise tax, together with such interest
penalties and additions to tax, is hereinafter collectively referred to as the
"Excise Tax"), the Company shall pay to Executive an additional amount (the "Tax
Reimbursement Payment") such that after payment by Executive of all taxes
(including, without limitation, any interest or penalties and any Excise Tax
imposed on or attributable to the Tax Reimbursement Payment itself), Executive
retains an amount of the Tax Reimbursement Payment equal to the sum of (i) the
amount of the Excise Tax imposed upon the Covered Payments, and (ii) without
duplication, an amount equal to the product of (A) any deductions disallowed for
federal, state or local income tax purposes because of the inclusion of the Tax
Reimbursement Payment in Executive's adjusted gross income, and (B) the highest
applicable marginal rate of federal, state or local income taxation,
respectively, for the calendar year in which the Tax Reimbursement Payment is
made or is to be made. The intent of this Section 13 is that (a) the Executive,
after paying his federal, state and local income tax and payroll taxes, will be
in the same position as if he was not subject to the Excise Tax under Section
4999 of the Code and did not receive the extra payments pursuant to this Section
13 and this Section 13 shall be interpreted accordingly.
(b) Except as otherwise provided in Section 13(a), for purposes of
determining whether any of the Covered Payments will be subject to the Excise
Tax and the amount of such Excise Tax, (i) such Covered Payments will be treated
as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code)
and such payments in excess of the Code Section 280G(b)(3) "base amount" shall
be treated as subject to the Excise Tax, unless, and except to the extent that,
the Company's independent certified public accountants appointed prior to the
change in ownership covered by Code Section 280G(b)(2) or legal counsel
(reasonably acceptable to Executive) appointed by such public accountants (or,
if the public accountants decline such appointment and decline appointing such
legal counsel, such independent certified public accountants as promptly
mutually agreed on in good faith by the Company and the Executive) (the
"Accountant"), deliver a written opinion to Executive, reasonably satisfactory
to Executive's legal counsel, that Executive has a reasonable basis to claim
that the Covered Payments (in whole or in part) (A) do not constitute "parachute
payments", (B) represent reasonable compensation for services actually rendered
(within the meaning of Section 280G(b)(4) of the Code) in excess of the "base
amount" allocable to such reasonable compensation, or (C) such "parachute
payments" are otherwise not subject to such Excise Tax (with appropriate legal
authority, detailed analysis and explanation provided therein by the
Accountants); and (ii) the value of any Covered Payments which are non-cash
benefits or deferred payments or benefits shall be determined by the Accountant
in accordance with the principles of Section 280G of the Code.
(c) For purposes of determining the amount of the Tax Reimbursement
Payment, Executive shall be deemed: (i) to pay federal, state and/or local
income taxes at the highest applicable marginal rate of income taxation for the
calendar year in which the Tax Reimbursement Payment is made or is to be made,
and (ii) to have otherwise allowable deductions for federal, state and local
income tax purposes at least equal to those disallowed due to the inclusion of
the Tax Reimbursement Payment in Executive's adjusted gross income.
11
<PAGE>
(d) (i) (A) In the event that prior to the time the Executive has
filed any of his tax returns for the calendar year in which the change in
ownership event covered by Code Section 280G(b)(2) occurred, the Accountant
determines, for any reason whatever, the correct amount of the Tax Reimbursement
Payment to be less than the amount determined at the time the Tax Reimbursement
Payment was made, the Executive shall repay to the Company, at the time that the
amount of such reduction in Tax Reimbursement Payment is determined by the
Accountant, the portion of the prior Tax Reimbursement Payment attributable to
such reduction (including the portion of the Tax Reimbursement Payment
attributable to the Excise Tax and federal, state and local income tax imposed
on the portion of the Tax Reimbursement Payment being repaid by the Executive,
using the assumptions and methodology utilized to calculate the Tax
Reimbursement Payment (unless manifestly erroneous)), plus interest on the
amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the
Code.
(B) In the event that the determination set forth in (A) above is made
by the Accountant after the filing by the Executive of any of his tax returns
for the calendar year in which the change in ownership event covered by Code
Section 280G(b)(2) occurred but prior to one (1) year after the occurrence of
such change in ownership, the Executive shall file at the request of the Company
an amended tax return in accordance with the Accountant's determination, but no
portion of the Tax Reimbursement Payment shall be required to be refunded to the
Company until actual refund or credit of such portion has been made to the
Executive, and interest payable to the Company shall not exceed the interest
received or credited to the Executive by such tax authority for the period it
held such portion (less any tax the Executive must pay on such interest and
which he is unable to deduct as a result of payment of the refund).
(C) In the event the Executive receives a refund pursuant to (B) above
and repays such amount to the Company, the Executive shall thereafter file for
refunds or credits by reason of the repayments to the Company. Executive and
the Company shall mutually agree upon the course of action, if any, to be
pursued (which shall be at the expense of the Company) if Executive's claim for
such refund or credit is denied.
(D) The Executive and the Company shall mutually agree upon the course
of action, if any, to be pursued (which shall be at the expense of the Company)
if the Executive's claim for refund or credit is denied.
(ii) In the event that the Excise Tax is later determined by the
Accountants or the Internal Revenue Service to exceed the amount taken into
account hereunder at the time the Tax Reimbursement Payment is made (including
by reason of any payment the existence or amount of which cannot be determined
at the time of the Tax Reimbursement Payment), the Company shall make an
additional Tax Reimbursement Payment in respect of such excess (plus any
interest, penalties or additions to tax payable with respect to such excess)
once the amount of such excess is finally determined.
(iii) In the event of any controversy with the Internal Revenue
Service (or other taxing authority) under this Section 13, subject to subpart
(i)(D) above, the Executive
12
<PAGE>
shall permit the Company to control issues related to this Section 13 (at its
expense), provided that such issues do not potentially materially adversely
affect the Executive, but the Executive shall control any other issues. In the
event the issues are interrelated, the Executive and the Company shall in good
faith cooperate so as not to jeopardize resolution of either issue, but if the
parties cannot agree Executive shall make the final determination with regard to
the issues. In the event of any conference with any taxing authority as to the
Excise Tax or associated income taxes, the Executive shall permit the
representative of the Company to accompany him and the Executive and his
representative shall cooperate with the Company and its representative.
(iv) With regard to any initial filing for a refund or any other
action required pursuant to this Section 13 (other than by mutual agreement) or,
if not required, agreed to by the Company and the Executive, the Executive shall
cooperate fully with the Company, provided that the foregoing shall not apply to
actions that are provided herein to be at the sole discretion of the Executive.
(e) The Tax Reimbursement Payment, or any portion thereof, payable by
the Company shall be paid not later than the fifth day following the
determination by the Accountant, and any payment made after such fifth day shall
bear interest at the rate provided in Code Section 1274(b)(2)(B). The Company
shall use its best efforts to cause the Accountant to promptly deliver the
initial determination required hereunder and, if not delivered, within ninety
(90) days after the change in ownership event covered by Section 280G(b)(2) of
the Code, the Company shall pay the Executive the Tax Reimbursement Payment set
forth in an opinion from counsel recognized as knowledgeable in the relevant
areas selected by the Executive, and reasonably acceptable to the Company,
within five (5) days after delivery of such opinion. In accordance with Section
16(g), the Company may withhold from the Tax Reimbursement Payment and deposit
into applicable taxing authorities such amounts as are required to be withheld
by applicable law. To the extent that Executive is required to pay estimated or
other taxes on amounts received by Executive beyond any withheld amounts,
Executive shall promptly make such payments. The amount of such payment shall
be subject to later adjustment in accordance with the determination of the
Accountant as provided herein.
(f) The Company shall be responsible for all charges of the Accountant
and if (e) is applicable the reasonable charges for the opinion given by
Executive's counsel.
(g) The Company and the Executive shall mutually agree on and
promulgate further guidelines in accordance with this Section 13 to the extent,
if any, necessary to effect the reversal of excessive or shortfall Tax
Reimbursement Payments. The foregoing shall not in any way be inconsistent with
Section 13(d)(i)(D) hereof.
14. Legal and Other Fees and Expenses. In the event that a claim for
---------------------------------
payment or benefits under this Agreement is disputed, the Company shall pay all
reasonable attorney, accountant and other professional fees and reasonable
expenses incurred by Executive in pursuing such claim, unless the claim by the
Executive is found to be frivolous by any court or arbitrator.
13
<PAGE>
15. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration
conducted in the City of Portland in the State of Oregon under the Commercial
Arbitration Rules then prevailing of the American Arbitration Association and
such submission shall request the American Arbitration Association to: (i)
appoint an arbitrator experienced and knowledgeable concerning the matter then
in dispute; (ii) require the testimony to be transcribed; (iii) require the
award to be accompanied by findings of fact and the statement for reasons for
the decision; and (iv) request the matter to be handled by and in accordance
with the expedited procedures provided for in the Commercial Arbitration Rules.
The determination of the arbitrators, which shall be based upon a de novo
interpretation of this Agreement, shall be final and binding and judgment may be
entered on the arbitrators' award in any court having jurisdiction. All costs
of the American Arbitration Association and the arbitrator shall be borne by the
Company.
16. Miscellaneous.
-------------
(a) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Oregon without reference to
principles of conflicts of laws.
(b) Entire Agreement/Amendments. This Agreement and the instruments
---------------------------
contemplated herein, contain the entire understanding of the parties with
respect to the employment of Executive by the Company from and after the
Commencement Date and supersedes any prior agreements, whether written or
otherwise, between the Company and Executive. There are no restrictions,
agreements, promises, warranties, covenants or undertakings between the parties
with respect to the subject matter herein other than those expressly set forth
herein and therein. This Agreement may not be altered, modified, or amended
except by written instrument signed by the parties hereto.
(c) No Waiver. The failure of a party to insist upon strict adherence
---------
to any term of this Agreement on any occasion shall not be considered a waiver
of such party's rights or deprive such party of the right thereafter to insist
upon strict adherence to that term or any other term of this Agreement. Any
such waiver must be in writing and signed by Executive or an authorized officer
of the Company, as the case may be.
(d) Assignment. This Agreement shall not be assignable by Executive.
----------
This Agreement shall be assignable, with the consent of the Executive, by the
Company only to an acquiror of all or substantially all of the assets of the
Company, provided such acquiror promptly assumes all of the obligations
hereunder of the Company in a writing delivered to the Executive and otherwise
complies with the provisions hereof with regard to such assumption.
(e) Successors; Binding Agreement; Third Party Beneficiaries. This
--------------------------------------------------------
Agreement shall inure to the benefit of and be binding upon parties hereto and
their personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees legatees and permitted assignees of the parties
hereto. If the Executive dies while any amount would still be payable hereunder
if the Executive had continued to live, all such amounts, unless otherwise
14
<PAGE>
provided herein, shall be paid in accordance with the terms of the Agreement to
the personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees, legatees and permitted assignees of the parties
hereto.
(f) Communications. For the purpose of this Agreement, notices and
--------------
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given (i) when faxed or delivered, and (ii)
two business days after being mailed by United States registered or certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the initial page of this Agreement, provided that all
notices to the Company shall be directed to the attention of Andy Wiederhorn of
the Company, or to such other address as any party may have furnished to the
other in writing in accordance herewith. Notice of change of address shall be
effective only upon receipt.
(g) Withholding Taxes. The Company may withhold from any and all
-----------------
amounts payable under this Agreement such federal, state and local taxes as may
be required to be withheld pursuant to any applicable law or regulation.
(h) Survivorship. The respective rights and obligations of the
------------
parties hereunder shall survive any termination of Executive's employment.
(i) Counterparts. This Agreement may be signed in counterparts, each
------------
of which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
(j) Headings. The headings of the sections contained in this
--------
Agreement are for convenience only and shall not be deemed to control or affect
the meaning or construction of any provision of this Agreement.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
WILSHIRE FINANCIAL SERVICES GROUP INC.
By:
----------------------------------
Name:
Title:
--------------------------------------
Lawrence A. Mendelsohn
16
<PAGE>
EXHIBIT 10.3
INCENTIVE STOCK PLAN
OF
WILSHIRE FINANCIAL SERVICES GROUP INC.
--------------------------------------
1. PURPOSE OF THE PLAN AND DEFINITIONS
-----------------------------------
1.1 PURPOSE. The purposes of this Incentive Stock Plan (the "Plan")
-------
of Wilshire Financial Services Group Inc. (the "Company") are to provide
additional incentives to eligible persons chosen to receive stock-based awards,
to encourage selected employees to accept or continue employment and to increase
the interest of directors in the Company's welfare through, in each such case,
participation in the appreciation of the Company's common stock.
1.2 DEFINITIONS. For purposes of this Plan, these terms have these
-----------
meanings:
"ADMINISTRATOR" has the meaning given it in Section 4.1.
-------------
"AFFILIATE" means a parent or subsidiary corporation, as
---------
defined in the applicable provisions (currently Section 424) of the Code when
this definition is being applied.
"AWARD" means any award under this Plan (i.e., any Option,
----- - -
Restricted Stock, Stock Appreciation Right or Formula Director Option).
"AWARD AGREEMENT" means, with respect to each Award, the signed
---------------
written agreement between the Company and the Participant or other written
document approved by the Administrator setting forth the terms and conditions of
the Award.
"BOARD" means the Company's Board of Directors.
-----
"CODE" means the Internal Revenue Code of 1986, as amended from
----
time to time, and any successor statute.
"COMMISSION" means the Securities and Exchange Commission and any
----------
successor agency.
<PAGE>
"COMMITTEE" has the meaning given it in Section 4.1.
---------
"COMPANY" has the meaning given it in Section 1.1.
-------
"EFFECTIVE DATE" has the meaning given it in Section 16.
--------------
"EMPLOYEE" has the meaning given to it for purposes of Section
--------
3401(c) of the Code and the Treasury Regulations adopted under that Section.
The term "employee" includes a director who is also an employee.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
------------
amended from time to time, and any successor statute.
"EXECUTIVE OFFICER" means a Participant who, as of the earliest
-----------------
of the date an Award is vested, the date restrictions with respect to the Award
lapse or the date a payment is made pursuant to the Award, is a "covered
employee" as defined in Section 162(m).
"FORMULA DIRECTOR OPTION" has the meaning given it in Section
-----------------------
5.3.
"GRANT DATE" means the date on which an Award becomes effective.
----------
"ISO" means any Option intended to be and designated as an
---
"incentive stock option" within the meaning of Section 422 of the Code.
"NON-EMPLOYEE DIRECTOR" has the meaning given it in Rule 16b-3.
---------------------
"NSO" means any Option that is not an ISO, it being understood
---
that Formula Director Options are also NSOs.
"OPTION" means an option granted under Section 6, but not an
------
option granted under Section 5.3.
"OPTION AGREEMENT" means an Award Agreement evidencing an Option.
----------------
"OUTSIDE DIRECTOR" means a person who is an "outside director" as
----------------
defined in Section 162(m).
"PARTICIPANT" means an eligible person granted an Award.
-----------
"PLAN" means this plan.
----
-2-
<PAGE>
"RESTRICTED STOCK" means an Award of Stock subject to
----------------
restrictions, as more fully described in Section 7.
"RULE 16B-3" means Rule 16b-3 adopted under Section 16(b) of the
----------
Exchange Act, as that rule may be amended from time to time, or any successor
rule.
"SECTION 162(M)" means Section 162(m) of the Code and the
--------------
Treasury Regulations adopted from time to time under that Section, as they may
be amended from time to time, or any successor law or regulations.
"SECURITIES ACT" means the Securities Act of 1933, as amended
--------------
from time to time, and any successor statute.
"STOCK" means the common stock, $0.01 par value per share, of the
-----
Company.
"STOCK APPRECIATION RIGHT" means an Award granted under
------------------------
Section 8.
"STOCKHOLDER APPROVED STANDARD" means any pre-established,
-----------------------------
objective performance goal qualifying as "qualified performance-based
compensation" under Section 162(m) (or otherwise excluded from Section 162(m))
and approved by the stockholders of the Company in accordance with Section
162(m).
"SUBSIDIARY" means a subsidiary corporation of the Company, as
----------
defined in the applicable provisions (currently Section 424(f)) of the Code when
this definition is being applied.
"TEN PERCENT STOCKHOLDER" means any person who, when this
-----------------------
definition is being applied, owns, directly or indirectly (or is treated as
owning by reason of attribution rules currently set forth in Section 424(d) of
the Code), stock of the Company constituting more than ten percent of the total
combined voting power of all classes of outstanding stock of the Company or of
any Affiliate of the Company.
"TERMINATION" means that a Participant has ceased, for any
-----------
reason and with or without cause, to be an employee or director of, or a
consultant to, the Company or any Subsidiary. However, "Termination" shall not
be deemed to have occurred if a Participant changes from one "eligible status"
to another eligible status (for example, ceases to be an employee but becomes a
consultant) or transfers from one "eligible entity" to another eligible entity
(for example, ceases being an employee of the Company but begins employment with
a Subsidiary). In addition, "Termination" shall not be deemed to have occurred
as a
-3-
<PAGE>
result of a leave of absence duly authorized by the Company in writing, unless
the Administrator has provided otherwise.
2. ELIGIBLE PERSONS
----------------
Every person who, as of the Grant Date, is (a) an employee of the
Company or a Subsidiary, (b) a director of the Company or (c) someone whom the
Administrator designates as eligible for an Award because that person (i)
performs bona fide consulting or advisory services for the Company or a
Subsidiary (other than services in connection with the offer or sale of
securities in a capital-raising transaction) and (ii) has a direct and
significant effect on the financial development of the Company or a Subsidiary
shall be eligible to receive Awards. However, only employees of the Company or
a Subsidiary shall be eligible to receive ISOs. The Administrator may grant
Awards to persons who are expected to become such employees, directors or
consultants, in which case the grant shall be deemed to have been made upon the
date the grantee becomes such an employee, director or consultant without the
necessity for further action or approval by the Administrator.
3. STOCK SUBJECT TO THIS PLAN
--------------------------
The total number of shares of Stock that may be issued under Awards is
1,750,000. Such shares may consist, in whole or in part, of unissued shares,
treasury shares or shares reacquired in private transactions or open market
purchases. However, all shares issued under the Plan, regardless of their
source, shall be counted against this 1,750,000-share limitation, including
shares represented by Stock Appreciation Rights. Any shares that are retained
by the Company upon exercise or settlement of an Award in order to satisfy the
exercise price in whole or in part, or to pay withholding taxes due with respect
to such exercise or settlement, shall be treated as issued to the Participant
and thereafter will not be available under the Plan. The number of shares
reserved for issuance under this Plan is subject to adjustment in accordance
with the provisions for adjustment in this Plan. The maximum number of shares
of Stock with respect to which Awards may be granted to any one Participant
during the term of this Plan is 900,000.
4. ADMINISTRATION
--------------
4.1 ADMINISTRATOR. This Plan shall be administered by the Board or
-------------
by a committee appointed by the Board (the "Committee"). If the Board appoints
a Committee, it may authorize the Committee to administer the entire Plan or may
authorize the Committee to administer the Plan with respect only to certain
Participants (for example, persons subject to Section 16 of the Exchange Act,
Executive Officers or both) or with
-4-
<PAGE>
respect only to certain types of Awards. If the Board appoints a Committee, it
may (but need not) choose to cause the members of the Committee to be Non-
Employee Directors, Outside Directors or both Non-Employee Directors and Outside
Directors. Unless the context requires otherwise, references in this Plan to the
"Administrator" refer to the Committee or the Board, whichever is applicable.
4.2 ADMINISTRATOR'S POWERS. Subject to the express provisions of the
----------------------
Plan, the Administrator shall have the authority, in its sole discretion: (a)
to adopt, amend and rescind administrative and interpretive rules and
regulations relating to the Plan; (b) to determine the eligible persons to whom,
and the time or times at which, Awards shall be granted; (c) to determine the
number of shares of Stock that shall be subject to each Award; (d) to determine
the provisions of each Award Agreement (which need not be identical) and any
amendments thereof, including provisions defining or otherwise relating to (i)
the period or periods and extent of exercisability of any Options or Stock
Appreciation Rights, (ii) the extent to which the transferability of shares of
Stock issued or transferred pursuant to any Award is restricted, (iii) the
effect of Termination (including death or disability) on the Award and (iv) the
effect of approved leaves of absence (consistent with any applicable Department
of Treasury Regulation under Section 421 of the Code); (e) to accelerate the
time of exercisability of any Option or Stock Appreciation Right; (f) to
construe Award Agreements and the Plan; (g) to make determinations of the fair
market value of Stock; (h) to waive any provision set forth in an Award
Agreement unless the Award Agreement says it is unavailable; (i) to certify
whether the performance goals and any other material terms of an Award have been
satisfied and (j) to make all other determinations, perform all other acts and
exercise all other powers and authority necessary or advisable for administering
the Plan, including the delegation of those ministerial acts and
responsibilities as the Administrator deems appropriate. The determinations of
the Administrator on the matters referred to in this Section 4.2 shall be final
and binding. The Administrator may not vary or waive any of the terms specified
or referred to in Section 5.3 of this Plan with respect to Formula Director
Options. However, nothing in Section 5.3 or elsewhere in this Plan shall
prevent the Company from granting Awards to Non-Employee Directors in addition
to Formula Director Options.
4.3 TERM OF PLAN. No Awards shall be granted under this Plan after
------------
ten years from the Effective Date.
-5-
<PAGE>
5. GRANT OF OPTIONS
----------------
5.1 WRITTEN AGREEMENT. Each Option shall be evidenced by an Option
-----------------
Agreement. The Option Agreement shall specify whether the Options it evidences
are NSOs or ISOs.
5.2 ANNUAL $100,000 LIMITATION ON ISOS. To the extent that the total
----------------------------------
"fair market value" of Stock with respect to which ISOs first become exercisable
by a Participant in any calendar year exceeds $100,000, taking into account ISOs
granted under this Plan and any other plan of the Company or any Affiliate of
the Company, all or part of the Options covering such additional shares becoming
exercisable in that year shall cease to be ISOs and thereafter be NSOs. For
this purpose, the "fair market value" of Stock subject to Options shall be
determined as of the date the Options were granted. In determining the Options
that will be treated as ISOs to meet this $100,000 limit, the most recently-
granted Options shall be treated as NSOs until the $100,000 limit has been met.
5.3 ANNUAL GRANTS TO DIRECTORS. On the last trading day of each
--------------------------
calendar quarter beginning March 31, 1997, each person who is then a Non-
Employee Director shall automatically be granted an NSO to purchase that number
of shares of Stock that equals $6,250 divided by the fair market value per share
of the Stock on that trading day. (Each option referred to in the previous
sentence is referred to as a "Formula Director Option".) The exercise price of
each Formula Director Option shall be the fair market value of the Stock subject
to that option on the date the option is granted. Each Formula Director Option
shall be fully exercisable beginning six months after the date of grant and
continuing, unless sooner terminated as provided in this Plan, for ten years
after the date of grant. If, for any reason other than death or permanent and
total disability, a Non-Employee Director ceases to be a member of the Board,
each Formula Director Option then held by that Non-Employee Director may be
exercised in whole or in part at any time within one year thereafter or until
the expiration of the Formula Director Option, whichever is earlier. If a Non-
Employee Director dies or becomes permanently and totally disabled (within the
meaning of Section 22(e)(3) of the Code) while a member of the Board (or within
the period that a Formula Director Option held by the member remains exercisable
after the member ceased to be a member of the Board), that Formula Director
Option may be exercised, in whole or in part, by the Non-Employee Director, by
the Non-Employee Director's personal representative or by the person to whom the
Non-Employee Director transferred the Formula Director Option by will or the
laws of descent and distribution, at any time within two years after the date of
death or permanent and total disability of the Non-Employee Director or until
the expiration date of the Formula Director Option, whichever is
-6-
<PAGE>
earlier. However, nothing in this Section 5.3 shall have the effect of
accelerating the exercisability of any Formula Director Option. Each Formula
Director Option shall be evidenced by a signed Option Agreement in the form of
Exhibit A to this Plan.
- ------- -
6. CERTAIN TERMS AND CONDITIONS OF OPTIONS AND OTHER AWARDS
--------------------------------------------------------
Each Option shall be designated an ISO or a NSO and shall be subject
to the terms and conditions set forth in Section 6.1. NSOs shall also be
subject to the terms and conditions set forth in Section 6.2, but not those set
forth in Section 6.3. ISOs shall also be subject to the terms and conditions
set forth in Section 6.3, but not those set forth in Section 6.2.
6.1 ALL AWARDS. Except to the extent specifically stated otherwise
----------
in this Section 6.1, all Options and other Awards shall be subject to the
following terms and conditions:
(a) CHANGES IN CAPITAL STRUCTURE. If the number of outstanding shares
----------------------------
of Stock is increased by means of a stock dividend payable in shares of Stock, a
stock split or other subdivision or by a reclassification of shares of Stock,
then, from and after the record date for such dividend, subdivision or
reclassification, the number and class of shares of stock subject to this Plan
(including its Section 3) and each outstanding Award shall be increased in
proportion to such increase in outstanding shares of Stock and the then-
applicable exercise price of each outstanding Award shall be correspondingly
decreased. If the number of outstanding shares of Stock is decreased by means
of a stock split or other subdivision or by a reclassification of shares of
Stock, then, from and after the record date for such split, subdivision or
reclassification, the number and class of shares of stock subject to this Plan
(including its Section 3) and each outstanding Award shall be decreased in
proportion to such decrease in outstanding shares of Stock and the then-
applicable exercise price of each outstanding Award shall be correspondingly
increased. In any such case, each outstanding ISO shall be adjusted so as to
retain its status as an ISO under the principles set forth in Section 424(a) of
the Code.
(b) CERTAIN CORPORATE TRANSACTIONS. This Section 6.1(b) addresses the
------------------------------
impact of certain corporate transactions. In case of any consolidation or
merger of the Company with or into another entity (other than a merger in which
the Company is a continuing corporation and which does not result in any
reclassification or change in the then-outstanding shares of Stock) or in the
case of any sale or conveyance to another entity of all or substantially all of
the Company's and its Subsidiaries' assets taken as a whole (including by means,
in whole or in part, of sales by the Company of shares of
-7-
<PAGE>
Subsidiaries), then, as a condition of such consolidation, merger, sale or
conveyance, the Company or such successor or purchasing entity, as the case may
be, shall make lawful and adequate provision whereby the holder of each
outstanding Award shall thereafter have the right, on exercise of such Award, to
receive the kind and amount of securities, property and/or cash receivable upon
such consolidation, merger, sale or conveyance by a holder of the number of
securities issuable upon exercise of such Award immediately before such
consolidation, merger, sale or conveyance. Such provision shall include
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in Section 6.1(a). Notwithstanding the foregoing, if
such a transaction occurs, in lieu of causing such rights to be substituted for
outstanding Awards, the Administrator may, upon 15 days' prior written notice to
Participants in its sole discretion: (i) shorten the period during which Awards
are exercisable, provided they remain exercisable, to the extent otherwise
exercisable, for at least 15 days after the date the notice is given or (ii)
cancel an Award upon payment to the Participant in cash, with respect to each
Award to the extent then exercisable, of an amount which, in the sole discretion
of the Administrator, is determined to be equivalent to the amount, if any, by
which the fair market value (at the effective time of the transaction) of the
consideration that the Participant would have received if the Award had been
exercised before the effective time of the transaction exceeds the exercise
price of the Award. The actions described in this Section 6.1(b) may be taken
without regard to any resulting tax consequences to the Participant.
(c) GRANT DATE. Each Award Agreement shall specify the date as
----------
of which it shall be effective (the "Grant Date").
(d) FAIR MARKET VALUE. For purposes of this Plan, the fair
-----------------
market value of Stock shall be determined as follows:
(i) If the Stock is listed on any established stock exchange or a
national market system, including, without limitation, the National Market
System of the National Association of Securities Dealers Automated Quotation
System, its fair market value shall be the mean between the highest and lowest
quoted selling prices for the Stock, or the mean between the high bid and low
asked prices if no sales were reported, as quoted on such system or exchange
(or, if the Stock is listed on more than one exchange, then on the largest such
exchange) for the date the value is to be determined (or if there are no sales
or bids for such date, then for the last preceding business day on which there
were sales or bids), as reported in The Wall Street Journal or similar
--- ---- ------ -------
publication.
-8-
<PAGE>
(ii) If the Stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, its fair market value shall be the
mean between the high bid and low asked prices for the Stock on the date the
value is to be determined (or if there are no quoted prices for the date of
grant, then for the last preceding business day on which there were quoted
prices).
(iii) In the absence of an established market for the Stock,
the fair market value shall be determined in good faith by the Administrator,
with reference to the Company's net worth, prospective earning power, dividend-
paying capacity and other relevant factors, including the goodwill of the
Company, the economic outlook in the Company's industry or industries, the
Company's position in its industry or industries and its management, and the
values of stock of other corporations in the same or similar lines of business.
(e) TIME OF EXERCISE AND VESTING. Awards may, in the sole discretion
----------------------------
of the Administrator, be exercisable or may vest, and restrictions may lapse, as
the case may be, at such times and in such amounts as may be specified by the
Administrator in the grant of the Award.
(f) NONASSIGNABILITY OF RIGHTS. No Award shall be transferable other
--------------------------
than by will or the laws of descent and distribution. However, Awards that are
not ISOs may be transferred pursuant to a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income Security Act of
1974, as amended, or any rules adopted thereunder. During a Participant's
lifetime, Awards shall be exercisable only by the Participant and, in the case
of Awards that are not ISOs, transferees pursuant to such a qualified domestic
relations order. After a Participant's death, Awards shall be exercisable only
by the executors, administrators or beneficiaries of the Participant and, in the
case of Awards that are not ISOs, the executors, administrators or beneficiaries
of transferees pursuant to such a qualified domestic relations order.
(g) NOTICE AND PAYMENT. To the extent it is exercisable, an Award
------------------
shall be exercisable only by written or recorded electronic notice of exercise,
in the manner specified by the Administrator from time to time, delivered to the
Company or its designated agent during the term of the Award. The notice shall
(a) state the number of shares of Stock with respect to which the Award is being
exercised, (b) be signed or otherwise given by the person authorized to exercise
the Award under Section 6.1(f) and (c) include such other information,
instruments and documents as may be required to satisfy any other condition to
exercise specified by the Administrator. Except as
-9-
<PAGE>
provided in the balance of this Section 6.1(g), payment in full, in cash, shall
be made for all Stock purchased at the time notice of exercise of an Award is
given to the Company. At the time an Award is granted or before it is exercised,
the Administrator, in the exercise of its sole discretion, may authorize any one
or more of the following additional methods of payment:
(i) acceptance of the Participant's full recourse promissory note for
some or all of the exercise price of the shares being acquired, payable on such
terms and bearing such interest rate as determined by the Administrator (but in
no event at a rate below the minimum rate required to avoid imputed interest or
original issue discount under the Code), and secured in such manner, if at all,
as the Administrator shall approve, including, without limitation, by a security
interest in the Stock or other securities;
(ii) delivery by the Participant of Stock of the Company already
owned by the Participant for all or part of the exercise price of the shares
being acquired, provided that the fair market value of such Stock is equal on
the date of exercise to the exercise price of the shares being acquired, or such
portion thereof as the Participant is authorized to pay and elects to pay by
delivery of such Stock;
(iii) surrender by the Participant, or withholding by the Company
from the shares issuable upon exercise of the Award, of a number of shares
subject to the Award being exercised with a fair market value equal to some or
all of the exercise price of the shares being acquired, together with such
documentation as the Administrator shall require or
(iv) to the extent permitted by applicable law, pursuant to
arrangements with a brokerage firm under which that brokerage firm, on behalf of
the Participant, shall pay to the Company the exercise price of the Award being
exercised (either as a loan to the Participant or from the proceeds of the sale
of Stock issued under that Award), in which case the Company shall promptly
cause the shares being purchased under the Award to be delivered to the
brokerage firm.
(h) TERMINATION. Any Award or portion thereof which is not
-----------
exercisable on or before the date of a Participant's Termination shall expire on
the date of Termination. As to an Award or portion thereof that is exercisable
by the time of Termination, the Administrator shall establish, in respect of
each Award when granted, the effect, if any, of a Termination on the rights and
benefits thereunder and in so doing may, but need not, make distinctions based
upon the cause of termination (such as retirement, death, disability or other
factors) or which party effected the termination (the employer or the employee).
-10-
<PAGE>
Notwithstanding any other provision in this Plan or the Award Agreement, the
Administrator may decide in its discretion at the time of any Termination (or
within a reasonable time thereafter) to extend the exercise period of an Award
(but not beyond the period specified in Section 6.2(b) or 6.3(b), as applicable)
and not decrease the number of shares covered by the Award with respect to which
the Award is exercisable or vested.
(i) OTHER PROVISIONS. Each Award Agreement may contain such other
----------------
provisions not inconsistent with this Plan, as may be determined by the
Administrator, and each ISO granted under this Plan shall include such
provisions as are necessary to qualify such Option as an "incentive stock
option" within the meaning of Section 422 of the Code unless the Administrator
determines otherwise.
(j) WITHHOLDING AND EMPLOYMENT TAXES. At the time of exercise of an
--------------------------------
Award, the expiration of an unexercised Stock Appreciation Right, the lapse of
restrictions on an Award or a "disqualifying disposition" of Stock issued under
an ISO (see Section 6.3(c)), the Participant shall remit to the Company in cash
all applicable federal and state withholding and employment taxes. The
Administrator may, in the exercise of the Administrator's sole discretion,
permit a Participant to pay some or all of such taxes by means of a recourse
promissory note on such terms as the Administrator deems appropriate. If and to
the extent authorized and approved by the Administrator in its sole discretion,
a Participant may elect, by a means prescribed by the Administrator, to have
shares which are acquired upon exercise of an Award withheld by the Company or
tender other shares of Stock owned by the Participant to the Company at the time
the amount of such taxes is determined, in order to pay the amount of such tax
obligations.
6.2 TERMS AND CONDITIONS TO WHICH ONLY NSOS ARE SUBJECT. Options
---------------------------------------------------
granted under this Plan that are designated NSOs shall be subject to the
following additional terms and conditions:
(a) EXERCISE PRICE. The exercise price of an NSO shall not be less
--------------
than 100 percent of the fair market value of the Stock subject to the Option on
the Grant Date or, if required by applicable state securities laws in the case
of an NSO granted to any Ten Percent Stockholder, not less than 110 percent of
such fair market value.
(b) OPTION TERM. Unless an earlier expiration date is specified by
-----------
the Administrator at the Grant Date, each NSO shall expire ten years after the
Grant Date or, if required by applicable state securities laws in the case of an
NSO granted to a Ten Percent Stockholder, five years after the Grant Date.
-11-
<PAGE>
6.3 TERMS AND CONDITIONS TO WHICH ONLY ISOS ARE SUBJECT. Options
---------------------------------------------------
granted under this Plan that are designated ISOs shall be subject to the
following additional terms and conditions:
(a) EXERCISE PRICE. The exercise price of an ISO shall be determined
--------------
in accordance with the applicable provisions of the Code and in no event shall
be less than 100 percent of the fair market value of the stock covered by the
ISO at the Grant Date, provided that the exercise price of an ISO granted to a
Ten Percent Stockholder shall not be less than 110 percent of such fair market
value.
(b) OPTION TERM. Unless an earlier expiration date is specified by
-----------
the Administrator at the Grant Date, each ISO shall expire ten years after the
Grant Date, provided that an ISO granted to a Ten Percent Stockholder shall
expire no later than five years after the Grant Date.
(c) DISQUALIFYING DISPOSITIONS. If Stock acquired by exercise of an
--------------------------
ISO is disposed of within two years after the Grant Date or within one year
after the transfer of the Stock to the optionee, the holder of the Stock
immediately before the disposition shall promptly notify the Company in writing
of the date and terms of the disposition, shall provide such other information
regarding the disposition as the Company may reasonably require and shall pay
the Company any withholding and employment taxes which the Company in its sole
discretion deems applicable to the disposition.
6.4 SURRENDER OF OPTIONS. The Administrator, acting in its sole
--------------------
discretion, may include a provision in an Option Agreement allowing the optionee
to surrender the Option covered by the agreement, in whole or in part in lieu of
exercise in whole or in part, on any date that the fair market value of the
Stock subject to the Option exceeds the exercise price and the Option is
exercisable (to the extent being surrendered). The surrender shall be effected
by the delivery of the Option Agreement, together with a signed statement that
specifies the number of shares as to which the optionee is surrendering the
Option, together with a request for such type of payment. Upon such surrender,
the optionee shall receive Stock equal to (or equal in fair market value to) the
excess of the fair market value of the shares covered by the portion of the
Option being surrendered on the date of surrender over the exercise price for
such shares.
7. RESTRICTED STOCK
----------------
Shares of Restricted Stock shall be subject to the following
additional terms and conditions:
-12-
<PAGE>
7.1 GRANT. The Administrator may grant one or more Awards of
-----
Restricted Stock to any Participant. Each Restricted Stock Award shall specify
the number of shares of Stock to be issued to the Participant, the date of
issuance, the consideration for such shares (but not less than the minimum
consideration required under applicable state law) and the restrictions imposed
on the shares including the conditions of release or lapse of such restrictions.
Pending the lapse of restrictions, stock certificates evidencing shares of
Restricted Stock shall bear a legend referring to the restrictions and shall be
held by the Company. Upon issuance of Restricted Stock Awards, the Participant
may be required to furnish such additional documentation or other assurances as
the Administrator may require to enforce the restrictions.
7.2 RESTRICTIONS. Except as specifically provided elsewhere in this
------------
Plan or the Restricted Stock Award, Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise disposed of or encumbered, either voluntarily
or involuntarily, until the restrictions have lapsed and the rights to the
shares have vested. With respect to any particular Award, the Administrator
may, in its sole discretion, provide in the Award Agreement for the lapse of
such restrictions in installments and may accelerate or waive such restrictions,
in whole or in part, based on service, performance or such other factors or
criteria as the Administrator may determine.
7.3 DIVIDENDS. Unless otherwise determined by the Administrator, any
---------
cash dividends payable by the Company with respect to shares of Restricted Stock
shall be paid to the recipient of the Restricted Stock Award on the normal
dividend payment dates, and dividends payable in Stock shall be paid in the form
of Restricted Stock having the same terms as the Restricted Stock upon which
such dividend is paid. The Award Agreement shall specify whether and, if so,
the extent to which the Participant shall be obligated to return to the Company
any dividends paid with respect to any shares of Restricted Stock that are
subsequently forfeited.
7.4 FORFEITURE OF RESTRICTED SHARES. Except to the extent otherwise
-------------------------------
provided in the Award Agreement, when a Participant's Termination occurs, the
Participant shall forfeit all shares still subject to restriction.
8. STOCK APPRECIATION RIGHTS
-------------------------
The Administrator may grant Stock Appreciation Rights to any
Participant. A Stock Appreciation Right shall entitle its holder to receive
from the Company, at the time of exercise of the right, an amount in cash equal
to (or, at the Administrator's discretion, shares of Stock equal in fair market
value to) the
-13-
<PAGE>
excess of the fair market value (at the date of exercise) of a share of Stock
over a specified price fixed by the Administrator in the governing Award
Agreement multiplied by the number of shares as to which the holder is
exercising the Stock Appreciation Right. The specified price fixed by the
Administrator shall not be less than the fair market value of the Stock at the
date of grant of the Stock Appreciation Right. Stock Appreciation Rights may be
granted in tandem with any contemporaneously granted Option or independently of
any Option. The specified price of a tandem Stock Appreciation Right shall be
the exercise price of the related Option. Any Stock Appreciation Rights granted
in connection with an ISO shall contain such terms as may be required to comply
with Section 422 of the Code.
9. SECURITIES LAWS
---------------
Nothing in this Plan or in any Award or Award Agreement shall require
the Company to issue any shares with respect to any Award if, in the opinion of
the Company or its counsel, that issuance could constitute a violation of the
Securities Act, any other law or the requirements of any applicable securities
exchange or securities association. As a condition to the grant or exercise of
any Award, the Company may require the Participant (or, in the event of the
Participant's death, the Participant's legal representatives, heirs, legatees or
distributees) to provide written representations concerning the Participant's
(or such other person's) intentions with regard to the retention or disposition
of the Stock covered by the Award and written covenants as to the manner of
disposal of such Stock as may be necessary or useful to ensure that the grant,
exercise or disposition will not violate the Securities Act, any other law or
any requirement of any applicable securities exchange or securities association.
The Company shall not be required to register any Stock under the Securities
Act, register or qualify any Stock or Awards under any state or other securities
laws, or cause any Stock or Awards to meet the requirements of any securities
exchange or securities association.
10. EMPLOYMENT OR OTHER RELATIONSHIP
--------------------------------
Nothing in this Plan or any Award shall in any way interfere with or
limit the right of the Company or of any of its Affiliates to terminate any
Participant's employment or status as a consultant or director at any time, nor
confer upon any Participant any right to continue in the employ of, or as a
director or consultant of, the Company or any of its Affiliates.
11. LIABILITY AND INDEMNIFICATION OF ADMINISTRATOR
----------------------------------------------
No member of the group constituting the Administrator shall be liable
for any act or omission on such person's part,
-14-
<PAGE>
including but not limited to the exercise of any power or discretion given to
such member under this Plan, except for those acts or omissions resulting from
such member's willful misconduct. The Company shall indemnify each present and
future member of the group constituting the Administrator against, and each such
member shall be entitled without further act on his or her part to indemnity
from the Company for, all expenses (including the amount of judgments and the
amount of approved settlements made with a view to the curtailment of costs of
litigation) reasonably incurred by such person in connection with or arising out
of any action, suit or proceeding to the fullest extent permitted by law and the
Company's Certificate of Incorporation and Bylaws.
12. CERTAIN DIRECTORS AND OFFICERS
------------------------------
With respect to any Award granted to any person who is subject to
Section 16 of the Exchange Act, unless the Administrator determines that the
Award should not comply with the requirements of Rule 16b-3, the Award shall be
deemed to include such additional provisions as Rule 16b-3 then requires.
Unless the Administrator determines that an Award to a Participant is not
intended to qualify for the exemption for performance-based compensation under
Section 162(m) or unless (and then only to the extent) the requirements of
Section 162(m) change: (a) the period over which the performance objectives of
the Award must be satisfied shall not be shorter than six months, (b) the
performance objectives applicable to the Award shall be based on one or more of
the Stockholder Approved Standards and (c) the Award shall be subject to any
additional requirements of Section 162(m).
13. SECURITIES LAW LEGENDS
----------------------
If the Company or its counsel deems it necessary or advisable,
certificates for shares of Stock issued under Awards may bear the following
legend and also statements of other applicable restrictions endorsed thereon:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THE
SHARES MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, TRANSFERRED OR OTHERWISE
DISPOSED OF UNTIL THE HOLDER HEREOF PROVIDES EVIDENCE SATISFACTORY TO THE
ISSUER (WHICH, IN THE SOLE DISCRETION OF THE ISSUER, MAY INCLUDE AN OPINION
OF COUNSEL SATISFACTORY TO THE ISSUER) THAT SUCH OFFER, SALE, PLEDGE,
TRANSFER OR OTHER DISPOSITION WILL NOT VIOLATE ANY APPLICABLE FEDERAL OR
STATE SECURITIES LAWS.
-15-
<PAGE>
14. SEVERABILITY
------------
If any provision of this Plan is held to be illegal or invalid for any
reason, that illegality or invalidity shall not affect the remaining provisions
of this Plan, but such provision shall be fully severable and the Plan shall be
construed and enforced as if the illegal or invalid provision had never been
included in this Plan. If any provision of this Plan or any Award Agreement
conflicts with the requirements of Rule 16b-3 (as that provision is applied to
eligible persons who are subject to Section 16 of the Exchange Act), Section 422
of the Code (with respect to ISOs) or Section 162(m) (with respect to the
exception for performance-based compensation), that conflicting provision shall
be deemed inoperative to the extent it conflicts with those requirements. With
respect to ISOs, if this Plan does not contain any provision required to be
included in a plan under Section 422 of the Code, that provision shall be deemed
to be incorporated into this Plan with the same force and effect as if it had
been expressly set out in this Plan. However, to the extent any Option that is
intended to qualify as an ISO cannot so qualify, the Option shall be deemed to
be an NSO for all purposes of this Plan.
15. AMENDMENT, SUSPENSION AND TERMINATION OF PLAN
---------------------------------------------
The Board may at any time amend, suspend or terminate this Plan
without stockholder approval, except as required by applicable law. However, no
amendment, suspension or termination shall be made which would impair the rights
of any Participant under any Award previously granted, without the Participant's
consent, except to conform this Plan and Awards granted to the requirements of
federal or other tax laws including Section 162(m) and ERISA, or to the
requirements of Rule 16b-3. The Board may choose to require that the Company's
stockholders approve any amendment to this Plan in order to satisfy the
requirements of Section 422 of the Code, Rule 16b-3, Section 162(m) or for any
other reason.
16. EFFECTIVE DATE AND PROCEDURAL HISTORY
-------------------------------------
This Plan was approved by the Company's Board on October 28, 1996.
It was approved by the holders of the Company's voting stock on October 28, 1996
(the "Effective Date").
-16-
<PAGE>
EXHIBIT A
---------
WILSHIRE FINANCIAL SERVICES GROUP INC.
DIRECTOR STOCK OPTION AGREEMENT
-------------------------------
I. NOTICE OF GRANT
---------------
Name: ______________________________
Address: ______________________________
______________________________
Subject to the terms and conditions of the Incentive Stock Plan (the
"Plan") of Wilshire Financial Services Group Inc. (the "Company") and this
Agreement, the Company has granted you (the "Optionee") an option to purchase
shares of the Company's Common Stock as follows:
Grant Number ______
Grant Date _______________, 199_
Total Number of Shares
Subject to this Option _______________
Exercise Price per Share $_________
Total Exercise Price $_________
Type of Option Nonstatutory (NSO)
Expiration Date (if not
terminated earlier) _______________, 200_
-17-
<PAGE>
II. AGREEMENT
---------
1. GRANT OF OPTION. The Company has granted Optionee a stock option (the
---------------
"Option") to purchase all or any portion of the number of shares of the
Company's Common Stock set forth in the Notice of Grant on the first page of
this Agreement (the "Option Shares") under Section 5.3 of the Plan. The Option
is subject to the terms and conditions set forth in this Agreement and in the
Plan. The terms and conditions of the Plan are incorporated into this Agreement
by reference. The Notice of Grant constitutes part of this Agreement.
2. EXERCISABILITY. No portion of the Option will be exercisable during
--------------
the first six months after the grant date. The Option shall become fully
exercisable on the first day after that six-month period.
3. MANNER OF EXERCISE. In order to exercise the Option or any portion of
------------------
the Option, Optionee must deliver a written notice of exercise to the Company
accompanied by payment of the exercise price in cash or by check.
4. EARLY TERMINATION OF OPTION. The expiration date of the Option is set
---------------------------
forth in the Notice of Grant. However, the Option
may terminate earlier, as explained in Sections 5.3 and 6.1(b) of the Plan.
5. ADJUSTMENTS. The Company shall adjust the number and kind of shares
-----------
subject to the Option and the exercise price of the Option under the
circumstances specified in, and in accordance with, the Plan.
6. NONASSIGNABILITY OF OPTION. The Option is not assignable or
--------------------------
transferable by the Optionee except to the limited extent permitted by Section
6.1(f) of the Plan.
7. RESTRICTIONS ON ISSUANCE OF OPTION SHARES
-----------------------------------------
7.1 LEGALITY OF ISSUANCE. The Company shall not be obligated to sell
--------------------
any shares under the Option if, in the opinion of the Company or its counsel,
the sale might constitute a violation by the Company of any law (including,
without limitation, the Securities Act of 1933, as amended [the "Act"]) or any
requirement of any applicable securities exchange or securities association.
7.2 REGISTRATION OR QUALIFICATION OF SECURITIES. The Company may,
-------------------------------------------
but shall not be required to, register or qualify
-18-
<PAGE>
the grant of the Option or the sale of Option Shares under the Act, any other
law or any requirement of any applicable securities exchange or securities
association.
7.3 RESTRICTIONS ON TRANSFER. The Company may impose restrictions
------------------------
upon the sale, pledge or other transfer of Option Shares if, in the judgment of
the Company or its counsel, such restrictions are necessary or desirable to
comply with the provisions of the Act or any other law or any requirement of any
applicable securities exchange or securities association. Stock certificates
evidencing Option Shares will bear any restrictive legends which the Company or
its counsel deems necessary or advisable in order to comply with any such law or
requirement.
7.4 REPRESENTATIONS AND WARRANTIES. If the Company or its counsel
------------------------------
consider it necessary or advisable, the issuance of Option Shares may be
conditioned upon Optionee's making certain representations and warranties to the
Company.
8. MISCELLANEOUS.
-------------
8.1 ASSIGNMENT AND BINDING EFFECT. Subject to Section 6 of this
-----------------------------
Agreement, this Agreement shall be binding upon and inure to the benefit of the
executors, administrators, heirs, legal representatives and successors of
Optionee.
8.2 GOVERNING LAW. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Delaware.
8.3 NOTICES. All notices and other communications under this
-------
Agreement shall be in writing. Unless and until Optionee is notified in writing
to the contrary, all notices, communications and documents directed to the
Company and related to this Agreement or the Option shall be delivered or
mailed, first class postage prepaid, to the following address:
Wilshire Financial Services Group Inc.
1776 S.W. Madison Street
Portland, Oregon 97205
Unless and until the Company is notified in writing to the contrary, all
notices, communications and documents intended for Optionee and related to this
Agreement or the Option shall be delivered or mailed, first class postage
prepaid, to Optionee's last known address as shown on the Company's books. All
mailings and deliveries related to this Agreement or the Option shall be deemed
delivered upon delivery (if personally delivered) or three days after deposit in
the U.S. mails (if mailed first class
-19-
<PAGE>
postage prepaid), in each such case directed or addressed in accordance with
this Section 8.3.
8.4 TAX ADVICE. Optionee understands that the Option is a non-
----------
statutory option rather than an incentive stock option. Optionee acknowledges
that neither the Company nor its representatives have made any warranties or
representations to Optionee with respect to the income tax consequences of the
transactions contemplated by this Agreement or the Option. Optionee is not
relying on the Company or its representatives for an assessment of any such tax
consequences.
8.5 COSTS OF ENFORCEMENT. If either party to this Agreement seeks to
--------------------
enforce this Agreement by legal proceedings or otherwise, the non-prevailing
party shall pay the prevailing party's costs and expenses including, without
limitation, reasonable attorneys' fees and costs.
8.6 SEVERABILITY. If any provision of this Agreement is held
------------
invalid, illegal or unenforceable, the provision shall be adjusted rather than
voided to carry out its intent to the maximum extent possible. In all events,
the remainder of this Agreement will remain in full force and effect.
8.7 COUNTERPARTS. This Agreement may be signed in counterparts, each
------------
of which shall be deemed an original but all
of which together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the date
the Option was granted.
WILSHIRE FINANCIAL SERVICES GROUP INC.
By ______________________________
Its _____________________________
OPTIONEE
_________________________________
-20-
<PAGE>
UNITED STATES OF AMERICA
Before The
OFFICE OF THRIFT SUPERVISION
- ------------------------------------
In the Matter of ) OTS Order No.
) -----------
FIRST BANK OF BEVERLY HILLS, FSB ) Dated:
San Diego, California. ) -------------------
- ------------------------------------
ORDER TO CEASE AND DESIST
WHEREAS, First Bank of Beverly Hills, FSB, San Diego, California ("First
Bank" or the "Association"), OTS Docket No. 8014, by and through its Board of
Directors ("Board"), has executed a Stipulation and Consent to the Issuance of
an Order to Cease and Desist ("Stipulation"); and
WHEREAS, First Bank, in the Stipulation, has consented and agreed to the
issuance of this Order to Cease and Desist ("Order") pursuant to Section 8(b) of
the Federal Deposit Insurance Act ("FDIA"), 12 U.S.C. (S) 1818(b)/1/; and
WHEREAS, the Director of the Office of Thrift Supervision ("OTS") has
delegated to the Regional Directors of the OTS the authority to issue an Order
to Cease and Desist on behalf of the OTS where a savings association has
consented to the issuance of the Order.
- -----------------------
1 All references to the United States Code ("U.S.C.") are as amended.
<PAGE>
A. CEASE AND DESIST PROVISIONS
---------------------------
NOW, THEREFORE, IT IS ORDERED THAT the Association and its directors,
officers, employees, and agents shall cease and desist from any action (alone or
with another or others) for or toward causing, bringing about, participating in,
counseling or the aiding and abetting of any unsafe and unsound practice or any
violation of:
(1) Section 11 of the Home Owner's Loan Act ("HOLA"), 12 U.S.C. (S) 1468,
Sections 563.41 and 563.42 of the OTS Regulations, 12 C.F.R. (S)(S) 563.41,
563.42 and Sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. (S)(S)
371c and 371c-1 (regarding banking affiliates/restrictions on transactions with
affiliates);
(2) Section 563.170(c) of the OTS Regulations, 12 C.F.R. (S) 563.170(c)
(regarding books and records);
(3) Section 576.6 of the OTS Regulations, 12 C.F.R. (S) 567.6 (regarding
risk-based capital credit risk-weight categories);
(4) Sections 3500.17(c)(3) and 3500.17(i) of the Department of Housing and
Urban Development Regulations, 24 C.F.R. (S)(S) 3500.17(c)(3) and 3500.17(i)
(regarding escrow analyses and account statements); and
(5) The Association's internal models, schedules, plans, policies, and
procedures.
IT IS FURTHER ORDERED THAT:
2
<PAGE>
B. CORRECTIVE PROVISIONS
---------------------
1. CAPITAL
-------
a. Capital Required
----------------
The Association shall maintain the capital ratios required to be
deemed a "well-capitalized" institution under 12 C.F.R. (S) 565.4(b)(1)(i)-
(iii), as measured at the end of each calendar quarter commencing December 31,
1996. In the event that the Association's capital ratios decline below the
levels required by this Section as a result of any OTS determination that
adversely affects the Association's financial condition (other than a
determination generally applicable to the thrift industry), the Association
shall have forty-five (45) days from the date of such determination to infuse
sufficient capital to be deemed "well-capitalized" thereafter. The Association
shall provide satisfactory evidence of such infusion to the OTS within five (5)
days after the infusion is complete.
b. Risk-Weight of Assets
---------------------
By December 31, 1996, the Association shall: (i) appropriately risk-
weight its assets and off-balance sheet items, pursuant to 12 C.F.R., (S) 567.6;
and (ii) establish and thereafter maintain internal controls sufficient to
ensure the accuracy and integrity of the Association's reported capital ratios.
2. ASSET QUALITY
-------------
a. Internal Asset Review
---------------------
(i) By October 31, 1996, the Board shall submit to the OTS a revised
Internal Asset Review ("IAR") policy and procedures (the "IAR Policy"). The IAR
Policy shall provide guidance on
3
<PAGE>
identifying and classifying troubled, collateral dependent loans under
Regulatory Bulletin No. 32. To ensure the independence of the IAR function, the
IAR Policy shall require the loan underwriting, servicing, and purchasing
functions to be segregated from the credit review function, except for common
oversight of all functions by members of senior management.
(ii) By December 31, 1996, the Board shall develop, fully implement,
and thereafter maintain, an effective IAR system that provides for adequate
internal controls to ensure that management timely reviews and classifies assets
under the IAR Policy.
b. Policy and Procedure Regarding
------------------------------
Allowance for Loan and
----------------------
Lease Losses
------------
(i) By October 31, 1996, the Board shall submit to the OTS a revised
allowance for loan and lease losses ("ALLL") policy and procedures (the "ALLL
Policy"). The ALLL Policy shall require management to set the ALLL after
considering: (a) the historical losses within each loan portfolio; (b)
classification and delinquency trends; (c) credit risk characteristics (e.g.,
high loan to value ratio, borrowers' poor credit); (d) economic trends; and (e)
regulatory guidance. The ALLL Policy shall provide for adequate internal
controls to ensure that management and the Association comply with it.
(ii) By March 1, 1997, and within sixty (60) days following the end of each
calendar quarter thereafter, the Association shall submit a report detailing its
progress in implementing the ALLL Policy and the results of its reserve analysis
for the preceding calendar quarter.
4
<PAGE>
c. Loan Purchases
--------------
(i) By November 30, 1996, the Board shall submit to the OTS a revised loan
purchase policy and procedures (the "Loan Purchase Policy"). The Loan Purchase
Policy shall: (a) provide specific guidance on due diligence scope and sampling;
(b) assign personnel to be responsible to oversee due diligence activities; (c)
require such personnel to ensure that all due diligence is completed in
accordance with the Loan Purchase Policy; and (d) provide specific guidance
regarding the use and reliance on Broker Price Opinions ("BPOs"). The Board
shall direct the Association to establish and maintain sufficient internal
controls to confirm that loan data for purchased loans meet certain minimum
standards set by the Association. The Board shall also require the Association
to identify loan documentation deficiencies of the sampled loans prior to
purchase.
(ii) By December 31, 1996, the Board shall submit to the OTS revised loan
purchase pricing and profitability models (the "Pricing Models"). The Pricing
Models shall, at a minimum: (a) include reasonable and adequately supported
prepayment assumptions and principal recovery estimates; (b) identify all
material costs associated with the proposed transaction (e.g., cost of funds,
capital, and overhead expenses); and (c) estimate net cashflow, specifying
assumptions employed.
(iii) By March 1, 1997, and within sixty (60) days following the end of
each calendar quarter thereafter, the Association shall compare the results of
its profitability model
5
<PAGE>
to the performance of the Association's purchased loan portfolios, and submit
such written review to the OTS.
3. MANAGEMENT
----------
a. Management Plan
---------------
By October 31, 1996, the Board shall submit to the OTS a plan (the
"Management Plan") to augment the depth and expertise of the Association's
management team. On the last day of each month thereafter and until the Board
certifies to the OTS that the Management Plan is fully implemented, the Board
shall report to the OTS in writing its progress implementing the Management
Plan.
b. Business Plan
-------------
(i) By December 31, 1996, the Board shall submit to the OTS a revised
three-year business plan (the "Business Plan") that reflects the Association's
current operating condition and results and estimates levels of growth
consistent with the limitations in Regulatory Bulletin No. 3a-1. The Business
Plan shall specify strategies with related assumptions and projections to ensure
that the Association continues to be deemed "well-capitalized" under 12 C.F.R.
(S) 565.4(b)(1)(i)-(iii). Management's financial projections shall be submitted
in a form generally consistent with the Thrift Financial Report ("TFR"). The
Business Plan shall incorporate the impact of several plausible interest rate
scenarios, conform with all applicable regulatory requirements, and conform with
the requirements set forth in Thrift Bulletin No. 36a. It shall also specify
the
6
<PAGE>
Association's strategies for resolving its nonperforming assets in a timely and
orderly fashion.
(ii) Within thirty (30) days of each calendar quarter-end, beginning April
30, 1997, the Board shall report in writing to the OTS any variances from the
Business Plan that occurred during the preceding quarter, showing actual and
planned results, and explaining any variances greater than 5 percent. The Board
shall submit any updates on modifications to the Plan, as they may periodically
occur in accordance with paragraph (c)(1)(b)(ii) of this Order.
c. Internal Audit
--------------
(i) By December 31, 1996, the Board shall submit to the OTS: (a) a
revised audit policy and procedures (the "Internal Audit Policy") that ensures
high standards of control and integrity of records. The Internal Audit Policy
shall identify the composition of the Audit Committee, provide for the
independence of the Audit Committee and audit personnel, and require the Audit
Committee to actively oversee and monitor the effectiveness of the audit
function; and (b) an audit schedule (the "Audit Schedule") that ensures timely
and comprehensive audits of the Association's higher risk areas. The Board
shall ensure that the Association implements the Internal Audit Policy and Audit
Schedule.
(ii) Within thirty (30) days of each calendar quarter-end, beginning April
30, 1997, the Board shall report in writing to the OTS its progress implementing
the Internal Audit Policy and
7
<PAGE>
the Audit Schedule, any variances from the approved audit schedule, and
explanations why variances occurred.
4. EARNINGS
--------
By October 31, 1996, the Board shall submit to the OTS an amended
accounting policy for loan discounts. The policy shall require management to:
(a) establish and adhere to appropriate guidance and procedures for the
amortization of discounts on purchased loans; (b) establish appropriate reserves
on purchased loans prior to the recognition of the yield adjustment into income;
and (c) demonstrate, with comprehensive supporting analysis, the accuracy of the
yield adjustment component of the discount.
5. ASSET/LIABILITY MANAGEMENT
--------------------------
a. Hedging
-------
By December 31, 1996, the Board shall submit to the OTS a hedging policy
that fully complies with the accounting requirements of Statement of Financial
Accounting Standards ("SFAS") No. 80. The hedging policy shall establish
written guidelines to ensure that the Association documents the expected
correlation between the hedging instrument and the hedged assets.
b. Interest Rate Risk Monitoring
-----------------------------
By October 31, 1996, the Board shall submit to the OTS a plan to develop or
obtain the internal expertise and resources necessary to measure, monitor, and
model the institution's net interest income ("NII") and net portfolio value
("NPV") (the "IRR Plan"). Management shall utilize its expertise and resources
to determine the expected impact of proposed transactions on the
8
<PAGE>
Association's capital levels, NII, and NPV prior to entering into any such
transaction. On the last day of each month, beginning November 30, 1996, and
continuing monthly thereafter until the Board certifies to the OTS that the IRR
Plan is fully implemented, the Board shall report to the OTS in writing its
progress implementing the IRR Plan during that month.
c. Investments
-----------
By December 31, 1996, management shall designate each of the Association's
assets as either available for sale, held to maturity, or trading, consistent
with SFAS No. 65, SFAS No. 115, and the Association's internal policies. By
December 31, 1996, the Board shall submit a copy of the designations to the OTS.
Thereafter, management shall report monthly to the Board all transfers from one
category to another with an adequate explanation for each transfer. Management
shall also report and document the rationale for any asset sales from the held
to maturity portfolio.
6. TRANSACTIONS WITH AFFILIATES
----------------------------
The Association shall comply with all statutory and regulatory requirements
pertaining to transactions with affiliates ("TWA"), as set forth in 12 C.F.R.
(S)(S) 563.41 and 563.42, 23A and 23B of the Federal Reserve Act, 12 U.S.C.
(S)(S) 371c and 371c-1, and Section 11(a) of the HOLA, 12 U.S.C. (S) 1468(a).
Within sixty (60) days from the end of each fiscal year, beginning with fiscal
year 1996, the Association shall review and analyze the terms of all loan
servicing agreements with affiliates to confirm that such agreements are no less
favorable
9
<PAGE>
than those available from nonaffiliated parties, and summarize its findings in
writing. With respect to any existing activities and agreements, the
Association shall confirm that its files contain current and adequate
documentation and analysis to support compliance with all laws and regulations
governing transactions with affiliates by no later than December 31, 1996. The
Association shall also confirm that it has formal written agreements with
respect to all outstanding material transactions with affiliates by such date.
7. COMPLIANCE
----------
a. Servicing the Adjustable Rate Mortgage Portfolio
------------------------------------------------
(i) By October 31, 1996, the Board shall submit to the OTS a plan, with
timetables, detailing how Wilshire Credit Corporation ("WCC") will complete a
comprehensive audit of all the Association's adjustable-rate mortgages ("ARMs")
serviced by WCC (the "ARM Audit").
(ii) The Association shall take such action as may be necessary to ensure
that WCC fully implements the ARM Audit. Specifically, the Association shall
ensure that WCC:
(a) evaluates the accuracy and integrity of the loan servicing system, loan
data, and interest rate calculations;
(b) develops appropriate corrective actions to ensure that WCC services the
ARMs according to the material interest rate and payment change terms of their
respective agreements;
(c) develops post-purchase quality controls to ensure compliance with all
applicable regulatory requirements; and
10
<PAGE>
(d) verifies the principal balance due with respect to each ARM loan it
services based upon the express written terms of the loan agreement and all
available payment history information.
(A) In those instances where WCC and the Association have, or obtain,
a complete loan history and if, based upon the results of the ARM Audit, the
Association determines that the borrower has been overcharged, the Association
shall (a) reimburse the borrower, or (b) correct its records to reflect the
correct principal balance due, whichever the borrower requests. If the borrower
fails to inform the Association how the error should be corrected, after
reasonable attempts are made to solicit the borrower's preference, the
Association's records shall be corrected to reflect the correct balance due, and
the borrower shall be advised of such correction.
(B) In those instances where WCC and the Association do not have, and
cannot reasonably obtain, a complete loan history with respect to any loan,
despite their best efforts to obtain such information, WCC shall reamortize each
such purchased loan, based upon the stated principal balance of the loan as of
the date such loan was acquired by the Association and any subsequent payments
made ("Reamortization"). If the Reamortization indicates that the borrower has
been overcharged, such error shall be corrected by following the procedure
outlined in the preceding paragraph.
(iii) With respect to any loan that the Association did not originate and
that is not supported by a complete loan history,
11
<PAGE>
the Association shall evaluate its potential liability and establish any
necessary reserves.
(iv) By March 31, 1997, the Association shall report to the OTS in writing
the results of the ARM Audit. Thereafter, the Association shall take the
corrective actions specified and adhere to the controls developed in the ARM
Audit.
b. Real Estate Settlement Procedures
---------------------------------
The Association shall take such action as may be necessary to ensure that
WCC has provided to the Association's borrowers the most recent annual escrow
analyses and account statements required under 24 C.F.R. (S)(S) 3500.17(c)(3)
and 3500.17(i) ("Statements") by October 31, 1996. Thereafter, the Association
shall ensure that all future escrow analyses and statements are delivered on a
timely basis.
8. INFORMATION SYSTEMS
-------------------
(a) By October 31, 1996, the Association shall submit to the OTS a plan,
including timetables, detailing how the Association will ensure that WCC takes
the corrective action specified in the Information Systems Report of Examination
dated March 4, 1996 (the "IS Plan"). Specifically, the IS Plan shall provide
for: (i) strengthening information security controls; (ii) securing systems
documentation for the Loan Servicing System; (iii) enhancing the Information
Systems disaster recovery plan; and (iv) enhancing audit coverage of WCC's
information systems activity.
(b) The Association shall require WCC to report in writing to the
Association WCC's progress implementing the IS Plan (the
12
<PAGE>
"Progress Report") by October 31, 1996, and by the last day of each month
thereafter, until the IS Plan is fully implemented. Within ten (10) days of
receipt, the Association shall forward the Progress Report to the OTS with the
Association's evaluation of any variances from the IS Plan and the Association's
proposed corrections for those variances.
9. TERMINATION OF SERVICING AGREEMENT
----------------------------------
The Association shall terminate its affected servicing agreements) with WCC
if WCC fails to:
(a) take the corrective actions that WCC is required to undertake pursuant
to paragraph 7(a)(ii);
(b) take the actions required by paragraph 7(b) of this order, by November
1, 1996; or
(c) correct the items identified in the Information Systems Report of
Examination dated March 4, 1996, to the satisfaction of the OTS by June 30,
1997.
Notwithstanding (a)-(c), above, WCC shall have at least sixty (60) days to
correct any item that has not, in the opinion of the OTS, been satisfactorily
corrected, commencing from the date of receipt of OTS's written notice of such
failure to correct.
10. ADEQUATE BOOKS, RECORDS AND RECORDKEEPING
-----------------------------------------
By October 31, 1996, the Board shall submit to the OTS a plan to enhance
the adequacy and integrity of the Association's books, records, and
recordkeeping (the "Records Plan"), such that, in accordance with 12 C.F.R.
(S) 563.170(c), the Association shall maintain adequate books, records, and
recordkeeping to
13
<PAGE>
enable management, outside auditors, and bank examiners adequately and timely to
review the Association's operations.
11. RESTRICTIONS ON ASSET GROWTH
----------------------------
As measured at the end of each calendar quarter, the Association shall not
increase its total assets in excess of $145,000,000, unless any such increase is
an amount representing the total net interest credited on deposit liabilities
earned during that quarter plus any increase permitted under this clause in a
prior quarter.
12. BANKCARD MERCHANT OPERATIONS
----------------------------
(a) By October 31, 1996, the Board shall submit to the OTS a plan to
correct deficiencies in the Association's BankCard merchant operations (the
"BankCard Plan"). The BankCard Plan shall: (i) establish a method by which the
Association will estimate the appropriate level of reserves for its BankCard
operations, which method shall require the Association's management to consider
historical losses, economic conditions, and any other factors that may affect
the credit risk of the Association's BankCard operations; (ii) establish
adequate internal controls to ensure that management and the Association comply
with the BankCard Plan; (iii) create an overdraft policy that requires timely
recognition of overdraft losses and identifies those Association employees with
authority to approve BankCard merchant overdrafts; and (iv) ensure that the
Association complies with all applicable statutes and regulations, in particular
Regulation Q, 12 C.F.R. Part 217.
14
<PAGE>
(b) By October 31, 1996, the Association shall correct all existing
Regulation Q violations.
C. MISCELLANEOUS
-------------
1. PLANS
-----
(a) Unless otherwise expressly specified in this Order, the Board and the
Association shall submit, in writing, to the OTS for review and non-objection
all models, schedules, audits, plans, policies, and procedures (each
individually referred to as a "Plan") that they must prepare under this Order by
the date this order requires the Board or the Association to complete each Plan.
If the OTS objects to any aspect of any Plan, the OTS shall notify the
Association of the objection. Within thirty (30) days of receipt of the OTS's
notification, the Association shall submit to the OTS a revision of the Plan.
Once the OTS indicates its written approval of or non-objection to any Plan, the
Association shall immediately implement and adhere to that Plan. The Board
shall expressly instruct management to implement each Plan immediately after OTS
indicates its approval or non-objection.
(b) Once the OTS approves a Plan, the Association shall: adhere to the
Plan; and (ii) not modify or alter it without the prior written approval or non-
objection of the OTS. Management shall adopt adequate internal controls to
ensure that the Association adheres to all approved Plans.
2. DIRECTOR RESPONSIBILITY
-----------------------
Notwithstanding the requirements of this Order that the Board submit
various matters to the OTS for the purpose of
15
<PAGE>
receiving approval, non-objection, or notice of acceptability, such regulatory
oversight does not derogate or supplant each individual director's continuing
fiduciary duty. The Board shall have the ultimate responsibility for overseeing
the safe and sound operation of the Association at all times, including
compliance with the determinations of the OTS as required by this Order.
3. COMPLIANCE WITH ORDER
---------------------
(a) The Board and officers of the Association shall take immediate action
to cause the Association to comply with the terms of this Order and shall take
all actions necessary or appropriate thereafter to cause the Association to
continue to carry out the provisions of this Order.
(b) The Board, on a monthly basis, shall adopt a board resolution (the
"Compliance Resolution") formally resolving that, following a diligent inquiry
of relevant information (including reports of management), to the best of its
knowledge and belief, during the immediately preceding calendar month, the
Association complied with each provision of this Order currently in effect,
except as otherwise stated. The Compliance Resolution shall: (i) specify in
detail how, if at all, full compliance was found not to exist; and (ii) identify
all notices of exemption issued by the Regional Director that were outstanding
as of the date of its adoption.
(c) The minutes of the meeting of the Board shall set forth the following
information with respect to the adoption of each Compliance Resolution: (i) the
identity of each director voting
16
<PAGE>
in favor of its adoption; and (ii) the identity of each director voting in
opposition to its adoption or abstaining from voting thereon, setting forth each
such Director's reasoning for opposing or abstaining.
(d) No later than the 25th Calendar Day of the month following the end of a
month, beginning with the month that this Order is executed and issued by the
OTS, the Association shall provide to the OTS a certified true copy of the
Compliance Resolution adopted at the Board meeting. The Board, by virtue of the
Association's submission of a certified true copy of each such Compliance
Resolution to the OTS, shall be deemed to have certified to the accuracy of the
statements set forth in each Compliance Resolution, except as provided below.
In the event that one or more Directors do not agree with the representations
set forth in a Compliance Resolution, such disagreement shall be noted in the
minutes of the Association.
(e) The Board shall promptly respond to any request from the OTS for
documents that the OTS reasonably requests to demonstrate compliance with this
Order.
4. DEFINITIONS
-----------
All technical words or terms used in this order and the Stipulation for
which meanings are not specified or otherwise provided by the provisions of this
Order shall, insofar as applicable, have meanings as defined in Chapter V of
Title 12 of the Code of Federal Regulations, HOLA, FDIA, or OTS Publications.
---------------------------
Any such technical words or terms used in this Order and the Stipulation and
undefined in said Code of Federal Regulations,
---------------------------
17
<PAGE>
HOLA, FDIA, or OTS Publications shall have meanings that are in accordance with
the best custom and usage in the savings and loan industry.
5. SUCCESSOR, STATUTES, REGULATIONS, GUIDANCE, AMENDMENTS
------------------------------------------------------
Reference in this Order and the Stipulation to provisions of statutes,
regulations, and OTS Publications shall be deemed to include references to all
amendments to such provisions as have been made as of the Effective Date and
references to successor provisions as they become applicable.
6. NOTICES
-------
(a) Except as otherwise provided herein, any request, demand,
authorization, direction, notice, consent, waiver or other document provided or
permitted by the Order to be made upon, given or furnished to, delivered to, or
filed with:
(i) the OTS by the Association, shall be sufficient for every purpose
hereunder if in writing and mailed, first class, postage prepaid or sent via
overnight delivery service or physically delivered, in each case addressed to
the Office of Thrift Supervision, Department of the Treasury, c/o Kenneth P.
Slosser, Assistant Regional Director, 18300 Von Karman Avenue, Suite 800,
Irvine, California, 92612, or telefaxed to (714) 440-3910 and confirmed by first
class mail, postage prepaid, overnight delivery service or physically delivered,
in each case to the above address; and
(ii) the Association by the OTS, shall be sufficient for every purpose
hereunder if in writing and mailed, first class, postage prepaid, or sent via
overnight delivery service or
18
<PAGE>
physically delivered, in each case addressed to the Association at Post Office
Box 1419, Portland, Oregon, 97207-1419, or telefaxed to (503) 952-7479 and
confirmed by first class mail, postage prepaid, overnight delivery service or
physically delivered, in each case to the above address.
(b) Notices hereunder shall be effective upon receipt, if by mail,
overnight delivery service or telefax, and upon delivery, if by physical
delivery. If there is a dispute about the date on which a written notice has
been received by a party to this Order, then, in the event such notice was sent
by the United States mail, there shall be a presumption that the notice was
received two (2) Business Days after the date of the postmark on the envelope in
which the notice was enclosed.
7. DURATION, TERMINATION OR SUSPENSION OF ORDER
--------------------------------------------
(a) This Order shall: (i) become effective upon its execution by the OTS,
through its authorized representative whose signature appears below and (ii)
remain in effect until terminated, modified or suspended in writing by the OTS,
acting through its Director or the Regional Director (including any authorized
designee thereof).
(b) The Regional Director in his or her sole discretion, may, by written
notice, suspend, modify or terminate any or all provisions of this Order.
8. TIME LIMITS
-----------
Time limitations for compliance with the terms of this Order run from the
Effective Date, unless otherwise noted.
19
<PAGE>
9. EFFECT OF HEADINGS
------------------
The Section headings herein are for convenience only and shall not affect
the construction hereof.
10. SEPARABILITY CLAUSE
-------------------
In case any provision in this Order is ruled to be invalid, illegal or
unenforceable by the decision of any Court of competent jurisdiction, the
validity, legality and enforceability of the remaining provisions hereof shall
not in any way be affected or impaired thereby, unless the Regional Director in
his or her sole discretion determines otherwise.
11. NO VIOLATIONS OF LAW, RULE, REGULATION OR POLICY STATEMENT AUTHORIZED;
----------------------------------------------------------------------
OTS NOT RESTRICTED
------------------
Nothing in this order shall be construed as: (a) allowing the Association
to violate any law, rule, regulation, or policy statement to which it is subject
or (b) restricting or estopping the OTS from taking any action(s) that it
believes are appropriate in fulfilling the responsibilities placed upon it by
law.
12. SUCCESSORS IN INTEREST/BENEFIT
------------------------------
The terms and provisions of this Order shall be binding upon, and inure to
the benefit of, the parties hereto and their successors in interest. Nothing in
this Order, express or implied, shall give to any person or entity, other than
the parties hereto, and the Federal Deposit Insurance Corporation and their
successors hereunder, any benefit or any legal or equitable right, remedy or
claim under this Order.
20
<PAGE>
13. PRIOR SUPERVISORY DOCUMENTS
---------------------------
The Supervisory Agreement between the Association and the OTS, dated
June 8, 1995, as amended on March 20, 1996, is hereby terminated. This Order
supercedes all prior supervisory directives.
THE OFFICE OF THRIFT SUPERVISION
By:_____________________________
John F. Robinson
Regional Director
West Region
Date: _________________________
21
<PAGE>
UNITED STATES OF AMERICA
Before The
OFFICE OF THRIFT SUPERVISION
______________________________
)
In the Matter of ) OTS Order No. ___________
)
GIRARD SAVINGS BANK, F.S.B. ) Dated: __________________
San Diego, California. )
______________________________)
ORDER TO CEASE AND DESIST
WHEREAS, Girard Savings Bank, F.S.B., San Diego, California ("Girard" or
the "Association"), OTS Docket No. 7810, by and through its Board of Directors
("Board"), has executed a Stipulation and Consent to the Issuance of an Order to
Cease and Desist ("Stipulation"); and
WHEREAS, Girard, in the Stipulation, has consented and agreed to the
issuance of this Order to Cease and Desist ("Order") pursuant to Section 8(b) of
the Federal Deposit Insurance Act ("FDIA"), 12 U.S.C. (S) 1818(b)/2/; and
WHEREAS, the Director of the Office of Thrift Supervision ("OTS") has
delegated to the Regional Directors of the OTS the authority to issue an Order
to Cease and Desist on behalf of the OTS where a savings association has
consented to the issuance of the Order.
- -------------------
/2/ All references to the United States Code ("U.S.C.") are as amended.
22
<PAGE>
A. CEASE AND DESIST PROVISIONS
---------------------------
NOW, THEREFORE, IT IS ORDERED THAT the Association and its directors,
officers, employees, and agents shall cease and desist from any action (alone or
with another or others) for or toward causing, bringing about, participating in,
counseling or the aiding and abetting of any unsafe and unsound practice or any
violation of:
(1) Section 11 of the Home Owner's Loan Act ("HOLA"), 12 U.S.C. (S) 1468,
Sections 563.41 and 563.42 of the OTS Regulations, 12 C.F.R. (S)(S) 563.41,
563.42 and Sections 23A and 23B of the Federal Reserve Act, 12 U.S.C.
(S)(S) 371c and 371c-1 (regarding banking affiliates/restrictions on
transactions with affiliates);
(2) Section 563.170(c) of the OTS Regulations, 12 C.F.R. (S) 563.170(c)
(regarding books and records);
(3) Section 576.6 of the OTS Regulations, 12 C.F.R. (S) 567.6 (regarding
risk-based capital credit risk-weight categories);
(4) Sections 3500.17(c)(3) and 3500.17(i) of the Department of Housing and
Urban Development Regulations, 24 C.F.R. (S)(S) 3500.17(c)(3) and 3500.17(i)
(regarding escrow analyses and account statements; and
(5) The Association's internal models, schedules, plans, policies, and
procedures.
23
<PAGE>
IT IS FURTHER ORDERED THAT:
B. CORRECTIVE PROVISIONS
---------------------
1. CAPITAL
-------
a. Capital Required
----------------
The Association shall maintain the capital ratios required to be deemed a
"well-capitalized" institution under 12 C.F.R (S) 565.4(b)(1)(i)-(iii), as
measured at the end of each calendar quarter commencing December 31, 1996. In
the event that the Association's capital ratios decline below the levels
required by this Section as a result of any OTS determination that adversely
affects the Association's financial condition (other than a determination
generally applicable to the thrift industry), the Association shall have forty-
five (45) days from the date of such determination to infuse sufficient capital
to be deemed "well-capitalized" thereafter. The Association shall provide
satisfactory evidence of such infusion to the OTS within five (5) days after the
infusion is complete.
b. Risk-Weight of Assets
---------------------
By December 31, 1996, the Association shall: (i) appropriately risk-weight
its assets and off-balance sheet items, pursuant to 12 C.F.R. (S) 567.6; and
(ii) establish and thereafter maintain internal controls sufficient to ensure
the accuracy and integrity of the Association's reported capital ratios.
24
<PAGE>
2. ASSET QUALITY
-------------
a. Internal Asset Review
---------------------
(i) By October 31, 1996, the Board shall submit to the OTS a revised
Internal Asset Review ("IAR") policy and procedures (the "IAR Policy"). The IAR
Policy shall provide guidance on identifying and classifying troubled,
collateral dependent loans under Regulatory Bulletin No. 32. To ensure the
independence of the IAR function, the IAR Policy shall require the loan
underwriting, servicing, and purchasing functions to be segregated from the
credit review function, except for common oversight of all functions by members
of senior management.
(ii) By December 31, 1996, the Board shall develop, fully implement,
and thereafter maintain, an effective IAR system that provides for adequate
internal controls to ensure that management timely reviews and classifies assets
under the IAR Policy.
b. Policy and Procedure Regarding Allowance for
--------------------------------------------
Loan and Lease Losses
---------------------
(i) By October 31, 1996, the Board shall submit to the OTS a revised
allowance for loan and lease losses ("ALLL) policy and procedures (the "ALLL
Policy"). The ALLL Policy shall require management to set the ALLL after
considering: (a) the historical losses within each loan portfolio; (b)
classification and delinquency trends; (c) credit risk characteristics (e.g.,
high loan to value ratio, borrowers' poor credit); (d) economic trends; and (e)
regulatory guidance. The ALLL Policy shall provide for adequate internal
controls to ensure that management and the Association comply with it.
25
<PAGE>
(ii) By March 1, 1997, and within sixty (60) days following the end of
each calendar quarter thereafter, the Association shall submit a report
detailing its progress in implementing the ALLL Policy and the results of its
reserve analysis for the preceding calendar quarter.
c. Loan Purchases
--------------
(i) By November 30, 1996, the Board shall submit to the OTS a revised
loan purchase policy and procedures (the "Loan Purchase Policy"). The Loan
Purchase Policy shall: (a) provide specific guidance on due diligence scope and
sampling; (b) assign personnel to be responsible to oversee due diligence
activities; (c) require such personnel to ensure that all due diligence is
completed in accordance with the Loan Purchase Policy; and (d) provide specific
guidance regarding the use and reliance on Broker Price Opinions ("BPOs"). The
Board shall direct the Association to establish and maintain sufficient internal
controls to confirm that loan data for purchased loans meet certain minimum
standards set by the Association. The Board shall also require the Association
to identify loan documentation deficiencies of the sampled loans prior to
purchase.
(ii) By December 31, 1996, the Board shall submit to the OTS revised
loan purchase pricing and profitability models (the "Pricing Models"). The
Pricing Models shall, at a minimum: (a) include reasonable and adequately
supported prepayment assumptions and principal recovery estimates; (b) identify
all material costs associated with the proposed transaction (e.g.,
26
<PAGE>
cost of funds, capital, and overhead expenses); and (c) estimate net cashflow,
specifying assumptions employed.
(iii) By March 1, 1997, and within sixty (60) days following the end
of each calendar quarter thereafter, the Association shall compare the results
of its profitability model to the performance of the Association's purchased
loan portfolios, and submit such written review to the OTS.
3. MANAGEMENT
----------
a. Management Plan
---------------
By October 31, 1996, the Board shall submit to the OTS a plan (the
"Management Plan") to augment the depth and expertise of the Association's
management team. On the last day of each month thereafter and until the Board
certifies to the OTS that the Management Plan is fully implemented, the Board
shall report to the OTS in writing its progress implementing the Management
Plan.
b. Business Plan
-------------
(i) By December 31, 1996, the Board shall submit to the OTS a revised
three-year business plan (the "Business Plan") that reflects the Association's
current operating condition and results and estimates levels of growth
consistent with the limitations in Regulatory Bulletin No. 3a-1. The Business
Plan shall specify strategies with related assumptions and projections to ensure
that the Association continues to be deemed "well-capitalized" under 12 C.F.R.
(S) 565.4(b)(1)(i)-(iii). Management's financial projections shall be submitted
in a form generally consistent with the Thrift Financial Report ("TFR").
27
<PAGE>
The Business Plan shall incorporate the impact of several plausible interest
rate scenarios, conform with all applicable regulatory requirements, and conform
with the requirements set forth in Thrift Bulletin No. 36a. It shall also
specify the Association's strategies for resolving its nonperforming assets in a
timely and orderly fashion.
(ii) Within thirty (30) days of each calendar quarter-end, beginning
April 30, 1997, the Board shall report in writing to the OTS any variances from
the Business Plan that occurred during the preceding quarter, showing actual and
planned results, and explaining any variances greater than 5 percent. The Board
shall submit any updates or modifications to the Plan, as they may periodically
occur in accordance with paragraph (c)(1)(b)(ii) of this Order.
c. Internal Audit
--------------
(i) By December 31, 1996, the Board shall submit to the OTS: (a) a
revised audit policy and procedures (the "Internal Audit Policy") that ensures
high standards of control and integrity of records. The Internal Audit Policy
shall identify the composition of the Audit Committee, provide for the
independence of the Audit Committee and audit personnel, and require the Audit
Committee to actively oversee and monitor the effectiveness of the audit
function; and (b) an audit schedule (the "Audit Schedule") that ensures timely
and comprehensive audits of the Association's higher risk areas. The Board shall
ensure that the Association implements the Internal Audit Policy and Audit
Schedule.
28
<PAGE>
(ii) Within thirty (30) days of each calendar quarter-end, beginning
April 30, 1997, the Board shall report in writing to the OTS its progress
implementing the Internal Audit Policy and the Audit Schedule, any variances
from the approved audit schedule, and explanations why variances occurred.
4. EARNINGS
--------
By October 31, 1996, the Board shall submit to the OTS an amended
accounting policy for loan discounts. The policy shall require management to:
(a) establish and adhere to appropriate guidance and procedures for the
amortization of discounts on purchased loans; (b) establish appropriate reserves
on purchased loans prior to the recognition of the yield adjustment into income;
and (c) demonstrate, with comprehensive supporting analysis, the accuracy of the
yield adjustment component of the discount.
5. ASSET/LIABILITY MANAGEMENT
--------------------------
a. Hedging
-------
By December 31, 1996, the Board shall submit to the OTS a hedging
policy that fully complies with the accounting requirements of Statement of
Financial Accounting Standards ("SFAS") No. 80. The hedging policy shall
establish written guidelines to ensure that the Association documents the
expected correlation between the hedging instrument and the hedged assets.
b. Interest Rate Risk Monitoring
-----------------------------
By October 31, 1996, the Board shall submit to the OTS a plan to
develop or obtain the internal expertise and resources necessary to measure,
monitor, and model the institution's net
29
<PAGE>
interest income ("NII") and net portfolio value ("NPV") (the "IRR Plan").
Management shall utilize its expertise and resources to determine the expected
impact of proposed transactions on the Association's capital levels, NII, and
NPV prior to entering into any such transaction. On the last day of each month,
beginning November 30, 1996, and continuing monthly thereafter until the Board
certifies to the OTS that the IRR Plan is fully implemented, the Board shall
report to the OTS in writing its progress implementing the IRR Plan during that
month.
c. Investments
-----------
By December 31, 1996, management shall designate each of the
Association's assets as either available for sale, held to maturity, or trading,
consistent with SFAS No. 65, SFAS No. 115, and the Association's internal
policies. By December 31, 1996, the Board shall submit a copy of the
designations to the OTS. Thereafter, management shall report monthly to the
Board all transfers from one category to another with an adequate explanation
for each transfer. Management shall also report and document the rationale for
any asset sales from the held to maturity portfolio.
6. TRANSACTIONS WITH AFFILIATES
----------------------------
The Association shall comply with all statutory and regulatory
requirements pertaining to transactions with affiliates ("TWA"), as set forth in
12 C.F.R. (S)(S) 563.41 and 563.42, 23A and 23B of the Federal Reserve Act,
12 U.S.C. (S)(S) 371c and 371c-1, and Section 11(a) of the HOLA, 12 U.S.C.
(S) 1468(a). Within sixty (60) days from the end of each fiscal year,
30
<PAGE>
beginning with fiscal year 1996, the Association shall review and analyze the
terms of all loan servicing agreements with affiliates to confirm that such
agreements are no less favorable than those available from nonaffiliated
parties, and summarize its findings in writing. With respect to any existing
activities and agreements, the Association shall confirm that its files contain
current and adequate documentation and analysis to support compliance with all
laws and regulations governing transactions with affiliates by no later than
December 31, 1996. The Association shall also confirm that it has formal written
agreements with respect to all outstanding material transactions with affiliates
by such date.
7. COMPLIANCE
----------
a. Servicing the Adjustable-Rate Mortgage Portfolio
------------------------------------------------
(i) By October 31, 1996, the Board shall submit to the OTS a plan,
with timetables, detailing how Wilshire Credit Corporation ("WCC") will complete
a comprehensive audit of all the Association's adjustable-rate mortgages
("ARMs") serviced by WCC (the "ARM Audit").
(ii) The Association shall take such action as may be necessary to
ensure that WCC fully implements the ARM Audit. Specifically, the Association
shall ensure that WCC:
(a) evaluates the accuracy and integrity of the
loan servicing system, loan data, and interest rate calculations;
(b) develops appropriate corrective actions to ensure that WCC
services the ARMs according to the material interest rate and payment change
terms of their respective agreements;
31
<PAGE>
(c) develops post-purchase quality controls to
ensure compliance with all applicable regulatory requirements; and
(d) verifies the principal balance due with respect to each
ARM loan it services based upon the express written terms of the loan agreement
and all available payment history information.
(A) In those instances where WCC and the Association have, or obtain,
a complete loan history and if, based upon the results of the ARM Audit, the
Association determines that the borrower has been overcharged, the Association
shall (a) reimburse the borrower, or (b) correct its records to reflect the
correct principal balance due, whichever the borrower requests. If the borrower
fails to inform the Association how the error should be corrected, after
reasonable attempts are made to solicit the borrower's preference, the
Association's records shall be corrected to reflect the correct balance due, and
the borrower shall be advised of such correction.
(B) In those instances where WCC and the Association do not have, and
cannot reasonably obtain, a complete loan history with respect to any loan, WCC
shall reamortize each such purchased loan, based upon the stated principal
balance of the loan as of the date such loan was acquired by the Association and
any subsequent payments made ("Reamortization"). If the Reamortization
indicates that the borrower has been overcharged, such error shall be corrected
by following the procedure outlined in the preceding paragraph.
32
<PAGE>
(iii) With respect to any loan that the Association did not originate
and that is not supported by a complete loan history, the Association shall
evaluate its potential liability and establish any necessary reserves.
(iv) By March 31, 1997, the Association shall report to the OTS in
writing the results of the ARM Audit. Thereafter, the Association shall take
the corrective actions specified and adhere to the controls developed in the ARM
Audit.
b. Real Estate Settlement Procedures
---------------------------------
The Association shall take such action as may be necessary to
ensure that WCC has provided to the Association's borrowers the most recent
annual escrow analyses and account statements required under 24 C.F.R.
(S)(S) 3500.17(c)(3) and 3500.17(i) ("Statements") by October 31, 1996.
Thereafter, the Association shall ensure that all future escrow analyses and
statements are delivered on a timely basis.
8. INFORMATION SYSTEMS
-------------------
(a) By October 31, 1996, the Association shall submit to the OTS a
plan, including timetables, detailing how the Association will ensure that WCC
takes the corrective action specified in the Information Systems Report of
Examination dated March 4, 1996 (the "IS Plan"). Specifically, the IS Plan
shall provide for: (i) strengthening information security controls; (ii)
securing systems documentation for the Loan Servicing System; (iii) enhancing
the Information Systems disaster recovery plan; and (iv) enhancing audit
coverage of WCC's information systems activity.
33
<PAGE>
(b) The Association shall require WCC to report in writing to the
Association WCC's progress implementing the IS Plan (the "Progress Report") by
October 31, 1996, and by the last day of each month thereafter, until the IS
Plan is fully implemented. Within ten (10) days of receipt, the Association
shall forward the Progress Report to the OTS with the Association's evaluation
of any variances from the IS Plan and the Association's proposed corrections for
those variances.
9. TERMINATION OF SERVICING AGREEMENT
----------------------------------
The Association shall terminate its affected servicing agreement(s) with
WCC if WCC fails to:
(a) take the corrective actions that WCC is required to undertake pursuant
to paragraph 7(a)(ii);
(b) take the actions required by paragraph 7(b) of this Order, by
November 1, 1996; or
(c) correct the items identified in the Information Systems Report of
Examination dated March 4, 1996, to the satisfaction of the OTS by
June 30, 1997.
Notwithstanding (a)-(c), above, WCC shall have at least sixty (60)
days to correct any item that has not, in the opinion of the OTS, been
satisfactorily corrected, commencing from the date of receipt of OTS's written
notice of such failure to correct.
10. ADEQUATE BOOKS, RECORDS AND RECORDKEEPING
-----------------------------------------
In accordance with 12 C.F.R. (S) 563.170(c), the Association shall
maintain adequate books, records, and recordkeeping to
34
<PAGE>
enable management, outside auditors, and bank examiners adequately and timely to
review the Association's operations.
11. RESTRICTIONS ON ASSET GROWTH
----------------------------
As measured at the end of each calendar quarter, the Association shall
not increase its total assets in excess of $408,000,000, unless any such
increase is an amount representing the total net interest credited on deposit
liabilities earned during that quarter plus any increase permitted under this
clause in a prior quarter.
C. MISCELLANEOUS
-------------
1. PLANS
-----
(a) Unless otherwise expressly specified in this Order, the Board and
the Association shall submit, in writing, to the OTS for review and non-
objection all models, schedules, audits, plans, policies, and procedures (each
individually referred to as a "Plan") that they must prepare under this Order by
the date this order requires the Board or the Association to complete each Plan.
If the OTS objects to any aspect of any Plan, the OTS shall notify the
Association of the objection. Within thirty (30) days of receipt of the OTS's
notification, the Association shall submit to the OTS a revision of the Plan.
Once the OTS indicates its written approval of or non-objection to any Plan, the
Association shall immediately implement and adhere to that Plan. The Board shall
expressly instruct management to implement each Plan immediately after OTS
indicates its approval or non-objection.
(b) Once the OTS approves a Plan, the Association shall:
35
<PAGE>
(i) adhere to the Plan; and (ii) not modify or alter it without the prior
written approval or non-objection of the OTS. Management shall adopt adequate
internal controls to ensure that the Association adheres to all approved Plans.
2. DIRECTOR RESPONSIBILITY
-----------------------
Notwithstanding the requirements of this Order that the Board submit
various matters to the OTS for the purpose of receiving approval, non-objection,
or notice of acceptability, such regulatory oversight does not derogate or
supplant each individual director's continuing fiduciary duty. The Board shall
have the ultimate responsibility for overseeing the safe and sound operation of
the Association at all times, including compliance with the determinations of
the OTS as required by this Order.
3. COMPLIANCE WITH ORDER
---------------------
(a) The Board and officers of the Association shall take immediate
action to cause the Association to comply with the terms of this order and shall
take all actions necessary or appropriate thereafter to cause the Association to
continue to carry out the provisions of this Order.
(b) The Board, on a monthly basis, shall adopt a board resolution (the
"Compliance Resolution") formally resolving that, following a diligent inquiry
of relevant information (including reports of management), to the best of its
knowledge and belief, during the immediately preceding calendar month, the
Association complied with each provision of this Order currently in effect,
except as otherwise stated. The Compliance Resolution shall:
36
<PAGE>
(i) specify in detail how, if at all, full compliance was found not to exist;
and (ii) identify all notices of exemption issued by the Regional Director that
were outstanding as of the date of its adoption.
(c) The minutes of the meeting of the Board shall set forth the
following information with respect to the adoption of each Compliance
Resolution: (i) the identity of each director voting in favor of its adoption;
and (ii) the identity of each director voting in opposition to its adoption or
abstaining from voting thereon, setting forth each such Director's reasoning for
opposing or abstaining.
(d) No later than the 25th Calendar Day of the month following the end
of a month, beginning with the month that this Order is executed and issued by
the OTS, the Association shall provide to the OTS a certified true copy of the
Compliance Resolution adopted at the Board meeting. The Board, by virtue of the
Association's submission of a certified true copy of each such Compliance
Resolution to the OTS, shall be deemed to have certified to the accuracy of the
statements set forth in each Compliance Resolution, except as provided below. In
the event that one or more Directors do not agree with the representations set
forth in a Compliance Resolution, such disagreement shall be noted in the
minutes of the Association.
(e) The Board shall promptly respond to any request from the OTS for
documents that the OTS reasonably requests to demonstrate compliance with this
Order.
37
<PAGE>
4. DEFINITIONS
-----------
All technical words or terms used in this Order and the Stipulation
for which meanings are not specified or otherwise provided by the provisions of
this Order shall, insofar as applicable, have meanings as defined in Chapter V
of Title 12 of the Code of Federal Regulations, HOLA, FDIA, or OTS Publications.
---------------------------
Any such technical words or terms used in this order and the Stipulation and
undefined in said Code of Federal Regulations, HOLA, FDIA, or OTS Publications
---------------------------
shall have meanings that are in accordance with the best custom and usage in the
savings and loan industry.
5. SUCCESSOR STATUTES, REGULATIONS, GUIDANCE, AMENDMENTS
-----------------------------------------------------
Reference in this Order and the Stipulation to provisions of statutes,
regulations, and OTS Publications shall be deemed to include references to all
amendments to such provisions as have been made as of the Effective Date and
references to successor provisions as they become applicable.
6. NOTICES
-------
(a) Except as otherwise provided herein, any request, demand,
authorization, direction, notice, consent, waiver or other document provided or
permitted by the Order to be made upon, given or furnished to, delivered to, or
filed with:
(i) the OTS by the Association, shall be sufficient for every purpose
hereunder if in writing and mailed, first class, postage prepaid or sent via
overnight delivery service or physically delivered, in each case addressed to
the Office of Thrift Supervision, Department of the Treasury, c/o Kenneth P.
38
<PAGE>
Slosser, Assistant Regional Director, 18300 Von Karman Avenue, Suite 800,
Irvine, California, 92612, or telefaxed to (714) 440-3910 and confirmed by first
class mail, postage prepaid, overnight delivery service or physically delivered,
in each case to the above address; and
(ii) the Association by the OTS, shall be sufficient for every purpose
hereunder if in writing and mailed, first class, postage prepaid, or sent via
overnight delivery service or physically delivered, in each case addressed to
the Association at Post Office Box 1419, Portland, Oregon, 97207-1419, or
telefaxed to (503) 223-8799 and confirmed by first class mail, postage prepaid,
overnight delivery service or physically delivered, in each case to the above
address.
(b) Notices hereunder shall be effective upon receipt, if by mail,
overnight delivery service or telefax, and upon delivery, if by physical
delivery. If there is a dispute about the date on which a written notice has
been received by a party to this Order, then, in the event such notice was sent
by the United States mail, there shall be a presumption that the notice was
received two (2) Business Days after the date of the postmark on the envelope in
which the notice was enclosed.
7. DURATION, TERMINATION OR SUSPENSION OF ORDER
--------------------------------------------
(a) This Order shall: (i) become effective upon its execution by the
OTS, through its authorized representative whose signature appears below and
(ii) remain in effect until terminated, modified or suspended in writing by the
OTS, acting
39
<PAGE>
through its Director or the Regional Director (including any authorized designee
thereof).
(b) The Regional Director in his or her sole discretion, may, by
written notice, suspend, modify or terminate any or all provisions of this
Order.
8. TIME LIMITS
-----------
Time limitations for compliance with the terms of this Order run from
the Effective Date, unless otherwise noted.
9. EFFECT OF HEADINGS
------------------
The Section headings herein are for convenience only and shall not
affect the construction hereof.
10. SEPARABILITY CLAUSE
-------------------
In case any provision in this Order is ruled to be invalid, illegal or
unenforceable by the decision of any Court of competent jurisdiction, the
validity, legality and enforceability of the remaining provisions hereof shall
not in any way be affected or impaired thereby, unless the Regional Director in
his or her sole discretion determines otherwise.
11. NO VIOLATIONS OF LAW, RULE, REGULATION OR POLICY
------------------------------------------------
STATEMENT AUTHORIZED; OTS NOT RESTRICTED
----------------------------------------
Nothing in this Order shall be construed as: (a) allowing the
Association to violate any law, rule, regulation, or policy statement to which
it is subject or (b) restricting or estopping the OTS from taking any action(s)
that it believes are appropriate in fulfilling the responsibilities placed upon
it by law.
40
<PAGE>
12. SUCCESSORS IN INTEREST/BENEFIT
------------------------------
The terms and provisions of this order shall be binding upon, and
inure to the benefit of, the parties hereto and their successors in interest.
Nothing in this Order, express or implied, shall give to any person or entity,
other than the parties hereto, and the Federal Deposit Insurance Corporation and
their successors hereunder, any benefit or any legal or equitable right, remedy
or claim under this order.
13. PRIOR SUPERVISORY DOCUMENTS
---------------------------
This Order supercedes all prior supervisory directives.
THE OFFICE OF THRIFT SUPERVISION
By: ____________________________
John F. Robinson
Regional Director
West Region
Date: __________________________
41
<PAGE>
EXHIBIT 10.12
LOAN SERVICING AGREEMENT
This Agreement is dated November 15, 1996 among Wilshire Credit
Corporation, a Nevada corporation ("WCC"), Wilshire Funding Corporation, a
Delaware corporation, ("WFC") Wilshire Financial Services Group Inc., a Delaware
corporation ("WFSG") and Wilshire Servicing Corporation, a Delaware corporation
("WSC"). WFC and WFSG are referred to as the "Company".
RECITALS
--------
The Company owns, and intends to acquire and make, loans, accounts,
chattel paper, real estate owned and other financial assets ("loans") during the
term of this Loan Servicing Agreement (the "Agreement"). The Company desires
that WCC service such loans. In addition, future entities that are affiliated
with the Company ("Affiliates") may acquire or make loans. The term Loan or
Loans shall mean all loans now owned by the Company or its Affiliates, acquired
or made by the Company or its Affiliates, or for which the Company or its
Affiliate acts as a master servicer, and including, without limitation, consumer
and commercial loans, secured and unsecured loans, and whether or not evidenced
by a promissory note.
The parties hereby agree as follows:
1. Exclusive Servicing of Loans. WCC shall provide loan portfolio
----------------------------
management services, including billing, portfolio administration and collection
services ("Services") for all Loans unless WCC and the Company agree that
specific Loans shall not be so serviced ("Excluded Loans"). The Company shall
agree that WCC shall not be required to service loans for which WCC may not have
applicable licenses. The Company agrees that all of its Loans and the Loans of
any Affiliate, except for Excluded Loans, shall be serviced by Wilshire under
this Agreement.
2. Manner and Performance of Service. Except as specifically provided
---------------------------------
herein, WCC shall be entitled to exercise its sole discretion in servicing the
Loans. WCC shall devote such time and attention as shall be necessary to
provide the Company with the Services described herein. WCC may service its own
loans and render services to any other current clients for existing contracts
and amendments thereof, provided that such activities do not interfere with
WCC's performance of the Services. Without limitation, WCC's Services shall
consist of the following:
2.1 WCC's Duties in General. WCC shall administer the Loans with
-----------------------
reasonable care, using that degree of skill and attention that WCC exercises
with respect to comparable Loans that it services for its own account or as a
fiduciary for others. WCC shall take all necessary actions which WCC in good
faith determines are commercially reasonable in regard to each Loan until it is
collected or WCC, in its good
<PAGE>
faith judgment, determines that it is no longer commercially reasonable to
continue to try to collect the outstanding indebtedness of the Loan.
2.2 Compliance. WCC shall use its best efforts to comply throughout
----------
the term of this Agreement with all requirements of applicable federal, state
and local laws and regulations thereunder, including to the extent applicable,
any consumer and debt collection protection laws and any other consumer credit,
equal opportunity and disclosure laws.
2.3 Collection. WCC shall use its reasonable efforts, but not less
----------
than the same efforts it uses with respect to comparable loans that it services
for its own account or for others, to collect all payments due and to become due
under each of the Loans from the party or parties liable thereunder (a
"Borrower").
2.4 Subcontractors. WCC may subcontract services, but no such
--------------
subcontract shall relieve or reduce WCC's obligations to perform services as
provided in this Agreement.
2.5 Indemnity. WCC shall reimburse and indemnify the Company and its
---------
successors and assigns for and against, and hold the Company and its successors
and assigns harmless from and against, any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses and
disbursements, including without limitation reasonable fees and disbursements of
counsel, which may be imposed upon, or incurred by the Company in any way
relating to or arising out of WCC's gross negligence in its performance of its
duties hereunder. The Company shall reimburse and indemnify WCC and its
successors and assigns for and against, and hold WCC and its successors and
assigns harmless from and against, any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses and
disbursements, including without limitation reasonable fees and disbursements of
counsel, which may be imposed upon, or incurred by WCC in any way relating to or
arising out of WCC's performance of its duties hereunder, the Loans or the
servicing thereof prior to the servicing by WCC other than arising out of WCC's
gross negligence.
2.6 Modifications, Adjustable Rate, and Payoffs. In connection with
-------------------------------------------
its collection efforts WCC may modify or change the interest rate of any Loan,
and quote to, and accept from, a Borrower a full or partial payoff amount on any
Loan as full settlement.
2.7 Monthly Accounting Reports. For each month during the term of
--------------------------
this Agreement, WCC will furnish the Company with a monthly report regarding the
Loans by the twenty-fifth (25th) day of the following month. WCC shall furnish
at WCC's cost such other information regarding WCC, the Loans and this Agreement
as the Company may from time to time reasonably request, provided, that if the
information or data requested by the Company is something WCC cannot produce
internally from its then
2
<PAGE>
existing reporting systems without manual compilation or production, or
reprogramming its computer system, the Company shall reimburse
WCC for its cost for furnishing such information.
3. Term. This Agreement shall be effective as of its original date and
----
will continue in full force and effect until five (5) years after the Servicing
Transfer as provided in Section 11 and thereafter for one year renewal periods
unless at least sixty (60) days prior to the beginning of the renewal period
either party notifies the other that the next one-year period will not be
renewed.
4. Fees and Costs. The Company shall pay WCC and WCC may retain or
--------------
disburse from any Loan proceeds the following amounts:
4.1 Reimbursement of Costs. All bona fide amounts paid by WCC to
----------------------
third parties in connection with this Agreement, including without limitation,
stationery suppliers, related printing costs, fees for recordings and filings,
mailgrams, repossession agency fees, legal fees, travel, insurance costs, and
payments arising out of acts or omissions of third parties (including persons
from which the Loans are acquired), and WCC's standard photocopy charges.
4.2 Service Fee. WCC shall be entitled to a fee ("WCC's Service
-----------
Fee") for servicing Loans equal to (a) all interest and other earnings paid or
accrued on amounts from time to time on deposit in any accounts in which
proceeds of Loans are deposited plus (b) a monthly fee equal to an amount
negotiated by the parties for each particular Loan portfolio, which monthly fee
shall be comparable to fees charged by other industry participants for servicing
comparable loan portfolios.
4.3 Payment. WCC may withdraw from all Loan proceeds all escrow
-------
payments, costs, and WCC's Service Fee. Within twenty-five (25) days after the
last day of each calendar month WCC shall pay to the Company or the Affiliate
owning the Loan the Net Proceeds received in that calendar month less WCC's
Service Fee. The Company or the applicable Affiliate shall pay WCC within
fifteen (15) days after billing for any excess fees and costs. WCC shall
receive any ancillary income, other than late charges, and any float revenue.
5. Independent Contractor. WCC shall provide the Services in the
----------------------
capacity of an independent contractor. Nothing in this Agreement shall be
construed as establishing an employment, partnership or joint venture between
the Company and WCC.
6. Representations of the Company. The Company represents and warrants
------------------------------
as follows:
3
<PAGE>
6.1 The Company has been duly organized and is validly existing and
in good standing under the laws of the jurisdiction of its organization, with
power and authority to own its properties and to conduct its business as such
properties are currently owned and such business is currently conducted.
6.2 The Company has the power and authority to execute and deliver
this Agreement and to carry out its terms; and the execution, delivery, and
performance of this Agreement have been duly authorized by the Company by all
necessary corporate action on the part of the Company.
6.3 This Agreement constitutes a legal, valid and binding obligation
of the Company enforceable in accordance with its terms, subject to bankruptcy,
insolvency, reorganization, moratorium, or other similar laws affecting
enforcement of creditor rights generally.
7. Representations of WCC. WCC represents and warrants as follows:
----------------------
7.1 WCC has been duly organized and is validly existing and in good
standing under the laws of the jurisdiction of its organization, with power and
authority to own its properties and to conduct its business as such properties
are currently owned and such business is currently conducted and has corporate
power, authority and legal right to service the Loans as provided in this
Agreement.
7.2 WCC has the power and authority to execute and deliver this
Agreement and to carry out its terms; and the execution, delivery, and
performance of this Agreement have been duly authorized by WCC by all necessary
corporate action on the part of WCC.
7.3 This Agreement constitutes a legal, valid and binding
obligation of WCC enforceable in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
affecting enforcement of creditor rights generally.
8. Audits and Examinations.
-----------------------
8.1 WCC shall use reasonable efforts to maintain in good order and
condition throughout the term of this Agreement all Loan files and relevant
materials that WCC has received regarding the Loans.
8.2 WCC shall maintain a copy of each Loan file at its office or
elsewhere within its control, provided, that at the Company's request, WCC will
deliver copies of such Loans to the Company or a designee of the Company. WCC
shall make available to the Company or its duly authorized representatives,
attorneys or auditors the
4
<PAGE>
Loan files and the related accounts, records and computer systems maintained by
WCC at such times as the the Company shall reasonably request.
8.3 WCC shall permit the the Company, and its agents to audit the
books and records of WCC applicable to the Loans at WCC's business premises
during WCC's normal business hours upon reasonable prior notice to WCC. The
Company shall have direct access to WCC's management information system for the
Loans or, if applicable, to any service bureau used by WCC for the Loans.
9. Substitute Servicer; Limited Arbitration.
----------------------------------------
9.1 If at any time during the term of this Agreement WCC shall
breach, or default in the performance of a material obligation of WCC undertaken
in this Agreement, the Company and WCC shall consult for such period of time as
the Company may determine is reasonable under the circumstances to determine a
mutually acceptable resolution. In the event the Company and WCC fail to agree
thereon within such period as the Company may specify, then the Company may, by
written notice to WCC and without limitation of any other right or remedy of the
Company, require that WCC transfer the Loans, and all of WCC's servicing and
related rights and obligations in and with respect to the Loans, to a substitute
servicer to be designated by the Company. Such substitute servicer shall
thereupon perform, pursuant to a servicing contract acceptable to the Company,
all of WCC's duties and obligations under this Agreement. Upon the Company's
designation of such a substitute servicer, WCC shall within a reasonable time
and to the extent it holds possession thereof, deliver to such substitute
servicer all written evidence and documentation of the Loans and WCC thereafter
shall cooperate and follow all instructions of the Company in all reasonable
respects to facilitate such substitute servicer's performance of WCC's duties
and obligations under this Agreement. The fees and expenses of the substitute
servicer shall be paid by the Company. WCC, however, shall continue to be
entitled to WCC's Service Fee with regard to any Loan being serviced under this
section, net of all servicing fees paid by the Company to the substitute
servicer for such Loan.
9.2 If WCC wishes to contest or dispute the Company's appointment
of a substitute servicer, WCC shall so notify the Company in writing within
thirty (30) days after such appointment, specifying in the notice WCC's reasons
for doing so. Such controversy or dispute regarding the Company's appointment
of a substitute servicer shall be settled by arbitration, by one arbitrator in
Portland, Oregon in accordance with the Rules of the American Arbitration
Association ("AAA"), subject to the provisions of Section 9.3 and any other
applicable provisions of this Agreement. The arbitrator, whether appointed by
the parties or pursuant to the Rules of the AAA, shall be impartial and neutral
and shall have experience in the management of operations of an institution
which performs financing and collection services similar to those to be
performed by WCC under this Agreement. The decision of the arbitrator shall be
final, binding and
5
<PAGE>
conclusive upon the parties. The arbitrator shall comply with the privacy
restrictions provided in Section 9.7 regarding publication of any award.
9.3 In no event shall the arbitrator have power or authority to add
to or detract from the agreements of the parties nor to award punitive or
consequential damages. The arbitrator shall be authorized only to render an
award regarding a dispute or controversy concerning the Company's appointment of
a substitute servicer pursuant to Section 9.1 hereof, including an award of
costs and expenses as herein provided, and the arbitrator shall not purport to
determine, or issue an award regarding, any other legal or equitable rights or
remedies of the parties.
9.4 The arbitration hearing will conclude and the arbitrator's award
shall be rendered in writing within 30 days after it commences. The arbitrator
will make every effort to enforce this requirement strictly, but may extend the
time for the hearing upon a showing that exceptional circumstances require
extension to prevent manifest injustice.
9.5 The parties will share equally the expense of deposits and
advances required by the AAA but either party may advance such amounts, subject
to recovery thereof as an addition or offset to any award. The arbitrator shall
award to the prevailing party, as determined by the arbitrator, all costs, fees
and expenses related to the arbitration, including reasonable fees and expenses
of attorneys, experts and other professionals incurred by the prevailing party.
9.6 In the event of any legal action relating to the arbitration,
including any action to stay the arbitration, to vacate, modify or correct any
award or otherwise, the prevailing party in such action as determined by the
court shall be entitled to recover from the other party its court costs and
reasonable fees and expenses of attorneys, experts and other professionals
incurred in connection with the action, including such costs, fees and expenses
upon appeal. The institution and maintenance of an action for judicial relief,
or the pursuit of any provisional, ancillary, or judicial remedy by any party,
shall not constitute a waiver of the right of any party, including the plaintiff
in such judicial action, to submit the controversy or claim to arbitration
pursuant to Section 9.2 hereof.
9.7 WCC and the Company acknowledge that the existence, progress and
results of any arbitration held under this Agreement, and any arbitral award,
are to remain private. Each party agrees not to publish or disclose any
information regarding the arbitration or any such award by any means, except as
may be required for enforcement of any arbitral award and further agrees to take
reasonable care, but in no event less care than it takes to protect its own
confidential business information generally, to prevent disclosure and
dissemination of such information.
9.8 The award rendered in any arbitration may be enforced in any
court of competent jurisdiction.
6
<PAGE>
10. Non-Compete. During the term of this Agreement and for a period of
-----------
one year after the termination of this Agreement, WCC will not, without the
prior approval of the Company, compete with the business currently conducted by
the Company, including the purchase of any Loans that the Company or an
Affiliate are able to purchase under applicable law and including the servicing
of loan portfolios (other than its own loan portfolios and servicing for other
current clients for existing contracts and amendments thereof).
11. Servicing Transfer. If WSC has substantially all of the licenses
------------------
required of it to service, WSC may request and, following the second anniversary
of the closing date of the Company's initial public offering, it may demand that
WCC transfer to WSC , within thirty days of such demand, all obligations for
servicing the Loans, loans owned by WCC, and any other loans being serviced by
WCC for which WCC may under its agreement for such servicing, transfer such
servicing ("Servicing Transfer"). If the Servicing Transfer has not occurred by
the third anniversary of the closing date of the Company's initial public
offering, WCC and WSC shall effect the Servicing Transfer at such date. If WCC
is required to obtain consent from other owners of loans to transfer such
servicing, WCC shall make a good faith attempt to obtain such consent. Upon such
servicing transfer WCC shall assume the obligations of WCC under the servicing
contracts transferred.
11.1 Upon the Servicing Transfer, WSC may purchase, and WCC shall sell
and transfer to WSC, all WCC assets that WSC may desire for the servicing
business, including without limitation, all equipment, books, records, forms,
computer systems and software, real and personal property leases, and contracts
(to the extent they are assignable). As consideration for such assets, WSC
shall pay to WCC such consideration as shall be mutually agreed and assume all
liabilities (including liabilities associated with employees and employee
benefits) related thereto arising after the Servicing Transfer. In the event
that WSC is unable to assume the servicing rights and obligations for any loans,
then WSC shall cooperate with WCC to allow WCC reasonable access and use of the
transferred assets to permit WCC to continue servicing those loans not
transferred to the Company.
11.2 Upon the Servicing Transfer, WSC shall service all loans owned by
WCC and its affiliates (other than the Company and its subsidiaries) on the same
terms and conditions on which WCC is servicing WSC Loans under this Agreement
except that the fees and costs to be paid by WCC for the servicing of its loans,
and the loans of its affiliates shall be WSC's average cost for servicing
comparable loans as the parties shall mutually agree from time to time.
7
<PAGE>
11.3 Notwithstanding the assignment to WSC of servicing rights
arising from WCC contracts with third persons, any proceeds of such contracts in
excess of the fees and costs to be paid by WCC to WSC hereunder for comparable
loans shall be paid to WCC by WSC unless the parties otherwise agree.
12. General Provisions.
------------------
12.1 Written Notices. Notices under this Agreement must be in
---------------
writing and mailed, U.S. Mail with first class postage prepaid or overnight
mail, or telecopied, to the appropriate address shown above unless the address
has been changed by notice given as provided herein at least three (3) business
days in advance of the effective date of such change. Notice will be effective
three (3) business days after mailing or one business day after telecopy.
Wilshire Credit Corporation
PO Box 8517
Portland, OR 97207
Telephone No.: (503) 223-5600
Telecopy No.: (503) 223-8399
Wilshire Financial Services Group Inc.
PO Box 8517
Portland, OR 97207
Telephone No.: (503) 223-5600
Telecopy No.: (503) 223-8399
Wilshire Funding Corporation
PO Box 8517
Portland, OR 97207
Telephone No.: (503) 223-5600
Telecopy No.: (503) 223-8399
Wilshire Servicing Corporation
PO Box 8517
Portland, OR 97207
Telephone No.: (503) 223-5600
Telecopy No.: (503) 223-8399
12.2 Attorneys' Fees. If any judicial proceeding is initiated by
---------------
either of the parties arising out of the subject matter of this Agreement,
including without limitation any suit or action arising under state or federal
securities laws, trial, appeal, or bankruptcy, the prevailing party in such
proceeding will be entitled to recover, in addition to any judgment obtained in
such proceeding, reasonable attorneys' fees and court costs incurred.
8
<PAGE>
12.3 Events Beyond the Control of the Parties. Performance by either
----------------------------------------
party hereunder will not be deemed to be in default where the delay or default
is due to events beyond its reasonable control, including without limitation
war, insurrection, strike, lock-outs, riots, floods, earthquakes, fires,
casualties, acts of God, epidemics, quarantine restrictions, governmental
restrictions, inability to secure necessary labor or materials, acts of the
other party or failure to act of any public or governmental agency or entity.
12.4 Further Assurances. Following the execution of this Agreement,
------------------
WCC and the Company, respectively, shall, from time to time at the request of
the other, execute and deliver such other documents and instruments, and shall
take such other actions, as may be reasonably necessary or appropriate to carry
out and perform more effectively the terms and purposes of this Agreement.
12.5 Governing Law. This Agreement will be governed by the laws of
-------------
the state of Oregon. Any dispute arising from or in connection with this
Agreement, other than as provided in Section 9, shall be resolved in the
applicable state or federal court in Portland, Oregon.
12.6 Severability. If any provision herein is deemed unenforceable
------------
in whole or in part, such provision shall be deemed severable solely to the
extent of such enforceability without impacting the remainder of this Agreement.
12.7 Counterparts. This Agreement may be executed in one or more
-------------
counterparts. Each signed counterpart shall be deemed an original, but all of
them together constitute one and the same instrument.
12.8 Entire Agreement. This Agreement constitutes the entire
----------------
agreement between the parties as to its subject matter and supersedes all
proposals, oral or written,
9
<PAGE>
and all negotiations, conversations or discussions heretofore had between the
parties related to the subject matter of this Agreement. Any amendment to this
Agreement must be in writing signed by the party to be charged.
Wilshire Financial Services Group Inc. Wilshire Credit Corporation
By: By:
----------------------------------- -----------------------------------
Its: Its:
---------------------------------- ----------------------------------
Wilshire Funding Corporation
By:
-----------------------------------
Its:
----------------------------------
Wilshire Servicing Corporation
By:
-----------------------------------
Its:
----------------------------------
10
<PAGE>
EXHIBIT 10.20
PSA
MASTER REPURCHASE AGREEMENT
Dated as of December 22, 1995
BETWEEN:
BEAR STEARNS MORTGAGE CAPITAL
CORPORATION ("BUYER")
AND
GIRARD SAVINGS BANK, FSB ("SELLER")
1. APPLICABILITY
From time to time the parties hereto may enter into transactions in
which one party ("Seller") agrees to transfer to the other ("Buyer") securities
or financial instruments ("Securities") against the transfer of funds by Buyer,
with a simultaneous agreement by Buyer to transfer to Seller such Securities at
a date certain or on demand against the transfer of funds by Seller. Each such
transaction shall be referred to herein as a "Transaction" and shall be governed
by this Agreement, including any supplemental terms or conditions contained in
Annex I hereto, unless otherwise agreed in writing.
2. DEFINITIONS
(a) "Act of Insolvency", with respect to any party, (i) the
commencement by such party as debtor of any case or proceeding under any
bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law,
or such party seeking the appointment of a receiver, trustee, custodian or
similar official for such party or any substantial part of its property, or (ii)
the commencement of any such case or proceeding against such party, or another
seeking such an appointment, or the filing against a party of an application for
a protective decree under the provisions of the Securities Investor Protection
Act of 1970, which (A) is consented to or not timely contested by such party,
(B) results in the entry of an order for relief, such an appointment, the
issuance of such a protective decree or the entry of an order having a similar
effect, or (C) is not dismissed within 15 days, (iii) the making by a party of a
general assignment for the benefit of creditors, or (iv) the admission in
writing by a party of such party's inability to pay such party's debts as they
become due;
(b) "Additional Purchased Securities", Securities provided by Seller
to Buyer pursuant to Paragraph 4(a) hereof;
<PAGE>
(c) "Buyer's Margin Amount", with respect to any Transaction as of any
date, the amount obtained by application of a percentage (which may be equal to
the percentage that is agreed to as the Seller's Margin Amount under
subparagraph (q) of this Paragraph), agreed to by Buyer and Seller prior to
entering into the Transaction, to the Repurchase Price for such Transaction as
of such date;
(d) "Confirmation", the meaning specified in Paragraph 3(b) hereof;
(e) "Income", with respect to any Security at any time, any principal
thereof then payable and all interest, dividends or other distributions thereon;
(f) "Margin Deficit", the meaning specified in Paragraph 4(a) hereof;
(g) "Margin Excess", the meaning specified in Paragraph 4(b) hereof;
(h) "Market Value", with respect to any Securities as of any date, the
price for such Securities on such date obtained from a generally recognized
source agreed to by the parties or the most recent closing bid quotation from
such a source, plus accrued Income to the extent not included therein (other
than any Income credited or transferred to, or applied to the obligations of,
Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to
market practice for such Securities);
(i) "Price Differential", with respect to any Transaction hereunder as
of any date, the aggregate amount obtained by daily application of the Pricing
Rate for such Transaction to the Purchase Price for such Transaction on a 360
day per year basis for the actual number of days during the period commencing on
(and including) the Purchase Date for such Transaction and ending on (but
excluding) the date of determination (reduced by any amount of such Price
Differential previously paid by Seller to Buyer with respect to such
Transaction);
(j) "Pricing Rate", the per annum percentage rate for determination of
the Price Differential;
(k) "Prime Rate", the prime rate of U.S. money center commercial banks
as published in The Wall Street Journal;
(l) "Purchase Date", the date on which Purchased Securities are
transferred by Seller to Buyer;
(m) "Purchase Price", (i) on the Purchase Date, the price at which
Purchased Securities are transferred by Seller to Buyer, and (ii) thereafter,
such price increased by the amount of any cash transferred by Buyer to Seller
pursuant to Paragraph 4(b) hereof and decreased by the amount of any cash
transferred by Seller to Buyer pursuant to Paragraph 4(a) hereof or applied to
reduce Seller's obligations under clause (ii) of Paragraph 5 hereof;
(n) "Purchased Securities", the Securities transferred by Seller to
Buyer in a Transaction hereunder, and any Securities substituted therefor in
accordance with Paragraph 9 hereof. The term "Purchased Securities" with
respect to any Transaction at any time also shall include Additional Purchased
Securities delivered pursuant to Paragraph 4(a) and shall exclude Securities
returned pursuant to Paragraph 4(b);
2
<PAGE>
(o) "Repurchase Date", the date on which Seller is to repurchase the
Purchased Securities from Buyer, including any date determined by application of
the provisions of Paragraphs 3(c) or 11 hereof;
(p) "Repurchase Price", the price at which Purchased Securities are to
be transferred from Buyer to Seller upon termination of a Transaction, which
will be determined in each case (including Transactions terminable upon demand)
as the sum of the Purchase Price and the Price Differential as of the date of
such determination, increased by any amount determined by the application of the
provisions of Paragraph 11 hereof;
(q) "Seller's Margin Amount", with respect to any Transaction as of
any date, the amount obtained by application of a percentage (which may be equal
to the percentage that is agreed to as the Buyer's Margin Amount under
subparagraph (c) of this Paragraph), agreed to by Buyer and Seller prior to
entering into the Transaction, to the Repurchase Price for such Transaction as
of such date.
3. INITIATION; CONFIRMATION; TERMINATION
(a) An agreement to enter into a Transaction may be made orally or in
writing at the initiation of either Buyer or Seller. On the Purchase Date for
the Transaction, the Purchased Securities shall be transferred to Buyer or its
agent against the transfer of the Purchase Price to an account of Seller.
(b) Upon agreeing to enter into a Transaction hereunder, Buyer or
Seller (or both), as shall be agreed, shall promptly deliver to the other party
a written confirmation of each Transaction (a "Confirmation"). The Confirmation
shall describe the Purchased Securities (including CUSIP number, if any),
identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase
Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on
demand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction,
and (v) any additional terms or conditions of the Transaction not inconsistent
with this Agreement. The Confirmation, together with this Agreement, shall
constitute conclusive evidence of the terms agreed between Buyer and Seller with
respect to the Transaction to which the Confirmation relates, unless with
respect to the Confirmation specific objection is made promptly after receipt
thereof. In the event of any conflict between the terms of such Confirmation
and this Agreement, this Agreement shall prevail.
(c) In the case of Transactions terminable upon demand, such demand
shall be made by Buyer or Seller, no later than such time as is customary in
accordance with market practice, by telephone or otherwise on or prior to the
business day on which such termination will be effective. On the date specified
in such demand, or on the date fixed for termination in the case of Transactions
having a fixed term, termination of the Transaction will be effected by transfer
to Seller or its agent of the Purchased Securities and any Income in respect
thereof received by Buyer (and not previously credited or transferred to, or
applied to the obligations of, Seller pursuant to Paragraph 5 hereof) against
the transfer of the Repurchase Price to an account of Buyer.
3
<PAGE>
4. MARGIN MAINTENANCE
(a) If at any time the aggregate Market Value of all Purchased
Securities subject to all Transactions in which a particular party hereto is
acting as Buyer is less than the aggregate Buyer's Margin Amount for all such
Transactions (a "Margin Deficit"), then Buyer may by notice to Seller require
Seller in such Transactions, at Seller's option, to transfer to Buyer cash or
additional Securities reasonably acceptable to Buyer ("Additional Purchased
Securities"), so that the cash and aggregate Market Value of the Purchased
Securities, including any such Additional Purchased Securities, will thereupon
equal or exceed such aggregate Buyer's Margin Amount (decreased by the amount of
any Margin Deficit as of such date arising from any Transactions in which such
Buyer is acting as Seller).
(b) If at any time the aggregate Market Value of all Purchased
Securities subject to all Transactions in which a particular party hereto is
acting as Seller exceeds the aggregate Seller's Margin Amount for all such
Transactions at such time (a "Margin Excess"), then Seller may by notice to
Buyer require Buyer in such Transactions, at Buyer's option, to transfer cash or
Purchased Securities to Seller, so that the aggregate Market Value of the
Purchased Securities, after deduction of any such cash or any Purchased
Securities so transferred, will thereupon not exceed such aggregate Seller's
Margin Amount (increased by the amount of any Margin Excess as of such date
arising from any Transactions in which such Seller is acting as Buyer).
(c) Any cash transferred pursuant to this Paragraph shall be
attributed to such Transactions as shall be agreed upon by Buyer and Seller.
(d) Seller and Buyer may agree, with respect to any or all
Transactions hereunder, that the respective rights of Buyer or Seller (or both)
under subparagraphs (a) and (b) of this Paragraph may be exercised only where a
Margin Deficit or Margin Excess exceeds a specified dollar amount or a specified
percentage of the Repurchase Prices for such Transactions (which amount or
percentage shall be agreed to by Buyer and Seller prior to entering into any
such Transactions).
(e) Seller and Buyer may agree, with respect to any or all
Transactions hereunder, that the respective rights of Buyer and Seller under
subparagraphs (a) and (b) of this Paragraph to require the elimination of a
Margin Deficit or a Margin Excess, as the case may be, may be exercised whenever
such a Margin Deficit or Margin Excess exists with respect to any single
Transaction hereunder (calculated without regard to any other Transaction
outstanding under this Agreement).
5. INCOME PAYMENTS
Where a particular Transaction's term extends over an Income payment
date on the Securities subject to that Transaction, Buyer shall, as the parties
may agree with respect to such Transaction (or, in the absence of any agreement,
as Buyer shall reasonably determine in its discretion), on the date such Income
is payable either (i) transfer to or credit to the account of Seller an amount
equal to such Income payment or payments with respect to any Purchased
Securities subject to such Transaction or (ii) apply the Income payment or
payments to reduce the amount to be transferred to Buyer by Seller upon
termination of the Transaction. Buyer shall not be obligated to take any action
pursuant to the preceding sentence to the
4
<PAGE>
extent that such action would result in the creation of a Margin Deficit, unless
prior thereto or simultaneously therewith Seller transfers to Buyer cash or
Additional Purchased Securities sufficient to eliminate such Margin Deficit.
6. SECURITY INTEREST
Although the parties intend that all Transactions hereunder be sales
and purchases and not loans, in the event any such Transactions are deemed to be
loans, Seller shall be deemed to have pledged to Buyer as security for the
performance by Seller of its obligations under each such Transaction, and shall
be deemed to have granted to Buyer a security interest in, all of the Purchased
Securities with respect to all Transactions hereunder and all proceeds thereof.
7. PAYMENT AND TRANSFER
Unless otherwise mutually agreed, all transfers of funds hereunder
shall be in immediately available funds. All Securities transferred by one
party hereto to the other party (i) shall be in suitable form for transfer or
shall be accompanied by duly executed instruments of transfer or assignment in
blank and such other documentation as the party receiving possession may
reasonably request, (ii) shall be transferred on the book-entry system of a
Federal Reserve Bank, or (iii) shall be transferred by any other method mutually
acceptable to Seller and Buyer. As used herein with respect to Securities,
"transfer" is intended to have the same meaning as when used in Section 8-313 of
the New York Uniform Commercial Code or, where applicable, in any federal
regulation governing transfers of the Securities.
8. SEGREGATION OF PURCHASED SECURITIES
To the extent required by applicable law, all Purchased Securities in
the possession of Seller shall be segregated from other securities in its
possession and shall be identified as subject to this Agreement. Segregation
may be accomplished by appropriate identification on the books and records of
the holder, including a financial intermediary or a clearing corporation. Title
to all Purchased Securities shall pass to Buyer and, unless otherwise agreed by
Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging
in repurchase transactions with the Purchased Securities or otherwise pledging
or hypothecating the Purchased Securities, but no such transaction shall relieve
Buyer of its obligations to transfer Purchased Securities to Seller pursuant to
Paragraphs 3, 4 or 11 hereof, or of Buyer's obligation to credit or pay Income
to, or apply Income to the obligations of, Seller pursuant to Paragraph 5
hereof.
5
<PAGE>
REQUIRED DISCLOSURE FOR TRANSACTIONS IN WHICH THE SELLER RETAINS CUSTODY OF THE
PURCHASED SECURITIES
Seller is not permitted to substitute other securities for those subject to
this Agreement and therefore must keep Buyer's securities segregated at all
times, unless in this Agreement Buyer grants Seller the right to substitute
other securities. If Buyer grants the right to substitute, this means that
Buyer's securities will likely be commingled with Seller's own securities during
the trading day. Buyer is advised that, during any trading day that Buyer's
securities are commingled with Seller's securities, they [will]/*/ [may]/**/ be
subject to liens granted by Seller to [its clearing bank]/*/ [third parties]/**/
and may be used by Seller for deliveries on other securities transactions.
Whenever the securities are commingled, Seller's ability to resegregate
substitute securities for Buyer will be subject to Seller's ability to satisfy
[the clearing]/*/ [any]/**/ lien or to obtain substitute securities.
9. SUBSTITUTION
(a) Seller may, subject to agreement with and acceptance by Buyer,
substitute other Securities for any Purchased Securities. Such substitution
shall be made by transfer to Buyer of such other Securities and transfer to
Seller of such Purchased Securities. After substitution, the substituted
Securities shall be deemed to be Purchased Securities.
(b) In Transactions in which the Seller retains custody of Purchased
Securities, the parties expressly agree that Buyer shall be deemed, for purposes
of subparagraph (a) of this Paragraph, to have agreed to and accepted in this
Agreement substitution by Seller of other Securities for Purchased Securities;
provided, however, that such other Securities shall have a Market Value at least
equal to the Market Value of the Purchased Securities for which they are
substituted.
10. REPRESENTATIONS
Each of Buyer and Seller represents and warrants to the other that (i)
it is duly authorized to execute and deliver this Agreement, to enter into the
Transactions contemplated hereunder and to perform its obligations hereunder and
has taken all necessary action to authorize such execution, delivery and
performance, (ii) it will engage in such Transactions as principal (or, if
agreed in writing in advance of any Transaction by the other party hereto, as
agent for a disclosed principal), (iii) the person signing this Agreement on its
behalf is duly authorized to do so on its behalf (or on behalf of any such
disclosed principal), (iv) it has obtained all authorizations of any
governmental body required in connection with this Agreement and the
Transactions hereunder and such authorizations are in full force and effect and
(v) the execution, delivery and performance of this Agreement and the
Transactions hereunder will not violate any law, ordinance, charter, by-law or
rule applicable to it or any agreement by which it is bound or by which any of
its assets are affected. On the Purchase
- ------------------------
/*/Language to be used under 17 C.F.R (S) 403.4(e) if Seller is a government
securities broker or dealer other than a financial institution.
/**/Language to be used under 17 C.F.R. (S) 403.5(d) if Seller is a financial
institution.
6
<PAGE>
Date for any Transaction Buyer and Seller shall each be deemed to repeat all the
foregoing representations made by it.
11. EVENTS OF DEFAULT
In the event that (i) Seller fails to repurchase or Buyer fails to
transfer Purchased Securities upon the applicable Repurchase Date, (ii) Seller
or Buyer fails, after one business day's notice, to comply with Paragraph 4
hereof, (iii) Buyer fails to comply with Paragraph 5 hereof, (iv) an Act of
Insolvency occurs with respect to Seller or Buyer, (v) any representation made
by Seller or Buyer shall have been incorrect or untrue in any material respect
when made or repeated or deemed to have been made or repeated, or (vi) Seller or
Buyer shall admit to the other its inability to, or its intention not to,
perform any of its obligations hereunder (each an "Event of Default"):
(a) At the option of the nondefaulting party, exercised by written
notice to the defaulting party (which option shall be deemed to have been
exercised, even if no notice is given, immediately upon the occurrence of an Act
of Insolvency), the Repurchase Date for each Transaction hereunder shall be
deemed immediately to occur.
(b) In all Transactions in which the defaulting party is acting as
Seller, if the nondefaulting party exercises or is deemed to have exercised the
option referred to in subparagraph (a) of this Paragraph, (i) the defaulting
party's obligations hereunder to repurchase all Purchased Securities in such
Transactions shall thereupon become immediately due and payable, (ii) to the
extent permitted by applicable law, the Repurchase Price with respect to each
such Transaction shall be increased by the aggregate amount obtained by daily
application of (x) the greater of the Pricing Rate for such Transaction or the
Prime Rate to (y) the Repurchase Price for such Transaction as of the Repurchase
Date as determined pursuant to subparagraph (a) of this Paragraph (decreased as
of any day by (A) any amounts retained by the nondefaulting party with respect
to such Repurchase Price pursuant to clause (iii) of this subparagraph, (B) any
proceeds from the sale of Purchased Securities pursuant to subparagraph (d)(i)
of this Paragraph, and (C) any amounts credited to the account of the defaulting
party pursuant to subparagraph (e) of this Paragraph) on a 360 day per year
basis for the actual number of days during the period from and including the
date of the Event of Default giving rise to such option to but excluding the
date of payment of the Repurchase Price as so increased, (iii) all Income paid
after such exercise or deemed exercise shall be retained by the nondefaulting
party and applied to the aggregate unpaid Repurchase Prices owed by the
defaulting party, and (iv) the defaulting party shall immediately deliver to the
nondefaulting party any Purchased Securities subject to such Transactions then
in the defaulting party's possession.
(c) In all Transactions in which the defaulting party is acting as
Buyer, upon tender by the nondefaulting party of payment of the aggregate
Repurchase Prices for all such Transactions, the defaulting party's right, title
and interest in all Purchased Securities subject to such Transactions shall be
deemed transferred to the nondefaulting party, and the defaulting party shall
deliver all such Purchased Securities to the nondefaulting party.
(d) After one business day's notice to the defaulting party (which
notice need not be given if an Act of Insolvency shall have occurred, and which
may be the notice
7
<PAGE>
given under subparagraph (a) of this Paragraph or the notice referred to in
clause (ii) of the first sentence of this Paragraph), the nondefaulting party
may:
(i) as to Transactions in which the defaulting party is acting as
Seller, (A) immediately sell, in a recognized market at such price or
prices as the nondefaulting party may reasonably deem satisfactory, any or
all Purchased Securities subject to such Transactions and apply the
proceeds thereof to the aggregate unpaid Repurchase Prices and any other
amounts owing by the defaulting party hereunder or (B) in its sole
discretion elect, in lieu of selling all or a portion of such Purchased
Securities, to give the defaulting party credit for such Purchased
Securities in an amount equal to the price therefor on such date, obtained
from a generally recognized source or the most recent closing bid quotation
from such a source, against the aggregate unpaid Repurchase Prices and any
other amounts owing by the defaulting party hereunder; and
(ii) as to Transactions in which the defaulting party is acting
as Buyer, (A) purchase securities ("Replacement Securities") of the same
class and amount as any Purchased Securities that are not delivered by the
defaulting party to the nondefaulting party as required hereunder or (B) in
its sole discretion elect, in lieu of purchasing Replacement Securities, to
be deemed to have purchased Replacement Securities at the price therefor on
such date, obtained from a generally recognized source or the most recent
closing bid quotation from such a source.
(e) As to Transactions in which the defaulting party is acting as
Buyer, the defaulting party shall be liable to the nondefaulting party (i) with
respect to Purchased Securities (other than Additional Purchased Securities),
for any excess of the price paid (or deemed paid) by the nondefaulting party for
Replacement Securities therefor over the Repurchase Price for such Purchased
Securities and (ii) with respect to Additional Purchased Securities, for the
price paid (or deemed paid) by the nondefaulting party for the Replacement
Securities therefor. In addition, the defaulting party shall be liable to the
nondefaulting party for interest on such remaining liability with respect to
each such purchase (or deemed purchase) of Replacement Securities from the date
of such purchase (or deemed purchase) until paid in full by Buyer. Such
interest shall be at a rate equal to the greater of the Pricing Rate for such
Transaction or the Prime Rate.
(f) For purposes of this Paragraph 11, the Repurchase Price for each
Transaction hereunder in respect of which the defaulting party is acting as
Buyer shall not increase above the amount of such Repurchase Price for such
Transaction determined as of the date of the exercise or deemed exercise by the
nondefaulting party of its option under subparagraph (a) of this Paragraph.
(g) The defaulting party shall be liable to the nondefaulting party
for the amount of all reasonable legal or other expenses incurred by the
nondefaulting party in connection with or as a consequence of an Event of
Default, together with interest thereon at a rate equal to the greater of the
Pricing Rate for the relevant Transaction or the Prime Rate.
(h) The nondefaulting party shall have, in addition to its rights
hereunder, any rights otherwise available to it under any other agreement or
applicable law.
8
<PAGE>
12. SINGLE AGREEMENT
Buyer and Seller acknowledge that, and have entered hereinto and will
enter into each Transaction hereunder in consideration of and in reliance upon
the fact that, all Transactions hereunder constitute a single business and
contractual relationship and have been made in consideration of each other.
Accordingly, each of Buyer and Seller agrees (i) to perform all of its
obligations in respect of each Transaction hereunder, and that a default in the
performance of any such obligations shall constitute a default by it in respect
of all Transactions hereunder, (ii) that each of them shall be entitled to set
off claims and apply property held by them in respect of any Transaction against
obligations owing to them in respect of any other Transactions hereunder and
(iii) that payments, deliveries and other transfers made by either of them in
respect of any Transaction shall be deemed to have been made in consideration of
payments, deliveries and other transfers in respect of any other Transactions
hereunder, and the obligations to make any such payments, deliveries and other
transfers may be applied against each other and netted.
13. NOTICES AND OTHER COMMUNICATIONS
Unless another address is specified in writing by the respective party
to whom any notice or other communication is to be given hereunder, all such
notices or communications shall be in writing or confirmed in writing and
delivered at the respective addresses set forth in Annex II attached hereto.
14. ENTIRE AGREEMENT; SEVERABILITY
This Agreement shall supersede any existing agreements between the parties
containing general terms and conditions for repurchase transactions. Each
provision and agreement herein shall be treated as separate and independent from
any other provision or agreement herein and shall be enforceable notwithstanding
the unenforceability of any such other provision or agreement.
15. NON-ASSIGNABILITY; TERMINATION
The rights and obligations of the parties under this Agreement and
under any Transaction shall not be assigned by either party without the prior
written consent of the other party. Subject to the foregoing, this Agreement
and any Transactions shall be binding upon and shall inure to the benefit of the
parties and their respective successors and assigns. This Agreement may be
cancelled by either party upon giving written notice to the other, except that
this Agreement shall, notwithstanding such notice, remain applicable to any
Transactions then outstanding.
16. GOVERNING LAW
This Agreement shall be governed by the laws of the State of New York
without giving effect to the conflict of law principles thereof.
9
<PAGE>
17. NO WAIVERS, ETC.
No express or implied waiver of any Event of Default by either party
shall constitute a waiver of any other Event of Default and no exercise of any
remedy hereunder by any party shall constitute a waiver of its right to exercise
any other remedy hereunder. No modification or waiver of any provision of this
Agreement and no consent by any party to a departure herefrom shall be effective
unless and until such shall be in writing and duly executed by both of the
parties hereto. Without limitation on any of the foregoing, the failure to give
a notice pursuant to subparagraphs 4(a) or 4(b) hereof will not constitute a
waiver of any right to do so at a later date.
18. USE OF EMPLOYEE PLAN ASSETS
(a) If assets of an employee benefit plan subject to any provision of
the Employee Retirement Income Security Act of 1974 ("ERISA") are intended to be
used by either party hereto (the"Plan Party") in a Transaction, the Plan Party
shall so notify the other party prior to the Transaction. The Plan Party shall
represent in writing to the other party that the Transaction does not constitute
a prohibited transaction under ERISA or is otherwise exempt therefrom, and the
other party may proceed in reliance thereon but shall not be required so to
proceed.
(b) Subject to the last sentence of subparagraph (a) of this
Paragraph, any such Transaction shall proceed only if Seller furnishes or has
furnished to Buyer its most recent available audited statement of its financial
condition and its most recent subsequent unaudited statement of its financial
condition.
(c) By entering into a Transaction pursuant to this Paragraph, Seller
shall be deemed (i) to represent to Buyer that since the date of Seller's latest
such financial statements, there has been no material adverse change in Seller's
financial condition which Seller has not disclosed to Buyer, and (ii) to agree
to provide Buyer with future audited and unaudited statements of its financial
condition as they are issued, so long as it is a Seller in any outstanding
Transaction involving a Plan Party.
19. INTENT
(a) The parties recognize that each Transaction is a "repurchase
agreement" as that term is defined in Section 101 of Title 11 of the United
States Code, as amended (except insofar as the type of Securities subject to
such Transaction or the term of such Transaction would render such definition
inapplicable), and a "securities contract" as that term is defined in Section
741 of Title 11 of the United States Code, as amended.
(b) It is understood that either party's right to liquidate Securities
delivered to it in connection with Transactions hereunder or to exercise any
other remedies pursuant to Paragraph 11 hereof, is a contractual right to
liquidate such Transaction as described in Sections 555 and 559 of Title 11 of
the United States Code, as amended.
10
<PAGE>
20. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS
The parties acknowledge that they have been advised that:
(a) in the case of Transactions in which one of the parties is a
broker or dealer registered with the Securities and Exchange Commission ("SEC")
under Section 15 of the Securities Exchange Act of 1934 ("1934 Act"), the
Securities Investor Protection Corporation has taken the position that the
provisions of the Securities Investor Protection Act of 1970 ("SIPA") do not
protect the other party with respect to any Transaction hereunder;
(b) in the case of Transactions in which one of the parties is a
government securities broker or a government securities dealer registered with
the SEC under Section 15C of the 1934 Act, SIPA will not provide protection to
the other party with respect to any Transaction hereunder; and
(c) in the case of Transactions in which one of the parties is a
financial institution, funds held by the financial institution pursuant to a
Transaction hereunder are not a deposit and therefore are not insured by the
Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance
Corporation or the National Credit Union Share Insurance Fund, as applicable.
[Name of Party] [Name of Party]
BEAR STEARNS MORTGAGE CAPITAL GIRARD SAVINGS BANK, FSB
CORPORATION
By: /s/ Richard S. Landau By: /s/ Annette J. Vecchio
---------------------------- ---------------------------
Title: President Title: Vice President
Date: December 22, 1995 Date: December 21, 1995
11
<PAGE>
EXHIBIT 10.21
MASTER REPURCHASE AGREEMENT
Dated as of _____________
Between:
CS FIRST BOSTON MORTGAGE CAPITAL CORP. ("BUYER")
and
WILSHIRE FUNDING CORPORATION ("SELLER")
1. APPLICABILITY
From time to time the parties hereto may enter into transactions in which
one party ("Seller") agrees to transfer to the other ("Buyer") securities or
financial instruments ("Securities") against the transfer of funds by Buyer,
with a simultaneous agreement by Buyer to transfer to Seller such Securities at
a date certain or on demand, against the transfer of funds by Seller. Each such
transaction shall be referred to herein as a "Transaction" and shall be governed
by this Agreement, including any supplemental terms or conditions contained in
Annex I hereto, unless otherwise agreed in writing.
2. DEFINITIONS
(a) "Act of Insolvency", with respect to any party, (i) the commencement
by such party as debtor of any case or proceeding under any bankruptcy,
insolvency, reorganization, liquidation, dissolution or similar law, or such
party seeking the appointment of a receiver, trustee, custodian or similar
official for such party or any substantial part of its property, or (ii) the
commencement of any such case or proceeding against such party, or another
seeking such an appointment, or the filing against a party of an application for
a protective decree under the provisions of the Securities Investor Protection
Act of 1970, which (A) is consented to or not timely contested by such party,
(B) results in the entry of an order for relief, such an appointment, the
issuance of such a protective decree or the entry of an order having a similar
effect, or (C) is not dismissed within 15 days, (iii) the making by a party of a
general assignment for the benefit of creditors, or (iv) the admission in
writing by a party of such party's inability to pay such party's debts as they
become due;
(b) "Additional Purchased Securities", Securities provided by Seller to
Buyer pursuant to Paragraph 4(a) hereof;
(c) "Buyer's Margin Amount", with respect to any Transaction as of any
date, the amount obtained by application of a percentage (which may be equal to
the percentage that is agreed to as the Seller's Margin Amount under
subparagraph (q) of this Paragraph), agreed to
<PAGE>
by Buyer and Seller prior to entering into the Transaction, to the Repurchase
Price for such Transaction as of such date;
(d) "Confirmation", the meaning specified in Paragraph 3(b) hereof;
(e) "Income", with respect to any Security at any time, any principal
thereof then payable and all interest, dividends or other distributions thereon;
(f) "Margin Deficit", the meaning specified in Paragraph 4(a) hereof;
(g) "Margin Excess", the meaning specified in Paragraph 4(b) hereof;
(h) "Market Value", with respect to any Securities as of any date, the
price for such Securities on such date obtained from a generally recognized
source agreed to by the parties or the most recent closing bid quotation from
such a source, plus accrued Income to the extent not included therein (other
than any Income credited or transferred to, or applied to the obligations of,
Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to
market practice for such Securities);
(i) "Price Differential", with respect to any Transaction hereunder as of
any date, the aggregate amount obtained by daily application of the Pricing Rate
for such Transaction to the Purchase Price for such Transaction on a 360 day per
year basis for the actual number of days during the period commencing on (and
including) the Purchase Date for such Transaction and ending on (but excluding)
the date of determination (reduced by any amount of such Price Differential
previously paid by Seller to Buyer with respect to such Transaction);
(j) "Pricing Rate", the per annum percentage rate for determination of the
Price Differential;
(k) "Prime Rate", the prime rate of U.S. money center commercial banks as
published in The Wall Street Journal;
(l) "Purchase Date", the date on which Purchased Securities are
transferred by Seller to Buyer;
(m) "Purchase Price", (i) on the Purchase Date, the price at which
Purchased Securities are transferred by Seller to Buyer, and (ii) thereafter,
such price increased by the amount of any cash transferred by Buyer to Seller
pursuant to Paragraph 4(b) hereof and decreased by the amount of any cash
transferred by Seller to Buyer pursuant to Paragraph 4(a) hereof or applied to
reduce Seller's obligations under clause (ii) of Paragraph 5 hereof;
(n) "Purchased Securities", the Securities transferred by Seller to Buyer
in a Transaction hereunder, and any Securities substituted therefor in
accordance with Paragraph 9 hereof. The term "Purchased Securities" with
respect to any Transaction at any time also shall
2
<PAGE>
include Additional Purchased Securities delivered pursuant to Paragraph 4(a) and
shall exclude Securities returned pursuant to Paragraph 4(b);
(o) "Repurchase Date", the date on which Seller is to repurchase the
Purchased Securities from Buyer, including any date determined by application of
the provisions of Paragraphs 3(c) or 11 hereof;
(p) "Repurchase Price", the price at which Purchased Securities are to be
transferred from Buyer to Seller upon termination of a Transaction, which will
be determined in each case (including Transactions terminable upon demand) as
the sum of the Purchase Price and the Price Differential as of the date of such
determination, increased by any amount determined by the application of the
provisions of Paragraph 11 hereof;
(q) "Seller's Margin Amount", with respect to any Transaction as of any
date, the amount obtained by application of a percentage (which may be equal to
the percentage that is agreed to as the Buyer's Margin Amount under subparagraph
(c) of this Paragraph), agreed to by Buyer and Seller prior to entering into the
Transaction, to the Repurchase Price for such Transaction as of such date;
3. INITIATION; CONFIRMATION; TERMINATION
(a) An agreement to enter into a Transaction may be made orally or in
writing at the initiation of either Buyer or Seller. On the Purchase Date for
the Transaction, the Purchased Securities shall be transferred to Buyer or its
agent against the transfer of the Purchase Price to an account of Seller.
(b) Upon agreeing to enter into a Transaction hereunder, Buyer or Seller
(or both), as shall be agreed, shall promptly deliver to the other party a
written confirmation of each Transaction (a "Confirmation"). The Confirmation
shall describe the Purchased Securities (including CUSIP number, if any),
identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase
Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on
demand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction,
and (v) any additional terms or conditions of the Transaction not inconsistent
with this Agreement. The Confirmation, together with this Agreement, shall
constitute conclusive evidence of the terms agreed between Buyer and Seller with
respect to the Transaction to which the Confirmation relates, unless with
respect to the Confirmation specific objection is made promptly after receipt
thereof. In the event of any conflict between the terms of such Confirmation
and this Agreement, this Agreement shall prevail.
(c) In the case of Transactions terminable upon demand, such demand shall
be made by Buyer or Seller, no later than such time as is customary in
accordance with market practice, by telephone or otherwise on or prior to the
business day on which such termination will be effective. On the date specified
in such demand, or on the date fixed for termination in the case of Transactions
having a fixed term, termination of the Transaction will be effected by transfer
3
<PAGE>
to Seller or its agent of the Purchased Securities and any Income in respect
thereof received by Buyer (and not previously credited or transferred to, or
applied to the obligations of, Seller pursuant to Paragraph 5 hereof) against
the transfer of the Repurchase Price to an account of Buyer.
4. MARGIN MAINTENANCE
(a) If at any time the aggregate Market Value of all Purchased Securities
subject to all Transactions in which a particular party hereto is acting as
Buyer is less than the aggregate Buyer's Margin Amount for all such Transactions
(a "Margin Deficit"), then Buyer may by notice to Seller require Seller in such
Transactions, at Seller's option, to transfer to Buyer cash or additional
Securities reasonably acceptable to Buyer ("Additional Purchased Securities"),
so that the cash and aggregate Market Value of the Purchased Securities,
including any such Additional Purchased Securities, will thereupon equal or
exceed such aggregate Buyer's Margin Amount (decreased by the amount of any
Margin Deficit as of such date arising from any Transactions in which such Buyer
is acting as Seller).
(b) If at any time the aggregate Market Value of all Purchased Securities
subject to all Transactions in which a particular party hereto is acting as
Seller exceeds the aggregate Seller's Margin Amount for all such Transactions at
such time (a "Margin Excess"), then Seller may by notice to Buyer require Buyer
in such Transactions, at Buyer's option, to transfer cash or Purchased
Securities to Seller, so that the aggregate Market Value of the Purchased
Securities, after deduction of any such cash or any Purchased Securities so
transferred, will thereupon not exceed such aggregate Seller's Margin Amount
(increased by the amount of any Margin Excess as of such date arising from any
Transactions in which such Seller is acting as Buyer).
(c) Any cash transferred pursuant to this Paragraph shall be attributed to
such Transactions as shall be agreed upon by Buyer and Seller.
(d) Seller and Buyer may agree, with respect to any or all Transactions
hereunder, that the respective rights of Buyer or Seller (or both) under
subparagraphs (a) and (b) of this Paragraph may be exercised only where a Margin
Deficit or Margin Excess exceeds a specified dollar amount or a specified
percentage of the Repurchase Prices for such Transactions (which amount or
percentage shall be agreed to by Buyer and Seller prior to entering into any
such Transactions).
(e) Seller and Buyer may agree, with respect to any or all Transactions
hereunder, that the respective rights of Buyer and Seller under subparagraphs
(a) and (b) of this Paragraph to require the elimination of a Margin Deficit or
a Margin Excess, as the case may be, may be exercised whenever such a Margin
Deficit or Margin Excess exists with respect to any single Transaction hereunder
(calculated without regard to any other Transaction outstanding under this
Agreement).
4
<PAGE>
5. INCOME PAYMENTS
Where a particular Transaction's term extends over an Income payment date
on the Securities subject to that Transaction, Buyer shall, as the parties may
agree with respect to such Transaction (or, in the absence of any agreement, as
Buyer shall reasonably determine in its discretion), on the date such Income is
payable either (i) transfer to or credit to the account of Seller an amount
equal to such Income payment or payments with respect to any Purchased
Securities subject to such Transaction or (ii) apply the Income payment or
payments to reduce the amount to be transferred to Buyer by Seller upon
termination of the Transaction. Buyer shall not be obligated to take any action
pursuant to the preceding sentence to the extent that such action would result
in the creation of a Margin Deficit, unless prior thereto or simultaneously
therewith Seller transfers to Buyer cash or Additional Purchased Securities
sufficient to eliminate such Margin Deficit.
6. SECURITY INTEREST
Although the parties intend that all Transactions hereunder be sales and
purchases and not loans, in the event any such Transactions are deemed to be
loans, Seller shall be deemed to have pledged to Buyer as security for the
performance by Seller of its obligations under each such Transaction, and shall
be deemed to have granted to Buyer a security interest in, all of the Purchased
Securities with respect to all Transactions hereunder and all proceeds thereof.
7. PAYMENT AND TRANSFER
Unless otherwise mutually agreed, all transfers of funds hereunder shall be
in immediately available funds. All Securities transferred by one party hereto
to the other party (i) shall be in suitable form for transfer or shall be
accompanied by duly executed instruments of transfer or assignment in blank and
such other documentation as the party receiving possession may reasonably
request, (ii) shall be transferred on the book-entry system of a Federal Reserve
Bank, or (iii) shall be transferred by any other method mutually acceptable to
Seller and Buyer. As used herein with respect to Securities, "transfer" is
intended to have the same meaning as when used in Section 8-313 of the New York
Uniform Commercial Code or, where applicable, in any federal regulation
governing transfers of the Securities.
8. SEGREGATION OF PURCHASED SECURITIES
To the extent required by applicable law, all Purchased Securities in the
possession of Seller shall be segregated from other securities in its possession
and shall be identified as subject to this Agreement. Segregation may be
accomplished by appropriate identification on the books and records of the
holder, including a financial intermediary or a clearing corporation. Title to
all Purchased Securities shall pass to Buyer and, unless otherwise agreed by
Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging
in repurchase transactions with the Purchased Securities or otherwise pledging
or hypothecating the Purchased Securities, but no such transaction shall relieve
Buyer of its obligations to transfer Purchased Securities to Seller
5
<PAGE>
pursuant to Paragraphs 3, 4 or 11 hereof, or of Buyer's obligation to credit or
pay Income to, or apply Income to the obligations of, Seller pursuant to
Paragraph 5 hereof.
REQUIRED DISCLOSURE FOR TRANSACTIONS IN WHICH THE SELLER RETAINS CUSTODY OF THE
PURCHASED SECURITIES
Seller is not permitted to substitute other securities for those
subject to this Agreement and therefore must keep Buyer's securities
segregated at all times, unless in this Agreement Buyer grants Seller the
right to substitute other securities. If Buyer grants the right to
substitute, this means that Buyer's securities will likely be commingled
with Seller's own securities during the trading day. Buyer is advised
that, during any trading day that Buyer's securities are commingled with
Seller's securities, they [will]/*/ [may]/**/ be subject to liens granted
by Seller to [its clearing bank]* [third parties]** and may be used by
Seller for deliveries on other securities transactions. Whenever the
securities are commingled, Seller's ability to resegregate substitute
securities for Buyer will be subject to Seller's ability to satisfy [the
clearing]/*/ [any]/**/ lien or to obtain substitute securities.
*Language to be used under 17 C.F.R (S)403.4(e) if Seller is a government
securities broker or dealer other than a financial institution.
**Language to be used under 17 C.F.R. (S)403.5(d) if Seller is a financial
institution.
9. SUBSTITUTION
(a) Seller may, subject to agreement with and acceptance by Buyer,
substitute other Securities for any Purchased Securities. Such substitution
shall be made by transfer to Buyer of such other Securities and transfer to
Seller of such Purchased Securities. After substitution, the substituted
Securities shall be deemed to be Purchased Securities.
(b) In Transactions in which the Seller retains custody of Purchased
Securities, the parties expressly agree that Buyer shall be deemed, for purposes
of subparagraph (a) of this Paragraph, to have agreed to and accepted in this
Agreement substitution by Seller of other
- ----------
/*/ Language to be used under 17 C.F.R. (S) 403.4(e) if Seller is a
government securities broker or dealer other than a financial institution.
/**/ Language to be used under 17 C.F.R. (S) 403.5(d) if Seller is a
financial institution.
6
<PAGE>
Securities for Purchased Securities; provided, however, that such other
Securities shall have a Market Value at least equal to the Market Value of the
Purchased Securities for which they are substituted.
10. REPRESENTATIONS
Each of Buyer and Seller represents and warrants to the other that (i) it
is duly authorized to execute and deliver this Agreement, to enter into the
Transactions contemplated hereunder and to perform its obligations hereunder and
has taken all necessary action to authorize such execution, delivery and
performance, (ii) it will engage in such Transactions as principal (or, if
agreed in writing in advance of any Transaction by the other party hereto, as
agent for a disclosed principal), (iii) the person signing this Agreement on
its behalf is duly authorized to do so on its behalf (or on behalf of any such
disclosed principal), (iv) it has obtained all authorizations of any
governmental body required in connection with this Agreement and the
Transactions hereunder and such authorizations are in full force and effect and
(v) the execution, delivery and performance of this Agreement and the
Transactions hereunder will not violate any law, ordinance, charter, by-law or
rule applicable to it or any agreement by which it is bound or by which any of
its assets are affected. On the Purchase Date for any Transaction Buyer and
Seller shall each be deemed to repeat all the foregoing representations made by
it.
11. EVENTS OF DEFAULT
In the event that (i) Seller fails to repurchase or Buyer fails to transfer
Purchased Securities upon the applicable Repurchase Date, (ii) Seller or Buyer
fails, after one business day's notice, to comply with Paragraph 4 hereof, (iii)
Buyer fails to comply with Paragraph 5 hereof, (iv) an Act of Insolvency occurs
with respect to Seller or Buyer, (v) any representation made by Seller or Buyer
shall have been incorrect or untrue in any material respect when made or
repeated or deemed to have been made or repeated, (vi) Seller or Buyer shall
admit to the other its inability to, or its intention not to, perform any of its
obligations hereunder (each an "Event of Default"):
(a) At the option of the nondefaulting party, exercised by written notice
to the defaulting party (which option shall be deemed to have been exercised,
even if no notice is given, immediately upon the occurrence of an Act of
Insolvency), the Repurchase Date for each Transaction hereunder shall be deemed
immediately to occur.
(b) In all Transactions in which the defaulting party is acting as Seller,
if the nondefaulting party exercises or is deemed to have exercised the option
referred to in subparagraph (a) of this Paragraph, (i) the defaulting party's
obligations hereunder to repurchase all Purchased Securities in such
Transactions shall thereupon become immediately due and payable, (ii) to the
extent permitted by applicable law, the Repurchase Price with respect to each
such Transaction shall be increased by the aggregate amount obtained by daily
application of (x) the greater of the Pricing Rate for such Transaction or the
Prime Rate to (y) the Repurchase Price for such Transaction as of the Repurchase
Date as determined pursuant to subparagraph
7
<PAGE>
(a) of this Paragraph (decreased as of any day by (A) any amounts retained by
the nondefaulting party with respect to such Repurchase Price pursuant to clause
(iii) of this subparagraph, (B) any proceeds from the sale of Purchased
Securities pursuant to subparagraph (d)(i) of this Paragraph, and (C) any
amounts credited to the account of the defaulting party pursuant to subparagraph
(e) of this Paragraph) on a 360 day per year basis for the actual number of days
during the period from and including the date of the Event of Default giving
rise to such option to but excluding the date of payment of the Repurchase Price
as so increased, (iii) all Income paid after such exercise or deemed exercise
shall be retained by the nondefaulting party and applied to the aggregate unpaid
Repurchase Prices owed by the defaulting party, and (iv) the defaulting party
shall immediately deliver to the nondefaulting party any Purchased Securities
subject to such Transactions then in the defaulting party's possession.
(c) In all Transactions in which the defaulting party is acting as Buyer,
upon tender by the nondefaulting party of payment of the aggregate Repurchase
Prices for all such Transactions, the defaulting party's right, title and
interest in all Purchased Securities subject to such Transactions shall be
deemed transferred to the nondefaulting party, and the defaulting party shall
deliver all such Purchased Securities to the nondefaulting party.
(d) After one business day's notice to the defaulting party (which notice
need not be given if an Act of Insolvency shall have occurred, and which may be
the notice given under subparagraph (a) of this Paragraph or the notice referred
to in clause (ii) of the first sentence of this Paragraph), the nondefaulting
party may:
(i) as to Transactions in which the defaulting party is acting as
Seller, (A) immediately sell, in a recognized market at such price or
prices as the nondefaulting party may reasonably deem satisfactory,
any or all Purchased Securities subject to such Transactions and apply
the proceeds thereof to the aggregate unpaid Repurchase Prices and any
other amounts owing by the defaulting party hereunder or (B) in its
sole discretion elect, in lieu of selling all or a portion of such
Purchased Securities, to give the defaulting party credit for such
Purchased Securities in an amount equal to the price therefor on such
date, obtained from a generally recognized source or the most recent
closing bid quotation from such a source, against the aggregate unpaid
Repurchase Prices and any other amounts owing by the defaulting party
hereunder; and
(ii) as to Transactions in which the defaulting party is acting as
Buyer, (A) purchase securities ("Replacement Securities") of the same
class and amount as any Purchased Securities that are not delivered by
the defaulting party to the nondefaulting party as required hereunder
or (B) in its sole discretion elect, in lieu of purchasing Replacement
Securities, to be deemed to have purchased Replacement Securities at
the price therefor on such date, obtained from a generally recognized
source or the most recent closing bid quotation from such a source.
8
<PAGE>
(e) As to Transactions in which the defaulting party is acting as
Buyer, the defaulting party shall be liable to the nondefaulting party (i) with
respect to Purchased Securities (other than Additional Purchased Securities),
for any excess of the price paid (or deemed paid) by the nondefaulting party for
Replacement Securities therefor over the Repurchase Price for such Purchased
Securities and (ii) with respect to Additional Purchased Securities, for the
price paid (or deemed paid) by the nondefaulting party for the Replacement
Securities therefor. In addition, the defaulting party shall be liable to the
nondefaulting party for interest on such remaining liability with respect to
each such purchase (or deemed purchase) of Replacement Securities from the date
of such purchase (or deemed purchase) until paid in full by Buyer. Such interest
shall be at a rate equal to the greater of the Pricing Rate for such Transaction
or the Prime Rate.
(f) For purposes of this Paragraph 11, the Repurchase Price for
each Transaction hereunder in respect of which the defaulting party is acting as
Buyer shall not increase above the amount of such Repurchase Price for such
Transaction determined as of the date of the exercise or deemed exercise by the
nondefaulting party of its option under subparagraph (a) of this Paragraph.
(g) The defaulting party shall be liable to the nondefaulting party
for the amount of all reasonable legal or other expenses incurred by the
nondefaulting party in connection with or as a consequence of an Event of
Default, together with interest thereon at a rate equal to the greater of the
Pricing Rate for the relevant Transaction or the Prime Rate.
(h) The nondefaulting party shall have, in addition to its rights
hereunder, any rights otherwise available to it under any other agreement or
applicable law.
12. SINGLE AGREEMENT
Buyer and Seller acknowledge that, and have entered hereinto and will enter
into each Transaction hereunder in consideration of and in reliance upon the
fact that, all Transactions hereunder constitute a single business and
contractual relationship and have been made in consideration of each other.
Accordingly, each of Buyer and Seller agrees (i) to perform all of its
obligations in respect of each Transaction hereunder, and that a default in the
performance of any such obligations shall constitute a default by it in respect
of all Transactions hereunder, (ii) that each of them shall be entitled to set
off claims and apply property held by them in respect of any Transaction against
obligations owing to them in respect of any other Transactions hereunder and
(iii) that payments, deliveries and other transfers made by either of them in
respect of any Transaction shall be deemed to have been made in consideration of
payments, deliveries and other transfers in respect of any other Transactions
hereunder, and the obligations to make any such payments, deliveries and other
transfers may be applied against each other and netted.
13. NOTICES AND OTHER COMMUNICATIONS
9
<PAGE>
Unless another address is specified in writing by the respective party to
whom any notice or other communication is to be given hereunder, all such
notices or communications shall be in writing or confirmed in writing and
delivered at the respective addresses set forth in Annex II attached hereto.
14. ENTIRE AGREEMENT; SEVERABILITY
This Agreement shall supersede any existing agreements between the parties
containing general terms and conditions for repurchase transactions. Each
provision and agreement herein shall be treated as separate and independent from
any other provision or agreement herein and shall be enforceable notwithstanding
the unenforceability of any such other provision or agreement.
15. NON-ASSIGNABILITY; TERMINATION
The rights and obligations of the parties under this Agreement and under
any Transaction shall not be assigned by either party without the prior written
consent of the other party. Subject to the foregoing, this Agreement and any
Transactions shall be binding upon and shall inure to the benefit of the parties
and their respective successors and assigns. This Agreement may be cancelled by
either party upon giving written notice to the other, except that this Agreement
shall, notwithstanding such notice, remain applicable to any Transactions then
outstanding.
16. GOVERNING LAW
This Agreement shall be governed by the laws of the State of New York
without giving effect to the conflict of law principles thereof.
17. NO WAIVERS, ETC.
No express or implied waiver of any Event of Default by either party shall
constitute a waiver of any other Event of Default and no exercise of any remedy
hereunder by any party shall constitute a waiver of its right to exercise any
other remedy hereunder. No modification or waiver of any provision of this
Agreement and no consent by any party to a departure herefrom shall be effective
unless and until such shall be in writing and duly executed by both of the
parties hereto. Without limitation on any of the foregoing, the failure to give
a notice pursuant to subparagraphs 4(a) or 4(b) hereof will not constitute a
waiver of any right to do so at a later date.
18. USE OF EMPLOYEE PLAN ASSETS
(a) If assets of an employee benefit plan subject to any provision of the
Employee Retirement Income Security Act of 1974 ("ERISA") are intended to be
used by either party hereto (the "Plan Party") in a Transaction, the Plan Party
shall so notify the other party prior to the Transaction. The Plan Party shall
represent in writing to the other party that the
10
<PAGE>
Transaction does not constitute a prohibited transaction under ERISA or is
otherwise exempt therefrom, and the other party may proceed in reliance thereon
but shall not be required so to proceed.
(b) Subject to the last sentence of subparagraph (a) of this Paragraph,
any such Transaction shall proceed only if Seller furnishes or has furnished to
Buyer its most recent available audited statement of its financial condition and
its most recent subsequent unaudited statement of its financial condition.
(c) By entering into a Transaction pursuant to this Paragraph, Seller
shall be deemed (i) to represent to Buyer that since the date of Seller's latest
such financial statements, there has been no material adverse change in Seller's
financial condition which Seller has not disclosed to Buyer, and (ii) to agree
to provide Buyer with future audited and unaudited statements of its financial
condition as they are issued, so long as it is a Seller in any outstanding
Transaction involving a Plan Party.
19. INTENT
(a) The parties recognize that each Transaction is a "repurchase
agreement" as that term is defined in Section 101 of Title 11 of the United
States Code, as amended (except insofar as the type of Securities subject to
such Transaction or the term of such Transaction would render such definition
inapplicable), and a "securities contract" as that term is defined in Section
741 of Title 11 of the United States Code, as amended.
(b) It is understood that either party's right to liquidate Securities
delivered to it in connection with Transactions hereunder or to exercise any
other remedies pursuant to Paragraph 11 hereof, is a contractual right to
liquidate such Transaction as described in Sections 555 and 559 of Title 11 of
the United States Code, as amended.
20. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS
The parties acknowledge that they have been advised that:
(a) in the case of Transactions in which one of the parties is a broker or
dealer registered with the Securities and Exchange Commission ("SEC") under
Section 15 of the Securities Exchange Act of 1934 ("1934 Act"), the Securities
Investor Protection Corporation has taken the position that the provisions of
the Securities Investor Protection Act of 1970 ("SIPA") do not protect the other
party with respect to any Transaction hereunder;
(b) in the case of Transactions in which one of the parties is a
government securities broker or a government securities dealer registered with
the SEC under Section 15C of the 1934 Act, SIPA will not provide protection to
the other party with respect to any Transaction hereunder; and
11
<PAGE>
(c) in the case of Transactions in which one of the parties is a financial
institution, funds held by the financial institution pursuant to a Transaction
hereunder are not a deposit and therefore are not insured by the Federal Deposit
Insurance Corporation, the Federal Savings and Loan Insurance Corporation or the
National Credit Union Share Insurance Fund, as applicable.
WILSHIRE FUNDING CORPORATION, CS FIRST BOSTON MORTGAGE
as Seller CAPITAL CORP., as Buyer
By By
--------------------------- ----------------------------
Title Title
------------------------ -------------------------
Date Date
------------------------- --------------------------
12
<PAGE>
ANNEX I
Supplemental Terms and Conditions
13
<PAGE>
ANNEX II
Names and Addresses for Communications Between Parties
14
<PAGE>
ANNEX I
ADDITIONAL SUPPLEMENTAL TERMS TO MASTER REPURCHASE AGREEMENT,
DATED AS OF NOVEMBER 15, 1996, BETWEEN
CS FIRST BOSTON MORTGAGE CAPITAL CORP. ("CSFB" or "Buyer") AND
WILSHIRE FUNDING CORPORATION ("WFC" or "Seller")
1. APPLICABILITY. These Additional Supplemental Terms (the "Additional
------------- ----------
Supplemental Terms") to Master Repurchase Agreement (Version 1987)
------------------
(the "Repurchase Agreement") modify the terms and conditions of the
--------------------
Repurchase Agreement and the terms under which the parties hereto may,
from time to time, enter into Transactions (the Repurchase Agreement,
together with the Annexes thereto, the "Agreement"). The provisions of
these Additional Supplemental Terms shall supersede the terms in the
Repurchase Agreement to the extent they are in conflict. The Agreement
shall be read, taken and construed as one and the same instrument.
Capitalized terms used in these Additional Supplemental Terms and not
otherwise defined herein shall have the meanings set forth in the
Repurchase Agreement.
2. ADDITIONAL DEFINITIONS.
----------------------
(a) Notwithstanding the definition set forth in Paragraph 2(h) of
--------------
the Repurchase Agreement, with respect to Contracts, the "Market
------
Value" of Contracts shall be the price of Contracts as
-----
reasonably determined from time to time (but in no event less
frequently than monthly) by CSFB in its good faith assessment of
the value of the Contracts.
(b) Notwithstanding the definition set forth in Paragraph 2(o) of
--------------
the Repurchase Agreement, the "Repurchase Date" with respect to
---------------
each Transaction shall be the earliest of (i) the twenty-fifth
(25th) day of the calendar month following the month in which
the Purchase Date for such Transaction occurs, or if such day is
not a Business Day, the immediately following Business Day, (ii)
the Termination Date, and (iii) the date determined by
application of Paragraph 11 of the Repurchase Agreement or
---------
Section 10 hereof.
(c) Notwithstanding the definition set forth in Paragraph 2(c) of
--------------
the Repurchase Agreement, the "Buyer's Margin Amount" with
---------------------
respect to each Transaction as of any date shall be the amount
obtained by application to the Repurchase Price of each such
Transaction of a percentage determined on the Purchase Date by
CSFB, agreed to by WFC and set forth in the relevant
Confirmation.
<PAGE>
(d) "Appraised Value": shall mean with respect to any related
---------------
Mortgaged Property, generally, the lesser of (a) the appraised
value of such Mortgaged Property based on an appraisal made at
the time of the origination or modification of the related
Contract and (b) the sales price of the related Mortgaged
Property at such time of origination; except in the case of a
Mortgaged Property securing a refinanced or modified Contract as
to which it is either the appraised value determined above or
the appraised value determined in an appraisal at the time of
refinancing or modification, as the case may be.
(e) "Balloon Contract" shall mean any Contract whose final Monthly
----------------
Payment is substantially greater than the preceding Monthly
Payments.
(f) "Breakage Costs" shall have the meaning assigned thereto in
--------------
Section 31 hereof.
(g) "Breakage Period" shall have the meaning assigned thereto in
---------------
Section 31 hereof.
(h) "Breakage Rate" shall have the meaning assigned thereto in
-------------
Section 31 hereof.
(i) "Business Day" shall mean any day other than (i) a Saturday or a
------------
Sunday or (ii) another day on which banking institutions in the
cities of Irvine, California, Portland, Oregon, or New York, New
York are authorized or obligated by law, executive order, or
governmental decree to be closed.
(j) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(k) "Collection Account" shall have the meaning assigned in the
------------------
Custodial Agreement.
(l) "Collection Period" in respect of a Repurchase Date shall be the
-----------------
month preceding the month in which such Repurchase Date occurs.
(m) "Computer Tape" shall mean a computer tape or other electronic
-------------
medium generated by the Seller and delivered to Buyer pursuant
to Section 4(b) hereof which provides information relating to
the Contracts in a format that was previously requested by the
Buyer or as provided in Section 4(b) hereof.
(n) "Confirmation" shall have the meaning assigned thereto in
------------
Section 4(c) hereof.
16
<PAGE>
(o) "Contracts" shall mean Mortgage Loan Contracts and Manufactured
---------
Home Loan Contracts which are to be sold and assigned by the
Seller to the Buyer and which are the subject of this Agreement.
The Contracts include, without limitation, all Records relating
to such Contract and all related security interests, the Related
Assets, and any and all rights to receive payments thereunder
and all other proceeds thereof (including, without limitation,
any recourse rights against third persons) from and after the
related Purchase Date.
(p) "Contract Account" shall have the meaning set forth in Section
----------------
4.2 of the Custodial Agreement.
(q) "Contract Rate" shall have the meaning set forth in the
-------------
Custodial Agreement.
(r) "Contract Schedule" shall have the meaning assigned in the
-----------------
Custodial Agreement.
(s) "Custodial Agreement" shall refer to the Custodial and Servicing
-------------------
Agreement dated as of November 15, 1996, by and among the Buyer,
the Seller, the Custodian and the Servicer, providing for the
custody and the servicing of the Contracts.
(t) "Custodial Receipt and Confirmation" shall refer to the
----------------------------------
confirmation statement issued by the Custodian that evidences
receipt and confirms ownership of the Contracts and other
documents indicated thereon, as provided in the Custodial
Agreement.
(u) "Custodian" shall refer to Bankers Trust Company of California,
---------
N.A., in its capacity as custodian under the Custodial
Agreement.
(v) "Custodian's Contract File" shall have the meaning set forth in
-------------------------
the Custodial Agreement.
(w) "Dealer" shall mean the dealer who sold a Financed Manufactured
------
Home to an Obligor and who originated and assigned the related
Manufactured Home Loan Contract to Seller under a Dealer
Agreement, and any successor to such Dealer.
(x) "Dealer Agreement" shall mean any agreement between Seller and a
----------------
Dealer with respect to the origination of Manufactured Home Loan
Contracts relating to Financed Manufactured Homes, substantially
in the form previously delivered to and approved by the Buyer.
17
<PAGE>
(y) "Dealer Recourse" shall mean, with respect to a Manufactured
---------------
Home Loan Contract, all of Seller's rights arising under the
related Dealer Agreement or otherwise against the Dealer which
originated such Manufactured Home Loan Contract.
(z) "Defaulted Contracts" shall mean the following: (1) with respect
-------------------
to Originated Contracts, (A) Manufactured Home Loan Contracts
and Second Mortgage Loan Contracts that are over sixty (60) days
past due in payment of a Monthly Payment, and (B) First Mortgage
Loan Contracts that are over ninety (90) days past due in
payment of a Monthly Payment; and (2) with respect to Non-
Originated Contracts, Contracts that are deemed past due in
accordance with the guidelines established by Buyer and Seller
with respect to such Contract, as such guidelines may be
modified or amended in writing by Buyer and Seller.
(aa) "Default Rate" shall mean, with respect to any Collection Period
------------
and any designated category of Contracts, the percentage
equivalent of a fraction the numerator of which is the product
of (i) 12 and (ii) the aggregate principal balance of all such
Contracts with respect to which (x) the related Mortgage
Property was foreclosed upon or repossessed, as applicable,
during such Collection Period, or (y) the related Obligor became
the subject debtor of a case under the federal bankruptcy laws
during such Collection Period or failed generally to pay its
debts as such debts became due, and the denominator of which is
the aggregate principal balance of such designated category of
Contracts as of the end of such Collection Period.
(ab) "Delinquency Percentage" shall mean, with respect to any
----------------------
calculation period and any designated category of Contracts, the
percentage equivalent of a fraction, the numerator of which is
the sum of the Delinquent Contract Balances for each of the
Collection Periods during such calculation period and the
denominator of which is the sum of the aggregate principal
balances of such designated category of Contracts, in each case
determined as of the end of each of the Collection Periods
during such calculation period.
(ac) "Delinquent Contract Balance" shall mean, with respect to any
---------------------------
Collection Period and any designated category of Contracts, the
aggregate principal balance of such designated category of
Contracts that were 60 days or more past due as of the end of
such Collection Period or, without duplication, as of the date
such Contracts were repurchased pursuant to Section 9 hereof.
18
<PAGE>
(ad) "Eligible Contract" shall mean, as of any date of determination,
-----------------
a Contract that complies in all material respects with the
representations and warranties set forth in Exhibit B hereto and
that has not been repurchased, and is not required to be
repurchased, pursuant to Section 9 hereof.
---------
(ae) "Effective Date" shall mean the date upon which the initial
--------------
public offering by Wilshire Financial Services Group Inc. is
completed.
(af) "Engagement Letter" means the letter agreement dated November
-----------------
15, 1996 between CSFB and WFC relating to, inter alia, the
transactions contemplated herein.
(ag) "ERISA" shall mean the Employee Retirement Income Security Act
-----
of 1974, as amended.
(ah) "Financed Manufactured Home" shall mean any new or used
--------------------------
Manufactured Home financed by loans arising under Manufactured
Home Loan Contracts.
(ai) "First Mortgage Loan Contract" shall mean a loan or other debt
----------------------------
instrument secured by a first Mortgage on a residential
dwelling, including, without limitation, all Records relating to
such First Mortgage Loan Contract and all related security
interests, the Related Assets and all rights to receive payments
thereunder and all other proceeds thereof (including, without
limitation, any recourse rights against third persons) from and
after the related Purchase Date.
(aj) "Fixed Rate Contract" shall mean a Contract bearing an interest
-------------------
rate that is fixed for the life of such Contract.
(ak) "GAAP" shall mean General Accepted Accounting Principles.
----
(al) "Guarantor" shall mean WFSG, or any successor thereto.
---------
(am) "Guaranty Agreement" shall mean the guaranty dated November 15,
------------------
1996 issued by WFSG for the benefit of the Buyer.
(an) "Insurance Policies" shall mean the policy of fire and extended
------------------
coverage insurance (and federal flood insurance, if applicable)
required to be maintained for the related Mortgaged Property (as
provided in the Underwriting Standards) and which may be a
blanket insurance policy maintained by the Servicer in
accordance with the terms and conditions set forth in the
Custodial Agreement.
19
<PAGE>
(ao) "Land-and-Home Contract" shall mean a Manufactured Home Loan
----------------------
Contract that is secured in part, or intended to be secured in
part, by the lien of a Mortgage.
(ap) "LIBOR" shall have the meaning assigned thereto in Section 16(a)
-----
hereof.
(aq) "List of Contracts" shall have the meaning assigned in Section 4
-----------------
hereof.
(ar) "Loan-to-Value Ratio" shall mean as of any date, the fraction,
-------------------
expressed as a percentage, the numerator of which is the
Outstanding Principal Amount of the related Contract at the date
of determination and the denominator of which is the Appraised
Value of the related Mortgaged Property.
(as) "Management Team" shall mean the group of managers of the
---------------
Seller, which shall include Lawrence A. Mendelsohn and Andrew A.
Wiederhorn.
(at) "Manufactured Home" shall mean a unit of manufactured housing
-----------------
which meets the requirements of Section 25(e)(10) of the Code,
including all accessions thereto, securing the indebtedness of
the Obligor under the related Contract.
(au) "Manufactured Home Loan Contract" shall mean each manufactured
housing fixed rate retail installment sale contract, installment
loan agreement and Land-and-Home Contract, including, without
limitation, all Records relating to such Manufactured Home Loan
Contract, and all related security interests, the Related Assets
and all rights to receive payments thereunder and all other
proceeds thereof (including, without limitation, any recourse
rights against third persons) from and after the related
Purchase Date.
(av) "MHLC Lockbox Account" shall have the meaning assigned in the
--------------------
Custodial Agreement.
(aw) "MLC Lockbox Account" shall have the meaning assigned in the
-------------------
Custodial Agreement.
(ax) "Monthly Payments" shall mean the scheduled monthly payments of
----------------
principal and interest on a Mortgage Loan Contract which is
payable by an Obligor under a Mortgage Note.
(ay) "Monthly Servicing Fee" shall have the meaning assigned in the
---------------------
Custodial Agreement.
20
<PAGE>
(az) "Mortgage" shall mean the mortgage or deed of trust creating a
--------
lien on an estate in fee simple interest in the real property
securing the related Contract.
(ba) "Mortgage Loan Contracts" shall mean First Mortgage Loan
-----------------------
Contracts and Second Mortgage Loan Contracts.
(bb) "Mortgage Note" shall mean the note or other evidence of the
-------------
indebtedness of an Obligor secured by a Mortgage.
(bc) "Mortgaged Property" shall mean the real property, including any
------------------
improvements thereon, or Manufactured Home securing the related
Contract, or both as the case may be.
(bd) "Multiemployer Plan" shall mean a multiemployer plan (within the
------------------
meaning of Section 4001(a)(3) of ERISA) in respect of which
Seller makes contributions or has liability.
(be) "Net Loss Rate" shall mean, with respect to any Collection
-------------
Period and any designated category of Contracts, the percentage
equivalent of a fraction, the numerator of which is the product
of (i) 12 and (ii) the net losses in respect of such Contracts
for such Collection Period, determined in accordance with the
credit and collection policies of the Servicer, and the
denominator of which is the aggregate principal balance of such
designated category of Contracts as of the end of such
Collection Period.
(bf) "Non-Originated Contracts" shall mean Contracts that are not
------------------------
Originated Contracts.
(bg) "Notice Date" shall have the meaning assigned thereto in Section
-----------
4(a) hereof.
(bh) "Obligor" shall mean each Person who is indebted under a
-------
Contract.
(bi) "Originated Contracts" shall mean Contracts that were originated
--------------------
by WFC or by a Person on behalf of WFC with whom WFC has or had
a correspondent relationship, and conform to the Underwriting
Standards.
(bj) "Outstanding Principal Amount" shall have the meaning assigned
----------------------------
in the Custodial Agreement.
(bk) "PBGC" shall mean the Pension Benefit Guaranty Corporation, and
----
any successor thereto.
21
<PAGE>
(bl) "Person" shall mean any legal person, including any individual,
------
corporation, partnership, association, joint-stock company,
trust, limited liability company, unincorporated organization,
governmental entity or other entity of similar nature.
(bm) "Plan" shall mean any pension plan (other than a Multiemployer
----
Plan) covered by Title IV of ERISA, which is maintained by
Seller or in respect of which Seller has liability.
(bn) "Prime Rate" shall mean, with respect to any date of
----------
determination, the daily prime loan rate as reported in The Wall
----
Street Journal as most recently available as of the date of
--------------
determination or, if such rate is not published for any reason,
a daily prime loan rate from a comparable financial publication.
(bo) "Records" shall mean, with respect to any Contract, all
-------
documents, books, records and other information (including,
without limitation, computer programs, tapes, discs, punch cards
and related property and rights) relating to such Contract.
(bp) "Related Assets" shall mean (i) Seller's security interest in
--------------
the Mortgaged Property and rights, remedies, powers and
privileges under the related Mortgage or other security
instrument, (ii) Seller's rights, remedies, powers and
privileges under the Contracts, including any personal guaranty
thereof, (iii) Seller's rights, remedies, powers and privileges
under the Agreement and the Custodial Agreement, (iv) Seller's
rights, remedies, powers and privileges under the Dealer
Agreements, including but not limited to Dealer Recourse and any
holdback amounts, (v) Seller's rights, remedies, powers and
privileges under the Insurance Policies, and (vi) all proceeds
of the foregoing.
(bq) "Reportable Event" shall mean any of the events set forth in
----------------
Section 4043(c) of ERISA or the regulations thereunder.
(br) "Second Mortgage Loan Contract" shall mean a loan or other debt
-----------------------------
instrument secured by a second Mortgage on a residential
dwelling with respect to which WFC is the holder and/or
originator of the first Mortgage on such residential dwelling,
including, without limitation, all Records relating to such
Second Mortgage Loan Contract and all related security
interests, the Related Assets and all rights to receive payments
thereunder and all other proceeds thereof (including, without
limitation, any recourse rights against third persons) from and
after the related Purchase Date.
22
<PAGE>
(bs) (Notwithstanding the definition set forth in Paragraph 1 of the
Repurchase Agreement, "Securities" shall mean Contracts
----------
purchased pursuant to this Agreement.
(bt) "Servicer" shall refer to Wilshire Funding Corporation in its
capacity as servicer under the Custodial Agreement, or any
successor or assigns (as expressly permitted pursuant to the
terms of the Custodial Agreement) thereto.
(bu) "Termination Date" shall have the meaning assigned thereto in
----------------
Section 13 hereof.
(bv) "Transaction" shall, in addition to the definition set forth in
-----------
the Repurchase Agreement, refer to substitutions pursuant to
Paragraph 9 of the Repurchase Agreement.
(bw) "Transaction Documents" means this Agreement, the Custodial
---------------------
Agreement, the Engagement Letter and any related agreements.
(bx) "Transaction Notice" shall have the meaning assigned thereto in
------------------
Section 4(b) hereof.
(by) "Underwriting Standards" shall mean the standards attached
----------------------
hereto as Exhibit D with respect to Originated Contracts.
(bz) "WFSG" shall mean Wilshire Financial Services Group Inc.
----
3. COMMITMENT. On the terms and subject to the conditions set forth in
----------
this Agreement, the Custodial Agreement, and the relevant Confirmation
Buyern agrees to purchase from the Seller Eligible Contracts and
Seller agrees to repurchase such Eligible Contracts from Buyer.
4. CONFIRMATIONS.
-------------
(a) An agreement to enter into a Transaction may not be entered into
orally. Unless otherwise agreed, Seller shall give Buyer at
least two (2) Business Days prior notice of any proposed
Purchase Date (the date on which such notice is set, the "Notice
Date").
(b) On the Notice Date, Seller shall deliver to Buyer and Custodian
(i) a request to enter into the related Transaction, in the form
of Schedule 1 hereto (each, a "Transaction Notice") and (ii) on
Computer Tape and in such computer readable form as requested by
the Buyer, the List of
23
<PAGE>
Contracts relating to the Contracts subject to such Transaction.
With respect to a Notice Date pursuant to Section 4(a) above,
Seller shall also deliver to the Custodian on or before 1:00
p.m. New York City time on such Notice Date the items listed in
Section 3.1 of the Custodial Agreement. Furthermore, Seller
shall, upon reasonable notice, make available or, at Buyer's
request, deliver to the Buyer or the Custodian any other
documents in its possession relating to the Contracts for
inspection by Buyer.
The List of Contracts ("List of Contracts") shall include fields
of information requested by Buyer, including, without
limitation, information set forth in Exhibit D to the Custodial
Agreement.
(c) When Buyer determines that (i) any Non-Originated Contracts are
acceptable to Buyer or (ii) any Originated Contracts are
Eligible Contracts, or both, and will be purchased pursuant to a
Transaction, Buyer will confirm the terms of each Transaction by
delivering a written confirmation to Seller, with a copy
delivered to the Custodian, on or before the related Purchase
Date, in the form of Schedule 2 attached hereto (a
"Confirmation"); provided that Buyer shall not confirm the terms
of a Transaction or deliver a written confirmation to Seller
until Buyer has received from the Custodian a certification that
the Custodian has received, for each Contract to be subject to
such Transaction, the items listed in Section 3.1 of the
Custodial Agreement. Seller shall review the Confirmation and,
if in agreement therewith, shall return (i) a copy of such fully
signed Confirmation by facsimile transmission to the Buyer prior
to the payment of the Purchase Price by Buyer on the Purchase
Date, and (ii) the original executed copy of such Confirmation
to the Buyer within 48 hours of the settlement of such
Transaction.
(d) Any Confirmation by Buyer shall be deemed to have been received
by Seller: (i) on the date sent if given by telecopy, telex or
other telecommunication device capable of transmitting or
creating a written record directly to the office of Seller, and
(ii) on the Business Day following the day sent if sent by a
nationally recognized overnight courier service.
5. BUYER MARGIN MAINTENANCE. Paragraph 4(a) of the Repurchase Agreement
------------------------ --------------
is hereby modified to provide that if the notice to be given by Buyer
to Seller under such Paragraph 4(a) is given at or prior to 1:00 p.m.
New York City time, Seller shall transfer cash or the Additional
Purchased Securities to Buyer prior to the close of business in New
York City on the date of such notice, and if such notice is given
after 1:00 p.m. New York City time, Seller shall transfer cash or the
Additional Purchased Securities prior to the close of business
24
<PAGE>
in New York City on the Business Day following the date of such
notice. The Custodial Agreement shall set forth further terms and
provisions relating to Buyer's and Seller's rights and obligations
under Paragraph 4 of the Repurchase Agreement.
6. SELLER MARGIN MAINTENANCE. Paragraph 4(b) of the Repurchase Agreement
------------------------- --------------
is hereby deleted in its entirety.
7. SECURITY INTEREST.
-----------------
(a) In the event, for any reason, any Transaction is construed by
any court as a secured loan rather than a purchase and sale, the
parties intend that Seller shall have granted to Buyer a
security interest in all of the Purchased Securities that is not
subject to any prior security interests created under the
Uniform Commercial Code in the appropriate jurisdiction.
(b) Seller shall pay all fees and expense associated with perfecting
and maintaining such security interest including, without
limitation, the cost of filing financing statements and
continuation statements under the Uniform Commercial Code and
the recording of any assignment of Mortgage in the appropriate
jurisdiction as and when required thereunder or specified by
Buyer.
(c) In the event that Buyer elects to engage in repurchase
transactions with the Purchased Securities or otherwise elects
to pledge or hypothecate the Purchased Securities, Seller shall,
at the request of Buyer and at the expense of Seller, do and
perform such acts and things necessary to enable the Custodian
to do and perform such further acts and things and to execute
and deliver to Buyer and its counterparty such additional
documents, acknowledgements, powers and instruments as are
required by Buyer in connection with such transaction and such
counterparty, it being understood and agreed that Seller will
retain all servicing rights in respect of any Purchased
Securities so transferred.
8. REPRESENTATIONS; COVENANTS.
--------------------------
(a) Each party represents and warrants, and shall on and as of the
Purchase Date for any Transaction and on and as of each date
thereafter through the related Repurchase Date be deemed to
represent and warrant, as follows:
i) The execution, delivery and performance of the Agreement
and the performance of each Transaction do not and will
not result in or require the creation of any lien,
security interest or other charge
25
<PAGE>
or encumbrance (other than pursuant hereto) upon or with
respect to any of its properties; and
ii) The Agreement is, and each Transaction when entered into
under the Agreement will be, a legal, valid and binding
obligation of it enforceable against it in accordance
with the terms of the Agreement.
(b) Seller hereby makes, and on and as of the Purchase Date of any
Transaction and on and as of each date thereafter through the
related Repurchase Date shall be deemed to have made, the
representations and warranties to Buyer set forth in Exhibit A
and Exhibit B hereto. The representations and warranties set
forth herein shall survive transfer of the Purchased Securities
to the Buyer and shall continue for so long as the Purchased
Securities are subject to this Agreement. In the event Buyer
engages in a repurchase transaction with any of the Purchased
Securities or otherwise pledges or hypothecates any of the
Purchased Securities, Buyer shall have the right to assign to
Buyer's counterparty any representations or warranties in
Exhibit B hereof as they relate to the Purchased Securities that
are subject to such repurchase transaction. provided, however,
-------- -------
that Buyer hereby represents and warrants that so long as this
Agreement is in effect, any repurchase transaction entered into
between Buyer and a counterparty with respect to Contracts which
are the subject of a Transaction hereunder shall not permit such
counterparty to assert a breach of an assigned representation or
warranty made by Seller with respect to such Contracts (as set
forth in Exhibit B hereunder) against Seller unless Buyer is in
default of its obligations under such repurchase transaction.
(c) Buyer represents and warrants that it is a separate and
independent corporate entity from the custodian named in the
Custodial Agreement. Buyer does not own a controlling interest
in such custodian either directly or through affiliates and no
director or officer of Buyer is also a director or officer of
such custodian.
9. REPURCHASE OF CONTRACTS.
-----------------------
(a) Upon discovery by the Seller of a breach of any of the
representations and warranties set forth in Exhibit B, the
Seller shall give prompt written notice thereof to the other
party. If the Seller does not correct or cure such breach on or
before the 15th day following the earlier of discovery of such
breach by Seller or receipt of notice of such breach, then the
Seller shall repurchase such Contract on the Repurchase Date
next succeeding such 15th
26
<PAGE>
day following receipt of such notice (or, if such 15th day
following receipt of such notice occurs on a Repurchase Date, on
such Repurchase Date).
(b) Seller shall repurchase from Buyer on each Repurchase Date
(without regard to whether the full amount of the Repurchase
Price for any Transaction is payable on such Repurchase Date)
each Contract that is a Defaulted Contract as of such Repurchase
Date. Any such repurchase made in respect of a Transaction
effected prior to the scheduled Repurchase Date shall reduce the
Repurchase Price payable on such Repurchase Date by the amount
paid in respect of such repurchase.
(c) In addition to the foregoing, Seller hereby indemnifies and
holds harmless Buyer for any loss, liability, expense (including
attorney fees) or damage suffered or incurred by Buyer arising
from or in any way related directly to a breach by Seller of any
representation or warranty of Seller in this Agreement.
10. EVENTS OF DEFAULT.
-----------------
(a) The term "Event of Default" shall, in addition to the definition
----------------
set forth in the Repurchase Agreement, include the following
events:
i) Buyer shall have reasonably determined that Seller is or
will be unable to meet its commitments under any of the
Transaction Documents or that the Guarantor is or will
be unable to meet its commitments under the Guaranty
Agreement and shall have notified Seller or Guarantor,
as applicable, of such determination and Seller or
Guarantor, as applicable, shall not have responded with
appropriate information to the contrary to the
satisfaction of the notifying party within two (2)
Business Days.
ii) The Agreement shall for any reason cease to create a
valid, first priority security interest in any of the
Purchased Securities purported to be covered thereby.
iii) A final judgement by any competent court in the United
States of America for the payment of money in an amount
of at least $100,000 is rendered against Seller and the
same remains undischarged for a period of 30 days during
which execution of such judgement is not effectively
stayed.
iv) WFC shall fail to observe or perform any of the
covenants or agreements under any Transaction Document,
which failure, in the
27
<PAGE>
reasonable judgment of CSFB, materially and adversely
affects the ability of WFC to perform under any such
Transaction Document.
v) Any material event of default or any event which with
notice, the passage of time or both shall constitute a
material event of default shall occur and be continuing
under any repurchase or other financing agreement for
borrowed funds or indenture for borrowed funds by which
WFC is bound or affected.
vi) In the good faith judgment of CSFB a material adverse
change shall have occurred in the business, operations
or financial condition of WFC or the Guarantor.
vii) CSFB shall not have received (a) a certificate,
substantially in the form set forth in Paragraph
II.(c)(2) of Exhibit A hereto, on the 5th Business Day
of each month with respect to the prior month's
activity, and (b) a certificate, substantially in the
form set forth in Paragraph II.(c)(1) of Exhibit A
hereto, within ten (10) Business Days following the date
the related annual or quarterly financial statement is
required to be delivered.
vii) WFC shall be in default with respect to any provision
under any material debt contract or agreement, any
servicing agreement or any lease to which it is a party,
which default, in the judgment of CSFB, could materially
and adversely affect the financial condition of WFC
(which defaults include, but are not limited to, an Act
of Insolvency of WFC or the failure of WFC to make
required payments under such contract or agreement as
they become due).
ix) Any representation or warranty made by WFC in Exhibit A
hereto, or in Paragraph I. (bb), (bc) or (bd) of Exhibit
B hereto or in Paragraph II. (bb), (bc) or (bd) of
Exhibit B hereto or in Section 5.8 of the Custodial
Agreement shall have been materially incorrect or untrue
when made or repeated or when deemed to have been made
or repeated, or any representation or warranty made by
the Guarantor in the Guaranty Agreement shall be
incorrect or untrue at any time during the term of the
Guaranty Agreement.
x) WFC shall fail to promptly notify CSFB of (i) the
acceleration of any material debt obligation or the
termination of any credit facility of WFC, respectively;
(ii) the amount of any material funding facility entered
into after the date hereof; (iii) any adverse
developments with respect to pending or future
litigation involving
28
<PAGE>
WFC, respectively; and (iv) any other developments which
would, in the good faith judgment of Buyer, materially
and adversely affect the financial condition of WFC.
xi) Either WFC's or the Guarantor's audited annual financial
statements or the notes thereto or other opinions or
conclusions stated therein shall be qualified or limited
by reference to the status of WFC or the Guarantor, as
applicable, as a "going concern" or a reference of
similar import.
xii) With respect to any Originated Contracts, any material
amendment to the Underwriting Standards or practices
which was not previously approved in writing by the
Buyer.
xiii) Either (i) a change in Control (as such term is defined
in Rule 12b-2 of the Securities Exchange Act of 1934, as
amended) of WFC shall have occurred other than in
connection with and as a result of the issuance and sale
by WFC of common stock or (ii) any two members of the
Management Team of the Seller shall cease to be an
officer of the Seller and to function in substantially
the same capacity as such member functions as of the
date hereof.
(b) In addition to the rights of the Buyer pursuant to Paragraph 11
------------
of the Repurchase Agreement, upon the occurrence of an Event of
Default by Seller:
i) Buyer's commitment to purchase Eligible Contracts under
Section 3 hereof shall immediately terminate;
ii) All rights of Seller to receive payments, other than the
Monthly Servicing Fee which it would otherwise be
authorized to receive pursuant to the Custodial
Agreement shall cease, and all such rights shall
thereupon become vested in Buyer, which shall thereupon
have the sole right to receive such payments and apply
them to the aggregate unpaid Repurchase Prices owed by
Seller;
iii) All payments which are received by Seller contrary to
the provisions of the preceding clause (ii) shall be
received in trust for the benefit of Buyer and shall as
soon as practicable, but no more than three (3) Business
Days after receipt, be segregated from other funds of
Seller; and
29
<PAGE>
iv) The Pricing Rate for each day from and after the date of
such Event of Default shall be a per annum rate equal to
the sum of (i) LIBOR and (ii) 3.50%.
(c) Each event specified in Section 10(a) of these Supplemental
Terms may, at the option of CSFB, cause an acceleration of the
Repurchase Date for a Transaction and shall be in addition to
any other rights of CSFB to cause such an acceleration under the
Agreement.
11. EVENTS OF TERMINATION. At the option of CSFB, exercised by written
---------------------
notice to WFC, Buyer's commitment to purchase Eligible Contracts that
are not the subject of a Transaction as of the occurrence of any of
the following events shall immediately terminate; provided, however,
-------- -------
that in the event of an occurrence of an event specified in
subsections (c), (d) or (e) of this Section 11, then Buyer's
commitment to purchase shall terminate only with respect to the
affected type of Contract specified in clauses (i) and (ii) thereof:
(a) In the judgment of CSFB a material adverse change shall
have occurred in the business, operations, properties,
prospects or condition (financial or otherwise) of WFC
or the Guarantor.
(b) CSFB shall request written assurances as to the
financial well-being of WFC or the Guarantor and such
assurances shall not have been provided within two (2)
Business Days of such request.
(c) (A) With respect to the four Collection Periods
immediately preceding the date of determination, the
Delinquency Percentage for either (i) Manufactured Home
Loan Contracts or (ii) Mortgage Loan Contracts that are
Originated Contracts shall exceed 10%; or (B) With
respect to the twelve Collection Periods immediately
preceding the date of determination, the Delinquency
Percentage for either designated category of Contracts
described in the preceding clauses (i) and (ii) shall
exceed 3.5%.
(d) With respect to the three Collection Periods immediately
preceding the date of determination, the weighted
average Default Rate for such Collection Periods with
respect to either (i) all Manufactured Home Loan
Contracts or (ii) all Mortgage Loan Contracts that are
Originated Contracts, in each case weighted on the basis
of the aggregate principal balance of all Contracts
described in the preceding clause (i) or clause (ii) as
of the end of the applicable Collection Period, shall
exceed 2.75%.
30
<PAGE>
(e) With respect to the three Collection Periods immediately
preceding the date of determination, the weighted
average Net Loss Rate for such Collection Periods with
respect to either (i) all Manufactured Home Loan
Contracts or (ii) all Mortgage Loan Contracts that are
Originated Contracts, in each case weighted on the basis
of the aggregate principal balance of all Contracts
described in the preceding clause (i) or clause (ii), as
of the end of the applicable Collection Period, shall
exceed 1.75%.
12. INTENTIONALLY OMITTED.
---------------------
13. TERM OF AGREEMENT.
-----------------
(a) The parties hereto agree that this Agreement shall be effective
as of the Effective Date. The parties further agree that the
initial Transaction hereunder shall not take place until after
the Effective Date.
(b) The last sentence of Paragraph 15 of the Repurchase Agreement is
------------
hereby deleted. Subject to earlier termination as set forth
below, the Agreement shall terminate on the Repurchase Date
occurring in the 24th calendar month following the date of the
Agreement (such termination date, as it may be extended pursuant
to the following proviso, the "Termination Date") and all
Transactions outstanding hereunder shall terminate automatically
without any requirement for notice on such date; provided,
--------
however, that the Agreement and any Transaction outstanding
-------
hereunder may be extended by mutual agreement of CSFB and WFC;
and provided further, however, that neither party shall be
obligated to agree to such an extension. It is further
understood and agreed that if, notwithstanding the foregoing,
any Transaction shall remain outstanding subsequent to the
termination of the Agreement, the relevant provisions of the
Agreement shall be deemed to govern the termination of such
outstanding Transaction as if such provisions have survived.
14. FINANCIAL STATEMENTS. As of the date hereof, the parties hereto have
--------------------
each provided the other with such party's audited year-end financial
statements and such party's most recent publicly available interim
financial statement, if any.
15. MINIMUM AND MAXIMUM TRANSACTION AMOUNTS. With respect to
---------------------------------------
Transactions:
(a) The minimum amount of any Transaction under this Agreement shall
have an aggregate Repurchase Price of $1,000,000 unless CSFB
shall have consented to a lesser amount with respect to any
individual Transaction.
31
<PAGE>
(b) The aggregate outstanding Repurchase Price for the Purchased
Securities subject to the Agreement at any one time shall not
exceed (i) an amount equal to $250,000,000 in the aggregate
minus, at any time, the aggregate outstanding repurchase price
for the purchased securities subject to the Master Repurchase
Agreement and Annex I, Additional Supplemental Terms To The
Master Repurchase Agreement, each dated as of July 29, 1996, and
each between Wilshire Credit Corporation, as seller, and CSFB,
as buyer, as supplemented and modified by a Supplement Agreement
To Repurchase Agreement and Custodial Agreement dated as of July
29, 1996 between CSFB, Wilshire Credit Corporation and Bankers
Trust Company of California, N.A., as custodian, (ii)
$75,000,000 with respect to Manufactured Home Loan Contracts,
and (iii) in the case of Second Mortgage Loan Contracts, 25% of
the then outstanding aggregate Repurchase Price for First
Mortgage Loan Contracts.
16. PRICING RATE; PURCHASE PRICE.
----------------------------
(a) The Pricing Rate with respect to each Transaction hereunder
shall be a per annum rate equal to (i) with respect to First
Mortgage Loan Contracts, LIBOR plus 1.50%, (ii) with respect to
Second Mortgage Loan Contracts, LIBOR plus 1.90%, (iii) with
respect to Manufactured Home Loan Contracts that are "A" and "B"
Contracts, as defined in the Underwriting Standards, LIBOR plus
1.90%, and (iv) with respect to Manufactured Home Loan Contracts
that are "C" and "D" Contracts, as defined in the Underwriting
Standards, LIBOR plus 2.90%. LIBOR shall be the offered rate for
United States dollars with a maturity of one month which appears
on Telerate as of 9:00 A.M., New York City time, on the Purchase
Date for such Transaction, provided, however, that if such
-------- -------
rate does not appear on the Dow Jones Telerate Service page 3750
(or such other page as may replace that page on that service) or
if such service is no longer offered, the rate for United States
dollars with a maturity of one month quoted by such other
service as may be selected by the Buyer.
(b) Notwithstanding the definition set forth in Paragraph 2(m) of
the Repurchase Agreement, the "Purchase Price" with respect to
each Transaction shall be the lesser of (i) the product of
(a)(x) in respect of Originated Contracts that are (1) First
Mortgage Loan Contracts or Manufactured Home Loan Contracts,
.95, or (2) Second Mortgage Loan Contracts, .85, or (y) in
respect of Non-Originated Contracts, a percentage to be
determined and mutually agreed upon by Buyer and Seller on a
case by case basis, and (b) the Market Value of each Contract to
be purchased by Buyer pursuant to such Transaction and (ii) the
aggregate Outstanding Principal Amount of the Contracts.
32
<PAGE>
17. REPURCHASE DATE AND REPURCHASE PRICE. On each Repurchase Date, unless
------------------------------------
(i) Buyer shall have notified Seller of an Event of Default pursuant to
Paragraph 11 of the Repurchase Agreement or Section 10 hereof or the
parties otherwise mutually agree, or (ii) such Repurchase Date shall be
the Termination Date, Seller and Buyer shall rollover all Transactions
maturing on such date into a single Transaction with respect to all
Purchased Securities (other than Purchased Securities rejected by Buyer
pursuant hereto or subject to repurchase by Seller on such Repurchase
Date pursuant hereto) which were the subject of the matured
Transactions. Seller shall pay to Buyer on each Repurchase Date the
excess, if any, of (A) the Repurchase Price for all Transactions
terminating on such Repurchase Date over (B) the Purchase Price of the
Purchased Securities purchased by Buyer on such Repurchase Date pursuant
to the preceding sentence and any other Purchased Securities purchased
in different Transactions on such date. If the difference between (A)
and (B) above is a negative number, Buyer shall pay to Seller the
absolute value thereof. Payment of amounts shall be made by wire
transfer in immediately available funds in accordance with the intended
recipient's written instructions.
18. ADDITIONAL INFORMATION.
----------------------
(a) At any reasonable time, Seller shall permit Buyer, its agents or
attorneys, to inspect and copy any and all documents and data in
their possession pertaining to each Contract that is the subject
of such Transaction. Such inspection shall occur upon the
request of Buyer at a mutually agreeable location during regular
business hours and on a date not more than two (2) Business Days
after the date of such request.
(b) Seller agrees to provide Buyer from time to time with such
information concerning Seller of a financial or operational
nature as Buyer may reasonably request.
(c) Seller shall provide Buyer with copies of all filings made by or
on behalf of Seller or any entity that controls Seller, with the
Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended, promptly upon making such
filings.
(d) Prior to the occurrence of an Event of Default, Buyer agrees to
keep confidential (and to use its best efforts to cause its
respective agents and representatives to keep confidential) the
Information (as defined below) and all copies thereof, extracts
therefrom and analyses or other materials based thereon, except
that the Buyer shall be permitted to disclose the Information
(a) to such of its respective officers, directors, employees,
agents, affiliates, representatives and auditors, on a need to
know basis, (b) to the extent requested by any regulatory
authority, (c) to the extent
33
<PAGE>
required by applicable laws and regulations or by any subpoena
or similar legal process, upon prior notice thereof (unless
prohibited by the terms of such subpoena or process) to the
Seller, (d) to the extent such Information (i) becomes publicly
available other than as a result of a breach of this Section
18(d) or (ii) becomes lawfully available to the Buyer on a
nonconfidential basis from a source other than the Seller or
(iii) is material to a counterparty of Buyer in the normal
course and Buyer gives notice to such counterparty that such
Information is subject to confidentiality and such counterparty
(which shall be disclosed to Seller) agrees to the maintenance
of confidentiality substantially on the terms in this Section
18(d), or (e) to the extent disclosure of such Information is
necessary as determined by Buyer in order for Buyer to enforce
or defend its rights under the Agreement. For the purposes of
this Section 18(d), "Information" shall mean all financial
-----------
statements, certificates, reports, or material non-public
information that are received from the Seller and clearly
identified and marked as Confidential at the time of delivery.
The provisions of this Section 18(d), shall remain operative and
in full force and effect regardless of the expiration and term
of this Agreement. To the extent Buyer reasonably incurs any
costs and expenses, including reasonable attorneys' fees, to
enforce, defend or comply with the terms or provisions of this
Section 18(d), Seller agrees to promptly reimburse Buyer such
costs and expenses, including reasonable attorneys' fees;
provided, however, that Seller shall have no obligation to make
-------- -------
such reimbursement in the event such costs and expenses were
incurred as a result of Buyer's negligence or misconduct in
complying with the terms of Section 18(d) hereof.
19. REJECTION OF SECURITIES. Buyer may reject any Originated Contract
-----------------------
from inclusion in a Transaction hereunder if Buyer determines, in its
sole discretion, that such Originated Contract was not originated in
conformity with the Underwriting Standards.
20. RIGHT OF SET-OFF. In addition to its rights hereunder, Buyer shall
----------------
have the right to proceed against any assets of Seller which may be in
the possession of Buyer, including the right to liquidate such assets
and to set-off the proceeds against monies owed by Seller to Buyer
pursuant to this Agreement. Buyer may set-off cash, the proceeds of the
liquidation of the Purchased Securities and Additional Purchased
Securities, any collateral or its proceeds, and all other sums or
obligations owed by Buyer to Seller hereunder against all of Seller's
obligations to Buyer, whether under this Agreement or under a
Transaction, whether or not such obligations are then due, without
prejudice to Buyer's right to recover any deficiency. Any cash proceeds,
or property in excess of any amounts due, or which Buyer reasonably
believes may become due, to it from
34
<PAGE>
Seller shall be returned to Seller after satisfaction of all
obligations of Seller to Buyer.
21. OPINIONS OF COUNSEL. Seller shall, on or prior to the date of the
-------------------
first Transaction hereunder, cause to be delivered to Buyer, a
favorable opinion or opinions of counsel with respect to the matters
set forth in Exhibit C hereto, in form and substance acceptable to
---------
CSFB. Buyer shall have the right to request, on an annual basis, from
Seller, and Seller shall promptly provide to Buyer after receipt of
such request, an opinion of counsel to the effect that Buyer has as of
the date of such opinion a perfected security interest in the
Purchased Securities that are subject to the Agreement, which opinion
shall be subject to customary and standard exceptions and
qualifications.
22. ADDITIONAL CONDITIONS. Prior to entering into the initial Transaction
---------------------
under this Agreement, Seller shall cause each of the following
conditions to occur:
(a) A Custodial and Servicing Agreement to cover the custody and
servicing of the Contracts, in a form satisfactory to CSFB,
shall have been executed and delivered by the parties thereto;
(b) WFC shall have disclosed information satisfactory to CSFB with
respect to the scheduled maturities and termination provisions
of all outstanding credit facilities and debt of WFC;
(c) WFC shall have executed and delivered to CSFB an engagement
letter agreement in form and substance satisfactory to CSFB;
(d) A guaranty agreement in form and substance satisfactory to CSFB
shall have been executed and delivered by Seller's parent, WFSG;
(e) WFC and WFSG shall have delivered or caused to be delivered to
CSFB an opinion of counsel to WFC and WFSG in form and substance
satisfactory to CSFB;
(f) WFC shall have executed and delivered to CSFB an indemnification
agreement letter in form and substance satisfactory to CSFB;
(g) WFC and WFSG shall have executed and delivered to CSFB a
Certificate of Secretary of WFC and WFSG a Certificate of
Officer of WFC and WFSG , both in form and substance
satisfactory to CSFB;
(h) WFC and WFSG shall have delivered to CSFB a certified copy of
the corporate resolutions duly adopted by the board of directors
of WFC and WFSG in form and substance satisfactory to CSFB;
35
<PAGE>
(i) WFC and WFSG shall have delivered to CSFB a Certificate of Good
Standing under the laws of the jurisdiction in which WFC and
WFSG is formed and organizaed; and
(j) WFC and WFSG shall have delivered to CSFB certified copies of
WFC's and WFSG's article of incorporation and by-laws.
23. REPURCHASE TRANSACTIONS. CSFB may in its sole election engage in
-----------------------
repurchase transactions with the Purchased Securities or otherwise
pledge, hypothecate, assign, transfer or otherwise convey the Purchased
Securities with a counterparty of CSFB's choice, subject to compliance
with Section 18(d) hereof; provided, however, that no such transaction
-------- -------
by CSFB shall relieve CSFB of its obligations to WFC in connection with
the repurchase by WFC of any Purchased Securities in accordance with the
terms of this Agreement and the relevant Confirmation.
24. NEW YORK JURISDICTION; WAIVER OF JURY TRIAL. WFC agrees to submit to
-------------------------------------------
personal jurisdiction in the State of New York in any action or
proceeding arising out of the Agreement. CSFB and WFC each hereby waive
the right of trial by jury in any litigation arising hereunder.
26. FURTHER ASSURANCES. Seller agrees to do such further acts and things
------------------
and to execute and deliver to Buyer such additional assignments,
acknowledgements, agreements, powers and instruments as are reasonably
required by Buyer to carry into effect the purposes of the Agreement, to
perfect the interests of the Custodian in the Contracts and the Related
Assets or to better assure and confirm unto Buyer its rights, powers and
remedies hereunder.
27. BINDING TERMS. All of the representations, warranties, covenants,
-------------
stipulations, promises and agreements in the Agreement shall bind and
inure to the benefit of the successors of the parties hereto, whether
expressed or not.
28. NOTICES AND OTHER COMMUNICATIONS. Any provision of Paragraph 13 of the
--------------------------------
Repurchase Agreement to the contrary notwithstanding, any notice
required or permitted by the Agreement shall be in writing (including
telegraphic, facsimile or telex communications) and shall be effective
and deemed delivered only when received by the party to which it is
sent; provided, however, that a facsimile transmission shall be deemed
to be received when transmitted so long as the transmitting machine has
provided an electronic confirmation of such transmission. Any such
notice shall be sent to a party at the address or facsimile transmission
number set forth in Annex II attached hereto.
29. FEES AND DISBURSEMENTS. Seller shall promptly pay all reasonable fees
----------------------
and expenses (including without limitation those of counsel and
accountants) incurred by Buyer and Custodian in entering into the
Transaction Documents to
36
<PAGE>
which it is a party and the Transactions. In the event that either party
commences a lawsuit or proceeding against the other in connection with
the Agreement, any and all reasonable attorneys' fees and costs incurred
by the Buyer in connection with such lawsuit or proceeding shall be paid
by the Seller.
30. DEFAULT BY BUYER. In the event Buyer breaches its obligations to
----------------
purchase or resell Contracts under the Agreement, then such breach shall
constitute an event of default by Buyer under the Engagement Letter, and
WFC shall have no obligations to Buyer with respect to any Offerings (as
defined in the Engagement Letter) that close after the date of such
breach.
31. PREPAYMENT.
----------
(a) Seller shall have the right to accelerate any Repurchase Date
for any Transaction at any time and prepay any Transaction prior
to the Repurchase Date and thereby terminate the Transaction,
without penalty or premium, subject, however, to payment of
Breakage Costs by Seller to Buyer as provided in subsection (b)
below.
(b) Breakage Costs shall be paid by Seller to Buyer at the time of
prepayment and shall be calculated as follows ("Breakage
Costs"): the product of (x) the aggregate Repurchase Price
(excluding Price Differential) and (y) the product of (i) the
Breakage Rate and (ii) a fraction, the numerator of which is the
Breakage Period and the denomination of which is 360. "Breakage
Rate" shall mean the applicable Pricing Rate minus the
prevailing one (1) month LIBOR. "Breakage Period" shall mean the
number of days from the date of prepayment to and including the
scheduled Repurchase Date.
37
<PAGE>
IN WITNESS WHEREOF, Buyer and Seller have caused their names to be
signed hereto by their respective officers thereunto duly authorized, all as of
the day and year first above written.
CS FIRST BOSTON MORTGAGE CAPITAL CORP.,
as Buyer
By
-------------------------------------
Name:
Title:
WILSHIRE FUNDING CORPORATION,
as Seller
By
-------------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER
I. WFC represents, warrants and covenants, as of the date hereof and as
of each day during the term of the Agreement, as follows:
(a) Due Organization and Qualification. WFC is a corporation duly
----------------------------------
organized, validly existing and in good standing under the laws of the state of
Delaware. WFC is duly qualified to do business, is in good standing and has
obtained all necessary licenses, permits, charters, registrations and approvals
(together, "approvals") necessary for the conduct of its business as currently
---------
conducted and the performance of its obligations under the Transaction
Documents, in each jurisdiction in which the failure to be so qualified or to
obtain such approvals would render any Contract unenforceable in any respect or
would otherwise have a material adverse effect upon any Transaction.
(b) Power and Authority. WFC has all necessary power and authority to
-------------------
conduct its business as currently conducted, to execute, deliver and perform its
obligations under the Transaction Documents and to consummate the Transactions.
(c) Due Authorization. The execution, delivery and performance of the
-----------------
Transaction Documents by WFC have been duly authorized by all necessary
corporate action and do not require any additional approvals or consents or
other action by or any notice to or filing with any Person.
(d) Noncontravention. None of the execution and delivery of the
----------------
Transaction Documents by WFC, the consummation of the transactions contemplated
thereby or the satisfaction of the terms and conditions of the Transaction
Documents:
(i) conflicts with or results in any breach or violation of any
provision of the articles or certificate of incorporation or by-laws of WFC
or any law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award currently in effect having applicability to WFC, or
any of its properties, including regulations issued by an administrative
agency or other governmental authority having supervisory powers over WFC;
(ii) constitutes a material default by WFC under or a material breach
of any provision of any loan agreement, mortgage, indenture or other
agreement or instrument to which WFC is a party or by which it or any of
its properties is or may be bound or affected; or
(iii) results in or requires the creation of any lien upon or in
respect of any of the assets of WFC except as otherwise expressly
contemplated by the Transaction Documents.
A-1
<PAGE>
(e) Legal Proceedings. There is no action, proceeding or investigation by
-----------------
or before any court, governmental or administrative agency or arbitrator against
or affecting all or any of the Contracts, WFC or any of its affiliates, or any
properties or rights of WFC or any of its affiliates, pending or threatened,
which, in any case, if decided adversely, would have a material adverse effect
with respect to WFC or any Contract.
(f) Valid and Binding Obligations. Each of the Transaction Documents to
-----------------------------
which WFC is a party when executed and delivered by WFC will constitute the
legal, valid and binding obligations of WFC, enforceable in accordance with
their respective terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and general equitable principles.
(g) Financial Statements. The financial statements of WFC, copies of which
--------------------
have been furnished to Buyer, (i) are, as of the dates and for the periods
referred to therein, complete and correct in all material respects, (ii) present
fairly the financial condition and results of operations of each of WFC as of
the dates and for the periods indicated and (iii) have been prepared in
accordance with generally accepted accounting principles consistently applied,
except as noted therein (subject as to interim statements to normal year-end
adjustments). Since the date of the most recent financial statements, there has
been no material adverse change in such financial condition or results of
operations. Except as disclosed in such financial statements, WFC is not subject
to any contingent liabilities or commitments that, individually or in the
aggregate, have a material possibility of causing a material adverse change in
the business or operations of WFC.
(h) ERISA. If applicable, WFC is in compliance with ERISA and has not
-----
incurred and does not reasonably expect to incur any liabilities to the PBGC
under ERISA in connection with any Plan or Multiemployer Plan or to contribute
now or in the future in respect of any Plan or Multiemployer Plan.
(i) Accuracy of Information. None of the documents or information prepared
-----------------------
by or on behalf of Seller and provided by Seller to Buyer relating to WFC or its
financial condition contain any statement of a material fact with respect to WFC
or the Transactions that was untrue or misleading in any material respect when
made. Since the furnishing of such documents or information, there has been no
change, nor any development or event involving a prospective change known to
WFC, that would render any of such documents or information untrue or misleading
in any material respect.
(j) No Consents. No consent, license, approval or authorization from, or
-----------
registration, filing or declaration with, any regulatory body, administrative
agency, or other governmental instrumentality, nor any consent, approval, waiver
or notification of any creditor, lessor or other nongovernmental person, is
required in connection with the execution, delivery and performance by WFC of
this Agreement or of any other Transaction Document.
A-2
<PAGE>
(k) Compliance With Law. Etc. No practice, procedure or policy employed or
-------------------
proposed to be employed by WFC in the conduct of its businesses violates any
law, regulation, judgment, agreement, order or decree applicable to it which, if
enforced, would result in a material adverse effect upon WFC.
(l) Solvency: Fraudulent Conveyance. WFC is solvent and will not be
-------------------------------
rendered insolvent by the Transaction and, after giving effect to such
Transaction, WFC will not be left with an unreasonably small amount of capital
with which to engage in its business. WFC does not intend to incur, or believe
that it has incurred, debts beyond its ability to pay such debts as they mature.
WFC is not contemplating the commencement of insolvency, bankruptcy, liquidation
or consolidation proceedings or the appointment of a receiver, liquidator,
conservator, trustee or similar official in respect of WFC or any of its assets.
The amount of consideration being received by the Seller upon the sale of the
Contracts to Buyer and thereafter upon the sale of any Contracts by the Seller
to the Buyer constitutes reasonably equivalent value and fair consideration for
such Contracts. WFC is not transferring any Contracts with any intent to hinder,
delay or defraud any of its creditors.
(m) Investment Company Act Compliance. WFC is neither required to be
---------------------------------
registered as an "investment company" as defined under the Investment Company
Act nor under the control of an "investment company" as defined under the
Investment Company Act.
(n) Taxes. WFC has filed all federal and state tax returns which are
-----
required to be filed and paid all taxes, including any assessments received by
it, to the extent that such taxes have become due. Any taxes, fees and other
governmental charges payable by WFC in connection with a Transaction and the
execution and delivery of the Transaction Documents have been paid (other than
for taxes that are being contested in good faith or for which it has established
adequate reserves).
(o) Licenses. Other than as set forth in Schedule 3 hereto, Buyer will not
--------
be required as a result of purchasing Contracts to be licensed, registered or
approved or to obtain permits or otherwise qualify (i) to do business in any
state in which it currently so required or (ii) under any state consumer
lending, fair debt collection or other applicable state statute or regulation
where the failure to be so licensed, registered, approved or qualified, or to
have obtained permits, would materially and adversely affect the Transactions.
II. WFC hereby agrees that during the term of the Agreement, unless Buyer
shall otherwise expressly consent in writing:
(a) Compliance With Agreements and Applicable Laws. WFC shall
----------------------------------------------
perform each of its obligations under the Transaction Documents and shall
comply with all material requirements of any law, rule or regulation
applicable to it or thereto, or that are required in connection with its
performance under any of the Transaction Documents.
A-3
<PAGE>
(b) Financial Statements: Accountants' Reports: Other Information.
-------------------------------------------------------------
WFC shall keep or cause to be kept in reasonable detail books and records
of account of its assets and business and shall clearly reflect therein the
transfer of Additional Contracts to the Buyer. WFC shall furnish or cause
to be furnished to Buyer:
(i) Annual Financial Statements. As soon as available, and
---------------------------
in any event within 120 days after the close of each fiscal year WFC,
the consolidated or combined, as applicable, audited balance sheets of
WFC as of the end of such fiscal year and the audited statements of
income and changes in equity of WFC for such fiscal year, all in
reasonable detail and stating in comparative form the respective
figures for the corresponding date and period in the preceding fiscal
year, prepared in accordance with generally accepted accounting
principles, consistently applied, and accompanied by the certificate
of WFC's independent accountants (who shall be, in each case, a
nationally recognized firm or otherwise acceptable to Buyer).
(ii) Quarterly Financial Statements. As soon as available,
------------------------------
and in any event within 60 days after the close of each of the first
three quarters of each fiscal year of WFC, the consolidated or
combined, as applicable, unaudited balance sheets of WFC as of the end
of such quarter and the unaudited statements of income and changes in
equity of WFC for the portion of the fiscal year then ended, all in
reasonable detail and stating in comparative form the respective
figures for the corresponding date and period in the preceding fiscal
year, prepared in accordance with generally accepted accounting
principles, consistently applied (subject to normal year-end
adjustments).
(iii) Monthly Financial Statements. As soon as available, and
----------------------------
in any event within 60 days after the last day of each calendar month,
the consolidated or combined, as applicable, unaudited balance sheets
of WFC as of the end of such calendar month and the unaudited
statements of income and changes in equity of WFC for the portion of
the fiscal year then ended, all in reasonable detail and prepared in
accordance with generally accepted accounting principles, consistently
applied subject to normal year-end adjustments.
(iv) Contract Performance Data. Monthly reports in form and
-------------------------
scope satisfactory to CSFB, setting forth data regarding the
performance of the Contracts, including, without limitation,
information with respect to delinquencies, repossessions, charge-offs,
Obligor bankruptcies, extensions and modifications and such other
information as CSFB may reasonably request.
(v) Monthly Servicing Diskettes. A computer tape and a
---------------------------
diskette (or any other electronic transmission acceptable to Buyer) in
a format acceptable to the Buyer containing such information with
respect to the Contracts and the servicing of the Contracts as CSFB
may reasonably request.
A-4
<PAGE>
(vi) Annual Budgets; Business Plans. Such annual budgets,
------------------------------
monthly and annual comparisons of conformity of operations with annual
budgets, annual projections of financial and operations results,
strategic business plans and other internal reports prepared or
reviewed by Executive Management as CSFB may reasonably request.
(vii) Other Information. Upon the reasonable request of Buyer,
-----------------
Seller shall permit Buyer or its authorized agents (A) to inspect the
books and records of WFC as they may relate to the obligations of WFC
under the Transaction Documents and the Transactions and WFC's
business; (B) to discuss the affairs, finances and accounts of WFC
with its respective chief operating officer and chief financial
officer, in each case no more frequently than annually, unless an
Event of Default has occurred; and (C) to discuss the affairs,
finances and accounts of WFC with its independent accountants,
provided that an officer of WFC shall have the right to be present
--------
during such discussions. Such inspections and discussions shall be
conducted during normal business hours and shall not unreasonably
disrupt the business of WFC. In addition, WFC shall promptly (but in
no case more than 30 days following issuance or receipt) provide to
Buyer a copy of all correspondence between WFC or any affiliate and
the PBGC, Internal Revenue Service, Department of Labor or the
administrators of a Multiemployer Plan relating to any Reportable
Event or the underfunded status, termination or possible termination
of a Plan or a Multiemployer Plan. The books and records of WFC will
be maintained at the respective addresses designated herein for
receipt of notices, unless WFC shall otherwise advise Buyer in
writing.
(viii) promptly after the filing or sending thereof, copies of
all proxy statements, financial statements, reports and registration
statements which WFC files, or delivers to, the Internal Revenue
Service, the Securities and Exchange Commission, or any other federal,
state or foreign government agency, authority or body which supervises
the issuance of securities by WFC or any national securities exchange.
(c) Compliance Certificate. (1) WFC shall deliver to Buyer
concurrently with the delivery of the annual and quarterly financial
statements required by paragraphs II.(b)(i) and II.(b)(ii) of this Exhibit
A a certificate signed by the chief financial officer of WFC stating that:
(i) a review of WFC's performance under the Transaction
Documents during such period has been made under such officer's
supervision; and
(ii) the attached financial reports are complete and correct
in all material respects and present fairly the financial condition
and results of operations of WFC as of the dates and for the periods
indicated, in accordance with generally accepted accounting principles
consistently applied (subject as to
A-5
<PAGE>
interim statements to normal year-end adjustments); provided, however,
-------- -------
that such certificate as to unaudited quarterly financial statements
may be based on the signer's knowledge and belief.
(2) WFC shall deliver to Buyer monthly a certificate signed by the
Chief Financial Officer of WFC stating that:
(i) to the best of such individual's knowledge, no Default
or Event of Default has occurred, or if a Default or Event of Default
has occurred, specifying the nature thereof and, if WFC has a right to
cure any such Default or Event of Default, stating in reasonable
detail the steps, if any, being taken by WFC to cure such Default or
Event of Default or to otherwise comply with the terms of the
agreement to which such Default or Event of Default relates.
(d) Notice of Material Events. WFC shall promptly inform (unless, in
-------------------------
the case of clause (i) only, prohibited by applicable law) Buyer in writing
of the occurrence of any of the following:
(i) the submission of any claim or the initiation of any
legal process, litigation or administrative or judicial investigation
(A) against WFC pertaining to the Contracts in general, (B) with
respect to a material portion of the Contracts or (C) in which a
request has been made for certification as a class action (or
equivalent relief) that would involve a material portion of the
Contracts;
(ii) any change in the location of WFC's principal office or
any change in the location of WFC's books and records;
(iii) the occurrence of any Default or Event of Default; or
(iv) any other event, circumstance or condition that has
resulted, or has a material possibility of resulting, in a material
adverse effect upon WFC.
(e) Further Assurances. WFC will file or cause to be filed all
------------------
necessary financing statements, assignments or other instruments, and any
amendments or continuation statements relating thereto, necessary to be
kept and filed in such manner and in such places as may be required by law
to preserve and protect fully the lien on and first priority security
interest in the Contracts.
(f) Independent Entity. WFC is a separate and independent corporate
------------------
entity from the custodian named in the Custodial Agreement and the servicer
named therein, WFC does not own a controlling interest in such custodian or
Servicer either directly or through affiliates and no director or officer
of WFC is also a director or officer of such custodian or Servicer;
A-6
<PAGE>
(g) Corporate Existence. WFC shall preserve and maintain its
-------------------
existence, rights, franchises and privileges and shall at all times
continue to be duly organized under the laws of the jurisdiction of its
organization, and qualify and remain qualified in good standing in each
jurisdiction where the failure to preserve and maintain such existence,
rights, franchises, privileges and qualifications would have a reasonable
likelihood of having a material adverse effect on the business or
properties of the Seller.
(h) Maintenance of Licenses. WFC shall maintain all licenses,
-----------------------
permits, charters and registrations as are material to the performance by
WFC of its business or its obligations under the Transaction Documents.
(i) Keeping of Records and Books of Account. Seller shall maintain
---------------------------------------
and implement administrative and operating procedures (including, an
ability to recreate records evidencing the Contracts in the event of the
destruction of the originals thereof), and shall keep and maintain, or
cause to be kept or maintained, all documents, books, records and other
information which, in the reasonable determination of Buyer, are necessary
or advisable in accordance with prudent industry practice and custom for
transactions of this type for the collection of all Contracts. Seller shall
maintain or cause to be maintained at all times accurate and complete
books, records and accounts relating to the Contracts, which books and
records shall be marked to indicate the transfer of the Contracts under the
Agreement.
(j) Minimum Net Worth. Seller and its parent, WFSG, shall maintain
-----------------
at all times on and after the Effective Date an aggregate minimum combined
Net Worth of Seller and its parent, WFSG, of not less than Thirty Million
Dollars ($30,000,000.00). The "Net Worth" of any party as of any date of
determination shall be equal to the sum of (i) the par value of its capital
stock, (ii) additional paid-in capital plus retained earnings (or minus
accumulated deficit) of such party on a consolidated basis, each item to be
determined in accordance with generally accepted accounting principles,
less (x) amounts attributable to stock that may be redeemed at the option
of the holder and with respect to which such holder has elected to have
such stock redeemed and (y) intangible assets.
(k) Limitations on Debt. The ratio of the total combined Debt of the
-------------------
Seller and its parent, WFSG, to the combined Net Worth of the Seller and
its parent, WFSG, plus the outstanding principal amount of any combined
subordinate Debt of the Seller and its parent, WFSG, shall not be more than
15 to 1, unless otherwise agreed to by Buyer. "Debt" of any party shall
mean any indebtedness, contingent or otherwise, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or
letters of credit or representing the balance deferred and unpaid of the
purchase price of any property (except any such balance that constitutes a
trade payable and an accrued liability arising in the ordinary course of
business that is not overdue by more than 90 days or that is being
contested in good faith), if and to the extent any of the foregoing
indebtedness would appear as a liability upon a consolidated balance sheet
of such party
A-7
<PAGE>
prepared in accordance with generally accepted accounting principles, and
shall also include, to the extent not otherwise included, indebtedness
secured by a lien or mortgage to which the property or assets owned or held
by such party is subject (whether or not the obligations secured thereby
shall have been assumed), guarantees of items that would be included within
this definition (without regard to whether such items would appear upon
such balance sheet), and obligations in respect of interest rate swap
obligations as and to the extent governed by GAAP; provided, however, that
-------- -------
"Debt" shall not include any of the foregoing to the extent the obligee in
respect thereof does not have recourse to substantially the whole of the
assets of such party. The amount of Debt of such party at any date shall be
the outstanding balance at such date of all unconditional obligations as
described above and the maximum liability of any such contingent
obligations at such date. "Net Worth" shall have the meaning assigned
thereto in subsection (j) above.
A-8
<PAGE>
EXHIBIT B
REPRESENTATIONS AND WARRANTIES OF SELLER REGARDING MORTGAGE LOAN CONTRACTS AND
- ------------------------------------------------------------------------------
MANUFACTURED HOME LOAN CONTRACTS
- --------------------------------
I. Representations and Warranties Regarding Mortgage Loan Contracts.
- ---------------------------------------------------------------------
WFC makes the following representations and warranties with respect to
each Mortgage Loan Contract, as of each Purchase Date with respect to such
Mortgage Loan Contract, which representations and warranties shall survive
transfer of each such Mortgage Loan Contract to Buyer pursuant to the Agreement:
(a) The information set forth in the List of Contracts and any other
information in respect to a Mortgage Loan Contract given by Seller to Buyer is
true and correct;
(b) Each Mortgage Loan Contract is principally secured by the
related Mortgaged Property. Such Mortgaged Property is improved by a one- to
four-family residential dwelling, which, to the best of such Seller's knowledge,
does not include cooperatives or mobile homes other than a permanently affixed
mobile home or manufactured housing units which constitute real property under
state law;
(c) Each Mortgage Loan Contract is being serviced by the Seller, and
is not subject to any subservicing arrangement except for an interim servicing
arrangement which shall not exceed sixty (60) days;
(d) Each First Mortgage Loan Contract is secured by a valid and
subsisting first lien on the Mortgaged Property and each Second Mortgage Loan
Contract is secured by a valid and subsisting second lien on the related
Mortgaged Property subject only to a first lien on such Mortgaged Property, and
subject in both cases, except in respect to some of the Second Mortgage Loan
Contracts, to the exceptions to title set forth in the title insurance policy or
the title opinion of counsel with respect to the related Mortgage Loan Contract,
which exceptions are generally acceptable to second mortgage lending companies,
and such other exceptions to which similar properties are commonly subject and
which do not individually, or in the aggregate, materially and adversely affect
the benefits of the security intended to be provided by the related Mortgage;
(e) No Mortgage Loan Contract has been sold, transferred, assigned,
or pledged by Seller to any Person other than Buyer. Except with respect to
liens released immediately prior to the transfer herein contemplated,
immediately prior to the transfer and assignment herein contemplated, the Seller
held good, marketable and indefeasible title to, and was the sole owner of, each
Mortgage Loan Contract; and immediately upon the transfer and assignment herein
contemplated, the Buyer will hold good, marketable and indefeasible title, to,
and be the sole owner of, each Mortgage Loan Contract free and clear of all
liens, charges, restrictions on transferability, mortgages, security interests,
encumbrances or rights of others.
B-1
<PAGE>
As of the Purchase Date, the lien or security interest in favor of the Buyer
with respect to the Mortgage Loan Contracts will be perfected by the delivery of
the Mortgage Loan Contracts to the Custodian, which Mortgage Loan Contracts the
Custodian will hold on behalf of the Buyer, the filing of financing statements
on Form UCC-1 in each jurisdiction where such recording or filing is necessary
for the perfection of the security interest in favor of the Buyer, the recording
of any assignment of Mortgage in the appropriate jurisdiction, and no other
filings or recordings in any jurisdiction or any other actions (except as
expressly provided herein) are necessary to perfect the Buyer's first priority
lien on and security interest in the Mortgage Loan Contracts as against any
third parties. The Agreement constitutes a valid transfer and assignment of the
Mortgage Loan Contracts enforceable against creditors of WFC.
(f) As of the Purchase Date, none of the Originated Contracts that
are Mortgage Loan Contracts are Defaulted Contracts;
(g) To the best of the Seller's knowledge, except as otherwise
disclosed to Buyer in writing (i) there is no delinquent tax or assessment lien
on any Mortgaged Property except those liens for which funds sufficient to
discharge such liens are held in escrow by the Servicer or an escrow agent and
(ii) each Mortgaged Property is free of material damage and is in average
repair;
(h) Each Mortgage Loan Contract is not subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury,
nor will the operation of any of the terms of the Mortgage Note or the Mortgage,
or the exercise of any right thereunder, render either the Mortgage Note or the
Mortgage unenforceable in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury,
and no such right of rescission, set-off, counterclaim or defense has been
asserted with respect thereto;
(i) To the best of the Seller's knowledge, there is no mechanics'
lien or claim for work, labor or material affecting any Mortgaged Property which
is or may be a lien prior to, or equal with, the lien of such Mortgage except
(i) those which are insured against by the title insurance policy and (ii) those
liens for which funds sufficient to discharge such liens are held in escrow by
the Seller or an escrow agent;
(j) Each Originated Contract that is a Mortgage Loan Contract at the
time it was made complied in all material respects with applicable state and
federal laws and regulations, including, without limitation, usury laws, local
licensing, the federal Truth-in-Lending Act, the Equal Credit Opportunity Act,
the Fair Credit Reporting Act, the Magnuson-Moss Warranty Act, the Federal
Reserve Board's Regulations B and Z, the Fair Debt Collection Practices Act, the
Federal Trade Commission Act, state adaptations of the National Consumer Act and
of the Uniform Consumer Credit Code, and other applicable consumer credit laws
and equal credit opportunity and disclosure laws;
B-2
<PAGE>
(k) To the best of Seller's knowledge, each Non-Originated Contract
that is a Mortgage Loan Contract at the time it was made complied in all
material respects with applicable state and federal laws and regulations,
including, without limitation, usury laws, local licensing, the federal
Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's
Regulations B and Z, the Fair Debt Collection Practices Act, the Federal Trade
Commission Act, state adaptations of the National Consumer Act and of the
Uniform Consumer Credit Code, and other applicable consumer credit laws and
equal credit opportunity and disclosure laws;
(l) With respect to each First Mortgage Loan Contract or Originated
Contracts that are Second Mortgage Loan Contracts, if applicable, either (A) a
Seller's title insurance policy, issued in standard or American Land Title
Association form (with modifications, if any, approved by the state in which the
related Mortgaged Property is located) by a title insurance company authorized
to transact business in the state in which the related Mortgaged Property is
situated, in an amount at least equal to the original principal amount of such
First Mortgage Loan Contract or such Originated Contract that is a Second
Mortgage Loan Contract insuring the mortgagee's interest under the related
Mortgage Loan Contract as the holder of a valid first or second mortgage lien of
record on the real property described in the related Mortgage Loan Contract,
subject only to a survey exception and other exceptions of the character
referred to in clauses (d), (h) and (j) above, was effective on the date of the
origination of such Mortgage Loan Contract, and, as of the Purchase Date, such
policy will be valid and thereafter such policy shall continue in full force and
effect, or (B) in those jurisdictions in which it is customary to obtain
opinions of counsel as to title matters rather than title insurance, an opinion
of counsel as to the mortgagee's interest under the related Mortgage Loan
Contract as the holder of a valid first or second mortgage lien of record on the
real property described in the related Mortgage, was obtained on the date or
origination of such Mortgage Loan Contract;
(m) At the Purchase Date, the Mortgaged Property is covered by a (i)
valid and existing hazard insurance policy with a carrier licensed in the state
in which the Mortgaged Property is located that provides for fire and extended
coverage representing coverage not less than the least of (A) the Outstanding
Principal Amount of the related Mortgage Loan Contract and, in the case of a
Second Mortgage Loan Contract, the Outstanding Principal Amount of the related
First Mortgage Loan Contract, (B) the minimum amount required to compensate for
loss or damage on a replacement cost basis or (C) the full insurable value of
the Mortgaged Property and (ii) if the improvements are in a special flood
hazard area, a flood insurance policy with the same minimum amount. All
individual insurance policies are the valid and binding obligation of the
related insurer and contain a standard mortgagee clause naming the Seller, its
successors and assigns, as mortgagee. All premiums then due thereon have been
paid or are subject to a blanket policy. The Mortgage obligates the obligor
thereunder to maintain all such insurance at the obligor's cost and expense.
Seller has caused to be performed any and all acts required to preserve the
rights and remedies of Buyer in any such insurance policies applicable to the
Mortgage Loan Contracts; including, without limitation, any necessary
notifications of insurers, assignments of policies or interests therein, and
establishments of co-insured, joint loss payee and mortgagee rights in favor of
the Buyer;
B-3
<PAGE>
(n) Each hazard insurance policy required to be maintained under
this Agreement with respect to such Mortgage Loan Contract is a valid, binding,
enforceable and subsisting insurance policy of its respective kind and is in
full force and effect or the risks are otherwise covered by a blanket policy;
(o) To the best of the Seller's knowledge, no Mortgaged Property
was, at origination, located within a 1 mile radius of any site with
environmental or hazardous waste risks, where actual knowledge is defined as not
including knowledge imputable by virtue of availability or accessibility to
information relating to environmental or hazardous waste sites thereof;
(p) Each Mortgage and Mortgage Note is the legal, valid and binding
obligation of the maker thereof and is enforceable in accordance with its terms,
except only as such enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity (whether
considered in a proceeding or action in equity or at law), and all parties to
each Mortgage Loan Contract had full legal capacity to execute all Mortgage Loan
Contract documents and convey the estate therein purported to be conveyed;
(q) The terms of the Mortgage Note and the Mortgage have not been
impaired, altered or modified in any material respect, except by a written
instrument which has been recorded or is in the process of being recorded, if
necessary, to protect the security interests or lien of the Buyer and which has
been or will be delivered to the Custodian. The substance of any such alteration
or modification is reflected on the Contract Schedule. Each original Mortgage
was recorded, and all subsequent assignments of the original Mortgage have been
recorded in the appropriate jurisdictions wherein such recordation is necessary
to perfect the lien thereof as against creditors of the Seller (or are in the
process of being recorded);
(r) No instrument of release or waiver has been executed in
connection with any Mortgage Loan Contract, and no Obligor has been released, in
whole or in part, except for partial release relating to those granted in the
ordinary course of business;
(s) To the best of the Seller's knowledge, all taxes, governmental
assessments, insurance premiums, water, sewer and municipal charges, leasehold
payments or ground rents which previously became due and owing have been paid,
or an escrow of funds has been established in an amount sufficient to pay for
every such item which remains unpaid and which has been assessed but is not yet
due and payable. Except for payments in the nature of escrow payments, including
without limitation, taxes and insurance payments, the Seller has not advanced
funds, or induced, solicited or knowingly received any advance of funds by a
party other than the Obligor, directly or indirectly, for the payment of any
amount required by the Mortgage, except for interest accruing from the date of
the Mortgage Note or date of disbursement of the Mortgage proceeds, whichever is
greater, to the day which precedes by one month the due date of the first
installment of principal and interest. With respect to Mortgaged Properties that
are the subject of a ground lease, to the best of the Seller's knowledge, all
lease
B-4
<PAGE>
rents, other payments or assessments that have become due have been paid and the
Obligor is not in material default under any other provisions of the lease and
the lease is valid, in good standing and in full force and effect;
(t) To the best of the Seller's knowledge, there is no proceeding
pending or threatened for the total or partial condemnation of the Mortgaged
Property, nor is such a proceeding currently occurring, and such property is
undamaged by waste, fire, earthquake or earth movement, windstorm, flood,
tornado or other casualty, so as to affect adversely the value of the Mortgaged
Property as security for the Mortgage Loan Contract or the use for which the
premises were intended;
(u) To the best of the Seller's knowledge, all of the improvements
which were included for the purpose of determining the Appraised Value of the
Mortgaged Property lie wholly within the boundaries and building restriction
lines of such property, and no improvements on adjoining properties encroach
upon the Mortgaged Property except for minor encroachments that do not
materially reduce the value of the Mortgaged Property;
(v) To the best of the Seller's knowledge, no improvement located on
or being part of the Mortgaged Property is in violation of any applicable zoning
law or regulation. To the best of the Seller's knowledge, all inspections,
licenses and certificates required to be made or issued with respect to all
occupied portions of the Mortgaged Property and, with respect to the use and
occupancy of the same, including but not limited to certificates of occupancy
and fire underwriting certificates, have been made or obtained from the
appropriate authorities;
(w) The proceeds of the Mortgage Loan Contract have been fully
disbursed to the Obligor or into an escrow account (i) for completion of
improvements to the Mortgaged Property or (ii) for the payment of taxes,
insurance, or other liens on the Mortgaged Property or (iii) to pay contractors
for construction on the Mortgaged Property, and there is no obligation on the
part of the mortgagee to make future advances thereunder. To the best of
Seller's knowledge, any and all requirements as to completion of any on-site or
off-site improvements and as to disbursements of any escrow funds therefor have
been complied with. All costs, fees and expenses incurred in making or closing
or recording the Mortgage Loan Contract were paid;
(x) The related Mortgage Note is not and has not been secured by any
collateral, pledged account or other security except the lien of the
corresponding Mortgage;
(y) No Mortgage Loan Contract was originated under a buydown plan
except for a cash buydown paid at closing;
(z) There is no obligation on the part of the Seller or any other
party to make payments in addition to those made by the Obligor;
(aa) With respect to each Mortgage constituting a deed of trust, a
trustee, duly qualified under applicable law to serve as such, has been properly
designated and currently so
B-5
<PAGE>
serves and is named in such Mortgage, and no fees or expenses are or will become
payable by the Buyer or the Custodian to the trustee under such deed of trust,
except in connection with a trustee's sale after default by the Obligor;
(ab) No Originated Contract that is a Mortgage Loan Contract has a
shared appreciation feature, or other contingent interest feature;
(ac) With respect to each Originated Contract that is a Second
Mortgage Loan Contract, the related first lien requires equal monthly payments,
or if it bears an adjustable interest rate, the monthly payments for the related
first lien may be adjusted not more frequently than once every six months;
(ad) With respect to each Originated Contract that is a Second
Mortgage Loan Contract, either (i) the mortgage instrument related to the first
lien indicates that no consent for the Mortgage Loan Contract is required by the
holder of the related first lien or (ii) if consent is required by such mortgage
instrument, such consent has been obtained and is contained in the Mortgage
File;
(ae) The maturity date of each Originated Contract that is a Second
Mortgage Loan Contract is prior to the maturity date of the related first lien
if such first lien provides for a balloon payment; and with respect to any first
lien that provides for negative amortization or deferred interest, the balance
of such first lien used to calculate the combined Loan-to-Value Ratio for such
Second Mortgage Loan Contract is based on the maximum amount of negative
amortization possible under such first lien;
(af) To the best of the Seller's knowledge, all parties which have
had any interest in the Mortgage Loan Contract, whether as mortgagee, assignee,
pledgee or otherwise, are (or, during the period in which they held and disposed
of such interest, were) (1) in compliance in all material respects with any and
all applicable licensing requirements of the laws of the state wherein the
Mortgaged Property is located, and (2)(A) organized under the laws of such
state, or (B) qualified to do business in such state, or (C) federal savings and
loan associations or national banks having principal offices in such state, or
(D) not doing business in such state so as to require qualification or
licensing;
(ag) The Mortgage contains a customary provision for the acceleration
of the payment of the unpaid principal balance of the Mortgage Loan Contract in
the event the related security for the Mortgage Loan Contract is sold without
the prior consent of the mortgagee thereunder;
(ah) All advances made prior to (and excluding) the Purchase Date
have been consolidated with the outstanding principal amount secured by the
Mortgage, and the secured principal amount, as consolidated, bears a single
interest rate and single repayment term reflected on the Contract Schedule. The
consolidated principal amount does not exceed the
B-6
<PAGE>
original principal amount of the Mortgage Loan Contract. The Mortgage Note does
not permit or obligate the Seller to make future advances to the Obligor at the
option of the Obligor;
(ai) The related Mortgage contains customary and enforceable
provisions which render the rights and remedies of the holder thereof adequate
for the realization against the Mortgaged Property of the benefits of the
security, including, (i) in the case of a Mortgage designated as a deed of
trust, by trustee's sale, and (ii) otherwise by judicial or non-judicial
foreclosure. There is no homestead or other exemption available to the Obligor
which would materially interfere with the right to sell the Mortgaged Property
at a trustee's sale or the right to foreclose the Mortgage;
(aj) To the best of the Seller's knowledge, there is no default,
breach, violation or event of acceleration existing under the Mortgage or the
related Mortgage Note and no event which, with the passage of time or with
notice and the expiration of any grace or cure period, would constitute a
default, breach, violation or event of acceleration, except the passage of time
for a payment to be made under a Mortgage Loan Contract that does not exceed the
number of days established for a Mortgage Loan Contract to be deemed a Defaulted
Contract; and Seller has not waived any default, breach, violation or event of
acceleration except for acceptance of late payments and workout arrangements
consistent with any applicable servicing arrangement;
(ak) To the best of Seller's knowledge, all parties to the Mortgage
Note and the Mortgage had legal capacity to execute the Mortgage Note and the
Mortgage and each Mortgage Note and Mortgage have been duly and properly
executed by such parties;
(al) With respect to each Mortgage Loan Contract that has a Contract
Rate that is adjustable, all of the terms of the Mortgage and the Mortgage Note
pertaining to interest rate adjustments, payment adjustments and adjustments of
the outstanding principal balance are enforceable, such adjustments will not
affect the priority of the lien on the Mortgage, and all of the interest rate
calculations have been properly calculated, recorded, reported and applied in
accordance with the Mortgage and the Mortgage Note;
(am) An appraisal, completed by independent fee appraisers, was
performed with respect to each Mortgage Loan Contract and is contained in the
Servicer's files, and no appraisal was based solely on a cost approach analysis;
(an) No Mortgage Loan Contract is secured by a leasehold interest
which does not extend for a period of at least five (5) years after the term of
the Mortgage Loan Contract;
(ao) Each Fixed Rate Contract that is a Mortgage Loan Contract and
not a Balloon Contract provides for a schedule of substantially level and equal
monthly scheduled payments which are sufficient to amortize fully the principal
balance of such Mortgage Note on or before its maturity date, which maturity
date is not more than thirty (30) years from the date of origination of such
Fixed Rate Contract. Each Balloon Contract that is a Mortgage Loan
B-7
<PAGE>
Contract has an original term to stated maturity of at least five (5) years and
an amortization schedule not greater than thirty (30) years;
(ap) Each Originated Contract that is a Mortgage Loan Contract was,
in all material respects, underwritten according to the Underwriting Standards;
(aq) Each Originated Contract that is a Mortgage Loan Contract shall
permit either partial or full prepayment of such Mortgage Loan Contract without
penalty or premiums where such penalties are prohibited;
(ar) None of the Mortgage Loan Contracts shall be due from the United
States of America or any State or from any agency, department, or
instrumentality of the United States of America or any State. All of the
Mortgage Loan Contracts shall be due from Obligors who are citizens, or legal
resident aliens, of the United States of America;
(as) No Mortgage Loan Contract shall have been satisfied,
subordinated, or rescinded, nor shall any Mortgaged Property have been released
from the lien granted by the related Mortgage in whole or in part;
(at) No Originated Contract that is a Mortgage Loan Contract shall
have been charged off in whole or in part as of the Purchase Date;
(au) No Mortgage Loan Contract shall have been originated in, or
shall be subject to the laws of, any jurisdiction under which the sale,
transfer, and assignment of such Mortgage Loan Contract under the Agreement
shall be unlawful, void, or voidable. Seller has not entered into any agreement
with any account debtor that prohibits, restricts or conditions the assignment
of any portion of the Mortgage Loan Contracts;
(av) There shall be only one original executed copy of each Mortgage
Loan Contract and such originated executed copy shall be in the possession of
the Custodian;
(aw) [Intentionally Omitted];
(ax) The number of scheduled payments shall not have been extended on
any Originated Contract that is a Mortgage Loan Contract on or before the
Purchase Date;
(ay) Each Originated Contract that is a Mortgage Loan Contract shall
have a first scheduled payment due on or prior to sixty (60) calendar days after
the origination thereof;
(az) All allocations of payments with respect to each Originated
Contract that is a Mortgage Loan Contract to principal and interest, and
determinations of periodic charges and the like, shall be made using the
actuarial method or the simple interest method, based on a 360-day year
consisting of twelve 30-day months. Each payment on a Mortgage Loan
B-8
<PAGE>
Contract shall be applied first to the amount of interest accrued on such
Mortgage Contract and then to reduce the principal amount outstanding on the
Mortgage Loan Contract;
(ba) No Mortgage Loan Contract shall be subject to a then repurchase
obligation under the terms of the related Mortgage Loan Contract which
repurchase obligation has not been satisfied within thirty (30) calendar days
after the occurrence of an event triggering such repurchase obligation;
(bb) By the Purchase Date, the Seller will have caused the portions
of the electronic ledger relating to the Mortgage Loan Contracts to be clearly
and unambiguously marked to show that the Mortgage Loan Contracts have been
transferred to Buyer;
(bc) The Computer Tape made available by the Seller to the Buyer and
the Custodian on the Purchase Date was complete and accurate and includes a
description of the same Mortgage Loan Contracts that are described in the List
of Contracts;
(bd) No selection procedures adverse to the Buyer were utilized in
selecting the Mortgage Loan Contracts from those Mortgage Loan Contracts owned
by Seller eligible for transfer to the Buyer pursuant to the Agreement;
(be) Each Obligor has been instructed to make scheduled payments on
its Mortgage Loan Contracts to Seller at the MLC Lockbox Account as provided in
the Custodial Agreement;
(bf) No error, omission, misrepresentation, negligence, fraud or
similar action occurred on the part of any Person in connection with the
origination of any Originated Contract that is a Mortgage Loan Contract. To the
best of Seller's knowledge, no error, omission, misrepresentation, negligence,
fraud or similar action occurred on the part of any Person in connection with
the origination of any Non-Originated Contract that is a Mortgage Loan Contract;
and
(bg) No Mortgaged Property has been foreclosed or is in foreclosure
status, unless otherwise agreed to by Buyer.
B-9
<PAGE>
II. Representations and Warranties Regarding Manufactured Home Loan Contracts.
------------------------------------------------------------
WFC makes the following representations and warranties with respect to
each Manufactured Home Loan Contract, as of each Purchase Date with respect to
such Manufactured Home Loan Contract, which representations and warranties shall
survive transfer of each such Manufactured Home Loan Contract to Buyer pursuant
to the Agreement:
(a) WFC information set forth in the List of Contracts and any other
information in respect to a Manufactured Home Loan Contract given by Seller to
Buyer is true and correct;
(b) Each Manufactured Home Loan Contract is principally secured by
the related Mortgaged Property;
(c) Each Manufactured Home Loan Contract is being serviced by
Seller, and is not subject to any subservicing arrangement except for an interim
servicing arrangement which shall not exceed sixty (60) days;
(d) Immediately prior to the sale, assignment, and transfer thereof,
each Manufactured Home Loan Contract shall be secured by a validly perfected
first priority security interest in or lien on the Financed Manufactured Home
and Mortgaged Property, if any in favor of Seller as secured party and upon the
sale thereof to Buyer on the related Purchase Date, Buyer shall have a valid and
effective assignment of such security interest, and all filings and recordings
(including, without limitation, UCC filings, notations or certificates of title,
the recording of any assignment of Mortgage in the appropriate jurisdiction, as
applicable) have been made and all other actions taken that are necessary to
provide Buyer a first priority perfected security interest in or lien on the
Financed Manufactured Home and Mortgaged Property;
(e) No Manufactured Home Loan Contract has been sold, transferred,
assigned, or pledged by Seller to any Person other than Buyer. Except with
respect to liens released immediately prior to the transfer herein contemplated,
immediately prior to the transfer and assignment herein contemplated, Seller
held good, marketable and indefeasible title to, and was the sole owner of, each
Manufactured Home Loan Contract; and immediately upon the transfer and
assignment herein contemplated, the Buyer will hold good, marketable and
indefeasible title, to, and be the sole owner of, each Manufactured Home Loan
Contract free of all liens, charges, mortgages, security interests,
encumbrances, restrictions on transferability or rights of others. As of the
Purchase Date, the lien or security interest in favor of the Buyer with respect
to the Manufactured Home Loan Contract will be perfected by the delivery of the
Manufactured Home Loan Contracts to the Custodian, which Manufactured Home Loan
Contracts the Custodian will hold on behalf of the Buyer, the filing of
financing statements on Form UCC-1 in each jurisdiction where such recording or
filing is necessary for the perfection of the security interest in favor of the
Buyer, including notations on certificates of title, if necessary, the recording
of any assignment of Mortgage in the appropriate jurisdiction, and no
B-10
<PAGE>
other filings or recordings in any jurisdiction or any other actions (except as
expressly provided herein) are necessary to perfect the Buyer's first priority
lien on and security interest in the Manufactured Home Loan Contracts as against
any third parties.
(f) As of the related Purchase Date other than financing statements
naming Seller as "seller/debtor" and Buyer as "purchaser/secured party," there
is no effective financing statement (or similar statement or instrument of
registration under the law of any jurisdiction) on file or registered in any
public office filed by Seller or purporting to be filed on behalf of Seller
covering any interest of any kind in the Manufactured Home Loan Contract or
intended so to be, except those in favor of Buyer;
(g) As of the Purchase Date, none of the Originated Contracts that
are Manufactured Home Loan Contracts are Defaulted Contracts;
(h) To the best of the Seller's knowledge, (i) there is no
delinquent tax or assessment lien on any Mortgaged Property except those liens
for which funds sufficient to discharge such liens are held in escrow by the
Servicer or an escrow agent and (ii) each Mortgaged Property is free of material
damage and is in average repair;
(i) Each Manufactured Home Loan Contract is not subject to any right
of rescission, set-off, counterclaim or defense, including the defense of usury,
nor will the operation of any of the terms of the Manufactured Home Loan
Contract, or the exercise of any right thereunder, render the Manufactured Home
Loan Contract unenforceable in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury,
and no such right of rescission, set-off, counterclaim or defense has been
asserted with respect thereto;
(j) To the best of the Seller's knowledge, there is no mechanics'
lien or claim for work, labor or material affecting any Mortgaged Property which
is or may be a lien prior to, or equal with, the security interest in the
Mortgaged Property granted by the Manufactured Home Loan Contract;
(k) Each Originated Contract that is a Manufactured Home Loan
Contract at the time it was made complied in all material respects with
applicable state and federal laws and regulations, including, without
limitation, usury laws, local licensing, the federal Truth-in-Lending Act, the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Magnuson-Moss
Warranty Act, the Federal Reserve Board's Regulations B and Z, the Fair Debt
Collection Practices Act, the Federal Trade Commission Act, state adaptations of
the National Consumer Act and of the Uniform Consumer Credit Code, and other
applicable consumer credit laws and equal credit opportunity and disclosure
laws;
(l) To the best of Seller's knowledge, each Non-Originated Contract
that is a Manufactured Home Loan Contract at the time it was made complied in
all material respects with applicable state and federal laws and regulations,
including, without limitation, usury laws,
B-11
<PAGE>
local licensing, the federal Truth-in-Lending Act, the Equal Credit Opportunity
Act, the Fair Credit Reporting Act, the Magnuson-Moss Warranty Act, the Federal
Reserve Board's Regulations B and Z, the Fair Debt Collection Practices Act, the
Federal Trade Commission Act, state adaptations of the National Consumer Act and
of the Uniform Consumer Credit Code, and other applicable consumer credit laws
and equal credit opportunity and disclosure laws;
(m) With respect to each Manufactured Home Loan Contract secured by
a Mortgage, either (A) a Seller's title insurance policy, issued in standard or
American Land Title Association form (with modifications, if any, approved by
the state in which the related Mortgaged Property is located) by a title
insurance company authorized to transact business in the state in which the
related Mortgaged Property is situated, in an amount at least equal to the
original principal amount of such Manufactured Home Loan Contract insuring the
mortgagee's interest under the related Manufactured Home Contract as the holder
of a valid first Mortgage lien of record on such real property, subject only to
a survey exception and other exceptions of the character referred to in any
related Title Insurance Policy and in subsections (h) and (j) above, was
effective on the date of the origination of such Manufactured Home Loan
Contract, and, as of the Purchase Date, such policy will be valid and thereafter
such policy shall continue in full force and effect, or (B) in those
jurisdictions in which it is customary to obtain opinions of counsel as to title
matters rather than title insurance, an opinion of counsel as to the mortgagee's
interest under the related Mortgage as the holder of a valid first Mortgage lien
of record on the real property described in the related Mortgage, was obtained
on the date or origination of the related Manufactured Home Loan Contract;
(n) At the Purchase Date, the Mortgaged Property is covered by a (i)
valid and existing hazard insurance policy with a carrier licensed in the state
in which the Mortgaged Property is located that provides for fire and extended
coverage representing coverage not less than the least of (A) the Outstanding
Principal Amount of the related Manufactured Home Loan Contract, (B) the minimum
amount required to compensate for loss or damage on a replacement cost basis or
(C) the full insurable value of the Mortgaged Property and (ii) if the
improvements are in a special flood hazard area, a flood insurance policy with
the same minimum amount. All individual insurance policies are the valid and
binding obligation of the related insurer and contain a standard mortgagee
clause naming the Seller, its successors and assigns, as mortgagee. All premiums
then due thereon have been paid or are subject to a blanket policy. The
Manufactured Home Loan Contract obligates the Obligor thereunder to maintain all
such insurance at the Obligor's cost and expense. Seller has caused to be
performed any and all acts required to preserve the rights and remedies of Buyer
in any such insurance policies applicable to the Manufactured Home Loan
Contracts, including, without limitation, any necessary notifications of
insurers, assignments of policies or interests therein, and establishment of co-
insured, joint loss payee and mortgagee rights in favor of the Buyer;
(o) Each hazard insurance policy required to be maintained under
this Agreement with respect to such Manufactured Home Loan Contract is a valid,
binding, enforceable and subsisting insurance policy of its respective kind and
is in full force and effect or is otherwise covered by a blanket policy;
B-12
<PAGE>
(p) To the best of the Seller's actual knowledge, no Mortgaged
Property was, at origination, located within a 1 mile radius of any site with
environmental or hazardous waste risks, where actual knowledge is defined as not
including knowledge imputable by virtue of availability or accessibility to
information relating to environmental or hazardous waste sites thereof;
(q) Each Manufactured Home Loan Contract is the legal, valid and
binding obligation of the maker thereof and is enforceable in accordance with
its terms, except only as such enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general principles of equity
(whether considered in a proceeding or action in equity or at law), and all
parties to each Manufactured Home Loan Contract had full legal capacity to
execute all Manufactured Home Loan Contract documents and convey the estate
therein purported to be conveyed;
(r) The terms of the Manufactured Home Loan Contracts have not been
impaired, altered or modified in any material respect, except by a written
instrument which has been recorded or filed or is in the process of being
recorded or filed, if necessary, to protect the security interests or lien of
the Buyer and which has been or will be delivered to the Custodian. The
substance of any such alteration or modification is reflected on the Contract
Schedule;
(s) No instrument of release or waiver has been executed in
connection with any Manufactured Home Loan Contract, and no Obligor has been
released, in whole or in part, except for partial release relating to those
granted in the ordinary course of business;
(t) To the best of the Seller's knowledge, all taxes, governmental
assessments, insurance premiums, water, sewer and municipal charges, leasehold
payments or ground rents which previously became due and owing have been paid,
or an escrow of funds has been established in an amount sufficient to pay for
every such item which remains unpaid and which has been assessed but is not yet
due and payable. Except for payments in the nature of escrow payments, including
without limitation, taxes and insurance payments, the Seller has not advanced
funds, or induced, solicited or knowingly received any advance of funds by a
party other than the Obligor, directly or indirectly, for the payment of any
amount required by the Manufactured Home Loan Contract, except for interest
accruing from the date of the Manufactured Home Loan Contract or the date of
disbursement of proceeds thereunder, whichever is greater, to the day which
precedes by one month the due date of the first installment of principal and
interest. With respect to Mortgaged Properties that are the subject of a ground
lease, to the best of the Seller's knowledge, all lease rents, other payments or
assessments that have become due have been paid and the Obligor is not in
material default under any other provisions of the lease and the lease is valid,
in good standing and in full force and effect;
(u) To the best of the Seller's knowledge, there is no proceeding
pending or threatened for the total or partial condemnation of the Mortgaged
Property, nor is such a
B-13
<PAGE>
proceeding currently occurring, and such property is undamaged by waste, fire,
earthquake or earth movement, windstorm, flood, tornado or other casualty, so as
to affect adversely the value of the Mortgaged Property as security for the
Manufactured Home Loan Contract or the use for which the premises were intended;
(v) To the best of the Seller's knowledge, all of the improvements
which were included for the purpose of determining the Appraised Value of the
Mortgaged Property lie wholly within the boundaries and building restriction
lines of such property, and no improvements on adjoining properties encroach
upon the Mortgaged Property except for minor encroachments that do not
materially reduce the value of the Mortgaged Property;
(w) To the best of the Seller's knowledge, no improvement located on
or being part of the Mortgaged Property is in violation of any applicable zoning
law or regulation. To the best of the Seller's knowledge, all inspections,
licenses and certificates required to be made or issued with respect to all
occupied portions of the Mortgaged Property and, with respect to the use and
occupancy of the same, including but not limited to certificates of occupancy
and fire underwriting certificates, have been made or obtained from the
appropriate authorities;
(x) The proceeds of the Manufactured Home Loan Contract have been
fully disbursed to the Obligor or into an escrow account (i) for completion of
improvements to the Mortgaged Property or (ii) for the payment of taxes,
insurance, or other liens on the Mortgaged Property or (iii) for the
construction of the Manufactured Home, and there is no obligation on the part of
the mortgagee to make future advances thereunder. To the best of Seller's
knowledge, any and all requirements as to completion of any on-site or off-site
improvements and as to disbursements of any escrow funds therefor have been
complied with. All costs, fees and expenses incurred in making or closing or
recording the Manufactured Home Loan Contract were paid;
(y) The Manufactured Home Loan Contract is not and has not been
secured by any collateral, pledged account or other security except the lien of
the corresponding Mortgaged Property;
(z) No Manufactured Home Loan Contract was originated under a
buydown plan except for a cash buydown paid at closing;
(aa) There is no obligation on the part of the Seller or any other
party to make payments in addition to those made by the Obligor;
(ab) With respect to each Mortgage constituting a deed of trust and
securing a Manufactured Home Loan Contract, a trustee, duly qualified under
applicable law to serve as such, has been properly designated and currently so
serves and is named in such Mortgage, and no fees or expenses are or will become
payable by the Buyer or the Custodian to the trustee under such deed of trust,
except in connection with a trustee's sale after default by the Obligor;
B-14
<PAGE>
(ac) No Originated Contract that is a Manufactured Home Loan Contract
has a shared appreciation feature, or other contingent interest feature;
(ad) To the best of the Seller's knowledge, all parties which have
had any interest in the Manufactured Home Loan Contract, whether as obligee,
assignee, pledgee or otherwise, are (or, during the period in which they held
and disposed of such interest, were) (1) in compliance in all material respects
with any and all applicable licensing requirements of the laws of the state
wherein the Mortgaged Property is located, and (2)(A) organized under the laws
of such state, or (B) qualified to do business in such state, or (C) federal
savings and loan associations or national banks having principal offices in such
state, or (D) not doing business in such state so as to require qualification or
licensing;
(ae) The Manufactured Home Loan Contract contains a customary
provision for the acceleration of the payment of the unpaid principal balance of
the Manufactured Home Loan Contract in the event the related security for the
Manufactured Home Loan Contract is sold without the prior consent of the
mortgagee thereunder;
(af) All advances made prior to (and excluding) the Purchase Date
have been consolidated with the Outstanding Principal Amount secured by the
Manufactured Home Loan Contract, and the secured principal amount, as
consolidated, bears a single interest rate and single repayment term reflected
on the List of Contracts. The consolidated principal amount does not exceed the
Original Principal Amount of the Manufactured Home Loan Contract. The
Manufactured Home Loan Contract does not permit or obligate the Seller to make
future advances to the Obligor at the option of the Obligor;
(ag) The Manufactured Home Loan Contract contains customary and
enforceable provisions which render the rights and remedies of the holder
thereof adequate for the realization against the Mortgaged Property of the
benefits of the security;
(ah) To the best of the Seller's knowledge, there is no default,
breach, violation or event of acceleration existing under the Manufactured Home
Loan Contract and no event which, with the passage of time or with notice and
the expiration of any grace or cure period, would constitute a default, breach,
violation or event of acceleration, except for the passage of time for a payment
to be made under the Manufactured Home Loan Contracts that does not exceed the
number of days established for Manufactured Home Loan Contracts to be deemed a
Defaulted Contract; and Seller has not waived any default, breach, violation or
event of acceleration except for acceptance of late payments and workout
arrangements consistent with any applicable servicing arrangement;
(ai) To the best of Seller's knowledge, all parties to the
Manufactured Home Loan Contract had legal capacity to execute the Manufactured
Home Loan Contract and each Manufactured Home Loan Contract has been duly and
properly executed by such parties;
B-15
<PAGE>
(aj) An appraisal, completed by independent fee appraisers, was
performed with respect to each Manufactured Home Loan Contract and is contained
in the Seller's Files, and no appraisal was based solely on a cost approach
analysis;
(ak) No Manufactured Home Loan Contract is secured by a leasehold
interest which does not extend for a period of at least five (5) years after the
term of the Manufactured Home Loan Contract;
(al) Each Fixed Rate Contract that is a Manufactured Home Loan
Contract and not a Balloon Contract provides for a schedule of substantially
level and equal monthly scheduled payments which are sufficient to amortize
fully the principal balance of such Manufactured Home Loan Contract on or before
its maturity date, which maturity date is not more than thirty (30) years from
the date of origination of such Fixed Rate Contract. Each Balloon Contract that
is a Manufactured Home Loan Contract has an original term to stated maturity of
at least five (5) years and an amortization schedule not greater than thirty
(30) years;
(am) Each Originated Contract that is a Manufactured Home Loan
Contract was, in all material respects, underwritten according to the
Underwriting Standards;
(an) Each Originated Contract that is a Manufactured Home Loan
Contract shall (to the extent originated by a Dealer) have been purchased from a
Dealer under an existing Dealer Agreement and sold to Seller (which Dealer had
all necessary licenses and permits to originate such Contract) and shall have
been validly sold and assigned by Seller to Buyer;
(ao) Each Originated Contract that is a Manufactured Home Loan
Contract shall permit either partial or full prepayment of such Manufactured
Home Loan Contract without penalty or premiums where such penalties are
prohibited;
(ap) None of the Manufactured Home Loan Contracts shall be due from
the United States of America or any State or from any agency, department, or
instrumentality of the United States of America or any State. All of the
Manufactured Home Loan Contracts shall be due from Obligors who are citizens, or
legal resident aliens, of the United States of America.
(aq) No Manufactured Home Loan Contract shall have been satisfied,
subordinated, or rescinded, nor shall any Mortgaged Property have been released
from the lien granted by the related Manufactured Home Loan Contract in whole or
in part;
(ar) No Originated Contract that is a Manufactured Home Loan Contract
shall have been charged off in whole or in part as of the Purchase Date;
(as) No Manufactured Home Loan Contract shall have been originated
in, or shall be subject to the laws of, any jurisdiction under which the sale,
transfer, and assignment of such Manufactured Home Loan Contract under the
applicable Dealer Agreement or the Agreement shall be unlawful, void, or
voidable. Seller has not entered into any agreement with
B-16
<PAGE>
any account debtor that prohibits, restricts or conditions the assignment of any
portion of the Manufactured Home Loan Contracts and has not entered into any
agreement which prohibits, restricts or conditions the assignment of any Dealer
Recourse;
(at) There shall be only one original executed copy of each
Manufactured Home Loan Contract and such originated executed copy shall be in
the possession of the Custodian ;
(au) Each Financed Manufactured Home shall have been a new or used
manufactured home at the time the related Obligor executed the related
Manufactured Home Loan Contract;
(av) No Manufactured Home Loan Contract shall have a maximum amount
financed that exceeds $100,000;
(aw) The number of scheduled payments shall not have been extended on
any Manufactured Home Loan Contract on or before the Purchase Date;
(ax) Each Manufactured Home Loan Contract shall have a first
scheduled payment due on or prior to sixty (60) calendar days after the
origination thereof;
(ay) All allocations of payments with respect to each Originated
Contract that is a Manufactured Home Loan Contract to principal and interest,
and determinations of periodic charges and the like, shall be made using the
actuarial method or the simple interest method, based on a 360-day year
consisting of twelve 30-day months. Each payment on a Manufactured Home Loan
Contract shall be applied first to the amount of interest accrued on such
Manufactured Home Loan Contract and then to reduce the principal amount
outstanding on the Manufactured Home Loan Contract;
(az) No Manufactured Home Loan Contract shall be subject to a then
repurchase obligation under the terms of the related Manufactured Home Loan
Contract or Dealer Agreement by a Dealer, an affiliate of the Dealer or any
other entity, as the case may be, which repurchase obligation has not been
satisfied within thirty (30) calendar days after the occurrence of an event
triggering such repurchase obligation;
(ba) By the Purchase Date, the Seller will have caused the portions
of the electronic ledger relating to the Manufactured Home Loan Contracts to be
clearly and unambiguously marked to show that the Manufactured Home Loan
Contracts have been transferred to Buyer;
(bb) The Computer Tape made available by the Seller to the Buyer and
the Custodian on the Purchase Date was complete and accurate and includes a
description of the same Manufactured Home Loan Contracts that are described in
the List of Contracts;
B-17
<PAGE>
(bc) No selection procedures adverse to the Buyer were utilized in
selecting the Manufactured Home Loan Contracts from those Manufactured Home Loan
Contracts owned by Seller eligible for transfer to the Buyer pursuant to the
Agreement;
(bd) The representations and warranties of the Dealer in the Dealer
Agreement with respect to each Manufactured Home Loan Contract purchased by
Seller pursuant to such Dealer Agreement were substantially true and correct as
of the date Seller acquired such Manufactured Home Loan Contract from that
Dealer;
(be) Each Obligor has been instructed to make scheduled payments on
its Manufactured Home Loan Contracts to Seller at the MHLC Lockbox Account as
provided in the Custodial Agreement;
(bf) No error, omission, misrepresentation, negligence, fraud or
similar action occurred on the part of any Person in connection with the
origination of any Originated Contract that is a Manufactured Home Loan
Contract. To the best of Seller's knowledge, no error, omission,
misrepresentation, negligence, fraud or similar action occurred on the part of
any Person in connection with the origination of any Non-Originated Contract
that is a Manufactured Home Loan Contract;
(bg) No Mortgaged Property that is a Manufactured Home has been
repossessed or is in repossession status or has been foreclosed or is in
foreclosure status;
(bh) Each of the Manufactured Home Loan Contracts is secured by a
"single family residence" within the meaning of Section 25(e)(10) of the Code;
and
(bi) Each Financed Manufactured Home is a residential manufactured
home as defined in Section 601 of the National Manufactured Housing and
Construction Standard Act of 1974 and was originated by one of the types of
structures described in Section 3(a)(41)(A)(ii) of the Securities Exchange Act
of 1934.
B-18
<PAGE>
EXHIBIT C
---------
OPINION OF COUNSEL TO SELLER
----------------------------
C-1
<PAGE>
EXHIBIT D
---------
UNDERWRITING STANDARDS
----------------------
D-1
<PAGE>
SCHEDULE 1
----------
FORM OF TRANSACTION NOTICE
CS First Boston Mortgage Capital Corp. Transaction No. __________
55 East 52nd Street
New York, New York 10055
Attention:
Bankers Trust Company of California, N.A.
3 Park Plaza
Irvine, California 92714
Attention:
Ladies and Gentlemen:
The undersigned executes and delivers this notice ("Notice") pursuant to
the requirements of the (i) Repurchase Agreement, dated as of November 15, 1996
(the "Repurchase Agreement") and Annex I, Additional Supplemental Terms dated as
of November 15, 1996, in each case between CS First Boston Mortgage Capital
Corp. ("Buyer") and Wilshire Funding Corporation ("Seller" or "WFC"), (ii) the
Custodial and Servicing Agreement, dated as of November 15, 1996 (the "Custodial
Agreement"), among WFC, as seller (in such capacity, "Seller") and as servicer
(in such capacity, "Servicer"), Buyer and Bankers Trust Company of California,
N.A., as custodian ("Custodian"), and (iii) the Supplement Agreement dated as of
November 15, 1996 by and among CSFB, Seller, Servicer and Custodian in
connection with the submission for sale thereunder on __________, 199 (the
"Purchase Date") of the Contracts identified on the Computer Tape delivered
herewith and the delivery of the related Custodian's Contract Files to
Custodian. All capitalized terms used in this certificate without definition
shall have the same meanings herein as they have in the Agreement.
Seller hereby represents and certifies to Buyer as follows:
1. As of this date, Seller is in compliance with all of the terms and
conditions of the Agreement.
2. Except as otherwise previously disclosed in writing to Buyer,
Seller's representations and warranties set forth in the Transaction
Documents and any other related document are true and accurate as of the
date of this Notice.
3. The Contracts, which are identified on such Computer Tape, satisfy
the requirements of the eligibility set forth in the Transaction Documents
and all related agreements between Buyer and Seller.
4. Upon payment to Seller by Buyer of the Purchase Price in respect of
the Transaction involving the Contracts, all of Seller's right (including
the power to convey title thereto), title and interest in and to each
document constituting the Custodian's Contract Files delivered to Custodian
or held by or on behalf of Seller with respect to each purchased Contract,
shall be transferred, assigned, set over and otherwise conveyed to Buyer.
5. The general terms of the sale are:
A. Number of Contracts:
B. Types of Contract:
(i) First Mortgage Loan Contracts _____
(a) Originated _____
(b) Non-Originated _____
(ii) Second Mortgage Loan Contracts _____
(a) Originated _____
(b) Non-Originated _____
(iii) Manufactured Home Loan Contracts _____
(a) Originated
(x) Secured by Manufactured Homes _____
(y) Land-and-Home Loan Contracts _____
(b) Non-Originated
(x) Secured by Manufactured Homes _____
(y) Land-and-Home Loan Contracts _____
C. Outstanding Principal Amount of Contracts: _____
D. Purchase Date: __________
E. Repurchase Date: __________
WILSHIRE FUNDING CORPORATION
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
Schedule 1-1
<PAGE>
SCHEDULE 2
----------
FORM OF CONFIRMATION
Wilshire Funding Corporation
[Address]
Attention:
Confirmation No.:
-------------------------
Gentlemen:
We have received your Transaction Notice attached hereto with respect to the
Contracts listed in Appendix I hereto. This letter confirms our agreement to
purchase from you such Contracts pursuant to the (i) Master Repurchase Agreement
and Annex I, Additional Supplemental Terms, each dated as of November 15, 1996
and between CS First Boston Mortgage Capital Corp., as buyer ("Buyer") and
Wilshire Funding Corporation, as seller ("Seller" or "WFC") and (ii) the
Supplement Agreement to Repurchase Agreement and Custodial Agreement dated as of
November 15, 1996 between Buyer, WFC as Seller and as servicer (in such
capacity, "Servicer"), and Bankers Trust Company of California, N.A., as
custodian, (collectively, the "Agreements"), as set forth below. Capitalized
terms used but not defined herein shall have the meanings assigned to them in
the Agreements.
Confirmation Date:
Purchased Securities:
Number of Contracts:
Outstanding Principal Amount
of Contracts:
Purchase Date:
Purchase Price:
Pricing Rate:
Repurchase Date:
Percentage used to
determine Buyer's
Schedule 2-1
<PAGE>
Margin Amount:
Market Value of
Contracts (aggregate):
CS FIRST BOSTON MORTGAGE CAPITAL
CORP.,
as Buyer
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
Acknowledged and Agreed to by:
WILSHIRE FUNDING CORPORATION,
as Seller
By:
--------------------------
Name:
------------------------
Title:
-----------------------
Schedule 2-2
<PAGE>
SCHEDULE 3
----------
REQUIRED LICENSES, REGISTRATION AND/OR QUALIFICATIONS
(EXHIBIT A, PARAGRAPH I.(O) TO ADDITIONAL SUPPLEMENTAL TERMS)
Schedule 2-1
<PAGE>
ANNEX II
NAMES AND ADDRESSES FOR COMMUNICATIONS BETWEEN PARTIES
------------------------------------------------------
CS FIRST BOSTON MORTGAGE CAPITAL CORP.
Park Avenue Plaza
55 East 52nd Street
New York, New York 10055-0186
Attention: Patrick McGrath
---------
Telephone: (212) 909-3556
Facsimile: (212) 318-1427
Any and all legal notices and the Certificate of
Compliance required to be delivered pursuant
to Paragraph II.(c) of Exhibit A must be sent to:
Walter Fekula, Director of Credit
First Boston Mortgage Capital Corp.
11 Madison Avenue, 7th Floor
New York, New York 10010
Telephone Number (212) 325-3063
Facsimile Number (212) 325-8219
WILSHIRE FUNDING CORPORATION
1776 SW Madison Street
Portland, Oregon 97205
Attention: Andrew A. Wiederhorn and Lawrence A. Mendelsohn
---------
Telephone: (503) 223-5600
Facsimile: (503) 223-8799
AII-1
<PAGE>
SUPPLEMENT AGREEMENT TO
REPURCHASE AGREEMENT AND CUSTODIAL AGREEMENT
This Supplement Agreement ("Supplement Agreement"), dated as of November
15, 1996, is entered into between CS First Boston Mortgage Capital Corp., as
buyer, ("Buyer"), Wilshire Funding Corporation, in its capacity as seller (in
such capacity, "Seller") and as servicer (in such capacity, "Servicer"), and
Bankers Trust Company of California, N.A., as custodian ("Custodian").
R E C I T A L S
A. Buyer and Seller entered into a Master Repurchase Agreement
("Master Agreement") dated as of November 15, 1996, and an Annex I, Additional
Supplemental Terms To Master Repurchase Agreement, dated as of November 15, 1996
("Additional Supplemental Terms") (collectively, the "Repurchase Agreement").
B. Buyer, Seller, Custodian and Servicer entered into a Custodial
and Servicing Agreement dated as of November 15, 1996 ("Custodial Agreement").
C. Seller intends to sell to Buyer a Non-Performing Pool (as
defined below) pursuant to a repurchase arrangement between Buyer and Seller.
D. Buyer, Seller, Custodian and Servicer each desire to supplement
and modify the terms of the Repurchase Agreement and the Custodial Agreement in
so far as such Agreements do not contemplate the Non-Performing Pool.
E. This Supplement Agreement shall apply only with respect to the
Non-Performing Pool.
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein contained and in the Repurchase Agreement and the Custodial
Agreement, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree to the following modifications:
1. Miscellaneous. For all purposes of this Supplement Agreement,
-------------
except as otherwise expressly provided or unless the context otherwise requires,
(a) unless otherwise defined herein, all capitalized terms used herein shall
have the meanings attributed to them by the Repurchase Agreement or the
Custodial Agreement, as applicable, (b) the capitalized terms expressly defined
in this Supplement Agreement have the meanings assigned to them in this
Supplement Agreement and include (i) all genders and (ii) the plural as well as
the singular, (c) all references to words such as "herein", "hereof" and the
like shall refer to this Supplement Agreement as a whole and not to any
particular article or section within this Supplement
AII-2
<PAGE>
-3-
Agreement, (d) the term "include" and all variations thereon shall mean "include
without limitation", and (e) the term "or" shall include "and/or".
2. Modifications and Supplements to the Additional Supplemental
------------------------------------------------------------
Terms.
- -----
A. The following definitions are hereby added to Section 2
of the Supplemental Additional Terms :
"Quick Sale BPO" means for each Mortgaged Property
--------------
relating to a Mortgage Loan Contract and each REO
Property, the drive by valuation generally prepared by a
real estate broker who is independent of the Servicer,
Seller and Buyer, which valuation indicates the expected
proceeds of a sale of such Mortgaged Property or REO
Property, and includes certain assumptions, including
those as to the condition of the interior of the
applicable Mortgaged Property or REO Property and
marketing time.
"Non-Performing Pool" means the pool of non-performing
-------------------
mortgage loans (characterized as Non-Originated
Contracts that are Mortgage Loan Contracts) and REO
Properties that are approved from time to time by Buyer
in its sole discretion and such pool shall not exceed a
Purchase Price of $75,000,000.
B. The definition of Second Mortgage Loan Contract is
hereby amended by inserting after the word "is" in the
third line of such definition the following:
"or, as in the case of the Non-Performing Pool, is not"
Sections 11(c), (d) and (e) of the Additional
Supplemental Terms shall not apply to the Non-Performing
C. Pool.
D. Sections 15(b)(ii) and (iii) of the Additional
Supplemental Terms shall not apply to any Contracts
contained in the Non-Performing Pool. Section 15(b)
shall be amended by adding after the word "Contracts" in
the sixth line of said Section 15(b) the following:
"and (iv) $75,000,000 with respect to Mortgage Loan
Contracts in the Non-Performing Pool."
E. Section 16(a)(i) through and including (iv) of the
Additional Supplemental Terms shall not apply to the
Non-Performing Pool.
AII-3
<PAGE>
-4-
However, with respect to Mortgage Loan Contracts in the
Non-Performing Pool, the Pricing Rate shall be LIBOR
plus 2.50%.
F. Section 16(b)(i)(a)(x) and (y) of the Additional
Supplemental Terms shall not apply to the Non-Performing
Pool. However, in respect of Mortgage Loan Contracts in
the Non-Performing Pool, the multiplier shall be ".90".
G. In respect of the Non-Performing Pool, notwithstanding
the existence of any REO Property arising as a result of
a foreclosure of a Mortgaged Property, the related
Mortgage Loan Contract shall be deemed outstanding for
purposes of the calculation of the Repurchase Price and
the repurchase obligation of Seller under the terms and
conditions of the Repurchase Agreement, and the payment
of the Repurchase Price for such Mortgaged Loan Contract
by Seller shall entitle Seller to receive the related
REO Property.
H. Exhibit B, Paragraph I. to the Additional Supplemental
Terms is amended as follows:
(i) Subparagraph (aj) therein is hereby amended by
inserting after the words "except" in the fourth
line of such subparagraph (aj) the following:
"with respect to Mortgage Loan Contracts in the
Non-Performing Pool, any monetary default, and
in any other case,"
(ii) Subparagraph (am) therein is hereby amended by
inserting at the end of the sentence after the
word "analysis" the following:
"or, with respect to Mortgage Loan Contracts in
the Non-Performing Pool, a Quick Sale BPO was
performed within three (3) months preceding
Seller's purchase of such Mortgage Loan
Contracts and is contained in the Servicer's
files."
I. The representations and warranties set forth in Exhibit
B, Paragraph I. (f), (az) and (bd) shall not apply to
Mortgage Loan Contracts in the Non-Performing Pool.
AII-4
<PAGE>
-5-
J. Exhibit B, Paragraph I. of the Additional Supplemental
Terms is hereby amended by adding at the end of said
Exhibit B, Paragraph I. the following representations
and warranties, which shall relate only to the Non-
Performing Pool:
"(bh) At the Purchase Date, the REO Property in the Non-
Performing Pool is covered by a (i) valid and existing
hazard insurance policy with a carrier licensed in the
state in which such REO Property is located that
provides for fire and extended coverage representing
coverage not less than (A) the minimum amount required
to compensate for loss or damage on a replacement cost
basis or (B) the full insurable value of such REO
Property and (ii) if the improvements are in a special
flood hazard area, a flood insurance policy with the
same minimum amount. All such Insurance Policies are the
valid and binding obligation of the related insurer and
contain a standard owner clause naming the Custodian,
its successor and assigns, as owner on behalf of Buyer.
All premiums then due thereon have been paid or are
subject to a blanket policy. Seller has caused to be
performed any and all acts required to preserve the
rights and remedies of Buyer in any such insurance
policies applicable to such REO Property, including,
without limitation, any necessary notifications of
insurers, assignments of policies or interests therein,
and establishments of co-insured, joint loss payee and
owner rights in favor of the Custodian on behalf of
Buyer;"
(bi) To the best of Seller's knowledge, with respect to
each Non-Originated Contract that is a Second Mortgage
Loan Contract in the Non-Performing Pool the related
first lien requires equal monthly payments, or if it
bears an adjustable interest rate, the monthly payments
for the related first lien may be adjusted not more
frequently than once every six months;
(bj) To the best of Seller's knowledge, the maturity
date of each Non-Originated Contract that is a Second
Mortgage Loan Contract in the Non-Performing Pool is
prior to the maturity date of the related first lien, if
such first lien provides for a balloon payment; and with
respect to any first lien that provides for negative
amortization or deferred interest, the balance of such
first lien used to calculate the combined Loan-to-Value
Ratio for such Second Mortgage Loan Contract is based on
the maximum amount of negative amortization possible
under such first lien;
AII-5
<PAGE>
-6-
(bk) To the best of Seller's knowledge, no Non-
Originated Contact that is a Mortgage Loan Contract in
the Non-Performing Pool shall have been charged off in
whole or in part as of the Purchase Date.
3. Modifications and Supplements to the Custodial Agreement.
--------------------------------------------------------
A. In addition to, and not in derogation of, the
obligations of the Servicer pursuant to Exhibit E of the
Custodial Agreement, with respect to Mortgage Loan
Contracts and REO Properties in the Non-Performing Pool,
the Servicer shall service, administer and manage such
Mortgage Loan Contracts and such REO Properties in
accordance with the terms of the Custodial Agreement and
this Supplement Agreement and the customary and prudent
standards of an institution servicing nonperforming
mortgage loans and managing real property for its own
account, and shall service, administer and manage such
Mortgage Loan Contracts and such REO Properties in
accordance with the following provisions of the
Servicing Agreement dated as of February 1, 1996 (the
"Servicing Agreement) among the Servicer, Bankers Trust
Company of California, N.A. as Trustee, and Wilshire
Liquidating Trust 1996-1 (the following Sections
referring to the Servicing Agreement):
(i) Section 2.01(d), with respect to
protecting and improving the Mortgaged Properties and
REO Properties;
(ii) Section 2.04(c), with respect to
maintaining accurate records with respect to the REO
Properties; and
(iii) Section 2.07, with respect to
maintaining Hazard Insurance Policies with respect to
the REO Properties.
B. In addition to the foregoing, the Servicer shall include
in its Monthly Servicing Report such information with
respect to the REO Properties in the Non-Performing Pool
as is required pursuant to Section 2.16(a) of the
Servicing Agreement and shall prepare and deliver such
reports to Mortgagors no later than January 31 and to
the Internal Revenue Service no later than February 28
of the year following such foreclosures or comparable
conversions, such reports as are required pursuant to
Section 3.02 of the Servicing Agreement.
AII-6
<PAGE>
-7-
C. In respect of the definition of Monthly Servicing Fee in the
Custodial Agreement clauses (i) through and including (v) shall
not apply to the Non-Performing Pool. However, the Monthly
Servicing Fee with respect to the Non-Performing Pool shall mean
"As to any Repurchase Date, one twelfth of the product of .50%
and the aggregate Outstanding Principal Amount of the Mortgage
Loan Contracts in the Non-Performing Pool as of the related
Purchase Date.
4. No Other Changes. Except as expressly supplemented, modified or
----------------
amended in this Supplement Agreement, all of the terms, provisions, agreements
and conditions of the Master Repurchase Agreement, Additional Supplemental Terms
and the Custodial Agreement are hereby ratified and confirmed in every respect
and shall remain unchanged and continue in full force and effect.
5. Counterparts. This Supplement Agreement may be executed in any number
------------
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed to be an original and all
of which taken together shall constitute one and the same instrument.
6. Governing Law; Waiver of Jury Trial. This Supplement Agreement shall
-----------------------------------
be construed in accordance with the laws of the State of New York and the
obligations, rights and remedies of the parties hereunder shall be determined in
accordance with such laws. The parties hereto each hereby waive the right of
trial by jury in any litigation arising hereunder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
AII-7
<PAGE>
IN WITNESS WHEREOF, Buyer, Seller, Custodian and Servicer have caused
their names to be signed hereto by their respective officers thereunto duly
authorized, all as of the day and year first above written.
CS FIRST BOSTON MORTGAGE CAPITAL CORP.,
as Buyer
By:
Name:
Title:
WILSHIRE FUNDING CORPORATION,
as Seller and Servicer
By:
Name:
Title:
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.,
as Custodian
By:
Name:
Title:
<PAGE>
EXHIBIT 10.22
[EXECUTION COPY]
INTERIM WAREHOUSE AND
SECURITY AGREEMENT
BY AND BETWEEN
PRUDENTIAL SECURITIES CREDIT
CORPORATION,
AS LENDER
AND
WMFC 1997-2, INC.,
AS BORROWER
DATED AS OF NOVEMBER 15, 1996
<PAGE>
INTERIM WAREHOUSE AND SECURITY AGREEMENT
INTERIM WAREHOUSE AND SECURITY AGREEMENT, dated as of November 15, 1995 (as
amended or otherwise modified from time to time, this "Agreement") among
---------
PRUDENTIAL SECURITIES CREDIT CORPORATION, a Delaware corporation, having an
office at 1220 N. Market Street, Wilmington, Delaware 19801 (the "Lender"), and
------
WMFC 1997-2, INC., a Delaware limited liability company, having its principal
office at 1776 S.W. Madison Street, Portland, Oregon 97205 (the "Borrower").
--------
WHEREAS, Wilshire Funding Company ("NewCo"), a newly-formed Delaware
-----
corporation and a subsidiary of Wilshire Financial Services Group Inc. ("WFSG"),
----
proposes to continue the loan origination and acquisition business previously
conducted by Wilshire Financing Company, L.L.C. ("Wilshire Financing")
------------------
following the completion of the initial public offering and related debt
offering by WFSG (the "Effective Date"); and
--------------
WHEREAS, the Lender wishes to cease lending to Wilshire Financing on the
Effective Date and wishes to begin lending to WMFC 1997-2, Inc., a subsidiary of
Newco, on the Effective Date;
WHEREAS, the Lender intends to lend and the Borrower intends to borrow up
to $100,000,000 (One Hundred Million dollars) to fund the purchase or
origination by the Borrower of certain fixed and adjustable rate, first lien and
second lien, residential mortgage loans; and
WHEREAS, it is intended that the amount loaned to the Borrower to fund the
purchase or origination by the Borrower of fixed and adjustable rate, second
lien, residential mortgage loans shall at no time exceed $20,000,000 (Twenty
Million dollars); and
WHEREAS, it is intended that the amount loaned to the Borrower to fund its
purchase or origination of mortgage loans under its 80/20 program shall at no
time exceed $20,000,000 (Twenty Million dollars); and
WHEREAS, the Lender's affiliate, Prudential Securities Incorporated ("PSI")
---
may act as the sole or lead manager or co-manager on a mortgage-backed
securities issuance (the "First Lien Securitization") collateralized by First
-------------------------
Lien Mortgage Loans (as defined below) and on a mortgage-backed securities
issuance (the "Second Lien Securitization") collateralized by Second Lien
--------------------------
Mortgage Loans (as defined below), in each case on the terms and subject to the
conditions set forth in Section 1(e)(ii) below;
An index to the location of the definitions of the defined terms used
herein is set forth in Section 19 hereof.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the parties hereto hereby agree as follows:
<PAGE>
Section 1. The Loan.
---------- --------
(a) Subject to the terms of this Agreement:
(i) On and following the Effective Date, the Lender agrees to
lend to the Borrower up to the Available Amount (as defined below) in one
or more advances in respect of either (x) fixed or adjustable rate, first
lien, residential mortgage loans (such borrowing being the "First Lien
----------
Loan" and any advances made in respect thereof being the "First Lien
-----------
Advances"), and/or (y) fixed or adjustable rate, second lien, residential
--------
mortgage loans (such borrowing being the "Second Lien Loan" and, together
-----------------
with the First Lien Loan, the "Loans"; and any advances made in respect of
-----
the Second Lien Loan being the "Second Lien Advances" and, together with
----------------------
the First Lien Advances, the "Advances"); provided, however, that at no
--------
time shall the aggregate outstanding amount of the Second Lien Loan be
greater than the Second Lien Amount (as defined below). In addition, the
Borrower agrees that at no time shall the aggregate amount of the Loans
made with respect to Mortgage Loans originated under Borrower's 80/20
program and not purchased in bulk ("Non-Bulk Mortgage Loans") be greater
-----------------------
than the Non-Bulk Amount (as defined below). The Borrower agrees that the
First Lien Loan shall be used to warehouse fixed or adjustable rate, first
lien, residential mortgage loans that are to be included in the First Lien
Securitization (the "First Lien Mortgage Loans"), as such First Lien
--------------------------
Mortgage Loans are identified to the Lender in writing and in electronic
form from time to time. The Borrower agrees that Second Lien Loan shall be
used to warehouse fixed or adjustable rate, second lien, residential
mortgage loans that are to be included in the Second Lien Securitization
(the "Second Lien Mortgage Loans" and, together with the First Lien
---------------------------
Mortgage Loans, the "Mortgage Loans"), as such Second Lien Mortgage Loans
--------------
are identified to the Lender in writing and in electronic form from time to
time. All Mortgage Loans fmanced hereunder shall be closed loans; i.e.,
this facility shall not be used for "wet" or "table" fundings. The Lender
may refuse to lend against any Mortgage Loans which the Lender in its sole
discretion believes will not be eligible for inclusion in any securitized
pool. "Available Amount" means, at any time, $100,000,000 (One Hundred
----------------
Million dollars) less the principal amount of mortgage loans outstanding
under the Interim Warehouse and Security Agreement between Wilshire
Financing Company, L.L.C. (formerly Wilshire Funding Company, L.L.C.) and
the Lender (the "Prior Agreement"). "Second Lien Amount" means, at any
--------------- ------------------
time, $20,000,000 (Twenty Million dollars) less the principal amount of
second lien mortgage loans outstanding under the Prior Agreement. "Non-
---
Bulk Amount" means, at any time, $20,000,000 (Twenty Million dollars) less
-----------
the principal amount of non-bulk mortgage loans outstanding under the Prior
Agreement.
(ii) Each Advance shall be made on or following the Effective
Date and on a date prior to the Maturity Date referred to below (each such
date, a "Funding Date"); provided that:
------------ --------
(A) the conditions precedent to the making of Advances set
forth in Section 2 hereof shall have been satisfied, and the
representations and warranties
-2-
<PAGE>
of the Borrower in Section 4 hereof shall be true and correct on and
as of such Funding Date as if made on and as of such date;
(B) no Event of Default shall have occurred and be continuing
or would exist after the making of the Advance on such Funding Date;
(C) the Lender shall have received (x) in connection with
each Advance, a certificate from the Custodian referred to below to
the effect that it has reviewed the mortgage files relating to the
Mortgage Loans being pledged in connection with the Advance being made
on such Funding Date and has found no material deficiencies in such
mortgage files (the "Custodian's Certification"), and (y) prior to the
-------------------------
initial Advance, a legal opinion from counsel (which may be in-house
counsel) to the Borrower in the form of Exhibit B attached hereto;
(D) following such Advance the Mortgage Loans (other than the
Non-Bulk Mortgage Loans) financed under this Agreement shall have (i)
a weighted average coupon of at least 10.00%; (ii) a weighted average
margin of at least 4.00% if it is a Mortgage Loan with an adjustable
interest rate; (iii) a weighted average original loan-to-value ratio
not to exceed 80% for First Lien Mortgage Loans, and the original
loan-to-value ratio for each individual First Lien Mortgage Loan not
to exceed 100% and the original loan-to-value ratio for each
individual Second Lien Mortgage Loan, when combined with the related
first lien mortgage loan, not to exceed 100%; (iv) a weighted average
remaining balance not to exceed $125,000; (v) no original term to
maturity to exceed 360 months; and (vii) a payment history, when
available, no worse than that of the B-rated first-lien borrowers
contemplated under the Borrower's 80/20 Program.
(E) the Borrower shall have delivered or caused to be
delivered to the Custodian all documents required to be delivered
pursuant to Section 2 of the Custodial Agreement with respect to the
Mortgage Loans being pledged on such Funding Date; and
(F) to the extent described in Section 5(c) hereof, no notice
described in said Section 5(c) shall have been received by PSI.
(iii) The Loan shall accrue interest daily (from and including
the date of disbursement to and excluding the date of payment) on its
outstanding principal amount, with interest calculated for the actual
number of days elapsed, based on a 365-day year. The interest rate shall
be (except as otherwise provided in Section 1(e) and Section 11(d) hereof)
LIBOR plus 1.50% per annum, and shall be reset on each business day.
Interest which accrues during each calendar month shall be payable on the
5th business day of the following month, with any outstanding interest due
and payable in its entirety on the date of termination of this warehouse
facility (including the Maturity Date).
-3-
<PAGE>
"LIBOR" shall mean, the London interbank offered rate for one-month
-----
U.S. dollar deposits, as set forth in the most recently-published edition
of The Wall Street Journal.
-----------------------
Any amounts pre-paid under this Agreement prior to the Maturity Date
may be re-borrowed, subject to the terms and conditions of this Agreement,
until the Maturity Date.
(b) The amount of each Advance in respect of Non-Bulk Mortgage Loans
shall not exceed the lesser of:
(i) 100% of the aggregate outstanding principal balance of the
Mortgage Loans (calculated as of the related Cut-Off Date or, if the
Borrower is using the proceeds of the Advance to purchase the related
Mortgage Loans at their aggregate outstanding principal balance as of the
settlement date for the purchase, then their aggregate outstanding
principal balance as of such settlement date) proposed to be pledged to the
Lender in connection with such Advance, minus, in the event that a
-----
Collateral Deficiency Situation exists as of the date of such Advance, the
Restoration Amount as of the date of such Advance; and
(ii) the product of (x) the Market Value of the Mortgage Loans
proposed to be pledged to the Lender in connection with such Advance and
(y) 95%, in the case of First Lien Advances, and 85%, in the case of Second
Lien Advances, minus, in the event that a Collateral Deficiency Situation
-----
exists as of the date of such Advance, the Restoration Amount as of the
date of such Advance.
For purposes of this Agreement:
A Collateral Deficiency Situation shall be deemed to be existing as of
---------------------------------
any day on which either: (i) the outstanding principal amount of the Loans
made in respect of Non-Bulk Mortgage Loans as of such day exceeds the
product of (I) the Market Value of the Pledged Mortgage Loans that are Non-
Bulk Mortgage Loans (disregarding the Market Value of any Mortgage Loans
proposed to be pledged to the Lender on such day) and (II) the Collateral
Percentage, in the case of First Lien Mortgage Loans, and 86%, in the case
of Second Lien Mortgage Loans; or (ii) the outstanding principal amount of
the Loans made in respect of Mortgage Loans that are not Non-Bulk Mortgage
Loans as of such day exceeds the product of (x) the lesser of (I) the
Market Value of the Pledged Mortgage Loans that are not Non-Bulk Mortgage
Loans (disregarding the Market Value of any Mortgage Loans proposed to be
pledged to the Lender on such day), or (II) the aggregate outstanding
principal balance of the Pledged Mortgage Loans that are not Non-Bulk
Mortgage Loans (disregarding the outstanding principal balance of any
Mortgage Loans proposed to be pledged to the Lender on such day), or (III)
the Cost of any Pledged Mortgage Loans that are not Non-Bulk Mortgage Loans
(disregarding the Cost of any Mortgage Loans proposed to be pledged to the
Lender on such day), and (y) the Collateral Percentage, in the case of
First Lien Mortgage Loans, and 86%, in the case of Second Lien Mortgage
Loans. "Collateral Percentage" means 96% so long as none of the First Lien
-----------------------
Mortgage Loans are more than 31 days delinquent and 95.5 % if any of the
First
-4-
<PAGE>
Lien Mortgage Loans are more than 31 days delinquent. "Cost" means, with
----
respect to any Mortgage Loan, the aggregate cost to the Borrower of such
Mortgage Loan, as determined by the Borrower, based on evidence reasonably
satisfactory to the Lender.
Cut-Off Date means, as of any date, the close of business on the date
------------
set forth in the related Mortgage Loan Schedule (as defined in the
Custodial Agreement). In no event shall the Cut-Off Date precede by more
than two weeks the date on which the related Mortgage Loan Schedule is
delivered.
Market Value means, as of any date and with respect to any Mortgage
------------
Loans, the whole-loan servicing-retained fair market value of such Mortgage
Loans as of such date as determined by the Lender (or an affiliate thereof)
in its sole discretion and in good faith, together with the aggregate
principal amount of principal payments and prepayments on deposit in the
Collection Account maintained by the Custodian in respect of the Mortgage
Loans.
Maturity Date, means, the earlier of (i) June 30, 1997 and (ii) the
-------------
date on which both the First Lien Securitization and the Second Lien
Securitization have occurred. The Maturity Date may be extended by Lender,
in Lender's sole and unreviewable discretion, on any date by the execution
and delivery of a Credit Increase Confirmation and Note Amendment in the
form of Exhibit C hereto. The Lender will give the Borrower 10 Business
Days prior written notice if it determines not to extend the Maturity Date
or renew this facility.
Pledged Mortgage Loans means, as of any date of determination, any
----------------------
mortgage loans then held by the Custodian on behalf of the Lender to secure
the Loans.
Restoration Amount means, as of any date of determination, either (A)
------------------
with respect to Loans made in respect of Non-Bulk Mortgage Loans, the
amount, if any, by which (x) the outstanding principal amount of the Loans
made in respect of Non-Bulk Mortgage Loans as of such date exceeds (y) the
lesser of (i) the product of (I) the Market Value of the Pledged Mortgage
Loans that are Non-Bulk Mortgage Loans (disregarding the Market Value of
any Mortgage Loans proposed to be pledged to the Lender on such date) and
(II) 95%, in the case of First Lien Mortgage Loans, and 85%, in the case of
Second Lien Mortgage Loans, and (ii) the outstanding principal balance of
the Pledged Mortgage Loans that are Non-Bulk Mortgage Loans (disregarding
the outstanding principal balance of any Mortgage Loans to be pledged to
the Lender on such date); or (B) with respect to Loans made in respect of
Mortgage Loans that are not Non-Bulk Mortgage Loans, the amount, if any, by
which the outstanding principal amount of the Loans made in respect of
Mortgage Loans that are not Non-Bulk Mortgage Loans as of such date exceeds
the product of (x) the lesser of (i) the Market Value of the Pledged
Mortgage Loans that are not Non-Bulk Mortgage Loans (disregarding the
Market Value of any Mortgage Loans proposed to be pledged to the Lender on
such date), or (ii) the outstanding principal amount of the Pledged Loans
that are not Non-Bulk Mortgage Loans (disregarding the outstanding
principal amount of any Mortgage Loans proposed to be pledged to the
-5-
<PAGE>
Lender on such date), or (iii) the Cost of the Pledged Loans that are not
Non-Bulk Mortgage Loans (disregarding the Cost of any Mortgage Loans
proposed to be pledged to the Lender on such date), and (y) 95%, in the
case of First Lien Mortgage Loans, and 85%, in the case of Second Lien
Mortgage Loans.
(c) The Loans evidenced hereby shall mature on the Maturity Date and
all amounts outstanding hereunder shall be due and payable on the Maturity Date.
(d) The Loans are pre-payable at any time without premium or penalty,
in whole or in part, and an equal aggregate principal amount of Pledged Mortgage
Loans may be removed from this facility in connection with any such prepayment
of the Loan in part; provided, that Pledged Mortgage Loans removed from this
--------
facility in connection with any prepayment of the Loans in part will not result
(based on rating agency criteria or standards) in the remaining Pledged Mortgage
Loans being, in the aggregate, materially inferior as collateral as compared to
the pool of Pledged Mortgage Loans immediately prior to such removal. In
addition, no Pledged Mortgage Loans may be removed from this facility with the
result that a Collateral Deficiency Situation would then exist. Notwithstanding
the foregoing, however, a Pledged Mortgage Loan, may in any event be removed
from this facility if such Pledged Mortgage Loan has been paid in full by the
mortgagor. If the Borrower intends to prepay the Loan in whole or in
substantial part from a source other than the proceeds of the Securitization,
the Borrower shall give two business days' written notice to the Lender.
(e) (i) If the Loan is not extended by means of a Credit Increase
Confirmation and Note Amendment, the Loan shall immediately and automatically
become due and payable without any further action by the Lender on the then
scheduled Maturity Date, and in the event of non-payment in full on such
Maturity Date the Lender may exercise all rights and remedies available to it as
the holder of a first perfected security interest under the Uniform Commercial
Code of the State of New York (the "New York UCC").
------------
(ii) So long as there are Loans outstanding under this Agreement, the
parties hereby acknowledge and agree that PSI will be invited to participate in
any issuance by the Borrower (or any special purpose entity created by the
Borrower) of mortgage-backed securities which are collateralized by Mortgage
Loans financed under this Program or by fixed or adjustable rate, first or
second lien, residential mortgage loans which were not financed under this
Program in each case on the following terms and conditions:
(1) in the event that any such mortgage-backed securities
issuance is not collateralized by any Mortgage Loans financed under
this Program, PSI will be invited to participate as a co-manager in
such mortgage-backed securities issuance and its allocation will be
determined by the lead manager (book runner);
(2) in the event that any such mortgage-backed securities
issuance is in part collateralized by Mortgage Loans financed under
this Program but such Mortgage Loans are less than a majority of all
mortgage loans collateralizing such mortgage-backed securities (based
on outstanding principal balances at the cut-off
-6-
<PAGE>
date), PSI will be invited to participate as a co-manager in such
mortgage-backed securities issuance and PSI will be entitled to
receive an allocation of securities being offered by underwriters,
i.e. excluding residual securities (the "Offered Securities"), in a
------------------
principal amount at least equal to the Specified Percentage (as
defined below) of the aggregate principal amount of the Offered
Securities; provided, that the price quoted by PSI for such Offered
--------
Securities (i.e., interest rate and issue price) will be at least
equal to the pricing set by the lead manager; and
(3) in the event that any such mortgage-backed securities
issuance is in part collateralized by Mortgage Loans financed under
this Program and such Mortgage Loans constitute a majority of all
mortgage loans collateralizing such mortgage-backed securities (based
on outstanding principal balances at the cut-off date), PSI will be
invited to act as lead manager (and book runner) in such mortgage-
backed securities issuance; provided, that PSI will be obligated to
--------
provide a minimum allocation of Offered Securities to any Specified
Underwriter in a principal amount at least equal to the Specified
Percentage (as defined below) of the aggregate principal amount of the
Offered Securities; provided, that the price quoted by such Specified
--------
Underwriter for such Offered Securities (i.e., interest rate and issue
price) will be at least equal to the pricing set by PSI.
For purposes of this agreement, "Specified Percentage" means the percentage
--------------------
determined by (i) in the case of PSI when not acting as lead manager, dividing
the aggregate principal amount of Mortgage Loans financed under the Program and
included in such mortgage-backed issuance by the aggregate principal amount of
all mortgage loans collateralizing such mortgage-backed securities (based on
outstanding principal balances at the cut-off date) and (ii) in the case of any
Specified Underwriter, dividing the aggregate principal amount of mortgage loans
financed under such Specified Underwriter's or one of its affiliate's warehouse
lending facility and included in such mortgage-backed issuance by the aggregate
principal amount of all mortgage loans collateralizing such mortgage-backed
securities (based on outstanding principal balances at the cut-off date). For
purposes of this agreement, "Specified Underwriter" means any underwriter
---------------------
designated by the Borrower with respect to which the Borrower or its parent has
a similar warehousing and underwriting arrangement as the one between the Lender
and PSI described in this Section.
(iii) In the event that the Borrower does not invite PSI to
participate in any issuance by the Borrower or any special purpose entity
created by the Borrower of mortgage-backed securities in the circumstances set
forth in Section 1(e)(ii) above or any Whole Loan Trade, then the interest rate
on the Loans shall increase to LIBOR plus 3.50% per annum, which higher rate
shall respectively be applied as of the related Funding Date for all prior
Advances or Pledged Mortgage Loans so involved. "Whole Loan Trade" shall mean
----------------
any whole loan trade involving the Pledged Mortgage Loans, other than a whole
loan trade instituted by the Borrower due to the termination of this facility by
the Lender prior to maturity as a result of an Event of Default (other than an
Event of Default under Section 10(a) below).
-7-
<PAGE>
(f) The First Lien Loan shall be evidenced by the secured promissory
note of the Borrower in the form attached hereto as Exhibit A-1 (the "First Lien
----------
Secured Note") and the Second Lien Loan shall be evidenced by the secured
- ------------
promissory note of the Borrower in the form attached hereto as Exhibit A-2 (the
"Second Lien Secured Note" and, together with the First Lien Secured Note, the
------------------------
"Secured Notes").
- --------------
(g) In the event that the Loan is extended beyond its then scheduled
Maturity Date by means of a Credit Increase Confirmation and Note Amendment, the
factors set forth in the definitions of "Collateral Deficiency Situation" and
"Restoration Amount" may be revised downward by the Lender in its sole
discretion.
(h) The Lender shall not make Advances in amounts less than $250,000 (Two
Hundred Fifty Thousand dollars). The amount of each Advance in respect of
Mortgage Loans (other than Non-Bulk Mortgage Loans) shall not exceed the lesser
of:
(A) The product of (x) the aggregate outstanding principal balance of
such Mortgage Loans (calculated as of the related Cut-Off Date or, if the
Borrower is using the proceeds of the Advance to purchase the related
Mortgage Loans at their aggregate outstanding principal balance as of the
settlement date for the purchase, then their aggregate outstanding
principal balance as of such settlement date) proposed to be pledged to the
Lender in connection with such Advance and (y) 95%, in the case of First
Lien Advances, and 85%, in the case of Second Lien Advances, minus, in the
event that a Collateral Deficiency Situation exists with respect to
Mortgage Loans that are not Non-Bulk Mortgage Loans as of the date of such
Advance, the Restoration Amount as of the date of such Advance; and
(B) the product of (x) the Market Value of the Mortgage Loans proposed
to be pledged to the Lender in connection with such Advance and (y) 95%, in
the case of First Lien Advances, and 85%, in the case of Second Lien
Advances, minus, in the event that a Collateral Deficiency Situation exists
with respect to Mortgage Loans that are not Non-Bulk Mortgage Loans as of
the date of such Advance, the Restoration Amount as of the date of such
Advance; and
(C) the product of (x) the Cost of the Mortgage Loans proposed to be
pledged to the Lender in connection with such Advance and (y) 95%, in the
case of First Lien Advances, and 85%, in the case of Second Lien Advances,
minus, in the event that a Collateral Deficiency Situation exists with
respect to Mortgage Loans that are not Non-Bulk Mortgage Loans as of the
date of such Advance, the Restoration Amount as of the date of such
Advance.
Section 2. Additional Conditions Precedent; Required Characteristics;
----------------------------------------------------------
and Correspondents.
- ------------------
(a) Not later than two business days prior to the proposed Funding
Date for an Advance, the Borrower shall deliver to the Lender (i) a written
notice in the form of Exhibit D
-8-
<PAGE>
hereto and (ii) an electronic disk or tape, in a mutually satisfactory form to
be agreed upon detailing certain specified characteristics of the Mortgage Loans
proposed to be pledged in connection with such Advance (each such schedule, a
"Mortgage Loan Schedule"). Mortgage Loan Schedules containing the information
- -----------------------
set forth in Exhibit F are considered to be in satisfactory form.
---------
(b) It is the Lender's understanding that the Borrower's current
business strategy (the "Program") is to operate as a "conduit" for the
-------
securitization of first and second lien, conforming and non-performing credit
mortgage loans which the Borrower will purchase from others.
In connection with the Program, the Borrower agrees as follows:
(i) the Borrower shall supply to the Lender and/or its
counsel copies of all purchase agreements ("Purchase Agreements") (or,
-------------------
if such agreements have not been finalized, the latest drafts of such
agreements), together with copies of all underwriting guidelines
applicable to any Mortgage Loans proposed to be financed hereunder,
not later than the second business day prior to the proposed Funding
Date (it being understood that if the same agreements and guidelines
apply to multiple Funding Dates they only need to be furnished once);
(ii) the Lender may in its sole reasonable discretion reject
for financing hereunder any Mortgage Loans based upon the identity of
the entity selling such Mortgage Loans to the Borrower (each such
entity, a "Correspondent"), or, if the originator of such Mortgage
-------------
Loans is not the Correspondent, upon the identity of such originator,
provided, that, in furtherance of the foregoing the Borrower and the
--------
Lender agree to communicate with reasonable frequency concerning the
Borrower's pipeline and upcoming trades;
(iii) the Borrower hereby assigns to the Lender, as
collateral security for the Loans, all of the Borrower's right, title
and interest in and to each Purchase Agreement and the Custodial
Agreement (collectively, the "Program Agreements"); and
------------------
(iv) notwithstanding the collateral assignment granted in
clause (iii) above, the Borrower agrees and covenants with the Lender
(x) to enforce diligently the Borrower's rights and remedies set forth
in the Program Agreements and (y) to provide the Lender with prompt
written notice of any default or event which, with the passage of
time, will become a default, by any party to any Program Agreement and
of which the Borrower is aware.
(c) The Borrower shall reimburse the Lender for any of the Lender's
reasonable out-of-pocket costs, including due diligence review costs and
reasonable attorney's fees, incurred by the Lender in determining the
acceptability to the Lender of (x) any Mortgage
-9-
<PAGE>
Loans, (y) any Program Agreement or (z) the identity of any Correspondent,
originator or servicer.
Section 3. Mortgage Files and Custodian. The Borrower shall deliver
---------- ----------------------------
to Bankers Trust Company of California, N.A. as custodian (the "Custodian") on
---------
behalf of the Lender, the documents and instruments listed in Section 2 of that
certain Custodial Agreement dated as of November 15, 1996 (the "Custodial
---------
Agreement") among the Borrower, Wilshire Funding Corporation and the Custodian.
- ---------
Such documents and instruments evidencing and relating to the Mortgage Loans,
together with any proceeds thereof, and together with the Borrower's right,
title and interest in and to the Program Agreements with respect to Pledged
Mortgage Loans are hereinafter referred to as the "Collateral". The Borrower
----------
hereby pledges all of its right, title and interest in and to the Collateral to
the Lender to secure the repayment of principal of and interest on the Loans and
all other amounts owing by the Borrower to the Lender hereunder (collectively,
the "Secured Obligations").
-------------------
Section 4. Representations, Warranties and Covenants. (a) The
---------- -----------------------------------------
Borrower represents and warrants to the Lender that:
(i) It has been duly organized and is validly existing as a
limited liability company in good standing under the laws of the State of
Delaware.
(ii) It or Wilshire Credit Corporation, as applicable, is duly
licensed as a "Licensee" or is otherwise qualified in each state in which
it or such affiliate transacts business and is not in default of such
state's applicable laws, rules and regulations. It has the requisite power
and authority and legal right to own and grant a lien on all of its right,
title and interest in and to the Collateral, and to execute and deliver,
engage in the transactions contemplated by, and perform and observe the
terms and conditions of, this Agreement, each Program Agreement, and the
Secured Notes.
(iii) At all times after the Custodian has received a Mortgage
Loan from the Borrower and until payment in full of the Loan, the Borrower
will not knowingly and intentionally commit any act in violation of
applicable laws or regulations promulgated with respect thereto.
(iv) Each of the Borrower and the guarantor under the attached
Guarantee (the "Guarantor") is solvent and is not in default under any
mortgage, borrowing agreement or other instrument or agreement pertaining
to indebtedness for borrowed money, and the execution, delivery and
performance by the Borrower of this Agreement, the Secured Notes and the
Program Agreements do not conflict with any term or provision of the
certificate of formation or operating agreement of the Borrower or any law,
rule, regulation, order, judgment, writ, injunction or decree applicable to
the Borrower of any court, regulatory body, administrative agency or
governmental body having jurisdiction over the Borrower and will not result
in any violation of any such mortgage, instrument or agreement.
-10-
<PAGE>
(v) All financial statements or certificates of the Borrower or
the Guarantor furnished to the Lender are true and complete and do not omit
to disclose any material liabilities or other facts relevant to the
Borrower's or such Guarantor's condition. All such financial statements
have been prepared in accordance with GAAP. No financial statement or
other financial information as of a date later than that supplied to the
Lender, has been furnished by the Borrower or the Guarantor to another
lender of the Borrower or the Guarantor that has not been furnished to the
Lender.
(vi) Except for those held by its affiliate, Wilshire Credit
Corporation, no consent, approval, authorization or order of, registration
or filing with, or notice to any governmental authority or court is
required under applicable law in connection with the execution, delivery
and performance by the Borrower of this Agreement, the Secured Notes and
the Program Agreements.
(vii) There is no action, proceeding or investigation pending
with respect to which the Borrower has received service of process or, to
the best of the Borrower's knowledge threatened against it before any
court, administrative agency or other tribunal (A) asserting the invalidity
of this Agreement, the Secured Notes or any Program Agreement, (B) seeking
to prevent the consummation of any of the transactions contemplated by this
Agreement, the Secured Notes or any Program Agreement, or (C) which might
materially and adversely affect the validity of the Mortgage Loans or the
performance by it of its obligations under, or the validity or
enforceability of, this Agreement, the Secured Notes or any Program
Agreement.
(viii) There has been no material adverse change in the
business, operations, financial condition, properties or prospects of the
Borrower or the Guarantor since the date set forth in the financial
statements supplied to the Lender.
(ix) This Agreement, the Secured Notes and the Program Agreements
have been (or, in the case of Program Agreements not yet executed, will be)
duly authorized, executed and delivered by the Borrower, all requisite
corporate action having been taken, and each is valid, binding and
enforceable against the Borrower in accordance with its terms except as
such enforcement may be affected by bankruptcy, by other insolvency laws,
or by general principles of equity.
(b) With respect to every Mortgage Loan pledged to the Lender, the
Borrower represents and warrants to the Lender that:
(i) Such Mortgage Loan and all documents listed in Section 2 of
the Custodial Agreement are complete and authentic and all signatures
thereon are genuine.
(ii) Such Mortgage Loan arose from a bona fide loan, complying
with all applicable State and Federal laws and regulations, to persons
having legal capacity to contract and is not subject to any defense, set
off or counterclaim.
-11-
<PAGE>
(iii) Except for payment defaults permitted by clause 8 below,
no default has occurred in any provisions of such Mortgage Loan.
(iv) To the best of the Borrower's knowledge, any property
subject to any security interest given in connection with such Mortgage
Loan is not subject to any other encumbrances other than in the case of
Second Lien Mortgages, the security interest of the party having the first
mortgage lien on such property.
(v) The Borrower pledging such Mortgage Loan hereunder holds good
and indefeasible title to, and is the sole owner of, such Mortgage Loan
subject to no liens, charges, mortgages, participations, encumbrances or
rights of others or other liens released simultaneously with such pledge.
(vi) Each Mortgage Loan conforms to the description thereof as
set forth on the related Mortgage Loan Schedule delivered to the Custodian
and the Lender.
(vii) All disclosures required by the Real Estate Settlement
Procedures Act, by Regulation X promulgated thereunder and by Regulation Z
of the Board of Governors of the Federal Reserve System promulgated
pursuant to the statute commonly known as the Truth-in-Lending Act and the
Notice of the Right of Rescission required by said statute and regulation
have been properly made and given.
(viii) Such Mortgage Loan is not 31 or more days delinquent as
of the last payment due date for such Mortgage Loan; except that in the
aggregate up to 1% of the First Lien Mortgage Loans hereunder may be not 61
or more days delinquent as of the last payment due date for such First Lien
Mortgage Loans.
(ix) Such Mortgage Loan was originated in accordance with the
underwriting guidelines set forth in the Wilshire Mortgage Corporation
Seller Guide as of the date of origination and referred to in the Purchase
Agreements.
(x) Each representation and warranty made by the related
Correspondent in the related Purchase Agreement was true and correct as of
its date.
(c) The Borrower covenants with the Lender that during the term of
this facility (i) the Guarantor will continue to maintain, for it and its
affiliates, insurance coverage with respect to employee dishonesty, forgery or
alteration, theft, disappearance and destruction, robbery and safe burglary,
property (other than money and securities) and computer fraud in an amount which
is consistent with industry practice, (ii) the Borrower will establish and
maintain a lock-box account with Bank of America (Oregon) for the benefit of the
Custodian under the Custodial Agreement into which the obligors on the Pledged
Mortgage Loans will be instructed to remit their payments and the Borrower will
remit, or cause to be remitted, from such account no later than the first
Business Day after the Business Day on which payments on the Mortgage Loans are
received and identified by the Servicer, all principal payments and such portion
of the interest payments on such Mortgage Loans in an amount sufficient to make
the monthly payments
-12-
<PAGE>
of interest required by Section 1(a)(iii) hereunder, and (iii) the Borrower and
the Guarantor will, at the request of the Lender, employ a third party contract
underwriter to reunderwrite up to 20% of the Mortgage Loans financed under this
Program during any month; provided, that (x) such third party contract
--------
underwriter shall initially be Baker & Associates and any successor thereto
appointed by the Borrower shall be a third party contract underwriter acceptable
to any credit rating agency or monoline insurance company, (y) the cost of such
third party contract underwriter's services shall be for the account of the
Borrower and shall not exceed $5,000 in any month, and (z) any such
reunderwriting shall be done during regular business hours with reasonable
frequency and in such a manner as to be the least disruptive as possible to the
Borrower and the Guarantor.
Section 5. Mandatory Payment of Loan.
---------- -------------------------
(a) Upon discovery by the Borrower or the Lender of any breach of any
of the representations and warranties listed in Section 4(b) preceding, the
party discovering such breach shall promptly give notice of such discovery to
the others.
The Lender has the right to require, in its unreviewable discretion,
the Borrower to repay the Loans in part with respect to any Mortgage Loan (i)
which breaches one or more of the representations and warranties listed in
Section 4(b) preceding or (ii) which is determined by a rating agency or a party
providing credit enhancement to be unacceptable for inclusion in the First Lien
Securitization or the Second Lien Securitization, as the case may be.
(b) If 1% of the First Lien Mortgage Loans hereunder are 31 or more
days delinquent as of the last payment due date for such First Lien Mortgage
Loans, the Lender may require the Borrower to prepay the First Lien Loan in part
with respect to any First Lien Mortgage Loan which becomes 31 or more days
delinquent as indicated on any Supplemental Mortgage Loan Schedule delivered
pursuant to Section 9(a) hereof, or, with the Lender's consent, deliver a
qualifying substitute mortgage loan in its place. The Lender may require the
Borrower to prepay the First Lien Loan in part with respect to any First Lien
Mortgage Loan which becomes 61 or more days delinquent as indicated on any
Supplemental Mortgage Loan Schedule delivered pursuant to Section 9(a) hereof,
or, with the Lender's consent, deliver a qualifying substitute mortgage loan in
its place. The Lender may require the Borrower to prepay the Second Lien Loan
in part with respect to any Second Lien Mortgage Loan which becomes 31 or more
days delinquent as indicated on any Supplemental Mortgage Loan Schedule
delivered pursuant to Section 9(a) hereof, or, with the Lender's consent,
deliver a qualifying substitute mortgage loan in its place.
(c) If the Borrower awards a securitization or any Whole Loan Trade
involving any Pledged Mortgage Loans to an investment banking house, agent or
underwriter other than as agreed or permitted in Section 1(e)(ii) then (x) the
Lender may demand that the Borrower prepay any portion of the Loans evidenced
hereby relating to the dollar amount of the Mortgage Loans to be included in
such securitization or Whole Loan Trade for payment within five business days of
the demand for prepayment, (y) the Lender may refuse to make further Advances
hereunder if such Advances would relate to Mortgage Loans to be included in such
-13-
<PAGE>
securitization or Whole Loan Trade in which PSI has not been selected for
participation and (z) the interest rate on the Loan shall increase as set forth
in Section 1(e)(iii) hereof. The Borrower shall give immediate notice, by
facsimile transmission, to the attention of Elizabeth Castagna at the Lender,
and to Evan Mitnick at PSI (fax 212-7787401) of any decision to award the lead
manager role or to name any group of managers for any Securitization or whole-
loan trade involving any Pledged Mortgage Loans.
(d) If, on any date other than a Funding Date, the Lender determines
that a Collateral Deficiency Situation exists, the Lender shall so notify the
Borrower, and the Borrower, within two business days, shall either (i) pay to
the Lender the Restoration Amount or (ii) deliver to the Custodian on behalf of
the Lender additional Mortgage Loans having an aggregate Market Value at least
equal to the Restoration Amount. The provisions of Section 1(b) shall govern
with regard to a Collateral Deficiency Situation as of a Funding Date.
Section 6. Release of Mortgage Files Following Payment. The Lender
---------- -------------------------------------------
agrees to release its lien hereunder and to cause to be released the documents
described in Section 2 of the Custodial Agreement upon payment in full of the
Loans, or, if a partial payment of the Loans occurs, the liens and documents
relating to the Pledged Mortgage Loans in respect of which such partial
prepayment was made.
Section 7. Servicing. Wilshire Credit Corporation or a subsidiary of
---------- ---------
WFSG shall act as servicer of the Mortgage Loans and shall service the Mortgage
Loans in the same manner and subject to the same standards as set forth in the
Wilshire Mortgage Corporation Loan Servicing Procedures Manual or comparable
procedures manual of such subsidiary of WFSG.
Section 8. Modifications; Successors and Assigns. No provisions of
---------- -------------------------------------
this Agreement shall be waived or modified except by a writing duly signed by
the authorized agents of the Lender and the Borrower. This Agreement shall be
binding upon the successors and assigns of the parties hereto and the parties
may assign their rights and obligations under this Agreement; provided that the
--------
Borrower will not be required to deal with a lender other than the Lender.
Section 9. Reports. (a) The Borrower shall provide the Lender with
---------- -------
an electronic disk or tape (each, a "Supplemental Mortgage Loan Schedule")
-----------------------------------
within two business days following any reasonable request made by the Lender or
any affiliate thereof for such a report, but in any event at least once a month
on the 8th day of such month. Such Supplemental Mortgage Loan Schedule will
contain information concerning all Mortgage Loans then held in the warehouse
facility, and shall be in the format as may be agreed upon by the Borrower and
the Lender from time to time.
(b) The Borrower shall furnish to Lender (x) promptly, copies of any
material and adverse notices (including, without limitation, notices of
defaults, breaches, potential defaults or potential breaches) given to or
received from its other lenders, (y) immediately, notice of the occurrence of
any "Event of Default" hereunder or of any situation which the Borrower, with
the
-14-
<PAGE>
passage of time or notice or both, would become an "Event of Default" hereunder
and (z) the following:
(i) audited financial statements of WFSG within 120 days of
its fiscal year end;
(ii) unaudited financial statements of WFSG for each of its
first three quarters of each fiscal year, within 45 days after quarter
end; and
(iii) unaudited financial statements of the Borrower for
each quarter within 45 days after quarter end.
All required financial statements, information and reports shall be
prepared in accordance with U.S. GAAP.
Section 10. Events of Default. Each of the following shall
----------- -----------------
constitute an "Event of Default" hereunder:
(a) Failure of the Borrower to (i) make any payment of interest or
principal or any other sum which has become due, whether by acceleration or
otherwise, under the terms of the Secured Notes, this Agreement, or (ii) pay or
deliver any Restoration Amount following the expiration of the grace period set
forth in Section 5(d).
(b) Any "event of default" by the Borrower or the Guarantor under any
agreement relating to any indebtedness of the Borrower or the Guarantor or any
warehouse and security agreement or any other document evidencing or securing
indebtedness of the Borrower to the Lender or to any affiliate of the Lender or
any other lender which results in the acceleration of such indebtedness in an
amount in excess of $100,000.
(c) Assignment or attempted assignment by the Borrower of this
Agreement or any rights hereunder, without first obtaining the written consent
of Lender, or the granting by the Borrower of any security interest, lien or
other encumbrance on any Collateral hereunder to any other person other than the
Lender or the holder of a second lien position in respect of such Collateral.
(d) The filing by the Borrower or the Guarantor of a petition for
liquidation, reorganization, arrangement or adjudication as a bankrupt or
similar relief under the bankruptcy, insolvency or similar laws of the United
States or any state or territory thereof or of any foreign jurisdiction; the
failure of the Borrower or the Guarantor to secure dismissal of any such
petition filed against it within forty-five (45) days of receiving notice of
such filing; the making of any general assignment by the Borrower or the
Guarantor for the benefit of creditors; the appointment of a receiver or trustee
for the Borrower or the Guarantor, or for any part of the Borrower's or the
Guarantor's assets; the institution by the Borrower or the Guarantor of any
other type of insolvency proceeding (under the Bankruptcy Code or otherwise) or
of any formal or informal proceeding, for the dissolution or liquidation of,
settlement of claims against, or winding up of
-15-
<PAGE>
the affairs of, the Borrower or the Guarantor; the institution of any such
proceeding against the Borrower or the Guarantor if the Borrower or the
Guarantor shall fail to secure a stay or dismissal thereof within forty-five
(45) days thereafter; the lifting of any such stay if the Borrower or the
Guarantor shall fail to secure a dismissal of such proceeding within forty-five
(45) days of the date such proceeding was originally instituted; the consent by
the Borrower or the Guarantor to any type of insolvency proceeding against the
Borrower or the Guarantor (under the Bankruptcy Code or otherwise).
(e) Any materially adverse change in the financial condition of the
Borrower or of the Guarantor or the occurrence of any other condition which in
the Lender's sole discretion impairs the Borrower's ability to perform its
obligations under this Agreement or the Borrower's obligations under the Secured
Notes or the Guarantor's obligations under the Guarantee and which condition is
not remedied within ten (10) days after written notice to the Borrower or the
Guarantor thereof or, if the conditions cannot be fully remedied within said ten
(10) days, substantial progress has not been made within said ten (10) days
toward remedy of the condition.
(f) Wilshire Credit Corporation or a subsidiary of WFSG ceases to be
the servicer of the Mortgage Loans and no replacement servicer reasonably
acceptable to the Lender is found within 30 days of such termination.
(g) A breach by the Borrower of any representation, warranty or
covenant set forth in Section 4, Section 7 or Section 9 hereof or a use by the
Borrower of the proceeds of the Loans for a purpose other than as set forth in
Section 1(a) hereof.
Section 11. Remedies Upon Default. (a) Upon the happening of one or
----------- ---------------------
more Events of Default, the Lender may (x) refuse to make further Advances
hereunder and (y) immediately declare the principal of the Secured Notes then
outstanding to be immediately due and payable, together with all interest
thereon and fees and expenses accruing under this Agreement; provided that, upon
--------
the occurrence of the Event of Default referred to in Section 10(d), such
amounts shall immediately and automatically become due and payable without any
further action by any person or entity. Upon such declaration or such automatic
acceleration, the balance then outstanding on the Secured Notes shall become
immediately due and payable without presentation, demand or further notice of
any kind to the Borrower.
(b) Upon the happening of one or more Events of Default, the Lender
shall have the right to obtain physical possession, and to commence an action to
obtain physical possession, of all files of the Borrower relating to the
Collateral and all documents relating to the Collateral which are then or may
thereafter come into the possession of the Borrower or any third party acting
for the Borrower. The Lender shall be entitled to specific performance of all
agreements of the Borrower contained in this Agreement. The Borrower and the
Lender hereby acknowledge that the Lender's right to obtain physical possession
of the Collateral is deemed for all purposes to be equivalent to the rights of
"seizure of property or maintenance or continuation of perfection of an interest
in property" as specified under Bankruptcy Code Sections 362(b) and 546(b)(2).
-16-
<PAGE>
(c) Upon the happening of one or more Events of Default, the Lender
shall have the right to direct all servicers then servicing any Pledged Mortgage
Loans to remit all collections on the Pledged Mortgage Loans to the Lender, and
if any such payments are received by the Borrower, the Borrower shall not
commingle the amounts received with other funds of the Borrower and shall
promptly pay them over to the Lender. In addition, the Lender shall have the
right to dispose of the Collateral as provided herein, or as provided in the
other documents executed in connection herewith, or in any commercially
reasonable manner, or as provided by law. Subject to the provisions of Section
11(e) below, such disposition may be on either a servicing released or a
servicing-retained basis. The Lender shall be entitled to place the Mortgage
Loans which it receives after any default in a pool for issuance of mortgage-
backed securities at the then-prevailing price for such securities and to sell
such securities for such prevailing price in the open market as a commercially
reasonable disposition of Collateral, subject to the applicable requirements of
the New York UCC. The Lender shall also be entitled to sell any or all of such
Mortgage Loans individually for the prevailing price as a commercially
reasonable disposition of Collateral, subject to the applicable requirements of
the New York UCC. The specification in this Section of manners of disposition
of collateral as being commercially reasonable shall not preclude the use of
other commercially reasonable methods (as contemplated by the New York UCC) at
the option of the Lender.
(d) Following the occurrence and during the continuance of an Event of
Default (other than an Event of Default under Section 10(a) above), interest
shall accrue on the Loan at a default interest rate of LIBOR plus 2.00% per
annum. Following the occurrence of an Event of Default under Section 10(a)
above, interest shall accrue on the Loan at a default interest rate of LIBOR
plus 5.00% per annum; provided, that such interest rate shall decline to LIBOR
--------
plus 2.50% per annum on the occurrence of a Trade Date as provided in Section
11(e) below. Following the occurrence and during the continuance of an Event of
Default, the Borrower or its designee, Wilshire Credit Corporation or a
subsidiary of WFSG, shall be entitled to receive a servicing fee (the "Servicing
---------
Fee"), payable monthly in arrears on the 5th day of each month, in an amount
- ---
equal to 0.50% per annum on the outstanding principal balance of the Mortgage
Loans as of the first day of the month preceding the month in which such fee is
payable, and such servicing fee shall continue to be payable until the default
is cured or the Collateral is disposed of as provided in Section 11(e) below.
In addition, following the occurrence and during the continuance of an Event of
Default, principal payments received in respect of Mortgage Loans will be
applied to reduce the principal amount of the Loans and interest payments will
be applied in the following order: first, to pay interest on the Loans, second,
to pay the Servicing Fee, and third to reduce the principal amount of the Loans.
(e) If the Lender determines to begin marketing the Collateral as
provided in Section 11(c) above, the Lender shall immediately give written
notice of such determination to Wilshire Credit Corporation and WFSG and, at any
time prior to the Lender entering into an agreement to sell all or a portion of
the Collateral with any third party (the "Trade Date"), will allow Wilshire
----------
Credit Corporation or WFSG (or any affiliate thereof) to purchase all the
Mortgage Loans then subject to this Agreement at a price equal to the then
outstanding principal balance of the Loans together with accrued interest. The
Lender agrees to promptly provide the Borrower with written evidence of any such
agreement with a third party. In the event that
-17-
<PAGE>
Wilshire Credit Corporation does not purchase the Mortgage Loans as provided in
this Section 11(e), the Lender agrees to act in a commercially reasonable manner
in disposing of such Collateral. The Lender and Borrower also agree that in the
event that the Mortgage Loans are sold to a third party as provided in this
Section 11(e) at a price in excess of 105% of the principal balance of such
Mortgage Loans, any amounts payable in excess of 105% of the principal balance
of such Mortgage Loans shall be equally divided between the Borrower and the
Lender. On payment by Wilshire Credit Corporation (or an affiliate), the Lender
shall promptly release any right, title interest or other claim in the Mortgage
Loans or proceeds thereof.
Section 12. Indemnification. The Borrower agrees to hold the Lender
----------- ---------------
harmless from and indemnifies the Lender against all liabilities, losses,
damages, judgments, costs and expenses of any kind which may be imposed on,
incurred by, or asserted against the Lender relating to or arising out of this
Agreement, the Secured Notes, any Program Agreement or any transaction
contemplated hereby or thereby resulting from anything other than the Lender's
negligence or willful misconduct. The Borrower also agrees to reimburse the
Lender for all reasonable expenses in connection with the enforcement of this
Agreement, the Secured Notes and any Program Agreement, including without
limitation the reasonable fees and disbursements of counsel. The Borrower's
agreements in this Section shall survive the payment in full of the Secured
Notes and the expiration or termination of this Agreement. The Borrower hereby
acknowledges that, notwithstanding the fact that the Secured Notes is secured by
the Collateral, the obligations of the Borrower under the Secured Notes are
recourse obligations of the Borrower.
Section 13. Power of Attorney. The Borrower hereby authorizes the
----------- -----------------
Lender, at the Borrower's expense, to file such financing statement or
statements relating to the Collateral without the Borrower's signature thereon
as the Lender at its option may deem appropriate, and appoints the Lender as the
Borrower's attorney-in-fact to execute any such financing statement or
statements in the Borrower's name and to perform all other acts which the Lender
deems appropriate to perfect and continue the security interest granted hereby
and to protect, preserve and realize upon the Collateral, including, but not
limited to, the right to endorse notes, complete blanks in documents, transfer
servicing, and sign assignments on behalf of the Borrower as its attorney-in-
fact. This Power of Attorney is coupled with an interest and is irrevocable
without the Lender's consent. Notwithstanding the foregoing, the power of
attorney hereby granted may be exercised only during the occurrence and
continuance of any Event of Default hereunder.
Section 14. Agreement Constitutes Security Agreement. This Agreement
----------- ----------------------------------------
is intended by the parties hereto to be governed by New York Law, and to
constitute a security agreement within the meaning of the New York UCC.
Section 15. Lender May Act Through Affiliates. The lender may, from
----------- ---------------------------------
time to time, designate one or more affiliates for the purpose of performing any
action hereunder.
Section 16. Notices. All demands, notices and communications
----------- -------
relating to this Agreement be in writing and shall be deemed to have been duly
given when received by the other party or parties at the address shown below, or
such other address as may hereafter be furnished to the other party or parties
by like notice.
-18-
<PAGE>
If to the Borrower:
WMFC 1997-2, Inc.
1776 S.W. Madison Street
Portland, Oregon 97205
Attn: Lawrence Mendelsohn
Telephone: (503) 223-5600
Telecopier: (503) 223-8799
If to the Guarantor:
Wilshire Financial Services Group Inc.
1776 S.W. Madison Street
Portland, Oregon 97205
Attn: Andrew Wiederhorn
Telephone: (503) 223-5600
Telecopier: (503) 223-8799
With copies to:
Proskauer Rose Goetz & Mendelsohn
1585 Broadway
New York, New York 10036
Attention: Jim Waddington
Phone Number: 212-969-3110
Fax Number: 212-969-2900
Stoel Rives Boley Jones & Grey
Standard Insurance Center
900 SW Fifth Ave,. Suite 2300
Portland, Oregon 97204-1268
Attention: Mark Peterman
Phone Number: 503-294-9563
Fax Number: 503-220-2480
If to the Lender:
Prudential Securities Credit
Corporation
One Seaport Plaza, 27th Floor
Treasury Department
New York, New York 10292
Attention: Ms. Elizabeth Castagna
Phone Number: 212-214-7772
Fax Number: 212-214-7572
-19-
<PAGE>
With copies to:
Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Attention: Evan Mitnick
Phone Number: 212-778-7469
Fax Number: 212-778-7401
Section 17. Severability. Any provision of this Agreement which is
----------- ------------
prohibited, unenforceable or not authorized in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition,
unenforceability or non-authorization, without invalidating the remaining
provisions hereof or affecting the validity, enforceability or legality of such
provision in any other jurisdiction.
Section 18. Counterparts. This Agreement may be executed in one or
----------- ------------
more counterparts, each of which shall be deemed to be an original, and all such
counterparts shall together constitute one and the same instrument.
Section 19. Certain Definitions. The following capitalized terms are
----------- -------------------
defined in the corresponding sections specified below:
"Advance" - Section 1(a)(i).
-------
"Agreements - Introductory Clause.
----------
"Borrower" - Introductory Clause.
--------
"Collateral" - Section 3.
----------
"Collateral Deficiency Situation" - Section 1(b)(ii).
-------------------------------
"Correspondent" - Section 2(b)(ii).
-------------
"Custodian" - Section 3.
---------
"Custodial Agreement" - Section 3.
-------------------
"Custodian's Certification" - Section 1(a)(ii)(C).
-------------------------
"Cut-Off Date" - Section 1(b)(ii).
------------
"Engagement Letter" - Recitals.
-----------------
"Event of Default" - Section 10.
----------------
-20-
<PAGE>
"First Lien Advance" - Section 1(a)(i).
------------------
"First Lien Mortgage Loan" - Section 1(a)(i).
------------------------
"Funding Date" - Section 1(a)(ii).
------------
"Guarantee" - Section 10.
---------
"Guarantor" - Section 10.
---------
"Lender" - Introductory Clause.
------
"LIBOR" - Section 1(a)(iii).
-----
"Loans" - Section 1(a)(i).
-----
"Market Value" - Section 1(b)(ii).
------------
"Maturity Date" - Section 1(b)(ii).
-------------
"Mortgage Loans" - Section 1(a)(i).
--------------
"NY UCC" - Section 1(e)(i).
------
"Offered Securities" - Section 1(e).
------------------
"Pledged Mortgage Loans" - Section (1)(b)(ii).
----------------------
"Program" - Section 2(b).
-------
"Program Agreements" - Section 2(b)(iv).
------------------
"PSI" - Recitals.
---
"Purchase Agreements" - Section 2(b)(i).
-------------------
"Restoration Amount" - Section 1(b)(ii).
------------------
"Second Lien Advance" - Section 1(a)(i).
-------------------
"Second Lien Mortgage Loan" - Section 1(a)(i)
-------------------------
"Secured Notes" - Section 1(f).
-------------
"Secured Obligations" - Section 3.
-------------------
-21-
<PAGE>
"Securitization" - Recitals.
--------------
"Specified Percentage" - Section 1(e).
--------------------
"Specified Underwriter" - Section 1(e).
---------------------
"Supplemental Mortgage Loan Schedule" - Section 9.
-----------------------------------
-22-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first above written.
WMFC 1997-2, INC.
By
---------------------------------
Name:
Title:
PRUDENTIAL SECURITIES CREDIT
CORPORATION
By
---------------------------------
Name:
Title:
[Signature Page for Warehouse Agreement]
-23-
<PAGE>
EXHIBIT A-1
-----------
SECURED NOTE
Dated November 15, 1996
FOR VALUE RECEIVED, the undersigned, WMFC 1997-2, INC., a limited
liability company organized under the laws of the State of Delaware, whose
address is 1776 S.W. Madison Street, Portland, Oregon 97205 (the "Borrower"),
promises to pay to the order of PRUDENTIAL SECURITIES CREDIT CORPORATION, a
Delaware corporation, whose address is One Seaport Plaza, New York, New York
10292 (the "Lender"), on or before the Maturity Date the amount then outstanding
in respect of First Lien Advances (including accrued interest) under that
certain Interim Warehouse and Security Agreement dated as of November 15, 1996
(the "Agreement"). Initially, the maximum principal amount which may be
outstanding in respect of Advances is $100,000,000. Capitalized terms used
herein and not defined herein shall have their respective meanings as set forth
in the Agreement.
The holder of this Note is authorized to record the date and amount of
each Advance and the date and amount of each repayment of principal thereof on
the schedule to be maintained by the Lender (which schedule may be obtained upon
Borrower's request), and any such recordation shall constitute prima facie
evidence of the accuracy of the amount so recorded; provided that the failure of
the holder hereof to make such recordation (or any error in such recordation)
shall not affect the obligations of the Borrower hereunder or under the
Agreement.
MAXIMUM RATE OF INTEREST: It is intended that the rate of interest
------------------------
herein shall never exceed the maximum rate, if any, which may be legally charged
on the Loans evidenced by this Note (the "Maximum Rate"), and if the provisions
for interest contained in this Note would result in a rate higher than the
Maximum Rate, interest shall nevertheless be limited to the Maximum Rate and any
amounts which may be paid toward interest in excess of the Maximum Rate shall be
applied to the reduction of principal, or, at the option of the Lender, returned
to the Borrower.
DUE DATE: If the Loans evidenced hereby are not paid before the
--------
Maturity Date, they shall be due and payable on the Maturity Date.
PLACE OF PAYMENT: All payments hereon shall be made, and all notices
----------------
to the Lender required or authorized hereby shall be given, at the office of the
Lender at the address designated in the heading of this Note, or at such other
place as the Lender may from time to time direct by written notice to the
Borrower.
PAYMENT AND EXPENSES OF COLLECTION: All amounts payable hereunder are
----------------------------------
payable by wire transfer in immediately available funds to the account number
specified by the Lender, in lawful money of the United States. Payments
remitted by the Borrower via wire transfer initiated after 1:00 p.m. New York
City time shall be deemed to be
<PAGE>
received on the next business day. The Borrower agrees to pay all costs of
collection when incurred, including, without limiting the generality of the
foregoing, reasonable attorneys' fees through appellate proceedings, and to
perform and comply with each of the covenants, conditions, provisions and
agreements contained in every instrument now evidencing or securing said
indebtedness.
SECURITY: This Note is issued pursuant to the Agreement and is
--------
secured by a pledge of the Collateral described therein. Notwithstanding the
pledge of the Collateral, the Borrower hereby acknowledges, admits and agrees
that the Borrower's obligations under this Note are full recourse obligations of
the Borrower to which the Borrower pledges its full faith and credit.
DEFAULTS: Upon the happening of an Event of Default, the Lender shall
--------
have all rights and remedies set forth in the Agreement.
The failure to exercise any of the rights and remedies set forth in
the Agreement shall not constitute a waiver of the right to exercise the same or
any other option at any subsequent time in respect of the same event or any
other event. The acceptance by the Lender of any payment hereunder which is
less than payment in full of all amounts due and payable at the time of such
payment shall not constitute a waiver of the right to exercise any of the
foregoing rights and remedies at that time or at any subsequent time or nullify
any prior exercise of any such rights and remedies without the express consent
of the Lender, except as and to the extent otherwise provided by law.
WAIVERS: The Borrower waives diligence, presentment, protest and
-------
demand and also notice of protest, demand, dishonor and nonpayment of this Note,
and expressly agrees that this Note, or any payment hereunder, may be extended
from time to time, and consents to the acceptance of further Collateral, the
release of any Collateral for this Note, the release of any party primarily or
secondarily liable hereon, and that it will not be necessary for the Lender, in
order to enforce payment of this Note, to first institute or exhaust Lender's
remedies against the Borrower or any other party liable hereon or against any
collateral for this Note. None of the foregoing shall affect the liability of
the Borrower. No extension of time for the payment of this Note or an
installment hereof, made by agreement by the Lender with any person now or
hereafter liable for the payment of this Note, shall affect the liability under
this Note of the Borrower, even if the Borrower is not a party to such
agreement; provided, however, that the Lender and the Borrower, by written
agreement between them, may affect the liability of the Borrower.
TERMINOLOGY: If more than one party joins in the execution of this
-----------
Note, the covenants and agreements herein contained shall be the joint and
several obligations of each and all of them and of their respective heirs,
executors, administrators, successors and assigns, and relative words herein
shall be read as if written in the plural when appropriate. Any reference
herein to the Lender shall be deemed to include and apply to every subsequent
holder of this Note. Words of masculine or neuter import shall be read as if
written in the neuter or masculine or feminine when appropriate.
A-1-2
<PAGE>
AGREEMENT: Reference is made to the Agreement for provisions as to
---------
Advances, rates of interest, mandatory principal repayments, collateral and
acceleration. If there is any conflict between the terms of this Note and the
terms of the Agreement, the terms of the Agreement shall control.
APPLICABLE LAW: This Note shall be governed by and construed in
--------------
accordance with the laws of the State of New York, which the Borrower hereby
expressly elects to apply to this Note. The Borrower agrees that any action or
proceeding brought to enforce or arising out of this Note may be commenced in
the Supreme Court of the State of New York, or in the United States District
Court for the Southern District of New York.
* * * * * * * * * * * * *
A-1-3
<PAGE>
WMFC 1997-2, INC.
By --------------------------
Name:
Title:
[First Lien Secured Note Signature Page]
<PAGE>
EXHIBIT A-2
-----------
SECURED NOTE
Dated November 15, 1996
FOR VALUE RECEIVED, the undersigned, WMFC 1997-2, INC., a limited
liability company organized under the laws of the State of Delaware, whose
address is 1776 S.W. Madison Street, Portland, Oregon 97205 (the "Borrower"),
promises to pay to the order of PRUDENTIAL SECURITIES CREDIT CORPORATION, a
Delaware corporation, whose address is One Seaport Plaza, New York, New York
10292 (the "Lender"), on or before the Maturity Date the amount then outstanding
in respect of Second Lien Advances (including accrued interest) under that
certain Interim Warehouse and Security Agreement dated as of November 15, 1996
(the "Agreement"). Initially, the maximum principal amount which may be
outstanding in respect of Second Lien Advances is $20,000,000. Capitalized
terms used herein and not defined herein shall have their respective meanings as
set forth in the Agreement.
The holder of this Note is authorized to record the date and amount of
each Advance and the date and amount of each repayment of principal thereof on
the schedule to be maintained by the Lender (which schedule may be obtained upon
Borrower's request), and any such recordation shall constitute prima facie
evidence of the accuracy of the amount so recorded; provided that the failure of
the holder hereof to make such recordation (or any error in such recordation)
shall not affect the obligations of the Borrower hereunder or under the
Agreement.
MAXIMUM RATE OF INTEREST: It is intended that the rate of interest
------------------------
herein shall never exceed the maximum rate, if any, which may be legally charged
on the Loans evidenced by this Note (the "Maximum Rate"), and if the provisions
for interest contained in this Note would result in a rate higher than the
Maximum Rate, interest shall nevertheless be limited to the Maximum Rate and any
amounts which may be paid toward interest in excess of the Maximum Rate shall be
applied to the reduction of principal, or, at the option of the Lender, returned
to the Borrower.
DUE DATE: If the Loans evidenced hereby are not paid before the
--------
Maturity Date, they shall be due and payable on the Maturity Date.
PLACE OF PAYMENT: All payments hereon shall be made, and all notices
----------------
to the Lender required or authorized hereby shall be given, at the office of the
Lender at the address designated in the heading of this Note, or at such other
place as the Lender may from time to time direct by written notice to the
Borrower.
PAYMENT AND EXPENSES OF COLLECTION: All amounts payable hereunder are
----------------------------------
payable by wire transfer in immediately available funds to the account number
specified by the Lender, in lawful money of the United States. Payments
remitted by the Borrower via wire transfer initiated after 1:00 p.m. New York
City time shall be deemed to be
<PAGE>
received on the next business day. The Borrower agrees to pay all costs of
collection when incurred, including, without limiting the generality of the
foregoing, reasonable attorneys' fees through appellate proceedings, and to
perform and comply with each of the covenants, conditions, provisions and
agreements contained in every instrument now evidencing or securing said
indebtedness.
SECURITY: This Note is issued pursuant to the Agreement and is
--------
secured by a pledge of the Collateral described therein. Notwithstanding the
pledge of the Collateral, the Borrower hereby acknowledges, admits and agrees
that the Borrower's obligations under this Note are full recourse obligations of
the Borrower to which the Borrower pledges its full faith and credit.
DEFAULTS: Upon the happening of an Event of Default, the Lender shall
--------
have all rights and remedies set forth in the Agreement.
The failure to exercise any of the rights and remedies set forth in
the Agreement shall not constitute a waiver of the right to exercise the same or
any other option at any subsequent time in respect of the same event or any
other event. The acceptance by the Lender of any payment hereunder which is
less than payment in full of all amounts due and payable at the time of such
payment shall not constitute a waiver of the right to exercise any of the
foregoing rights and remedies at that time or at any subsequent time or nullify
any prior exercise of any such rights and remedies without the express consent
of the Lender, except as and to the extent otherwise provided by law.
WAIVERS: The Borrower waives diligence, presentment, protest and
-------
demand and also notice of protest, demand, dishonor and nonpayment of this Note,
and expressly agrees that this Note, or any payment hereunder, may be extended
from time to time, and consents to the acceptance of further Collateral, the
release of any Collateral for this Note, the release of any party primarily or
secondarily liable hereon, and that it will not be necessary for the Lender, in
order to enforce payment of this Note, to first institute or exhaust Lender's
remedies against the Borrower or any other party liable hereon or against any
collateral for this Note. None of the foregoing shall affect the liability of
the Borrower. No extension of time for the payment of this Note or an
installment hereof, made by agreement by the Lender with any person now or
hereafter liable for the payment of this Note, shall affect the liability under
this Note of the Borrower, even if the Borrower is not a party to such
agreement; provided, however, that the Lender and the Borrower, by written
agreement between them, may affect the liability of the Borrower.
TERMINOLOGY: If more than one party joins in the execution of this
-----------
Note, the covenants and agreements herein contained shall be the joint and
several obligations of each and all of them and of their respective heirs,
executors, administrators, successors and assigns, and relative words herein
shall be read as if written in the plural when appropriate. Any reference
herein to the Lender shall be deemed to include and apply to every subsequent
holder of this Note. Words of masculine or neuter import shall be read as if
written in the neuter or masculine or feminine when appropriate.
A-2-2
<PAGE>
AGREEMENT: Reference is made to the Agreement for provisions as to
---------
Advances, rates of interest, mandatory principal repayments, collateral and
acceleration. If there is any conflict between the terms of this Note and the
terms of the Agreement, the terms of the Agreement shall control.
APPLICABLE LAW: This Note shall be governed by and construed in
--------------
accordance with the laws of the State of New York, which the Borrower hereby
expressly elects to apply to this Note. The Borrower agrees that any action or
proceeding brought to enforce or arising out of this Note may be commenced in
the Supreme Court of the State of New York, or in the United States District
Court for the Southern District of New York.
* * * * * * * * * * * *
A-2-3
<PAGE>
WMFC 1997-2, INC.
By
-----------------------------
Name:
Title:
[Second Lien Secured Note Signature Page]
<PAGE>
EXHIBIT B
---------
November 15, 1996
Bankers Trust Company of
California, N.A.
3 Park Plaza
Irvine, California 92714
Prudential Securities Credit Corporation
One New York Plaza
New York, NY 10292-2015
Re: Interim Funding Arrangement
---------------------------
Gentlemen:
We have acted as special New York counsel to WMFC 1997-2, Inc., a
Delaware limited liability company (the "Borrower") and to Wilshire Financial
Services Group Inc., a Delaware corporation (the "Guarantor") in connection with
the execution and delivery of the following documents:
(i) Interim Warehouse and Security Agreement, dated as of
November 15, 1996 (the "Interim Warehouse and Security Agreement"), between
the Borrower and Prudential Securities Credit Corporation (the "Lender");
(ii) each of the two Secured Notes executed November 15, 1996 by
the Borrower in favor of the Lender (the "Notes");
(iii) Custodial Agreement, dated as of November 15, 1996 (the
"Custodial Agreement"), among the Borrower, the Guarantor and Bankers Trust
Company of California, N.A.; and
(iv) Guarantee, dated November 15, 1996 (the "Guarantee"),
executed by the Guarantor in favor of the Lender.
<PAGE>
Capitalized terms used herein, but not defined herein, shall have the
meanings assigned to them in the Interim Warehouse and Security Agreement.
We have examined executed copies of the Interim Warehouse and Security
Agreement, the Notes, the Guarantee and the Custodial Agreement. We have also
examined originals or photostatic or certified copies of all such corporate
records of the Borrower and the Guarantor and such certificates of public
officials, certificates of corporate officers, and other documents as we have
deemed appropriate and necessary as a basis for the opinions hereinafter
expressed. In making our examination and rendering the opinions herein
expressed, we have made the following assumptions: (i) each party to each of the
Interim Warehouse and Security Agreement and the Custodial Agreement (other than
the Borrower and the Guarantor) has the power to enter into and perform all of
its obligations thereunder, (ii) the due authorization, execution and delivery
of each of the Interim Warehouse and Security Agreement and the Custodial
Agreement by all parties thereto (other than the Borrower and the Guarantor),
and (iii) the validity and binding effect on all parties thereto (other than the
Borrower and the Guarantor) of each of the Interim Warehouse and Security
Agreement and the Custodial Agreement.
The opinions expressed below with respect to enforceability are
subject to the following additional qualifications:
(a) The effect of insolvency, reorganization, moratorium,
conservatorship, receivership, or other similar laws relating to or affecting
the rights of creditors.
(b) The application of general principles of equity, including, but
not limited to, the right of specific performance (regardless of whether
enforceability is considered in a proceeding in equity or at law).
(c) The unenforceability of provisions to the effect that failure to
exercise or delay in exercising rights or remedies will not operate as a waiver
of any such rights or remedies, or to the effect that provisions therein may
only be waived in writing to the extent that an oral agreement has been entered
into modifying such provisions.
We are licensed to practice law in the State of New York and each
opinion hereinafter set forth is an opinion concerning only the law of the State
of New York and the general corporation and limited liability company law of the
State of Delaware. All opinions expressed herein are based on laws, regulations
and policy guidelines currently enforced and may be affected by future changes
in law. Furthermore, no opinion is expressed herein regarding the applicable
state Blue Sky, legal investment or real estate syndication laws.
Based upon the foregoing, and subject to the last paragraph hereof, we
are of the opinion that:
1. The Interim Warehouse and Security Agreement, the Notes and the
Custodial Agreement each constitutes the valid, legal and binding agreement
of the Borrower, and each is enforceable against the Borrower in accordance
with its terms.
B-2
<PAGE>
2. No consent, approval, authorization or order of, registration or
filing with, or notice to, any governmental authority or court is required
under federal laws or the laws of the State of New York for the execution,
delivery and performance of the Interim Warehouse and Security Agreement,
the Notes, or the Custodial Agreement as applicable, by the Borrower,
except such of which as have been obtained.
3. The execution, delivery and performance by the Borrower of the
Interim Warehouse and Security Agreement, the Notes and the Custodial
Agreement does not conflict with or result in a breach of, or constitute a
default under any law, rule or regulation of the federal government or of
the State of New York.
4. The execution, delivery and performance of the Interim Warehouse
and Security Agreement, the Notes and the Custodial Agreement by the
Borrower will not result in a default under any mortgage, borrowing
agreement, or other instrument or agreement pertaining to indebtedness for
borrowed money to which the Borrower is a party.
5. The Guarantee constitutes the valid, legal and binding agreement
of the Guarantor, and is enforceable against the Guarantor in accordance
with its terms.
6. No consent, approval, authorization or order of, registration or
filing with, or notice to, any governmental authority or court is required
under federal laws or the laws of the State of New York for the execution,
delivery and performance of the Guarantee by the Guarantor, except such of
which as have been obtained.
7. The execution, delivery and performance by the Guarantor of the
Guarantee does not conflict with or result in a breach of, or constitute a
default under any law, rule or regulation of the federal government or of
the State of New York.
8. The execution, delivery and performance of the Guarantee by the
Guarantor will not result in a default under any mortgage, borrowing
agreement, or other instrument or agreement pertaining to indebtedness for
borrowed money to which the Guarantor is a party.
This opinion is furnished is solely for the benefit of the addressees
hereof.
Yours truly,
B-3
<PAGE>
EXHIBIT C
---------
[FORM OF CREDIT INCREASE CONFIRMATION AND
NOTE AMENDMENT AND LEGALITY CERTIFICATE]
Dated , 199
------------------ -
Reference is made to (i) the Interim Warehouse and Security Agreement,
dated as of November 15, 1996 (the "Interim Warehouse Agreement") between
Prudential Securities Credit Corporation (the "Lender") and WMFC 1997-2, Inc.
(the "Borrower ") and (ii) each of the two Secured Notes dated November 15, 1996
(the "Notes") from the Borrower to the Lender.
Section 1.
- ----------
The "Maturity Date" referenced in the Interim Warehouse Agreement and
in the Notes shall be .
---------------------------------
[Any other changes.]
Section 2.
- ----------
As amended by Section 1 hereof all provisions of the Interim Warehouse
Agreement and of the Notes are reconfirmed as of the date hereof. The Borrower,
in addition, hereby reconfirms and remakes as of the date hereof each of its
representations, warranties and covenants set forth in the Interim Warehouse
Agreement.
WMFC 1997-2, INC.
By:
----------------------------
Name:
Title:
PRUDENTIAL SECURITIES CREDIT
CORPORATION
By:
----------------------------
Name:
Title:
<PAGE>
Approval as to Legality
-----------------------
, special New York counsel to the Borrower, hereby
-------------
confirms that (i) we delivered the opinion letter dated November __, 1996
relating to the Interim Warehouse Agreement and the Notes, a copy of which is
attached hereto (the "Opinion Letter"), (ii) we have represented the Borrower in
connection with its execution and delivery of the Credit Increase Confirmation
and Note Amendment (the "Confirmation") to which this Approval as to Legality is
attached, and we hereby confirm as of the date hereof the opinions set forth in
the Opinion Letter to cover both the Confirmation itself as well as the
transactions described on the Confirmation and confirm, as of the date hereof,
and subject to any and all assumptions and qualifications set forth therein, the
opinions set forth in the Opinion Letter.
Yours truly,
-------------------------------------------
Dated:
-----------------
C-2
<PAGE>
EXHIBIT D
---------
[FORM OF NOTICE TO LENDER]
[Date]
Prudential Securities Realty
Funding Corporation
One Seaport Plaza
New York, NY 10292
Gentlemen:
Reference is made to the Interim Warehouse and Security Agreement,
dated as of November 15, 1996, between you and us (the "Agreement"). We hereby
request that on , 199 , you make an Advance (as defined in the
----------------
Agreement) in the amount of $ in respect of the mortgage
-------------------
loans identified in the [electronic disk] [tape] delivered to you together with
this notice.
Very truly yours,
WMFC 1997-2, INC.
By:
-------------------------
Name:
Title:
<PAGE>
EXHIBIT E
---------
[FORM OF GUARANTEE]
WILSHIRE FINANCIAL SERVICES GROUP INC., a corporation duly organized
and existing under the laws of the State of Delaware (the "Guarantor"), hereby
issues this full recourse Guarantee (this "Guarantee") to PRUDENTIAL SECURITIES
CREDIT CORPORATION (the "Lender"). Unless otherwise indicated, all capitalized
terms herein have the same meaning ascribed to such terms in the Interim
Warehouse and Security Agreement dated as of November 15, 1996 (the "Loan
Agreement"), by and among the Lender and WMFC 1997-2, INC., as the Borrower (the
"Borrower").
The Lender has required the execution, delivery and on-going
effectiveness of this Guarantee as a condition to its providing the financing
facility described in the Loan Agreement. The Guarantor indirectly owns more
than 95% of the Borrower, and the Guarantor has determined that the issuance of
this Guarantee is in furtherance of the best interests of the Borrower and of
the Guarantor.
To the extent that funds available in accordance with the Loan
Agreement are insufficient to make payments on any of the Secured Obligations
owed by the Borrower to the Lender in connection with the Loan Agreement or the
Secured Note when such payments become due, the Guarantor hereby unconditionally
and irrevocably agrees to pay such amounts to the Lender upon demand.
The obligations of the Guarantor under this Guarantee shall be a
continuing obligation and a fresh cause of action under this Guarantee shall be
deemed to arise in respect of each payment default by the Borrower under the
Loan Agreement. This Guarantee shall remain in full force and effect until the
later of (a) the Maturity Date (subject to extension, if any, pursuant to the
terms of the Loan Agreement), (b) the termination of the Loan Agreement and (c)
the date on which all Secured Obligations due and owing by the Borrower to the
Lender in connection with the Loan Agreement have been paid in full. The
Guarantor's obligations under this Guarantee shall be reinstated and be
continued in full force and effect if at any time any payment received by the
Lender under the Loan Agreement is invalidated, declared to be fraudulent or
preferentially set aside and/or required to be repaid by the Lender. This is a
guarantee of payment and not of collection and is a primary obligation of the
Guarantor. The Lender may enforce this Guarantee against the Guarantor without
prior enforcement of the Secured Obligations against the Borrower.
The Guarantor hereby agrees that its obligations under this Guarantee
shall be unconditional, irrespective of the validity, regularity or
enforceability of the Loan Agreement; the absence of any action to enforce the
same; any waiver or consent by the Lender concerning any provisions thereof, the
rendering of any judgment against the Borrower or any action to enforce the
same; or any other circumstance that might otherwise constitute a legal or
equitable discharge of a guarantor or a defense of a guarantor. The Guarantor
covenants that this Guarantee will not be discharged except by complete payment
of the amounts payable hereunder. This Guarantee
<PAGE>
shall continue to be effective if the Borrower merges or consolidates with or
into another entity, loses its separate legal identity or ceases to exist.
The Guarantor shall be subrogated to all rights of the Lender against
the Borrower in respect of any amounts paid by the Guarantor pursuant to the
provisions of this Guarantee; provided, however, that the Guarantor shall not be
entitled to enforce, or to receive any payments arising out of or based upon
such right of subrogation until all Secured Obligations under the LA)an
Agreement shall have been paid in full for a period of one year.
The Guarantor hereby waives diligence, presentment, protest, notice of
protest, notice of acceleration, notice of dishonor, filing of claims with a
court in the event of insolvency or bankruptcy of the Borrower, all demands
whatsoever, and any right to require a proceeding first against the Borrower.
The Guarantor makes the following representations and warranties to
the Lender, all of which shall be continuing representations and warranties
until all of the Secured Obligations shall have been paid in full and this
Guarantee shall be terminated:
(a) The Guarantor has been duly organized and is validly
existing in good standing under the laws of the state of
Delaware, and is duly qualified to do business and is in good
standing as a foreign corporation in all jurisdictions where the
nature of its properties or business requires it to be so
qualified and where the failure to so qualify could have a
material adverse effect upon the business, operations or
conditions (financial or otherwise) of the Guarantor.
(b) The Guarantor has the corporate power and authority to
execute, deliver and perform its obligations under this
Guarantee. The execution, delivery and performance of this
Guarantee (a) have been duly authorized by all requisite
corporate action, (b) do not conflict with or result in a
violation or breach of the Certificate of Incorporation or the
By-Laws of the Guarantor or of any agreement, instrument,
indenture, note, statute, regulation, rule, order, writ, judgment
or decree to which the Guarantor is a party or to which it or its
property is subject, and (c) will not give cause for acceleration
of any indebtedness of the Guarantor.
(c) This Guarantee has been duly executed and delivered by
the Guarantor and constitutes a legal and binding obligation of
the Guarantor, enforceable against the Guarantor in accordance
with its terms, except as such validity and enforceability may be
limited by any applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium and similar laws affecting
creditor's rights generally or by the effect of general
principles of equity (regardless of whether considered in a
proceeding in equity or at law).
E-2
<PAGE>
(d) The audited, consolidated balance sheet of the Guarantor
and certain subsidiaries as of September 30, 1996 and the related
statements of income, cash flows and changes in stockholders
equity for the period then ended contained in such financial
statements were prepared in accordance with generally accepted
accounting principles consistently applied, and present fairly
the financial condition and results of operations at the dates
and for the periods indicated therein.
(e) There has been no material adverse change in the
financial condition of the Guarantor since September 30, 1996.
(f) No authority from or approval by any court, governmental
body, commission or agency is required in connection with the
Guarantor's execution, delivery and performance of this
Guarantee.
This Guarantee shall be governed by, and construed in accordance with,
the laws of the State of New York (without regard to choice of law provisions).
This Guarantee becomes effective concurrent with the effectiveness of
the Loan Agreement, according to its terms.
If any one or more provisions contained in this Guarantee should be
invalid, illegal or unenforceable in any respect, the validity, legality, and
enforceability of the remaining provisions contained herein shall in no way be
affected or impaired thereby.
* * * * * * * * * * * *
E-3
<PAGE>
IN WITNESS WHEREOF, the Guarantor has caused this Guarantee to be executed in
its name by its duly authorized representative.
WILSHIRE FINANCIAL SERVICES GROUP INC.
By:
-----------------------------------
Name:
Title:
Dated: November 15, 1996
[Guarantee Signature Page]
E-4
<PAGE>
EXHIBIT F
---------
MORTGAGE LOAN SCHEDULE
The Mortgage Loan Schedule shall include the following items to the
extent applicable:
1. the Servicer's Loan identifying number;
2. the Obligors' first and last name(s);
3. the street address of the Mortgaged Property;
4. the state in which the Mortgaged Property is located;
5. the city in which the Mortgaged Property is located;
6. the five digit zip code in which the Mortgaged Property is located;
7. a code indicating whether the Mortgaged Property is occupied as the owner's
primary residence or as a second home or is an investment property;
8. the original months to maturity;
9. the original principal amount of the Mortgage Loan;
10. the Loan-to-Value Ratio at origination of the Mortgage being sold to the
Owner;
11. the Mortgage Interest Rate at origination;
12. the date on which the first Monthly Payment was due on the Mortgage Loan;
13. the stated maturity date;
14. the amount of the Monthly Payment;
15. the original closing date of the Mortgage Note (origination date);
16. with respect to each Adjustable Rate Loan, the next Rate Adjustment Date;
17. with respect to each Adjustable Rate Loan, the period between resets;
18. with respect to each Adjustable Rate Loan, the Gross Margin;
19. with respect to each Adjustable Rate Loan, the number of days prior to the
Adjustment Date on which the value of Index is determined, i.e., the look-
back;
20. with respect to each Adjustable Rate Loan, a code indicating the rounding
factor, if any, applied to the Mortgage Interest Rate, e.g. the nearest
1/8%, or up to the nearest 1/8%;
21. with respect to each Adjustable Rate Loan, the Maximum Mortgage Interest
Rate under the terms of the Mortgage Note;
22. with respect to each Adjustable Rate Loan, the Minimum Mortgage Interest
Rate under the terms of the Mortgage Note;
23. with respect to each Adjustable Rate Loan, the Periodic Rate Cap (if the
initial periodic cap is different from the subsequent periodic caps, this
field should state the initial periodic cap);
24. a code indicating if the Mortgage Loan is a balloon mortgage;
25. the Appraised Value of the Mortgaged Property at origination;
26. a code indicating if the Mortgage Loan has a prepayment penalty;
27. with respect to each Mortgage Loan that is not a first lien, the principal
balance of the senior lien on the Mortgaged Property at the time the
Mortgage Loan being sold to the Owner is originated;
28. a code indicating the lien position of the Mortgage Loan;
<PAGE>
29. a code indicating which, if any, primary mortgage insurance company has
insured the Mortgage Loan;
30. a code indicating the relevant index; and
31. if the Mortgage Loan is not secured by a first lien, the combined loan-to-
value ratio.
* * * * * * * * * * * *
F-2
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C> <C>
Section 1. The Loan...................................................... 1
Section 2. Additional Conditions Precedent; Required Characteristics; and
Correspondents................................................ 6
Section 3. Mortgage Files and Custodian.................................. 7
Section 4. Representations, Warranties and Covenants..................... 8
Section 5. Mandatory Payment of Loan..................................... 11
Section 6. Release of Mortgage Files Following Payment................... 12
Section 7. Servicing..................................................... 12
Section 8. Modifications; Successors and Assigns......................... 12
Section 9. Reports....................................................... 12
Section 10. Events of Default............................................. 13
Section 11. Remedies Upon Default......................................... 14
Section 12. Indemnification............................................... 16
Section 13. Power of Attorney............................................. 16
Section 14. Agreement Constitutes Security Agreement...................... 16
Section 15. Lender May Act Through Affiliates............................. 16
Section 16. Notices....................................................... 16
Section 17. Severability 18
Section 18. Counterparts 18
Section 19. Certain Definitions........................................... 18
</TABLE>
EXHIBITS
- --------
Exhibit A - Secured Notes
Exhibit B - Legal Opinion
Exhibit C - Form of Credit Increase
Exhibit D - Form of Notice to Lender
Exhibit E - Form of Guarantee
Exhibit F - Mortgage Loan Schedule Information
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR
ENDED ENDED ENDED OCTOBER 8 --
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1993
---------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Income (Loss):
Net Income (Loss)....... $(1,082) $ 592 $ (1,252) $ 915
Redeemable Preferred
Stock Dividends........ 0 0 0 0
------- ------ -------- -------
$(1,082) $ 592 $ (1,252) $ 915
Weighted Average number
of Shares:
Average common shares
outstanding............ 77,024 23,596 9,245 6,138
Common shares
equivalents resulting
from assumed exercise
of stock options....... 0 0 0 0
------- ------ -------- -------
77,024 23,596 9,245 6,138
Earnings (Loss) per com-
mon share............... $(14.05) $25.09 $(135.42) $149.07
</TABLE>
<PAGE>
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
JULY 1, 1992 JULY 1 TO OCTOBER 8 TO DECEMBER 31, ENDED
TO JUNE 30, OCTOBER 7, DECEMBER 31, --------------- SEPTEMBER 30,
1993 1993 1993 1994 1995 1996
------------ ---------- ------------ ------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Pre-tax income
(loss)............... ($1,162) ($525) $202 ($1,778) $639 ($5,734)
------- ----- ----- ------- ------ --------
Add:
Interest and fixed
charges............ 4,055 956 849 5,457 14,481 19,592
Portion of rent
under long-term
operating leases
representative of
an interest
factor............. 0 0 0 0 0 0
Total earnings
available for fixed
charges.............. 2,893 431 1,051 3,679 15,120 13,858
------- ----- ----- ------- ------ --------
Fixed charges:
Interest and fixed
charges.............. 4,055 956 849 5,457 14,481 19,592
Portion of rent under
long-term operating
losses representative
of an interest
factor............... 0 0 0 0 0 0
Total fixed charges... 4,055 956 849 5,457 14,481 19,592
------- ----- ----- ------- ------ --------
Deficiency in earnings
to cover fixed
charges................ 1,162 525 -- 1,778 -- 5,734
Ratio of earnings to
fixed charges.......... 1.24 1.04
</TABLE>
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders
Wilshire Financial Services Group, Inc.
We consent to the use in this Amendment No. 1 to the Registration Statement
of Wilshire Financial Services Group, Inc. and Subsidiaries on Form S-1 for an
offering of Common Stock of our report dated November 13, 1996 (which
expresses an unqualified opinion on the consolidated financial statements of
Wilshire Financial Services Group, Inc. and includes an explanatory paragraph
relating to certain regulatory agreements); our report dated March 10, 1995 on
the consolidated financial statements of Girard Savings Bank F.S.B. and
Subsidiary; and our report dated November 13, 1996 on the combined financial
statements of Wilshire Credit Corporation and Affiliates, which reports appear
in the Prospectus, which is a part of this Registration Statement. We also
consent to the reference to us under the heading "Experts" in such Prospectus
which is part of this Registration Statement.
Deloitte & Touche LLP
November 14, 1996
Los Angeles, California
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders
Wilshire Financial Services Group, Inc.
We consent to the use in this Amendment No. 1 to the Registration Statement
of Wilshire Financial Services Group, Inc. and Subsidiaries on Form S-1 for an
offering of Notes due 2003 of our report dated November 13, 1996 (which
expresses an unqualified opinion on the consolidated financial statements of
Wilshire Financial Services Group Inc. and includes an explanatory paragraph
relating to certain regulatory agreements); our report dated March 10, 1995 on
the consolidated financial statements of Girard Savings Bank F.S.B. and
Subsidiary; and our report dated November 13, 1996 on the combined financial
statements of Wilshire Credit Corporation and Affiliates, which reports appear
in the Prospectus, which is a part of this Registration Statement. We also
consent to the reference to us under the heading "Experts" in such Prospectus
which is part of this Registration Statement.
Deloitte & Touche LLP
November 14, 1996
Los Angeles, California
<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT
TO SECTION 305(b)(2) ___________
---------------------
BANKERS TRUST COMPANY
(Exact name of trustee as specified in its charter)
NEW YORK 13-4941247
(Jurisdiction of Incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification no.)
FOUR ALBANY STREET
NEW YORK, NEW YORK 10006
(Address of principal (Zip Code)
executive offices)
BANKERS TRUST COMPANY
LEGAL DEPARTMENT
130 LIBERTY STREET, 31ST FLOOR
NEW YORK, NEW YORK 10006
(212) 250-2201
(Name, address and telephone number of agent for service)
---------------------
WILSHIRE FINANCIAL SERVICES GROUP INC.
(Exact name of obligor as specified in its charter)
DELAWARE APPLIED FOR
(State or other jurisdiction of (I.R.S. employer
Incorporation or organization) Identification no.)
1776 SW MADISON ST.
PORTLAND, OR 97205
(Address of principal executive offices) (Zip Code)
_____% NOTES DUE 2003
(Title of the indenture securities)
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee.
(a) Name and address of each examining or supervising authority to
which it is subject.
NAME ADDRESS
---- -------
Federal Reserve Bank (2nd District) New York, NY
Federal Deposit Insurance Corporation Washington, D.C.
New York State Banking Department Albany, NY
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
If the obligor is an affiliate of the Trustee, describe each such
affiliation.
None.
ITEM 3.-15. NOT APPLICABLE
ITEM 16. LIST OF EXHIBITS.
EXHIBIT 1 - Restated Organization Certificate of Bankers Trust
Company dated August 7, 1990 and Certificate of
Admendment of the Organization Certificate of Bankers
Trust Company dated March 21, 1996, copy attached.
EXHIBIT 2 - Certificate of Authority to commence business -
Incorporated herein by reference to Exhibit 2 filed
with Form T-1 Statement, Registration No. 33-21047.
EXHIBIT 3 - Authorization of the Trustee to exercise corporate
trust powers - Incorporated herein by reference to
Exhibit 2 filed with Form T-1 Statement, Registration
No. 33-21047.
EXHIBIT 4 - Existing By-Laws of Bankers Trust Company, as amended
on September 17, 1996, copy attached.
-2-
<PAGE>
EXHIBIT 5 - Not applicable.
EXHIBIT 6 - Consent of Bankers Trust Company required by Section
321(b) of the Act. - Incorporated herein by reference
to Exhibit 4 filed with Form T-1 Statement,
Registration No. 22-18864.
EXHIBIT 7 - A copy of the latest report of condition of Bankers
Trust Company dated as of June 30, 1996.
EXHIBIT 8 - Not Applicable.
EXHIBIT 9 - Not Applicable.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Bankers Trust Company, a corporation organized and
existing under the laws of the State of New York, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in The City of New York, and State of New York, on the 7th day
of November, 1996.
BANKERS TRUST COMPANY
By: s/Carl H. Nasib/
---------------------
Carl H. Nasib
Vice President
-4-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Bankers Trust Company, a corporation organized and
existing under the laws of the State of New York, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in The City of New York, and State of New York, on the 7th day
of November, 1996.
BANKERS TRUST COMPANY
By: /s/ Carl H. Nasib
---------------------
Carl H. Nasib
Vice President
<PAGE>
Exhibit 7
<TABLE>
<S> <C> <C> <C>
Legal Title of Bank: Bankers Trust Company Call Date: 6/30/96 ST-BK: 36-4840 FFIEC 031
Address: 130 Liberty Street Vendor ID: D CERT: 00623 Page RC-1
City, State ZIP: New York, NY 10006 11
FDIC Certificate No.: 0 0 6 2 3
</TABLE>
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS JUNE 30, 1996
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, reported the amount outstanding as of the last business day of the
quarter.
SCHEDULE RC--BALANCE SHEET
<TABLE>
<CAPTION>
------------
C400
-------------------
Dollar Amounts in Thousands RCFD Bil Mil Thou
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS //////////////
1. Cash and balances due from depository institutions (from Schedule RC-A): //////////////
a. Noninterest-bearing balances and currency and coin(1)................... 0081 1,631,000 1.a.
b. Interest-bearing balances(2)............................................ 0071 2,066,000 1.b.
2. Securities: //////////////
a. Held-to-maturity securities (from Schedule RC-B, column A).............. 1754 0 2.a.
b. Available-for-sale securities (from Schedule RC-B, column D)............ 1773 3,761,000 2.b.
3. Federal funds sold and securities purchased under agreements to resell in domestic offices //////////////
of the bank and of its Edge and Agreement subsidiaries, and in IBFs: //////////////
a. Federal funds sold...................................................... 0276 5,162,000 3.a.
b. Securities purchased under agreements to resell......................... 0277 4,192,000 3.b.
4. Loans and lease financing receivables: //////////////
a. Loans and leases, net of unearned income (from Schedule RC-C).......RCFD 2122 24,849,000 ////////////// 4.a.
b. LESS: Allowance for loan and lease losses..........................RCFD 3123 923,000 ////////////// 4.b.
c. LESS: Allocated transfer risk reserve .............................RCFD 3128 0 ////////////// 4.c.
d. Loans and leases, net of unearned income, //////////////
allowance, and reserve (item 4.a minus 4.b and 4.c)..................... 2125 23,926,000 4.d.
5. Assets held in trading accounts.............................................. 3545 33,052,000 5.
6. Premises and fixed assets (including capitalized leases)..................... 2145 858,000 6.
7. Other real estate owned (from Schedule RC-M)................................. 2150 216,000 7.
8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) 2130 271,000 8.
9. Customers' liability to this bank on acceptances outstanding................. 2155 572,000 9.
10. Intangible assets (from Schedule RC-M)...................................... 2143 18,000 10.
11. Other assets (from Schedule RC-F)............................................ 2160 7,612,000 11.
12. Total assets (sum of items 1 through 11)..................................... 2170 83,337,000 12.
-------------------
</TABLE>
__________________________
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held in trading accounts.
<PAGE>
<TABLE>
<S> <C> <C> <C>
Legal Title of Bank: Bankers Trust Company Call Date: 6/30/96 ST-BK: 36-4840 FFIEC 031
Address: 130 Liberty Str Vendor ID: D CERT: 00623 Page RC-1
City, State ZIP: New York, NY 10006 12
FDIC Certificate No.: 0 0 6 2 3
</TABLE>
SCHEDULE RC--CONTINUED
<TABLE>
<CAPTION>
----------------------
Dollar Amounts in Thousands Bil Mil Thou
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LIABILITIES ////////////////////
13. Deposits: ////////////////////
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E, part I) RCON 2200 9,040,000 13.a.
(1) Noninterest-bearing(1)............................RCON 6631 3,569,000 //////////////////// 13.a.(1)
(2) Interest-bearing..................................RCON 6636 5,471,000 //////////////////// 13.a.(2)
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from Schedule RC-E ////////////////////
part II) RCFN 2200 19,648,000 13.b.
(1) Noninterest-bearing..............................RCFN 6631 494,000 //////////////////// 13.b.(1)
(2) Interest-bearing.................................RCFN 6636 19,154,000 //////////////////// 13.b.(2)
14. Federal funds purchased and securities sold under agreements to repurchase in ////////////////////
domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs: ////////////////////
a. Federal funds purchased................................................................ RCFD 0278 2,564,000 14.a.
b. Securities sold under agreements to repurchase......................................... RCFD 0279 790,000 14.b.
15. a. Demand notes issued to the U.S. Treasury............................................... RCON 2840 0 15.a.
b. Trading liabilities.................................................................... RCFD 3548 18,177,000 15.b.
16. Other borrowed money: ////////////////////
a. With original maturity of one year or less............................................. RCFD 2332 16,421,000 16.a.
b. With original maturity of more than one year........................................... RCFD 2333 3,388,000 16.b.
17. Mortgage indebtedness and obligations under capitalized leases............................. RCFD 2910 31,000 17.
18. Bank's liability on acceptances executed and outstanding................................... RCFD 2920 572,000 18.
19. Subordinated notes and debentures.......................................................... RCFD 3200 1,227,000 19.
20. Other liabilities (from Schedule RC-G)..................................................... RCFD 2930 6,911,000 20.
21. Total liabilities (sum of items 13 through 20)............................................. RCFD 2948 78,769,000 21.
22. Limited-life preferred stock and related surplus........................................... RCFD 3282 0 22.
EQUITY CAPITAL ////////////////////
23. Perpetual preferred stock and related surplus.............................................. RCFD 3838 500,000 23.
24. Common stock............................................................................... RCFD 3230 1,002,000 24.
25. Surplus (exclude all surplus related to preferred stock)................................... RCFD 3839 528,000 25.
26. a. Undivided profits and capital reserves RCFD 3632 2,915,000 26.a.
b. Net unrealized holding gains (losses) on available-for-sale securities................. RCFD 8434 ( 5,000) 26.b.
27. Cumulative foreign currency translation adjustments........................................ RCFD 3284 ( 372,000) 27.
28. Total equity capital (sum of items 23 through 27).......................................... RCFD 3210 4,568,000 28.
29. Total liabilities, limited-life preferred stock, and equity capital (sum of items 21, 22, ////////////////////
and 28).................................................................................... RCFD 3300 83,337,000 29.
----------------------
</TABLE>
Memorandum
<TABLE>
<S> <C> <C> <C>
To be reported only with the March Report of Condition.
1. Indicate in the box at the right the number of the statement below that best describes the Number
most comprehensive level of auditing work performed for the bank by independent external -----------
auditors as of any date during 1995............................................................. RCFD 6724 N/A M.1
------------------------
</TABLE>
<TABLE>
<S> <C>
1 = Independent audit of the bank conducted in accordance 4 = Directors' examination of the bank performed by other
with generally accepted auditing standards by a certified external auditors (may be required by state chartering
public accounting firm which submits a report on the bank authority)
2 = Independent audit of the bank's parent holding company 5 = Review of the bank's financial statements by external
conducted in accordance with generally accepted auditing auditors
standards by a certified public accounting firm which 6 = Compilation of the bank's financial statements by external
submits a report on the consolidated holding company auditors
(but not on the bank separately) 7 = Other audit procedures (excluding tax preparation work)
3 = Directors' examination of the bank conducted in 8 = No external audit work
accordance with generally accepted auditing standards
by a certified public accounting firm (may be required by
state chartering authority)
</TABLE>
- ------------------------
(1) Including total demand deposits and noninterest-bearing time and savings
deposits.
<PAGE>
Exhibit 1
State of New York,
Banking Department
I, PETER M. PHILBIN, Deputy Superintendent of Bank of the State of New
York, DO HEREBY APPROVE the annexed Certificate entitled "CERTIFICATE OF
AMENDMENT OF THE ORGANIZATION CERTIFICATE OF BANKERS TRUST COMPANY UNDER SECTION
8005 OF THE BANKING LAW," dated March 20, 1996, providing for an increase in
authorized capital stock from $1,351,666,670 consisting of 85,166,667 shares
with a par value of $10 each designated as Common Stock and 500 shares with a
par value of $1,000,000 each designated as Series Preferred Stock to
$1,501,666,670 consisting of 100,166,667 shares with a par value of $10 each
designated as Common Stock and 500 shares with a par value of $1,000,000 each
designated as Series Preferred Stock.
WITNESS, my hand and official seal of the Banking Department at the City of New
York,
this 21ST day of MARCH in the Year of our Lord
--------- ---------
one thousand nine hundred and NINETY-SIX.
s/Peter M. Philbin/
-------------------------------------
Deputy Superintendent of Banks
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
ORGANIZATION CERTIFICATE
OF BANKERS TRUST
Under Section 8005 of the Banking Law
-----------------------------
We, James T. Byrne, Jr. and Lea Lahtinen, being respectively a Managing
Director and an Assistant Secretary of Bankers Trust Company, do hereby certify:
1. The name of the corporation is Bankers Trust Company.
2. The organization certificate of said corporation was filed by the
Superintendent of Banks on the 5th of March, 1903.
3. The organization certificate as heretofore amended is hereby amended
to increase the aggregate number of shares which the corporation shall have
authority to issue and to increase the amount of its authorized capital stock in
conformity therewith.
4. Article III of the organization certificate with reference to the
authorized capital stock, the number of shares into which the capital stock
shall be divided, the par value of the shares and the capital stock outstanding,
which reads as follows:
"III. The amount of capital stock which the corporation is hereafter to
have is One Billion, Three Hundred Fifty One Million, Six Hundred Sixty-Six
Thousand, Six Hundred Seventy Dollars ($1,351,666,670), divided into
Eighty-Five Million, One Hundred Sixty-Six Thousand, Six Hundred Sixty-
Seven (85,166,667) shares with a par value of $10 each designated as Common
Stock and 500 shares with a par value of One Million Dollars ($1,000,000)
each designated as Series Preferred Stock."
is hereby amended to read as follows:
"III. The amount of capital stock which the corporation is hereafter to
have is One Billion, Five Hundred One Million, Six Hundred Sixty-Six
Thousand, Six Hundred Seventy Dollars ($1,501,666,670), divided into One
Hundred Million, One Hundred Sixty Six Thousand, Six Hundred Sixty-Seven
(100,166,667) shares with a par value of $10 each designated as Common
Stock and 500 shares with a par value of One Million Dollars ($1,000,000)
each designated as Series Preferred Stock."
<PAGE>
6. The foregoing amendment of the organization certificate was authorized
by unanimous written consent signed by the holder of all outstanding shares
entitled to vote thereon.
IN WITNESS WHEREOF, we have made and subscribed this certificate this 20th
day of March , 1996.
s/James T. Byrne, Jr./
---------------------------
James T. Byrne, Jr.
Managing Director
s/Lea Lahtinen/
---------------------------
Lea Lahtinen
Assistant Secretary
State of New York )
) ss:
County of New York )
Lea Lahtinen, being fully sworn, deposes and says that she is an Assistant
Secretary of Bankers Trust Company, the corporation described in the foregoing
certificate; that she has read the foregoing certificate and knows the contents
thereof, and that the statements herein contained are true.
s/Lea Lahtinen/
-------------------------
Lea Lahtinen
Sworn to before me this 20th day
of March, 1996.
s/Sandra L. West/
------------------------
Notary Public
SANDRA L. WEST Counterpart filed in the
Notary Public State of New York Office of the Superintendent of
No. 31-4942101 Banks, State of New York,
Qualified in New York County This 21st day of March, 1996
Commission Expires September 19, 1996
<PAGE>
Exhibit 4
BY-LAWS
SEPTEMBER 17, 1996
BANKERS TRUST COMPANY
NEW YORK
<PAGE>
BY-LAWS
OF
BANKERS TRUST COMPANY
ARTICLE I
MEETINGS OF STOCKHOLDERS
SECTION 1. The annual meeting of the stockholders of this Company shall be held
at the office of the Company in the Borough of Manhattan, City of New York, on
the third Tuesday in January of each year, for the election of directors and
such other business as may properly come before said meeting.
SECTION 2. Special meetings of stockholders other than those regulated by
statute may be called at any time by a majority of the directors. It shall be
the duty of the Chairman of the Board, the Chief Executive Officer or the
President to call such meetings whenever requested in writing to do so by
stockholders owning a majority of the capital stock.
SECTION 3. At all meetings of stockholders, there shall be present, either in
person or by proxy, stockholders owning a majority of the capital stock of the
Company, in order to constitute a quorum, except at special elections of
directors, as provided by law, but less than a quorum shall have power to
adjourn any meeting.
SECTION 4. The Chairman of the Board or, in his absence, the Chief Executive
Officer or, in his absence, the President or, in their absence, the senior
officer present, shall preside at meetings of the stockholders and shall direct
the proceedings and the order of business. The Secretary shall act as secretary
of such meetings and record the proceedings.
ARTICLE II
DIRECTORS
SECTION 1. The affairs of the Company shall be managed and its corporate powers
exercised by a Board of Directors consisting of such number of directors, but
not less than ten nor more than twenty-five, as may from time to time be fixed
by resolution adopted by a majority of the directors then in office, or by the
stockholders. In the event of any increase in the number of directors,
additional directors may be elected within the limitations so fixed, either by
the stockholders or within the limitations imposed by law, by a majority of
directors then in office. One-third of the number of directors, as fixed from
time to time, shall constitute a quorum. Any one or more members of the Board
of Directors or any Committee thereof may participate in a meeting of the Board
of Directors or Committee thereof by means of a conference telephone or similar
communications equipment which allows all persons participating in the meeting
to hear each
1
<PAGE>
other at the same time. Participation by such means shall constitute presence in
person at such a meeting.
All directors hereafter elected shall hold office until the next annual meeting
of the stockholders and until their successors are elected and have qualified.
No person who shall have attained age 70 shall be eligible to be elected or re-
elected a director.
No Officer-Director who shall have attained age 65, or earlier relinquishes his
responsibilities and title, shall be eligible to serve as a director.
SECTION 2. Vacancies not exceeding one-third of the whole number of the Board
of Directors may be filled by the affirmative vote of a majority of the
directors then in office, and the directors so elected shall hold office for the
balance of the unexpired term.
SECTION 3. The Chairman of the Board shall preside at meetings of the Board of
Directors. In his absence, the Chief Executive Officer or, in his absence, such
other director as the Board of Directors from time to time may designate shall
preside at such meetings.
SECTION 4. The Board of Directors may adopt such Rules and Regulations for the
conduct of its meetings and the management of the affairs of the Company as it
may deem proper, not inconsistent with the laws of the State of New York, or
these By-Laws, and all officers and employees shall strictly adhere to, and be
bound by, such Rules and Regulations.
SECTION 5. Regular meetings of the Board of Directors shall be held from time
to time on the third Tuesday of the month. If the day appointed for holding
such regular meetings shall be a legal holiday, the regular meeting to be held
on such day shall be held on the next business day thereafter. Special meetings
of the Board of Directors may be called upon at least two day's notice whenever
it may be deemed proper by the Chairman of the Board or, the Chief Executive
Officer or, in their absence, by such other director as the Board of Directors
may have designated pursuant to Section 3 of this Article, and shall be called
upon like notice whenever any three of the directors so request in writing.
SECTION 6. The compensation of directors as such or as members of committees
shall be fixed from time to time by resolution of the Board of Directors.
ARTICLE III
COMMITTEES
SECTION 1. There shall be an Executive Committee of the Board consisting of not
less than five directors who shall be appointed annually by the Board of
Directors. The Chairman of the Board shall preside at meetings of the Executive
Committee. In his absence, the Chief Executive Officer
2
<PAGE>
or, in his absence, such other member of the Committee as the Committee from
time to time may designate shall preside at such meetings.
The Executive Committee shall possess and exercise to the extent permitted by
law all of the powers of the Board of Directors, except when the latter is in
session, and shall keep minutes of its proceedings, which shall be presented to
the Board of Directors at its next subsequent meeting. All acts done and powers
and authority conferred by the Executive Committee from time to time shall be
and be deemed to be, and may be certified as being, the act and under the
authority of the Board of Directors.
A majority of the Committee shall constitute a quorum, but the Committee may act
only by the concurrent vote of not less than one-third of its members, at least
one of whom must be a director other than an officer. Any one or more directors,
even though not members of the Executive Committee, may attend any meeting of
the Committee, and the member or members of the Committee present, even though
less than a quorum, may designate any one or more of such directors as a
substitute or substitutes for any absent member or members of the Committee, and
each such substitute or substitutes shall be counted for quorum, voting, and all
other purposes as a member or members of the Committee.
SECTION 2. There shall be an Audit Committee appointed annually by resolution
adopted by a majority of the entire Board of Directors which shall consist of
such number of directors, who are not also officers of the Company, as may from
time to time be fixed by resolution adopted by the Board of Directors. The
Chairman shall be designated by the Board of Directors, who shall also from time
to time fix a quorum for meetings of the Committee. Such Committee shall
conduct the annual directors' examinations of the Company as required by the New
York State Banking Law; shall review the reports of all examinations made of the
Company by public authorities and report thereon to the Board of Directors; and
shall report to the Board of Directors such other matters as it deems advisable
with respect to the Company, its various departments and the conduct of its
operations.
In the performance of its duties, the Audit Committee may employ or retain, from
time to time, expert assistants, independent of the officers or personnel of the
Company, to make studies of the Company's assets and liabilities as the
Committee may request and to make an examination of the accounting and auditing
methods of the Company and its system of internal protective controls to the
extent considered necessary or advisable in order to determine that the
operations of the Company, including its fiduciary departments, are being
audited by the General Auditor in such a manner as to provide prudent and
adequate protection. The Committee also may direct the General Auditor to make
such investigation as it deems necessary or advisable with respect to the
Company, its various departments and the conduct of its operations. The
Committee shall hold regular quarterly meetings and during the intervals thereof
shall meet at other times on call of the Chairman.
SECTION 3. The Board of Directors shall have the power to appoint any other
Committees as may seem necessary, and from time to time to suspend or continue
the powers and duties of such Committees. Each Committee appointed pursuant to
this Article shall serve at the pleasure of the Board of Directors.
3
<PAGE>
ARTICLE IV
OFFICERS
SECTION 1. The Board of Directors shall elect from among their number a
Chairman of the Board and a Chief Executive Officer, and shall also elect a
President, a Senior Vice Chairman, one or more Vice Chairmen, one or more
Executive Vice Presidents, one or more Senior Managing Directors, one or more
Managing Directors, one or more Senior Vice Presidents, one or more Vice
Presidents, one or more General Managers, a Secretary, a Controller, a
Treasurer, a General Counsel, one or more Associate General Counsels, a General
Auditor, a General Credit Auditor, and one or more Deputy Auditors, who need not
be directors. The officers of the corporation may also include such other
officers or assistant officers as shall from time to time be elected or
appointed by the Board. The Chairman of the Board or the Chief Executive
Officer or, in their absence, the President, the Senior Vice Chairman or any
Vice Chairman, may from time to time appoint assistant officers. All officers
elected or appointed by the Board of Directors shall hold their respective
offices during the pleasure of the Board of Directors, and all assistant
officers shall hold office at the pleasure of the Board or the Chairman of the
Board or the Chief Executive Officer or, in their absence, the President, the
Senior Vice Chairman or any Vice Chairman. The Board of Directors may require
any and all officers and employees to give security for the faithful performance
of their duties.
SECTION 2. The Board of Directors shall designate the Chief Executive Officer
of the Company who may also hold the additional title of Chairman of the Board,
President, Senior Vice Chairman or Vice Chairman and such person shall have,
subject to the supervision and direction of the Board of Directors or the
Executive Committee, all of the powers vested in such Chief Executive Officer by
law or by these By-Laws, or which usually attach or pertain to such office. The
other officers shall have, subject to the supervision and direction of the Board
of Directors or the Executive Committee or the Chairman of the Board or, the
Chief Executive Officer, the powers vested by law or by these By-Laws in them as
holders of their respective offices and, in addition, shall perform such other
duties as shall be assigned to them by the Board of Directors or the Executive
Committee or the Chairman of the Board or the Chief Executive Officer.
The General Auditor shall be responsible to the Chief Executive Officer and,
through the Audit Committee, to the Board of Directors for the determination of
the program of the internal audit function and the evaluation of the adequacy of
the system of internal controls. He shall perform such other duties as the
Chief Executive Officer may prescribe and shall make such examinations and
reports as may be required by the Audit Committee. The General Auditor shall
have unrestricted access to all records and premises and shall delegate such
authority to his subordinates. He shall have the duty to report to the Chairman
of the Board and the Chief Executive Officer on all matters concerning the
internal audit program and the adequacy of the system of internal controls of
the Company which he deems advisable or which the Chairman of the Board and/or
Chief Executive Officer may request. Additionally, the General Auditor shall
have the duty of reporting independently of all officers of the Company to the
Audit Committee at least quarterly on any matters concerning the internal audit
program and the adequacy of the system of
4
<PAGE>
internal controls of the Company which should be brought to the attention of the
directors except those matters responsibility for which has been vested in the
officer in charge of Credit Audit. Should the General Auditor deem any matter to
be of special immediate importance, he shall report thereon forthwith to the
Audit Committee.
The General Credit Auditor shall be responsible to the Chief Executive Officer
and, through the Audit Committee, to the Board of Directors for the systems of
internal credit audit, shall perform such other duties as the Chief Executive
Officer may prescribe, and shall make such examinations and reports as may be
required by the Audit Committee. The General Credit Auditor shall have
unrestricted access to all records and may delegate such authority to
subordinates.
SECTION 3. The compensation of all officers shall be fixed under such plan or
plans of position evaluation and salary administration as shall be approved from
time to time by resolution of the Board of Directors.
SECTION 4. The Board of Directors, the Executive Committee, the Chairman of the
Board, the Chief Executive Officer or any person authorized for this purpose by
the Chief Executive Officer, shall appoint or engage all other employees and
agents and fix their compensation. The employment of all such employees and
agents shall continue during the pleasure of the Board of Directors or the
Executive Committee or the Chairman of the Board or the Chief Executive Officer
or any such authorized person; and the Board of Directors, the Executive
Committee, the Chairman of the Board, the Chief Executive Officer or any such
authorized person may discharge any such employees and agents at will.
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
SECTION 1. The Company shall, to the fullest extent permitted by Section 7018
of the New York Banking Law, indemnify any person who is or was made, or
threatened to be made, a party to an action or proceeding, whether civil or
criminal, whether involving any actual or alleged breach of duty, neglect or
error, any accountability, or any actual or alleged misstatement, misleading
statement or other act or omission and whether brought or threatened in any
court or administrative or legislative body or agency, including an action by or
in the right of the Company to procure a judgment in its favor and an action by
or in the right of any other corporation of any type or kind, domestic or
foreign, or any partnership, joint venture, trust, employee benefit plan or
other enterprise, which any director or officer of the Company is servicing or
served in any capacity at the request of the Company by reason of the fact that
he, his testator or intestate, is or was a director or officer of the Company,
or is serving or served such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any capacity, against
judgments, fines, amounts paid in settlement, and costs, charges and expenses,
including attorneys' fees, or any appeal therein; provided, however, that no
indemnification shall be provided to any such person if a judgment or other
final adjudication adverse to the director or officer establishes that (i) his
acts were committed in bad faith or were the result of active and deliberate
dishonesty and, in either
5
<PAGE>
case, were material to the cause of action so adjudicated, or (ii) he personally
gained in fact a financial profit or other advantage to which he was not legally
entitled.
SECTION 2. The Company may indemnify any other person to whom the Company is
permitted to provide indemnification or the advancement of expenses by
applicable law, whether pursuant to rights granted pursuant to, or provided by,
the New York Banking Law or other rights created by (i) a resolution of
stockholders, (ii) a resolution of directors, or (iii) an agreement providing
for such indemnification, it being expressly intended that these By-Laws
authorize the creation of other rights in any such manner.
SECTION 3. The Company shall, from time to time, reimburse or advance to any
person referred to in Section 1 the funds necessary for payment of expenses,
including attorneys' fees, incurred in connection with any action or proceeding
referred to in Section 1, upon receipt of a written undertaking by or on behalf
of such person to repay such amount(s) if a judgment or other final adjudication
adverse to the director or officer establishes that (i) his acts were committed
in bad faith or were the result of active and deliberate dishonesty and, in
either case, were material to the cause of action so adjudicated, or (ii) he
personally gained in fact a financial profit or other advantage to which he was
not legally entitled.
SECTION 4. Any director or officer of the Company serving (i) another
corporation, of which a majority of the shares entitled to vote in the election
of its directors is held by the Company, or (ii) any employee benefit plan of
the Company or any corporation referred to in clause (i) in any capacity shall
be deemed to be doing so at the request of the Company. In all other cases, the
provisions of this Article V will apply (i) only if the person serving another
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise so served at the specific request of the Company, evidenced by
a written communication signed by the Chairman of the Board, the Chief Executive
Officer or the President, and (ii) only if and to the extent that, after making
such efforts as the Chairman of the Board, the Chief Executive Officer or the
President shall deem adequate in the circumstances, such person shall be unable
to obtain indemnification from such other enterprise or its insurer.
SECTION 5. Any person entitled to be indemnified or to the reimbursement or
advancement of expenses as a matter of right pursuant to this Article V may
elect to have the right to indemnification (or advancement of expenses)
interpreted on the basis of the applicable law in effect at the time of
occurrence of the event or events giving rise to the action or proceeding, to
the extent permitted by law, or on the basis of the applicable law in effect at
the time indemnification is sought.
SECTION 6. The right to be indemnified or to the reimbursement or advancement
of expense pursuant to this Article V (i) is a contract right pursuant to which
the person entitled thereto may bring suit as if the provisions hereof were set
forth in a separate written contract between the Company and the director or
officer, (ii) is intended to be retroactive and shall be available with respect
to events occurring prior to the adoption hereof, and (iii) shall continue to
exist after the rescission or restrictive modification hereof with respect to
events occurring prior thereto.
6
<PAGE>
SECTION 7. If a request to be indemnified or for the reimbursement or
advancement of expenses pursuant hereto is not paid in full by the Company
within thirty days after a written claim has been received by the Company, the
claimant may at any time thereafter bring suit against the Company to recover
the unpaid amount of the claim and, if successful in whole or in part, the
claimant shall be entitled also to be paid the expenses of prosecuting such
claim. Neither the failure of the Company (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of or
reimbursement or advancement of expenses to the claimant is proper in the
circumstance, nor an actual determination by the Company (including its Board of
Directors, independent legal counsel, or its stockholders) that the claimant is
not entitled to indemnification or to the reimbursement or advancement of
expenses, shall be a defense to the action or create a presumption that the
claimant is not so entitled.
SECTION 8. A person who has been successful, on the merits or otherwise, in the
defense of a civil or criminal action or proceeding of the character described
in Section 1 shall be entitled to indemnification only as provided in Sections 1
and 3, notwithstanding any provision of the New York Banking Law to the
contrary.
ARTICLE VI
SEAL
SECTION 1. The Board of Directors shall provide a seal for the Company, the
counterpart dies of which shall be in the charge of the Secretary of the Company
and such officers as the Chairman of the Board, the Chief Executive Officer or
the Secretary may from time to time direct in writing, to be affixed to
certificates of stock and other documents in accordance with the directions of
the Board of Directors or the Executive Committee.
SECTION 2. The Board of Directors may provide, in proper cases on a specified
occasion and for a specified transaction or transactions, for the use of a
printed or engraved facsimile seal of the Company.
ARTICLE VII
CAPITAL STOCK
SECTION 1. Registration of transfer of shares shall only be made upon the books
of the Company by the registered holder in person, or by power of attorney, duly
executed, witnessed and filed with the Secretary or other proper officer of the
Company, on the surrender of the certificate or certificates of such shares
properly assigned for transfer.
7
<PAGE>
ARTICLE VIII
CONSTRUCTION
SECTION 1. The masculine gender, when appearing in these By-Laws, shall be
deemed to include the feminine gender.
ARTICLE IX
AMENDMENTS
SECTION 1. These By-Laws may be altered, amended or added to by the Board of
Directors at any meeting, or by the stockholders at any annual or special
meeting, provided notice thereof has been given.
I, Carl Nasib, Vice President of Bankers Trust Company, New York, New York,
hereby certify that the foregoing is a complete, true and correct copy of the
By-Laws of Bankers Trust Company, and that the same are in full force and effect
at this date.
/s/ Carl H. Nasib
---------------------------
VICE PRESIDENT
DATED: November 7, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Balance Sheet as of September 30, 1996 and Statement of Earnings for
the nine months ended September 30, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 11231
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9300
<TRADING-ASSETS> 7092
<INVESTMENTS-HELD-FOR-SALE> 6483
<INVESTMENTS-CARRYING> 29805
<INVESTMENTS-MARKET> 29230
<LOANS> 501954
<ALLOWANCE> 46304
<TOTAL-ASSETS> 533107
<DEPOSITS> 487535
<SHORT-TERM> 0
<LIABILITIES-OTHER> 11020
<LONG-TERM> 0
0
0
<COMMON> 35550
<OTHER-SE> (996)
<TOTAL-LIABILITIES-AND-EQUITY> 533109
<INTEREST-LOAN> 31686
<INTEREST-INVEST> 2451
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 34137
<INTEREST-DEPOSIT> 17448
<INTEREST-EXPENSE> 19592
<INTEREST-INCOME-NET> 14545
<LOAN-LOSSES> 15751
<SECURITIES-GAINS> 1601
<EXPENSE-OTHER> 10905
<INCOME-PRETAX> (5734)
<INCOME-PRE-EXTRAORDINARY> (5734)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1082)
<EPS-PRIMARY> (14.05)
<EPS-DILUTED> (14.05)
<YIELD-ACTUAL> 9.10
<LOANS-NON> 44582
<LOANS-PAST> 0
<LOANS-TROUBLED> 26936
<LOANS-PROBLEM> 3100
<ALLOWANCE-OPEN> 25651
<CHARGE-OFFS> 12494
<RECOVERIES> 1424
<ALLOWANCE-CLOSE> 46304
<ALLOWANCE-DOMESTIC> 46304
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
