<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 31, 1996
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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
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<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(2) PRICE(2) FEE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per
share.......................... 1,725,000 shares(1) $12.00 $20,700,000 $6,273.09
- ------------------------------------------------------------------------------------------------
Notes due 2003.................. $50,000,000 100% $50,000,000 $15,151.15
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Total....................... $70,700,000 $21,424.24
</TABLE>
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(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) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as
amended, solely for the purpose of calculating the registration fee.
---------------
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.
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<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) $50 million principal amount of % Notes due 2003
(the "Notes") of Wilshire Financial Services Group Inc.
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 OCTOBER 31, 1996
PROSPECTUS
-------------
WILSHIRE
-------------
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 79% 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 $50 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.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) THE COMPANY(2)
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<S> <C> <C> <C>
Per Share................................. $ $ $
Total(3).................................. $ $ $
</TABLE>
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(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 $1.2 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 $543.2 million at June 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") in October 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 six months ended June 30, 1996 and the years ended
December 31, 1995, 1994 and 1993 was approximately $276.4 million, $337.4
million, $388.5 million and $333.8 million, respectively. As of June 30, 1996,
the Company had $543.2 million of assets and stockholders' equity of $35.1
million.
After giving effect to the Reorganization, the organizational structure of
the Company will be as follows:
Wilshire Financial Services Group Inc.
Wilshire Funding Wilshire Servicing Wilshire Acquisitions
Corporation Corporation* Corporation
Special First Bank of Girard
European Purpose Beverly Savings
Operations Entities** Hills, F.S.B. 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. The Company believes that it
can significantly increase its acquisition activities without a
commensurate increase in operating costs.
. 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 August 31, 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
5
<PAGE>
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
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 June 30, 1996, WCC
was servicing more than $1.0 billion principal amount of loans,
including $509.4 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 $3.3 million
during the six months ended June 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 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
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)............... 7,500,000 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 increase the Savings Banks' capital
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 $50 million principal amount of Notes, 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 . 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 years ended December 31, 1995
and 1994 and for the period from October 8 through December 31, 1993 have been
derived from the audited consolidated financial statements of the Company (or
its predecessor) included elsewhere in this Prospectus (the "Audited Financial
Statements"). For the purpose of financial statement presentation herein, First
Bank is treated as the predecessor of the Company. On October 7, 1993, WAC
acquired 94.9% of First Bank's common stock in a purchase accounting
transaction.
On November 9, 1994, Wilshire Acquisitions Corporation II ("WACII"), a newly-
formed entity with ownership and management common to WAC acquired 94.9% of the
common stock of Girard in a purchase accounting transaction. Because WAC and
WACII were under common control at the time of their respective acquisitions of
First Bank and Girard, the Summary Consolidated Financial Information is
presented on a combined basis as of December 31, 1994. On December 27, 1995,
WAC and WACII were merged with WAC as the surviving entity. Summary
Consolidated Financial Information as of December 31, 1995 is presented on a
consolidated basis and includes the accounts of WAC, First Bank and Girard.
The historical income statement and balance sheet data presented at and for
the six months ended June 30, 1996 and 1995 have 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
six months ended June 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.
8
<PAGE>
The historical income statement and balance sheet data of the predecessor for
any date prior to October 8, 1993 have not been included because prior to its
acquisition the predecessor was seriously under-capitalized and subject to a
cease and desist order and a prompt corrective action which severely limited
its operations, including restrictions on asset growth and new deposits.
Further, the predecessor was subject to an imminent regulatory takeover by the
OTS/RTC if the acquisition by WAC had not occurred. Prior to the acquisition of
the predecessor by WAC in October 1993, the predecessor was operated by
different management with a different strategy and business plan. Current
management has significantly changed the business plan of the predecessor and
has substantially increased the Company's assets while disposing of, and
reserving against, Inherited Loans. Accordingly, management believes that the
predecessor's results of operations do not have a significant bearing on the
Company.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31, OCTOBER 8 -
---------------- ----------------- DECEMBER 31,
1996 1995 1995 1994 1993
------- ------- ------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income... $21,951 $10,879 $24,381 $ 9,569 $ 1,654
Total interest expense.. 12,020 6,707 14,481 5,457 849
------- ------- ------- -------- -------
Net interest income..... 9,931 4,172 9,900 4,112 805
Provision for estimated
losses on loans........ 10,868 2,201 4,266 2,173 63
------- ------- ------- -------- -------
Net interest income
(loss) after provision
for estimated losses on
loans.................. (937) 1,971 5,634 1,939 742
Other income (loss):
Bankcard income(1)...... 3,275 1,955 4,694 635 --
Bankcard processing ex-
pense.................. (2,616) (1,391) (3,462) (274) --
Other, net.............. 2,877 486 1,875 866 96
------- ------- ------- -------- -------
Total other income
(loss)............... 3,536 1,050 3,107 1,227 96
Other expenses:
Other general and admin-
istrative expenses..... 5,507 3,151 8,102 4,944 636
------- ------- ------- -------- -------
(Loss) income before in-
come tax provision..... (2,908) (130) 639 (1,778) 202
Income tax (benefit)
provision.............. (1,279) (10) 47 (526) (713)
------- ------- ------- -------- -------
Net (loss) income ...... $(1,629) $ (120) $ 592 $ (1,252) $ 915
======= ======= ======= ======== =======
(Loss) earnings per
share.................. $(21.11) $ (5.13) $ 25.09 $(135.43) $149.07
======= ======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------
1996 1995 1994 1993
--------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................ $ 543,198 $ 341,454 $ 230,636 $ 99,367
Loan portfolio, net(2).............. 446,053 259,417 179,377 68,743
Discounted loan portfolio:
Total loans........................ 21,932 53,439 2,995 --
Unaccreted discount................ (1,761) (6,671) (470) --
Allowance for loan losses.......... (6,973) (15,414) (431) --
Discounted loans, net.............. 13,198 31,354 2,094 --
Loans held for sale, at lower of
cost or market(3).................. -- 18,597 -- --
Real estate owned, net.............. 3,527 4,964 1,208 1,037
Deposits, net....................... 433,769 304,020 196,289 84,821
Borrowings.......................... 66,771 13,000 21,500 6,608
Stockholders' equity(4)............. 35,074 7,039 6,793 3,806
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31, OCTOBER 8-
------------------ --------------- DECEMBER 31,
1996 1995 1995 1994 1993
------- ------ ------- ------ ------------
<S> <C> <C> <C> <C> <C>
FINANCIAL RATIOS AND
OTHER DATA:
Return on average as-
sets................... (.35)% (.05)% .24% (.92)% .97%
Return on average equi-
ty..................... (4.62)% (1.73)% 8.65% (31.03)% 26.69%
Average interest rate on
total loans............ 9.64% 9.36% 9.57% 7.65% 7.62%
Average equity to aver-
age assets............. 7.68% 2.96% 2.72% 2.96% 3.62%
Net interest spread(5).. 3.47% 2.81% 3.08% 2.85% 3.37%
Net interest margin(6).. 4.19% 3.41% 3.72% 3.04% .87%
Ratio of earnings to
fixed charges(7):
Including interest on
deposits.............. .76 .98 1.04 .67 1.24
Excluding interest on
deposits.............. (1.10) .46 2.19 (3.04) 3.38
Non-performing loans to
loans at end of
period(2).............. 5.39% 6.50% 4.46% 5.95% 9.71%
Allowance for loan
losses to total loans
at end of period....... 6.3% 15.2% 7.6% 3.9% 5.8%
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31, OCTOBER 8-
------------------ --------------- DECEMBER 31,
1996 1995 1995 1994 1993(8)
------- ------ ------- ------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
LOAN ORIGINATIONS(9).... $ 1,145 $2,125 $ 8,748 $4,345 $ --
LOAN ACQUISITION DA-
TA(9):
Loans:
Single-family residen-
tial.................. 220,629(10) 6,812 121,883 36,462 1,618
Multi-family residen-
tial.................. -- -- -- 61,247 72
Commercial and other
mortgage loans........ -- -- 2,126 31,091 462
Consumer and other
loans(11)............. 17,324 -- 11,012 10,847 --
Discounted Loans........ -- (12) 55,995 55,995 3,624 --
LOANS SOLD(9)........... 27,965(10) 8,724 16,673 -- --
</TABLE>
- --------
(1) The Company began its bankcard operations in 1994.
(2) Does not include Discounted Loans.
(3) Primarily Discounted Loans included in the total of Discounted loans, net.
(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.
(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.
(8) The predecessor was not acquiring or selling loans prior to its acquisition
in October 1993.
(9) Unpaid principal balances.
(10) 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."
(11) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(12) Girard recently committed to purchase approximately $248 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 $1.6 million
for the six months ended June 30, 1996, principally due to provisions for
estimated losses on the Sub-Prime Auto Loans ($4.1 million) and the Inherited
Loans ($4.7 million). The Company also expects a loss in the third quarter of
approximately $4.4 million due to an anticipated loss provisions of $4.3
million on the Sub-Prime Auto Loans and a $1.4 million charge for the Savings
Association Insurance Fund (the "SAIF") special assessment. See "Recent
Developments."
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 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 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-
11
<PAGE>
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 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 six months of 1996. The Savings
Banks' deposits increased from $196.3 million at December 31, 1994 to $433.8
million at June 30, 1996. More than 73% of Girard's total loan portfolio was
acquired in the four quarters ended June 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 six months ended June 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
six months ended June 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 $2.5 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 65.9% of which have become greater
than 30 days delinquent. The Savings Banks have established reserves
aggregating $4.1 million during the first half of 1996, including a 10%
reserve on such loans which are current. During the third quarter of 1996, the
Savings Banks established an additional $4.3 million of reserves for the Sub-
Prime Auto Loans. As a result of the repossession of the collateral securing
the loans, the Savings Banks now hold approximately 300 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
As of June 30, 1996, both Girard and First Bank are "well capitalized"
savings institutions under OTS regulations. 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.
As a result of the SAIF special assessment and additional provisions for
loan losses on the Sub-Prime Auto Loans, as of September 30, 1996, First
Bank's level of capital was below the "well-capitalized" standard. See "Recent
Developments." Since failure to comply with the Orders could have significant
adverse consequences to the Savings Banks and the Company, the Company will
utilize approximately $1.0 million of the proceeds of the Common Stock
Offering and the Notes Offering to cause First Bank to become "well
capitalized" as required by the Orders. 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
13
<PAGE>
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
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 June 30, 1996, WCC's discounted loan portfolio included
$417.4 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 and
under-performing loans ("discounted 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Changes in Financial Condition." 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, Executive Vice 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--
14
<PAGE>
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.
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. However, because First Bank, as a result of
the recapitalization of the SAIF and additional allowances for loan losses
relating to the Sub-Prime Auto Loans, will only be "adequately capitalized,"
as of September 30, 1996, it is prohibited from using brokered deposits until
such time as it is "well-capitalized" at the end of a quarterly accounting
period. See "Recent Developments--Recapitalization of SAIF" and "Regulation--
The Savings Banks--Brokered Deposits."
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 retail 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.
15
<PAGE>
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.
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
Approximately 51.5% of the Company's total loan portfolio is 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.
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
16
<PAGE>
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 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 79% 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
17
<PAGE>
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 to time.
Upon completion of the Common Stock Offering, 7,500,000 shares of Common Stock
will be issued and outstanding and 781,819 shares of Common Stock will be
issuable upon the exercise of outstanding stock options. Of such oustanding
shares, 5,943,193 shares of Common Stock will be "restricted" shares as
defined in Rule 144 ("Rule 144") promulgated under the Securities.
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, directors, and certain current stockholders of the Company
holding an aggregate of 5,943,193 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 October 28, 1996, the Company had outstanding
options to purchase an aggregate of approximately 31,819 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 1,500,000 of Common Stock issuable under the
Company's Stock Option Plan. Thereafter, 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
RESULTS OF OPERATIONS
The Company incurred a net loss for the first nine months of 1996. The
Company's net loss resulted primarily from provisions for losses on loans for
the first nine months of 1996 and a charge for the SAIF special assessment.
These loss provisions resulted primarily from the further deterioration of the
Company's Inherited Loans and Sub-Prime Auto Loans.
LOAN ACQUISITIONS
In the third quarter of 1996, the Private Companies acquired or committed to
acquire 24 Loan Portfolios aggregating $294.3 million principal amount, of
which two Loan Portfolios aggregating approximately $23.7 million principal
amount were acquired by the Savings Banks. 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.
Girard has 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 is expected to settle on November 1, 1996 (the
"Settlement Date"). Girard is expected to make a concurrent sale of
approximately $38.8 million unpaid principal amount of the Citicorp Portfolio
to two unaffiliated third parties on the Settlement Date resulting in a gain.
The remainder of the purchase price to be paid to Citicorp will be financed by
Girard under a master repurchase agreement with Bear Stearns Mortgage Capital
Corporation ("BSMCC") pursuant to which BSMCC will purchase certain performing
residential mortgage loans and Girard will simultaneously agree 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.
In October 1996, Girard also agreed to acquire approximately $31.9 million
in unpaid principal amount of discounted residential mortgage loans to be sold
by a succcessful bidder in an auction conducted by HUD, and such transaction
is expected to settle on December 12, 1996.
As a result, on completion of such series of transactions, Girard will have
purchased approximately $272 million of 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"). The settlement of this
transaction is expected to occur in the first quarter of 1997. The
Institutional Portfolio is currently held by WCC as a part of a participation
agreement pursuant to which the Institutional Investor receives a specified
percentage of the cash flow until it recovers its investment and thereafter
divides the profits between WCC and itself. 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.
Historically, the Private Companies have acquired a significant portion of
loans in the fourth quarter. In the fourth quarter of the year ended 1995, the
Private Companies acquired 39 Loan Portfolios aggregating $163.8 principal
amount.
20
<PAGE>
ALLOWANCES FOR LOAN LOSSES
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 at a
purchase price of approximately $22.3 million. 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 Savings Banks have established reserves aggregating $4.1
million through the second quarter of 1996, including a 10% reserve on such
loans which are current. In the third of quarter of 1996, the Company
established an additional $4.3 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. As of September 30, 1996, the Company
has reserves of approximately $10.1 million of approximately $19.7 million of
the remaining outstanding principal amount of Sub-Prime Auto Loans.
RECAPITALIZATION OF SAIF
The deposits of the Savings Banks are insured by the FDIC through the SAIF,
which, due to the large number of failed savings institutions in the late
1980's and early 1990's, has been unable to attain a 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 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 of 65.7 basis points will result in the Savings
Banks' incurring a pre-tax charge of approximately $1.4 million. As a result
of this assessment and additional provisions for loan losses on the Sub-Prime
Auto Loans, First Bank's level of capital fell below the "well-capitalized"
standard to "adequately capitalized" levels at September 30, 1996. The Company
will use a portion of the proceeds from the Common Stock Offering and the
Notes Offering to cause First Bank to become "well-capitalized" as required by
the Orders. A determination as to the capital levels of the Savings Banks will
be performed quarterly by the OTS. The proposed FDIC regulations contain a
reduction schedule which would reduce future semi-annual SAIF assessments for
savings associations such as the Savings Banks. However, there can be no
assurance that the reduction schedule will be adopted as proposed by the FDIC.
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. The U.K. Servicer is currently
servicing 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.
21
<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>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- --------------------------
1996 1995 1995 1994 1993
---------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
LOAN ACQUISITION AND
ORIGINATION DATA:
Loan purchases and origina-
tions:
Single-family residential.... $ 6,589 $ 1,758 $ 5,742 $ 57,832 $ 1,059
Multi-family residential..... -- -- 983 667 --
Commercial and other mortgage
loans....................... -- 548 2,671 39,002 1,964
Consumer and other........... -- 7,683 14,223 101,890 39,330
---------- -------- -------- -------- --------
Total...................... 6,589 9,989 23,619 199,391 42,353
Discounted loan purchases:
Single-family residential.... 30,699 8,410 36,653 26,342 95
Multi-family residential..... -- 890 4,773 1,392 191
Commercial and other mortgage
loans....................... -- 1,086 22,252 8,087 4,322
Consumer and other........... -- 6,152 50,345 5,669 284,663
---------- -------- -------- -------- --------
Total...................... 30,699 16,538 114,023 41,490 289,271
---------- -------- -------- -------- --------
Total loan acquisitions and
originations.................. $ 37,288 $ 26,527 $137,642 $240,881 $331,624
========== ======== ======== ======== ========
LOANS SOLD..................... $ -- $ 77,979 $133,500 $ 9,000 $ --
LOANS SERVICED-END OF PERIOD... $1,045,249 $862,744 $894,649 $889,585 $606,122
</TABLE>
22
<PAGE>
The following table sets forth the composition of WCC's total loan portfolio
(excluding participation interests) at the end of the periods indicated.
COMPOSITION OF WCC'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------- ------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loan Portfolio:
Single-family residen-
tial.................. $ 42,067 $ 97,291 $ 40,951 $ 138,063 $ 197
Multi-family residen-
tial.................. 1,285 605 1,458 721 --
Commercial and other
mortgage loans........ 16,219 28,619 21,015 36,276 242
Consumer and other..... 67,355 69,878 60,116 96,980 50,563
--------- --------- --------- --------- --------
Loan Portfolio....... 126,926 196,393 123,540 272,040 51,002
Discounted Loan Portfo-
lio:
Single-family residen-
tial.................. 77,369 24,610 79,636 19,939 68
Multi-family residen-
tial.................. 6,920 1,362 8,835 699 135
Commercial and other
mortgage loans........ 35,847 7,367 60,736 8,905 2,008
Consumer and other..... 297,277 304,643 261,880 324,358 453,693
--------- --------- --------- --------- --------
Discounted Loan Port-
folio............... 417,413 337,982 411,087 353,901 455,904
Accrued Interest......... 267,192 221,497 238,020 210,050 210,667
Unaccreted discount (1).. (597,878) (575,298) (615,339) (583,870) (658,946)
--------- --------- --------- --------- --------
Total Loan Portfolio, net
........................ $ 213,653 $ 180,574 $ 157,308 $ 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 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").
The historical income statement and balance sheet data presented at and for
the six months ended June 30, 1996 and 1995 have been derived from unaudited
combined financial statements (the "Unaudited WCC Financial Statements" and,
together with the WCC Audited Financial Statements, the "WCC Financial
Statements") and include all adjustments, consisting only of normal recurring
accruals, which WCC considers necessary for a fair presentation of WCC's
results of operations for these periods. Operating results for the six months
ended June 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.
23
<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. 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).
As a result, WCC's profit on its loan assets would be expected to be less than
the profits of the Company since under the participation agreements generally
65-85% of the profits on such assets do not accrue to WCC.
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 only 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>
SIX MONTHS
ENDED JUNE 30, DECEMBER 31,
---------------- --------------------------
WCC SELECTED FINANCIAL 1996 1995 1995 1994 1993
INFORMATION -------- ------ -------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Servicing fees.................. $ 5,005 $5,460 $ 9,739 $ 3,339 $1,356
Income from investments......... 3,045 2,578 3,529 1,159 450
Other interest and dividend
income......................... 1,471 410 1,595 508 110
Other revenues.................. 458 423 668 657 4,509
Compensation and other general
and administrative expenses.... (6,017) (4,644) (11,030) (5,964) (4,509)
Interest expense................ (5,482) (3,448) (3,789) (894) (339)
Other........................... 19 (203) (193) 134 --
-------- ------ -------- -------- ------
Net income (loss)............... $ (1,501) $ 576 $ 519 $ (1,061) $1,577
======== ====== ======== ======== ======
BALANCE SHEET DATA:
Total assets.................... $275,872 $204,944 $288,004
Performing loan portfolio, net.. 113,245 104,688 125,942
Discounted Loan portfolio, net.. 100,408 19,352 17,188
Loans held for sale, at lower of
cost or market................. -- 33,268 108,991
Participation liabilities....... 133,422 150,298 205,331
Borrowings...................... 180,202 70,164 60,941
Stockholders' equity (deficit).. (50,501) (23,801) (11,099)
</TABLE>
24
<PAGE>
Servicing Fees and Income from Investments in Loans and Securities. WCC's
servicing fees decreased by $0.5 million, and income from investments in loans
and securities increased by $0.5 million, during the six months ended June 30,
1996 compared to the six months ended June 30, 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 Interest and Dividend Income. Other interest and dividend income
increased by approximately $1.1 million during the six months ended June 30,
1996 compared to the six months ended June 30, 1995. Such income is generated
from interest-bearing cash equivalents, U.S. Treasury securities, commercial
notes receivable and interest-earning assets other than loans and subordinate
asset-backed securities. The average balance of these instruments increased in
1996 as compared to 1995, to satisfy greater liquidity requirements and to
provide collateral for certain borrowing arrangements.
Other Revenues. Other revenues are derived from various sources including
rental income from commercial properties and gains on sales of loans. Total
other revenues remained relatively constant during the first six months of
1996 compared to the first six months of 1995. However, this category of
income can fluctuate significantly from period to period depending on whether
there are significant loan sales.
General and Administrative Expense. WCC's general and administrative expense
increased by approximately $1.4 million during the six months ended June 30,
1996 compared to the six months ended June 30, 1995 as a result of the
increased cost in acquiring a greater number of loan portfolios.
Interest Expense. WCC's interest expense increased by approximately $2.0
million during the six months ended June 30, 1996 compared to the six months
ended June 30, 1995 as a result of increased borrowings to acquire loan
portfolios.
Performing and Discounted Loans. WCC's loans increased by approximately
$89.6 million during the six months ended June 30, 1996 as a result of the
Company's business strategy of aggressively acquiring loan portfolios of
discounted loans and performing mortgage loans.
Loans Available for Sale. WCC's loans available for sale decreased by
approximately $33.2 million during the six months ended June 30, 1996 as a
result of the securitization of such loans.
Participations. Participations decreased by approximately $16.9 million or
11.2% during the six months ended June 30, 1996 primarily as a result of the
Company's strategy to fund loan portfolio acquisitions through borrowings and
as a result of securitization of portfolios or the resolution of outstanding
loans.
Borrowings. Borrowings increased by approximately $110.0 million during the
six months ended June 30, 1996 as a result of WCC entering into certain
reverse repurchase transactions primarily as a result of WCC's strategy to
acquire loan portfolios directly and not enter into participation agreements.
Stockholders' Equity. Stockholders' equity decreased by approximately $26.7
million during the six months ended June 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.
25
<PAGE>
USE OF PROCEEDS
Net proceeds to be received by the Company from the Common Stock Offering
currently are estimated to be $16.1 million after deducting the underwriting
discount and estimated offering expenses payable by the Company ($18.5, 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 $47.4 million after deducting the underwriting discount and
estimated offering expenses payable by the Company.
Approximately $1.0 million of the net proceeds from the Common Stock
Offering and the Notes Offering will be contributed by the Company to the
capital of the Savings Banks to support future growth and to cause First Bank
to become "well-capitalized" under regulatory definitions. 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 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.
26
<PAGE>
DILUTION
The net book value of the Company's Common Stock as of June 30, 1996 was
$35.1 million or approximately $5.85 per share(3). 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 6,000,000 shares
outstanding as of June 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 $50 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 June 30, 1996 would have been $57.2 million or $6.83 per share.
This represents an immediate increase in net tangible book value of $0.98 per
share to existing stockholders and an immediate dilution in net tangible book
value of $5.17 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
Net tangible book value per share as of June 30, 1996............... $35,074
Net tangible book value per share before Common Stock Offering and
Notes Offering..................................................... $ 5.85
Increase per share attributable to new investors.................... $ 0.98
Pro forma net tangible book value per share after the Common Stock Of-
fering and Notes Offering(2)......................................... $ 6.83
Dilution per share to new investors................................... $ 5.17
</TABLE>
- --------
(1) Before deducting estimated underwriting discounts and estimated expenses
of the Common Stock Offering payable by the Company.
(2) Excludes 750,000 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 31,819 shares of
Common Stock issuable upon the exercise of options. See "Management--
Incentive Stock Plan--Options to be Granted at Closing."
(3) Outstanding shares as of June 30, 1996 are based on Common Stock issued,
at the date when WPSG 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 June 30, 1996.
The following table summarizes on a pro forma as adjusted basis as of June
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....... 6,000,000 80% 35,074 70% $ 5.85
New Investors............... 1,500,000 20% 15 30% $12.00
--------- --- ----------- -------- ------
Total..................... 7,500,000 100% 50,074 100%
</TABLE>
27
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 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"; and (ii) 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>
JUNE 30, 1996
--------------------------
ACTUAL AS ADJUSTED
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Repurchase agreements............................. $ 66,771 $ 66,771
Long-term debt:
% Subordinated Notes due 2003.................... -- 50,000
----------- -----------
Total......................................... 66,771 116,771
----------- -----------
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; shares issued and
outstanding (actual); 7,500,000 shares issued and
outstanding (as adjusted) for the Common Stock
Offering(1)...................................... 35,550 53,550
Retained earnings (accumulated deficit)........... (1,374) (3,234)
Unrealized gain on available for sale securities.. 898 898
----------- -----------
Total stockholders' equity.................... 35,074 51,214
----------- -----------
Total capitalization.......................... $ 101,845 $ 167,985
=========== ===========
Savings Banks' Regulatory Capital:
Regulatory capital ratios of First Bank(2):
Tangible capital................................ 7.0% 7.6%
Core capital.................................... 7.0% 7.6%
Risk-based capital.............................. 11.2% 12.1%
Regulatory capital ratios of Girard(2):
Tangible capital................................ 7.0% 7.0%
Core capital.................................... 7.0% 7.0%
Risk-based capital.............................. 10.4% 10.4%
</TABLE>
- --------
(1) Excludes shares of Common Stock issuable upon the exercise of options. See
"Management--Incentive Stock Plan--Options to be Granted at Closing."
(2) Assumes the contribution of $1.0 million to the capital of First Bank.
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 years ended December 31, 1995 and 1994
and for the period from October 8 through December 31, 1993 have been derived
from the Audited Consolidated Financial Statements included elsewhere in this
Prospectus. For the purpose of financial statement presentation herein, First
Bank is treated as the predecessor to the Company. On October 7, 1993, WAC
acquired 94.9% of First Bank's common stock in a purchase accounting
transaction.
On November 9, 1994, Wilshire Acquisitions Corporation II ("WACII") a newly-
formed entity with ownership and management common to WAC acquired 94.9% of
the common stock of Girard in a purchase accounting transaction. Because WAC
and WACII were under common control at the time of their respective
acquisitions of First Bank and Girard, the Selected Financial Information is
presented on a combined basis as of December 31, 1994. On December 27, 1995,
WAC and WACII were merged with WAC as the surviving entity. Selected Financial
Information as of December 31, 1995 is presented on a consolidated basis and
includes the accounts of WAC, First Bank and Girard.
The historical income statement and balance sheet data presented at and for
the six months ended June 30, 1996 and 1995 have been derived from unaudited
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 six months ended June 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 Selected 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.
The historical income statement and balance sheet data of the predecessor
for any date prior to October 8, 1993 have not been included because prior to
its acquisition the predecessor was seriously under-capitalized and subject to
a cease and desist order and a prompt corrective action which severely limited
its operations, including restrictions on asset growth and new deposits.
Further, the predecessor was subject to a regulatory takeover by the OTS/RTC
if the acquisition by WAC was not completed. Prior to the acquisition of the
predecessor by WAC in October 1993, the predecessor was operated by different
management with a different strategy and business plan. Current management has
significantly changed the business plan of the predecessor and has
substantially increased the Company's assets while disposing of, and receiving
against, Inherited Loans. Accordingly, management believes that the
predecessor's results of operations do not have a significant bearing on the
Company.
29
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31, OCTOBER 8-
----------------- ------------------ DECEMBER 31,
1996 1995 1995 1994 1993
-------- ------- -------- -------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest Income:
Loans.................. $ 20,436 $ 9,589 $ 21,821 $ 7,923 $ 1,383
Mortgage-backed
securities............ 898 1,019 1,359 1,361 218
Investments and federal
funds sold............ 617 271 1,201 285 53
-------- ------- -------- -------- -------
Total interest income.. 21,951 10,879 24,381 9,569 1,654
-------- ------- -------- -------- -------
Interest expense:
Deposits............... 10,633 6,465 13,944 5,017 764
Borrowings............. 1,387 242 537 440 85
-------- ------- -------- -------- -------
Total interest
expense............... 12,020 6,707 14,481 5,457 849
-------- ------- -------- -------- -------
Net interest income..... 9,931 4,172 9,900 4,112 805
Provision for estimated
losses on loans........ 10,868 2,201 4,266 2,173 63
-------- ------- -------- -------- -------
Net interest (loss)
income after provision
for estimated losses on
loans.................. (937) 1,971 5,634 1,939 742
-------- ------- -------- -------- -------
Other Income (Loss):
Bankcard income(1)..... 3,275 1,955 4,694 635 --
Bankcard processing
expense............... (2,616) (1,391) (3,462) (274) --
Gain (loss) on sale of
loans................. 1,983 24 642 -- --
Loan fees and charges.. 648 199 610 43 --
Gain on sale of
mortgage-backed
securities available
for sale.............. -- -- 14 54 96
Amortization of
deferred credits...... 230 230 460 388 --
Other, net............. 16 33 149 381 --
-------- ------- -------- -------- -------
Total other income
(loss)................ 3,536 1,050 3,107 1,227 96
-------- ------- -------- -------- -------
Other Expenses:
Compensation and
employee benefits..... 1,479 1,075 2,516 1,922 204
FDIC insurance
premiums.............. 387 285 721 261 61
Occupancy.............. 141 145 385 319 38
Professional services.. 297 370 1,028 507 49
Data processing and
equipment rentals..... 124 98 232 162 15
Real estate owned,
net................... 104 126 170 241 269
Loan service fees and
expenses.............. 2,111 369 1,958 242 --
Other general and
administrative
expenses.............. 864 683 1,092 1,290 --
-------- ------- -------- -------- -------
Total other expenses... 5,507 3,151 8,102 4,944 636
-------- ------- -------- -------- -------
(Loss) income before
income tax (benefit)
provision.............. (2,908) (130) 639 (1,778) 202
Income tax (benefit)
provision.............. (1,279) (10) 47 (526) (713)
-------- ------- -------- -------- -------
Net (loss) income....... $ (1,629) $ (120) $ 592 $ (1,252) $ 915
======== ======= ======== ======== =======
(Loss) earnings per
share(2)............... $ (21.11) $ (5.13) $ 25.09 $(135.43) $149.07
======== ======= ======== ======== =======
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------
1996 1995 1994 1993
-------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................. $543,198 $341,454 $230,636 $99,367
Cash and due from banks.................. 8,253 3,382 4,880 174
Federal funds sold....................... 6,100 1,100 3,950 2,985
Investment securities held to maturity,
at amortized cost....................... 7,421 6,470 4,505 14,787
Mortgage-backed securities available for
sale, at fair value..................... 14,431 9,083 10,943 6,632
Mortgage-backed securities held to
maturity, at amortized cost............. 23,500 13,119 14,439 14,787
Loan portfolio, net(3)................... 446,053 259,417 179,377 68,743
Discounted loan portfolio:
Total loans............................. 21,932 53,439 2,995 --
Unaccreted discount..................... (1,761) (6,671) (470) --
Allowance for loan losses............... (6,973) (15,414) (431) --
Discounted loans, net................... 13,198 31,354 2,094 --
Loans held for sale, at lower of cost or
market(4)............................... -- 18,597 -- --
Stock in FHLB of San Francisco, at cost.. 2,868 1,421 1,612 564
Real estate owned, net................... 3,527 4,964 1,208 1,037
Leasehold improvements and equipment..... 325 275 167 31
Due from affiliate(5).................... 8,063 4,514 4,062 1,229
Accrued interest receivable.............. 4,545 3,042 1,599 650
Prepaid expenses and other assets........ 3,386 1,724 1,026 1,419
Income taxes receivable, net............. 1,528 1,589 774 1,116
Deposits................................. 433,769 304,020 196,289 84,821
Borrowings............................... 66,771 13,000 21,500 6,608
Due to affiliates(6)..................... 2,259 759 652 675
Deferred credits(7)...................... 948 1,134 1,772 1,785
Subordinated debt(8)..................... -- 11,000 -- --
Minority interest........................ 519 600 574 347
Preferred stock in subsidiary held by
others.................................. -- -- 1,000 --
Note payable to subsidiary stockholders.. -- -- -- 300
Accounts payable and other liabilities... 3,858 3,902 2,056 1,027
Stockholders' equity(8).................. 35,074 7,039 6,793 3,806
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED -------------
JUNE 30, DECEMBER 31, OCTOBER 8 -
-------------- ------------- DECEMBER 31,
1996 1995 1995 1994 1993
------ ------ ---- ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL RATIOS AND OTHER DATA:
Return on average assets.......... (.35)% (.05)% .24% (.92)% .97%
Return on average equity.......... (4.62)% (1.73)% 8.65% (31.03)% 26.69%
Average interest rate on total
loans............................ 9.64% 9.36% 9.57% 7.65% 7.62%
Average equity to average assets.. 7.68% 2.96% 2.72% 2.96% 3.62%
Net interest spread(9)............ 3.47% 2.81% 3.08% 2.85% 3.37%
Net interest margin(10)........... 4.19% 3.41% 3.72% 3.04% .87%
Ratio of earnings to fixed
charges(11)(12):
Including interest on deposits... .76 .98 1.04 .67 1.24
Excluding interest on deposits... (1.10) .46 2.19 (3.04) 3.38
Non-performing loans to loans at
end of period(3)................. 5.39% 6.50% 4.46% 5.95% 9.71%
Allowance for loan losses to total
loans at end of period........... 6.3% 15.2% 7.6% 3.9% 5.8%
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31, OCTOBER 8-
-------------------- --------------- DECEMBER 31,
1996 1995 1995 1994 1993(13)
-------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
LOAN ORIGINATIONS............ $ 1,145 $ 2,125 $ 8,748 $ 4,345 $ --
LOAN ACQUISITION DATA:
Loan Portfolio:
Single-family residential... 220,629(14) 6,812 121,883 36,462 1,618
Multi-family residential.... -- -- -- 61,247 72
Commercial and other mort-
gage loans................. -- -- 2,126 31,091 462
Consumer and other
loans(15).................. 17,324 -- 11,012 10,847 --
Discounted Loans:
Single-family residential... -- (16) 49,662 49,662 1,542 --
Multi-family residential.... -- (16) 96 96 -- --
Commercial and other mort-
gage loans................. -- 869 869 1,843 --
Consumer and other loans.... -- 5,368 5,368 239 --
LOANS SOLD................... 27,965 8,724 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 June 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) Primarily Discounted Loans included in Discounted Loans, net.
(5) 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.
(6) Due to affiliates primarily consists of amounts owed to WCC for WAC
operating expenses paid by WCC.
(7) 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.
(8) 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) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(10) Net interest margin represents net interest income divided by total
average earning assets.
(11) 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.
(12) Pro forma ratio of earnings to fixed charges for the six months ended
June 30, 1996 and the year ended December 31, 1995 were 0.0 and .64,
respectively.
(13) The predecessor was not acquiring or selling loans prior to its
acquisition in October 1993.
(14) 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."
(15) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(16) Girard committed to purchase approximately $248 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 as of June 30, 1996 and December 31, 1995
and 1994 was $459.3 million, $290.8 million and $181.5 million, respectively.
Net interest income for the six month period ended June 30, 1996 and for the
years ended December 31, 1995 and 1994 was $9.9 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 $1.6 million for the six
months ended June 30, 1996, compared to a loss in the similar prior year
period of $0.1 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 six 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 $10.9 million in the first six 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 $4.3 million of reserves
expected to be taken in the third quarter of 1996, allowances for Sub-Prime
Auto Loans as a percentage of the unpaid principal balances was 51.3% 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>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31, OCTOBER 8-
----------------- --------------- DECEMBER 31,
1996 1995 1995 1994 1993
-------- -------- ------- ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income......... $21,951 $10,879 $24,381 $ 9,569 $1,654
Gains on sale of loans.. 1,983 24 642 -- --
Bankcard processing op-
erations............... 3,275 1,955 4,694 635 --
Other, net(1)........... 894 462 1,233 866 96
-------- -------- ------- ------- ------
Total revenue......... $28,103 $13,320 $30,950 $11,070 $1,750
======== ======== ======= ======= ======
</TABLE>
- --------
(1) Other consists primarily of loan fees and charges and the amortization of
negative goodwill.
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 tables set 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>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------
1996 1995
-------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE(1) BALANCE INTEREST YIELD/RATE(1)
-------- -------- ------------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Average Assets:
Mortgage-backed
securities............. $ 28,686 $ 898 6.26% $ 24,792 $ 1,019 8.22%
Loan portfolio (2)...... 423,944 20,436 9.64 204,900 9,589 9.36
Investment securities
and other.............. 20,933 617 5.89 15,153 271 3.58
-------- ------- -------- -------
Total interest-earning
assets................ 473,563 21,951 9.27 244,845 10,879 8.89
Non-interest earning
cash................... 1,516 -- -- 1,984 -- --
Allowance for loan
losses and unaccreted
discount............... (45,873) -- -- (24,822) -- --
Other assets............ 29,990 -- -- 12,557 -- --
-------- ------- -------- -------
Total assets........... $459,196 $21,951 $234,564 $10,879
======== ======= ======== =======
Average Liabilities and
Stockholders' Equity:
Interest-bearing
deposits............... $364,559 $10,633 5.83 $210,281 $ 6,465 6.15
FHLB advances........... 2,667 86 6.45 3,447 86 4.99
Subordinated debentures
and other interest-
bearing obligations.... 47,546 1,301 5.47 6,892 156 4.53
-------- ------- -------- -------
Total interest-bearing
liabilities........... 414,772 12,020 5.80 220,620 6,707 6.08
Non-interest bearing
deposits............... 3,301 -- -- 2,489 -- --
Escrow deposits......... 338 -- -- 151 -- --
Other liabilities....... 5,533 -- -- 4,363 -- --
-------- ------- -------- -------
Total liabilities...... 423,944 12,020 227,623 6,707
Stockholders' equity.... 35,252 -- -- 6,941 -- --
-------- ------- -------- -------
Total liabilities and
stockholders' equity.. $459,196 $12,020 $234,564 $ 6,707
======== ======= ======== =======
Net interest income..... $ 9,931 $ 4,172
Net interest spread..... 3.47 2.81
Net interest margin..... 4.19 3.41
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 114.2% 111.8%
======== ========
</TABLE>
34
<PAGE>
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------- OCTOBER 8-DECEMBER 31,
1995 1994 1993
----------------------------- ----------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE(1)
-------- -------- ---------- -------- -------- ---------- ------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Assets:
Mortgage-backed
securities............. $ 24,054 $ 1,359 5.65% $ 23,515 $1,361 5.79% $16,224 $ 218 5.37%
Loan portfolio(2)....... 227,970 21,821 9.57 103,583 7,923 7.65 72,600 1,383 7.62
Investment securities
and other.............. 14,216 1,201 8.45 7,969 285 3.58 3,704 53 5.72
-------- ------- -------- ------ ------- ------
Total interest-earning
assets, interest
income................. 266,240 24,381 9.16 135,067 9,569 7.08 92,528 1,654 7.15
Non-interest earning
cash................... 1,868 -- -- 2,053 -- -- 3,168 -- --
Allowance for loan
losses and unaccreted
discount............... (31,845) -- -- (8,595) -- -- (5,302) -- --
Other assets............ 15,277 -- -- 7,646 -- -- 4,320 -- --
-------- ------- -------- ------ ------- ------
Total assets........... $251,540 $24,381 $136,171 $9,569 $94,714 $1,654
======== ======= ======== ====== ======= ======
Average Liabilities and
Stockholders' Equity:
Interest-bearing
deposits............... $231,555 $13,944 6.02 $118,277 $5,017 4.24 $85,291 $ 764 3.58
FHLB advances........... 1,381 104 7.53 5,916 228 3.85 -- -- --
Subordinated debentures
and other interest-
bearing obligations.... 5,383 433 8.04 4,757 212 4.44 4,507 85 7.54
-------- ------- -------- ------ ------- ------
Total interest-bearing
liabilities, interest
expense............... 238,319 14,481 6.08 128,950 5,457 4.23 89,798 849 3.78
Non-interest bearing
deposits............... 2,196 -- -- 1,537 -- -- -- -- --
Escrow deposits......... 106 -- -- 74 -- -- 23 -- --
Other liabilities....... 4,077 -- -- 1,582 -- -- 1,465 -- --
-------- ------- -------- ------ ------- ------
Total liabilities...... 244,698 14,481 132,143 5,457 91,286 849
Stockholders' equity.... 6,842 -- -- 4,028 -- -- 3,428 -- --
-------- ------- -------- ------ ------- ------
Total liabilities and
stockholders' equity.. $251,540 $14,481 $136,171 $5,457 $94,714 $ 849
======== ======= ======== ====== ======= ======
Net interest income..... $ 9,900 $4,112 $ 805
Net interest spread..... 3.08 2.85 3.37
Net interest margin..... 3.72 3.04 .87
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 111.7% 104.7% 104.6%
======== ======== =======
</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.
35
<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>
SIX MONTHS ENDED
JUNE 30, 1996 VS. YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED ------------------------------------------------
JUNE 30, 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............ $(355) $ 234 $ (121) $ (37) $ 35 $ (2) $ 168 $ 975 $1,143
Loan portfolio......... 297 10,550 10,847 2,405 11,493 13,898 60 6,480 6,540
Investment securities
and other............. 218 128 346 581 335 916 (112) 344 232
----- ------- ------- ------ ------- ------- ------- ------ ------
Total interest-earning
assets................ 160 10,912 11,072 2,949 11,863 14,812 116 7,799 7,915
Interest-Bearing Liabil-
ities:
Interest-bearing depos-
its................... (313) 4,481 4,168 2,723 6,204 8,927 1,368 2,885 4,253
FHLB advances.......... -- -- -- (626) 502 (124) -- 228 228
Other interest-bearing
obligations........... 39 1,106 1,145 191 30 221 146 (19) 127
----- ------- ------- ------ ------- ------- ------- ------ ------
Total interest-bearing
liabilities........... (274) 5,587 5,313 2,288 6,736 9,024 1,514 3,094 4,608
----- ------- ------- ------ ------- ------- ------- ------ ------
Increase (decrease) in
net interest income.... $ 434 $ 5,325 $ 5,759 $ 661 $ 5,127 $ 5,788 $(1,398) $4,705 $3,307
===== ======= ======= ====== ======= ======= ======= ====== ======
</TABLE>
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 1996
VERSUS SIX MONTHS ENDED JUNE 30, 1995
NET INTEREST INCOME
The Company's net interest income increased by approximately $5.8 million or
138.0% during the six months ended June 30, 1996, as compared to the same
period in the prior year. This increase resulted from an approximately $11.1
million or 101.8% increase to interest income due to an approximately $228.7
million or 93.4% increase in average interest-earning assets from period to
period and, to a lesser extent, a 38 basis point increase in the weighted
average yield on such assets. The increase in interest income was offset in
part by an approximately $5.3 million or 79.2% increase in interest expense
due to an approximately $194.2 million or 88.0% increase in average interest-
bearing liabilities, primarily certificates of deposit, and, to a lesser
extent, a 14 basis point increase in the weighted average rate paid on
interest-bearing liabilities.
The increase in interest income during the six months ended June 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
$194.2 million or 88.0% during the six months ended June 30, 1996, as compared
to the same period in the prior year, as a result of the Savings Banks'
continued reliance on brokered and other wholesale certificates of deposit and
repurchase agreements as its principal source of funds. 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."
36
<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 $10.9 million for the six months ended June 30, 1996, as
compared to approximately $2.2 million for the comparable period in the prior
year, an increase of 395.5%. The following table sets forth the Company's
provision for estimated losses on loans for the six months ended June 30,
1996:
<TABLE>
<CAPTION>
% OF
PROVISIONS TOTAL
---------- ------
(IN THOUSANDS)
<S> <C> <C>
Inherited Loans.......................................... $ 4,702 43.3%
Sub-Prime Auto Loans..................................... 4,084 37.6%
Other Purchased Loans.................................... 2,072 19.1%
------- ------
Total provision for estimated losses on loans............ $10,858 100.0%
======= ======
</TABLE>
Approximately $4.1 million of the increase in the provisions from 1994 to
1995 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.
Following these provisions and a $4.3 million provision expected to be made by
the Savings Banks in the third quarter (See "Recent Developments"), the
Company will have an allowance of approximately $10.1 million or 51.3% of the
unpaid principal balances of the Sub-Prime Auto Loans at September 30, 1996.
The Company also made a provision of approximately $4.7 million in the six
months ended June 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 147.5% to a loss of approximately $(0.9) million for
the six months ended June 30, 1996 from income of approximately $2.0 million
for the same period in 1995. This decrease was due to the substantial increase
in provisions for estimated losses on loans.
37
<PAGE>
OTHER INCOME
The Company's other income was approximately $3.5 million for the six months
ended June 30, 1996 compared to approximately $1.1 million for the same period
in the prior year, an increase of 236.8%. 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>
SIX MONTHS ENDED
JUNE 30,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other income:
Bankcard income................................ $ 3,275 $ 1,955
Bankcard processing expense.................... (2,616) (1,391)
Gain on sale of loans.......................... 1,983 24
Loan fees and charges.......................... 648 199
Amortization of deferred credits............... 230 230
Other, net..................................... 16 33
----------- -----------
Total other income........................... $ 3,536 $ 1,050
=========== ===========
</TABLE>
Bankcard Income and Processing Expense. The increase in other income for the
six months ended June 30, 1996 was due in part to an increase of approximately
$1.3 million in bankcard income, from approximately $2.0 million for the six
months ended June 30, 1995 to approximately $3.3 million for the six months
ended June 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 $1.2 million from
approximately $1.4 million for the six months ended June 30, 1995 to
approximately $2.6 million for the six months ended June 30, 1996. This
increase resulted primarily from an increase in bankcard operations due to the
addition of several new customers.
Gains on Sale of Loans. The increase in other income in 1996 was also due in
part to an increase of approximately $2.0 million in gains on sales of loans,
from less than $0.1 million for the six months ended June 30, 1995 to
approximately $2.0 million for the six months ended June 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 $0.4 million, from
approximately $0.2 million for the six months ended June 30, 1995 to
approximately $0.6 million for the six months ended June 30, 1996. The
increase was primarily due to an increase in loan volume.
38
<PAGE>
OTHER EXPENSE
The Company's other expenses totalled approximately $5.5 million for the six
months ended June 30, 1996 compared to approximately $3.2 million for the six
months ended June 30, 1995, an increase of 74.8%.
Loan Service Fees and Expenses. The largest component of other expenses in
1996 was loan service fees and expense which increased by approximately $1.7
million from approximately $0.4 million for the six months ended June 30, 1995
to approximately $2.1 million for the six months ended June 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 in the first half of 1996 compared to the first half
of 1995. 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 six
months ended June 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 $1.1 million for the
six months ended June 30, 1995 to approximately $1.5 million for the six
months ended June 30, 1996, an increase of approximately $0.4 million (or
37.6%). 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 35 for the six months ended June 30, 1995
to 50 for the six months ended June 30, 1996, reflecting the expansion of
business activities, particularly loan acquisition activities and the growth
of non-traditional bankcard activities.
FDIC Insurance Premiums. FDIC insurance premiums increased from
approximately $0.3 million for the six months ended June 30, 1995 to
approximately $0.4 million for the six months ended June 30, 1996, an increase
of approximately $0.1 million (or 35.8%), as a result of growth in deposits
outstanding.
Professional Services. Other expense relating to professional services
decreased from approximately $0.4 million for the six months ended June 30,
1995 to approximately $0.3 million for the six months ended June 30, 1996, a
decrease of approximately $0.1 million (or 19.7%), reflecting the higher legal
and accounting expenses incurred in 1995 in connection with certain
acquisition and consulting activities.
INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit) amounted to a benefit of approximately $1.3
million during the six months ended June 30, 1996 compared to a benefit of
less than $0.1 million during the six months ended June 30, 1995. The
Company's effective tax rate amounted to (44.0%) and (7.7%) during the six
months ended June 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 six months ended June 30, 1996 and 1995, respectively.
39
<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 165.6%. 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.
40
<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 $110.2 million in 1994 to $239.2 million in 1995,
an increase of 117.1%.
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
41
<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.
RESULTS OF OPERATIONS--1994 COMPARED TO 1993
The following discussion compares the audited results of operations of the
Company for fiscal year 1994 to the unaudited results of operations of the
Company and its predecessor (the "Predecessor") for the twelve-month period
ended December 31, 1993. As described above under "Selected Financial
Information," since the Predecessor operated with a fiscal year ended June 30
and the Company converted to a fiscal year ended December 31 following the
acquisition, the audited historical financial statements included elsewhere in
this Prospectus provide audited information with respect to the six-month
period ended December 31, 1993 and the twelve-month period ended June 30, 1993
and do not provide audited information for the twelve-month period ended
December 31, 1993. Accordingly, to provide investors with financial
information for 1993 which is readily comparable to the results of operations
for the twelve-month period ended December 31, 1994, the following discussion
is based on unaudited financial information for the twelve months ended
December 31, 1993 ("fiscal year (unaudited) 1993") prepared by management
using the audited financial information for the six-month period ended
December 31, 1993 and the unaudited financial information for the first two
quarters of calendar year 1993. Certain purchase accounting adjustments
affecting operating results in the post-acquisition period of 1993 and in all
of 1994 are not reflected in the pre-acquisition period of 1993.
Management believes that the Predecessor's results of operations in 1993 are
not helpful or meaningful in evaluating the Company's current business or
results of operations. The Predecessor was acquired in October 1993 at a
substantial discount to its book value, reflecting the poor quality of its
assets. Prior to the acquisition, the Predecessor was seriously under-
capitalized and subject to a cease and desist order and a prompt corrective
action which severely limited its operations, including restrictions on asset
growth and new deposits. Further, the Predecessor was subject to a regulatory
takeover by the OTS/RTC if the acquisition by WAC had not occurred. Prior to
the acquisition of the Predecessor by WAC in October 1993, the Predecessor was
operated by different management with a different strategy and business plan.
Current management has significantly changed the business plan of the
Predecessor and has substantially increased the Company's assets while
disposing of, and reserving against, Inherited Loans. Accordingly, management
believes that the Predecessor's results of operations do not have a
significant bearing on the Company.
42
<PAGE>
NET INTEREST INCOME
The Company's net interest income was approximately $4.1 million for fiscal
year 1994 compared to approximately $3.6 million for the fiscal year
(unaudited) 1993, an increase of 13.9%. 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 $9.6
million for fiscal year 1994 compared to approximately $7.2 million for fiscal
year (unaudited) 1993, an increase of 33.3%. The increase in the Company's
interest income from 1993 to 1994 was due primarily to an increase in interest
received on loans from approximately $6.6 million in fiscal year (unaudited)
1993 to approximately $7.9 million in fiscal year 1994 and an increase in
interest received on investments from approximately $0.7 million in fiscal
year (unaudited) 1993 to approximately $1.6 million in fiscal year 1994. The
increase in interest received on loans was primarily the result of the
Company's strategy to pursue acquisitions of Loan Portfolios, which the
Company began implementing with the acquisition of the Predecessor and Girard
in 1993 and 1994, respectively, and resulted in an increase in the Company's
total loan portfolio from approximately $74.0 million at year end 1993 to
approximately $198.6 million at year end 1994. In addition, the Company
acquired Girard in November 1994 and, as a result, the Company's 1994 results
of operations reflect two months of Girard's operations while 1993 results do
not reflect any operations by Girard. In addition, the average rate earned by
the Company on its average interest-bearing assets decreased from 7.04% in
fiscal year (unaudited) 1993 to 6.75% in 1994. The increase in the average
rate was primarily due to a higher interest rate environment.
Interest Expense. The Company's interest expense was approximately $5.5
million for fiscal year 1994 compared to approximately $3.6 million in fiscal
year (unaudited) 1993, an increase of 52.8%. The increase in interest expense
from 1993 to 1994 was due primarily to an increase in average certificates of
deposit outstanding from approximately $85.3 million in 1993 to approximately
$118.3 million in 1994 (an increase of 38.7%), which occurred in order to fund
the growth of the loan portfolio noted above. In addition, interest expense
increased in 1994 due to the inclusion of Girard's results of operations for
two months of 1994. In addition, the average interest rate on all of the
Company's interest-bearing liabilities increased from 3.78% during 1993 to
4.23% during 1994. The increase in the average interest rate payable by the
Company was primarily due to an overall increase in interest rates.
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
The Company recorded a provision for estimated losses on loans totalling
approximately $2.2 million for fiscal year 1994 compared to approximately $3.3
million for fiscal year (unaudited) 1993, a decrease of 33.3%.
The decrease in the provisions from 1993 to 1994 was attributable to the
high reserves required on the Inherited Loans of the predecessor in 1993 due
to the poor quality of those loans, prolonged slump in the Southern California
economy and real estate values in that region and the increased level of
regulatory scrutiny of the Predecessor prior to its acquisition by WAC.
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOSSES ON LOANS
The Company's net interest income after provision for estimated losses on
loans increased approximately $1.5 million (or 375.0%) to approximately $1.9
million for fiscal year 1994 from approximately $0.4 million for fiscal year
(unaudited) 1993.
43
<PAGE>
OTHER INCOME
The Company's other income was approximately $1.2 million for fiscal year
1994 compared to approximately $0.1 million for fiscal year (unaudited) 1993.
This increase was primarily attributable to growth in the Company's bankcard
processing operation, amortization of deferred credits and other (net) and to
a lesser degree to loan fees and charges and gain on the sale of mortgage-
backed securities available for sale. The components of the Company's non-
interest income are reflected in the following table:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1994 1993
------- ------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Bankcard income................................................. $ 635 $ --
Bankcard processing expense..................................... (274) --
Loan fees and charges........................................... 43 --
Gain on sale of mortgage-backed securities available for sale... 54 96
Amortization of deferred credits................................ 388 --
Other, net...................................................... 381 --
------- -----
Total......................................................... $ 1,227 $ 96
======= =====
</TABLE>
The increase in other income in 1994 was due primarily to an increase of
approximately $0.6 million in bankcard income, from no bankcard income in
fiscal year (unaudited) 1993 as a result of the commencement of bankcard
operations in mid-1994. As a result of the launch of the Company's bankcard
processing operation following the acquisition of First Bank in late 1993,
bankcard processing expense increased by approximately $0.3 million from no
bankcard expenses in fiscal year (unaudited) 1993. The increase in other
income in 1994 was also due in part to an increase of approximately $0.4
million in amortization of deferred credits, from no such amortization of
deferred credits in fiscal year (unaudited) 1993. Since the purchase prices of
the Savings Banks were less than the fair values of the net assets acquired,
the Company recorded deferred credits (negative goodwill) of approximately
$2.2 million. These credits are being amortized over five years on a straight-
line method. The increase in other income in 1994 was also due in part to an
increase of approximately $0.4 million in other (net). To a lesser degree, the
increase in other income in 1994 was due to the Company beginning to receive
loan fees and charges in fiscal year 1994 due to changes in loan fee practices
under new management, which was partially offset by a decrease of less than
$0.1 million in gains from sales of securities.
OTHER EXPENSE
The Company's other expense totalled approximately $4.9 million for fiscal
year 1994 compared to approximately $2.0 million for fiscal year (unaudited)
1993, an increase of 145.0%. Substantially all of the key items of other
expense (including compensation and employee benefits, and professional
services) showed an increase from 1993 to 1994 except for a minor decrease in
real estate owned (net). This increase was primarily attributable to growth in
First Bank and the acquisition of Girard in late 1994.
Compensation. The largest component of other expense in 1994 was
compensation and employee benefits which increased from approximately $0.7
million in fiscal year (unaudited) 1993 to approximately $1.9 million in
fiscal year 1994, an increase of approximately $1.2 million (or 171.4%),
primarily as a result of an increase in the average number of full-time
equivalent employees and the inclusion of compensation expenses for Girard in
late 1994.
Other General and Administrative. Other general and administrative expenses
increased from approximately $0.4 million in fiscal year (unaudited) 1993 to
approximately $1.3 million in fiscal year 1994, an increase of 225%.
Loan Service Fees and Expenses. Loan service fees and expenses increased
from no such fees and expenses in fiscal year (unaudited) 1993 to
approximately $0.2 million in fiscal year 1994. Loan service fees and
44
<PAGE>
expenses relate to fees and reimbursable expenses to WCC to service the
Company's total loan portfolio. Prior to the acquisition of First Bank in
November 1993, WCC did not service the Company's total loan portfolio.
Professional Services. Other expense relating to professional services also
increased approximately $0.2 million from approximately $0.3 million in fiscal
year (unaudited) 1993 to approximately $0.5 million in fiscal year 1994
primarily as a result of legal and accounting expenses incurred in connection
with acquisitions of the Savings Banks.
Real Estate Owned (Net). Other expense relating to Real Estate owned (net)
decreased approximately $0.2 million from approximately $0.4 million in fiscal
year (unaudited) 1993 to approximately $0.2 million in fiscal year 1994.
INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit) amounted to a benefit of approximately $0.5
million in fiscal year 1994 compared to a benefit of approximately $0.9
million for fiscal year (unaudited) 1993. The Company's effective tax rate
(benefit) amounted to (29.6)% and (353.0)% during 1994 and 1993, respectively.
Differences in the Company's effective tax rates compared to combined Federal
and State statutory rates during such periods were primarily attributable to
changes in assessments of the realization of deferred tax assets. For
additional information regarding the Company's effective tax rates and
information regarding net operating loss carryforwards of the Company, see
Note 8 to the Consolidated Financial Statements.
45
<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,
JUNE 30, -----------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents.......................... $ 14,353 $ 4,482 $ 8,830
Investment securities held to maturity, at amor-
tized cost........................................ 7,421 6,470 4,505
Mortgage-backed securities available for sale, at
fair value........................................ 14,431 9,083 10,943
Mortgage-backed securities held to maturity, at am-
ortized cost...................................... 23,500 13,119 14,439
Loans receivable, net.............................. 459,251 272,174 181,471
Loans held for sale, at lower of cost or market.... -- 18,597 --
Stock in Federal Home Loan Bank of San Francisco,
at cost........................................... 2,868 1,421 1,612
Real estate owned, net............................. 3,527 4,964 1,208
Leasehold improvements and equipment, net.......... 325 275 167
Due from affiliate................................. 8,063 4,514 4,062
Accrued interest receivable........................ 4,545 3,042 1,599
Prepaid expenses and other assets.................. 3,386 1,724 1,026
Income taxes receivable, net....................... 1,528 1,589 774
-------- -------- --------
Total Assets..................................... $543,198 $341,454 $230,636
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits........................................... $433,769 $304,020 $196,289
Borrowings......................................... 66,771 13,000 21,500
Accounts payable and other liabilities............. 3,858 3,902 2,056
Subordinated debt.................................. -- 11,000 --
Preferred stock in subsidiary held by others....... -- -- 1,000
Deferred credits................................... 948 1,134 1,772
Minority interest in subsidiaries.................. 519 600 574
Due from affiliates................................ 2,259 759 652
-------- -------- --------
Total liabilities................................ 508,124 334,415 223,833
Stockholders' Equity............................... 35,074 7,039 6,793
-------- -------- --------
Total Liabilities and Stockholders' Equity....... $543,198 $341,454 $230,636
======== ======== ========
</TABLE>
Mortgage-Backed and Investment Securities. The Company's mortgage-backed
securities available for sale increased $5.3 million during the six months
ended June 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 $10.4 million, respectively, during the six months ended June 30,
1996. Investment 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 to secure certain representations and warranties under a
mortgage loan securitization and for collateral securing an interest rate swap
contract.
46
<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>
SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
------------------ ---------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loan Portfolio:
Single-family residential... $264,315 $ 68,407 $ 93,350 $ 31,414 $20,254
Multi-family residential.... 74,838 74,413 70,631 36,089 25,567
Commercial and other mort-
gage loans................. 55,990 54,816 53,852 33,163 26,396
Consumer and other.......... 28,801 7,264 10,137 2,917 383
-------- -------- -------- -------- -------
Total loans............... 423,944 204,900 227,970 103,583 72,600
Unaccreted Discount......... (18,848) (6,550) (10,254) (4,086) (988)
Allowance for loan losses... (27,025) (18,272) (21,591) (4,509) (4,314)
-------- -------- -------- -------- -------
$378,071 $180,078 $196,125 $ 94,988 $67,298
======== ======== ======== ======== =======
</TABLE>
The Company's total loan portfolio, net of discounts and allowances,
increased by approximately $168.5 million during the six months ended June 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 six months ended June 30, 1996 and the
year ended December 31, 1995 are a decrease of $27.8 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 decreased by
approximately $18.6 million during the six months ended June 30, 1996 as a
result of the securitization of such loans. Loans held for sale are included
in the averages in the total loan portfolio table above.
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
$1.4 million or 28.9% during the six months ended June 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 six months
ended June 30, 1996, the Company sold 49 properties of real estate owned
related to its total loan portfolio with a carrying value of approximately
$5.8 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.
47
<PAGE>
Due from Affiliate. Due from affiliate increased by approximately $3.5
million or 78.6% during the six months ended June 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 $129.7 million or 42.7% during
the six months ended June 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 $107.7 million during 1995
primarily for the same reason.
Borrowings. Borrowings increased by approximately $53.8 million during 1996
as a result of the Bank's entering into certain reverse repurchase
transactions, primarily as a result of the Company's strategy to acquire Loan
portfolios.
Subordinated Debt. Subordinated debt decreased by approximately $11.0
million during the six months ended June 30, 1996 because on January 1, 1996,
the subordinated debt was exchanged for common stock.
Stockholders' Equity. Stockholders' equity increased by $28.0 million during
the six months ended June 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' board 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
48
<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
$63.2 million notional principal amount of interest rate swap agreements
outstanding at June 30, 1996, which had the effect of increasing the Company's
net interest income by approximately $0.1 million during the six months ended
June 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
<TABLE>
<CAPTION>
AT JUNE 30, 1996
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.
49
<PAGE>
Sources of liquidity include wholesale and brokered certificates of deposit.
As of June 30, 1996, the Company had approximately $427 million of
certificates of deposit. As of June 30, 1996, scheduled maturities of
certificates of deposit during the 12 months ending June 30, 1997 and
thereafter amounted to approximately $377.6 million and approximately $49.3
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 June 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.
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 June 30, 1996,
the Company had $0.5 million of FHLB advances outstanding, and was eligible to
borrow up to an aggregate of $11.8 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
$12.3 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 six months ended June 30, 1996 and the
years ended December 31, 1995, 1994 and 1993. 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 six months of 1996, and fiscal years
1995 and 1994, the Company used cash in the approximate amounts of $222.8
million, $186.9 million, and $41.6 million, respectively, for new loan
purchases. During the first six months of 1996 and 1995, the Company received
cash from the securitization of loans of approximately, $18.7 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 six months of 1996, and fiscal years 1995 and
1994, the Company used borrowings under various repurchase arrangements and
FHLB advances in the
50
<PAGE>
approximate amounts of $224.6 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 12.1% as of June 30, 1996 and averaged 12.7%, 9.1%, 8.0% and 9.2%
during the six months ended June 30, 1996 and the years ended December 31,
1995 and 1994 and the quarter ended December 31, 1993, respectively. Girard's
liquidity, as measured for regulatory purposes, amounted to 5.4% as of June
30, 1996 and averaged 6.5%, 11.2%, and 8.5% during the six months ended June
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 Bank 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."
51
<PAGE>
The following table sets forth the regulatory capital ratios of the Savings
Banks at June 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............. $ 9,950 7.0% 1.5% $ 7,808 5.5% N.A. N.A. N.A.
Girard................. 27,822 7.0% 1.5% 21,826 5.5% N.A. N.A. N.A.
Tier 1 Capital to Aver-
age Assets:
First Bank............. 9,950 6.9% 4.0% 4,222 2.9% 5.0% $2,790 1.9%
Girard................. 27,822 7.3% 4.0% 12,621 3.3% 5.0% 8,821 2.3%
Tier 1 Capital to Risk-
Weighted Assets:
First Bank............. 9,950 9.9% N.A. N.A. N.A. 6.0% 3,895 3.9%
Girard................. 27,822 9.1% N.A. N.A. N.A. 6.0% 9,561 3.1%
Total Risk-Based Capital
to Risk-Weighted As-
sets:
First Bank............. 11,271 11.2% 8.0% 3,198 3.2% 10% 1,180 1.2%
Girard................. 31,695 10.4% 8.0% 7,347 2.4% 10% 1,259 0.4%
</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.
52
<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 six
months ended June 30, 1996 and the years ended December 31, 1995, 1994 and
1993 was $276.4 million, $337.4 million, $388.5 million and $333.8 million,
respectively, including $238.0 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
53
<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 six 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
54
<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. A unanimous decision of the Investment Committee is
necessary to increase the amount of the offer above the amount determined by
the senior acquisition personnel. 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 June 30, 1996, the Company's total loan
portfolio, net of unaccreted discount and allowance for loan losses amounted
to $459.3 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.
55
<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>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31, OCTOBER 8-
------------------ ------------------ DECEMBER 31,
1996 1995 1995 1994(1) 1993(2)
-------- -------- -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period.................. $337,455 $198,588 $198,588 $ 74,045 $75,082
Originations:
Single-family residen-
tial.................. 771 1,357 3,508 1,478 --
Multi-family residen-
tial.................. 374 280 1,180 252 --
Commercial and other
mortgage loans........ -- 488 4,060 2,615 --
Consumer and other
loans................. -- -- -- -- --
-------- -------- -------- -------- -------
Total loans originat-
ed.................. 1,145 2,125 8,748 4,345 --
Loan Purchases(4):
Single-family residen-
tial.................. 220,629 6,812 121,883 36,462 1,618
Multi-family residen-
tial.................. -- -- -- 61,247 72
Commercial and other
mortgage loans........ -- -- 2,126 31,091 462
Consumer and other
loans(3).............. 17,324 -- 11,012 10,847 --
-------- -------- -------- -------- -------
Total loans pur-
chased.............. 237,953 6,812 135,021 139,647 2,152
Discounted Loan Pur-
chases:
Single-family residen-
tial.................. -- 49,662 49,662 1,542 --
Multi-family residen-
tial.................. -- 96 96 -- --
Commercial and other
mortgage loans........ -- 869 869 1,843 --
Consumer and other
loans................. -- 5,368 5,368 239 --
-------- -------- -------- -------- -------
Total Discounted
Loans purchased..... -- 55,995 55,995 3,624 --
Sales.................... (27,965) (8,724) (16,673) -- --
Principal repayments, net
of capitalized inter-
est..................... (23,091) (10,029) (27,452) (14,813) (2,457)
Transfer to real estate
owned and other......... (16,092) (6,626) (16,772) (8,260) (732)
-------- -------- -------- -------- -------
Net increase (decrease)
in loans................ 171,950 39,553 138,867 124,543 (1,037)
-------- -------- -------- -------- -------
Balance at end of peri-
od...................... $509,405 $238,141 $337,455 $198,588 $74,045
======== ======== ======== ======== =======
</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 as balance at beginning of period $75.1 million aggregate
principal amount of loans held by First Bank on the date that it was
acquired by WAC.
(3) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(4) Excludes Discounted Loans.
56
<PAGE>
Composition of Total Loan Portfolio. As of June 30, 1996, the Company's
total loan portfolio, net of unaccreted discount, deferred fees and allowance
for loan losses, amounted to $459.3 million or 84.5% 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>
JUNE 30, DECEMBER 31,
-------------------- ---------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
LOAN PORTFOLIO:
Single-family residen-
tial.................... $318,098(2) $ 45,829 $139,566 $ 53,095 $20,657
Multi-family residen-
tial.................... 78,616 75,476 71,239 77,884 26,076
Commercial real estate... 59,078 53,919 53,458 57,881 26,921
Consumer and other....... 31,681 5,672 19,753 6,733 391
-------- -------- -------- -------- -------
Loan portfolio............. 487,473 180,896 284,016 195,593 74,045
Unaccreted discount and de-
ferred fees............... (16,405) (4,759) (14,362) (8,946) (988)
Valuation allowance........ (25,015) (9,106) (10,237) (7,270) (4,314)
-------- -------- -------- -------- -------
Loan portfolio, net........ $446,053 $167,031 $259,417 $179,377 $68,743
======== ======== ======== ======== =======
DISCOUNTED LOAN PORTFOLIO:
Single-family residen-
tial.................... $ 18,051(3) $ 55,454 $ 50,937 $ 348 $ --
Multi-family residen-
tial.................... -- (3) -- -- -- --
Commercial real estate... 1,246 938 1,523 432 --
Consumer and other....... 2,635 853 979 2,215 --
-------- -------- -------- -------- -------
Discounted Loan portfolio.. 21,932 57,245 53,439 2,995 --
Unaccreted discount and de-
ferred fees............... (1,761) (383) (6,671) (470) --
Valuation allowance(1)..... (6,973) (27,209) (15,414) (431) --
-------- -------- -------- -------- -------
Discounted Loan portfolio,
net....................... $ 13,198 $ 29,653 $ 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 committed to purchase approximately $248 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 June 30, 1996, the five states with the
greatest concentration of properties securing the Company's loans were
California, New York, New Jersey, Florida and Rhode Island, which had $262.2
million, $30.7 million, $17.0 million, $13.0 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
June 30, 1996, the five states with the greatest concentration of properties
securing the Company's Discounted Loans were Massachusetts, Connecticut,
Texas, California and New Jersey, which had $16.7 million, $11.8 million, $3.3
million, $1.9 million and $1.7 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."
57
<PAGE>
Contractual Principal Repayments. The following table sets forth certain
information as of December 31, 1995 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................... $ 3,674 $14,920 $ 7,272 $113,700
Multi-family residen-
tial................... 8,284 35,339 14,902 12,714
Commercial and other
mortgage loans......... 17,394 25,034 9,231 1,799
Consumer and other
loans.................. 2,771 16,566 256 160
Interest rate terms on
amounts due after one
year:
Fixed................. -- 54,706 25,880 79,219
Adjustable............ -- 37,153 5,781 49,154
</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 June 30, 1996, the Private Companies purchased
or committed to purchase under its mortgage conduit program approximately $3.1
million principal amount of manufactured housing loans and $8.1 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.
58
<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.
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.
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,
59
<PAGE>
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 June 30, 1996, $125.7 million or
29% of the Savings Banks' total deposits were brokered and $301.3 million or
70% 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." In
addition, there are various limitations on the ability of all but well-
capitalized insured financial institutions to obtain brokered deposits. See
"Regulation--The Savings Banks--Brokered Deposits." These limitations became
applicable to First Bank at the end of the third quarter as a result of the
recapitalization of the SAIF and the provisions for loan losses relating to
the Sub-Prime Auto Loans which caused First Bank's capital levels to fall
below the "well-capitalized" institution standard to "adequately capitalized."
Accordingly, until First Bank returns to a "well-capitalized" level at the end
of a quarterly reporting period, First Bank may not solicit new brokered
deposits. Management believes that First Bank's inability to obtain brokered
deposits for a limited period of time will not have a material adverse effect
on the Company. See "Regulation--The Savings Banks--Regulatory Capital
Requirements." Since the failure to comply with required capital levels could
have significant adverse consequences to the Savings Banks and the Company,
the Company will utilize approximately $1.0 million of proceeds of the Common
Stock Offering and the Notes Offering to cause First Bank to become "well-
capitalized" as required by the Orders.
60
<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,
JUNE 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...... $ 3,978 0.00% $ 3,532 0.00% $ 3,045 0.00% $ -- -- %
NOW and money market
checking accounts...... 2,458 3.28 2,846 2.99 3,170 3.28 3,633 2.96
Saving accounts......... 382 2.10 304 2.38 215 2.25 194 2.50
Certificates of depos-
it..................... 426,951 5.82 297,338 6.15 189,859 5.48 80,994 3.86
-------- ---- -------- ---- -------- ---- ------- ----
Total deposits......... $433,769 5.76% $304,020 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 June 30, 1996.
INTEREST RATE CATEGORIES FOR THE COMPANY'S CERTIFICATES OF DEPOSIT
<TABLE>
<CAPTION>
JUNE 30,
1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
3.50% or less...................................... $ 847
3.51-4.50.......................................... 99
4.51-5.50.......................................... 94,564
5.51-6.50.......................................... 309,367
6.51-7.50.......................................... 18,515
7.51-8.50.......................................... 3,559
--------
Total............................................ $426,951
========
</TABLE>
The following table sets forth the amount and maturities of the certificates
of deposit in the Company as of June 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.......... $ 94,109 $ 5,906 $ 199
Weighted Avg............ 5.60% 6.35% 5.77%
Balances Maturing in 4 to
12 Months............... $243,690 $33,307 $ 347
Weighted Avg............ 5.78% 6.52% 7.00%
Balances Maturing in 13
to 36 Months............ -- $48,750 $ 596
Weighted Avg............ 5.96% 6.73%
Balances Maturing in 37
or More Months.......... -- -- $ 47
Weighted Avg............ 2.76%
</TABLE>
As of June 30, 1996, the Company had $7.5 million of certificates of deposit
in amounts greater than $100,000 or more maturing as follows: $1.2 million
within three months; $1.5 million over three months through six months; $4.4
million over six months through 12 months; and $298,000 thereafter.
61
<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,
JUNE 30, ----------------------
1996 1995 1994 1993
-------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB Advances.................................. $ 481 $ -- $13,000 $ --
Reverse Repurchase Agreements.................. 66,290 13,000 8,500 6,608
------- ------- ------- ------
Total........................................ $66,771 $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,
SIX MONTHS ENDED ------------------------
JUNE 30, 1996 1995 1994 1993
---------------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB advances:......................
Average amount outstanding during
the period....................... $ 2,667 $ 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............... 6.45% 7.53% 3.85% --
At end of period................ -- -- 4.33% --
Repurchase agreements:
Average amount outstanding during
the period....................... $47,546 $ 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............... 5.47% 5.62% 4.44% 7.54%
At end of period................ 6.81% 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 lending arrangements as of September
30, 1996.
<TABLE>
<CAPTION>
CURRENT BORROWER AFTER
LENDER BORROWER REORGANIZATION COMMITMENT UTILIZED(2)
------ -------------------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
REPURCHASE FACILITIES:
Bear Stearns Mortgage
Capital Corporation... First Bank First Bank $ 10 million(3) --
Bear Stearns Mortgage
Capital
Corporation........... Girard Girard $200 million(3) --
CS First Boston
Mortgage Capital
Corporation........... Private Companies(1) WFC $150 million $67,012
Bear, Stearns Interna- Private Companies(1) WFC $100 million(3) $ 1,673
tional (U.K.).........
CS First Boston Corpo-
ration
(Hong Kong) Limited... Private Companies(1) WFC $ 50 million(3) $ 2,912
WAREHOUSE FACILITY:
Prudential Securities
Realty Funding
Corp. ................ Private Companies(1) WFC $100 million $12,374
TERM LOAN:
Bear, Stearns Affili- Private Companies(1) WFC $100 million $ 2,772
ate...................
------------
TOTAL COMMITMENTS....... $710 million
============
</TABLE>
62
<PAGE>
- --------
(1) On the closing of the Common Stock Offering and the Notes Offering,
existing lines of credit will be transferred to 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.
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.
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.
Term Loans. In 1995, the Private Companies entered into a three year secured
term loan agreement with an affiliate of Bear Stearns & Co., Inc. for the
purchase of discounted residential mortgage loans. In September 1996, the
lender submitted a revised proposal to the Private Companies for a revised
$100 million three year term loan with more favorable terms for the borrower.
The Private Companies are currently discussing such proposal with the lenders.
The Company anticipates that undrawn balances on this term facility would also
be made available to the Company.
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
63
<PAGE>
Banks for investment and lending activities and other general business
purposes. FHLB advances are made 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 June 30, 1996, WCC was servicing approximately
$1.0 billion principal amount of loans, including approximately $509.4 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
64
<PAGE>
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 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.
65
<PAGE>
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.
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 $3.3
million during the six months ended June 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,
JUNE 30, ------------------------
1996 1995 1994 1993
-------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-performing loans:
Single-family residential............... $20,919 $10,996 $ 5,554 $1,285
Multi-family residential................ 1,080 270 1,471 379
Commercial real estate and land......... 1,920 910 4,207 5,354
Consumer and other loans................ 2,349 503 400 175
------- ------- ------- ------
Total................................. $26,268 $12,679 $11,632 $7,193
======= ======= ======= ======
Non-performing loans as a percentage of:
Total loans(2).......................... 5.39% 4.46% 5.95% 9.71%
Total assets............................ 4.84% 3.71% 5.04% 7.27%
Allowance for loan losses as a percentage
of:
Total loans(2).......................... 5.13% 3.60% 3.72% 5.83%
Non-performing loans.................... 95.23% 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
66
<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. Accumulated specific valuation allowances amounted to
$0.4 million as of June 30, 1996. In addition, at the same date the Company
also had a $0.1 million general valuation allowance related to its real estate
owned.
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,
JUNE 30, -----------------------
1996 1995 1994 1993
-------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Discounted loan portfolio:
Single-family residential................. $1,234(1) $ 3,226 $ -- $ --
Multi-family residential.................. -- -- -- --
Commercial and other mortgage loans....... 315 66 -- --
------ ------- ------ ------
Total................................... 1,549 3,292 -- --
Loan portfolio:
Singe-family residential.................. 1,338 1,676 613 764
Multi-family residential.................. 650 611 254 --
Commercial and other mortgage loans....... 447 578 464 328
------ ------- ------ ------
Total................................... 3,984 6,157 1,331 1,092
Allowance for total losses.................. (457) (1,193) (123) (55)
------ ------- ------ ------
Real estate owned, net...................... $3,527 $ 4,964 $1,208 $1,037
====== ======= ====== ======
</TABLE>
- --------
(1) The differences between the balance at December 31, 1995 and June 30, 1996
reflects the securitization of certain single-family residential loans.
The following table sets forth certain geographical information as of June
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............. $1,018 10 $1,151 6
Texas.................. 463 18 -- --
Connecticut............ 371 6 91 1
Massachusetts.......... 263 10 -- --
New Jersey............. 3 1 170 1
Other.................. 454 17 -- --
-------------- ----------- ------------ ---------
Total................ $2,572 62 $1,412 8
============== =========== ============ =========
</TABLE>
67
<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 June 30, 1996
consisted of $55.4 million of assets classified as substandard, $3.8 million
of assets classified as doubtful and $11.1 million of assets classified as
loss, which includes $5.2 million, $3.7 million, and $2.5 million of
Discounted Loans, respectively. In addition, at the same date, $41.3 million
of assets were designated as special mention, which includes $14.0 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
68
<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 $4.7 million through June 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
$4.1 million through the second quarter of 1996, including a 10% reserve on
such loans which are current.
In the third quarter of 1996, the Company established an additional $4.3
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 six months ended June
30, 1996.
<TABLE>
<CAPTION>
% OF
PROVISIONS TOTAL
------------- ----------
(DOLLARS IN THOUSANDS)
------------------------
<S> <C> <C>
Inherited Loans.................................. $ 4,702 43.3%
Sub-Prime Auto Loans............................. 4,084 37.6%
Other Purchased Loans............................ 2,072 19.1%
----------- ----------
Total provision for estimated losses on loans.... $ 10,858 100.0%
=========== ==========
</TABLE>
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<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,
JUNE 30, ------------------------
1996 1995 1994 1993
-------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan portfolio:
Real estate............................... $19,013 $ 9,831 $ 5,976 $ 4,088
Non-real estate........................... 6,002 407 280 226
Discounted Loan portfolio................. 6,973(1) 15,414 431 --
------- -------- ------- -------
Total Allowances........................ $31,989 $ 25,652 $ 6,687 $ 4,314
======= ======== ======= =======
</TABLE>
- --------
(1)The difference between the balance at December 31, 1995 and June 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, JULY 1 TO
JUNE 30, -------------------------- DECEMBER 31,
1996 1995 1994 1993
-------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of pe-
riod.................... $25,651 $ 7,701 $ 4,314 $4,221
Provision for loan loss-
es...................... 10,868 4,266 2,173 1,111
Allocation from purchased
loan discounts.......... 6,861 19,007 2,809 --
Charge-offs:
Real estate............ 10,843 5,096 1,620 1,042
Non-real estate........ 1,923 308 46 --
------- ------------ ----------- ------
Total charge-offs...... 12,766 5,404 1,666 1,042
Recoveries:
Real estate............ 1,347 81 71 24
Non-real estate........ 27 -- -- --
------- ------------ ----------- ------
Total Recoveries....... 1,374 81 71 24
Net (charge-offs) recov-
eries................... (11,392) (5,323) (1,595) (1,018)
------- ------------ ----------- ------
Balance, end of period... $31,988 $ 25,651 $ 7,701 $4,314
======= ============ =========== ======
Net (charge-offs) recov-
eries as a percentage of
average loan portfolio.. (2.7)% (2.2)% (1.4)% (1.4)%
</TABLE>
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<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,
SIX MONTHS ENDED -------------------------------------
JUNE 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............ $14,108 2.9% $ 3,726 1.3% $ 4,513 2.4%
60-89 days............ 13,487 2.8 3,037 1.1 2,202 1.1
90 days or more(2).... 26,268 5.4 12,679 4.5 11,632 6.1
------- ------- -------
Total loans delin-
quent.............. $53,863(3) 11.1% $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>
SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
----------------- -----------------------
1996 1995 1995 1994 1993
-------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities.......... $ 14,431 $ 13,850 $ 9,083 $10,943 $ 6,632
Held to maturity
U.S. Government securities.......... 7,421 4,503 6,470 4,505 --
Mortgage-backed securities.......... 23,500 9,541 13,119 14,439 14,787
FHLB stock(1)....................... 2,868 1,386 1,421 1,612 564
-------- -------- ------- ------- -------
Total............................. 33,789 15,430 21,010 20,556 15,351
-------- -------- ------- ------- -------
Total investment securities......... $ 48,220 $ 29,280 $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,
71
<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 50 employees. As of the
closing of the Common Stock Offering and the Notes Offering the Company is
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
72
<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.
73
<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;
74
<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.
75
<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,
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<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.
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<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, of which the First Bank had $9.95
million and Girard had $27.8 million as of June 30, 1996. 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 June 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
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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 will result in the Savings Banks' incurring a pre-tax
charge of approximately $1.4 million. As a result of the special assessment
and additional allowances for loan losses relating to the Sub-Prime Auto
Loans, First Bank's capital levels fell below the "well-capitalized"
institution standard to "adequately capitalized."
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)
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"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 June 30,
1996, the Savings Banks were "well capitalized" institutions under the prompt
corrective action regulations of the OTS; however, as a result of the special
assessment to re-capitalize the SAIF and additional allowances for loan losses
relating to the Sub-Prime Auto Loans, First Bank's capital levels will fall
below the "well-capitalized" institution standard to "adequately capitalized."
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. These
restrictions became applicable to First Bank at the end of the third quarter
as a result of the recapitalization of the SAIF and the provisions for loan
losses relating to the Sub-Prime Auto Loans which caused First Bank's capital
levels to fall below the "well-capitalized" institution standard to
"adequately capitalized."
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
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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 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
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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.
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 June 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 June 30, 1996, First Bank's and Girard's unimpaired capital and
surplus amounted to $12.8 million and $27.2 million, respectively, resulting
in a general loans-to-one borrower limitation of $1.9 million and $4.1
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.
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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 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 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.
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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) 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.
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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 a
Ph.D./ABD degree 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 & Ekonomexamen)
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
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until November 1992 he was a consultant to Entertainment Publications Inc.--
CUC International Inc. Mr. Berchtold received a B.S.C. degree in
Business/Finance and Marketing from Santa Clara University and an M.B.A. from
the University of Oregon. 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 International Manufacturing and Licensing, Inc., a
subsidiary of the ICT Group, Inc., a supplier of wireless phone customers
worldwide. From January 1988 until March 1994, Mr. Coleman was President of
Liquid Spring Corporation, a manufacturer of automobile components. Mr.
Coleman is a director of ICT Group, Inc., Fabricated Metals, Inc., a
fabricated metals handling company, and American Life Support Technology, a
venture capital-funded hospital equipment start-up company. 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.
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.
86
<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.
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 $1,000 for each Directors' meeting and a per hour
fee for each committee meeting attended which is not on a regularly scheduled
meeting date. Under the Company's Stock Incentive Plan, each non-employee
director has been granted, effective as of the date on which the initial
public offering price is determined, a non-qualified option to purchase at the
initial public offering price a number of shares of Common Stock equal to
6,250 divided by the initial public offering price, and each new non-employee
director upon the date of his or her election or appointment will be granted a
non-qualified option to purchase at the fair market value on the date of grant
a number of shares of Common Stock equal to 6,250 divided by the fair market
value on the date of grant.
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<PAGE>
EXECUTIVE COMPENSATION
The following table shows compensation received by the Company's Chief
Executive Officer and the four other most highly paid executive officers for
the fiscal years ended December 31, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
NAME AND
PRINCIPAL POSITION YEAR SALARY($)(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
R. Scott Stevenson............................. 1995 120,000 25,000
President of Girard and First Bank
</TABLE>
- --------
(1) For the year ended December 31, 1995 the Chief Executive Officer and the
four 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 non-publicly held
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 a
bonus. The bonus payable to Mr. Wiederhorn and Mr. Mendelsohn will be equal to
15% of the difference between the pre-tax profits of the Company and after tax
earnings which result in a return on equity of 15%. Mr. Wiederhorn's and Mr.
Mendelsohn's share of the bonus will be two-thirds and one-third,
respectively. The Company will also recommend that the Compensation Committee
grant 500,000 options to purchase the Common Stock to Mr. Wiederhorn and
250,000 options to purchase the Common Stock to Mr. Mendelsohn. 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
88
<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 36
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 November 1, 1996.
The Company's stockholders approved it on October 31, 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 November 1, 2006
unless terminated earlier by the Board of Directors.
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<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 1,500,000 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 750,000
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 exercise date. If the shares are sold within one year after the
exercise date, 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 short-term capital
gain. If the option shares are sold more than one year after the exercise date
but less than two years after the grant date, the difference between the
exercise price and the market value at the date of exercise (but not more than
the actual gain on sale) is taxable as ordinary income and any gain is long-
term capital gain. 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
90
<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 options.
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 750,000 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 772,500 shares
of Common Stock. A partial exercise of the over-allotment option will result
in option amounts between 750,000 and 772,500 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 of the NSOs will be
$ per share (100% of the initial offering price to the public in the Common
Stock Offering). 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.
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<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.... 500,000(1) 67% $-- (2) 3,773 9,562
Lawrence A. Mendelsohn.. 250,000(4) 33% -- (2) 1,886 4,781
</TABLE>
- --------
(1) This figure will be 515,000 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. Assumes all options are NSOs and
exercise price is $12 per share.
(4) This figure will be 257,500 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 $ 0 500,000(2) 0 $ 0 --
Lawrence A. Mendelsohn.. 0 0 250,000(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).
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the beneficial
ownership of Common Stock at October 28, 1996 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.... 3,945,957 65.77% 3,945,957 52.61%
Lawrence A. Mendelsohn.. 1,972,723 32.88% 1,972,723 26.30%
Bo G. Aberg............. -- -- -- --
Donald J. Berchtold..... -- -- -- --
Sheryl Anne Morehead.... -- -- -- --
Kenneth E. Kepp......... -- -- -- --
Chris Tassos............ -- -- -- --
Phillip D. Vincent...... -- -- -- --
Don H. Coleman.......... 12,242 .2% 12,242 .16%
Philip G. Forte......... -- -- -- --
David Dale-Johnson...... 12,242 .2% 12,242 .16%
All directors and execu-
tive officers as a
group (11 persons)..... 5,943,164 99.05% 5,943,164 79.23%
</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.
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<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 exchanged 226,590 shares of common stock of
Girard for 65,074 shares of Common Stock of WFSG and 74,306 shares of common
stock of First Bank for 24,484 shares of Common Stock of WFSG and 98,804
shares of common stock of WAC for 5,853,607 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 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 loans 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
94
<PAGE>
Discounted Loan Portfolios. Servicing fees for new Discounted Loan portfolio
servicing agreements 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.
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.
95
<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, 7,500,000 shares
of Common Stock and no shares of Preferred Stock will be outstanding. The
issued and outstanding shares of Common Stock have been, and the shares of
Common Stock offered hereby will be, duly authorized, validly issued, fully
paid and nonassessable. In addition, 31,819 shares of Common Stock have been
reserved for issuance upon exercise of outstanding options and an additional
1,500,000 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 79% 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. 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.
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
96
<PAGE>
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 $50 million 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.
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after , 2001 at specified redemption prices
together with accrued and unpaid interest, if any, to the date of redemption.
In addition, upon the occurrence of a Change of Control (as defined), each
holder of Notes will be able to require the Company to repurchase all or a
portion of such holder's Notes at % of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of repurchase.
The Indenture governing the Notes will contain certain covenants, including
a liquidity maintenance requirement, 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, mergers and sales of assets and on the conduct of business.
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 7,500,000 shares of Common Stock (assuming
no exercise of the Underwriters' over-allotment option).
The 1,500,000 shares of Common Stock to be sold in the Common Stock
Offering, which will constitute all of the outstanding shares of Common Stock
(225,000 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. 5,943,193 presently outstanding shares of Common
Stock and the 31,819 shares of Common Stock issuable upon the exercise of
outstanding options will be "restricted securities" within the meaning of Rule
144, and are eligible for sale in the public market in compliance with Rule
144. In addition, 750,000 shares of Common Stock issuable upon the exercise of
options to be granted at the closing of the Common Stock Offering and the
Notes
97
<PAGE>
Offering will be "restricted securities." All officers, directors and certain
current stockholders 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 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.
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 form 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 (75,000 shares based upon 7,500,000 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 from 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.
98
<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 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.
99
<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 December 31, 1995 and 1994, and for the years then ended and
the period from October 8 through December 31, 1993, the audited financial
statements of the Company's predecessor for the periods ended October 7, 1993
and June 30, 1993, 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, 1994 and 1993 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.
The audited consolidated financial statements of Girard Savings Bank, F.S.B.
and Subsidiary for the year ended December 31, 1993 included herein and
elsewhere in the Registration Statement have been included herein and
elsewhere in the Registration Statement in reliance upon the reports of KPMG
Peat Marwick LLP, independent auditors, included herein and elsewhere in the
Registration Statement, upon the authority of said firm as experts in auditing
and accounting. Girard Savings Bank F.S.B. changed its method of accounting
for income taxes in 1993 to adopt the provisions of Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
100
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
Independent Auditors' Report............................................ F-2
Consolidated Statements of Financial Condition at June 30, 1996
(unaudited) and December 31, 1995 and 1994............................. F-3
Consolidated Statements of Operations for the Six Months ended June 30,
1996 and 1995 (unaudited), the Years ended December 31, 1995 and 1994,
and the Period from October 8 through December 31, 1993, and the
Predecessor's Periods from July 1 through October 7, 1993 and July 1,
1992 through June 30, 1993 ............................................ F-4
Consolidated Statements of Cash Flows for the Six Months ended June 30,
1996 and 1995 (unaudited), the Years ended December 31, 1995 and 1994,
and the Period from October 8 through December 31, 1993, and the
Predecessor's Periods from July 1 through October 7, 1993 and July 1,
1992 through June 30, 1993............................................. F-5
Consolidated Statements of Stockholders' Equity for the Six Months ended
June 30, 1996 (unaudited), the Years ended December 31, 1995 and 1994,
and the Period from October 8, 1993 through December 31, 1993.......... F-8
Notes to Consolidated Financial Statements.............................. F-9
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
Independent Auditors' Report of Deloitte & Touche LLP................... F-29
Independent Auditors' Report of KPMG Peat Marwick LLP................... F-30
Consolidated Statements of Operations for the Period from January 1,
1994 through November 8, 1994 and the Year Ended December 31, 1993..... F-31
Consolidated Statements of Cash Flows for the Period from January 1,
1994 through November 8, 1994 and the Year Ended December 31, 1993..... F-32
Notes to Consolidated Financial Statements.............................. F-33
WILSHIRE CREDIT CORPORATION AND AFFILIATES
Independent Auditors' Report............................................ F-37
Combined Statements of Financial Position as of June 30, 1996
(unaudited)............................................................ F-38
Combined Statements of Operations for the Six Months Ended June 30, 1996
and 1995 (unaudited) and for the Years Ended December 31, 1995, 1994
and 1993............................................................... F-40
Combined Statements of Stockholders' Equity for the Six Months Ended
June 30, 1996 (unaudited) and for the Years Ended December 31, 1995,
1994 and 1993.......................................................... F-41
Combined Statements of Cash Flows for the Six Months Ended June 30, 1996
and 1995 (unaudited) and for the Years Ended December 31, 1995, 1994
and 1993............................................................... F-42
Notes to Combined Financial Statements.................................. F-43
</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 December 31, 1995 and 1994, the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1995 and 1994 and for the period from October 8, 1993
through December 31, 1993, and the statements of operations and cash flows of
the Company's Predecessor, First Bank of Beverly Hills, F.S.B., for the period
from July 1 through October 7, 1993 and for the year ended June 30, 1993.
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 December 31, 1995 and 1994, the results of
their operations and their cash flows for the years ended December 31, 1995
and 1994 and the period from October 8 through December 31, 1993, and the
results of operations and the cash flows of First Bank of Beverly Hills,
F.S.B. for the period from July 1 through October 7, 1993 and for the year
ended June 30, 1993, 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 expected to be operating under cease and desist orders with
the Office of Thrift Supervision that will require them to meet certain
prescribed requirements.
September 30, 1996
Los Angeles, California
F-2
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1996 1995 1994
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks.............. $ 8,253,000 $ 3,382,000 $ 4,880,000
Federal funds sold................... 6,100,000 1,100,000 3,950,000
------------ ------------ ------------
Total cash and cash equivalents.. 14,353,000 4,482,000 8,830,000
Investment securities held to
maturity, at amortized cost (fair
value of $7,442,000, $6,488,000 and
$4,353,000 in 1996, 1995 and 1994,
respectively)....................... 7,421,000 6,470,000 4,505,000
Mortgage-backed securities available
for sale, at fair value (amortized
cost of $12,934,000, $9,099,000 and
$11,613,000 in 1996, 1995 and 1994,
respectively)....................... 14,431,000 9,083,000 10,943,000
Mortgage-backed securities held to
maturity, at amortized cost (fair
value of $22,766,000, $12,873,000
and $12,948,000 in 1996, 1995 and
1994, respectively)................. 23,500,000 13,119,000 14,439,000
Loans receivable, net................ 459,251,000 272,174,000 181,471,000
Loans held for sale, at lower of cost
or market........................... 18,597,000
Stock in Federal Home Loan Bank of
San Francisco, at cost.............. 2,868,000 1,421,000 1,612,000
Real estate owned, net............... 3,527,000 4,964,000 1,208,000
Leasehold improvements and equipment,
net................................. 325,000 275,000 167,000
Due from affiliate................... 8,063,000 4,514,000 4,062,000
Accrued interest receivable.......... 4,545,000 3,042,000 1,599,000
Prepaid expenses and other assets.... 3,386,000 1,724,000 1,026,000
Income taxes receivable, net......... 1,528,000 1,589,000 774,000
------------ ------------ ------------
TOTAL............................ $543,198,000 $341,454,000 $230,636,000
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits........................... $433,769,000 $304,020,000 $196,289,000
Borrowings......................... 66,771,000 13,000,000 21,500,000
Accounts payable and other
liabilities....................... 3,858,000 3,902,000 2,056,000
Subordinated debt.................. 11,000,000
Deferred credits................... 948,000 1,134,000 1,772,000
Minority interest in subsidiaries.. 519,000 600,000 574,000
Preferred stock in subsidiary held
by others......................... 1,000,000
Due to affiliates.................. 2,259,000 759,000 652,000
------------ ------------ ------------
Total liabilities................ 508,124,000 334,415,000 223,843,000
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A preferred stock........... 1,000,000
Common stock....................... 35,550,000 6,800,000 6,800,000
Retained earnings (accumulated
deficit).......................... (1,374,000) 255,000 (337,000)
Unrealized gain (loss) on available
for sale securities, net.......... 898,000 (16,000) (670,000)
------------ ------------ ------------
Total stockholders' equity....... 35,074,000 7,039,000 6,793,000
------------ ------------ ------------
TOTAL............................ $543,198,000 $341,454,000 $230,636,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
-------------------------------------------------------------- -------------------------
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31, OCTOBER 8- JULY 1-
----------------------- ----------------------- DECEMBER 31, OCTOBER 7, JULY 1, 1992-
1996 1995 1995 1994 1993 1993 JUNE 30, 1993
----------- ---------- ---------- ----------- ------------ ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans.................. $20,436,000 $9,589,000 21,821,000 $ 7,923,000 $1,383,000 $1,763,000 $ 7,437,000
Mortgage-backed
securities............ 898,000 1,019,000 1,359,000 1,361,000 218,000 169,000 26,000
Investments and federal
funds sold............ 617,000 271,000 1,201,000 285,000 53,000 57,000 241,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
Total interest income.. 21,951,000 10,879,000 24,381,000 9,569,000 1,654,000 1,989,000 7,704,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
INTEREST EXPENSE:
Deposits............... 10,633,000 6,465,000 13,944,000 5,017,000 764,000 956,000 4,055,000
Borrowings............. 1,387,000 242,000 537,000 440,000 85,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
Total interest
expense............... 12,020,000 6,707,000 14,481,000 5,457,000 849,000 956,000 4,055,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
NET INTEREST INCOME..... 9,931,000 4,172,000 9,900,000 4,112,000 805,000 1,033,000 3,649,000
PROVISION FOR ESTIMATED
LOSSES ON LOANS........ 10,868,000 2,201,000 4,266,000 2,173,000 63,000 1,048,000 2,625,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
NET INTEREST (LOSS)
INCOME AFTER PROVISION
FOR ESTIMATED LOSSES ON
LOANS.................. (937,000) 1,971,000 5,634,000 1,939,000 742,000 (15,000) 1,024,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
OTHER INCOME (LOSS):
Bankcard income........ 3,275,000 1,955,000 4,694,000 635,000
Bankcard processing
expense............... (2,616,000) (1,391,000) (3,462,000) (274,000)
Gain (loss) on sale of
loans................. 1,983,000 24,000 642,000 (60,000)
Loan fees and charges.. 648,000 199,000 610,000 43,000
Gain on sale of
mortgage-backed
securities available
for sale.............. 14,000 54,000 96,000
Amortization of
deferred credits...... 230,000 230,000 460,000 388,000
Other, net............. 16,000 33,000 149,000 381,000
----------- ---------- ---------- ----------- ---------- -----------
Total other income
(loss)................ 3,536,000 1,050,000 3,107,000 1,227,000 96,000 (60,000)
----------- ---------- ---------- ----------- ---------- -----------
OTHER EXPENSES:
Compensation and
employee benefits..... 1,479,000 1,075,000 2,516,000 1,922,000 204,000 182,000 808,000
FDIC insurance
premiums.............. 387,000 285,000 721,000 261,000 61,000 73,000 246,000
Occupancy.............. 141,000 145,000 385,000 319,000 38,000 64,000 214,000
Professional services.. 297,000 370,000 1,028,000 507,000 49,000 95,000 279,000
Data processing and
equipment rentals..... 124,000 98,000 232,000 162,000 15,000 20,000 67,000
Real estate owned,
net................... 104,000 126,000 170,000 241,000 269,000 6,000 165,000
Loan service fees and
expenses.............. 2,111,000 369,000 1,958,000 242,000
Other general and
administrative
expenses.............. 864,000 683,000 1,092,000 1,290,000 70,000 347,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
Total other expenses... 5,507,000 3,151,000 8,102,000 4,944,000 636,000 510,000 2,126,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
(LOSS) INCOME BEFORE
INCOME TAX PROVISION... (2,908,000) (130,000) 639,000 (1,778,000) 202,000 (525,000) (1,162,000)
INCOME TAX (BENEFIT)
PROVISION.............. (1,279,000) (10,000) 47,000 (526,000) (713,000) (115,000) 167,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
NET (LOSS) INCOME....... $(1,629,000) $ (120,000) $ 592,000 $(1,252,000) $ 915,000 $ (410,000) $(1,329,000)
=========== ========== ========== =========== ========== ========== ===========
(LOSS) EARNINGS PER
SHARE.................. $ (21.11) $ (5.13) $ 25.09 $ (135.43) $ 149.07
=========== ========== ========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
---------------------------------------------------------------- -------------------------
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31, OCTOBER 8- JULY 1-
------------------------ ------------------------ DECEMBER 31, OCTOBER 7, JULY 1, 1992-
1996 1995 1995 1994 1993 1993 JUNE 30, 1993
------------ ---------- ---------- ------------ ------------ ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net (loss) income...... $ (1,629,000) $ (120,000) $ 592,000 $ (1,252,000) $ 915,000 $ (410,000) $ (1,329,000)
Reconciliation of net
income to net cash
provided by operating
activities:
Provision for loan
losses................ 10,868,000 2,201,000 4,266,000 2,173,000 63,000 1,048,000 2,625,000
Provision for real es-
tate owned losses..... 323,000 598,000 100,000 1,000 108,000
Depreciation and
amortization.......... 78,000 42,000 241,000 121,000 15,000 15,000 62,000
Loss (gain) on sale of
real estate owned..... (386,000) (19,000) (97,000) 406,000 6,000 (15,000)
(Gain) loss from sale
of
securities available
for sale.............. (24,000) (14,000) (54,000) (96,000)
(Gain) loss on sale of
loans held for sale... (1,983,000) (126,000) (642,000) 60,000
Proceeds from sale of
loans held for sale... 21,411,000 2,506,000 16,673,000
Amortization of dis-
counts and deferred
fees.................. (2,373,000) (1,038,000) (1,246,000) (600,000) (13,000) (25,000) (82,000)
Amortization of de-
ferred credits........ (230,000) (230,000) (460,000) (388,000) (101,000)
FHLB stock dividend.... (21,000) (40,000) (40,000) (39,000) (6,000) (5,000) (10,000)
Change in:
Mortgage-backed
securities held for
trading.............. 489,000 (489,000)
Accrued interest
receivable........... (1,503,000) (205,000) (1,443,000) (238,000) (125,000) 27,000 171,000
Prepaid expenses and
other assets......... (1,662,000) (258,000) (698,000) 483,000 (1,073,000) 26,000 (283,000)
Due from affiliates... (3,549,000) 2,184,000 (452,000) (2,833,000) (1,229,000)
Due to affiliates..... (79,000) (104,000) 107,000 (210,000) 675,000
Current income taxes
receivable........... (750,000) (100,000) (396,000) 591,000 (108,000) 94,000
Deferred income
taxes................ 170,000 (228,000) (419,000) 111,000 (124,000)
Accounts payable and
other liabilities.... 1,535,000 (176,000) 1,846,000 (474,000) 765,000 (141,000) (10,000)
Minority interest..... (81,000) (19,000) 26,000 347,000
Other................. 44,000 (143,000) (180,000) 4,000
------------ ---------- ---------- ------------ ---------- ---------- ------------
Net cash provided by
(used in) operating
activities.......... 19,860,000 4,426,000 18,262,000 (1,614,000) (579,000) 541,000 1,391,000
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
---------------------------------------------------------------------- -------------------------
SIX MONTHS YEARS
ENDED ENDED
JUNE 30, DECEMBER 31, OCTOBER 8 - JULY 1-
--------------------------- --------------------------- DECEMBER 31, OCTOBER 7, JULY 1, 1992-
1996 1995 1995 1994 1993 1993 JUNE 30, 1993
------------- ------------ ------------- ------------ ------------ ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of loans....... $(222,791,000) $(24,547,000) $(186,895,000) $(41,561,000) $(889,000) $ (100,000)
Loan repayments, net of
originations........... 21,946,000 4,308,000 49,035,000 16,836,000 $ 3,630,000 3,940,000 12,526,000
Purchase of mortgage-
backed securities
available for sale..... (2,737,000) (10,655,000) (6,143,000)
Proceeds from maturity
of investment
securities held to
maturity............... 16,367,000 1,000,000 5,394,000 126,000
Purchase of mortgage-
backed securities held
to maturity............ (30,534,000) (4,198,000) (12,329,000)
Repayments of mortgage-
backed securities held
to maturity............ 784,000 589,000 824,000 643,000
Proceeds from sale of
mortgage-backed
securities available
for sale............... 1,513,000 1,496,000 3,963,000
Repayments of mortgage-
backed securities
available for sale..... 1,060,000 400,000 1,528,000
Purchases of securities
and FHLB stock......... (1,426,000) (2,965,000) (105,000) (9,112,000)
Proceeds from sale of
FHLB stock............. 266,000 231,000 127,000
Proceeds from sale of
real estate owned...... 6,200,000 443,000 5,254,000 569,000 121,000 632,000
Purchase of subsidiary
net of cash and cash
equivalents............ (346,000)
Real estate owned
improvements........... (21,000) (35,000)
Purchases of leasehold
improvements and
equipment.............. (128,000) (89,000) (349,000) (184,000) (29,000) (3,000)
------------- ------------ ------------- ------------ ----------- --------- ----------
Net cash (used in)
provided by investing
activities........... (211,259,000) (17,117,000) (130,841,000) (35,038,000) (9,448,000) 3,248,000 4,035,000
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------------------------------------------------------------ --------------------------
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31, OCTOBER 8- JULY 1-
------------------------- ------------------------- DECEMBER 31, OCTOBER 7, JULY 1, 1992-
1996 1995 1995 1994 1993 1993 JUNE 30, 1993
------------ ----------- ------------ ----------- ------------ ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net change in
deposits.............. $129,749,000 $34,722,000 $107,731,000 $26,181,000 $(6,289,000) $ (112,000) $(7,984,000)
Proceeds from issuance
of common stock....... 17,750,000 -- -- 3,750,000 3,000,000 -- --
Issuance of
subordinated debt..... -- 3,500,000 9,000,000 -- -- -- --
Proceeds from other
borrowings............ 224,626,000 46,926,000 77,419,000 41,677,000 6,348,000 260,000 --
Repayments of other
borrowings............ (170,855,000) (68,044,000) (85,919,000) (30,285,000) -- -- --
Issuance of preferred
stock................. -- -- -- 1,000,000 -- -- --
------------ ----------- ------------ ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities.......... 201,270,000 17,104,000 108,231,000 42,323,000 3,059,000 148,000 (7,984,000)
------------ ----------- ------------ ----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 9,871,000 4,413,000 (4,348,000) 5,671,000 (6,968,000) 3,937,000 (2,558,000)
------------ ----------- ------------ ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS:...........
Beginning of year...... 4,482,000 8,830,000 8,830,000 3,159,000 10,127,000 6,190,000 8,748,000
------------ ----------- ------------ ----------- ----------- ----------- -----------
End of year............ $ 14,353,000 $13,243,000 $ 4,482,000 $ 8,830,000 $ 3,159,000 $10,127,000 $ 6,190,000
============ =========== ============ =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW
INFORMATION--
Cash paid during the
period for:
Interest............... $ 12,933,000 $ 6,456,000 $ 13,833,000 $ 5,479,000 $ 768,000 $ 964,000 $ 4,134,000
Income taxes........... -- -- 365,000 110,000 94,000 24,000 280,000
NONCASH INVESTING
ACTIVITIES:
Additions to real
estate owned acquired
in settlement of
loans................. 4,377,000 1,727,000 9,878,000 3,122,000 65,000 259,000 842,000
Loans to facilitate the
sale of real estate
owned................. -- 224,000 367,000 2,352,000 -- -- --
NONCASH FINANCING
ACTIVITIES:
Exchange of
subordinated debt for
common stock.......... 2,000,000 -- -- -- -- -- --
Exchange of preferred
stock for subordinated
debt.................. -- -- 2,000,000 -- -- -- --
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS)
ON
SERIES A 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, October 8,
1993................... -- $ -- 6,644 $ 3,050,000 $ -- $ -- $ 3,050,000
Net income............. 915,000 915,000
Unrealized loss on
available-for-sale
securities............ (159,000) (159,000)
---------- ---------- ------- ----------- ----------- --------- -----------
BALANCE, December 31,
1993................... 6,644 3,050,000 915,000 (159,000) 3,806,000
Net loss............... (1,252,000) (1,252,000)
Unrealized loss on
available-for-sale
securities............ (511,000) (511,000)
Issuance of stock...... 1,000,000 1,000,000 16,952 3,750,000 4,750,000
---------- ---------- ------- ----------- ----------- --------- -----------
BALANCE, December 31,
1994................... 1,000,000 1,000,000 23,596 6,800,000 (337,000) (670,000) 6,793,000
Net income............. 592,000 592,000
Unrealized gain on
available-for-sale
securities............ 654,000 654,000
Exchange of preferred
stock for subordinated
debt.................. (1,000,000) (1,000,000) (1,000,000)
---------- ---------- ------- ----------- ----------- --------- -----------
BALANCE, December 31,
1995................... 23,596 6,800,000 255,000 (16,000) 7,039,000
Net loss (unaudited)... (1,629,000) (1,629,000)
Unrealized gain on
available-for-sale
securities, net of tax
(unaudited)........... 914,000 914,000
Exchange of
subordinated debt for
common stock
(unaudited)........... 36,913 11,000,000 11,000,000
Issuance of common
stock (unaudited)..... 60,304 17,750,000 17,750,000
---------- ---------- ------- ----------- ----------- --------- -----------
BALANCE, JUNE 30, 1996
(Unaudited)............ -- $ -- 120,813 $35,550,000 $(1,374,000) $ 898,000 $35,074,000
========== ========== ======= =========== =========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--Wilshire Financial Services Group, Inc. and
subsidiaries (the "Company") operate two 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
two banks acquired in transactions discussed below. WFSG has had no historical
operations other than those of WAC and its subsidiaries, but is expected to
form other subsidiaries in the future that will conduct other operations.
The Predecessor to the Company is First Bank of Beverly Hills, F.S.B.
("FBBH"). On October 7, 1993, WAC (or "Successor") acquired 94.9% of FBBH's
common stock in a purchase accounting transaction. FBBH's fiscal year end was
then changed from June 30 to December 31. Therefore, the accompanying
financial statements present the operations of FBBH for its fiscal year ended
June 30, 1993 and for the period from July 1 through October 7, 1993, and the
consolidated operations of WAC and FBBH for the period from October 8 through
December 31, 1993.
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 periods from November 9 through
December 31, 1994 and from January 1 through December 27, 1995. On December
27, 1995, WAC and WACII were merged and WAC was named as the surviving entity.
Financial information as of December 31, 1995 and for the period from December
27, 1995 through December 31, 1995 is presented on a consolidated basis and
includes the accounts of WAC, FBBH and GSB.
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 $2,156,000. 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.
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".
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 amounts of
revenues 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.
F-9
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investment Securities and Mortgage-Backed Securities--The Company's
securities portfolios consist of mortgage-backed and other investment
securities that are classified as held-to-maturity or as available-for-sale.
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 an
historical cost basis, adjusted for the amortization of premiums and accretion
of discounts using a method that approximates the interest method. 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. The Company has no
trading securities.
Loans Receivable, Loans Held for Sale and Allowance for Loan Losses--Loans
are reported at the principal amount outstanding, net of deferred loan
origination fees, the allowance for loan losses and discounts on purchased
loans. 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 shown net of outstanding loan balances. The net deferred fees
and costs are recognized in interest income over the terms of the loans using
a method that approximates the interest method.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards ("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. This statement prescribes that a loan is
impaired when it is probable that the creditor will be unable to collect all
contractual principal and interest payments under the terms of the loan
agreement. This statement generally requires impaired loans to be measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as an expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. Specific valuation allowances are recorded when the measurement of
impairment indicates that the fair value of the loan is less than its carrying
amount. Adoption of SFAS No. 114 did not have a material effect on the
Company's financial statements.
The Company considers most purchased pools of loans (pools comprising
single-family residential loans and consumer loans) to consist of smaller
balance homogeneous loans and therefore, as permitted by SFAS No. 114,
evaluates such loans for impairment on a pooled basis, considering the
discounts in purchase prices relative to gross principal and interest.
After purchase, discounts on purchased loan pools 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 specific and general valuation allowances are included
in the allowance for loan losses. Discounts regarded as yield adjustments are
accreted to interest income using a method that approximates the interest
method.
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 allowance is increased by provisions for loan losses charged
against operations and recoveries of previously charged off credits.
F-10
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loans Held for Sale and Securitizations--The Company does not generally
acquire loans with the intention of selling or securitizing them. However,
when a decision is made to sell certain loans, they are classified as held for
sale and are carried at the lower of cost or market. Adjustments to the lower
of cost or market are charged to current operations. Gains or losses on loan
pools 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 loan
pools. 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.
There were no loans held for sale as of June 30, 1996 or December 31, 1994.
Loans held for sale at December 31, 1995 were predominantly nonperforming
loans purchased at deep discounts, and were sold in a 1996 securitization
transaction.
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 1995. As of 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
F-11
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 (see Note 7).
Effective January 1, 1996, all subordinated debt was exchanged for WAC's
common stock.
Earnings Per Share is calculated based on the weighted average number of
shares of 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 1995,
1994 and the period in 1993 subsequent to the acquisition of the Predecessor
was 23,596, 9,245 and 6,138, respectively. The weighted average shares
outstanding for the six months ended June 30, 1996 was 77,175 (unaudited).
Recent Accounting Standards--SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, is effective
for financial statements issued for fiscal years beginning after December 15,
1995. The Company does not anticipate a material impact on its operations or
financial position from the implementation of SFAS No. 121 in 1996.
SFAS No. 123, Accounting for Stock-Based Compensation, is effective for
financial statements for fiscal years beginning after December 15, 1995. The
Company does not intend to adopt the fair value method of accounting for stock
compensation discussed in SFAS No. 123, but will instead retain the intrinsic
value method used historically, and will make the disclosures required by the
statement.
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 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.
Interim Financial Data--In the opinion of management of the Company, the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of the Company as of June 30, 1996 and
the results of operations for the six months ended June 30, 1996 and 1995.
Disclosures concerning the unaudited interim financial information presented
in these notes to the consolidated financial statements have been included
when management considered them necessary with respect to significant changes
in the business during the six months ended June 30, 1996. Not all disclosures
considered necessary for annual audited financial statements are presented.
F-12
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost, fair value and gross unrealized gains and losses on
investment securities (U.S. Treasury notes) and mortgage-backed securities as
of December 31, 1995 and 1994 are shown below. Fair value estimates were
obtained from an independent pricing service.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
1995 COST GAINS LOSSES VALUE
---- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Available-for-sale
mortgage-backed
securities............... $ 9,099,000 $ -- $ 16,000 $ 9,083,000
============ ======== ========== ============
Held-to-maturity:
U.S. Treasury notes..... $ 6,470,000 $ 22,000 $ 4,000 $ 6,488,000
Mortgage-backed
securities............. 13,119,000 -- 246,000 12,873,000
------------ -------- ---------- ------------
Total held-to-
maturity............. $ 19,589,000 $ 22,000 $ 250,000 $ 19,361,000
============ ======== ========== ============
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
1994 COST GAINS LOSSES VALUE
---- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Available-for-sale
mortgage-backed
securities............... $ 11,613,000 $ -- $ 670,000 $ 10,943,000
============ ======== ========== ============
Held-to-maturity:
U.S. Treasury notes..... $ 4,505,000 $ -- $ 152,000 $ 4,353,000
Mortgage-backed
securities............. 14,439,000 -- 1,491,000 12,948,000
------------ -------- ---------- ------------
Total held-to-
maturity............. $ 18,944,000 $ -- $1,643,000 $ 17,301,000
============ ======== ========== ============
</TABLE>
The amortized cost and estimated fair value of investment securities held to
maturity other than mortgage-backed securities at December 31, 1995 and 1994
by contractual maturity are as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
1995 COST VALUE
---- ----------- -----------
<S> <C> <C>
Due in less than one year........................... $ 4,970,000 $ 4,966,000
Due in one to five years............................ 1,500,000 1,522,000
----------- -----------
$ 6,470,000 $ 6,488,000
=========== ===========
<CAPTION>
1994
----
<S> <C> <C>
Due in less than one year........................... $ 1,000,000 $ 983,000
Due in one to five years............................ 3,505,000 3,370,000
----------- -----------
$ 4,505,000 $ 4,353,000
=========== ===========
</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 June 30, 1996, mortgage-backed securities with carrying values of
$27,340,000 (unaudited) and market values of approximately $26,700,000
(unaudited) were pledged to secure FHLB borrowings, merchant bankcard
transactions and certain guarantees related to a loan securitization
transaction. Of the total securities pledged, securities with fair values of
approximately $9,100,000 (unaudited) were delivered to, and are held in
custody of, Bankers Trust and the Federal Reserve Bank.
The loan securitization involved the sale of discounted nonperforming loans
with carrying amounts of approximately $31,800,000 (unaudited). The Banks are
contingently liable for losses, if any, that could arise if the collectibility
of any securitized loan is unenforceable due to the absence of original notes
or files. 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.
F-13
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. LOANS RECEIVABLE AND LOANS HELD FOR SALE
Loans receivable and loans held for sale consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------
1996 1995 1994
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Real estate loans:
One to four units................. $336,149,000 $190,424,000 $ 53,308,000
Over four units................... 78,616,000 71,239,000 77,891,000
Commercial........................ 56,874,000 52,078,000 55,112,000
Land.............................. 3,450,000 2,903,000 3,329,000
------------ ------------ ------------
Total loans secured by real
estate......................... 475,089,000 316,644,000 189,640,000
Other loans....................... 34,316,000 20,811,000 8,948,000
------------ ------------ ------------
509,405,000 337,455,000 198,588,000
Less:
Allowance for loan losses......... 31,988,000 25,651,000 7,701,000
Deferred loan fees................ 219,000 245,000 286,000
Discount on purchased loans not
included in allowance for loan
losses........................... 17,947,000 20,788,000 9,130,000
------------ ------------ ------------
$459,251,000 $290,771,000 $181,471,000
============ ============ ============
</TABLE>
Included in the preceding table are loans held for sale as of December 31,
1995, consisting of the following, at cost, which is lower than estimated fair
value:
<TABLE>
<S> <C>
Real estate loans:
One to four units............................................. $33,497,000
Commercial.................................................... 466,000
Land.......................................................... 194,000
-----------
Total loans secured by real estate.......................... 34,157,000
Other loans..................................................... 12,000
-----------
34,169,000
Less allowances, discounts and fees............................. 15,572,000
-----------
$18,597,000
===========
</TABLE>
As of December 31, 1995 and 1994, loans receivable with adjustable rates of
interest were $265,702,000 and $170,437,000, respectively, and loans receivable
with fixed rates of interest were $71,753,000 and $28,151,000, 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.
The Company has a geographic concentration of mortgage loans in Southern
California, which experienced declines in real estate values in recent years.
Substantially all loans originated or acquired by the Predecessor, and by GSB
prior to its 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)
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS YEAR ENDED DECEMBER 31, JULY 1 TO
ENDED ------------------------ DECEMBER 31,
JUNE 30, 1996 1995 1994 1993
------------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, beginning of
year................... $ 25,651,000 $ 7,701,000 $ 4,314,000 $ 4,221,000
Loans charged off....... (12,766,000) (5,404,000) (1,666,000) (1,042,000)
Recoveries.............. 1,374,000 81,000 71,000 24,000
Provision for loan loss-
es..................... 10,868,000 4,266,000 2,173,000 1,111,000
Allocations from
purchased loan
discounts.............. 6,861,000 19,007,000 2,809,000
------------ ----------- ----------- -----------
Balance, end of year.... $ 31,988,000 $25,651,000 $ 7,701,000 $ 4,314,000
============ =========== =========== ===========
</TABLE>
Both FBBH and GSB were examined by the Office of Thrift Supervision ("OTS")
during the six months ended June 30, 1996. Based on its examination findings
and its policies concerning financial reporting practices for savings
institutions, the OTS required adjustments to the allowance for loan losses,
primarily related to two loan products in the portfolio. Additional provisions
for losses of $4,084,000 and $2,887,000 (unaudited) were recorded for
purchased high-coupon automobile loans to sub-prime borrowers and for certain
income-producing real estate loans in the Banks' preacquisition portfolios,
respectively. The Banks invested in automobile loans in late 1995 and early
1996. OTS regulations require that such loans, if past due more than 120 days,
must be fully reserved. Management believes that dispositions of the
automobile collateral will provide for significant recoveries. Real estate
loans for which additional losses were provided in 1996 were identified by the
OTS as "troubled collateral-dependent" loans. These loans were primarily
performing loans that were undercollateralized, based on the current fair
value of the real estate collateral, and loans that had become impaired during
1996. The losses provided were the amounts necessary to reduce the carrying
values of the loans to the fair values of the collateral. Potential recoveries
of losses on these loans depend on continued performance by the borrowers
and/or improvement in the fair values of the real estate.
At December 31, 1995, the Company had classified $14,241,000 of its loans as
impaired with specific valuation allowances related to impairment of
$4,155,000, and $9,593,000 of its loans impaired with no related specific
valuation allowances determined in accordance with SFAS No. 114. The average
recorded investment in impaired loans during the year ended December 31, 1995
was $24,204,000. Interest income of $1,631,000 was recognized on impaired
loans during the year ended December 31, 1995 based on cash payments. These
amounts exclude consideration of single family residential and consumer loan
pools not evaluated for impairment under SFAS No. 114. Management believes
that allowances allocated from purchased loan discounts, and other allowances
established through provisions for loan losses, provide adequate measurements
of impairments of these pools collectively. Loans for which income was not
being accrued at December 31, 1995 and 1994 were approximately $55,335,000 and
$12,801,000, respectively, including loans evaluated for impairment under SFAS
No. 114 and loans evaluated for impairment on a pooled basis. Interest income
that would have been recorded under the original terms of such loans was
$7,267,000 and $1,298,000 for the years ended December 31, 1995 and 1994,
respectively.
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
F-15
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
environment. Although management believes the levels of the allowance as of
December 31, 1995 and June 30, 1996 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.
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>
SIX MONTHS PERIOD FROM
ENDED YEAR ENDED DECEMBER 31, JULY 1 TO
JUNE 30, 1996 ------------------------- DECEMBER 31,
(UNAUDITED) 1995 1994 1993
------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balance, beginning of
year................... $1,193,000 $ 123,000 $ 55,000 $54,000
Charge-offs............. (736,000) (82,000) (32,000)
Allocation of purchase
discount............... 554,000
Provision for the year.. 598,000 100,000 1,000
---------- ------------ ---------- -------
Balance, end of year.... $ 457,000 $ 1,193,000 $ 123,000 $55,000
========== ============ ========== =======
</TABLE>
5. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ---------
<S> <C> <C>
Leasehold improvements................................ $ 299,000 $ 275,000
Furniture and equipment............................... 718,000 629,000
---------- ---------
Total cost............................................ 1,017,000 904,000
Accumulated depreciation and amortization............. (742,000) (737,000)
---------- ---------
$ 275,000 $ 167,000
========== =========
</TABLE>
6. DEPOSITS
Deposits consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
------------ ------------
<S> <C> <C>
Passbook accounts.................................. $ 304,000 $ 90,000
Money market accounts.............................. 1,267,000 2,831,000
NOW/checking....................................... 5,111,000 3,509,000
Time deposits:
Less than $100,000............................... 247,814,000 160,018,000
$100,000 and greater............................. 49,524,000 29,841,000
------------ ------------
Total deposits................................... $304,020,000 $196,289,000
============ ============
</TABLE>
F-16
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of time deposits by maturity at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996........................................................... $253,107,000
1997........................................................... 39,644,000
1998........................................................... 4,341,000
1999........................................................... 246,000
------------
$297,338,000
============
</TABLE>
7. BORROWINGS AND SUBORDINATED DEBT
Federal Home Loan Bank ("FHLB") advances and repurchase agreements consist
of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
----------- -----------
<S> <C> <C>
FHLB advances........................................ $13,000,000
Repurchase agreement................................. $13,000,000 8,500,000
----------- -----------
$13,000,000 $21,500,000
=========== ===========
</TABLE>
Repurchase agreements are issued under a master repurchase agreement with
Bear Stearns Mortgage Capital Corp. Proceeds from the agreements are used to
purchase 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 $54,210,000 and securities with carrying values of
$2,930,000. At December 31, 1994 repurchase agreements and FHLB advances were
secured by FHLB stock, loans with unpaid principal balances of $21,859,000 and
securities with carrying values of $13,165,000. 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>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED ------------------------
JUNE 30, 1996 1995 1994
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Average balance during the period.. $68,495,000 $ 1,000,000 $ 2,297,000
Highest amount outstanding during
the period........................ 97,000,000 13,000,000 8,500,000
Average interest rate during the
period............................ 6.8% 6.7% 5.8%
Average interest rate--end of peri-
od................................ 6.9% 6.7% 5.8%
</TABLE>
The following unaudited information concerns significant developments
related to the repurchase agreements and other financial instruments during
the six months ended June 30, 1996:
At June 30, 1996, outstanding repurchase agreements were $66,290,000,
secured by loans with unpaid principal balances of $156,280,000.
In April, 1996, the Banks entered into an interest-rate swap with a
$70,000,000 notional amount with Bear Stearns. The swap effectively
converts $70,000,000 of purchased fixed-rate loans to variable-rate loans.
The Banks pay 6.25% and Bear Stearns pays 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 June 30, 1996, the notional principal is $63,246,000.
F-17
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
WAC's capitalization includes subordinated debt with majority stockholders
in amounts up to $50,000,000. This borrowing 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 $11,000,000. As stated in Note 1, the
Company's common stock was exchanged for the subordinated debt on January 1,
1996.
8. INCOME TAXES
The provisions for income tax (benefit) consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, OCTOBER 8 THROUGH
-------------------- DECEMBER 31,
1995 1994 1993
--------- --------- -----------------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal.......................... $ 434,000 $(656,000) $ 124,000
State............................ 32,000 19,000 22,000
--------- --------- ---------
466,000 (637,000) 146,000
--------- --------- ---------
Deferred tax expense (benefit):
Federal.......................... (250,000) 90,000 (902,000)
State............................ (169,000) 21,000 43,000
--------- --------- ---------
(419,000) 111,000 (859,000)
--------- --------- ---------
Total income tax provision (bene-
fit).............................. $ 47,000 $(526,000) $(713,000)
========= ========= =========
</TABLE>
Deferred income taxes receivable (payable) are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets:
Purchase discounts................................. $ 1,349,000 $ 211,000
Purchase accounting adjustments.................... 629,000 899,000
Depreciation....................................... 65,000 67,000
Provision for loan loss............................ 408,000 1,404,000
Net operating loss................................. 170,000 229,000
State taxes........................................ 10,000 20,000
----------- -----------
Gross deferred tax assets........................ 2,631,000 2,830,000
----------- -----------
Deferred tax liabilities:
Partnership income................................. (44,000) (275,000)
Deferred loan fees................................. (351,000) (405,000)
FHLB stock dividends............................... (242,000) (220,000)
Prepaids........................................... (97,000) (74,000)
Other.............................................. (1,000) (6,000)
----------- -----------
Gross deferred tax liability..................... (735,000) (980,000)
----------- -----------
Total deferred tax asset............................. 1,896,000 1,850,000
Valuation allowance.................................. (1,726,000) (2,099,000)
----------- -----------
Net deferred tax asset (liability)................... $ 170,000 $ (249,000)
=========== ===========
</TABLE>
F-18
<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>
PERIOD FROM
YEARS ENDED OCTOBER 8
DECEMBER 31, THROUGH
--------------- DECEMBER 31,
1995 1994 1993
------ ------ ------------
<S> <C> <C> <C>
Federal income tax provision at statutory
rate...................................... 35.0 % (35.0)% 35.0 %
State taxes, net of federal benefit........ 4.0
Valuation allowance........................ (25.1) 8.8 (388.0)
Change in prior year estimate.............. (7.8)
Other...................................... 1.3 (3.4)
------ ------ ------
Effective income tax rate................ 7.4 % (29.6)% (353.0)%
====== ====== ======
</TABLE>
At December 31, 1995, the Banks had net operating loss carryforwards for
state income tax purposes of approximately $1,319,000, $155,000 and $32,000,
expiring in the years 1997, 1998 and 1999, respectively. At December 31, 1994,
the Banks had net operating loss carryforwards for state income tax purposes
of approximately $9,000, $1,324,000, $122,000 and $565,000, expiring in the
years 1996, 1997, 1998 and 1999, respectively.
At June 30, 1996, income taxes receivable (unaudited) consist entirely of
taxes currently receivable (i.e., refundable from loss carrybacks), and there
is a valuation allowance recorded against all deferred tax assets, net of
deferred tax liabilities.
9. COMMITMENTS AND CONTINGENCIES
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. In 1995, the Banks
contributed $28,000 to the plan.
Lease Commitments--The following is a schedule by year of future minimum
rental payments:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1996............................................................... $245,000
1997............................................................... 156,000
1998............................................................... 127,000
1999............................................................... 116,000
2000............................................................... 7,000
--------
Total............................................................ $651,000
========
</TABLE>
Lending Commitments--At June 30, 1996 and December 31, 1995, the Company had
commitments to extend credit of $3,235,000 (unaudited) and $793,000,
respectively. There were no lending commitments at December 31, 1994. 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 categories of collateral are real estate and
certificates of deposit.
F-19
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
10. REGULATORY MATTERS
Regulatory Agreement--As of September 30, 1996, FBBH and GSB have received
drafts of, and are expected to consent to, separate but similar Orders to
Cease and Desist (the "Orders") issued by the OTS.
The Order expected to be issued to FBBH will supersede a previously existing
Supervisory Agreement between FBBH and the OTS issued June 8, 1995 which
contained requirements similar to those discussed below.
The Orders will 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 will 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 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 will take effect immediately.
The Orders will be 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 mandatory--and possibly
additional discretionary--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 risk-based capital, as these terms are defined in
OTS regulation. Under the prompt corrective action regulations, 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-20
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Banks' actual and required capital ratios at December 31, 1995 are as
follows (dollars in thousands):
<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>
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 December 31, 1995 and 1994, the most recent notifications from the OTS
categorized FBBH as "adequately-capitalized" and GSB as "well-capitalized".
Subsequent to December 31, 1995, WAC provided additional capital to FBBH in
the form of preferred stock to enable FBBH to comply with the 1995 Supervisory
Agreement and with the proposed new Order relating to FBBH, to maintain
capital at "well-capitalized" levels. In consideration of the additional
capital infusion to FBBH since December 31, 1995, management believes that
until September 30, 1996, no conditions or events occurred that would
otherwise affect the Banks' categories. However, the OTS has, in recent
examinations, requested adjustments to reported financial information and to
the risk-weightings of certain assets and off-balance sheet items that have
affected capital computations. Management believes that such adjustments,
including their application to new transactions during 1996, are fully
reflected in capital computations reported to the OTS in the Banks' most
recent reports to the OTS and that, until September 30, 1996, FBBH's capital
ratios have been maintained in excess of the minimums required for them to be
categorized "well-capitalized". See "SAIF Legislation" below concerning
September 30, 1996 events affecting capital compliance.
As of June 30, 1996, the Banks' capital ratios were as follows (unaudited):
<TABLE>
<CAPTION>
FBBH GSB
----- -----
<S> <C> <C>
Total capital to risk-weighted assets............................. 11.2 % 10.4 %
Tier 1 capital to risk-weighted assets............................ 9.9 % 9.1 %
Tier 1 capital to average assets.................................. 6.9 % 7.3 %
Tangible capital.................................................. 7.0 % 7.0 %
</TABLE>
Because the Banks have minimum regulatory capital requirements,
substantially all retained earnings of the Banks are restricted as to
distribution to WAC or other stockholders.
F-21
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SAIF Legislation--On September 30, 1996, legislation was enacted that
imposes a one-time special assessment on banks and savings institutions whose
deposits are insured by the Savings Association Insurance Fund ("SAIF"). SAIF-
insured institutions will pay a special one-time assessment of approximately
65.7 basis points (to be finally determined by the FDIC) on assessable
deposits as of March 31, 1995. The Company will record an estimate of
approximately $1,400,000 (pretax) for this assessment during the quarter
ending September 30, 1996. The assessment is tax-deductible.
As a result of the SAIF assessment, management expects that FBBH capital
ratios will be reduced, as of September 30, 1996, to "adequately capitalized"
levels. Management plans to use a portion of the proceeds from public
offerings of equity and debt in the fourth quarter of 1996 to restore capital
levels to "well capitalized" levels by December 31, 1996. Until such time,
FBBH are restricted from taking new brokered deposits.
11. RELATED PARTY TRANSACTIONS
Substantially all loans receivable are serviced by Wilshire Credit
Corporation ("WCC"), which is affiliated with WAC 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.
12. STOCK OPTIONS
The Banks issue stock options for the benefit of certain of the Banks'
directors, executives and consultants.
The exercise price of the options is set by the Boards of Directors and was
at least equal to the book value of the shares on the grant date. The
following table summarizes the activity relating to the Banks' stock options
for the year ended December 31, 1995.
<TABLE>
<CAPTION>
FBBH GSB
----------- ------
<S> <C> <C>
Balance at beginning of year............................. 19,447 --
Options granted.......................................... 23,161 69,724
----------- ------
Balance at end of year................................... 42,608 69,724
=========== ======
Exercise price........................................... $3.67-$4.50 $ 1.47
=========== ======
</TABLE>
All options outstanding at December 31, 1995 were exercisable.
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
F-22
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------
CARRYING
OR NOTIONAL ESTIMATED
AMOUNT FAIR VALUE
------------ ------------
<S> <C> <C>
Assets:
Cash and due from banks......................... $ 3,382,000 $ 3,382,000
Federal funds sold.............................. 1,100,000 1,100,000
Investment securities held to maturity.......... 6,470,000 6,488,000
Mortgage-backed securities available-for-sale... 9,083,000 9,083,000
Mortgage-backed securities held to maturity..... 13,119,000 12,873,000
Loans receivable and loans held for sale........ 290,771,000 295,747,000
Federal Home Loan Bank stock.................... 1,421,000 1,421,000
Liabilities:
Deposits........................................ 304,020,000 307,177,000
Borrowings...................................... 13,000,000 13,000,000
Subordinated debt............................... 11,000,000 11,000,000
Off-balance-sheet items:
Loan commitments................................ 673,000 --
</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.
Investment and Mortgage-Backed Securities--The fair values of investment
securities are generally obtained from market bids for similar or identical
securities, or are obtained from independent security brokers or dealers.
Loans Receivable and Loans Held for Sale--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 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 performing and nonperforming 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 approximated the prevailing rates
offered to depositors as of the reporting date.
F-23
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Borrowings--The carrying amounts of FHLB advances and 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.
Loan Commitments--The Company's lending commitments are of a short-term
nature, and otherwise have terms that result in fair values that are
immaterial as of the balance-sheet date.
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
------------------------
JUNE 30, MARCH 31,
1996 1996
----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE INFORMATION)
<S> <C> <C>
Interest income.................................. $ 12,407 $ 9,544
Interest expense................................. 7,046 4,974
Provision for loan losses........................ 5,483 5,385
----------- ----------
Net interest loss after provision for loan loss-
es.............................................. (122) (815)
Non-interest income.............................. 2,268 3,884
Non-interest expense............................. 3,976 4,147
----------- ----------
Loss before income taxes......................... (1,830) (1,078)
Income tax benefit............................... 805 474
----------- ----------
Net loss......................................... $ (1,025) $ (604)
=========== ==========
Loss per share................................... $ (13.28) $ (7.83)
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995
------------ ------------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C>
Interest income.............. $7,407 $ 6,095 $5,776 $5,103
Interest expense............. 4,064 3,710 3,573 3,134
Provision for loan losses
(provision reversal)........ (436) 2,501 1,028 1,173
------ ------- ------ ------
Net interest income (loss)
after provision for loan
losses...................... 3,779 (116) 1,175 796
Non-interest income.......... 1,427 2,701 1,355 1,086
Non-interest expense......... 3,909 3,113 2,463 2,079
------ ------- ------ ------
Income (loss) before income
taxes....................... 1,297 (528) 67 (197)
Income tax (expense)
benefit..................... (95) 38 (4) 14
------ ------- ------ ------
Net income (loss)............ $1,202 $ (490) $ 63 $ (183)
====== ======= ====== ======
Earnings (loss) per share.... $50.92 $(20.73) $ 2.63 $(7.73)
====== ======= ====== ======
</TABLE>
F-24
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1994 1994 1994 1994
------------ ------------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<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 loan losses... 2,173 -- -- --
------- ------- ------- ------
Net interest (loss) income
after provision for loan
losses..................... (627) 791 699 1,076
Non-interest income......... 762 445 122 172
Non-interest expense........ 2,050 1,364 1,061 743
------- ------- ------- ------
(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>
15. PARENT COMPANY INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
------------ -----------
<S> <C> <C>
ASSETS
Cash............................................... $ 1,000 $ 320,000
Investments in Banks............................... 18,777,000 7,142,000
Prepaid expenses and other assets.................. 153,000 204,000
------------ -----------
$ 18,931,000 $ 7,666,000
------------ -----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable and other liabilities............. $ 317,000 $ 227,000
Due to affiliates.................................. 575,000 646,000
Subordinated debt to majority stockholders......... 11,000,000
------------ -----------
Total liabilities................................ 11,892,000 873,000
------------ -----------
Contributed and retained equity.................... 7,039,000 6,793,000
------------ -----------
$ 18,931,000 $ 7,666,000
============ ===========
</TABLE>
F-25
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 8
YEAR ENDED DECEMBER 31, THROUGH
------------------------- DECEMBER 31,
1995 1994 1993
----------- ------------- ---------
<S> <C> <C> <C>
Interest income................ $ 9,000 $ 24,000 $ 4,000
Interest expense............... 243,000 31,000 5,000
---------- ------------- ---------
Net interest expense........... (234,000) (7,000) (1,000)
Noninterest income............. 1,155,000 611,000 157,000
Noninterest expense............ (363,000) (156,000) (118,000)
---------- ------------- ---------
Income before equity in
earnings (loss) of
subsidiaries.................. 558,000 448,000 38,000
Equity in earnings (loss) of
subsidiaries.................. 34,000 (1,700,000) 877,000
---------- ------------- ---------
Net income (loss).............. $ 592,000 $ (1,252,000) $ 915,000
========== ============= =========
</TABLE>
F-26
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 8
YEAR ENDED DECEMBER 31, THROUGH
------------------------- DECEMBER 31,
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................. $ 592,000 $ (1,252,000) $ 915,000
Adjustments to reconcile net
income to
net cash provided by operating
activities:
Amortization of purchase
accounting
adjustments..................... (1,045,000) (488,000) (101,000)
Equity in (earnings) loss of
subsidiaries.................... (34,000) 1,700,000 (877,000)
Change in:
Prepaid expenses and other
assets......................... 51,000 495,000 (699,000)
Accounts payable and other
liabilities.................... 90,000 (111,000) 338,000
Due to affiliates and other
officers....................... (71,000) (29,000) 675,000
Other........................... 33,000
----------- ------------ ----------
Net cash (used in) provided by
operating activities.......... (384,000) 315,000 251,000
----------- ------------ ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net investment in subsidiaries.... (9,000,000) (4,746,000) (3,300,000)
----------- ------------ ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of capital stock......... 4,750,000 3,050,000
Issuance of subordinated debt..... 9,000,000
Dividends from subsidiary......... 65,000
----------- ------------ ----------
Net cash provided by financing
activities.................... 9,065,000 4,750,000 3,050,000
----------- ------------ ----------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS......... (319,000) 319,000 1,000
CASH:
Beginning of year................. 320,000 1,000
----------- ------------ ----------
End of year....................... $ 1,000 $ 320,000 $ 1,000
=========== ============ ==========
NONCASH FINANCING ACTIVITIES:
Conversion of capital stock to
subordinated
debt............................. $ 2,000,000
</TABLE>
F-27
<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 and
the period October 8 through December 31, 1993 as though the GSB purchase had
occurred as of the beginning of each year and period. The proforma amounts are
not necessarily indicative of what would have actually occurred if the
acquisition had occurred as of the beginning of each year and period.
<TABLE>
<CAPTION>
YEAR PERIOD FROM
ENDED OCTOBER 8-
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
Net interest income and
non-interest revenue..... $7,222,000 $ 999,000
Income (loss) before
change in accounting
principle................ (920,000) 1,087,000
Cumulative effect of
change in accounting
principle................ (119,000)
Net income (loss)......... (920,000) 968,000
Earnings (loss) per share:
Income (loss) before
accounting change...... (38.99) 41.05
Net income (loss)....... (38.99) 41.05
</TABLE>
F-28
<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. The consolidated statements of operations and of cash flows of the
Bank for the year ended December 31, 1993 were audited by other auditors,
whose report dated March 18, 1994 expressed an unqualified opinion on these
financial statements.
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 a reasonable 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 8, 1994, in conformity with generally accepted
accounting principles.
March 10, 1995
Los Angeles, California
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Girard Savings Bank:
We have audited the accompanying consolidated statements of operations, and
cash flows of Girard Savings Bank F.S.B. and subsidiary (the Savings Bank) for
the year ended December 31, 1993. These consolidated financial statements are
the responsibility of the Savings Bank's management. Our responsibility is to
express an opinion on these consolidated 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 a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and the
cash flows of the Savings Bank for the year ended December 31, 1993, in
conformity with generally accepted accounting principles.
As discussed in Notes 1 and 9 to the consolidated financial statements, the
Savings Bank changed its method of accounting for income taxes in 1993 to
adopt the provisions of Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes."
KPMG Peat Marwick LLP
San Diego, California
March 18, 1994
F-30
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994 AND THE YEAR ENDED
DECEMBER 31, 1993
<TABLE>
<CAPTION>
PERIOD
FROM
JANUARY 1 YEAR
THROUGH ENDED
NOVEMBER 8, DECEMBER 31,
1994 1993
----------- ------------
<S> <C> <C>
INTEREST INCOME:
Loans............................................. $5,577,000 $ 7,854,000
Mortgage-backed securities........................ 337,000 397,000
---------- -----------
Total interest income........................... 5,914,000 8,251,000
---------- -----------
INTEREST EXPENSE:
Deposits.......................................... 3,006,000 3,979,000
Borrowings........................................ 292,000 667,000
---------- -----------
Total interest expense.......................... 3,298,000 4,646,000
---------- -----------
NET INTEREST INCOME................................. 2,616,000 3,605,000
PROVISION FOR ESTIMATED LOAN LOSSES................. 827,000 2,524,000
---------- -----------
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED
LOAN LOSSES........................................ 1,789,000 1,081,000
---------- -----------
OTHER INCOME (LOSS)--Service charges and other
fees............................................... (3,000) 15,000
---------- -----------
OTHER EXPENSES:
Compensation and other employee benefits.......... 512,000 453,000
FDIC insurance premiums........................... 262,000 374,000
Depreciation and amortization..................... 14,000 10,000
Amortization of excess of cost over net assets
acquired......................................... 993,000 67,000
Occupancy......................................... 57,000 81,000
Professional services............................. 338,000 153,000
Data processing................................... 54,000 64,000
Real estate owned, net............................ 194,000 988,000
Other general and administrative.................. 143,000 272,000
---------- -----------
Total other expenses............................ 2,567,000 2,462,000
---------- -----------
LOSS BEFORE INCOME TAX PROVISION.................... (781,000) (1,366,000)
INCOME TAX PROVISION (BENEFIT)...................... 156,000 (432,000)
---------- -----------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE............................... (937,000) (934,000)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE.......................................... -- (119,000)
---------- -----------
NET LOSS............................................ $ (937,000) $(1,053,000)
========== ===========
</TABLE>
See notes to consolidated financial statements.
F-31
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994 AND THE YEAR ENDED
DECEMBER 31, 1993
<TABLE>
<CAPTION>
PERIOD
FROM
JANUARY 1 YEAR
THROUGH ENDED
NOVEMBER 8, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (937,000) $ (1,053,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation...................................... 14,000 10,000
Amortization of excess of cost over net assets
acquired......................................... 993,000 67,000
Amortization of deferred interest and fees........ (56,000) (100,000)
Provision for loan losses......................... 827,000 2,524,000
Provision for real estate losses.................. 97,000 483,000
Loss on real estate sold.......................... -- 618,000
Change in:
Accrued interest receivable...................... (109,000) 110,000
Prepaid expenses and other assets................ (52,000) (8,000)
Income taxes receivable.......................... 921,000 (78,000)
Other liabilities................................ 468,000 193,000
Deferred taxes................................... 212,000 593,000
------------ ------------
Net cash provided by operating activities....... 2,378,000 3,359,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan repayments--net.............................. 5,503,000 6,110,000
Proceeds from the maturity of investment securi-
ties............................................. 3,497,000 --
Purchases of investment securities and FHLB
stock............................................ (2,046,000) (1,532,000)
Investment in real estate......................... (107,000) (87,000)
Proceeds from real estate sold.................... 2,850,000 10,135,000
Proceeds from sale of FHLB stock.................. -- 246,000
------------ ------------
Net cash provided by investing activities....... 9,697,000 14,872,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits............................ (2,402,000) (21,837,000)
Issuance of common stock.......................... 13,000 1,000
Proceeds from FHLB advances....................... 12,000,000 13,500,000
Payments of FHLB advances......................... (21,000,000) (17,500,000)
------------ ------------
Net cash used in financing activities........... (11,389,000) (25,836,000)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS.......... 686,000 (7,605,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..... 2,903,000 10,508,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR........... $ 3,589,000 $ 2,903,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Payments during the period for:
Interest.......................................... $ 3,300,000 $ 4,662,000
NONCASH INVESTING ACTIVITIES:
Additions to real estate acquired in settlement of
loans............................................ -- 2,817,000
Loans originated to finance the sale of foreclosed
real estate...................................... 1,190,000 2,404,000
Additions to loans resulting from the transfer of
in-substance foreclosures........................ -- 3,629,000
</TABLE>
See notes to consolidated financial statements.
F-32
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994
AND THE YEAR ENDED DECEMBER 31, 1993
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 addresses 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 bought 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
its investment securities as held to maturity and accounts for them in the
same manner.
Loans Receivable--Loans are reported at the principal amount 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.
In May 1993, the Financial Accounting Standards ("FASB") issued SFAS No.
114, Accounting by Creditors for Impairment of a Loan. This statement
prescribes that a loan is impaired when it is probable that a
F-33
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
creditor will be unable to collect all amounts due (principal and interest)
according to the contractual terms of the loan agreement. Measurement of the
impairment is generally based on the fair value of the collateral for a
collateral-dependent loan. Additionally, SFAS No. 114 prescribes measuring
impairment of a restructured loan by discounting the total expected future
cash flows at the loan's effective rate of interest in the original loan
agreement. Finally, the impact of initially applying the statement is reported
as a part of the provision for loan losses. The Bank must adopt SFAS No. 114
in 1995. Management estimates that the effect of this accounting change will
not be material.
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 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 allowances 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
borrowers' 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 or 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. Any subsequent operating
expense or income, reduction in estimated values, and gains of losses on
disposition of such properties are charged to current operations.
Income Taxes--The Bank adopted SFAS No. 109, Accounting for Income Taxes, in
1993. Under this standard, 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.
The Bank recorded a cumulative tax benefit of $119,000 as a result of the
change in accounting principle.
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 $3,558,750. In
addition, the Bank issued and sold to WACII
F-34
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
nonvoting preferred stock for $1,000,000. 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 $920,000 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 $256,000 related to its sale.
3. INCOME TAX PROVISION
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1
THROUGH YEAR ENDED
NOVEMBER 8, DECEMBER 31,
1994 1993
----------- ------------
<S> <C> <C>
Current:
Federal income tax benefit....................... $(61,000) $(1,026,000)
State income taxes............................... 5,000 1,000
-------- -----------
Total current (benefit) tax.................... (56,000) (1,025,000)
Deferred:
Federal income taxes............................. 212,000 593,000
-------- -----------
Total income tax provision (benefit)........... $156,000 $ (432,000)
======== ===========
</TABLE>
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 federal income tax rate can be
attributed to the following:
<TABLE>
<CAPTION>
PERIOD
FROM
JANUARY 1 YEAR
THROUGH ENDED
NOVEMBER 8, DECEMBER 31,
1994 1993
----------- ------------
<S> <C> <C>
Federal income tax (benefit) at statutory rate.... (35.0)% (35.0)%
Nondeductible goodwill............................ 41.2 2.4
Valuation allowance............................... 7.6 --
Other............................................. 6.2 1.0
----- -----
Effective income tax (benefit) rate............... 20.0% (31.6)%
===== =====
</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 included 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.
F-35
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $59,000 in 1994
and $57,000 in 1993. 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-36
<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
December 31, 1995 and 1994, and the related combined statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1995,
1994 and 1993. 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 December 31, 1995 and 1994, and the combined
results of their operations and their cash flows for the years ended December
31, 1995, 1994 and 1993, in conformity with generally accepted accounting
principles.
March 15, 1996
Los Angeles, California
F-37
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1996 1995 1994
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS............ $ 18,233,718 $ 3,576,843 $ 3,559,499
INVESTMENT IN LOANS AND SECURITIES:
Performing loans, at amortized
cost:
Gross principal.................. 126,925,820 123,539,505 151,115,067
Gross accrued interest........... 4,987,175 3,054,145 4,469,598
Discount......................... (18,668,222) (21,905,766) (29,642,774)
------------ ------------ ------------
Net investment in performing
loans......................... 113,244,773 104,687,884 125,941,891
------------ ------------ ------------
Nonperforming loans, at cost:
Gross principal.................. 417,413,214 341,268,914 353,900,845
Gross accrued interest........... 262,204,678 221,393,572 203,967,349
Discount......................... (579,209,669) (543,310,032) (540,680,382)
------------ ------------ ------------
Net investment in nonperforming
loans......................... 100,408,223 19,352,454 17,187,812
------------ ------------ ------------
Loans held for sale, at lower of
cost or market:
Gross principal.................. -- 69,818,190 120,925,441
Gross accrued interest........... -- 13,572,724 1,613,379
Discounts and deferred hedging
gains, net of premiums.......... -- (50,123,228) (13,293,442)
Valuation allowance.............. -- -- (253,890)
------------ ------------ ------------
Net investment in loans held
for sale...................... -- 33,267,686 108,991,488
------------ ------------ ------------
Securities held to maturity, at
amortized cost:
Gross principal.................. 30,744,316 28,829,846 4,103,847
Discount......................... (10,062,211) (3,462,622) (3,252,983)
------------ ------------ ------------
Net investment in securities
held to maturity.............. 20,682,105 25,367,224 850,864
------------ ------------ ------------
NET INVESTMENT IN LOANS AND
SECURITIES.......................... 234,335,101 182,675,248 252,972,055
SECURITY PURCHASED UNDER AGREEMENT TO
RESELL, At cost..................... -- -- 24,937,500
DUE FROM AFFILIATES.................. 2,447,176 758,978 373,107
COMMERCIAL NOTES RECEIVABLE.......... 5,646,751 4,968,750 1,000,000
OTHER RECEIVABLES.................... 4,150,600 3,126,091 1,821,763
PROPERTY, Net of accumulated
depreciation........................ 7,926,206 6,716,836 1,756,947
OTHER ASSETS......................... 3,132,020 3,121,728 1,210,150
------------ ------------ ------------
TOTAL................................ $275,871,572 $204,944,474 $287,631,021
============ ============ ============
</TABLE>
See notes to combined financial statements.
F-38
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1996 1995 1994
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
PARTICIPATION LIABILITIES........... $133,646,438 $150,298,405 $205,330,619
BORROWINGS.......................... 180,201,514 70,164,488 60,941,093
SECURITY SOLD BUT NOT YET PURCHASED,
At market.......................... -- -- 24,738,281
CAPITAL LEASE OBLIGATIONS........... 1,077,032 1,125,722 1,251,427
DUE TO AFFILIATES, Net.............. 8,136,283 3,698,488 3,512,431
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES........................ 3,311,307 3,458,390 2,955,683
------------ ------------ ------------
Total liabilities............. 326,372,574 228,745,493 298,729,534
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock...................... 524,150 524,150 524,150
Retained earnings (accumulated
deficit)......................... (1,422,634) 77,915 537,278
Distributions to stockholders..... (49,602,518) (24,403,084) (12,159,941)
------------ ------------ ------------
Total stockholders' equity
(deficit).................... (50,501,002) (23,801,019) (11,098,513)
------------ ------------ ------------
TOTAL............................... $275,871,572 $204,944,474 $287,631,021
============ ============ ============
</TABLE>
See notes to combined financial statements.
F-39
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------------- ------------------------------------
1996 1995 1995 1994 1993
----------- ---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Servicing fees ........ $ 5,004,913 $5,460,355 $ 9,738,984 $ 3,339,471 $1,355,813
Income from investment
in loans and
securities ........... 3,045,296 2,578,104 3,528,852 1,159,220 450,245
Other interest and
dividend income ...... 1,471,055 409,662 1,595,088 507,589 109,567
Gain on sale of loans
...................... 43,017 43,017 464,982 4,312,423
Rental income ......... 458,377 251,417 517,158 164,415 98,321
Finance lease revenue
...................... 128,104 108,077 27,297 98,340
----------- ---------- ----------- ----------- ----------
Total revenues ........ 9,979,641 8,870,659 15,531,176 5,662,974 6,424,709
----------- ---------- ----------- ----------- ----------
EXPENSES:
Compensation and
employee benefits .... 3,379,784 2,975,551 6,604,707 3,833,621 3,282,359
Professional services
...................... 267,993 347,841 898,039 311,287 250,995
Rent .................. 129,583 132,115 253,774 217,105 167,611
Telephone ............. 107,261 135,449 349,007 262,200 155,877
Postage ............... 80,003 80,134 143,190 205,605 65,259
Portfolio servicing
expense .............. 254,478 24,496 51,837 32,415
Travel ................ 656,749 439,819 1,232,753 177,495 135,911
Depreciation and
amortization ......... 511,121 184,913 504,164 208,037 136,388
Advertising............ 96,398 12,371 82,297 32,822 32,389
Other general and
administrative ....... 533,367 311,357 909,975 683,407 281,862
----------- ---------- ----------- ----------- ----------
Total expenses ........ 6,016,737 4,644,046 11,029,743 5,963,994 4,508,651
----------- ---------- ----------- ----------- ----------
OTHER (EXPENSE) INCOME:
Interest expense ...... (5,482,006) (3,447,669) (3,788,687) (893,657) (339,154)
Other investment income
...................... 65,960 253,066
Other investment
(expense) income, net
...................... (47,407) (203,408) (194,109) (119,855)
----------- ---------- ----------- ----------- ----------
Total other (expense)
income ............... (5,463,453) (3,651,077) (3,982,796) (760,446) (339,154)
----------- ---------- ----------- ----------- ----------
NET (LOSS) INCOME ...... $(1,500,549) $ 575,536 $ 518,637 $(1,061,466) $1,576,904
----------- ---------- ----------- ----------- ----------
</TABLE>
See notes to combined financial statements.
F-40
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
EARNINGS
COMMON (ACCUMULATED DISTRIBUTIONS TO
STOCK DEFICIT) STOCKHOLDERS TOTAL
-------- ------------ ---------------- ------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993.. $524,150 $ 21,840 $ 545,990
Net income.............. 1,576,904 1,576,904
Distributions to
stockholders........... $ (4,584,119) (4,584,119)
-------- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1993..................... 524,150 1,598,744 (4,584,119) (2,461,225)
Net loss................ (1,061,466) (1,061,466)
Distributions to
stockholders........... (7,575,822) (7,575,822)
-------- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1994..................... 524,150 537,278 (12,159,941) (11,098,513)
Net income.............. 518,637 518,637
Distributions to
stockholders........... (12,243,143) (12,243,143)
Dividends............... (978,000) (978,000)
-------- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1995..................... 524,150 77,915 (24,403,084) (23,801,019)
Net loss (unaudited).... (1,500,549) (1,500,549)
Distributions to
stockholders
(unaudited)............ (25,199,434) (25,199,434)
-------- ----------- ------------ ------------
BALANCE, JUNE 30, 1996
(Unaudited).............. $524,150 $(1,422,634) $(49,602,518) $(50,501,002)
======== =========== ============ ============
</TABLE>
See notes to combined financial statements.
F-41
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------------ ---------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net (loss) income .... $(1,500,549) $ 575,536 $ 518,637 $ (1,061,466) $ 1,576,904
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
(Increase) decrease in
net investment in
loans and
securities........... (51,659,853) 35,673,617 74,939,534 (194,598,366) (32,248,792)
Deferred hedging gains
..................... (209,414)
Decrease (increase) in
security purchased
under agreement to
resell .............. 2,911,969 24,937,500 (24,937,500)
Valuation adjustment--
loans held for sale
..................... 253,890
(Decrease) increase in
due from affiliates
..................... (1,688,198) (30,108) (385,871) 111,076 (484,183)
Increase in other
receivables ......... (1,024,509) (358,017) (1,304,328) (995,524) (756,443)
Depreciation and
amortization ........ 228,749 184,913 340,729 179,008 136,104
(Increase) decrease in
other assets ........ (10,292) 219,266 (1,911,578) (1,126,553) (2,770)
Increase in accounts
payable and accrued
liabilities ......... (147,083) 140,740 502,707 1,952,444 729,239
Increase (decrease) in
due to affiliate .... 4,437,795 (1,660,308) 186,057 2,769,017 743,414
(Decrease) increase in
participation
liability ........... (16,651,967) (95,610,548) (55,032,214) 143,373,862 37,498,669
Increase in borrowings
secured by specific
investments in loans
and securities ...... 79,241,791 66,695,241 (10,656,036) 58,006,578
Interest accretion on
borrowings .......... 86,146 140,390 235,873
Proceeds from security
sold but not yet
purchased ........... (2,712,750) (18,819,824) 24,814,453
----------- ----------- ----------- ------------- -----------
Net cash provided by
operating activities
.................... 11,225,884 6,115,697 13,455,703 8,767,378 7,192,142
----------- ----------- ----------- ------------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of U.S.
Treasury securities
..................... (4,642,727)
Increase in commercial
notes receivable .... (678,001) (4,913,927) (3,968,750) (1,000,000)
Purchase of property
..................... (1,438,119) (3,401,308) (5,338,653) (218,348) (135,046)
Proceeds from sales of
property ............ 38,035
----------- ----------- ----------- ------------- -----------
Net cash used in
investing securities
.................... (2,116,120) (8,315,235) (13,912,095) (1,218,348) (135,046)
----------- ----------- ----------- ------------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from
borrowings .......... 30,829,571 4,476,970 15,755,099 2,000,000 1,663,193
Principal payments on
borrowings .......... (34,336) (1,847,539) (1,934,515) (150,000) (2,050,443)
Principal payments on
capital leases ...... 48,690 (67,407) (125,705) (59,283) (337,500)
Distributions to
stockholders......... (25,199,434) (4,389,940) (12,243,143) (7,575,822) (4,584,119)
Cash dividends paid .. (141,000) (978,000)
----------- ----------- ----------- ------------- -----------
Net cash provided by
financing activities
.................... (5,547,111) (1,968,916) 473,736 (5,785,105) (5,308,869)
----------- ----------- ----------- ------------- -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS
...................... 14,656,875 (4,168,454) 17,344 1,763,925 1,748,227
CASH AND CASH
EQUIVALENTS,
BEGINNING OF YEAR .... 3,576,843 3,559,499 3,559,499 1,795,574 47,347
----------- ----------- ----------- ------------- -----------
CASH AND CASH
EQUIVALENTS, END OF
YEAR ................. $18,233,718 $ (608,955) $ 3,576,843 $ 3,559,499 $ 1,795,574
=========== =========== =========== ============= ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION--
Interest paid ........ $ 6,144,474 $ 1,602,193 $ 3,121,199 $ 359,069 $ 302,305
SUPPLEMENTAL DISCLOSURE
OF NONCASH INVESTING
AND FINANCING
ACTIVITIES--
Purchases of property
through capital
leases .............. $ 101,681 $ 1,502,098
</TABLE>
See notes to combined financial statements.
F-42
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
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 Financing 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 Business--The Corporations acquire and service performing and
nonperforming 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. PSC services two of the loan portfolios under contracts with the
WCC.
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 $25,464,344 consumer loan-backed bond, a
$30,756,557 manufactured housing-backed bond, and a $64,753,000 mortgage-
backed bond, respectively.
WMFC is the holding company for WF, which was formed for the purpose of
acquiring and originating residential home mortgages.
F-43
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
For purposes of presenting cash flow information in the combined statements
of cash flows, all investments in loans and securities (except investments in
U.S. Treasury securities), as well as related participation liabilities and
borrowings (except borrowings that are not collateralized by specific loan
pools and repaid from cash flows from those pools), are presented as operating
cash flows, due to the nature of WCC's business, which is in substance a
servicing operation. The specific methods of collecting or otherwise
liquidating loan portfolios and B class securities vary depending on the
nature of the specific investments and changes in markets for these assets,
and include securitizations and other sales. The investments and related
obligations used to fund them are closely matched and interdependent, and the
Corporations' ultimate interest resides principally in its servicing fees,
which are the difference between net cash flows realized from the investments
and net cash flows paid to participants and certain lenders. Cash flows
related to traditional longer-term lending activity (e.g., commercial notes
receivable), U.S. Treasury securities, property, capital leases, longer-term
borrowings not matched against specific investments, and the Corporations'
common stock are presented as investing or financing activities, as
appropriate.
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.
Investments in Loans--To account for investments in loan portfolios, other
than loans designated as held for sale, the Corporations follow the guidance
in the AICPA's Accounting Standards Division's Practice Bulletin 6 ("PB 6"),
"Amortization of Discounts in Certain Acquired Loans." Such guidance is
generally applied on a portfolio-by-portfolio basis, rather than on an
individual loan basis, because most portfolios contain large numbers of
relatively homogeneous loans with individually small balances.
Performing loan portfolios are carried at amortized cost. Discounts are
accreted into income using a method approximating the interest method, in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 91,
and interest income is recognized on an accrual basis. Nonperforming loan
portfolios, including portfolios of loans previously charged off by prior
lenders, are recorded using the cost recovery method. Such portfolios are
generally acquired at steep discounts, and the extent of cash that will
ultimately be collected on a specific 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. Income from a nonperforming loan portfolio, other than
collected servicing income, is not recognized until the Corporations' initial
net investment in the portfolio is fully recovered, in accordance with PB 6.
The Corporations do not evaluate individual loans for impairment under
guidance in SFAS No. 114, "Accounting for Impairment of a Loan." Impairment is
evaluated on a portfolio basis considering projections of future cash
collections from 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.
Management believes that total cash collections from each portfolio are likely
to exceed the Corporations' net investment (i.e., gross principal plus accrued
interest less discount) in the portfolio. Consequently, no allowance for loan
losses has been provided for in the financial statements, as permitted by
PB 6. A specific loan is written off, with a corresponding charge to the loan
discount account, when management
F-44
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
determines that the amount is uncollectible. A substantial portion of the
total nonperforming loan portfolio consists of impaired loans and troubled
debt restructured loans. It is not practicable to estimate the additional
income that might have been recognized had these loans performed under their
original terms.
Certain loans were purchased in 1994 specifically for the purpose of
securitizing them. In addition, certain other loans were selected by
management from various purchased loan pools to be included in securitizations
that were subsequently completed. These loans have been identified as held for
sale and are carried at the lower of cost or market. Market value exceeded
cost at December 31, 1995 and was $253,890 less than cost at December 31,
1994. There were no loans held for sale at June 30, 1996 (unaudited).
Investments in Securities--The Corporations classify investments in
securities as held to maturity based on the Corporations' ability and positive
intent to hold them to maturity. The securities are carried at amortized cost.
Securities consist primarily of B class pass-through mortgage and other asset-
backed securities, which were either purchased at steep discounts or represent
residual interests in loans previously securitized by the Corporations. These
securities involve high degrees of credit and prepayment risk. Fair values of
these securities and related unrealized gains and losses are not readily
determinable. Actual maturities will differ from stated maturities, which are
in excess of ten years.
Interest Income on Investments in Loans and Securities--When the
Corporations record interest, including discount accretion, on loans and
securities, income is recognized in the combined statements of operations only
to the extent of the Corporations' direct investment in the loans or
securities, and not to the extent of any participating interests. When
interest is recorded relative to the participants' share of the assets, there
is a corresponding increase in the participation liability. Accrued interest
shown on the combined statements of financial condition comprises gross
interest accruable under the legal terms of the assets, including purchased
accrued interest. Discount is credited to the extent that the accrued interest
is not recognizable in accordance with the accounting policies summarized in
the preceding section of this note--Investments in Loans. Other interest and
dividend income in the combined statements of operations, represents interest
from cash equivalents, U.S. Treasury bills, preferred stock and commercial
notes receivable.
Rental Income--Rental 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.
Participation Liability and Servicing Income--Participation liability
represents amounts invested by third parties for an interest in cash flows
from specific loan portfolios, net of the cash flows already remitted to the
participants. Participants share credit risks and certain other risks
associated with the loan portfolios that provide the source of repayment and
potential income to the participants. If cash flows from specific loan
portfolios 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
liability as of June 30, 1996 and December 31, 1995 and 1994 are $4,875,883
(unaudited), $5,604,660 and $9,630,611, respectively, representing amounts
collected from borrowers but not yet remitted to the participants.
Agreements with participants generally provide that, in exchange for the
Corporations' servicing of the loan portfolios, the Corporations retain a
specified portion of portfolio cash flows allocable to the participant's
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
F-45
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
Option premiums received for writing puts and calls for trading purposes are
recorded as liabilities representing the market value of the options. The
liabilities 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 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.
Interim Financial Data--In the opinion of management of the Corporations,
the accompanying unaudited combined financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of the Corporations as of June 30, 1996
and the results of operations for the six months ended June 30, 1996 and 1995.
Disclosures concerning the unaudited interim financial information presented
in these notes to the combined financial statements have been included when
management considered them necessary with respect to describing significant
changes in the business during the six months ended June 30, 1996. Not all
disclosures considered necessary for annual audited financial statements are
presented for the interim unaudited financial statements.
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.
2. SECURITY PURCHASED UNDER AGREEMENT TO RESELL
The security purchased under an agreement to resell of $24,937,500 at
December 31, 1994 in a U.S. Treasury security. The amount advanced under the
agreement represents a short-term investment and is reflected as a receivable
in the balance sheet at December 31, 1994. This agreement was entered into for
purposes of investing the proceeds received from the security sold but not yet
purchased, which was outstanding at December 31, 1994 (see Note 6). The
agreement had a maturity of less than 30 days. The Corporations had securities
purchased under agreements to resell outstanding at only one other month-end
during the year, in the amount of $8,000,000.
The security underlying the agreement is a book-entry security. The security
was delivered into a third-party custodian's account under a written custodial
agreement that explicitly recognizes the Corporations' interest in the
security.
There were no securities purchased under agreements to resell outstanding as
of June 30, 1996 (unaudited) and December 31, 1995.
F-46
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. OTHER RECEIVABLES
Other receivables consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ----------
<S> <C> <C>
Other charges receivable.............................. $2,786,456 $1,852,774
Receivables under forward contracts, at market........ 133,242
Other................................................. 1,098,613 208,854
---------- ----------
Total............................................... $3,885,069 $2,194,870
========== ==========
</TABLE>
Other charges receivable represent reimbursable direct costs incurred by the
Corporations in the loan collection process. The costs are generally charged
to the borrowers or are reimbursable by investors in the loan pools to the
extent of their participating interests.
Receivables under forward contracts represent the market value of forward
sales of U.S. Treasury securities entered into by the Corporations in
connection with hedging activities discussed in Note 6.
4. PROPERTY
Property consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ----------
<S> <C> <C>
Land.................................................. $1,762,656 $ 498,150
Buildings............................................. 4,701,173 768,778
Vehicles.............................................. 48,100 119,496
Furniture and equipment............................... 812,193 689,694
---------- ----------
Total............................................... 7,324,122 2,076,118
Less accumulated depreciation......................... 607,286 319,171
---------- ----------
Property, net......................................... $6,716,836 $1,756,947
========== ==========
</TABLE>
Land and buildings comprise the Corporations' headquarters, which secure a
capital lease obligation (see Note 7), 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 December 31, 1995:
<TABLE>
<S> <C>
1996.............................................................. $ 760,836
1997.............................................................. 568,386
1998.............................................................. 364,956
1999.............................................................. 370,096
2000.............................................................. 287,946
Thereafter........................................................ 14,000
----------
$2,366,220
==========
</TABLE>
F-47
<PAGE>
5. BORROWINGS
Borrowings consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------
1996 1995 1994
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Borrowings used to fund specific
investments in loans:
Payable from 85% of cash flows from
specified loan pools, interest at
prime plus 3.75%, maturing from
March 1998 to January 2006......... $ 41,056,861 $27,996,062 $ 7,150,563
Payable from 90% of cash flows from
specified loan pools, interest at
the reference rate plus 5% but no
less than 10%, due July 1998....... 764,084 8,208,523
Payable from cash flows from
specified loan pools, interest at
LIBOR plus 0.25%, due December
1996............................... 4,533,750 5,918,457
Payable from 90% of cash flows from
specified loans pools, interest at
LIBOR plus 4%, due May 1999........ 2,870,000 5,227,500
Payable from substantially all cash
flows from mortgage loans held for
sale, interest at LIBOR plus 2.5%,
due upon sale of loans............. 50,856,015
Payable from cash flows from
specified loan pools, interest at
LIBOR plus 1.5%, due June 1997..... 2,995,659
Payable for BB bond from non-
performing securitization of loans.
Interest at 8.5%................... 1,263,980
Payable for BB note from non-
performing securitization of loans.
Interest at 11.5%.................. 5,436,690
Payable due for bonds (net of
discount) from non-performing
securitization of loans. Interest
ranging from 6% to 8%.............. 58,377,259
Payable due sellers from non-
performing securitization of
loans.............................. 20,039,507
Other borrowings:
Borrowings with interest at prime
plus 3.75%, maturing through
January 2006....................... 28,750,000 11,000,000
Borrowings secured by investment
real estate, interest ranging from
9.75% to 18% and maturing from
September 1998 to June 2005........ 4,442,634 4,476,970
Bank borrowing secured by loans,
interest at prime plus 2%, due
February 1996 to September 1996.... 5,000,000 2,750,000
Due on demand, secured by specified
loan pools, interest payable in
monthly installments at 10.5%...... 3,500,000 3,500,000 1,000,000
Related party borrowings............ 1,171,090 1,086,976 1,934,515
------------ ----------- -----------
Total borrowings.................. $180,201,514 $70,164,488 $60,941,093
============ =========== ===========
</TABLE>
Borrowings used to fund specific investments in loans are repaid monthly as
cash flows from the loans are received. Any remaining amounts owed under such
borrowings are due at the maturity dates shown above.
F-48
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Related party borrowings at December 31, 1995 and 1994 are due upon demand.
They include borrowings from a relative of the Corporations' majority
shareholder with interest at prime plus .75% and from a trust managed by and
for the benefit of the Corporations' majority shareholder with interest at
15%. During 1995 and 1994, the Corporations recognized interest expense of
$153,157 and $199,741, respectively, on related party borrowings.
The Corporations have borrowing commitments as of December 31, 1995 from
various third parties totaling $265,000,000 as follows:
. Interim warehouse and security agreement of $150,000,000 available to
fund specific investments in loans; not drawn upon at December 31, 1995;
expiring June 1996
. Commitment for $100,000,000 available for various uses; $38,996,062 drawn
upon at December 31, 1995 to fund specific investments in loans; secured
by investments in loans and securities, cash equivalents and loan
servicing rights; expiring October 1998
. Commitment for $15,000,000 available to fund specific investments in
loans; $8,208,523 drawn upon at December 31, 1995; secured by investments
in specific loans; expiring July 1998
Included in borrowings used to fund specific investments in loans is
$5,918,457 at December 31, 1995 representing securities (U.S. Treasury bills
of $4,642,727) and cash equivalents sold under agreements to repurchase.
6. FINANCIAL INSTRUMENTS
Hedging Activities--Part of the Corporations' strategy for managing
interest-rate risk is to enter into short sales or forward sales of U.S.
Treasury securities of a duration similar to the fixed rate loans held for
sale being hedged. This results in market gains or losses on the hedging
instruments, in response to interest rate increases or decreases,
respectively, which approximate the amount of the corresponding market losses
or gains, respectively, on the loans being hedged.
Financial instruments outstanding as of December 31, 1994, which are used by
the Corporations for purposes of hedging future fluctuations in the market
value of loans held for sale, include a U.S. Treasury security sold but not
yet purchased, reflected as a liability in the balance sheet, at market value,
and forward sales of U.S. Treasury securities, included in other receivables
in the balance sheet, at market value (see Note 3). As of December 31, 1994,
realized and unrealized gains totaling $703,477 have been deferred and
reflected as adjustments to the carrying value of loans held for sale. Such
deferred gains were recognized upon the ultimate sales of such loans in 1995.
The following summarizes the significant terms of the hedging instruments
and the related credit exposure as of December 31, 1994:
<TABLE>
<CAPTION>
NOTIONAL CREDIT
DESCRIPTION AMOUNT EXPOSURE
----------- ----------- --------
<S> <C> <C>
Security sold but not yet purchased--U.S. Treasury
note, 7.375%, due 1997, sold at 99.26 ................ $25,000,000
Forward sales:
U.S. Treasury note, 6.875%, due 1996, sale price
99.44, contract settlement date January 31, 1995 ... 18,000,000 $129,375
U.S. Treasury note, 7.5%, due 1999, sale price 98.86,
contract settlement date January 31, 1995........... 2,250,000 3,867
</TABLE>
F-49
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Amounts shown above as credit exposure represented the amount of loss that
would have been incurred as of December 31, 1994 if the counterparties had
completely failed to perform their obligations under the contracts. No credit
losses were incurred as a result of these transactions. The Corporations
deposited mortgage-backed securities with a principal amount of $1,392,709
into an account with the counterparty as collateral for the forward sales.
No such hedging instruments and related exposure existed at December 31,
1995 or at June 30, 1996 (unaudited).
Trading Activities--The Corporations engages in buying and selling of
futures contracts, as well as writing and purchasing put and call options on
interest rates, foreign currencies, US government securities, and market
indices for purposes of realizing short-term profits. As of December 31, 1995
and 1994, the market value of the liability for options contracts outstanding
is $8,093 and $20,313, respectively. As of December 31, 1995, the market value
for futures contracts is $45,656. There were no futures contracts as of
December 31, 1994. Both options and futures contracts are included in accounts
payable and accrued liabilities in the combined balance sheets. The average
market value of the liability for written options contracts outstanding during
the year ended December 31, 1995 and 1994, computed based upon month-end
positions outstanding, was $23,821 and $59,109, respectively. The average
market value of the liability for futures contracts outstanding during the
year ended December 31, 1995, computed based upon month-end positions
outstanding, was $42,319. Net losses (gains) on options and futures trading
activity were $194,109 and ($97,387) for the years ended December 31, 1995 and
1994, respectively, and are included in other investment income (loss) in the
combined statements of operations.
The following is a summary of the liability under options contracts
outstanding:
<TABLE>
<CAPTION>
UNREALIZED
NOTIONAL MARKET PREMIUM GAIN
1995 AMOUNT VALUE RECEIVED/PAID (LOSS)
---- ----------- ------- ------------- ----------
<S> <C> <C> <C> <C>
Short Positions Calls (writ-
ten)--
February 1996 US T-Bonds... $ 1,000,000 $ 2,656 $ 1,562 $(1,094)
January 1996 Japanese Yen.. 1,221,625 125 4,125 4,000
February 1996 Japanese
Yen....................... 1,221,625 2,875 5,750 2,875
Puts (purchased)--
February 1996 US T-Bonds... 1,000,000 1,562 5,468 3,906
January 1996 S&P 500....... 4,619,475 3,750 11,250 7,500
Long Positions Puts (writ-
ten)--
January 1996 S&P 500....... 1,539,825 (2,875) (8,750) (5,875)
----------- ------- ------- -------
$10,602,550 $ 8,093 $19,405 $11,312
=========== ======= ======= =======
<CAPTION>
1994
----
<S> <C> <C> <C> <C>
Calls--
February 1995 US T-Bonds... $ 1,000,000 $15,938 $19,531 $ 3,593
Puts--
February 1995 US T-Bonds... 1,000,000 4,375 6,250 1,875
----------- ------- ------- -------
$ 2,000,000 $20,313 $25,781 $ 5,468
=========== ======= ======= =======
</TABLE>
F-50
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Following is a summary of the liability under futures contracts outstanding:
<TABLE>
<CAPTION>
OPEN
NOTIONAL TRADE
AMOUNT EQUITY
---------- -------
<S> <C> <C>
Short Positions
Puts--
March 1996 US T-Bonds................................ $1,000,000 $ 8,125
March 1996 US T-Notes................................ 900,000 4,781
Long Positions
Puts--
March 1996 Japanese Yen.............................. 1,221,625 32,750
---------- -------
$3,121,625 $45,656
========== =======
</TABLE>
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 December 31,
1995 and 1994, such margin requirements were $98,572 and $39,537,
respectively.
7. CAPITAL LEASE OBLIGATIONS
The Corporations have purchased various assets, including their headquarters
facility and certain automobiles and equipment, under capital leases. Future
minimum lease payments for capital leases as of December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996............................................................. $ 195,497
1997............................................................. 217,572
1998............................................................. 142,262
1999............................................................. 115,973
2000............................................................. 111,166
Thereafter....................................................... 1,574,846
----------
Total.......................................................... 2,357,316
Less amount representing interest................................ 1,231,594
----------
Capital lease obligation......................................... $1,125,722
==========
</TABLE>
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 December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996.............................................................. $ 755,143
1997.............................................................. 751,294
1998.............................................................. 721,584
1999.............................................................. 671,376
----------
$2,899,397
==========
</TABLE>
The management fee portion of the annual lease payment for a corporate jet
of $227,000 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.
F-51
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
9. LOAN SERVICING
Loans serviced for others, except for participated loans acquired in the
name of WCC, are not included in the accompanying balance sheets. WCC performs
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>
DECEMBER 31,
-------------------------
1995 1994
------------ ------------
<S> <C> <C>
Related parties.................................... $279,801,000 $113,333,475
Others............................................. 18,416,726 30,277, 483
------------ ------------
Total............................................ $298,217,726 $143,610,958
============ ============
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing and in connection with WCC-owned and participated loans were
$720,799 at December 31, 1994. At December 31, 1995, WCC had made escrow
payments in excess of amounts collected, which are included in other
receivables.
10. LOANS TO STOCKHOLDERS
The Corporations have extended loans to their two stockholders. The loans
have stated interest rates of 11% and no specific terms of repayment, and were
used principally for investing in other companies affiliated by common
ownership (companies not combined in these financial statements). For
accounting purposes, the interest on these loans has not been recognized in
the combined statements of operations, and the loaned amounts are presented in
the stockholders' equity section of the statements of financial condition as
distributions to stockholders.
11. 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 Boards
of Directors, the Corporations may elect to contribute to the plan based on
profits of the Corporations or based on matching participants' contributions.
During 1995, the Corporation contributed $46,408 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 June 30, 1996 and December 31, 1995, the
Corporations were committed to purchase $2,825,724 of loans (unaudited) at par
and $14,843,686 of loans for $5,840,729, respectively.
12. RELATED PARTY TRANSACTIONS
The following disclosures about transactions with related parties are in
addition to those elsewhere in these footnotes.
Participation liabilities owed to related parties, including companies for
which the Corporations' majority owner and president had management control,
relatives of the Corporations' owners, and investment vehicles of those
related parties, are $71,836 and $145,272 at December 31, 1995 and 1994,
respectively.
At June 30, 1996 (unaudited) and December 31, 1995 and 1994, due to
affiliates consists primarily of amounts owed to affiliated banks for
collection on loans serviced on behalf of those affiliates. This liability is
net of approximately $758,000 and $548,000 of receivables from uncombined
affiliates for reimbursement of expenses incurred on behalf of those
affiliates at December 31, 1995 and 1994, respectively.
F-52
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
13. 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 Corporation
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 balance
sheet for cash and cash equivalents approximate their fair values.
Investments in Loans and Securities, Participation Liabilities and
Borrowings Secured by Investments in Loans and Securities--It is not
practicable to estimate the fair values of the Investments in loans and
securities (except certain pools classified as held for sale, which are stated
at lower of cost or market, and U.S Treasury bills), or related investor
liabilities and borrowings secured by specific pools, primarily because of the
limited nature of the market for such investments and the highly subjective
and judgmental risk-rating process undertaken by potential buyers. The
Corporations monitor loan portfolio performance, which is related to fair
value, on a portfolio-by-portfolio basis. Some portfolios contain loans that
are similar with respect to collateral type, geography, initial underwriting
standards, and in other respects, while other portfolios contain loans that
are dissimilar in various respects and to varying degrees. Fair value
estimations for most portfolios require extensive analysis of the credit risk
associated with the portfolios at any specific point in time, as well as
consideration of the collective repayment terms and the prevailing interest
rate environment. Consequently, estimation of fair value is not practicable
for the portfolio as a whole as of any specific point in time.
The following is information about investments in loans and securities that
may be relevant to estimating fair value:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
1995 NUMBER INTEREST MATURITY GROSS
TYPE OF LOAN OR COLLATERAL OF LOANS RATE (IN MONTHS) PRINCIPAL
-------------------------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Performing:
Automobiles/equipment............. 2,283 15% 32.95 $11,942,056
Real estate....................... 2,899 10% 89.20 81,574,329
Manufactured housing.............. 2,784 12% 104.40 11,159,601
Other............................. 2,141 13% 41.05 29,122,518
Nonperforming:
Automobiles/equipment............. 1,382 13% 9.85 6,996,631
Real estate....................... 1,371 10% 60.33 95,052,802
Other............................. 98,882 10% 17.88 292,506,241
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
1994 NUMBER INTEREST MATURITY GROSS
TYPE OF LOAN OR COLLATERAL OF LOANS RATE (IN MONTHS) PRINCIPAL
-------------------------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Performing:
Automobiles/equipment............. 1,757 14% 10.31 $17,085,843
Real estate....................... 4,037 8% 62.75 206,729.946
Other............................. 3,269 10% 38.49 43,008,622
Nonperforming:
Automobiles/equipment............. 3,192 15% 28.78 8,549,223
Real estate....................... 2,041 9% 120.37 98,522,366
Other............................. 115,390 9% 0.63 256,149,200
</TABLE>
F-53
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of U.S. Treasury bills included in investments in securities
held-to-maturity at December 31, 1995 and 1994 approximate their carrying
value of $4,642,727. These securities mature within one year, and are pledged
as collateral for certain borrowings.
Security Purchased Under Agreement to Resell, Other Borrowings, Security
Sold but not yet Purchased--The carrying amounts approximate fair values due
to the short-term maturities or repricing of these instruments. The difference
between the fair value and carrying amount of borrowings secured by investment
real estate is not material.
Receivables from Related Parties and Notes Receivable--It is not practicable
to estimate the fair values of these instruments, for which there is not a
market and for which terms are not established on an arms-length basis.
F-54
<PAGE>
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- --------------------------------------------------------------------------------
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
Dividend Policy.......................................................... 24
Dilution................................................................. 24
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
Shares Eligible for Future Sale.......................................... 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 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
----------------
WILSHIRE
----------------
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 OCTOBER 31, 1996
PROSPECTUS
$50,000,000
--------------------------
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 $50 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. 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 12 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.................................... $ $ $
</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
$ .
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 $1.2 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 $543.2 million at June 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") in October 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 six months ended June 30, 1996 and the years ended
December 31, 1995, 1994 and 1993 was approximately $276.4 million, $337.4
million, $388.5 million and $333.8 million, respectively. As of June 30, 1996,
the Company had $543.2 million of assets and stockholders' equity of $35.1
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. The Company believes that it
can significantly increase its acquisition activities without a
commensurate increase in operating costs.
. 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 August 31, 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
5
<PAGE>
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
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 June 30, 1996, WCC
was servicing more than $1.0 billion principal amount of loans,
including $509.4 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 $3.3 million
during the six months ended June 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 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 NOTES OFFERING
Amount offered.............. $50 million aggregate principal amount.
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.
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 % 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 defined) of the Company; 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; or the sale or other
disposition of any Significant Subsidiary of the
Company (as defined). 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 a
certain level of liquid assets, limit the ability
of the Company and its subsidiaries to incur
certain indebtedness, 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
7
<PAGE>
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 and the Savings Banks' ability to
merge, consolidate or sell all the assets of the
Company or the Savings Banks. 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 increase the Savings Banks'
capital 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.
8
<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 years ended December 31, 1995
and 1994 and for the period from October 8 through December 31, 1993 have been
derived from the audited consolidated financial statements of the Company (or
its predecessor) included elsewhere in this Prospectus (the "Audited Financial
Statements"). For the purpose of financial statement presentation herein, First
Bank is treated as the predecessor of the Company. On October 7, 1993, WAC
acquired 94.9% of First Bank's common stock in a purchase accounting
transaction.
On November 9, 1994, Wilshire Acquisitions Corporation II ("WACII"), a newly-
formed entity with ownership and management common to WAC acquired 94.9% of the
common stock of Girard in a purchase accounting transaction. Because WAC and
WACII were under common control at the time of their respective acquisitions of
First Bank and Girard, the Summary Consolidated Financial Information is
presented on a combined basis as of December 31, 1994. On December 27, 1995,
WAC and WACII were merged with WAC as the surviving entity. Summary
Consolidated Financial Information as of December 31, 1995 is presented on a
consolidated basis and includes the accounts of WAC, First Bank and Girard.
The historical income statement and balance sheet data presented at and for
the six months ended June 30, 1996 and 1995 have 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
six months ended June 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.
9
<PAGE>
The historical income statement and balance sheet data of the predecessor for
any date prior to October 8, 1993 have not been included because prior to its
acquisition the predecessor was seriously under-capitalized and subject to a
cease and desist order and a prompt corrective action which severely limited
its operations, including restrictions on asset growth and new deposits.
Further, the predecessor was subject to an imminent regulatory takeover by the
OTS/RTC if the acquisition by WAC had not occurred. Prior to the acquisition of
the predecessor by WAC in October 1993, the predecessor was operated by
different management with a different strategy and business plan. Current
management has significantly changed the business plan of the predecessor and
has substantially increased the Company's assets while disposing of, and
reserving against, Inherited Loans. Accordingly, management believes that the
predecessor's results of operations do not have a significant bearing on the
Company.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31, OCTOBER 8 -
---------------- ----------------- DECEMBER 31,
1996 1995 1995 1994 1993
------- ------- ------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income... $21,951 $10,879 $24,381 $ 9,569 $ 1,654
Total interest expense.. 12,020 6,707 14,481 5,457 849
------- ------- ------- -------- -------
Net interest income..... 9,931 4,172 9,900 4,112 805
Provision for estimated
losses on loans........ 10,868 2,201 4,266 2,173 63
------- ------- ------- -------- -------
Net interest income
(loss) after provision
for estimated losses on
loans.................. (937) 1,971 5,634 1,939 742
Other income (loss):
Bankcard income(1)...... 3,275 1,955 4,694 635 --
Bankcard processing ex-
pense.................. (2,616) (1,391) (3,462) (274) --
Other, net.............. 2,877 486 1,875 866 96
------- ------- ------- -------- -------
Total other income
(loss)............... 3,536 1,050 3,107 1,227 96
Other expenses:
Other general and admin-
istrative expenses..... 5,507 3,151 8,102 4,944 636
------- ------- ------- -------- -------
(Loss) income before in-
come tax provision..... (2,908) (130) 639 (1,778) 202
Income tax (benefit)
provision.............. (1,279) (10) 47 (526) (713)
------- ------- ------- -------- -------
Net (loss) income ...... $(1,629) $ (120) $ 592 $ (1,252) $ 915
======= ======= ======= ======== =======
(Loss) earnings per
share.................. $(21.11) $ (5.13) $ 25.09 $(135.43) $149.07
======= ======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------
1996 1995 1994 1993
--------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................ $ 543,198 $ 341,454 $ 230,636 $ 99,367
Loan portfolio, net(2).............. 446,053 259,417 179,377 68,743
Discounted loan portfolio:
Total loans........................ 21,932 53,439 2,995 --
Unaccreted discount................ (1,761) (6,671) (470) --
Allowance for loan losses.......... (6,973) (15,414) (431) --
Discounted loans, net.............. 13,198 31,354 2,094 --
Loans held for sale, at lower of
cost or market(3).................. -- 18,597 -- --
Real estate owned, net.............. 3,527 4,964 1,208 1,037
Deposits, net....................... 433,769 304,020 196,289 84,821
Borrowings.......................... 66,771 13,000 21,500 6,608
Stockholders' equity(4)............. 35,074 7,039 6,793 3,806
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31, OCTOBER 8-
------------------ --------------- DECEMBER 31,
1996 1995 1995 1994 1993
------- ------ ------- ------ ------------
<S> <C> <C> <C> <C> <C>
FINANCIAL RATIOS AND
OTHER DATA:
Return on average as-
sets................... (.35)% (.05)% .24% (.92)% .97%
Return on average equi-
ty..................... (4.62)% (1.73)% 8.65% (31.03)% 26.69%
Average interest rate on
total loans............ 9.64% 9.36% 9.57% 7.65% 7.62%
Average equity to aver-
age assets............. 7.68% 2.96% 2.72% 2.96% 3.62%
Net interest spread(5).. 3.47% 2.81% 3.08% 2.85% 3.37%
Net interest margin(6).. 4.19% 3.41% 3.72% 3.04% .87%
Ratio of earnings to
fixed charges(7):
Including interest on
deposits.............. .76 .98 1.04 .67 1.24
Excluding interest on
deposits.............. (1.10) .46 2.19 (3.04) 3.38
Non-performing loans to
loans at end of
period(2).............. 5.39% 6.50% 4.46% 5.95% 9.71%
Allowance for loan
losses to total loans
at end of period....... 6.3% 15.2% 7.6% 3.9% 5.8%
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31, OCTOBER 8-
------------------ --------------- DECEMBER 31,
1996 1995 1995 1994 1993(8)
------- ------ ------- ------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
LOAN ORIGINATIONS(9).... $ 1,145 $2,125 $ 8,748 $4,345 $ --
LOAN ACQUISITION DA-
TA(9):
Loans:
Single-family residen-
tial.................. 220,629(10) 6,812 121,883 36,462 1,618
Multi-family residen-
tial.................. -- -- -- 61,247 72
Commercial and other
mortgage loans........ -- -- 2,126 31,091 462
Consumer and other
loans(11)............. 17,324 -- 11,012 10,847 --
Discounted Loans........ -- (12) 55,995 55,995 3,624 --
LOANS SOLD(9)........... 27,965(10) 8,724 16,673 -- --
</TABLE>
- --------
(1) The Company began its bankcard operations in 1994.
(2) Does not include Discounted Loans.
(3) Primarily Discounted Loans included in the total of Discounted loans, net.
(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.
(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.
(8) The predecessor was not acquiring or selling loans prior to its acquisition
in October 1993.
(9) Unpaid principal balances.
(10) 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."
(11) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(12) Girard recently committed to purchase approximately $248 million unpaid
principal amount of discounted residential mortgage loans. See "Recent
Developments."
11
<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. 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 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 consumption 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.
12
<PAGE>
RECENT LOSSES; NO ASSURANCE AS TO CONSISTENCY OF RESULTS OF OPERATIONS
Recent Losses. The Company reported a net loss of approximately $1.6 million
for the six months ended June 30, 1996, principally due to provisions for
estimated losses on the Sub-Prime Auto Loans ($4.1 million) and the Inherited
Loans ($4.7 million). The Company also expects a loss in the third quarter of
approximately $4.4 million due to an anticipated loss provisions of $4.3
million on the Sub-Prime Auto Loans and a $1.4 million charge for the Savings
Association Insurance Fund (the "SAIF") special assessment. See "Recent
Developments."
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 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 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;
13
<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 six months of 1996. The Savings
Banks' deposits increased from $196.3 million at December 31, 1994 to $433.8
million at June 30, 1996. More than 73% of Girard's total loan portfolio was
acquired in the four quarters ended June 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.
14
<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 six months ended June 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
six months ended June 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 $2.5 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 65.9% of which have become greater
than 30 days delinquent. The Savings Banks have established reserves
aggregating $4.1 million during the first half of 1996, including a 10%
reserve on such loans which are current. During the third quarter of 1996, the
Savings Banks established an additional $4.3 million of reserves for the Sub-
Prime Auto Loans. As a result of the repossession of the collateral securing
the loans, the Savings Banks now hold approximately 300 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
As of June 30, 1996, both Girard and First Bank are "well capitalized"
savings institutions under OTS regulations. 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.
As a result of the SAIF special assessment and additional provisions for
loan losses on the Sub-Prime Auto Loans, as of September 30, 1996, First
Bank's level of capital was below the "well-capitalized" standard. See "Recent
Developments." Since failure to comply with the Orders could have significant
adverse consequences to the Savings Banks and the Company, the Company will
utilize approximately $1.0 million of the proceeds of the Common Stock
Offering and the Notes Offering to cause First Bank to become "well
capitalized" as required by the Orders. 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
15
<PAGE>
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
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 June 30, 1996, WCC's discounted loan portfolio included
$417.4 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 and
under-performing loans ("discounted 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Changes in Financial Condition." 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, Executive Vice 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--
16
<PAGE>
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.
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. However, because First Bank, as a result of
the recapitalization of the SAIF and additional allowances for loan losses
relating to the Sub-Prime Auto Loans, will only be "adequately capitalized,"
as of September 30, 1996, it is prohibited from using brokered deposits until
such time as it is "well-capitalized" at the end of a quarterly accounting
period. See "Recent Developments--Recapitalization of SAIF" and "Regulation--
The Savings Banks--Brokered Deposits."
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 retail 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.
17
<PAGE>
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.
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
Approximately 51.5% of the Company's total loan portfolio is 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.
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
18
<PAGE>
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 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 79% 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.
19
<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.
20
<PAGE>
RECENT DEVELOPMENTS
RESULTS OF OPERATIONS
The Company incurred a net loss for the first nine months of 1996. The
Company's net loss resulted primarily from provisions for losses on loans for
the first nine months of 1996 and a charge for the SAIF special assessment.
These loss provisions resulted primarily from the further deterioration of the
Company's Inherited Loans and Sub-Prime Auto Loans.
LOAN ACQUISITIONS
In the third quarter of 1996, the Private Companies acquired or committed to
acquire 24 Loan Portfolios aggregating $294.3 million principal amount, of
which two Loan Portfolios aggregating approximately $23.7 million principal
amount were acquired by the Savings Banks. 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.
Girard has 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 is expected to settle on November 1, 1996 (the
"Settlement Date"). Girard is expected to make a concurrent sale of
approximately $38.8 million unpaid principal amount of the Citicorp Portfolio
to two unaffiliated third parties on the Settlement Date resulting in a gain.
The remainder of the purchase price to be paid to Citicorp will be financed by
Girard under a master repurchase agreement with Bear Stearns Mortgage Capital
Corporation ("BSMCC") pursuant to which BSMCC will purchase certain performing
residential mortgage loans and Girard will simultaneously agree 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.
In October 1996, Girard also agreed to acquire approximately $31.9 million
in unpaid principal amount of discounted residential mortgage loans to be sold
by a succcessful bidder in an auction conducted by HUD, and such transaction
is expected to settle on December 12, 1996.
As a result, on completion of such series of transactions, Girard will have
purchased approximately $272 million of 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"). The settlement of this
transaction is expected to occur in the first quarter of 1997. The
Institutional Portfolio is currently held by WCC as a part of a participation
agreement pursuant to which the Institutional Investor receives a specified
percentage of the cash flow until it recovers its investment and thereafter
divides the profits between WCC and itself. 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.
Historically, the Private Companies have acquired a significant portion of
loans in the fourth quarter. In the fourth quarter of the year ended 1995, the
Private Companies acquired 39 Loan Portfolios aggregating $163.8 principal
amount.
21
<PAGE>
ALLOWANCES FOR LOAN LOSSES
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 at a
purchase price of approximately $22.3 million. 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 Savings Banks have established reserves aggregating $4.1
million through the second quarter of 1996, including a 10% reserve on such
loans which are current. In the third of quarter of 1996, the Company
established an additional $4.3 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. As of September 30, 1996, the Company
has reserves of approximately $10.1 million of approximately $19.7 million of
the remaining outstanding principal amount of Sub-Prime Auto Loans.
RECAPITALIZATION OF SAIF
The deposits of the Savings Banks are insured by the FDIC through the SAIF,
which, due to the large number of failed savings institutions in the late
1980's and early 1990's, has been unable to attain a 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 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 of 65.7 basis points will result in the Savings
Banks' incurring a pre-tax charge of approximately $1.4 million. As a result
of this assessment and additional provisions for loan losses on the Sub-Prime
Auto Loans, First Bank's level of capital fell below the "well-capitalized"
standard to "adequately capitalized" levels at September 30, 1996. The Company
will use a portion of the proceeds from the Common Stock Offering and the
Notes Offering to cause First Bank to become "well-capitalized" as required by
the Orders. A determination as to the capital levels of the Savings Banks will
be performed quarterly by the OTS. The proposed FDIC regulations contain a
reduction schedule which would reduce future semi-annual SAIF assessments for
savings associations such as the Savings Banks. However, there can be no
assurance that the reduction schedule will be adopted as proposed by the FDIC.
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. The U.K. Servicer is currently
servicing 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.
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>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- --------------------------
1996 1995 1995 1994 1993
---------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
LOAN ACQUISITION AND
ORIGINATION DATA:
Loan purchases and origina-
tions:
Single-family residential.... $ 6,589 $ 1,758 $ 5,742 $ 57,832 $ 1,059
Multi-family residential..... -- -- 983 667 --
Commercial and other mortgage
loans....................... -- 548 2,671 39,002 1,964
Consumer and other........... -- 7,683 14,223 101,890 39,330
---------- -------- -------- -------- --------
Total...................... 6,589 9,989 23,619 199,391 42,353
Discounted loan purchases:
Single-family residential.... 30,699 8,410 36,653 26,342 95
Multi-family residential..... -- 890 4,773 1,392 191
Commercial and other mortgage
loans....................... -- 1,086 22,252 8,087 4,322
Consumer and other........... -- 6,152 50,345 5,669 284,663
---------- -------- -------- -------- --------
Total...................... 30,699 16,538 114,023 41,490 289,271
---------- -------- -------- -------- --------
Total loan acquisitions and
originations.................. $ 37,288 $ 26,527 $137,642 $240,881 $331,624
========== ======== ======== ======== ========
LOANS SOLD..................... $ -- $ 77,979 $133,500 $ 9,000 $ --
LOANS SERVICED-END OF PERIOD... $1,045,249 $862,744 $894,649 $889,585 $606,122
</TABLE>
23
<PAGE>
The following table sets forth the composition of WCC's total loan portfolio
(excluding participation interests) at the end of the periods indicated.
COMPOSITION OF WCC'S TOTAL LOAN PORTFOLIO
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------- ------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loan Portfolio:
Single-family residen-
tial.................. $ 42,067 $ 97,291 $ 40,951 $ 138,063 $ 197
Multi-family residen-
tial.................. 1,285 605 1,458 721 --
Commercial and other
mortgage loans........ 16,219 28,619 21,015 36,276 242
Consumer and other..... 67,355 69,878 60,116 96,980 50,563
--------- --------- --------- --------- --------
Loan Portfolio....... 126,926 196,393 123,540 272,040 51,002
Discounted Loan Portfo-
lio:
Single-family residen-
tial.................. 77,369 24,610 79,636 19,939 68
Multi-family residen-
tial.................. 6,920 1,362 8,835 699 135
Commercial and other
mortgage loans........ 35,847 7,367 60,736 8,905 2,008
Consumer and other..... 297,277 304,643 261,880 324,358 453,693
--------- --------- --------- --------- --------
Discounted Loan Port-
folio............... 417,413 337,982 411,087 353,901 455,904
Accrued Interest......... 267,192 221,497 238,020 210,050 210,667
Unaccreted discount (1).. (597,878) (575,298) (615,339) (583,870) (658,946)
--------- --------- --------- --------- --------
Total Loan Portfolio, net
........................ $ 213,653 $ 180,574 $ 157,308 $ 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 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").
The historical income statement and balance sheet data presented at and for
the six months ended June 30, 1996 and 1995 have been derived from unaudited
combined financial statements (the "Unaudited WCC Financial Statements" and,
together with the WCC Audited Financial Statements, the "WCC Financial
Statements") and include all adjustments, consisting only of normal recurring
accruals, which WCC considers necessary for a fair presentation of WCC's
results of operations for these periods. Operating results for the six months
ended June 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. 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).
As a result, WCC's profit on its loan assets would be expected to be less than
the profits of the Company since under the participation agreements generally
65-85% of the profits on such assets do not accrue to WCC.
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 only 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>
SIX MONTHS
ENDED JUNE 30, DECEMBER 31,
---------------- --------------------------
WCC SELECTED FINANCIAL 1996 1995 1995 1994 1993
INFORMATION -------- ------ -------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Servicing fees.................. $ 5,005 $5,460 $ 9,739 $ 3,339 $1,356
Income from investments......... 3,045 2,578 3,529 1,159 450
Other interest and dividend
income......................... 1,471 410 1,595 508 110
Other revenues.................. 458 423 668 657 4,509
Compensation and other general
and administrative expenses.... (6,017) (4,644) (11,030) (5,964) (4,509)
Interest expense................ (5,482) (3,448) (3,789) (894) (339)
Other........................... 19 (203) (193) 134 --
-------- ------ -------- -------- ------
Net income (loss)............... $ (1,501) $ 576 $ 519 $ (1,061) $1,577
======== ====== ======== ======== ======
BALANCE SHEET DATA:
Total assets.................... $275,872 $204,944 $288,004
Performing loan portfolio, net.. 113,245 104,688 125,942
Discounted Loan portfolio, net.. 100,408 19,352 17,188
Loans held for sale, at lower of
cost or market................. -- 33,268 108,991
Participation liabilities....... 133,422 150,298 205,331
Borrowings...................... 180,202 70,164 60,941
Stockholders' equity (deficit).. (50,501) (23,801) (11,099)
</TABLE>
25
<PAGE>
Servicing Fees and Income from Investments in Loans and Securities. WCC's
servicing fees decreased by $0.5 million, and income from investments in loans
and securities increased by $0.5 million, during the six months ended June 30,
1996 compared to the six months ended June 30, 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 Interest and Dividend Income. Other interest and dividend income
increased by approximately $1.1 million during the six months ended June 30,
1996 compared to the six months ended June 30, 1995. Such income is generated
from interest-bearing cash equivalents, U.S. Treasury securities, commercial
notes receivable and interest-earning assets other than loans and subordinate
asset-backed securities. The average balance of these instruments increased in
1996 as compared to 1995, to satisfy greater liquidity requirements and to
provide collateral for certain borrowing arrangements.
Other Revenues. Other revenues are derived from various sources including
rental income from commercial properties and gains on sales of loans. Total
other revenues remained relatively constant during the first six months of
1996 compared to the first six months of 1995. However, this category of
income can fluctuate significantly from period to period depending on whether
there are significant loan sales.
General and Administrative Expense. WCC's general and administrative expense
increased by approximately $1.4 million during the six months ended June 30,
1996 compared to the six months ended June 30, 1995 as a result of the
increased cost in acquiring a greater number of loan portfolios.
Interest Expense. WCC's interest expense increased by approximately $2.0
million during the six months ended June 30, 1996 compared to the six months
ended June 30, 1995 as a result of increased borrowings to acquire loan
portfolios.
Performing and Discounted Loans. WCC's loans increased by approximately
$89.6 million during the six months ended June 30, 1996 as a result of the
Company's business strategy of aggressively acquiring loan portfolios of
discounted loans and performing mortgage loans.
Loans Available for Sale. WCC's loans available for sale decreased by
approximately $33.2 million during the six months ended June 30, 1996 as a
result of the securitization of such loans.
Participations. Participations decreased by approximately $16.9 million or
11.2% during the six months ended June 30, 1996 primarily as a result of the
Company's strategy to fund loan portfolio acquisitions through borrowings and
as a result of securitization of portfolios or the resolution of outstanding
loans.
Borrowings. Borrowings increased by approximately $110.0 million during the
six months ended June 30, 1996 as a result of WCC entering into certain
reverse repurchase transactions primarily as a result of WCC's strategy to
acquire loan portfolios directly and not enter into participation agreements.
Stockholders' Equity. Stockholders' equity decreased by approximately $26.7
million during the six months ended June 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 $47.4 million after deducting the
underwriting discount and estimated offering expenses payable by the Company.
Net proceeds to be received by the Company from the Common Stock Offering
currently are estimated to be $16.1 million after deducting the underwriting
discount and estimated offering expenses payable by the Company ($18.5, if the
Common Stock Underwriters' over-allotment option is exercised in full).
Approximately $1.0 million of the net proceeds from the Common Stock
Offering and the Notes Offering will be contributed by the Company to the
capital of the Savings Banks to support future growth and to cause First Bank
to become "well-capitalized" under regulatory standards. 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 June 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"; and (ii) 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>
JUNE 30, 1996
--------------------------
ACTUAL AS ADJUSTED
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Repurchase agreements............................. $ 66,771 $ 66,771
Long-term debt:
% Subordinated Notes due 2003.................... -- 50,000
----------- -----------
Total......................................... 66,771 116,771
----------- -----------
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; shares issued and
outstanding (actual); 7,500,000 shares issued and
outstanding (as adjusted) for the Common Stock
Offering(1)...................................... 35,550 53,550
Retained earnings (accumulated deficit)........... (1,374) (3,234)
Unrealized gain on available for sale securities.. 898 898
----------- -----------
Total stockholders' equity.................... 35,074 51,214
----------- -----------
Total capitalization.......................... $ 101,845 $ 167,985
=========== ===========
Savings Banks' Regulatory Capital:
Regulatory capital ratios of First Bank(2):
Tangible capital................................ 7.0% 7.6%
Core capital.................................... 7.0% 7.6%
Risk-based capital.............................. 11.2% 12.1%
Regulatory capital ratios of Girard(2):
Tangible capital................................ 7.0% 7.0%
Core capital.................................... 7.0% 7.0%
Risk-based capital.............................. 10.4% 10.4%
</TABLE>
- --------
(1) Excludes shares of Common Stock issuable upon the exercise of options. See
"Management--Incentive Stock Plan--Options to be Granted at Closing."
(2) Assumes the contribution of $1.0 million to the capital of First Bank.
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 years ended December 31, 1995 and 1994
and for the period from October 8 through December 31, 1993 have been derived
from the Audited Consolidated Financial Statements included elsewhere in this
Prospectus. For the purpose of financial statement presentation herein, First
Bank is treated as the predecessor to the Company. On October 7, 1993, WAC
acquired 94.9% of First Bank's common stock in a purchase accounting
transaction.
On November 9, 1994, Wilshire Acquisitions Corporation II ("WACII") a newly-
formed entity with ownership and management common to WAC acquired 94.9% of
the common stock of Girard in a purchase accounting transaction. Because WAC
and WACII were under common control at the time of their respective
acquisitions of First Bank and Girard, the Selected Financial Information is
presented on a combined basis as of December 31, 1994. On December 27, 1995,
WAC and WACII were merged with WAC as the surviving entity. Selected Financial
Information as of December 31, 1995 is presented on a consolidated basis and
includes the accounts of WAC, First Bank and Girard.
The historical income statement and balance sheet data presented at and for
the six months ended June 30, 1996 and 1995 have been derived from unaudited
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 six months ended June 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 Selected 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.
The historical income statement and balance sheet data of the predecessor
for any date prior to October 8, 1993 have not been included because prior to
its acquisition the predecessor was seriously under-capitalized and subject to
a cease and desist order and a prompt corrective action which severely limited
its operations, including restrictions on asset growth and new deposits.
Further, the predecessor was subject to a regulatory takeover by the OTS/RTC
if the acquisition by WAC was not completed. Prior to the acquisition of the
predecessor by WAC in October 1993, the predecessor was operated by different
management with a different strategy and business plan. Current management has
significantly changed the business plan of the predecessor and has
substantially increased the Company's assets while disposing of, and receiving
against, Inherited Loans. Accordingly, management believes that the
predecessor's results of operations do not have a significant bearing on the
Company.
29
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31, OCTOBER 8-
----------------- ------------------ DECEMBER 31,
1996 1995 1995 1994 1993
-------- ------- -------- -------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest Income:
Loans.................. $ 20,436 $ 9,589 $ 21,821 $ 7,923 $ 1,383
Mortgage-backed
securities............ 898 1,019 1,359 1,361 218
Investments and federal
funds sold............ 617 271 1,201 285 53
-------- ------- -------- -------- -------
Total interest income.. 21,951 10,879 24,381 9,569 1,654
-------- ------- -------- -------- -------
Interest expense:
Deposits............... 10,633 6,465 13,944 5,017 764
Borrowings............. 1,387 242 537 440 85
-------- ------- -------- -------- -------
Total interest
expense............... 12,020 6,707 14,481 5,457 849
-------- ------- -------- -------- -------
Net interest income..... 9,931 4,172 9,900 4,112 805
Provision for estimated
losses on loans........ 10,868 2,201 4,266 2,173 63
-------- ------- -------- -------- -------
Net interest (loss)
income after provision
for estimated losses on
loans.................. (937) 1,971 5,634 1,939 742
-------- ------- -------- -------- -------
Other Income (Loss):
Bankcard income(1)..... 3,275 1,955 4,694 635 --
Bankcard processing
expense............... (2,616) (1,391) (3,462) (274) --
Gain (loss) on sale of
loans................. 1,983 24 642 -- --
Loan fees and charges.. 648 199 610 43 --
Gain on sale of
mortgage-backed
securities available
for sale.............. -- -- 14 54 96
Amortization of
deferred credits...... 230 230 460 388 --
Other, net............. 16 33 149 381 --
-------- ------- -------- -------- -------
Total other income
(loss)................ 3,536 1,050 3,107 1,227 96
-------- ------- -------- -------- -------
Other Expenses:
Compensation and
employee benefits..... 1,479 1,075 2,516 1,922 204
FDIC insurance
premiums.............. 387 285 721 261 61
Occupancy.............. 141 145 385 319 38
Professional services.. 297 370 1,028 507 49
Data processing and
equipment rentals..... 124 98 232 162 15
Real estate owned,
net................... 104 126 170 241 269
Loan service fees and
expenses.............. 2,111 369 1,958 242 --
Other general and
administrative
expenses.............. 864 683 1,092 1,290 --
-------- ------- -------- -------- -------
Total other expenses... 5,507 3,151 8,102 4,944 636
-------- ------- -------- -------- -------
(Loss) income before
income tax (benefit)
provision.............. (2,908) (130) 639 (1,778) 202
Income tax (benefit)
provision.............. (1,279) (10) 47 (526) (713)
-------- ------- -------- -------- -------
Net (loss) income....... $ (1,629) $ (120) $ 592 $ (1,252) $ 915
======== ======= ======== ======== =======
(Loss) earnings per
share(2)............... $ (21.11) $ (5.13) $ 25.09 $(135.43) $149.07
======== ======= ======== ======== =======
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------
1996 1995 1994 1993
-------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................. $543,198 $341,454 $230,636 $99,367
Cash and due from banks.................. 8,253 3,382 4,880 174
Federal funds sold....................... 6,100 1,100 3,950 2,985
Investment securities held to maturity,
at amortized cost....................... 7,421 6,470 4,505 14,787
Mortgage-backed securities available for
sale, at fair value..................... 14,431 9,083 10,943 6,632
Mortgage-backed securities held to
maturity, at amortized cost............. 23,500 13,119 14,439 14,787
Loan portfolio, net(3)................... 446,053 259,417 179,377 68,743
Discounted loan portfolio:
Total loans............................. 21,932 53,439 2,995 --
Unaccreted discount..................... (1,761) (6,671) (470) --
Allowance for loan losses............... (6,973) (15,414) (431) --
Discounted loans, net................... 13,198 31,354 2,094 --
Loans held for sale, at lower of cost or
market(4)............................... -- 18,597 -- --
Stock in FHLB of San Francisco, at cost.. 2,868 1,421 1,612 564
Real estate owned, net................... 3,527 4,964 1,208 1,037
Leasehold improvements and equipment..... 325 275 167 31
Due from affiliate(5).................... 8,063 4,514 4,062 1,229
Accrued interest receivable.............. 4,545 3,042 1,599 650
Prepaid expenses and other assets........ 3,386 1,724 1,026 1,419
Income taxes receivable, net............. 1,528 1,589 774 1,116
Deposits................................. 433,769 304,020 196,289 84,821
Borrowings............................... 66,771 13,000 21,500 6,608
Due to affiliates(6)..................... 2,259 759 652 675
Deferred credits(7)...................... 948 1,134 1,772 1,785
Subordinated debt(8)..................... -- 11,000 -- --
Minority interest........................ 519 600 574 347
Preferred stock in subsidiary held by
others.................................. -- -- 1,000 --
Note payable to subsidiary stockholders.. -- -- -- 300
Accounts payable and other liabilities... 3,858 3,902 2,056 1,027
Stockholders' equity(8).................. 35,074 7,039 6,793 3,806
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED -------------
JUNE 30, DECEMBER 31, OCTOBER 8 -
-------------- ------------- DECEMBER 31,
1996 1995 1995 1994 1993
------ ------ ---- ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL RATIOS AND OTHER DATA:
Return on average assets.......... (.35)% (.05)% .24% (.92)% .97%
Return on average equity.......... (4.62)% (1.73)% 8.65% (31.03)% 26.69%
Average interest rate on total
loans............................ 9.64% 9.36% 9.57% 7.65% 7.62%
Average equity to average assets.. 7.68% 2.96% 2.72% 2.96% 3.62%
Net interest spread(9)............ 3.47% 2.81% 3.08% 2.85% 3.37%
Net interest margin(10)........... 4.19% 3.41% 3.72% 3.04% .87%
Ratio of earnings to fixed
charges(11)(12):
Including interest on deposits... .76 .98 1.04 .67 1.24
Excluding interest on deposits... (1.10) .46 2.19 (3.04) 3.38
Non-performing loans to loans at
end of period(3)................. 5.39% 6.50% 4.46% 5.95% 9.71%
Allowance for loan losses to total
loans at end of period........... 6.3% 15.2% 7.6% 3.9% 5.8%
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31, OCTOBER 8-
-------------------- --------------- DECEMBER 31,
1996 1995 1995 1994 1993(13)
-------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
LOAN ORIGINATIONS............ $ 1,145 $ 2,125 $ 8,748 $ 4,345 $ --
LOAN ACQUISITION DATA:
Loan Portfolio:
Single-family residential... 220,629(14) 6,812 121,883 36,462 1,618
Multi-family residential.... -- -- -- 61,247 72
Commercial and other mort-
gage loans................. -- -- 2,126 31,091 462
Consumer and other
loans(15).................. 17,324 -- 11,012 10,847 --
Discounted Loans:
Single-family residential... -- (16) 49,662 49,662 1,542 --
Multi-family residential.... -- (16) 96 96 -- --
Commercial and other mort-
gage loans................. -- 869 869 1,843 --
Consumer and other loans.... -- 5,368 5,368 239 --
LOANS SOLD................... 27,965 8,724 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 June 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) Primarily Discounted Loans included in Discounted Loans, net.
(5) 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.
(6) Due to affiliates primarily consists of amounts owed to WCC for WAC
operating expenses paid by WCC.
(7) 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.
(8) 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) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(10) Net interest margin represents net interest income divided by total
average earning assets.
(11) 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.
(12) Pro forma ratio of earnings to fixed charges for the six months ended
June 30, 1996 and the year ended December 31, 1995 were 0.0 and .64,
respectively.
(13) The predecessor was not acquiring or selling loans prior to its
acquisition in October 1993.
(14) 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."
(15) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(16) Girard committed to purchase approximately $248 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 as of June 30, 1996 and December 31, 1995
and 1994 was $459.3 million, $290.8 million and $181.5 million, respectively.
Net interest income for the six month period ended June 30, 1996 and for the
years ended December 31, 1995 and 1994 was $9.9 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 $1.6 million for the six
months ended June 30, 1996, compared to a loss in the similar prior year
period of $0.1 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 six 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 $10.9 million in the first six 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 $4.3 million of reserves
expected to be taken in the third quarter of 1996, allowances for Sub-Prime
Auto Loans as a percentage of the unpaid principal balances was 51.3% 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>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31, OCTOBER 8-
----------------- --------------- DECEMBER 31,
1996 1995 1995 1994 1993
-------- -------- ------- ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income......... $21,951 $10,879 $24,381 $ 9,569 $1,654
Gains on sale of loans.. 1,983 24 642 -- --
Bankcard processing op-
erations............... 3,275 1,955 4,694 635 --
Other, net(1)........... 894 462 1,233 866 96
-------- -------- ------- ------- ------
Total revenue......... $28,103 $13,320 $30,950 $11,070 $1,750
======== ======== ======= ======= ======
</TABLE>
- --------
(1) Other consists primarily of loan fees and charges and the amortization of
negative goodwill.
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 tables set 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>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------
1996 1995
-------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE(1) BALANCE INTEREST YIELD/RATE(1)
-------- -------- ------------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Average Assets:
Mortgage-backed
securities............. $ 28,686 $ 898 6.26% $ 24,792 $ 1,019 8.22%
Loan portfolio (2)...... 423,944 20,436 9.64 204,900 9,589 9.36
Investment securities
and other.............. 20,933 617 5.89 15,153 271 3.58
-------- ------- -------- -------
Total interest-earning
assets................ 473,563 21,951 9.27 244,845 10,879 8.89
Non-interest earning
cash................... 1,516 -- -- 1,984 -- --
Allowance for loan
losses and unaccreted
discount............... (45,873) -- -- (24,822) -- --
Other assets............ 29,990 -- -- 12,557 -- --
-------- ------- -------- -------
Total assets........... $459,196 $21,951 $234,564 $10,879
======== ======= ======== =======
Average Liabilities and
Stockholders' Equity:
Interest-bearing
deposits............... $364,559 $10,633 5.83 $210,281 $ 6,465 6.15
FHLB advances........... 2,667 86 6.45 3,447 86 4.99
Subordinated debentures
and other interest-
bearing obligations.... 47,546 1,301 5.47 6,892 156 4.53
-------- ------- -------- -------
Total interest-bearing
liabilities........... 414,772 12,020 5.80 220,620 6,707 6.08
Non-interest bearing
deposits............... 3,301 -- -- 2,489 -- --
Escrow deposits......... 338 -- -- 151 -- --
Other liabilities....... 5,533 -- -- 4,363 -- --
-------- ------- -------- -------
Total liabilities...... 423,944 12,020 227,623 6,707
Stockholders' equity.... 35,252 -- -- 6,941 -- --
-------- ------- -------- -------
Total liabilities and
stockholders' equity.. $459,196 $12,020 $234,564 $ 6,707
======== ======= ======== =======
Net interest income..... $ 9,931 $ 4,172
Net interest spread..... 3.47 2.81
Net interest margin..... 4.19 3.41
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 114.2% 111.8%
======== ========
</TABLE>
34
<PAGE>
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------- OCTOBER 8-DECEMBER 31,
1995 1994 1993
----------------------------- ----------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE(1)
-------- -------- ---------- -------- -------- ---------- ------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Assets:
Mortgage-backed
securities............. $ 24,054 $ 1,359 5.65% $ 23,515 $1,361 5.79% $16,224 $ 218 5.37%
Loan portfolio(2)....... 227,970 21,821 9.57 103,583 7,923 7.65 72,600 1,383 7.62
Investment securities
and other.............. 14,216 1,201 8.45 7,969 285 3.58 3,704 53 5.72
-------- ------- -------- ------ ------- ------
Total interest-earning
assets, interest
income................. 266,240 24,381 9.16 135,067 9,569 7.08 92,528 1,654 7.15
Non-interest earning
cash................... 1,868 -- -- 2,053 -- -- 3,168 -- --
Allowance for loan
losses and unaccreted
discount............... (31,845) -- -- (8,595) -- -- (5,302) -- --
Other assets............ 15,277 -- -- 7,646 -- -- 4,320 -- --
-------- ------- -------- ------ ------- ------
Total assets........... $251,540 $24,381 $136,171 $9,569 $94,714 $1,654
======== ======= ======== ====== ======= ======
Average Liabilities and
Stockholders' Equity:
Interest-bearing
deposits............... $231,555 $13,944 6.02 $118,277 $5,017 4.24 $85,291 $ 764 3.58
FHLB advances........... 1,381 104 7.53 5,916 228 3.85 -- -- --
Subordinated debentures
and other interest-
bearing obligations.... 5,383 433 8.04 4,757 212 4.44 4,507 85 7.54
-------- ------- -------- ------ ------- ------
Total interest-bearing
liabilities, interest
expense............... 238,319 14,481 6.08 128,950 5,457 4.23 89,798 849 3.78
Non-interest bearing
deposits............... 2,196 -- -- 1,537 -- -- -- -- --
Escrow deposits......... 106 -- -- 74 -- -- 23 -- --
Other liabilities....... 4,077 -- -- 1,582 -- -- 1,465 -- --
-------- ------- -------- ------ ------- ------
Total liabilities...... 244,698 14,481 132,143 5,457 91,286 849
Stockholders' equity.... 6,842 -- -- 4,028 -- -- 3,428 -- --
-------- ------- -------- ------ ------- ------
Total liabilities and
stockholders' equity.. $251,540 $14,481 $136,171 $5,457 $94,714 $ 849
======== ======= ======== ====== ======= ======
Net interest income..... $ 9,900 $4,112 $ 805
Net interest spread..... 3.08 2.85 3.37
Net interest margin..... 3.72 3.04 .87
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 111.7% 104.7% 104.6%
======== ======== =======
</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.
35
<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>
SIX MONTHS ENDED
JUNE 30, 1996 VS. YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED ------------------------------------------------
JUNE 30, 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............ $(355) $ 234 $ (121) $ (37) $ 35 $ (2) $ 168 $ 975 $1,143
Loan portfolio......... 297 10,550 10,847 2,405 11,493 13,898 60 6,480 6,540
Investment securities
and other............. 218 128 346 581 335 916 (112) 344 232
----- ------- ------- ------ ------- ------- ------- ------ ------
Total interest-earning
assets................ 160 10,912 11,072 2,949 11,863 14,812 116 7,799 7,915
Interest-Bearing Liabil-
ities:
Interest-bearing depos-
its................... (313) 4,481 4,168 2,723 6,204 8,927 1,368 2,885 4,253
FHLB advances.......... -- -- -- (626) 502 (124) -- 228 228
Other interest-bearing
obligations........... 39 1,106 1,145 191 30 221 146 (19) 127
----- ------- ------- ------ ------- ------- ------- ------ ------
Total interest-bearing
liabilities........... (274) 5,587 5,313 2,288 6,736 9,024 1,514 3,094 4,608
----- ------- ------- ------ ------- ------- ------- ------ ------
Increase (decrease) in
net interest income.... $ 434 $ 5,325 $ 5,759 $ 661 $ 5,127 $ 5,788 $(1,398) $4,705 $3,307
===== ======= ======= ====== ======= ======= ======= ====== ======
</TABLE>
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 1996
VERSUS SIX MONTHS ENDED JUNE 30, 1995
NET INTEREST INCOME
The Company's net interest income increased by approximately $5.8 million or
138.0% during the six months ended June 30, 1996, as compared to the same
period in the prior year. This increase resulted from an approximately $11.1
million or 101.8% increase to interest income due to an approximately $228.7
million or 93.4% increase in average interest-earning assets from period to
period and, to a lesser extent, a 38 basis point increase in the weighted
average yield on such assets. The increase in interest income was offset in
part by an approximately $5.3 million or 79.2% increase in interest expense
due to an approximately $194.2 million or 88.0% increase in average interest-
bearing liabilities, primarily certificates of deposit, and, to a lesser
extent, a 14 basis point increase in the weighted average rate paid on
interest-bearing liabilities.
The increase in interest income during the six months ended June 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
$194.2 million or 88.0% during the six months ended June 30, 1996, as compared
to the same period in the prior year, as a result of the Savings Banks'
continued reliance on brokered and other wholesale certificates of deposit and
repurchase agreements as its principal source of funds. 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."
36
<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 $10.9 million for the six months ended June 30, 1996, as
compared to approximately $2.2 million for the comparable period in the prior
year, an increase of 395.5%. The following table sets forth the Company's
provision for estimated losses on loans for the six months ended June 30,
1996:
<TABLE>
<CAPTION>
% OF
PROVISIONS TOTAL
---------- ------
(IN THOUSANDS)
<S> <C> <C>
Inherited Loans.......................................... $ 4,702 43.3%
Sub-Prime Auto Loans..................................... 4,084 37.6%
Other Purchased Loans.................................... 2,072 19.1%
------- ------
Total provision for estimated losses on loans............ $10,858 100.0%
======= ======
</TABLE>
Approximately $4.1 million of the increase in the provisions from 1994 to
1995 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.
Following these provisions and a $4.3 million provision expected to be made by
the Savings Banks in the third quarter (See "Recent Developments"), the
Company will have an allowance of approximately $10.1 million or 51.3% of the
unpaid principal balances of the Sub-Prime Auto Loans at September 30, 1996.
The Company also made a provision of approximately $4.7 million in the six
months ended June 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 147.5% to a loss of approximately $(0.9) million for
the six months ended June 30, 1996 from income of approximately $2.0 million
for the same period in 1995. This decrease was due to the substantial increase
in provisions for estimated losses on loans.
37
<PAGE>
OTHER INCOME
The Company's other income was approximately $3.5 million for the six months
ended June 30, 1996 compared to approximately $1.1 million for the same period
in the prior year, an increase of 236.8%. 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>
SIX MONTHS ENDED
JUNE 30,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other income:
Bankcard income................................ $ 3,275 $ 1,955
Bankcard processing expense.................... (2,616) (1,391)
Gain on sale of loans.......................... 1,983 24
Loan fees and charges.......................... 648 199
Amortization of deferred credits............... 230 230
Other, net..................................... 16 33
----------- -----------
Total other income........................... $ 3,536 $ 1,050
=========== ===========
</TABLE>
Bankcard Income and Processing Expense. The increase in other income for the
six months ended June 30, 1996 was due in part to an increase of approximately
$1.3 million in bankcard income, from approximately $2.0 million for the six
months ended June 30, 1995 to approximately $3.3 million for the six months
ended June 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 $1.2 million from
approximately $1.4 million for the six months ended June 30, 1995 to
approximately $2.6 million for the six months ended June 30, 1996. This
increase resulted primarily from an increase in bankcard operations due to the
addition of several new customers.
Gains on Sale of Loans. The increase in other income in 1996 was also due in
part to an increase of approximately $2.0 million in gains on sales of loans,
from less than $0.1 million for the six months ended June 30, 1995 to
approximately $2.0 million for the six months ended June 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 $0.4 million, from
approximately $0.2 million for the six months ended June 30, 1995 to
approximately $0.6 million for the six months ended June 30, 1996. The
increase was primarily due to an increase in loan volume.
38
<PAGE>
OTHER EXPENSE
The Company's other expenses totalled approximately $5.5 million for the six
months ended June 30, 1996 compared to approximately $3.2 million for the six
months ended June 30, 1995, an increase of 74.8%.
Loan Service Fees and Expenses. The largest component of other expenses in
1996 was loan service fees and expense which increased by approximately $1.7
million from approximately $0.4 million for the six months ended June 30, 1995
to approximately $2.1 million for the six months ended June 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 in the first half of 1996 compared to the first half
of 1995. 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 six
months ended June 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 $1.1 million for the
six months ended June 30, 1995 to approximately $1.5 million for the six
months ended June 30, 1996, an increase of approximately $0.4 million (or
37.6%). 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 35 for the six months ended June 30, 1995
to 50 for the six months ended June 30, 1996, reflecting the expansion of
business activities, particularly loan acquisition activities and the growth
of non-traditional bankcard activities.
FDIC Insurance Premiums. FDIC insurance premiums increased from
approximately $0.3 million for the six months ended June 30, 1995 to
approximately $0.4 million for the six months ended June 30, 1996, an increase
of approximately $0.1 million (or 35.8%), as a result of growth in deposits
outstanding.
Professional Services. Other expense relating to professional services
decreased from approximately $0.4 million for the six months ended June 30,
1995 to approximately $0.3 million for the six months ended June 30, 1996, a
decrease of approximately $0.1 million (or 19.7%), reflecting the higher legal
and accounting expenses incurred in 1995 in connection with certain
acquisition and consulting activities.
INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit) amounted to a benefit of approximately $1.3
million during the six months ended June 30, 1996 compared to a benefit of
less than $0.1 million during the six months ended June 30, 1995. The
Company's effective tax rate amounted to (44.0%) and (7.7%) during the six
months ended June 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 six months ended June 30, 1996 and 1995, respectively.
39
<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 165.6%. 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.
40
<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 $110.2 million in 1994 to $239.2 million in 1995,
an increase of 117.1%.
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
41
<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.
RESULTS OF OPERATIONS--1994 COMPARED TO 1993
The following discussion compares the audited results of operations of the
Company for fiscal year 1994 to the unaudited results of operations of the
Company and its predecessor (the "Predecessor") for the twelve-month period
ended December 31, 1993. As described above under "Selected Financial
Information," since the Predecessor operated with a fiscal year ended June 30
and the Company converted to a fiscal year ended December 31 following the
acquisition, the audited historical financial statements included elsewhere in
this Prospectus provide audited information with respect to the six-month
period ended December 31, 1993 and the twelve-month period ended June 30, 1993
and do not provide audited information for the twelve-month period ended
December 31, 1993. Accordingly, to provide investors with financial
information for 1993 which is readily comparable to the results of operations
for the twelve-month period ended December 31, 1994, the following discussion
is based on unaudited financial information for the twelve months ended
December 31, 1993 ("fiscal year (unaudited) 1993") prepared by management
using the audited financial information for the six-month period ended
December 31, 1993 and the unaudited financial information for the first two
quarters of calendar year 1993. Certain purchase accounting adjustments
affecting operating results in the post-acquisition period of 1993 and in all
of 1994 are not reflected in the pre-acquisition period of 1993.
Management believes that the Predecessor's results of operations in 1993 are
not helpful or meaningful in evaluating the Company's current business or
results of operations. The Predecessor was acquired in October 1993 at a
substantial discount to its book value, reflecting the poor quality of its
assets. Prior to the acquisition, the Predecessor was seriously under-
capitalized and subject to a cease and desist order and a prompt corrective
action which severely limited its operations, including restrictions on asset
growth and new deposits. Further, the Predecessor was subject to a regulatory
takeover by the OTS/RTC if the acquisition by WAC had not occurred. Prior to
the acquisition of the Predecessor by WAC in October 1993, the Predecessor was
operated by different management with a different strategy and business plan.
Current management has significantly changed the business plan of the
Predecessor and has substantially increased the Company's assets while
disposing of, and reserving against, Inherited Loans. Accordingly, management
believes that the Predecessor's results of operations do not have a
significant bearing on the Company.
42
<PAGE>
NET INTEREST INCOME
The Company's net interest income was approximately $4.1 million for fiscal
year 1994 compared to approximately $3.6 million for the fiscal year
(unaudited) 1993, an increase of 13.9%. 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 $9.6
million for fiscal year 1994 compared to approximately $7.2 million for fiscal
year (unaudited) 1993, an increase of 33.3%. The increase in the Company's
interest income from 1993 to 1994 was due primarily to an increase in interest
received on loans from approximately $6.6 million in fiscal year (unaudited)
1993 to approximately $7.9 million in fiscal year 1994 and an increase in
interest received on investments from approximately $0.7 million in fiscal
year (unaudited) 1993 to approximately $1.6 million in fiscal year 1994. The
increase in interest received on loans was primarily the result of the
Company's strategy to pursue acquisitions of Loan Portfolios, which the
Company began implementing with the acquisition of the Predecessor and Girard
in 1993 and 1994, respectively, and resulted in an increase in the Company's
total loan portfolio from approximately $74.0 million at year end 1993 to
approximately $198.6 million at year end 1994. In addition, the Company
acquired Girard in November 1994 and, as a result, the Company's 1994 results
of operations reflect two months of Girard's operations while 1993 results do
not reflect any operations by Girard. In addition, the average rate earned by
the Company on its average interest-bearing assets decreased from 7.04% in
fiscal year (unaudited) 1993 to 6.75% in 1994. The increase in the average
rate was primarily due to a higher interest rate environment.
Interest Expense. The Company's interest expense was approximately $5.5
million for fiscal year 1994 compared to approximately $3.6 million in fiscal
year (unaudited) 1993, an increase of 52.8%. The increase in interest expense
from 1993 to 1994 was due primarily to an increase in average certificates of
deposit outstanding from approximately $85.3 million in 1993 to approximately
$118.3 million in 1994 (an increase of 38.7%), which occurred in order to fund
the growth of the loan portfolio noted above. In addition, interest expense
increased in 1994 due to the inclusion of Girard's results of operations for
two months of 1994. In addition, the average interest rate on all of the
Company's interest-bearing liabilities increased from 3.78% during 1993 to
4.23% during 1994. The increase in the average interest rate payable by the
Company was primarily due to an overall increase in interest rates.
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
The Company recorded a provision for estimated losses on loans totalling
approximately $2.2 million for fiscal year 1994 compared to approximately $3.3
million for fiscal year (unaudited) 1993, a decrease of 33.3%.
The decrease in the provisions from 1993 to 1994 was attributable to the
high reserves required on the Inherited Loans of the predecessor in 1993 due
to the poor quality of those loans, prolonged slump in the Southern California
economy and real estate values in that region and the increased level of
regulatory scrutiny of the Predecessor prior to its acquisition by WAC.
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOSSES ON LOANS
The Company's net interest income after provision for estimated losses on
loans increased approximately $1.5 million (or 375.0%) to approximately $1.9
million for fiscal year 1994 from approximately $0.4 million for fiscal year
(unaudited) 1993.
43
<PAGE>
OTHER INCOME
The Company's other income was approximately $1.2 million for fiscal year
1994 compared to approximately $0.1 million for fiscal year (unaudited) 1993.
This increase was primarily attributable to growth in the Company's bankcard
processing operation, amortization of deferred credits and other (net) and to
a lesser degree to loan fees and charges and gain on the sale of mortgage-
backed securities available for sale. The components of the Company's non-
interest income are reflected in the following table:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1994 1993
------- ------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Bankcard income................................................. $ 635 $ --
Bankcard processing expense..................................... (274) --
Loan fees and charges........................................... 43 --
Gain on sale of mortgage-backed securities available for sale... 54 96
Amortization of deferred credits................................ 388 --
Other, net...................................................... 381 --
------- -----
Total......................................................... $ 1,227 $ 96
======= =====
</TABLE>
The increase in other income in 1994 was due primarily to an increase of
approximately $0.6 million in bankcard income, from no bankcard income in
fiscal year (unaudited) 1993 as a result of the commencement of bankcard
operations in mid-1994. As a result of the launch of the Company's bankcard
processing operation following the acquisition of First Bank in late 1993,
bankcard processing expense increased by approximately $0.3 million from no
bankcard expenses in fiscal year (unaudited) 1993. The increase in other
income in 1994 was also due in part to an increase of approximately $0.4
million in amortization of deferred credits, from no such amortization of
deferred credits in fiscal year (unaudited) 1993. Since the purchase prices of
the Savings Banks were less than the fair values of the net assets acquired,
the Company recorded deferred credits (negative goodwill) of approximately
$2.2 million. These credits are being amortized over five years on a straight-
line method. The increase in other income in 1994 was also due in part to an
increase of approximately $0.4 million in other (net). To a lesser degree, the
increase in other income in 1994 was due to the Company beginning to receive
loan fees and charges in fiscal year 1994 due to changes in loan fee practices
under new management, which was partially offset by a decrease of less than
$0.1 million in gains from sales of securities.
OTHER EXPENSE
The Company's other expense totalled approximately $4.9 million for fiscal
year 1994 compared to approximately $2.0 million for fiscal year (unaudited)
1993, an increase of 145.0%. Substantially all of the key items of other
expense (including compensation and employee benefits, and professional
services) showed an increase from 1993 to 1994 except for a minor decrease in
real estate owned (net). This increase was primarily attributable to growth in
First Bank and the acquisition of Girard in late 1994.
Compensation. The largest component of other expense in 1994 was
compensation and employee benefits which increased from approximately $0.7
million in fiscal year (unaudited) 1993 to approximately $1.9 million in
fiscal year 1994, an increase of approximately $1.2 million (or 171.4%),
primarily as a result of an increase in the average number of full-time
equivalent employees and the inclusion of compensation expenses for Girard in
late 1994.
Other General and Administrative. Other general and administrative expenses
increased from approximately $0.4 million in fiscal year (unaudited) 1993 to
approximately $1.3 million in fiscal year 1994, an increase of 225%.
Loan Service Fees and Expenses. Loan service fees and expenses increased
from no such fees and expenses in fiscal year (unaudited) 1993 to
approximately $0.2 million in fiscal year 1994. Loan service fees and
44
<PAGE>
expenses relate to fees and reimbursable expenses to WCC to service the
Company's total loan portfolio. Prior to the acquisition of First Bank in
November 1993, WCC did not service the Company's total loan portfolio.
Professional Services. Other expense relating to professional services also
increased approximately $0.2 million from approximately $0.3 million in fiscal
year (unaudited) 1993 to approximately $0.5 million in fiscal year 1994
primarily as a result of legal and accounting expenses incurred in connection
with acquisitions of the Savings Banks.
Real Estate Owned (Net). Other expense relating to Real Estate owned (net)
decreased approximately $0.2 million from approximately $0.4 million in fiscal
year (unaudited) 1993 to approximately $0.2 million in fiscal year 1994.
INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit) amounted to a benefit of approximately $0.5
million in fiscal year 1994 compared to a benefit of approximately $0.9
million for fiscal year (unaudited) 1993. The Company's effective tax rate
(benefit) amounted to (29.6)% and (353.0)% during 1994 and 1993, respectively.
Differences in the Company's effective tax rates compared to combined Federal
and State statutory rates during such periods were primarily attributable to
changes in assessments of the realization of deferred tax assets. For
additional information regarding the Company's effective tax rates and
information regarding net operating loss carryforwards of the Company, see
Note 8 to the Consolidated Financial Statements.
45
<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,
JUNE 30, -----------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents.......................... $ 14,353 $ 4,482 $ 8,830
Investment securities held to maturity, at amor-
tized cost........................................ 7,421 6,470 4,505
Mortgage-backed securities available for sale, at
fair value........................................ 14,431 9,083 10,943
Mortgage-backed securities held to maturity, at am-
ortized cost...................................... 23,500 13,119 14,439
Loans receivable, net.............................. 459,251 272,174 181,471
Loans held for sale, at lower of cost or market.... -- 18,597 --
Stock in Federal Home Loan Bank of San Francisco,
at cost........................................... 2,868 1,421 1,612
Real estate owned, net............................. 3,527 4,964 1,208
Leasehold improvements and equipment, net.......... 325 275 167
Due from affiliate................................. 8,063 4,514 4,062
Accrued interest receivable........................ 4,545 3,042 1,599
Prepaid expenses and other assets.................. 3,386 1,724 1,026
Income taxes receivable, net....................... 1,528 1,589 774
-------- -------- --------
Total Assets..................................... $543,198 $341,454 $230,636
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits........................................... $433,769 $304,020 $196,289
Borrowings......................................... 66,771 13,000 21,500
Accounts payable and other liabilities............. 3,858 3,902 2,056
Subordinated debt.................................. -- 11,000 --
Preferred stock in subsidiary held by others....... -- -- 1,000
Deferred credits................................... 948 1,134 1,772
Minority interest in subsidiaries.................. 519 600 574
Due from affiliates................................ 2,259 759 652
-------- -------- --------
Total liabilities................................ 508,124 334,415 223,833
Stockholders' Equity............................... 35,074 7,039 6,793
-------- -------- --------
Total Liabilities and Stockholders' Equity....... $543,198 $341,454 $230,636
======== ======== ========
</TABLE>
Mortgage-Backed and Investment Securities. The Company's mortgage-backed
securities available for sale increased $5.3 million during the six months
ended June 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 $10.4 million, respectively, during the six months ended June 30,
1996. Investment 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 to secure certain representations and warranties under a
mortgage loan securitization and for collateral securing an interest rate swap
contract.
46
<PAGE>
Due from Affiliate. Due from affiliate increased by approximately $3.5
million or 78.6% during the six months ended June 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 $129.7 million or 42.7% during
the six months ended June 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 $107.7 million during 1995
primarily for the same reason.
Borrowings. Borrowings increased by approximately $53.8 million during 1996
as a result of the Bank's entering into certain reverse repurchase
transactions, primarily as a result of the Company's strategy to acquire Loan
portfolios.
Subordinated Debt. Subordinated debt decreased by approximately $11.0
million during the six months ended June 30, 1996 because on January 1, 1996,
the subordinated debt was exchanged for common stock.
Stockholders' Equity. Stockholders' equity increased by $28.0 million during
the six months ended June 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' board 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
47
<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
$63.2 million notional principal amount of interest rate swap agreements
outstanding at June 30, 1996, which had the effect of increasing the Company's
net interest income by approximately $0.1 million during the six months ended
June 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
<TABLE>
<CAPTION>
AT JUNE 30, 1996 ---
<S> <C> <C> <C> <C>
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%
</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.
48
<PAGE>
Sources of liquidity include wholesale and brokered certificates of deposit.
As of June 30, 1996, the Company had approximately $427 million of
certificates of deposit. As of June 30, 1996, scheduled maturities of
certificates of deposit during the 12 months ending June 30, 1997 and
thereafter amounted to approximately $377.6 million and approximately $49.3
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 June 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.
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 June 30, 1996,
the Company had $0.5 million of FHLB advances outstanding, and was eligible to
borrow up to an aggregate of $11.8 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
$12.3 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 six months ended June 30, 1996 and the
years ended December 31, 1995, 1994 and 1993. 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 six months of 1996, and fiscal years
1995 and 1994, the Company used cash in the approximate amounts of $222.8
million, $186.9 million, and $41.6 million, respectively, for new loan
purchases. During the first six months of 1996 and 1995, the Company received
cash from the securitization of loans of approximately, $18.7 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 six months of 1996, and fiscal years 1995 and
1994, the Company used borrowings under various repurchase arrangements and
FHLB advances in the
49
<PAGE>
approximate amounts of $224.6 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 12.1% as of June 30, 1996 and averaged 12.7%, 9.1%, 8.0% and 9.2%
during the six months ended June 30, 1996 and the years ended December 31,
1995 and 1994 and the quarter ended December 31, 1993, respectively. Girard's
liquidity, as measured for regulatory purposes, amounted to 5.4% as of June
30, 1996 and averaged 6.5%, 11.2%, and 8.5% during the six months ended June
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 Bank 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."
50
<PAGE>
The following table sets forth the regulatory capital ratios of the Savings
Banks at June 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............. $ 9,950 7.0% 1.5% $ 7,808 5.5% N.A. N.A. N.A.
Girard................. 27,822 7.0% 1.5% 21,826 5.5% N.A. N.A. N.A.
Tier 1 Capital to Aver-
age Assets:
First Bank............. 9,950 6.9% 4.0% 4,222 2.9% 5.0% $2,790 1.9%
Girard................. 27,822 7.3% 4.0% 12,621 3.3% 5.0% 8,821 2.3%
Tier 1 Capital to Risk-
Weighted Assets:
First Bank............. 9,950 9.9% N.A. N.A. N.A. 6.0% 3,895 3.9%
Girard................. 27,822 9.1% N.A. N.A. N.A. 6.0% 9,561 3.1%
Total Risk-Based Capital
to Risk-Weighted As-
sets:
First Bank............. 11,271 11.2% 8.0% 3,198 3.2% 10% 1,180 1.2%
Girard................. 31,695 10.4% 8.0% 7,347 2.4% 10% 1,259 0.4%
</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.
51
<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 six
months ended June 30, 1996 and the years ended December 31, 1995, 1994 and
1993 was $276.4 million, $337.4 million, $388.5 million and $333.8 million,
respectively, including $238.0 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
52
<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 six 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
53
<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. A unanimous decision of the Investment Committee is
necessary to increase the amount of the offer above the amount determined by
the senior acquisition personnel. 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 June 30, 1996, the Company's total loan
portfolio, net of unaccreted discount and allowance for loan losses amounted
to $459.3 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.
54
<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>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31, OCTOBER 8-
------------------ ------------------ DECEMBER 31,
1996 1995 1995 1994(1) 1993(2)
-------- -------- -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period.................. $337,455 $198,588 $198,588 $ 74,045 $75,082
Originations:
Single-family residen-
tial.................. 771 1,357 3,508 1,478 --
Multi-family residen-
tial.................. 374 280 1,180 252 --
Commercial and other
mortgage loans........ -- 488 4,060 2,615 --
Consumer and other
loans................. -- -- -- -- --
-------- -------- -------- -------- -------
Total loans originat-
ed.................. 1,145 2,125 8,748 4,345 --
Loan Purchases(4):
Single-family residen-
tial.................. 220,629 6,812 121,883 36,462 1,618
Multi-family residen-
tial.................. -- -- -- 61,247 72
Commercial and other
mortgage loans........ -- -- 2,126 31,091 462
Consumer and other
loans(3).............. 17,324 -- 11,012 10,847 --
-------- -------- -------- -------- -------
Total loans pur-
chased.............. 237,953 6,812 135,021 139,647 2,152
Discounted Loan Pur-
chases:
Single-family residen-
tial.................. -- 49,662 49,662 1,542 --
Multi-family residen-
tial.................. -- 96 96 -- --
Commercial and other
mortgage loans........ -- 869 869 1,843 --
Consumer and other
loans................. -- 5,368 5,368 239 --
-------- -------- -------- -------- -------
Total Discounted
Loans purchased..... -- 55,995 55,995 3,624 --
Sales.................... (27,965) (8,724) (16,673) -- --
Principal repayments, net
of capitalized inter-
est..................... (23,091) (10,029) (27,452) (14,813) (2,457)
Transfer to real estate
owned and other......... (16,092) (6,626) (16,772) (8,260) (732)
-------- -------- -------- -------- -------
Net increase (decrease)
in loans................ 171,950 39,553 138,867 124,543 (1,037)
-------- -------- -------- -------- -------
Balance at end of peri-
od...................... $509,405 $238,141 $337,455 $198,588 $74,045
======== ======== ======== ======== =======
</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 as balance at beginning of period $75.1 million aggregate
principal amount of loans held by First Bank on the date that it was
acquired by WAC.
(3) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
(4) Excludes Discounted Loans.
55
<PAGE>
Composition of Total Loan Portfolio. As of June 30, 1996, the Company's
total loan portfolio, net of unaccreted discount, deferred fees and allowance
for loan losses, amounted to $459.3 million or 84.5% 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>
JUNE 30, DECEMBER 31,
-------------------- ---------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
LOAN PORTFOLIO:
Single-family residen-
tial.................... $318,098(2) $ 45,829 $139,566 $ 53,095 $20,657
Multi-family residen-
tial.................... 78,616 75,476 71,239 77,884 26,076
Commercial real estate... 59,078 53,919 53,458 57,881 26,921
Consumer and other....... 31,681 5,672 19,753 6,733 391
-------- -------- -------- -------- -------
Loan portfolio............. 487,473 180,896 284,016 195,593 74,045
Unaccreted discount and de-
ferred fees............... (16,405) (4,759) (14,362) (8,946) (988)
Valuation allowance........ (25,015) (9,106) (10,237) (7,270) (4,314)
-------- -------- -------- -------- -------
Loan portfolio, net........ $446,053 $167,031 $259,417 $179,377 $68,743
======== ======== ======== ======== =======
DISCOUNTED LOAN PORTFOLIO:
Single-family residen-
tial.................... $ 18,051(3) $ 55,454 $ 50,937 $ 348 $ --
Multi-family residen-
tial.................... -- (3) -- -- -- --
Commercial real estate... 1,246 938 1,523 432 --
Consumer and other....... 2,635 853 979 2,215 --
-------- -------- -------- -------- -------
Discounted Loan portfolio.. 21,932 57,245 53,439 2,995 --
Unaccreted discount and de-
ferred fees............... (1,761) (383) (6,671) (470) --
Valuation allowance(1)..... (6,973) (27,209) (15,414) (431) --
-------- -------- -------- -------- -------
Discounted Loan portfolio,
net....................... $ 13,198 $ 29,653 $ 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 committed to purchase approximately $248 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 June 30, 1996, the five states with the
greatest concentration of properties securing the Company's loans were
California, New York, New Jersey, Florida and Rhode Island, which had $262.2
million, $30.7 million, $17.0 million, $13.0 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
June 30, 1996, the five states with the greatest concentration of properties
securing the Company's Discounted Loans were Massachusetts, Connecticut,
Texas, California and New Jersey, which had $16.7 million, $11.8 million, $3.3
million, $1.9 million and $1.7 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."
56
<PAGE>
Contractual Principal Repayments. The following table sets forth certain
information as of December 31, 1995 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................... $ 3,674 $14,920 $ 7,272 $113,700
Multi-family residen-
tial................... 8,284 35,339 14,902 12,714
Commercial and other
mortgage loans......... 17,394 25,034 9,231 1,799
Consumer and other
loans.................. 2,771 16,566 256 160
Interest rate terms on
amounts due after one
year:
Fixed................. -- 54,706 25,880 79,219
Adjustable............ -- 37,153 5,781 49,154
</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 June 30, 1996, the Private Companies purchased
or committed to purchase under its mortgage conduit program approximately $3.1
million principal amount of manufactured housing loans and $8.1 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.
57
<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.
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.
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,
58
<PAGE>
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 June 30, 1996, $125.7 million or
29% of the Savings Banks' total deposits were brokered and $301.3 million or
70% 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." In
addition, there are various limitations on the ability of all but well-
capitalized insured financial institutions to obtain brokered deposits. See
"Regulation--The Savings Banks--Brokered Deposits." These limitations became
applicable to First Bank at the end of the third quarter as a result of the
recapitalization of the SAIF and the provisions for loan losses relating to
the Sub-Prime Auto Loans which caused First Bank's capital levels to fall
below the "well-capitalized" institution standard to "adequately capitalized."
Accordingly, until First Bank returns to a "well-capitalized" level at the end
of a quarterly reporting period, First Bank may not solicit new brokered
deposits. Management believes that First Bank's inability to obtain brokered
deposits for a limited period of time will not have a material adverse effect
on the Company. See "Regulation--The Savings Banks--Regulatory Capital
Requirements." Since the failure to comply with required capital levels could
have significant adverse consequences to the Savings Banks and the Company,
the Company will utilize approximately $1.0 million of proceeds of the Common
Stock Offering and the Notes Offering to cause First Bank to become "well-
capitalized" as required by the Orders.
59
<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,
JUNE 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...... $ 3,978 0.00% $ 3,532 0.00% $ 3,045 0.00% $ -- -- %
NOW and money market
checking accounts...... 2,458 3.28 2,846 2.99 3,170 3.28 3,633 2.96
Saving accounts......... 382 2.10 304 2.38 215 2.25 194 2.50
Certificates of depos-
it..................... 426,951 5.82 297,338 6.15 189,859 5.48 80,994 3.86
-------- ---- -------- ---- -------- ---- ------- ----
Total deposits......... $433,769 5.76% $304,020 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 June 30, 1996.
INTEREST RATE CATEGORIES FOR THE COMPANY'S CERTIFICATES OF DEPOSIT
<TABLE>
<CAPTION>
JUNE 30,
1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
3.50% or less...................................... $ 847
3.51-4.50.......................................... 99
4.51-5.50.......................................... 94,564
5.51-6.50.......................................... 309,367
6.51-7.50.......................................... 18,515
7.51-8.50.......................................... 3,559
--------
Total............................................ $426,951
========
</TABLE>
The following table sets forth the amount and maturities of the certificates
of deposit in the Company as of June 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.......... $ 94,109 $ 5,906 $ 199
Weighted Avg............ 5.60% 6.35% 5.77%
Balances Maturing in 4 to
12 Months............... $243,690 $33,307 $ 347
Weighted Avg............ 5.78% 6.52% 7.00%
Balances Maturing in 13
to 36 Months............ -- $48,750 $ 596
Weighted Avg............ 5.96% 6.73%
Balances Maturing in 37
or More Months.......... -- -- $ 47
Weighted Avg............ 2.76%
</TABLE>
As of June 30, 1996, the Company had $7.5 million of certificates of deposit
in amounts greater than $100,000 or more maturing as follows: $1.2 million
within three months; $1.5 million over three months through six months; $4.4
million over six months through 12 months; and $298,000 thereafter.
60
<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,
JUNE 30, ----------------------
1996 1995 1994 1993
-------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB Advances.................................. $ 481 $ -- $13,000 $ --
Reverse Repurchase Agreements.................. 66,290 13,000 8,500 6,608
------- ------- ------- ------
Total........................................ $66,771 $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,
SIX MONTHS ENDED ------------------------
JUNE 30, 1996 1995 1994 1993
---------------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB advances:......................
Average amount outstanding during
the period....................... $ 2,667 $ 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............... 6.45% 7.53% 3.85% --
At end of period................ -- -- 4.33% --
Repurchase agreements:
Average amount outstanding during
the period....................... $47,546 $ 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............... 5.47% 5.62% 4.44% 7.54%
At end of period................ 6.81% 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 lending arrangements as of September
30, 1996.
<TABLE>
<CAPTION>
CURRENT BORROWER AFTER
LENDER BORROWER REORGANIZATION COMMITMENT UTILIZED(2)
------ -------------------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
REPURCHASE FACILITIES:
Bear Stearns Mortgage
Capital Corporation... First Bank First Bank $ 10 million(3) --
Bear Stearns Mortgage
Capital
Corporation........... Girard Girard $200 million(3) --
CS First Boston
Mortgage Capital
Corporation........... Private Companies(1) WFC $150 million $67,012
Bear, Stearns Interna- Private Companies(1) WFC $100 million(3) $ 1,673
tional (U.K.).........
CS First Boston Corpo-
ration
(Hong Kong) Limited... Private Companies(1) WFC $ 50 million(3) $ 2,912
WAREHOUSE FACILITY:
Prudential Securities
Realty Funding
Corp. ................ Private Companies(1) WFC $100 million $12,374
TERM LOAN:
Bear, Stearns Affili- Private Companies(1) WFC $100 million $ 2,772
ate...................
------------
TOTAL COMMITMENTS....... $710 million
============
</TABLE>
61
<PAGE>
- --------
(1) On the closing of the Common Stock Offering and the Notes Offering,
existing lines of credit will be transferred to 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.
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.
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.
Term Loans. In 1995, the Private Companies entered into a three year secured
term loan agreement with an affiliate of Bear Stearns & Co., Inc. for the
purchase of discounted residential mortgage loans. In September 1996, the
lender submitted a revised proposal to the Private Companies for a revised
$100 million three year term loan with more favorable terms for the borrower.
The Private Companies are currently discussing such proposal with the lenders.
The Company anticipates that undrawn balances on this term facility would also
be made available to the Company.
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
62
<PAGE>
Banks for investment and lending activities and other general business
purposes. FHLB advances are made 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 June 30, 1996, WCC was servicing approximately
$1.0 billion principal amount of loans, including approximately $509.4 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
63
<PAGE>
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 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.
64
<PAGE>
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.
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 $3.3
million during the six months ended June 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,
JUNE 30, ------------------------
1996 1995 1994 1993
-------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-performing loans:
Single-family residential............... $20,919 $10,996 $ 5,554 $1,285
Multi-family residential................ 1,080 270 1,471 379
Commercial real estate and land......... 1,920 910 4,207 5,354
Consumer and other loans................ 2,349 503 400 175
------- ------- ------- ------
Total................................. $26,268 $12,679 $11,632 $7,193
======= ======= ======= ======
Non-performing loans as a percentage of:
Total loans(2).......................... 5.39% 4.46% 5.95% 9.71%
Total assets............................ 4.84% 3.71% 5.04% 7.27%
Allowance for loan losses as a percentage
of:
Total loans(2).......................... 5.13% 3.60% 3.72% 5.83%
Non-performing loans.................... 95.23% 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
65
<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. Accumulated specific valuation allowances amounted to
$0.4 million as of June 30, 1996. In addition, at the same date the Company
also had a $0.1 million general valuation allowance related to its real estate
owned.
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,
JUNE 30, -----------------------
1996 1995 1994 1993
-------- ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Discounted loan portfolio:
Single-family residential................. $1,234(1) $ 3,226 $ -- $ --
Multi-family residential.................. -- -- -- --
Commercial and other mortgage loans....... 315 66 -- --
------ ------- ------ ------
Total................................... 1,549 3,292 -- --
Loan portfolio:
Singe-family residential.................. 1,338 1,676 613 764
Multi-family residential.................. 650 611 254 --
Commercial and other mortgage loans....... 447 578 464 328
------ ------- ------ ------
Total................................... 3,984 6,157 1,331 1,092
Allowance for total losses.................. (457) (1,193) (123) (55)
------ ------- ------ ------
Real estate owned, net...................... $3,527 $ 4,964 $1,208 $1,037
====== ======= ====== ======
</TABLE>
- --------
(1) The differences between the balance at December 31, 1995 and June 30, 1996
reflects the securitization of certain single-family residential loans.
The following table sets forth certain geographical information as of June
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............. $1,018 10 $1,151 6
Texas.................. 463 18 -- --
Connecticut............ 371 6 91 1
Massachusetts.......... 263 10 -- --
New Jersey............. 3 1 170 1
Other.................. 454 17 -- --
-------------- ----------- ------------ ---------
Total................ $2,572 62 $1,412 8
============== =========== ============ =========
</TABLE>
66
<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 June 30, 1996
consisted of $55.4 million of assets classified as substandard, $3.8 million
of assets classified as doubtful and $11.1 million of assets classified as
loss, which includes $5.2 million, $3.7 million, and $2.5 million of
Discounted Loans, respectively. In addition, at the same date, $41.3 million
of assets were designated as special mention, which includes $14.0 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
67
<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 $4.7 million through June 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
$4.1 million through the second quarter of 1996, including a 10% reserve on
such loans which are current.
In the third quarter of 1996, the Company established an additional $4.3
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 six months ended June
30, 1996.
<TABLE>
<CAPTION>
% OF
PROVISIONS TOTAL
------------- ----------
(DOLLARS IN THOUSANDS)
------------------------
<S> <C> <C>
Inherited Loans.................................. $ 4,702 43.3%
Sub-Prime Auto Loans............................. 4,084 37.6%
Other Purchased Loans............................ 2,072 19.1%
----------- ----------
Total provision for estimated losses on loans.... $ 10,858 100.0%
=========== ==========
</TABLE>
68
<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,
JUNE 30, ------------------------
1996 1995 1994 1993
-------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan portfolio:
Real estate............................... $19,013 $ 9,831 $ 5,976 $ 4,088
Non-real estate........................... 6,002 407 280 226
Discounted Loan portfolio................. 6,973(1) 15,414 431 --
------- -------- ------- -------
Total Allowances........................ $31,989 $ 25,652 $ 6,687 $ 4,314
======= ======== ======= =======
</TABLE>
- --------
(1)The difference between the balance at December 31, 1995 and June 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, JULY 1 TO
JUNE 30, -------------------------- DECEMBER 31,
1996 1995 1994 1993
-------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of pe-
riod.................... $25,651 $ 7,701 $ 4,314 $4,221
Provision for loan loss-
es...................... 10,868 4,266 2,173 1,111
Allocation from purchased
loan discounts.......... 6,861 19,007 2,809 --
Charge-offs:
Real estate............ 10,843 5,096 1,620 1,042
Non-real estate........ 1,923 308 46 --
------- ------------ ----------- ------
Total charge-offs...... 12,766 5,404 1,666 1,042
Recoveries:
Real estate............ 1,347 81 71 24
Non-real estate........ 27 -- -- --
------- ------------ ----------- ------
Total Recoveries....... 1,374 81 71 24
Net (charge-offs) recov-
eries................... (11,392) (5,323) (1,595) (1,018)
------- ------------ ----------- ------
Balance, end of period... $31,988 $ 25,651 $ 7,701 $4,314
======= ============ =========== ======
Net (charge-offs) recov-
eries as a percentage of
average loan portfolio.. (2.7)% (2.2)% (1.4)% (1.4)%
</TABLE>
69
<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,
SIX MONTHS ENDED -------------------------------------
JUNE 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............ $14,108 2.9% $ 3,726 1.3% $ 4,513 2.4%
60-89 days............ 13,487 2.8 3,037 1.1 2,202 1.1
90 days or more(2).... 26,268 5.4 12,679 4.5 11,632 6.1
------- ------- -------
Total loans delin-
quent.............. $53,863(3) 11.1% $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>
SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
----------------- -----------------------
1996 1995 1995 1994 1993
-------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Available for sale:
Mortgage-backed securities.......... $ 14,431 $ 13,850 $ 9,083 $10,943 $ 6,632
Held to maturity
U.S. Government securities.......... 7,421 4,503 6,470 4,505 --
Mortgage-backed securities.......... 23,500 9,541 13,119 14,439 14,787
FHLB stock(1)....................... 2,868 1,386 1,421 1,612 564
-------- -------- ------- ------- -------
Total............................. 33,789 15,430 21,010 20,556 15,351
-------- -------- ------- ------- -------
Total investment securities......... $ 48,220 $ 29,280 $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,
70
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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 50 employees. As of the
closing of the Common Stock Offering and the Notes Offering the Company is
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
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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.
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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;
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(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.
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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,
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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.
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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, of which the First Bank had $9.95
million and Girard had $27.8 million as of June 30, 1996. 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 June 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
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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 will result in the Savings Banks' incurring a pre-tax
charge of approximately $1.4 million. As a result of the special assessment
and additional allowances for loan losses relating to the Sub-Prime Auto
Loans, First Bank's capital levels fell below the "well-capitalized"
institution standard to "adequately capitalized."
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)
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"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 June 30,
1996, the Savings Banks were "well capitalized" institutions under the prompt
corrective action regulations of the OTS; however, as a result of the special
assessment to re-capitalize the SAIF and additional allowances for loan losses
relating to the Sub-Prime Auto Loans, First Bank's capital levels will fall
below the "well-capitalized" institution standard to "adequately capitalized."
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. These
restrictions became applicable to First Bank at the end of the third quarter
as a result of the recapitalization of the SAIF and the provisions for loan
losses relating to the Sub-Prime Auto Loans which caused First Bank's capital
levels to fall below the "well-capitalized" institution standard to
"adequately capitalized."
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
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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 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
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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.
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 June 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 June 30, 1996, First Bank's and Girard's unimpaired capital and
surplus amounted to $12.8 million and $27.2 million, respectively, resulting
in a general loans-to-one borrower limitation of $1.9 million and $4.1
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.
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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 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 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.
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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) 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.
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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 a
Ph.D./ABD degree 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 & Ekonomexamen)
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
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until November 1992 he was a consultant to Entertainment Publications Inc.--
CUC International Inc. Mr. Berchtold received a B.S.C. degree in
Business/Finance and Marketing from Santa Clara University and an M.B.A. from
the University of Oregon. 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 International Manufacturing and Licensing, Inc., a
subsidiary of the ICT Group, Inc., a supplier of wireless phone customers
worldwide. From January 1988 until March 1994, Mr. Coleman was President of
Liquid Spring Corporation, a manufacturer of automobile components. Mr.
Coleman is a director of ICT Group, Inc., Fabricated Metals, Inc., a
fabricated metals handling company, and American Life Support Technology, a
venture capital-funded hospital equipment start-up company. 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.
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.
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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.
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 $1,000 for each Directors' meeting and a per hour
fee for each committee meeting attended which is not on a regularly scheduled
meeting date. Under the Company's Stock Incentive Plan, each non-employee
director has been granted, effective as of the date on which the initial
public offering price is determined, a non-qualified option to purchase at the
initial public offering price a number of shares of Common Stock equal to
6,250 divided by the initial public offering price, and each new non-employee
director upon the date of his or her election or appointment will be granted a
non-qualified option to purchase at the fair market value on the date of grant
a number of shares of Common Stock equal to 6,250 divided by the fair market
value on the date of grant.
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EXECUTIVE COMPENSATION
The following table shows compensation received by the Company's Chief
Executive Officer and the four other most highly paid executive officers for
the fiscal years ended December 31, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
NAME AND
PRINCIPAL POSITION YEAR SALARY($)(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
R. Scott Stevenson............................. 1995 120,000 25,000
President of Girard and First Bank
</TABLE>
- --------
(1) For the year ended December 31, 1995 the Chief Executive Officer and the
four 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 non-publicly held
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 a
bonus. The bonus payable to Mr. Wiederhorn and Mr. Mendelsohn will be equal to
15% of the difference between the pre-tax profits of the Company and after tax
earnings which result in a return on equity of 15%. Mr. Wiederhorn's and Mr.
Mendelsohn's share of the bonus will be two-thirds and one-third,
respectively. The Company will also recommend that the Compensation Committee
grant 500,000 options to purchase the Common Stock to Mr. Wiederhorn and
250,000 options to purchase the Common Stock to Mr. Mendelsohn. 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
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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 36
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 November 1, 1996.
The Company's stockholders approved it on October 31, 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 November 1, 2006
unless terminated earlier by the Board of Directors.
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<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 1,500,000 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 750,000
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 exercise date. If the shares are sold within one year after the
exercise date, 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 short-term capital
gain. If the option shares are sold more than one year after the exercise date
but less than two years after the grant date, the difference between the
exercise price and the market value at the date of exercise (but not more than
the actual gain on sale) is taxable as ordinary income and any gain is long-
term capital gain. 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
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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 options.
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 750,000 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 772,500 shares
of Common Stock. A partial exercise of the over-allotment option will result
in option amounts between 750,000 and 772,500 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 of the NSOs will be
$ per share (100% of the initial offering price to the public in the Common
Stock Offering). 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.
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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.... 500,000(1) 67% $-- (2) 3,773 9,562
Lawrence A. Mendelsohn.. 250,000(4) 33% -- (2) 1,886 4,781
</TABLE>
- --------
(1) This figure will be 515,000 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. Assumes all options are NSOs and
exercise price is $12 per share.
(4) This figure will be 257,500 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 $ 0 500,000(2) 0 $ 0 --
Lawrence A. Mendelsohn.. 0 0 250,000(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).
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the beneficial
ownership of Common Stock at October 28, 1996 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.... 3,945,957 65.77% 3,945,957 52.61%
Lawrence A. Mendelsohn.. 1,972,723 32.88% 1,972,723 26.30%
Bo G. Aberg............. -- -- -- --
Donald J. Berchtold..... -- -- -- --
Sheryl Anne Morehead.... -- -- -- --
Kenneth E. Kepp......... -- -- -- --
Chris Tassos............ -- -- -- --
Phillip D. Vincent...... -- -- -- --
Don H. Coleman.......... 12,242 .2% 12,242 .16%
Philip G. Forte......... -- -- -- --
David Dale-Johnson...... 12,242 .2% 12,242 .16%
All directors and execu-
tive officers as a
group (11 persons)..... 5,943,164 99.05% 5,943,164 79.23%
</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.
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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 exchanged 226,590 shares of common stock of
Girard for 65,074 shares of Common Stock of WFSG and 74,306 shares of common
stock of First Bank for 24,484 shares of Common Stock of WFSG and 98,804
shares of common stock of WAC for 5,853,607 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 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 loans 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
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<PAGE>
Discounted Loan Portfolios. Servicing fees for new Discounted Loan portfolio
servicing agreements 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.
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.
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DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to an Indenture (the "Indenture") between
WFSG and Bankers Trust Company, 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 $50
million. 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 Underwriter 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 Underwriter), banks, trust companies,
clearing corporations and certain other organizations, some of whom
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<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
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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>
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.
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:
Limitations on Indebtedness. 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.
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 Funded Indebtedness (including any Funded
Indebtedness assumed in connection with the acquisition of assets from another
Person) unless at the time of such event either (i) the principal amount of
total Funded Indebtedness of the Company (which includes the Notes) would not
exceed 100% of the Company's Consolidated Tangible Net Worth, or (ii) if the
Notes are then rated by a nationally recognized statistical rating
organization in an investment grade category, after the incurrence,
assumption, guarantee or creation by the Company of the additional Funded
Indebtedness, (A) the Notes continue to retain such investment grade rating,
and (B) the Fixed Charge 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 incurrence would have been
greater than 3.00 to 1.00 determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional Funded
Indebtedness had been incurred and the application of the net proceeds
therefrom had occurred at the beginning of such four-quarter period.
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 Savings Banks under 12
C.F.R. Part 567 or any successor regulation, except 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.
Liquidity Maintenance. The Company 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. 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.
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Restrictions on Issuance and Sale or Disposition of Capital Stock of the
Savings Banks. The Indenture provides that the Company shall not sell,
transfer or otherwise dispose of shares of Capital Stock of either Bank or
permit either Bank to issue, sell or otherwise dispose of shares of its
Capital Stock (other than shares of Preferred Stock that do not constitute
Voting Stock as permitted in the last paragraph under "Limitations on
Indebtedness" above), unless in either case the respective Bank remains a
Wholly-Owned Subsidiary of the Company. In addition, the Indenture provides
that the Company shall not permit either Bank to merge or consolidate with any
other entity (other than the Company or another Wholly-Owned Subsidiary of the
Company, including the other Bank) unless the surviving entity is the Company
or a Wholly-Owned Subsidiary of the Company, or permit either Bank to convey
or transfer its properties and assets substantially as an entirety to any
Person except to the Company or any Wholly-Owned Subsidiary of the Company.
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 Bank would fail to meet any of the Regulatory Capital
Requirements under the regulations of the OTS; 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
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 Fixed Charge 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 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).
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Limitations on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any of its
Subsidiaries 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;
(2) restrictions existing under agreements in effect on the date of the
Indenture under which the Notes are issued;
(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 Indebtedness 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 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;
(7) restrictions existing under agreements evidencing Indebtedness that
is incurred after the date of the Indenture as permitted by the covenant
described above under "Limitation on Indebtedness"; and
(8) restrictions existing under any agreement that refinances or replaces
any of the agreements containing the restrictions in clauses (2), (3) and
(7); 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 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 Board of Directors of the
Company; 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
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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 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 either (A) in the ordinary course of business and consistent with
the past practice of the Company or such Subsidiary or (B) 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 (vi) any transaction or series of transactions
in which the total amount involved does not exceed $125,000 or (vii) servicing
performed for WCC pursuant to agreements between the Company and/or the
Savings Banks and WCC.
Limitations on Liens and Guarantees. The Company will not create, assume,
incur or suffer to exist any Lien upon (i) the Capital Stock of any Subsidiary
as security for Indebtedness or (ii) any of the Company's assets (other than
the Capital Stock of any Subsidiary) as security for Indebtedness having a
contractual time to maturity greater than one year, without, in the case of
either (i) or (ii), 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 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
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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.]
Status of the Savings Banks as FDIC-insured Institutions. The Indenture will
include a provision pursuant to which the Company will agree to use its best
efforts to have the Savings Banks remain FDIC-insured depository institutions.
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 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 Funded Indebtedness without violating the covenant 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; (iv) except as otherwise
permitted under the "Merger and Consolidation" provisions of the Indenture,
consent to the assignment or transfer by the Company of any of its rights and
obligations under the Indenture; (v) amend or modify any of the provisions of
the Indenture relating to the subordination of the Notes in any manner adverse
to any of the Holders of the Notes; or (vi) 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
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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;
(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 Tangible 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 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 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 Bank or Savings
Banks of its determination not to approve such capital plan or plans, or
(c) during the period that the 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; provided, further, that if the each of the Savings
Banks meets the minimum amount of capital required to meet each of the
industrywide regulatory capital requirements 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, notwithstanding the failure of either or
both of the Savings Banks to meet an individual minimum capital requirement
pursuant to 12 U.S.C. Section 1464(s) and 12.C.F.R. Section 567.3 (and any
amendment to either thereof) or any successor law or regulation, no Event
of Default shall have occurred pursuant to this clause (v) unless written
notice thereof shall have been given (x) to the Company by the Trustee or
(y) to the Company and the Trustee by the Holders of 25% in aggregate
principal amount of the Notes then outstanding;
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(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 Tangible 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, 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.
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
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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 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, 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 .
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
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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;
(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;
(d) (1) the Company sells, transfers or otherwise disposes of any shares
of Capital Stock of any Significant Subsidiary (other than to the Company
or a Wholly-Owned Subsidiary), or
(2) any Significant Subsidiary (i) issues, sells or otherwise disposes of
shares of its Capital Stock (or securities convertible into or exercisable
for shares of Capital Stock), (ii) conveys, transfers or leases all or
substantially all its assets to any Person or group or (iii) merges with or
into any other entity, except in the case of any event described in this
clause (2) with the Company or a Wholly-Owned Subsidiary; or
(e) 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.
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"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, 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) all extraordinary gains and losses (other than those
relating to the use of net operating losses of such Person carried forward),
less all fees and expenses relating thereto, net of taxes, (ii) 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, (iii) 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, (iv) any gain or loss, net of taxes, realized upon the
termination of any employee pension benefit plan or (v) 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 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 Tangible 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 less an amount equal to the
consolidated intangible assets (other than capitalized mortgage servicing
rights) 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.
"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.
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"Earnings" means, with respect to any Person for any period, the
Consolidated Net Income (Loss) of such Person for such period from continuing
operations plus (a) an amount equal to any net loss realized in connection
with an asset sale or sales of capital stock of any subsidiary (to the extent
such losses were deducted in computing Consolidated Net Income (Loss)), plus
(b) provision for taxes based on income or profits of such Person for such
period deducted in computing Consolidated Net Income (Loss) and any provision
for taxes utilized in computing net loss under clause (a), plus (c)
Consolidated Interest Expense of such Person for such period, plus (d)
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 (e) without duplication, any
other non-cash charges reducing Consolidated Net Income (Loss) of such Person
for such period (excluding any such charge which represents an accrual of a
reserve for an anticipated cash charge in any future period), less (f) without
duplication, non-cash items increasing Consolidated Net Income (Loss) of such
Person for such period (excluding any items which represent the reversal of
any accrual in a prior period of a reserve for anticipated cash charges in
subsequent periods), in each case, on a consolidated basis for such Person.
"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 Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of Earnings 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 Funded Indebtedness (including any Funded
Indebtedness which constitutes Acquired Indebtedness) subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the event for which the calculation of the Fixed
Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, guarantee or redemption of Funded Indebtedness, as if the same had
occurred at the beginning of the applicable 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 and the change in Earnings 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 Fixed Charge
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 Funded Indebtedness bears a floating rate of interest and is
being given pro forma effect, the interest on such Funded 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
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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 Funded 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.
"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 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.
"Funded Indebtedness" means, with respect to any Person as of the date of
determination Indebtedness which by its terms has a Maturity, or is extendable
or renewable at the option of such Person to a date, which is more than twelve
months after the date of creation or incurrence of such Indebtedness.
"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.
"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 (even if the rights and remedies of the
seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), 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,
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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.
"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.
"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.
"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 Payment" means, so long as no Default or Event of Default is
continuing,
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(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 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.
"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 Bank, respectively,
is required to maintain in order to meet any individual minimum capital
standard applicable to the 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.
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"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 (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 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 or
real estate mortgage investment conduit.
"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.
"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.
111
<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, 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 Note Underwriter by Gibson, Dunn & Crutcher LLP, Orange County,
California.
EXPERTS
The audited consolidated financial statements of the Company and its
subsidiaries at December 31, 1995 and 1994, and for the years then ended and
the period from October 8 through December 31, 1993, the audited financial
statements of the Company's predecessor for the periods ended October 7, 1993
and June 30, 1993, 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, 1994 and 1993 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.
The audited consolidated financial statements of Girard Savings Bank, F.S.B.
and Subsidiary for the year ended December 31, 1993 included herein and
elsewhere in the Registration Statement have been included herein and
elsewhere in the Registration Statement in reliance upon the reports of KPMG
Peat Marwick LLP, independent auditors, included herein and elsewhere in the
Registration Statement, upon the authority of said firm as experts in auditing
and accounting. Girard Savings Bank F.S.B. changed its method of accounting
for income taxes in 1993 to adopt the provisions of Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
112
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
Independent Auditors' Report............................................ F-2
Consolidated Statements of Financial Condition at June 30, 1996
(unaudited) and December 31, 1995 and 1994............................. F-3
Consolidated Statements of Operations for the Six Months ended June 30,
1996 and 1995 (unaudited), the Years ended December 31, 1995 and 1994,
and the Period from October 8 through December 31, 1993, and the
Predecessor's Periods from July 1 through October 7, 1993 and July 1,
1992 through June 30, 1993 ............................................ F-4
Consolidated Statements of Cash Flows for the Six Months ended June 30,
1996 and 1995 (unaudited), the Years ended December 31, 1995 and 1994,
and the Period from October 8 through December 31, 1993, and the
Predecessor's Periods from July 1 through October 7, 1993 and July 1,
1992 through June 30, 1993............................................. F-5
Consolidated Statements of Stockholders' Equity for the Six Months ended
June 30, 1996 (unaudited), the Years ended December 31, 1995 and 1994,
and the Period from October 8, 1993 through December 31, 1993.......... F-8
Notes to Consolidated Financial Statements.............................. F-9
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
Independent Auditors' Report of Deloitte & Touche LLP................... F-29
Independent Auditors' Report of KPMG Peat Marwick LLP................... F-30
Consolidated Statements of Operations for the Period from January 1,
1994 through November 8, 1994 and the Year Ended December 31, 1993..... F-31
Consolidated Statements of Cash Flows for the Period from January 1,
1994 through November 8, 1994 and the Year Ended December 31, 1993..... F-32
Notes to Consolidated Financial Statements.............................. F-33
WILSHIRE CREDIT CORPORATION AND AFFILIATES
Independent Auditors' Report............................................ F-37
Combined Statements of Financial Position as of June 30, 1996
(unaudited)............................................................ F-38
Combined Statements of Operations for the Six Months Ended June 30, 1996
and 1995 (unaudited) and for the Years Ended December 31, 1995, 1994
and 1993............................................................... F-40
Combined Statements of Stockholders' Equity for the Six Months Ended
June 30, 1996 (unaudited) and for the Years Ended December 31, 1995,
1994 and 1993.......................................................... F-41
Combined Statements of Cash Flows for the Six Months Ended June 30, 1996
and 1995 (unaudited) and for the Years Ended December 31, 1995, 1994
and 1993............................................................... F-42
Notes to Combined Financial Statements.................................. F-43
</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 December 31, 1995 and 1994, the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1995 and 1994 and for the period from October 8, 1993
through December 31, 1993, and the statements of operations and cash flows of
the Company's Predecessor, First Bank of Beverly Hills, F.S.B., for the period
from July 1 through October 7, 1993 and for the year ended June 30, 1993.
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 December 31, 1995 and 1994, the results of
their operations and their cash flows for the years ended December 31, 1995
and 1994 and the period from October 8 through December 31, 1993, and the
results of operations and the cash flows of First Bank of Beverly Hills,
F.S.B. for the period from July 1 through October 7, 1993 and for the year
ended June 30, 1993, 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 expected to be operating under cease and desist orders with
the Office of Thrift Supervision that will require them to meet certain
prescribed requirements.
September 30, 1996
Los Angeles, California
F-2
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1996 1995 1994
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks.............. $ 8,253,000 $ 3,382,000 $ 4,880,000
Federal funds sold................... 6,100,000 1,100,000 3,950,000
------------ ------------ ------------
Total cash and cash equivalents.. 14,353,000 4,482,000 8,830,000
Investment securities held to
maturity, at amortized cost (fair
value of $7,442,000, $6,488,000 and
$4,353,000 in 1996, 1995 and 1994,
respectively)....................... 7,421,000 6,470,000 4,505,000
Mortgage-backed securities available
for sale, at fair value (amortized
cost of $12,934,000, $9,099,000 and
$11,613,000 in 1996, 1995 and 1994,
respectively)....................... 14,431,000 9,083,000 10,943,000
Mortgage-backed securities held to
maturity, at amortized cost (fair
value of $22,766,000, $12,873,000
and $12,948,000 in 1996, 1995 and
1994, respectively)................. 23,500,000 13,119,000 14,439,000
Loans receivable, net................ 459,251,000 272,174,000 181,471,000
Loans held for sale, at lower of cost
or market........................... 18,597,000
Stock in Federal Home Loan Bank of
San Francisco, at cost.............. 2,868,000 1,421,000 1,612,000
Real estate owned, net............... 3,527,000 4,964,000 1,208,000
Leasehold improvements and equipment,
net................................. 325,000 275,000 167,000
Due from affiliate................... 8,063,000 4,514,000 4,062,000
Accrued interest receivable.......... 4,545,000 3,042,000 1,599,000
Prepaid expenses and other assets.... 3,386,000 1,724,000 1,026,000
Income taxes receivable, net......... 1,528,000 1,589,000 774,000
------------ ------------ ------------
TOTAL............................ $543,198,000 $341,454,000 $230,636,000
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits........................... $433,769,000 $304,020,000 $196,289,000
Borrowings......................... 66,771,000 13,000,000 21,500,000
Accounts payable and other
liabilities....................... 3,858,000 3,902,000 2,056,000
Subordinated debt.................. 11,000,000
Deferred credits................... 948,000 1,134,000 1,772,000
Minority interest in subsidiaries.. 519,000 600,000 574,000
Preferred stock in subsidiary held
by others......................... 1,000,000
Due to affiliates.................. 2,259,000 759,000 652,000
------------ ------------ ------------
Total liabilities................ 508,124,000 334,415,000 223,843,000
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A preferred stock........... 1,000,000
Common stock....................... 35,550,000 6,800,000 6,800,000
Retained earnings (accumulated
deficit).......................... (1,374,000) 255,000 (337,000)
Unrealized gain (loss) on available
for sale securities, net.......... 898,000 (16,000) (670,000)
------------ ------------ ------------
Total stockholders' equity....... 35,074,000 7,039,000 6,793,000
------------ ------------ ------------
TOTAL............................ $543,198,000 $341,454,000 $230,636,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
-------------------------------------------------------------- -------------------------
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31, OCTOBER 8- JULY 1-
----------------------- ----------------------- DECEMBER 31, OCTOBER 7, JULY 1, 1992-
1996 1995 1995 1994 1993 1993 JUNE 30, 1993
----------- ---------- ---------- ----------- ------------ ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans.................. $20,436,000 $9,589,000 21,821,000 $ 7,923,000 $1,383,000 $1,763,000 $ 7,437,000
Mortgage-backed
securities............ 898,000 1,019,000 1,359,000 1,361,000 218,000 169,000 26,000
Investments and federal
funds sold............ 617,000 271,000 1,201,000 285,000 53,000 57,000 241,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
Total interest income.. 21,951,000 10,879,000 24,381,000 9,569,000 1,654,000 1,989,000 7,704,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
INTEREST EXPENSE:
Deposits............... 10,633,000 6,465,000 13,944,000 5,017,000 764,000 956,000 4,055,000
Borrowings............. 1,387,000 242,000 537,000 440,000 85,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
Total interest
expense............... 12,020,000 6,707,000 14,481,000 5,457,000 849,000 956,000 4,055,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
NET INTEREST INCOME..... 9,931,000 4,172,000 9,900,000 4,112,000 805,000 1,033,000 3,649,000
PROVISION FOR ESTIMATED
LOSSES ON LOANS........ 10,868,000 2,201,000 4,266,000 2,173,000 63,000 1,048,000 2,625,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
NET INTEREST (LOSS)
INCOME AFTER PROVISION
FOR ESTIMATED LOSSES ON
LOANS.................. (937,000) 1,971,000 5,634,000 1,939,000 742,000 (15,000) 1,024,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
OTHER INCOME (LOSS):
Bankcard income........ 3,275,000 1,955,000 4,694,000 635,000
Bankcard processing
expense............... (2,616,000) (1,391,000) (3,462,000) (274,000)
Gain (loss) on sale of
loans................. 1,983,000 24,000 642,000 (60,000)
Loan fees and charges.. 648,000 199,000 610,000 43,000
Gain on sale of
mortgage-backed
securities available
for sale.............. 14,000 54,000 96,000
Amortization of
deferred credits...... 230,000 230,000 460,000 388,000
Other, net............. 16,000 33,000 149,000 381,000
----------- ---------- ---------- ----------- ---------- -----------
Total other income
(loss)................ 3,536,000 1,050,000 3,107,000 1,227,000 96,000 (60,000)
----------- ---------- ---------- ----------- ---------- -----------
OTHER EXPENSES:
Compensation and
employee benefits..... 1,479,000 1,075,000 2,516,000 1,922,000 204,000 182,000 808,000
FDIC insurance
premiums.............. 387,000 285,000 721,000 261,000 61,000 73,000 246,000
Occupancy.............. 141,000 145,000 385,000 319,000 38,000 64,000 214,000
Professional services.. 297,000 370,000 1,028,000 507,000 49,000 95,000 279,000
Data processing and
equipment rentals..... 124,000 98,000 232,000 162,000 15,000 20,000 67,000
Real estate owned,
net................... 104,000 126,000 170,000 241,000 269,000 6,000 165,000
Loan service fees and
expenses.............. 2,111,000 369,000 1,958,000 242,000
Other general and
administrative
expenses.............. 864,000 683,000 1,092,000 1,290,000 70,000 347,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
Total other expenses... 5,507,000 3,151,000 8,102,000 4,944,000 636,000 510,000 2,126,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
(LOSS) INCOME BEFORE
INCOME TAX PROVISION... (2,908,000) (130,000) 639,000 (1,778,000) 202,000 (525,000) (1,162,000)
INCOME TAX (BENEFIT)
PROVISION.............. (1,279,000) (10,000) 47,000 (526,000) (713,000) (115,000) 167,000
----------- ---------- ---------- ----------- ---------- ---------- -----------
NET (LOSS) INCOME....... $(1,629,000) $ (120,000) $ 592,000 $(1,252,000) $ 915,000 $ (410,000) $(1,329,000)
=========== ========== ========== =========== ========== ========== ===========
(LOSS) EARNINGS PER
SHARE.................. $ (21.11) $ (5.13) $ 25.09 $ (135.43) $ 149.07
=========== ========== ========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
---------------------------------------------------------------- -------------------------
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31, OCTOBER 8- JULY 1-
------------------------ ------------------------ DECEMBER 31, OCTOBER 7, JULY 1, 1992-
1996 1995 1995 1994 1993 1993 JUNE 30, 1993
------------ ---------- ---------- ------------ ------------ ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net (loss) income...... $ (1,629,000) $ (120,000) $ 592,000 $ (1,252,000) $ 915,000 $ (410,000) $ (1,329,000)
Reconciliation of net
income to net cash
provided by operating
activities:
Provision for loan
losses................ 10,868,000 2,201,000 4,266,000 2,173,000 63,000 1,048,000 2,625,000
Provision for real es-
tate owned losses..... 323,000 598,000 100,000 1,000 108,000
Depreciation and
amortization.......... 78,000 42,000 241,000 121,000 15,000 15,000 62,000
Loss (gain) on sale of
real estate owned..... (386,000) (19,000) (97,000) 406,000 6,000 (15,000)
(Gain) loss from sale
of
securities available
for sale.............. (24,000) (14,000) (54,000) (96,000)
(Gain) loss on sale of
loans held for sale... (1,983,000) (126,000) (642,000) 60,000
Proceeds from sale of
loans held for sale... 21,411,000 2,506,000 16,673,000
Amortization of dis-
counts and deferred
fees.................. (2,373,000) (1,038,000) (1,246,000) (600,000) (13,000) (25,000) (82,000)
Amortization of de-
ferred credits........ (230,000) (230,000) (460,000) (388,000) (101,000)
FHLB stock dividend.... (21,000) (40,000) (40,000) (39,000) (6,000) (5,000) (10,000)
Change in:
Mortgage-backed
securities held for
trading.............. 489,000 (489,000)
Accrued interest
receivable........... (1,503,000) (205,000) (1,443,000) (238,000) (125,000) 27,000 171,000
Prepaid expenses and
other assets......... (1,662,000) (258,000) (698,000) 483,000 (1,073,000) 26,000 (283,000)
Due from affiliates... (3,549,000) 2,184,000 (452,000) (2,833,000) (1,229,000)
Due to affiliates..... (79,000) (104,000) 107,000 (210,000) 675,000
Current income taxes
receivable........... (750,000) (100,000) (396,000) 591,000 (108,000) 94,000
Deferred income
taxes................ 170,000 (228,000) (419,000) 111,000 (124,000)
Accounts payable and
other liabilities.... 1,535,000 (176,000) 1,846,000 (474,000) 765,000 (141,000) (10,000)
Minority interest..... (81,000) (19,000) 26,000 347,000
Other................. 44,000 (143,000) (180,000) 4,000
------------ ---------- ---------- ------------ ---------- ---------- ------------
Net cash provided by
(used in) operating
activities.......... 19,860,000 4,426,000 18,262,000 (1,614,000) (579,000) 541,000 1,391,000
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
---------------------------------------------------------------------- -------------------------
SIX MONTHS YEARS
ENDED ENDED
JUNE 30, DECEMBER 31, OCTOBER 8 - JULY 1-
--------------------------- --------------------------- DECEMBER 31, OCTOBER 7, JULY 1, 1992-
1996 1995 1995 1994 1993 1993 JUNE 30, 1993
------------- ------------ ------------- ------------ ------------ ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of loans....... $(222,791,000) $(24,547,000) $(186,895,000) $(41,561,000) $(889,000) $ (100,000)
Loan repayments, net of
originations........... 21,946,000 4,308,000 49,035,000 16,836,000 $ 3,630,000 3,940,000 12,526,000
Purchase of mortgage-
backed securities
available for sale..... (2,737,000) (10,655,000) (6,143,000)
Proceeds from maturity
of investment
securities held to
maturity............... 16,367,000 1,000,000 5,394,000 126,000
Purchase of mortgage-
backed securities held
to maturity............ (30,534,000) (4,198,000) (12,329,000)
Repayments of mortgage-
backed securities held
to maturity............ 784,000 589,000 824,000 643,000
Proceeds from sale of
mortgage-backed
securities available
for sale............... 1,513,000 1,496,000 3,963,000
Repayments of mortgage-
backed securities
available for sale..... 1,060,000 400,000 1,528,000
Purchases of securities
and FHLB stock......... (1,426,000) (2,965,000) (105,000) (9,112,000)
Proceeds from sale of
FHLB stock............. 266,000 231,000 127,000
Proceeds from sale of
real estate owned...... 6,200,000 443,000 5,254,000 569,000 121,000 632,000
Purchase of subsidiary
net of cash and cash
equivalents............ (346,000)
Real estate owned
improvements........... (21,000) (35,000)
Purchases of leasehold
improvements and
equipment.............. (128,000) (89,000) (349,000) (184,000) (29,000) (3,000)
------------- ------------ ------------- ------------ ----------- --------- ----------
Net cash (used in)
provided by investing
activities........... (211,259,000) (17,117,000) (130,841,000) (35,038,000) (9,448,000) 3,248,000 4,035,000
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------------------------------------------------------------ --------------------------
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31, OCTOBER 8- JULY 1-
------------------------- ------------------------- DECEMBER 31, OCTOBER 7, JULY 1, 1992-
1996 1995 1995 1994 1993 1993 JUNE 30, 1993
------------ ----------- ------------ ----------- ------------ ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net change in
deposits.............. $129,749,000 $34,722,000 $107,731,000 $26,181,000 $(6,289,000) $ (112,000) $(7,984,000)
Proceeds from issuance
of common stock....... 17,750,000 -- -- 3,750,000 3,000,000 -- --
Issuance of
subordinated debt..... -- 3,500,000 9,000,000 -- -- -- --
Proceeds from other
borrowings............ 224,626,000 46,926,000 77,419,000 41,677,000 6,348,000 260,000 --
Repayments of other
borrowings............ (170,855,000) (68,044,000) (85,919,000) (30,285,000) -- -- --
Issuance of preferred
stock................. -- -- -- 1,000,000 -- -- --
------------ ----------- ------------ ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities.......... 201,270,000 17,104,000 108,231,000 42,323,000 3,059,000 148,000 (7,984,000)
------------ ----------- ------------ ----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 9,871,000 4,413,000 (4,348,000) 5,671,000 (6,968,000) 3,937,000 (2,558,000)
------------ ----------- ------------ ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS:...........
Beginning of year...... 4,482,000 8,830,000 8,830,000 3,159,000 10,127,000 6,190,000 8,748,000
------------ ----------- ------------ ----------- ----------- ----------- -----------
End of year............ $ 14,353,000 $13,243,000 $ 4,482,000 $ 8,830,000 $ 3,159,000 $10,127,000 $ 6,190,000
============ =========== ============ =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW
INFORMATION--
Cash paid during the
period for:
Interest............... $ 12,933,000 $ 6,456,000 $ 13,833,000 $ 5,479,000 $ 768,000 $ 964,000 $ 4,134,000
Income taxes........... -- -- 365,000 110,000 94,000 24,000 280,000
NONCASH INVESTING
ACTIVITIES:
Additions to real
estate owned acquired
in settlement of
loans................. 4,377,000 1,727,000 9,878,000 3,122,000 65,000 259,000 842,000
Loans to facilitate the
sale of real estate
owned................. -- 224,000 367,000 2,352,000 -- -- --
NONCASH FINANCING
ACTIVITIES:
Exchange of
subordinated debt for
common stock.......... 2,000,000 -- -- -- -- -- --
Exchange of preferred
stock for subordinated
debt.................. -- -- 2,000,000 -- -- -- --
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS)
ON
SERIES A 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, October 8,
1993................... -- $ -- 6,644 $ 3,050,000 $ -- $ -- $ 3,050,000
Net income............. 915,000 915,000
Unrealized loss on
available-for-sale
securities............ (159,000) (159,000)
---------- ---------- ------- ----------- ----------- --------- -----------
BALANCE, December 31,
1993................... 6,644 3,050,000 915,000 (159,000) 3,806,000
Net loss............... (1,252,000) (1,252,000)
Unrealized loss on
available-for-sale
securities............ (511,000) (511,000)
Issuance of stock...... 1,000,000 1,000,000 16,952 3,750,000 4,750,000
---------- ---------- ------- ----------- ----------- --------- -----------
BALANCE, December 31,
1994................... 1,000,000 1,000,000 23,596 6,800,000 (337,000) (670,000) 6,793,000
Net income............. 592,000 592,000
Unrealized gain on
available-for-sale
securities............ 654,000 654,000
Exchange of preferred
stock for subordinated
debt.................. (1,000,000) (1,000,000) (1,000,000)
---------- ---------- ------- ----------- ----------- --------- -----------
BALANCE, December 31,
1995................... 23,596 6,800,000 255,000 (16,000) 7,039,000
Net loss (unaudited)... (1,629,000) (1,629,000)
Unrealized gain on
available-for-sale
securities, net of tax
(unaudited)........... 914,000 914,000
Exchange of
subordinated debt for
common stock
(unaudited)........... 36,913 11,000,000 11,000,000
Issuance of common
stock (unaudited)..... 60,304 17,750,000 17,750,000
---------- ---------- ------- ----------- ----------- --------- -----------
BALANCE, JUNE 30, 1996
(Unaudited)............ -- $ -- 120,813 $35,550,000 $(1,374,000) $ 898,000 $35,074,000
========== ========== ======= =========== =========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--Wilshire Financial Services Group, Inc. and
subsidiaries (the "Company") operate two 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
two banks acquired in transactions discussed below. WFSG has had no historical
operations other than those of WAC and its subsidiaries, but is expected to
form other subsidiaries in the future that will conduct other operations.
The Predecessor to the Company is First Bank of Beverly Hills, F.S.B.
("FBBH"). On October 7, 1993, WAC (or "Successor") acquired 94.9% of FBBH's
common stock in a purchase accounting transaction. FBBH's fiscal year end was
then changed from June 30 to December 31. Therefore, the accompanying
financial statements present the operations of FBBH for its fiscal year ended
June 30, 1993 and for the period from July 1 through October 7, 1993, and the
consolidated operations of WAC and FBBH for the period from October 8 through
December 31, 1993.
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 periods from November 9 through
December 31, 1994 and from January 1 through December 27, 1995. On December
27, 1995, WAC and WACII were merged and WAC was named as the surviving entity.
Financial information as of December 31, 1995 and for the period from December
27, 1995 through December 31, 1995 is presented on a consolidated basis and
includes the accounts of WAC, FBBH and GSB.
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 $2,156,000. 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.
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".
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 amounts of
revenues 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.
F-9
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investment Securities and Mortgage-Backed Securities--The Company's
securities portfolios consist of mortgage-backed and other investment
securities that are classified as held-to-maturity or as available-for-sale.
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 an
historical cost basis, adjusted for the amortization of premiums and accretion
of discounts using a method that approximates the interest method. 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. The Company has no
trading securities.
Loans Receivable, Loans Held for Sale and Allowance for Loan Losses--Loans
are reported at the principal amount outstanding, net of deferred loan
origination fees, the allowance for loan losses and discounts on purchased
loans. 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 shown net of outstanding loan balances. The net deferred fees
and costs are recognized in interest income over the terms of the loans using
a method that approximates the interest method.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards ("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. This statement prescribes that a loan is
impaired when it is probable that the creditor will be unable to collect all
contractual principal and interest payments under the terms of the loan
agreement. This statement generally requires impaired loans to be measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as an expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. Specific valuation allowances are recorded when the measurement of
impairment indicates that the fair value of the loan is less than its carrying
amount. Adoption of SFAS No. 114 did not have a material effect on the
Company's financial statements.
The Company considers most purchased pools of loans (pools comprising
single-family residential loans and consumer loans) to consist of smaller
balance homogeneous loans and therefore, as permitted by SFAS No. 114,
evaluates such loans for impairment on a pooled basis, considering the
discounts in purchase prices relative to gross principal and interest.
After purchase, discounts on purchased loan pools 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 specific and general valuation allowances are included
in the allowance for loan losses. Discounts regarded as yield adjustments are
accreted to interest income using a method that approximates the interest
method.
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 allowance is increased by provisions for loan losses charged
against operations and recoveries of previously charged off credits.
F-10
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loans Held for Sale and Securitizations--The Company does not generally
acquire loans with the intention of selling or securitizing them. However,
when a decision is made to sell certain loans, they are classified as held for
sale and are carried at the lower of cost or market. Adjustments to the lower
of cost or market are charged to current operations. Gains or losses on loan
pools 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 loan
pools. 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.
There were no loans held for sale as of June 30, 1996 or December 31, 1994.
Loans held for sale at December 31, 1995 were predominantly nonperforming
loans purchased at deep discounts, and were sold in a 1996 securitization
transaction.
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 1995. As of 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
F-11
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 (see Note 7).
Effective January 1, 1996, all subordinated debt was exchanged for WAC's
common stock.
Earnings Per Share is calculated based on the weighted average number of
shares of 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 1995,
1994 and the period in 1993 subsequent to the acquisition of the Predecessor
was 23,596, 9,245 and 6,138, respectively. The weighted average shares
outstanding for the six months ended June 30, 1996 was 77,175 (unaudited).
Recent Accounting Standards--SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, is effective
for financial statements issued for fiscal years beginning after December 15,
1995. The Company does not anticipate a material impact on its operations or
financial position from the implementation of SFAS No. 121 in 1996.
SFAS No. 123, Accounting for Stock-Based Compensation, is effective for
financial statements for fiscal years beginning after December 15, 1995. The
Company does not intend to adopt the fair value method of accounting for stock
compensation discussed in SFAS No. 123, but will instead retain the intrinsic
value method used historically, and will make the disclosures required by the
statement.
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 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.
Interim Financial Data--In the opinion of management of the Company, the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of the Company as of June 30, 1996 and
the results of operations for the six months ended June 30, 1996 and 1995.
Disclosures concerning the unaudited interim financial information presented
in these notes to the consolidated financial statements have been included
when management considered them necessary with respect to significant changes
in the business during the six months ended June 30, 1996. Not all disclosures
considered necessary for annual audited financial statements are presented.
F-12
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost, fair value and gross unrealized gains and losses on
investment securities (U.S. Treasury notes) and mortgage-backed securities as
of December 31, 1995 and 1994 are shown below. Fair value estimates were
obtained from an independent pricing service.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
1995 COST GAINS LOSSES VALUE
---- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Available-for-sale
mortgage-backed
securities............... $ 9,099,000 $ -- $ 16,000 $ 9,083,000
============ ======== ========== ============
Held-to-maturity:
U.S. Treasury notes..... $ 6,470,000 $ 22,000 $ 4,000 $ 6,488,000
Mortgage-backed
securities............. 13,119,000 -- 246,000 12,873,000
------------ -------- ---------- ------------
Total held-to-
maturity............. $ 19,589,000 $ 22,000 $ 250,000 $ 19,361,000
============ ======== ========== ============
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
1994 COST GAINS LOSSES VALUE
---- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Available-for-sale
mortgage-backed
securities............... $ 11,613,000 $ -- $ 670,000 $ 10,943,000
============ ======== ========== ============
Held-to-maturity:
U.S. Treasury notes..... $ 4,505,000 $ -- $ 152,000 $ 4,353,000
Mortgage-backed
securities............. 14,439,000 -- 1,491,000 12,948,000
------------ -------- ---------- ------------
Total held-to-
maturity............. $ 18,944,000 $ -- $1,643,000 $ 17,301,000
============ ======== ========== ============
</TABLE>
The amortized cost and estimated fair value of investment securities held to
maturity other than mortgage-backed securities at December 31, 1995 and 1994
by contractual maturity are as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
1995 COST VALUE
---- ----------- -----------
<S> <C> <C>
Due in less than one year........................... $ 4,970,000 $ 4,966,000
Due in one to five years............................ 1,500,000 1,522,000
----------- -----------
$ 6,470,000 $ 6,488,000
=========== ===========
<CAPTION>
1994
----
<S> <C> <C>
Due in less than one year........................... $ 1,000,000 $ 983,000
Due in one to five years............................ 3,505,000 3,370,000
----------- -----------
$ 4,505,000 $ 4,353,000
=========== ===========
</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 June 30, 1996, mortgage-backed securities with carrying values of
$27,340,000 (unaudited) and market values of approximately $26,700,000
(unaudited) were pledged to secure FHLB borrowings, merchant bankcard
transactions and certain guarantees related to a loan securitization
transaction. Of the total securities pledged, securities with fair values of
approximately $9,100,000 (unaudited) were delivered to, and are held in
custody of, Bankers Trust and the Federal Reserve Bank.
The loan securitization involved the sale of discounted nonperforming loans
with carrying amounts of approximately $31,800,000 (unaudited). The Banks are
contingently liable for losses, if any, that could arise if the collectibility
of any securitized loan is unenforceable due to the absence of original notes
or files. 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.
F-13
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. LOANS RECEIVABLE AND LOANS HELD FOR SALE
Loans receivable and loans held for sale consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------
1996 1995 1994
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Real estate loans:
One to four units................. $336,149,000 $190,424,000 $ 53,308,000
Over four units................... 78,616,000 71,239,000 77,891,000
Commercial........................ 56,874,000 52,078,000 55,112,000
Land.............................. 3,450,000 2,903,000 3,329,000
------------ ------------ ------------
Total loans secured by real
estate......................... 475,089,000 316,644,000 189,640,000
Other loans....................... 34,316,000 20,811,000 8,948,000
------------ ------------ ------------
509,405,000 337,455,000 198,588,000
Less:
Allowance for loan losses......... 31,988,000 25,651,000 7,701,000
Deferred loan fees................ 219,000 245,000 286,000
Discount on purchased loans not
included in allowance for loan
losses........................... 17,947,000 20,788,000 9,130,000
------------ ------------ ------------
$459,251,000 $290,771,000 $181,471,000
============ ============ ============
</TABLE>
Included in the preceding table are loans held for sale as of December 31,
1995, consisting of the following, at cost, which is lower than estimated fair
value:
<TABLE>
<S> <C>
Real estate loans:
One to four units............................................. $33,497,000
Commercial.................................................... 466,000
Land.......................................................... 194,000
-----------
Total loans secured by real estate.......................... 34,157,000
Other loans..................................................... 12,000
-----------
34,169,000
Less allowances, discounts and fees............................. 15,572,000
-----------
$18,597,000
===========
</TABLE>
As of December 31, 1995 and 1994, loans receivable with adjustable rates of
interest were $265,702,000 and $170,437,000, respectively, and loans receivable
with fixed rates of interest were $71,753,000 and $28,151,000, 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.
The Company has a geographic concentration of mortgage loans in Southern
California, which experienced declines in real estate values in recent years.
Substantially all loans originated or acquired by the Predecessor, and by GSB
prior to its 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)
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS YEAR ENDED DECEMBER 31, JULY 1 TO
ENDED ------------------------ DECEMBER 31,
JUNE 30, 1996 1995 1994 1993
------------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance, beginning of
year................... $ 25,651,000 $ 7,701,000 $ 4,314,000 $ 4,221,000
Loans charged off....... (12,766,000) (5,404,000) (1,666,000) (1,042,000)
Recoveries.............. 1,374,000 81,000 71,000 24,000
Provision for loan loss-
es..................... 10,868,000 4,266,000 2,173,000 1,111,000
Allocations from
purchased loan
discounts.............. 6,861,000 19,007,000 2,809,000
------------ ----------- ----------- -----------
Balance, end of year.... $ 31,988,000 $25,651,000 $ 7,701,000 $ 4,314,000
============ =========== =========== ===========
</TABLE>
Both FBBH and GSB were examined by the Office of Thrift Supervision ("OTS")
during the six months ended June 30, 1996. Based on its examination findings
and its policies concerning financial reporting practices for savings
institutions, the OTS required adjustments to the allowance for loan losses,
primarily related to two loan products in the portfolio. Additional provisions
for losses of $4,084,000 and $2,887,000 (unaudited) were recorded for
purchased high-coupon automobile loans to sub-prime borrowers and for certain
income-producing real estate loans in the Banks' preacquisition portfolios,
respectively. The Banks invested in automobile loans in late 1995 and early
1996. OTS regulations require that such loans, if past due more than 120 days,
must be fully reserved. Management believes that dispositions of the
automobile collateral will provide for significant recoveries. Real estate
loans for which additional losses were provided in 1996 were identified by the
OTS as "troubled collateral-dependent" loans. These loans were primarily
performing loans that were undercollateralized, based on the current fair
value of the real estate collateral, and loans that had become impaired during
1996. The losses provided were the amounts necessary to reduce the carrying
values of the loans to the fair values of the collateral. Potential recoveries
of losses on these loans depend on continued performance by the borrowers
and/or improvement in the fair values of the real estate.
At December 31, 1995, the Company had classified $14,241,000 of its loans as
impaired with specific valuation allowances related to impairment of
$4,155,000, and $9,593,000 of its loans impaired with no related specific
valuation allowances determined in accordance with SFAS No. 114. The average
recorded investment in impaired loans during the year ended December 31, 1995
was $24,204,000. Interest income of $1,631,000 was recognized on impaired
loans during the year ended December 31, 1995 based on cash payments. These
amounts exclude consideration of single family residential and consumer loan
pools not evaluated for impairment under SFAS No. 114. Management believes
that allowances allocated from purchased loan discounts, and other allowances
established through provisions for loan losses, provide adequate measurements
of impairments of these pools collectively. Loans for which income was not
being accrued at December 31, 1995 and 1994 were approximately $55,335,000 and
$12,801,000, respectively, including loans evaluated for impairment under SFAS
No. 114 and loans evaluated for impairment on a pooled basis. Interest income
that would have been recorded under the original terms of such loans was
$7,267,000 and $1,298,000 for the years ended December 31, 1995 and 1994,
respectively.
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
F-15
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
environment. Although management believes the levels of the allowance as of
December 31, 1995 and June 30, 1996 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.
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>
SIX MONTHS PERIOD FROM
ENDED YEAR ENDED DECEMBER 31, JULY 1 TO
JUNE 30, 1996 ------------------------- DECEMBER 31,
(UNAUDITED) 1995 1994 1993
------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balance, beginning of
year................... $1,193,000 $ 123,000 $ 55,000 $54,000
Charge-offs............. (736,000) (82,000) (32,000)
Allocation of purchase
discount............... 554,000
Provision for the year.. 598,000 100,000 1,000
---------- ------------ ---------- -------
Balance, end of year.... $ 457,000 $ 1,193,000 $ 123,000 $55,000
========== ============ ========== =======
</TABLE>
5. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ---------
<S> <C> <C>
Leasehold improvements................................ $ 299,000 $ 275,000
Furniture and equipment............................... 718,000 629,000
---------- ---------
Total cost............................................ 1,017,000 904,000
Accumulated depreciation and amortization............. (742,000) (737,000)
---------- ---------
$ 275,000 $ 167,000
========== =========
</TABLE>
6. DEPOSITS
Deposits consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
------------ ------------
<S> <C> <C>
Passbook accounts.................................. $ 304,000 $ 90,000
Money market accounts.............................. 1,267,000 2,831,000
NOW/checking....................................... 5,111,000 3,509,000
Time deposits:
Less than $100,000............................... 247,814,000 160,018,000
$100,000 and greater............................. 49,524,000 29,841,000
------------ ------------
Total deposits................................... $304,020,000 $196,289,000
============ ============
</TABLE>
F-16
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of time deposits by maturity at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996........................................................... $253,107,000
1997........................................................... 39,644,000
1998........................................................... 4,341,000
1999........................................................... 246,000
------------
$297,338,000
============
</TABLE>
7. BORROWINGS AND SUBORDINATED DEBT
Federal Home Loan Bank ("FHLB") advances and repurchase agreements consist
of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
----------- -----------
<S> <C> <C>
FHLB advances........................................ $13,000,000
Repurchase agreement................................. $13,000,000 8,500,000
----------- -----------
$13,000,000 $21,500,000
=========== ===========
</TABLE>
Repurchase agreements are issued under a master repurchase agreement with
Bear Stearns Mortgage Capital Corp. Proceeds from the agreements are used to
purchase 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 $54,210,000 and securities with carrying values of
$2,930,000. At December 31, 1994 repurchase agreements and FHLB advances were
secured by FHLB stock, loans with unpaid principal balances of $21,859,000 and
securities with carrying values of $13,165,000. 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>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED ------------------------
JUNE 30, 1996 1995 1994
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Average balance during the period.. $68,495,000 $ 1,000,000 $ 2,297,000
Highest amount outstanding during
the period........................ 97,000,000 13,000,000 8,500,000
Average interest rate during the
period............................ 6.8% 6.7% 5.8%
Average interest rate--end of peri-
od................................ 6.9% 6.7% 5.8%
</TABLE>
The following unaudited information concerns significant developments
related to the repurchase agreements and other financial instruments during
the six months ended June 30, 1996:
At June 30, 1996, outstanding repurchase agreements were $66,290,000,
secured by loans with unpaid principal balances of $156,280,000.
In April, 1996, the Banks entered into an interest-rate swap with a
$70,000,000 notional amount with Bear Stearns. The swap effectively
converts $70,000,000 of purchased fixed-rate loans to variable-rate loans.
The Banks pay 6.25% and Bear Stearns pays 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 June 30, 1996, the notional principal is $63,246,000.
F-17
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
WAC's capitalization includes subordinated debt with majority stockholders
in amounts up to $50,000,000. This borrowing 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 $11,000,000. As stated in Note 1, the
Company's common stock was exchanged for the subordinated debt on January 1,
1996.
8. INCOME TAXES
The provisions for income tax (benefit) consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, OCTOBER 8 THROUGH
-------------------- DECEMBER 31,
1995 1994 1993
--------- --------- -----------------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal.......................... $ 434,000 $(656,000) $ 124,000
State............................ 32,000 19,000 22,000
--------- --------- ---------
466,000 (637,000) 146,000
--------- --------- ---------
Deferred tax expense (benefit):
Federal.......................... (250,000) 90,000 (902,000)
State............................ (169,000) 21,000 43,000
--------- --------- ---------
(419,000) 111,000 (859,000)
--------- --------- ---------
Total income tax provision (bene-
fit).............................. $ 47,000 $(526,000) $(713,000)
========= ========= =========
</TABLE>
Deferred income taxes receivable (payable) are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets:
Purchase discounts................................. $ 1,349,000 $ 211,000
Purchase accounting adjustments.................... 629,000 899,000
Depreciation....................................... 65,000 67,000
Provision for loan loss............................ 408,000 1,404,000
Net operating loss................................. 170,000 229,000
State taxes........................................ 10,000 20,000
----------- -----------
Gross deferred tax assets........................ 2,631,000 2,830,000
----------- -----------
Deferred tax liabilities:
Partnership income................................. (44,000) (275,000)
Deferred loan fees................................. (351,000) (405,000)
FHLB stock dividends............................... (242,000) (220,000)
Prepaids........................................... (97,000) (74,000)
Other.............................................. (1,000) (6,000)
----------- -----------
Gross deferred tax liability..................... (735,000) (980,000)
----------- -----------
Total deferred tax asset............................. 1,896,000 1,850,000
Valuation allowance.................................. (1,726,000) (2,099,000)
----------- -----------
Net deferred tax asset (liability)................... $ 170,000 $ (249,000)
=========== ===========
</TABLE>
F-18
<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>
PERIOD FROM
YEARS ENDED OCTOBER 8
DECEMBER 31, THROUGH
--------------- DECEMBER 31,
1995 1994 1993
------ ------ ------------
<S> <C> <C> <C>
Federal income tax provision at statutory
rate...................................... 35.0 % (35.0)% 35.0 %
State taxes, net of federal benefit........ 4.0
Valuation allowance........................ (25.1) 8.8 (388.0)
Change in prior year estimate.............. (7.8)
Other...................................... 1.3 (3.4)
------ ------ ------
Effective income tax rate................ 7.4 % (29.6)% (353.0)%
====== ====== ======
</TABLE>
At December 31, 1995, the Banks had net operating loss carryforwards for
state income tax purposes of approximately $1,319,000, $155,000 and $32,000,
expiring in the years 1997, 1998 and 1999, respectively. At December 31, 1994,
the Banks had net operating loss carryforwards for state income tax purposes
of approximately $9,000, $1,324,000, $122,000 and $565,000, expiring in the
years 1996, 1997, 1998 and 1999, respectively.
At June 30, 1996, income taxes receivable (unaudited) consist entirely of
taxes currently receivable (i.e., refundable from loss carrybacks), and there
is a valuation allowance recorded against all deferred tax assets, net of
deferred tax liabilities.
9. COMMITMENTS AND CONTINGENCIES
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. In 1995, the Banks
contributed $28,000 to the plan.
Lease Commitments--The following is a schedule by year of future minimum
rental payments:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1996............................................................... $245,000
1997............................................................... 156,000
1998............................................................... 127,000
1999............................................................... 116,000
2000............................................................... 7,000
--------
Total............................................................ $651,000
========
</TABLE>
Lending Commitments--At June 30, 1996 and December 31, 1995, the Company had
commitments to extend credit of $3,235,000 (unaudited) and $793,000,
respectively. There were no lending commitments at December 31, 1994. 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 categories of collateral are real estate and
certificates of deposit.
F-19
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
10. REGULATORY MATTERS
Regulatory Agreement--As of September 30, 1996, FBBH and GSB have received
drafts of, and are expected to consent to, separate but similar Orders to
Cease and Desist (the "Orders") issued by the OTS.
The Order expected to be issued to FBBH will supersede a previously existing
Supervisory Agreement between FBBH and the OTS issued June 8, 1995 which
contained requirements similar to those discussed below.
The Orders will 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 will 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 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 will take effect immediately.
The Orders will be 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 mandatory--and possibly
additional discretionary--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 risk-based capital, as these terms are defined in
OTS regulation. Under the prompt corrective action regulations, 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-20
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Banks' actual and required capital ratios at December 31, 1995 are as
follows (dollars in thousands):
<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>
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 December 31, 1995 and 1994, the most recent notifications from the OTS
categorized FBBH as "adequately-capitalized" and GSB as "well-capitalized".
Subsequent to December 31, 1995, WAC provided additional capital to FBBH in
the form of preferred stock to enable FBBH to comply with the 1995 Supervisory
Agreement and with the proposed new Order relating to FBBH, to maintain
capital at "well-capitalized" levels. In consideration of the additional
capital infusion to FBBH since December 31, 1995, management believes that
until September 30, 1996, no conditions or events occurred that would
otherwise affect the Banks' categories. However, the OTS has, in recent
examinations, requested adjustments to reported financial information and to
the risk-weightings of certain assets and off-balance sheet items that have
affected capital computations. Management believes that such adjustments,
including their application to new transactions during 1996, are fully
reflected in capital computations reported to the OTS in the Banks' most
recent reports to the OTS and that, until September 30, 1996, FBBH's capital
ratios have been maintained in excess of the minimums required for them to be
categorized "well-capitalized". See "SAIF Legislation" below concerning
September 30, 1996 events affecting capital compliance.
As of June 30, 1996, the Banks' capital ratios were as follows (unaudited):
<TABLE>
<CAPTION>
FBBH GSB
----- -----
<S> <C> <C>
Total capital to risk-weighted assets............................. 11.2 % 10.4 %
Tier 1 capital to risk-weighted assets............................ 9.9 % 9.1 %
Tier 1 capital to average assets.................................. 6.9 % 7.3 %
Tangible capital.................................................. 7.0 % 7.0 %
</TABLE>
Because the Banks have minimum regulatory capital requirements,
substantially all retained earnings of the Banks are restricted as to
distribution to WAC or other stockholders.
F-21
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SAIF Legislation--On September 30, 1996, legislation was enacted that
imposes a one-time special assessment on banks and savings institutions whose
deposits are insured by the Savings Association Insurance Fund ("SAIF"). SAIF-
insured institutions will pay a special one-time assessment of approximately
65.7 basis points (to be finally determined by the FDIC) on assessable
deposits as of March 31, 1995. The Company will record an estimate of
approximately $1,400,000 (pretax) for this assessment during the quarter
ending September 30, 1996. The assessment is tax-deductible.
As a result of the SAIF assessment, management expects that FBBH capital
ratios will be reduced, as of September 30, 1996, to "adequately capitalized"
levels. Management plans to use a portion of the proceeds from public
offerings of equity and debt in the fourth quarter of 1996 to restore capital
levels to "well capitalized" levels by December 31, 1996. Until such time,
FBBH are restricted from taking new brokered deposits.
11. RELATED PARTY TRANSACTIONS
Substantially all loans receivable are serviced by Wilshire Credit
Corporation ("WCC"), which is affiliated with WAC 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.
12. STOCK OPTIONS
The Banks issue stock options for the benefit of certain of the Banks'
directors, executives and consultants.
The exercise price of the options is set by the Boards of Directors and was
at least equal to the book value of the shares on the grant date. The
following table summarizes the activity relating to the Banks' stock options
for the year ended December 31, 1995.
<TABLE>
<CAPTION>
FBBH GSB
----------- ------
<S> <C> <C>
Balance at beginning of year............................. 19,447 --
Options granted.......................................... 23,161 69,724
----------- ------
Balance at end of year................................... 42,608 69,724
=========== ======
Exercise price........................................... $3.67-$4.50 $ 1.47
=========== ======
</TABLE>
All options outstanding at December 31, 1995 were exercisable.
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
F-22
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------
CARRYING
OR NOTIONAL ESTIMATED
AMOUNT FAIR VALUE
------------ ------------
<S> <C> <C>
Assets:
Cash and due from banks......................... $ 3,382,000 $ 3,382,000
Federal funds sold.............................. 1,100,000 1,100,000
Investment securities held to maturity.......... 6,470,000 6,488,000
Mortgage-backed securities available-for-sale... 9,083,000 9,083,000
Mortgage-backed securities held to maturity..... 13,119,000 12,873,000
Loans receivable and loans held for sale........ 290,771,000 295,747,000
Federal Home Loan Bank stock.................... 1,421,000 1,421,000
Liabilities:
Deposits........................................ 304,020,000 307,177,000
Borrowings...................................... 13,000,000 13,000,000
Subordinated debt............................... 11,000,000 11,000,000
Off-balance-sheet items:
Loan commitments................................ 673,000 --
</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.
Investment and Mortgage-Backed Securities--The fair values of investment
securities are generally obtained from market bids for similar or identical
securities, or are obtained from independent security brokers or dealers.
Loans Receivable and Loans Held for Sale--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 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 performing and nonperforming 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 approximated the prevailing rates
offered to depositors as of the reporting date.
F-23
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Borrowings--The carrying amounts of FHLB advances and 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.
Loan Commitments--The Company's lending commitments are of a short-term
nature, and otherwise have terms that result in fair values that are
immaterial as of the balance-sheet date.
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
------------------------
JUNE 30, MARCH 31,
1996 1996
----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE INFORMATION)
<S> <C> <C>
Interest income.................................. $ 12,407 $ 9,544
Interest expense................................. 7,046 4,974
Provision for loan losses........................ 5,483 5,385
----------- ----------
Net interest loss after provision for loan loss-
es.............................................. (122) (815)
Non-interest income.............................. 2,268 3,884
Non-interest expense............................. 3,976 4,147
----------- ----------
Loss before income taxes......................... (1,830) (1,078)
Income tax benefit............................... 805 474
----------- ----------
Net loss......................................... $ (1,025) $ (604)
=========== ==========
Loss per share................................... $ (13.28) $ (7.83)
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995
------------ ------------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C>
Interest income.............. $7,407 $ 6,095 $5,776 $5,103
Interest expense............. 4,064 3,710 3,573 3,134
Provision for loan losses
(provision reversal)........ (436) 2,501 1,028 1,173
------ ------- ------ ------
Net interest income (loss)
after provision for loan
losses...................... 3,779 (116) 1,175 796
Non-interest income.......... 1,427 2,701 1,355 1,086
Non-interest expense......... 3,909 3,113 2,463 2,079
------ ------- ------ ------
Income (loss) before income
taxes....................... 1,297 (528) 67 (197)
Income tax (expense)
benefit..................... (95) 38 (4) 14
------ ------- ------ ------
Net income (loss)............ $1,202 $ (490) $ 63 $ (183)
====== ======= ====== ======
Earnings (loss) per share.... $50.92 $(20.73) $ 2.63 $(7.73)
====== ======= ====== ======
</TABLE>
F-24
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1994 1994 1994 1994
------------ ------------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<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 loan losses... 2,173 -- -- --
------- ------- ------- ------
Net interest (loss) income
after provision for loan
losses..................... (627) 791 699 1,076
Non-interest income......... 762 445 122 172
Non-interest expense........ 2,050 1,364 1,061 743
------- ------- ------- ------
(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>
15. PARENT COMPANY INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
------------ -----------
<S> <C> <C>
ASSETS
Cash............................................... $ 1,000 $ 320,000
Investments in Banks............................... 18,777,000 7,142,000
Prepaid expenses and other assets.................. 153,000 204,000
------------ -----------
$ 18,931,000 $ 7,666,000
------------ -----------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable and other liabilities............. $ 317,000 $ 227,000
Due to affiliates.................................. 575,000 646,000
Subordinated debt to majority stockholders......... 11,000,000
------------ -----------
Total liabilities................................ 11,892,000 873,000
------------ -----------
Contributed and retained equity.................... 7,039,000 6,793,000
------------ -----------
$ 18,931,000 $ 7,666,000
============ ===========
</TABLE>
F-25
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 8
YEAR ENDED DECEMBER 31, THROUGH
------------------------- DECEMBER 31,
1995 1994 1993
----------- ------------- ---------
<S> <C> <C> <C>
Interest income................ $ 9,000 $ 24,000 $ 4,000
Interest expense............... 243,000 31,000 5,000
---------- ------------- ---------
Net interest expense........... (234,000) (7,000) (1,000)
Noninterest income............. 1,155,000 611,000 157,000
Noninterest expense............ (363,000) (156,000) (118,000)
---------- ------------- ---------
Income before equity in
earnings (loss) of
subsidiaries.................. 558,000 448,000 38,000
Equity in earnings (loss) of
subsidiaries.................. 34,000 (1,700,000) 877,000
---------- ------------- ---------
Net income (loss).............. $ 592,000 $ (1,252,000) $ 915,000
========== ============= =========
</TABLE>
F-26
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 8
YEAR ENDED DECEMBER 31, THROUGH
------------------------- DECEMBER 31,
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................. $ 592,000 $ (1,252,000) $ 915,000
Adjustments to reconcile net
income to
net cash provided by operating
activities:
Amortization of purchase
accounting
adjustments..................... (1,045,000) (488,000) (101,000)
Equity in (earnings) loss of
subsidiaries.................... (34,000) 1,700,000 (877,000)
Change in:
Prepaid expenses and other
assets......................... 51,000 495,000 (699,000)
Accounts payable and other
liabilities.................... 90,000 (111,000) 338,000
Due to affiliates and other
officers....................... (71,000) (29,000) 675,000
Other........................... 33,000
----------- ------------ ----------
Net cash (used in) provided by
operating activities.......... (384,000) 315,000 251,000
----------- ------------ ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net investment in subsidiaries.... (9,000,000) (4,746,000) (3,300,000)
----------- ------------ ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of capital stock......... 4,750,000 3,050,000
Issuance of subordinated debt..... 9,000,000
Dividends from subsidiary......... 65,000
----------- ------------ ----------
Net cash provided by financing
activities.................... 9,065,000 4,750,000 3,050,000
----------- ------------ ----------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS......... (319,000) 319,000 1,000
CASH:
Beginning of year................. 320,000 1,000
----------- ------------ ----------
End of year....................... $ 1,000 $ 320,000 $ 1,000
=========== ============ ==========
NONCASH FINANCING ACTIVITIES:
Conversion of capital stock to
subordinated
debt............................. $ 2,000,000
</TABLE>
F-27
<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 and
the period October 8 through December 31, 1993 as though the GSB purchase had
occurred as of the beginning of each year and period. The proforma amounts are
not necessarily indicative of what would have actually occurred if the
acquisition had occurred as of the beginning of each year and period.
<TABLE>
<CAPTION>
YEAR PERIOD FROM
ENDED OCTOBER 8-
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
Net interest income and
non-interest revenue..... $7,222,000 $ 999,000
Income (loss) before
change in accounting
principle................ (920,000) 1,087,000
Cumulative effect of
change in accounting
principle................ (119,000)
Net income (loss)......... (920,000) 968,000
Earnings (loss) per share:
Income (loss) before
accounting change...... (38.99) 41.05
Net income (loss)....... (38.99) 41.05
</TABLE>
F-28
<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. The consolidated statements of operations and of cash flows of the
Bank for the year ended December 31, 1993 were audited by other auditors,
whose report dated March 18, 1994 expressed an unqualified opinion on these
financial statements.
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 a reasonable 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 8, 1994, in conformity with generally accepted
accounting principles.
March 10, 1995
Los Angeles, California
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Girard Savings Bank:
We have audited the accompanying consolidated statements of operations, and
cash flows of Girard Savings Bank F.S.B. and subsidiary (the Savings Bank) for
the year ended December 31, 1993. These consolidated financial statements are
the responsibility of the Savings Bank's management. Our responsibility is to
express an opinion on these consolidated 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 a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and the
cash flows of the Savings Bank for the year ended December 31, 1993, in
conformity with generally accepted accounting principles.
As discussed in Notes 1 and 9 to the consolidated financial statements, the
Savings Bank changed its method of accounting for income taxes in 1993 to
adopt the provisions of Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes."
KPMG Peat Marwick LLP
San Diego, California
March 18, 1994
F-30
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994 AND THE YEAR ENDED
DECEMBER 31, 1993
<TABLE>
<CAPTION>
PERIOD
FROM
JANUARY 1 YEAR
THROUGH ENDED
NOVEMBER 8, DECEMBER 31,
1994 1993
----------- ------------
<S> <C> <C>
INTEREST INCOME:
Loans............................................. $5,577,000 $ 7,854,000
Mortgage-backed securities........................ 337,000 397,000
---------- -----------
Total interest income........................... 5,914,000 8,251,000
---------- -----------
INTEREST EXPENSE:
Deposits.......................................... 3,006,000 3,979,000
Borrowings........................................ 292,000 667,000
---------- -----------
Total interest expense.......................... 3,298,000 4,646,000
---------- -----------
NET INTEREST INCOME................................. 2,616,000 3,605,000
PROVISION FOR ESTIMATED LOAN LOSSES................. 827,000 2,524,000
---------- -----------
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED
LOAN LOSSES........................................ 1,789,000 1,081,000
---------- -----------
OTHER INCOME (LOSS)--Service charges and other
fees............................................... (3,000) 15,000
---------- -----------
OTHER EXPENSES:
Compensation and other employee benefits.......... 512,000 453,000
FDIC insurance premiums........................... 262,000 374,000
Depreciation and amortization..................... 14,000 10,000
Amortization of excess of cost over net assets
acquired......................................... 993,000 67,000
Occupancy......................................... 57,000 81,000
Professional services............................. 338,000 153,000
Data processing................................... 54,000 64,000
Real estate owned, net............................ 194,000 988,000
Other general and administrative.................. 143,000 272,000
---------- -----------
Total other expenses............................ 2,567,000 2,462,000
---------- -----------
LOSS BEFORE INCOME TAX PROVISION.................... (781,000) (1,366,000)
INCOME TAX PROVISION (BENEFIT)...................... 156,000 (432,000)
---------- -----------
NET LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE............................... (937,000) (934,000)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE.......................................... -- (119,000)
---------- -----------
NET LOSS............................................ $ (937,000) $(1,053,000)
========== ===========
</TABLE>
See notes to consolidated financial statements.
F-31
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994 AND THE YEAR ENDED
DECEMBER 31, 1993
<TABLE>
<CAPTION>
PERIOD
FROM
JANUARY 1 YEAR
THROUGH ENDED
NOVEMBER 8, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (937,000) $ (1,053,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation...................................... 14,000 10,000
Amortization of excess of cost over net assets
acquired......................................... 993,000 67,000
Amortization of deferred interest and fees........ (56,000) (100,000)
Provision for loan losses......................... 827,000 2,524,000
Provision for real estate losses.................. 97,000 483,000
Loss on real estate sold.......................... -- 618,000
Change in:
Accrued interest receivable...................... (109,000) 110,000
Prepaid expenses and other assets................ (52,000) (8,000)
Income taxes receivable.......................... 921,000 (78,000)
Other liabilities................................ 468,000 193,000
Deferred taxes................................... 212,000 593,000
------------ ------------
Net cash provided by operating activities....... 2,378,000 3,359,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan repayments--net.............................. 5,503,000 6,110,000
Proceeds from the maturity of investment securi-
ties............................................. 3,497,000 --
Purchases of investment securities and FHLB
stock............................................ (2,046,000) (1,532,000)
Investment in real estate......................... (107,000) (87,000)
Proceeds from real estate sold.................... 2,850,000 10,135,000
Proceeds from sale of FHLB stock.................. -- 246,000
------------ ------------
Net cash provided by investing activities....... 9,697,000 14,872,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits............................ (2,402,000) (21,837,000)
Issuance of common stock.......................... 13,000 1,000
Proceeds from FHLB advances....................... 12,000,000 13,500,000
Payments of FHLB advances......................... (21,000,000) (17,500,000)
------------ ------------
Net cash used in financing activities........... (11,389,000) (25,836,000)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS.......... 686,000 (7,605,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..... 2,903,000 10,508,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR........... $ 3,589,000 $ 2,903,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Payments during the period for:
Interest.......................................... $ 3,300,000 $ 4,662,000
NONCASH INVESTING ACTIVITIES:
Additions to real estate acquired in settlement of
loans............................................ -- 2,817,000
Loans originated to finance the sale of foreclosed
real estate...................................... 1,190,000 2,404,000
Additions to loans resulting from the transfer of
in-substance foreclosures........................ -- 3,629,000
</TABLE>
See notes to consolidated financial statements.
F-32
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1994 THROUGH NOVEMBER 8, 1994
AND THE YEAR ENDED DECEMBER 31, 1993
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 addresses 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 bought 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
its investment securities as held to maturity and accounts for them in the
same manner.
Loans Receivable--Loans are reported at the principal amount 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.
In May 1993, the Financial Accounting Standards ("FASB") issued SFAS No.
114, Accounting by Creditors for Impairment of a Loan. This statement
prescribes that a loan is impaired when it is probable that a
F-33
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
creditor will be unable to collect all amounts due (principal and interest)
according to the contractual terms of the loan agreement. Measurement of the
impairment is generally based on the fair value of the collateral for a
collateral-dependent loan. Additionally, SFAS No. 114 prescribes measuring
impairment of a restructured loan by discounting the total expected future
cash flows at the loan's effective rate of interest in the original loan
agreement. Finally, the impact of initially applying the statement is reported
as a part of the provision for loan losses. The Bank must adopt SFAS No. 114
in 1995. Management estimates that the effect of this accounting change will
not be material.
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 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 allowances 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
borrowers' 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 or 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. Any subsequent operating
expense or income, reduction in estimated values, and gains of losses on
disposition of such properties are charged to current operations.
Income Taxes--The Bank adopted SFAS No. 109, Accounting for Income Taxes, in
1993. Under this standard, 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.
The Bank recorded a cumulative tax benefit of $119,000 as a result of the
change in accounting principle.
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 $3,558,750. In
addition, the Bank issued and sold to WACII
F-34
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
nonvoting preferred stock for $1,000,000. 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 $920,000 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 $256,000 related to its sale.
3. INCOME TAX PROVISION
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1
THROUGH YEAR ENDED
NOVEMBER 8, DECEMBER 31,
1994 1993
----------- ------------
<S> <C> <C>
Current:
Federal income tax benefit....................... $(61,000) $(1,026,000)
State income taxes............................... 5,000 1,000
-------- -----------
Total current (benefit) tax.................... (56,000) (1,025,000)
Deferred:
Federal income taxes............................. 212,000 593,000
-------- -----------
Total income tax provision (benefit)........... $156,000 $ (432,000)
======== ===========
</TABLE>
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 federal income tax rate can be
attributed to the following:
<TABLE>
<CAPTION>
PERIOD
FROM
JANUARY 1 YEAR
THROUGH ENDED
NOVEMBER 8, DECEMBER 31,
1994 1993
----------- ------------
<S> <C> <C>
Federal income tax (benefit) at statutory rate.... (35.0)% (35.0)%
Nondeductible goodwill............................ 41.2 2.4
Valuation allowance............................... 7.6 --
Other............................................. 6.2 1.0
----- -----
Effective income tax (benefit) rate............... 20.0% (31.6)%
===== =====
</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 included 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.
F-35
<PAGE>
GIRARD SAVINGS BANK F.S.B. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $59,000 in 1994
and $57,000 in 1993. 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-36
<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
December 31, 1995 and 1994, and the related combined statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1995,
1994 and 1993. 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 December 31, 1995 and 1994, and the combined
results of their operations and their cash flows for the years ended December
31, 1995, 1994 and 1993, in conformity with generally accepted accounting
principles.
March 15, 1996
Los Angeles, California
F-37
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1996 1995 1994
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS............ $ 18,233,718 $ 3,576,843 $ 3,559,499
INVESTMENT IN LOANS AND SECURITIES:
Performing loans, at amortized
cost:
Gross principal.................. 126,925,820 123,539,505 151,115,067
Gross accrued interest........... 4,987,175 3,054,145 4,469,598
Discount......................... (18,668,222) (21,905,766) (29,642,774)
------------ ------------ ------------
Net investment in performing
loans......................... 113,244,773 104,687,884 125,941,891
------------ ------------ ------------
Nonperforming loans, at cost:
Gross principal.................. 417,413,214 341,268,914 353,900,845
Gross accrued interest........... 262,204,678 221,393,572 203,967,349
Discount......................... (579,209,669) (543,310,032) (540,680,382)
------------ ------------ ------------
Net investment in nonperforming
loans......................... 100,408,223 19,352,454 17,187,812
------------ ------------ ------------
Loans held for sale, at lower of
cost or market:
Gross principal.................. -- 69,818,190 120,925,441
Gross accrued interest........... -- 13,572,724 1,613,379
Discounts and deferred hedging
gains, net of premiums.......... -- (50,123,228) (13,293,442)
Valuation allowance.............. -- -- (253,890)
------------ ------------ ------------
Net investment in loans held
for sale...................... -- 33,267,686 108,991,488
------------ ------------ ------------
Securities held to maturity, at
amortized cost:
Gross principal.................. 30,744,316 28,829,846 4,103,847
Discount......................... (10,062,211) (3,462,622) (3,252,983)
------------ ------------ ------------
Net investment in securities
held to maturity.............. 20,682,105 25,367,224 850,864
------------ ------------ ------------
NET INVESTMENT IN LOANS AND
SECURITIES.......................... 234,335,101 182,675,248 252,972,055
SECURITY PURCHASED UNDER AGREEMENT TO
RESELL, At cost..................... -- -- 24,937,500
DUE FROM AFFILIATES.................. 2,447,176 758,978 373,107
COMMERCIAL NOTES RECEIVABLE.......... 5,646,751 4,968,750 1,000,000
OTHER RECEIVABLES.................... 4,150,600 3,126,091 1,821,763
PROPERTY, Net of accumulated
depreciation........................ 7,926,206 6,716,836 1,756,947
OTHER ASSETS......................... 3,132,020 3,121,728 1,210,150
------------ ------------ ------------
TOTAL................................ $275,871,572 $204,944,474 $287,631,021
============ ============ ============
</TABLE>
See notes to combined financial statements.
F-38
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1996 1995 1994
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
PARTICIPATION LIABILITIES........... $133,646,438 $150,298,405 $205,330,619
BORROWINGS.......................... 180,201,514 70,164,488 60,941,093
SECURITY SOLD BUT NOT YET PURCHASED,
At market.......................... -- -- 24,738,281
CAPITAL LEASE OBLIGATIONS........... 1,077,032 1,125,722 1,251,427
DUE TO AFFILIATES, Net.............. 8,136,283 3,698,488 3,512,431
ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES........................ 3,311,307 3,458,390 2,955,683
------------ ------------ ------------
Total liabilities............. 326,372,574 228,745,493 298,729,534
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock...................... 524,150 524,150 524,150
Retained earnings (accumulated
deficit)......................... (1,422,634) 77,915 537,278
Distributions to stockholders..... (49,602,518) (24,403,084) (12,159,941)
------------ ------------ ------------
Total stockholders' equity
(deficit).................... (50,501,002) (23,801,019) (11,098,513)
------------ ------------ ------------
TOTAL............................... $275,871,572 $204,944,474 $287,631,021
============ ============ ============
</TABLE>
See notes to combined financial statements.
F-39
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------------- ------------------------------------
1996 1995 1995 1994 1993
----------- ---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Servicing fees ........ $ 5,004,913 $5,460,355 $ 9,738,984 $ 3,339,471 $1,355,813
Income from investment
in loans and
securities ........... 3,045,296 2,578,104 3,528,852 1,159,220 450,245
Other interest and
dividend income ...... 1,471,055 409,662 1,595,088 507,589 109,567
Gain on sale of loans
...................... 43,017 43,017 464,982 4,312,423
Rental income ......... 458,377 251,417 517,158 164,415 98,321
Finance lease revenue
...................... 128,104 108,077 27,297 98,340
----------- ---------- ----------- ----------- ----------
Total revenues ........ 9,979,641 8,870,659 15,531,176 5,662,974 6,424,709
----------- ---------- ----------- ----------- ----------
EXPENSES:
Compensation and
employee benefits .... 3,379,784 2,975,551 6,604,707 3,833,621 3,282,359
Professional services
...................... 267,993 347,841 898,039 311,287 250,995
Rent .................. 129,583 132,115 253,774 217,105 167,611
Telephone ............. 107,261 135,449 349,007 262,200 155,877
Postage ............... 80,003 80,134 143,190 205,605 65,259
Portfolio servicing
expense .............. 254,478 24,496 51,837 32,415
Travel ................ 656,749 439,819 1,232,753 177,495 135,911
Depreciation and
amortization ......... 511,121 184,913 504,164 208,037 136,388
Advertising............ 96,398 12,371 82,297 32,822 32,389
Other general and
administrative ....... 533,367 311,357 909,975 683,407 281,862
----------- ---------- ----------- ----------- ----------
Total expenses ........ 6,016,737 4,644,046 11,029,743 5,963,994 4,508,651
----------- ---------- ----------- ----------- ----------
OTHER (EXPENSE) INCOME:
Interest expense ...... (5,482,006) (3,447,669) (3,788,687) (893,657) (339,154)
Other investment income
...................... 65,960 253,066
Other investment
(expense) income, net
...................... (47,407) (203,408) (194,109) (119,855)
----------- ---------- ----------- ----------- ----------
Total other (expense)
income ............... (5,463,453) (3,651,077) (3,982,796) (760,446) (339,154)
----------- ---------- ----------- ----------- ----------
NET (LOSS) INCOME ...... $(1,500,549) $ 575,536 $ 518,637 $(1,061,466) $1,576,904
----------- ---------- ----------- ----------- ----------
</TABLE>
See notes to combined financial statements.
F-40
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
EARNINGS
COMMON (ACCUMULATED DISTRIBUTIONS TO
STOCK DEFICIT) STOCKHOLDERS TOTAL
-------- ------------ ---------------- ------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993.. $524,150 $ 21,840 $ 545,990
Net income.............. 1,576,904 1,576,904
Distributions to
stockholders........... $ (4,584,119) (4,584,119)
-------- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1993..................... 524,150 1,598,744 (4,584,119) (2,461,225)
Net loss................ (1,061,466) (1,061,466)
Distributions to
stockholders........... (7,575,822) (7,575,822)
-------- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1994..................... 524,150 537,278 (12,159,941) (11,098,513)
Net income.............. 518,637 518,637
Distributions to
stockholders........... (12,243,143) (12,243,143)
Dividends............... (978,000) (978,000)
-------- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1995..................... 524,150 77,915 (24,403,084) (23,801,019)
Net loss (unaudited).... (1,500,549) (1,500,549)
Distributions to
stockholders
(unaudited)............ (25,199,434) (25,199,434)
-------- ----------- ------------ ------------
BALANCE, JUNE 30, 1996
(Unaudited).............. $524,150 $(1,422,634) $(49,602,518) $(50,501,002)
======== =========== ============ ============
</TABLE>
See notes to combined financial statements.
F-41
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------------ ---------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net (loss) income .... $(1,500,549) $ 575,536 $ 518,637 $ (1,061,466) $ 1,576,904
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
(Increase) decrease in
net investment in
loans and
securities........... (51,659,853) 35,673,617 74,939,534 (194,598,366) (32,248,792)
Deferred hedging gains
..................... (209,414)
Decrease (increase) in
security purchased
under agreement to
resell .............. 2,911,969 24,937,500 (24,937,500)
Valuation adjustment--
loans held for sale
..................... 253,890
(Decrease) increase in
due from affiliates
..................... (1,688,198) (30,108) (385,871) 111,076 (484,183)
Increase in other
receivables ......... (1,024,509) (358,017) (1,304,328) (995,524) (756,443)
Depreciation and
amortization ........ 228,749 184,913 340,729 179,008 136,104
(Increase) decrease in
other assets ........ (10,292) 219,266 (1,911,578) (1,126,553) (2,770)
Increase in accounts
payable and accrued
liabilities ......... (147,083) 140,740 502,707 1,952,444 729,239
Increase (decrease) in
due to affiliate .... 4,437,795 (1,660,308) 186,057 2,769,017 743,414
(Decrease) increase in
participation
liability ........... (16,651,967) (95,610,548) (55,032,214) 143,373,862 37,498,669
Increase in borrowings
secured by specific
investments in loans
and securities ...... 79,241,791 66,695,241 (10,656,036) 58,006,578
Interest accretion on
borrowings .......... 86,146 140,390 235,873
Proceeds from security
sold but not yet
purchased ........... (2,712,750) (18,819,824) 24,814,453
----------- ----------- ----------- ------------- -----------
Net cash provided by
operating activities
.................... 11,225,884 6,115,697 13,455,703 8,767,378 7,192,142
----------- ----------- ----------- ------------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of U.S.
Treasury securities
..................... (4,642,727)
Increase in commercial
notes receivable .... (678,001) (4,913,927) (3,968,750) (1,000,000)
Purchase of property
..................... (1,438,119) (3,401,308) (5,338,653) (218,348) (135,046)
Proceeds from sales of
property ............ 38,035
----------- ----------- ----------- ------------- -----------
Net cash used in
investing securities
.................... (2,116,120) (8,315,235) (13,912,095) (1,218,348) (135,046)
----------- ----------- ----------- ------------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from
borrowings .......... 30,829,571 4,476,970 15,755,099 2,000,000 1,663,193
Principal payments on
borrowings .......... (34,336) (1,847,539) (1,934,515) (150,000) (2,050,443)
Principal payments on
capital leases ...... 48,690 (67,407) (125,705) (59,283) (337,500)
Distributions to
stockholders......... (25,199,434) (4,389,940) (12,243,143) (7,575,822) (4,584,119)
Cash dividends paid .. (141,000) (978,000)
----------- ----------- ----------- ------------- -----------
Net cash provided by
financing activities
.................... (5,547,111) (1,968,916) 473,736 (5,785,105) (5,308,869)
----------- ----------- ----------- ------------- -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS
...................... 14,656,875 (4,168,454) 17,344 1,763,925 1,748,227
CASH AND CASH
EQUIVALENTS,
BEGINNING OF YEAR .... 3,576,843 3,559,499 3,559,499 1,795,574 47,347
----------- ----------- ----------- ------------- -----------
CASH AND CASH
EQUIVALENTS, END OF
YEAR ................. $18,233,718 $ (608,955) $ 3,576,843 $ 3,559,499 $ 1,795,574
=========== =========== =========== ============= ===========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION--
Interest paid ........ $ 6,144,474 $ 1,602,193 $ 3,121,199 $ 359,069 $ 302,305
SUPPLEMENTAL DISCLOSURE
OF NONCASH INVESTING
AND FINANCING
ACTIVITIES--
Purchases of property
through capital
leases .............. $ 101,681 $ 1,502,098
</TABLE>
See notes to combined financial statements.
F-42
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
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 Financing 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 Business--The Corporations acquire and service performing and
nonperforming 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. PSC services two of the loan portfolios under contracts with the
WCC.
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 $25,464,344 consumer loan-backed bond, a
$30,756,557 manufactured housing-backed bond, and a $64,753,000 mortgage-
backed bond, respectively.
WMFC is the holding company for WF, which was formed for the purpose of
acquiring and originating residential home mortgages.
F-43
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
For purposes of presenting cash flow information in the combined statements
of cash flows, all investments in loans and securities (except investments in
U.S. Treasury securities), as well as related participation liabilities and
borrowings (except borrowings that are not collateralized by specific loan
pools and repaid from cash flows from those pools), are presented as operating
cash flows, due to the nature of WCC's business, which is in substance a
servicing operation. The specific methods of collecting or otherwise
liquidating loan portfolios and B class securities vary depending on the
nature of the specific investments and changes in markets for these assets,
and include securitizations and other sales. The investments and related
obligations used to fund them are closely matched and interdependent, and the
Corporations' ultimate interest resides principally in its servicing fees,
which are the difference between net cash flows realized from the investments
and net cash flows paid to participants and certain lenders. Cash flows
related to traditional longer-term lending activity (e.g., commercial notes
receivable), U.S. Treasury securities, property, capital leases, longer-term
borrowings not matched against specific investments, and the Corporations'
common stock are presented as investing or financing activities, as
appropriate.
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.
Investments in Loans--To account for investments in loan portfolios, other
than loans designated as held for sale, the Corporations follow the guidance
in the AICPA's Accounting Standards Division's Practice Bulletin 6 ("PB 6"),
"Amortization of Discounts in Certain Acquired Loans." Such guidance is
generally applied on a portfolio-by-portfolio basis, rather than on an
individual loan basis, because most portfolios contain large numbers of
relatively homogeneous loans with individually small balances.
Performing loan portfolios are carried at amortized cost. Discounts are
accreted into income using a method approximating the interest method, in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 91,
and interest income is recognized on an accrual basis. Nonperforming loan
portfolios, including portfolios of loans previously charged off by prior
lenders, are recorded using the cost recovery method. Such portfolios are
generally acquired at steep discounts, and the extent of cash that will
ultimately be collected on a specific 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. Income from a nonperforming loan portfolio, other than
collected servicing income, is not recognized until the Corporations' initial
net investment in the portfolio is fully recovered, in accordance with PB 6.
The Corporations do not evaluate individual loans for impairment under
guidance in SFAS No. 114, "Accounting for Impairment of a Loan." Impairment is
evaluated on a portfolio basis considering projections of future cash
collections from 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.
Management believes that total cash collections from each portfolio are likely
to exceed the Corporations' net investment (i.e., gross principal plus accrued
interest less discount) in the portfolio. Consequently, no allowance for loan
losses has been provided for in the financial statements, as permitted by
PB 6. A specific loan is written off, with a corresponding charge to the loan
discount account, when management
F-44
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
determines that the amount is uncollectible. A substantial portion of the
total nonperforming loan portfolio consists of impaired loans and troubled
debt restructured loans. It is not practicable to estimate the additional
income that might have been recognized had these loans performed under their
original terms.
Certain loans were purchased in 1994 specifically for the purpose of
securitizing them. In addition, certain other loans were selected by
management from various purchased loan pools to be included in securitizations
that were subsequently completed. These loans have been identified as held for
sale and are carried at the lower of cost or market. Market value exceeded
cost at December 31, 1995 and was $253,890 less than cost at December 31,
1994. There were no loans held for sale at June 30, 1996 (unaudited).
Investments in Securities--The Corporations classify investments in
securities as held to maturity based on the Corporations' ability and positive
intent to hold them to maturity. The securities are carried at amortized cost.
Securities consist primarily of B class pass-through mortgage and other asset-
backed securities, which were either purchased at steep discounts or represent
residual interests in loans previously securitized by the Corporations. These
securities involve high degrees of credit and prepayment risk. Fair values of
these securities and related unrealized gains and losses are not readily
determinable. Actual maturities will differ from stated maturities, which are
in excess of ten years.
Interest Income on Investments in Loans and Securities--When the
Corporations record interest, including discount accretion, on loans and
securities, income is recognized in the combined statements of operations only
to the extent of the Corporations' direct investment in the loans or
securities, and not to the extent of any participating interests. When
interest is recorded relative to the participants' share of the assets, there
is a corresponding increase in the participation liability. Accrued interest
shown on the combined statements of financial condition comprises gross
interest accruable under the legal terms of the assets, including purchased
accrued interest. Discount is credited to the extent that the accrued interest
is not recognizable in accordance with the accounting policies summarized in
the preceding section of this note--Investments in Loans. Other interest and
dividend income in the combined statements of operations, represents interest
from cash equivalents, U.S. Treasury bills, preferred stock and commercial
notes receivable.
Rental Income--Rental 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.
Participation Liability and Servicing Income--Participation liability
represents amounts invested by third parties for an interest in cash flows
from specific loan portfolios, net of the cash flows already remitted to the
participants. Participants share credit risks and certain other risks
associated with the loan portfolios that provide the source of repayment and
potential income to the participants. If cash flows from specific loan
portfolios 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
liability as of June 30, 1996 and December 31, 1995 and 1994 are $4,875,883
(unaudited), $5,604,660 and $9,630,611, respectively, representing amounts
collected from borrowers but not yet remitted to the participants.
Agreements with participants generally provide that, in exchange for the
Corporations' servicing of the loan portfolios, the Corporations retain a
specified portion of portfolio cash flows allocable to the participant's
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
F-45
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
Option premiums received for writing puts and calls for trading purposes are
recorded as liabilities representing the market value of the options. The
liabilities 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 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.
Interim Financial Data--In the opinion of management of the Corporations,
the accompanying unaudited combined financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of the Corporations as of June 30, 1996
and the results of operations for the six months ended June 30, 1996 and 1995.
Disclosures concerning the unaudited interim financial information presented
in these notes to the combined financial statements have been included when
management considered them necessary with respect to describing significant
changes in the business during the six months ended June 30, 1996. Not all
disclosures considered necessary for annual audited financial statements are
presented for the interim unaudited financial statements.
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.
2. SECURITY PURCHASED UNDER AGREEMENT TO RESELL
The security purchased under an agreement to resell of $24,937,500 at
December 31, 1994 in a U.S. Treasury security. The amount advanced under the
agreement represents a short-term investment and is reflected as a receivable
in the balance sheet at December 31, 1994. This agreement was entered into for
purposes of investing the proceeds received from the security sold but not yet
purchased, which was outstanding at December 31, 1994 (see Note 6). The
agreement had a maturity of less than 30 days. The Corporations had securities
purchased under agreements to resell outstanding at only one other month-end
during the year, in the amount of $8,000,000.
The security underlying the agreement is a book-entry security. The security
was delivered into a third-party custodian's account under a written custodial
agreement that explicitly recognizes the Corporations' interest in the
security.
There were no securities purchased under agreements to resell outstanding as
of June 30, 1996 (unaudited) and December 31, 1995.
F-46
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. OTHER RECEIVABLES
Other receivables consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ----------
<S> <C> <C>
Other charges receivable.............................. $2,786,456 $1,852,774
Receivables under forward contracts, at market........ 133,242
Other................................................. 1,098,613 208,854
---------- ----------
Total............................................... $3,885,069 $2,194,870
========== ==========
</TABLE>
Other charges receivable represent reimbursable direct costs incurred by the
Corporations in the loan collection process. The costs are generally charged
to the borrowers or are reimbursable by investors in the loan pools to the
extent of their participating interests.
Receivables under forward contracts represent the market value of forward
sales of U.S. Treasury securities entered into by the Corporations in
connection with hedging activities discussed in Note 6.
4. PROPERTY
Property consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ----------
<S> <C> <C>
Land.................................................. $1,762,656 $ 498,150
Buildings............................................. 4,701,173 768,778
Vehicles.............................................. 48,100 119,496
Furniture and equipment............................... 812,193 689,694
---------- ----------
Total............................................... 7,324,122 2,076,118
Less accumulated depreciation......................... 607,286 319,171
---------- ----------
Property, net......................................... $6,716,836 $1,756,947
========== ==========
</TABLE>
Land and buildings comprise the Corporations' headquarters, which secure a
capital lease obligation (see Note 7), 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 December 31, 1995:
<TABLE>
<S> <C>
1996.............................................................. $ 760,836
1997.............................................................. 568,386
1998.............................................................. 364,956
1999.............................................................. 370,096
2000.............................................................. 287,946
Thereafter........................................................ 14,000
----------
$2,366,220
==========
</TABLE>
F-47
<PAGE>
5. BORROWINGS
Borrowings consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------
1996 1995 1994
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Borrowings used to fund specific
investments in loans:
Payable from 85% of cash flows from
specified loan pools, interest at
prime plus 3.75%, maturing from
March 1998 to January 2006......... $ 41,056,861 $27,996,062 $ 7,150,563
Payable from 90% of cash flows from
specified loan pools, interest at
the reference rate plus 5% but no
less than 10%, due July 1998....... 764,084 8,208,523
Payable from cash flows from
specified loan pools, interest at
LIBOR plus 0.25%, due December
1996............................... 4,533,750 5,918,457
Payable from 90% of cash flows from
specified loans pools, interest at
LIBOR plus 4%, due May 1999........ 2,870,000 5,227,500
Payable from substantially all cash
flows from mortgage loans held for
sale, interest at LIBOR plus 2.5%,
due upon sale of loans............. 50,856,015
Payable from cash flows from
specified loan pools, interest at
LIBOR plus 1.5%, due June 1997..... 2,995,659
Payable for BB bond from non-
performing securitization of loans.
Interest at 8.5%................... 1,263,980
Payable for BB note from non-
performing securitization of loans.
Interest at 11.5%.................. 5,436,690
Payable due for bonds (net of
discount) from non-performing
securitization of loans. Interest
ranging from 6% to 8%.............. 58,377,259
Payable due sellers from non-
performing securitization of
loans.............................. 20,039,507
Other borrowings:
Borrowings with interest at prime
plus 3.75%, maturing through
January 2006....................... 28,750,000 11,000,000
Borrowings secured by investment
real estate, interest ranging from
9.75% to 18% and maturing from
September 1998 to June 2005........ 4,442,634 4,476,970
Bank borrowing secured by loans,
interest at prime plus 2%, due
February 1996 to September 1996.... 5,000,000 2,750,000
Due on demand, secured by specified
loan pools, interest payable in
monthly installments at 10.5%...... 3,500,000 3,500,000 1,000,000
Related party borrowings............ 1,171,090 1,086,976 1,934,515
------------ ----------- -----------
Total borrowings.................. $180,201,514 $70,164,488 $60,941,093
============ =========== ===========
</TABLE>
Borrowings used to fund specific investments in loans are repaid monthly as
cash flows from the loans are received. Any remaining amounts owed under such
borrowings are due at the maturity dates shown above.
F-48
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Related party borrowings at December 31, 1995 and 1994 are due upon demand.
They include borrowings from a relative of the Corporations' majority
shareholder with interest at prime plus .75% and from a trust managed by and
for the benefit of the Corporations' majority shareholder with interest at
15%. During 1995 and 1994, the Corporations recognized interest expense of
$153,157 and $199,741, respectively, on related party borrowings.
The Corporations have borrowing commitments as of December 31, 1995 from
various third parties totaling $265,000,000 as follows:
. Interim warehouse and security agreement of $150,000,000 available to
fund specific investments in loans; not drawn upon at December 31, 1995;
expiring June 1996
. Commitment for $100,000,000 available for various uses; $38,996,062 drawn
upon at December 31, 1995 to fund specific investments in loans; secured
by investments in loans and securities, cash equivalents and loan
servicing rights; expiring October 1998
. Commitment for $15,000,000 available to fund specific investments in
loans; $8,208,523 drawn upon at December 31, 1995; secured by investments
in specific loans; expiring July 1998
Included in borrowings used to fund specific investments in loans is
$5,918,457 at December 31, 1995 representing securities (U.S. Treasury bills
of $4,642,727) and cash equivalents sold under agreements to repurchase.
6. FINANCIAL INSTRUMENTS
Hedging Activities--Part of the Corporations' strategy for managing
interest-rate risk is to enter into short sales or forward sales of U.S.
Treasury securities of a duration similar to the fixed rate loans held for
sale being hedged. This results in market gains or losses on the hedging
instruments, in response to interest rate increases or decreases,
respectively, which approximate the amount of the corresponding market losses
or gains, respectively, on the loans being hedged.
Financial instruments outstanding as of December 31, 1994, which are used by
the Corporations for purposes of hedging future fluctuations in the market
value of loans held for sale, include a U.S. Treasury security sold but not
yet purchased, reflected as a liability in the balance sheet, at market value,
and forward sales of U.S. Treasury securities, included in other receivables
in the balance sheet, at market value (see Note 3). As of December 31, 1994,
realized and unrealized gains totaling $703,477 have been deferred and
reflected as adjustments to the carrying value of loans held for sale. Such
deferred gains were recognized upon the ultimate sales of such loans in 1995.
The following summarizes the significant terms of the hedging instruments
and the related credit exposure as of December 31, 1994:
<TABLE>
<CAPTION>
NOTIONAL CREDIT
DESCRIPTION AMOUNT EXPOSURE
----------- ----------- --------
<S> <C> <C>
Security sold but not yet purchased--U.S. Treasury
note, 7.375%, due 1997, sold at 99.26 ................ $25,000,000
Forward sales:
U.S. Treasury note, 6.875%, due 1996, sale price
99.44, contract settlement date January 31, 1995 ... 18,000,000 $129,375
U.S. Treasury note, 7.5%, due 1999, sale price 98.86,
contract settlement date January 31, 1995........... 2,250,000 3,867
</TABLE>
F-49
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Amounts shown above as credit exposure represented the amount of loss that
would have been incurred as of December 31, 1994 if the counterparties had
completely failed to perform their obligations under the contracts. No credit
losses were incurred as a result of these transactions. The Corporations
deposited mortgage-backed securities with a principal amount of $1,392,709
into an account with the counterparty as collateral for the forward sales.
No such hedging instruments and related exposure existed at December 31,
1995 or at June 30, 1996 (unaudited).
Trading Activities--The Corporations engages in buying and selling of
futures contracts, as well as writing and purchasing put and call options on
interest rates, foreign currencies, US government securities, and market
indices for purposes of realizing short-term profits. As of December 31, 1995
and 1994, the market value of the liability for options contracts outstanding
is $8,093 and $20,313, respectively. As of December 31, 1995, the market value
for futures contracts is $45,656. There were no futures contracts as of
December 31, 1994. Both options and futures contracts are included in accounts
payable and accrued liabilities in the combined balance sheets. The average
market value of the liability for written options contracts outstanding during
the year ended December 31, 1995 and 1994, computed based upon month-end
positions outstanding, was $23,821 and $59,109, respectively. The average
market value of the liability for futures contracts outstanding during the
year ended December 31, 1995, computed based upon month-end positions
outstanding, was $42,319. Net losses (gains) on options and futures trading
activity were $194,109 and ($97,387) for the years ended December 31, 1995 and
1994, respectively, and are included in other investment income (loss) in the
combined statements of operations.
The following is a summary of the liability under options contracts
outstanding:
<TABLE>
<CAPTION>
UNREALIZED
NOTIONAL MARKET PREMIUM GAIN
1995 AMOUNT VALUE RECEIVED/PAID (LOSS)
---- ----------- ------- ------------- ----------
<S> <C> <C> <C> <C>
Short Positions Calls (writ-
ten)--
February 1996 US T-Bonds... $ 1,000,000 $ 2,656 $ 1,562 $(1,094)
January 1996 Japanese Yen.. 1,221,625 125 4,125 4,000
February 1996 Japanese
Yen....................... 1,221,625 2,875 5,750 2,875
Puts (purchased)--
February 1996 US T-Bonds... 1,000,000 1,562 5,468 3,906
January 1996 S&P 500....... 4,619,475 3,750 11,250 7,500
Long Positions Puts (writ-
ten)--
January 1996 S&P 500....... 1,539,825 (2,875) (8,750) (5,875)
----------- ------- ------- -------
$10,602,550 $ 8,093 $19,405 $11,312
=========== ======= ======= =======
<CAPTION>
1994
----
<S> <C> <C> <C> <C>
Calls--
February 1995 US T-Bonds... $ 1,000,000 $15,938 $19,531 $ 3,593
Puts--
February 1995 US T-Bonds... 1,000,000 4,375 6,250 1,875
----------- ------- ------- -------
$ 2,000,000 $20,313 $25,781 $ 5,468
=========== ======= ======= =======
</TABLE>
F-50
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Following is a summary of the liability under futures contracts outstanding:
<TABLE>
<CAPTION>
OPEN
NOTIONAL TRADE
AMOUNT EQUITY
---------- -------
<S> <C> <C>
Short Positions
Puts--
March 1996 US T-Bonds................................ $1,000,000 $ 8,125
March 1996 US T-Notes................................ 900,000 4,781
Long Positions
Puts--
March 1996 Japanese Yen.............................. 1,221,625 32,750
---------- -------
$3,121,625 $45,656
========== =======
</TABLE>
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 December 31,
1995 and 1994, such margin requirements were $98,572 and $39,537,
respectively.
7. CAPITAL LEASE OBLIGATIONS
The Corporations have purchased various assets, including their headquarters
facility and certain automobiles and equipment, under capital leases. Future
minimum lease payments for capital leases as of December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996............................................................. $ 195,497
1997............................................................. 217,572
1998............................................................. 142,262
1999............................................................. 115,973
2000............................................................. 111,166
Thereafter....................................................... 1,574,846
----------
Total.......................................................... 2,357,316
Less amount representing interest................................ 1,231,594
----------
Capital lease obligation......................................... $1,125,722
==========
</TABLE>
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 December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996.............................................................. $ 755,143
1997.............................................................. 751,294
1998.............................................................. 721,584
1999.............................................................. 671,376
----------
$2,899,397
==========
</TABLE>
The management fee portion of the annual lease payment for a corporate jet
of $227,000 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.
F-51
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
9. LOAN SERVICING
Loans serviced for others, except for participated loans acquired in the
name of WCC, are not included in the accompanying balance sheets. WCC performs
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>
DECEMBER 31,
-------------------------
1995 1994
------------ ------------
<S> <C> <C>
Related parties.................................... $279,801,000 $113,333,475
Others............................................. 18,416,726 30,277, 483
------------ ------------
Total............................................ $298,217,726 $143,610,958
============ ============
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing and in connection with WCC-owned and participated loans were
$720,799 at December 31, 1994. At December 31, 1995, WCC had made escrow
payments in excess of amounts collected, which are included in other
receivables.
10. LOANS TO STOCKHOLDERS
The Corporations have extended loans to their two stockholders. The loans
have stated interest rates of 11% and no specific terms of repayment, and were
used principally for investing in other companies affiliated by common
ownership (companies not combined in these financial statements). For
accounting purposes, the interest on these loans has not been recognized in
the combined statements of operations, and the loaned amounts are presented in
the stockholders' equity section of the statements of financial condition as
distributions to stockholders.
11. 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 Boards
of Directors, the Corporations may elect to contribute to the plan based on
profits of the Corporations or based on matching participants' contributions.
During 1995, the Corporation contributed $46,408 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 June 30, 1996 and December 31, 1995, the
Corporations were committed to purchase $2,825,724 of loans (unaudited) at par
and $14,843,686 of loans for $5,840,729, respectively.
12. RELATED PARTY TRANSACTIONS
The following disclosures about transactions with related parties are in
addition to those elsewhere in these footnotes.
Participation liabilities owed to related parties, including companies for
which the Corporations' majority owner and president had management control,
relatives of the Corporations' owners, and investment vehicles of those
related parties, are $71,836 and $145,272 at December 31, 1995 and 1994,
respectively.
At June 30, 1996 (unaudited) and December 31, 1995 and 1994, due to
affiliates consists primarily of amounts owed to affiliated banks for
collection on loans serviced on behalf of those affiliates. This liability is
net of approximately $758,000 and $548,000 of receivables from uncombined
affiliates for reimbursement of expenses incurred on behalf of those
affiliates at December 31, 1995 and 1994, respectively.
F-52
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
13. 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 Corporation
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 balance
sheet for cash and cash equivalents approximate their fair values.
Investments in Loans and Securities, Participation Liabilities and
Borrowings Secured by Investments in Loans and Securities--It is not
practicable to estimate the fair values of the Investments in loans and
securities (except certain pools classified as held for sale, which are stated
at lower of cost or market, and U.S Treasury bills), or related investor
liabilities and borrowings secured by specific pools, primarily because of the
limited nature of the market for such investments and the highly subjective
and judgmental risk-rating process undertaken by potential buyers. The
Corporations monitor loan portfolio performance, which is related to fair
value, on a portfolio-by-portfolio basis. Some portfolios contain loans that
are similar with respect to collateral type, geography, initial underwriting
standards, and in other respects, while other portfolios contain loans that
are dissimilar in various respects and to varying degrees. Fair value
estimations for most portfolios require extensive analysis of the credit risk
associated with the portfolios at any specific point in time, as well as
consideration of the collective repayment terms and the prevailing interest
rate environment. Consequently, estimation of fair value is not practicable
for the portfolio as a whole as of any specific point in time.
The following is information about investments in loans and securities that
may be relevant to estimating fair value:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
1995 NUMBER INTEREST MATURITY GROSS
TYPE OF LOAN OR COLLATERAL OF LOANS RATE (IN MONTHS) PRINCIPAL
-------------------------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Performing:
Automobiles/equipment............. 2,283 15% 32.95 $11,942,056
Real estate....................... 2,899 10% 89.20 81,574,329
Manufactured housing.............. 2,784 12% 104.40 11,159,601
Other............................. 2,141 13% 41.05 29,122,518
Nonperforming:
Automobiles/equipment............. 1,382 13% 9.85 6,996,631
Real estate....................... 1,371 10% 60.33 95,052,802
Other............................. 98,882 10% 17.88 292,506,241
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
1994 NUMBER INTEREST MATURITY GROSS
TYPE OF LOAN OR COLLATERAL OF LOANS RATE (IN MONTHS) PRINCIPAL
-------------------------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Performing:
Automobiles/equipment............. 1,757 14% 10.31 $17,085,843
Real estate....................... 4,037 8% 62.75 206,729.946
Other............................. 3,269 10% 38.49 43,008,622
Nonperforming:
Automobiles/equipment............. 3,192 15% 28.78 8,549,223
Real estate....................... 2,041 9% 120.37 98,522,366
Other............................. 115,390 9% 0.63 256,149,200
</TABLE>
F-53
<PAGE>
WILSHIRE CREDIT CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of U.S. Treasury bills included in investments in securities
held-to-maturity at December 31, 1995 and 1994 approximate their carrying
value of $4,642,727. These securities mature within one year, and are pledged
as collateral for certain borrowings.
Security Purchased Under Agreement to Resell, Other Borrowings, Security
Sold but not yet Purchased--The carrying amounts approximate fair values due
to the short-term maturities or repricing of these instruments. The difference
between the fair value and carrying amount of borrowings secured by investment
real estate is not material.
Receivables from Related Parties and Notes Receivable--It is not practicable
to estimate the fair values of these instruments, for which there is not a
market and for which terms are not established on an arms-length basis.
F-54
<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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$50,000,000
---------------
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.......................................... $21,424.24
NASD and NASDAQ fees.......................................... *
Accounting fees and expenses.................................. *
Legal fees and expenses....................................... *
Blue sky fees and expenses (including counsel fees)........... *
Printing and engraving expenses............................... *
Transfer agent's fees......................................... *
Miscellaneous expenses........................................ *
----------
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 Employment Agreement dated October , 1996 among the Company
and Andrew A. Wiederhorn
*10.2 Employment Agreement dated October , 1996 among the Company
and Lawrence A. Mendelsohn
*10.3 Incentive Stock Plan
*10.11 Cease and Desist Order
*10.12 Servicing Agreement dated as of October , 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
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.
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 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 30th day
of October, 1996.
Wilshire Financial Services Group
Inc.
/s/ Andrew A. Wiederhorn
By: _________________________________
Andrew A. Wiederhorn Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Andrew A. Wiederhorn and Lawrence A.
Mendelsohn, and each of them, his attorney-in-fact, with full power of
substitution, for him in all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact, or either of them, or their
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in their capacities on
October 30, 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 Executive Vice President and
- ------------------------------------- Director
LAWRENCE A. MENDELSOHN
/s/ Donald H. Coleman Director
- -------------------------------------
DONALD H. COLEMAN
/s/ David Dale-Johnson Director
- -------------------------------------
DAVID DALE-JOHNSON
/s/ Philip G. Forte Director
- -------------------------------------
PHILIP G. FORTE
/s/ Chris Tassos Senior Vice President and Chief
- ------------------------------------- Financial Officer (Principal
CHRIS TASSOS Accounting and Financial Officer)
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 Employment Agreement dated October , 1996 among the
Company and Andrew A. Wiederhorn
*10.2 Employment Agreement dated October , 1996 among the
Company and Lawrence A. Mendelsohn
*10.3 Incentive Stock Plan
*10.11 Cease and Desist Order
*10.12 Servicing Agreement dated as of October , 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
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.
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
WILSHIRE FINANCIAL SERVICES GROUP INC.
I, the undersigned, for the purposes of incorporating and organizing a
corporation under the General Corporation Law of the General Corporation Law of
the State of Delaware, do execute this Certificate of Incorporation and do
hereby certify as follows:
FIRST. The name of the corporation is Wilshire Financial Services Group
Inc.
SECOND. The address of the corporation's registered office in the state of
Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle,
19805. The name of its registered agent at such address is the Corporation
Service Company.
THIRD. The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH. The total number of shares of all classes of stock which the
corporation has the authority to issue is sixty million (60,000,000) shares,
consisting of fifty million (50,000,000) shares of Common Stock, par value $.01
per share (the "Common Stock"), and ten million (10,000,000) shares of Preferred
Stock, par value $.01 per share, which Preferred Stock shall have such
designations, powers, preferences and rights as may be authorized by the Board
of Directors from time to time.
The Board of Directors is hereby authorized, subject to the provisions
contained in this Article FOURTH, 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 distribution of assets of the corporation upon the
voluntary or involuntary liquidation, dissolution or winding up of the
corporation, as hereinafter provided, and shall have such designations as may be
stated in the resolution or resolutions providing for the issuance of such stock
adopted by the Board of Directors. In such resolution or resolutions providing
for the issuance of shares of each particular series, the Board of Directors is
hereby expressly authorized and empowered to fix the number of shares
constituting such series and to fix the designations and any of the preferences,
powers or rights of the shares of the series so established to the full extent
allowable by law. Such authorization in the Board of Directors shall expressly
include the authority to fix and determine the designations, preferences, powers
or rights of such shares in all respects including, without limitation, the
following:
(1) The number of shares in and the distinguishing designation of that
series;
(2) Whether shares of the series shall have full, special, conditional,
limited or no voting rights, except to the extent otherwise provided by the Act;
<PAGE>
(3) Whether shares of that series shall be convertible and the terms and
conditions of the conversion, including provision for adjustment of the
conversion rate in circumstances determined by the Board of Directors;
(4) Whether shares of that series shall be redeemable and the terms and
conditions of redemption, including the date or dates upon or after which they
shall be redeemable and the amount per share payable in case of redemption,
which amount may vary under different conditions or at different redemption
dates;
(5) The dividend rate, if any, on shares of that series, the manner of
calculating any dividends and the preferences of any dividends;
(6) The rights of shares of that series in the event of voluntary or
involuntary dissolution of the corporation and the rights of priority of that
series relative to the Common Stock and any other series of Preferred Stock on
the distribution of assets on dissolution; and
(7) Any other rights, preferences and limitations of that series that are
permitted by law to vary.
COMMON STOCK
------------
Section 1. Voting Rights. The holders of shares of Common Stock shall be
--------- -------------
entitled to one vote for each share so held with respect to all matters voted on
by the stockholders of the corporation, subject in all cases to the rights of
the Preferred Stock, if any.
Section 2. Dividends. Subject to the rights of the Preferred Stock, if
--------- ---------
any, dividends may be paid on the Common Stock as and when declared by the Board
of Directors.
Section 3. Liquidation Rights. Subject to the prior and superior right of
--------- ------------------
the Preferred Stock, if any, upon any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the corporation, the holders of
Common Stock shall be entitled to receive that portion of the remaining funds to
be distributed in accordance with the provisions of this Certificate of
Incorporation, as it may from time to time be amended or supplemented, including
without limitation any supplement effected pursuant to a certificate of
designations, acting forth such prior and superior rights. Such funds shall be
paid to the holders of Common Stock pro rata on the basis of the number of
shares of Common Stock held by each of them.
Section 4. Merger, Consolidation, Sale of Assets. Subject to the prior
--------- -------------------------------------
and superior rights of the Preferred Stock, if any, in the event of any merger
or consolidation of the corporation with or into another corporation in which
the corporation shall not survive, or the sale or transfer of all of the
substantially all of the assets of the corporation to another entity, or a
merger or consolidation in which the corporation shall be the surviving entity
but its Common Stock is exchanged for
2
<PAGE>
stock, securities or property of another entity, the holders of Common Stock
shall be entitled to receive all cash, securities and other property received by
the Corporation pro rata on the basis of the number of shares of Common Stock
held by each of them.
Section 5. Residual Rights. All rights accruing to the outstanding shares
--------- ---------------
of the Corporation not expressly provided for to the contrary in this
Certificate of Incorporation, as it may from time to time be amended or
supplemented, including without limitation any supplement effected pursuant to a
certificate of designations, shall be vested in the Common Stock.
FIFTH. Unless and except to the extent that the by-laws of the corporation
shall so require, the election of directors of the corporation need not be by
written ballot.
SIXTH. In furtherance, and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors of the corporation is
expressly authorized to make, alter and repeal the by-laws of the corporation,
subject to the power of the stockholders of the corporation to alter or repeal
any by-law whether adopted by them or otherwise.
SEVENTH. A director of the corporation can be removed only with cause, and
then only if such removal is approved by the affirmative vote of the holders of
two-thirds of the votes entitled to be cast on the matter. No amendment of the
bylaws of the corporation shall have the effect of shortening the term of any
incumbent director. The provisions set forth in this Article may not be
amended, altered, changed or repealed in any respect, nor may any provision be
adopted which is inconsistent with this Article unless such action is approved
by the affirmative vote of the holders of two-thirds of the votes entitled to be
cast on the matter.
EIGHTH. No director shall be personally liable to the corporation or any of
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the directors's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (ii) under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal benefit.
Any amendment, modification or repeal of the foregoing sentence shall not
adversely affect any right or protection of a director of the corporation
hereunder in respect of any act or omission occurring prior to the time of such
amendment, modification or repeal.
NINTH. 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
3
<PAGE>
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 any 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 under this Article. No
amendment to this Article 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 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 any statute, bylaw, agreement, general or specific action of the Board of
Directors, vote of shareholders or other document or arrangement.
TENTH. The incorporator of the corporation is Steven Hull, whose mailing
address is, Stoel Rives, 900 SW Fifth Avenue, Suite 2300, Portland, Oregon
97204.
ELEVENTH. The powers of the incorporator are to terminate upon the filing
of this Certificate of Incorporation. The name and mailing address of the
person who is to serve as the initial director of the corporation until the
first annual meeting of stockholders of the corporation, or until his successor
is elected and qualified, is Andrew Weiderhorn, 1776 SW Madison St., Portland,
OR 97205.
The undesigned incorporator for purposes of forming a corporation under the
laws of the State of Delaware, makes, files and records this Certificate and
acknowledges that the foregoing certificate of incorporation is his act and deed
on this 25th day of October, 1996.
/s/
----------------------------------
Steven Hull
Incorporator
4
<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 Executive Vice 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 Executive Vice 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 Executive Vice 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 Executive Vice 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.
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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
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(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"), an Executive Vice 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.
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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 Executive Vice President. The Executive Vice 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 Executive Vice 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.
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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.
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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 Executive Vice 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
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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 10.13
Public Securities Association
40 Broad Street, New York, NY 10004-2373
Telephone (212) 809-7000
MASTER REPURCHASE AGREEMENT
DATED AS OF JULY 29, 1996
--------------
BETWEEN:
Wilshire Credit Corporation
- ---------------------------
AND
CS First Boston Mortgage Capital Corporation
- --------------------------------------------
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 "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
<PAGE>
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 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;
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<PAGE>
(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 "Repurchased 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);
(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
3
<PAGE>
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.
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.
4
<PAGE>
(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 &hall 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 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
5
<PAGE>
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.
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(e) if Seller is a financial
institution.
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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 his behalf (or on behalf of any such
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, 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"):
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<PAGE>
(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 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
8
<PAGE>
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.
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<PAGE>
12. SINGLE AGREEMENT
Buyer and Seller acknowledge that, and have entered hereunto 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.
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<PAGE>
Title Executive Vice President Title
------------------------------- -----------------------------------
Date July 30, 1996 Date
------------------------ -----------------------------------
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 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.
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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 Slates 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
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<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 Credit Corporation CS First Boston Mortgage Capital Corp.
By By
--------------------------- -----------------------------------
Michael A. Commaroto
Title Vice President Title
------------------------ ----------------------------------
Date July 29, 1996 Date
------------------------- -----------------------------------
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EXHBIT 10.14
ANNEX I
ADDITIONAL SUPPLEMENTAL TERMS TO MASTER REPURCHASE AGREEMENT,
DATED AS OF JULY 29, 1996, BETWEEN
CS FIRST BOSTON MORTGAGE CAPITAL CORP. ("CSFB" OR "Buyer") AND
WILSHIRE CREDIT CORPORATION ("WCC" OR "Seller")
1. APPLICABILITY. These Additional supplemental Terms (the "Additional
------------- ----------
Supplemental Terms") to Master Repurchase Agreement (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 WCC and set forth in the relevant
Confirmation.
(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 sale price of the related Mortgage 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.
<PAGE>
(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.
(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 Tri-Party Custodial and
-------------------
Servicing Agreement, by and among the Buyer, the Seller and the
Servicer and the Custodian, providing for the
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<PAGE>
custody of the Contracts and related documents listed in Schedule
I thereto, 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.
(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
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<PAGE>
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.
(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) "Engagement Letter" means the letter agreement dated July 29,
-----------------
1996 between CSFB and WCC relating to, inter alia, the
transactions contemplated herein.
(af) "ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended.
(ag) "Financed Manufactured Home" shall mean any new or used
--------------------------
Manufactured Home financed by loans arising under Manufactured
Home Loan Contracts.
(ah) "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.
(ai) "Fixed Rate Contract" shall mean a Contract bearing an interest
-------------------
rate that is fixed for the life of such Contract.
(aj) "GAAP" shall mean General Accepted Accounting Principles.
----
(ak) "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.
(al) "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.
(am) "LIBOR" shall have the meaning assigned thereto in Section 16(a)
-----
hereof.
4
<PAGE>
(an) "List of Contracts" shall have the meaning assigned in Section 4
-----------------
hereof.
(ao) "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.
(ap) "Management Team" shall mean the group of managers of the Seller,
---------------
which shall include Lawrence A. Mendelsohn and Andrew A.
Wiederhorn.
(aq) "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.
(ar) "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.
(as) "MHLC Lockbox Account" shall have the meaning assigned in the
--------------------
Custodial Agreement.
(at) "MLC Lockbox Account" shall have the meaning assigned in the
-------------------
Custodial Agreement.
(au) "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.
(av) "Monthly Servicing Fee" shall have the meaning assigned in the
---------------------
Custodial Agreement.
(aw) "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.
(ax) "Mortgage Loan Contracts" shall mean First Mortgage Loan
-----------------------
Contracts and Second Mortgage Loan Contracts.
(ay) "Mortgage Note" shall mean the note or other evidence of the
-------------
indebtedness of an Obligor secured by a Mortgage.
(az) "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.
(ba) "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.
(bb) "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
5
<PAGE>
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.
(bc) "Non-Originated Contracts" shall mean Contracts that are not
------------------------
Originated Contracts.
(bd) "Notice Date" shall have the meaning assigned thereto in Section
-----------
4(a) hereof.
(be) "Obligor" shall mean each Person who is indebted under a
-------
Contract.
(bf) "Originated Contracts" shall mean Contracts that were originated
--------------------
by WCC or by a Person on behalf of WCC with whom WCC has or had a
correspondent relationship, and conform to the Underwriting
Standards.
(bg) "Outstanding Principal Amount" shall have the meaning assigned in
----------------------------
the Custodial Agreement.
(bh) "PBGC" shall mean the Pension Benefit Guaranty Corporation, and
----
any successor thereto.
(bi) "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.
(bj) "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.
(bk) "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.
(bl) "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.
(bm) "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.
6
<PAGE>
(bn) "Reportable Event" shall mean any of the events set forth in
----------------
Section 4043(c) of ERISA or the regulations thereunder.
(bo) "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 WCC is the holder and 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.
(bp) Notwithstanding the definition set forth in Paragraph 1 of the
Repurchase Agreement, "Securities" shall mean Contracts purchased
----------
pursuant to this Agreement.
(bq) "Termination Date" shall have the meaning assigned thereto in
----------------
Section 13 hereof.
(br) "Transaction" shall, in addition to the definition set forth in
-----------
the Repurchase Agreement, refer to substitutions pursuant to
Paragraph 9 of the Repurchase Agreement.
(bs) "Transaction Documents" means this Agreement, the Custodial
---------------------
Agreement, the Engagement Letter and any related agreements.
(bt) "Transaction Notice" shall have the meaning assigned thereto in
------------------
Section 4(b) hereof.
(bu) "Underwriting Standards" shall mean the standards attached hereto
----------------------
as Exhibit D with respect to Originated Contracts.
3. COMMITMENT. On the terms and subject to the conditions set forth in
----------
this Agreement, the Custodial Agreement, and the relevant Confirmation
Buyer 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 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
7
<PAGE>
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 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.
8
<PAGE>
(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 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
9
<PAGE>
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 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 and shall have notified Seller of such
determination and Seller 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
10
<PAGE>
days during which execution of such judgement is not
effectively stayed.
iv) WCC shall fail to observe or perform any of the covenants or
agreements under any Transaction Document, which failure, in
the reasonable judgment of CSFB, materially and adversely
affects the ability of WCC 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 WCC
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 WCC.
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.
viii) WCC 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 WCC (which
defaults include, but are not limited to, an Act of
Insolvency of WCC or the failure of WCC to make required
payments under such contract or agreement as they become
due).
ix) Any representation or warranty made by WCC 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.
X) WCC shall fail to promptly notify CSFB of (i) the
acceleration of any material debt obligation or the
termination of any credit facility of WCC, 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 WCC,
respectively; and (iv) any other developments which would,
in the good faith judgment of Buyer, materially and
adversely affect the financial condition of WCC.
xi) WCC's audited annual financial statements or the notes
thereto or other opinions or conclusions stated therein
shall be qualified or limited by reference to
11
<PAGE>
WCC's status 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 of WCC shall have occurred
other than in connection with and as a result of the
issuance and sale by WCC 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 tb 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
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 WCC, 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 WCC.
12
<PAGE>
(b) CSFB shall request written assurances as to the financial
well-being of WCC 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%.
(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. 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 WCC; 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.
13
<PAGE>
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.
(b) The aggregate outstanding Repurchase Price for the Purchased
Securities subject to the Agreement at any one time shall not
exceed (i) $150,000,000 in the aggregate, (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.
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
14
<PAGE>
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 and WCC 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 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
15
<PAGE>
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 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 Agreement to cover the Contracts, in a form
satisfactory to CSFB, shall have been executed and delivered by
the parties thereto;
(b) WCC shall have disclosed information satisfactory to CSFB with
respect to the scheduled maturities and termination provisions of
all outstanding credit facilities and debt of WCC; and
(c) WCC shall have executed and delivered to CSFB the Engagement
Letter.
23. REPURCHASE TRANSACTIONS. CSFB may in its sole election engage in
-----------------------
repurchase transactions with the Purchased Securities or otherwise
16
<PAGE>
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 WCC in
connection with the repurchase by WCC of any Purchased Securities in
accordance with the terms of this Agreement and the relevant
Confirmation.
24. NEW YORK JURISDICTION; WAIVER OF JURY TRIAL. WCC agrees to submit to
-------------------------------------------
personal jurisdiction in the State of New York in any action or
proceeding arising out of the Agreement. CSFB and WCC 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 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 prevailing party in
connection with such lawsuit or proceeding shall be paid by the non-
prevailing party.
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 WCC shall have no obligations to Buyer with respect to any
Offerings (as defined in the Engagement Letter) that closes 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,
17
<PAGE>
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.
18
<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 /s/
----------------------------------
Name: Michael A. Commaroto
Title: Vice President
WILSHIRE CREDIT CORPORATION,
as Seller
By /s/
----------------------------------
Name: Lawrence Mendelsohn
Title: Executive Vice President
19
<PAGE>
EXHIBIT 10.15
[EXECUTION COPY]
================================================================================
INTERIM WAREHOUSE AND
SECURITY AGREEMENT
by and between
PRUDENTIAL SECURITIES REALTY
FUNDING CORPORATION,
as Lender
and
WILSHIRE FUNDING COMPANY, L.L.C.,
as Borrower
Dated as of December 1, 1995
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 1. The Loan................................... 1
Section 2. Additional Conditions Precedent; Required
Characteristics; and Correspondents........ 7
Section 3. Mortgage Files and Custodian............... 8
Section 4. Representations, Warranties and Covenants.. 9
Section 5. Mandatory Prepayment of Loan............... 12
Section 6. Release of Mortgage Files following Payment 13
Section 7. Servicing.................................. 14
Section 8. Modifications; Successors and Assigns...... 14
Section 9. Reports.................................... 14
Section 10. Events of Default.......................... 14
Section 11. Remedies Upon Default...................... 16
Section 12. Indemnification............................ 18
Section 13. Power of Attorney.......................... 18
Section 14. Agreement Constitutes Security Agreement... 19
Section 15. Lender May Act Through Affiliates.......... 19
Section 16. Notices.................................... 19
Section 17. Severability............................... 20
Section 18. Counterparts............................... 20
Section 19. Certain Definitions........................ 20
</TABLE>
EXHIBITS
- --------
Exhibit A - Secured Note
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>
INTERIM WAREHOUSE AND SECURITY AGREEMENT
----------------------------------------
INTERIM WAREHOUSE AND SECURITY AGREEMENT, dated as of December 1, 1995
(as amended or otherwise modified from time to time, this "Agreement") among
---------
PRUDENTIAL SECURITIES REALTY FUNDING CORPORATION, a Delaware corporation, having
an office at 1220 N. Market Street, Wilmington, Delaware 19801 (the "Lender"),
------
and WILSHIRE FUNDING COMPANY, L.L.C., a Delaware limited liability company,
having its principal office at 1776 S.W. Madison Street, Portland, Oregon 97205
(the "Borrower").
--------
WHEREAS, the Lender intends to lend and the Borrower intends to borrow
up to $120,000,000 (One Hundred Twenty Million dollars) to fund the purchase or
origination by the Borrower of fixed and adjustable rate, first lien,
residential mortgage loans; and
WHEREAS, the Lender intends to lend and the Borrower intends to borrow
up to $30,000,000 (Thirty Million dollars) to fund the purchase or origination
by the Borrower of fixed and adjustable rate, second lien, residential mortgage
loans which were purchased or originated in conjunction with the related first
lien mortgage loans; and
WHEREAS, the Lender's affiliate, Prudential Securities Incorporated
("PSI") may act as the sole or lead manager or co-manager on a mortgaged-backed
- -----
securities insurance (the "First Lien Securitization") collateralized by Fist
-------------------------
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:
Section 1. The Loan.
--------- --------
(a) Subject to the terms of this Agreement:
(i) The Lender agrees to lend to the Borrower up to (x) $120,000,000
(such borrowing, the "First Lien Loan") to be made in one or more advances
---------------
(the "First Lien Advances") in respect of fixed or adjustable rate, first
-------------------
lien, residential mortgage loans and (y) $30,000,000 (such borrowing, the
"Second Lien Loan" and, together with the First Lien Loan, the "Loans") to
----------------- -----
be made in one or more advances (the "Second Lien Advances" and, together
--------------------
with the First Lien Advances, the "Advances") in respect of fixed or
--------
<PAGE>
adjustable rate, second lien, residential mortgage loans which were
purchased or originated in conjunction with the related first lien mortgage
loans. 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 the Second Lien Loans shall be used to warehouse fixed or
adjustable rate, second lien, residential mortgage loans (which were
purchased or originated in conjunction with the related First Lien 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 financed 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 Loan(s) which the Lender reasonably
believes will not be eligible for inclusion in any securitized pool either
(x) due to the characteristics of such Mortgage Loan or (y) due to the
expected aggregate characteristics of the Mortgage Loans.
(ii) Each Advance shall be made 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 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 receive (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;
-2-
<PAGE>
(D) 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
(E) 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).
"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 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.
-3-
<PAGE>
For purpose of this Agreement:
A Collateral Deficiency Situation shall be deemed to be existing as of
---------------------------------
any day on which (x) the outstanding principal amount of the Loans as of such
day exceeds (y) the product of (I) the Market Value of the Pledged 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. "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
Lien Mortgage Loans are more than 31 days delinquent.
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 14, 1996 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, the amount,
------------------
if any, by which (x) the outstanding principal amount of the Loans as of such
date exceeds (y) the lesser of (i) the product of (I) the Market Value of the
Pledged 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
(disregarding the outstanding principal balance of any Mortgage Loans to be
pledged to the Lender on such date).
-4-
<PAGE>
(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 the 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 the 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
-5-
<PAGE>
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 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 mount 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
-6-
<PAGE>
agreement 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 retroactively 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).
(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.
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 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-conforming credit
mortgage loans which the Borrower will purchase from others.
-7-
<PAGE>
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 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
-8-
<PAGE>
Custodial Agreement dated as of December 1, 1995 (the "Custodial Agreement")
-------------------
among the Borrower, Wilshire Credit 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 the Guarantor 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 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.
(v) All financial statements or certificates of the Borrower or the
Guarantor shed to the Lender are true and
-9-
<PAGE>
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 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.
-10-
<PAGE>
(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.
(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 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
-11-
<PAGE>
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 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 Prepayment 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
-12-
<PAGE>
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 Lander may refuse to make further Advances
hereunder if such Advances would relate to Mortgage Loans to be included in such
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,
Valerie Kay at PSI (fax 212-778-7401) and to Evan Mitnick at PSI (fax 212-778-
7401) 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.
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<PAGE>
Section 7. Servicing. Wilshire Credit Corporation 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.
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 passage of time or notice or both, would become an "Event of Default"
hereunder and (z) the following:
(i) audited financial statements of Wilshire Credit Corporation
within 120 days of Wilshire Credit Corporation's fiscal year end;
(ii) unaudited financial statements of Wilshire Credit
Corporation for each of Wilshire Credit Corporation's 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:
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<PAGE>
(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 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
-15-
<PAGE>
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 the Borrower's parent company
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).
(c) Upon the happening of one or more Events of Default, the Lender
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
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<PAGE>
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 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
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<PAGE>
Credit Corporation and, at any time prior to the Lender entering into an
agreement to sell all or a portion of the Collateral with any party (the "Trade
Date"), will allow Wilshire Credit Corporation (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 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
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<PAGE>
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 shall 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.
If to the Borrower:
Wilshire Funding Company, L.L.C.
1776 S.W. Madison Street
Portland, Oregon 97205
Attn: Lawrence Mendelsohn
Telephone: (503) 223-5600
Telecopier: (503) 223-8799
If to the Guarantor:
Wilshire Credit Corporation
1776 S.W. Madison Street
Portland, Oregon 97205
Attn: Andrew Wiederhorn
Telephone: (503) 223-5600
Telecopier: (503) 223-8799
With copies to:
Whitman Breed Abbott & Morgan
200 Park Avenue
New York, New York 10166
Attention: Jim Waddington
Phone Number: 212-351-3193
Fax Number: 212-351-3131
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<PAGE>
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 Realty Funding
Corporation
One Seaport Plaza, 27th Floor
Treasury Department
New York, New York 10291
Attention: Ms. Elizabeth Castagna
Phone Number: 212-214-7772
Fax Number: 212-214-7572
With copies to:
Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Attention: Valerie Kay
Phone Number: 212-778-4127
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).
-------
"Agreement" - Introductory Clause.
---------
"Borrower" - Introductory Clause.
--------
"Collateral" - Section 3.
----------
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<PAGE>
"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.
----------------
"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).
--------------
"Mortgage Loan Schedule" - Section 2(a).
----------------------
"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).
-------------------
-21-
<PAGE>
"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.
-------------------
"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.
WILSHIRE FUNDING COMPANY, L.L.C.
By Wilshire Credit Corporation,
a Member
By: /s/
---------------------------------------
Name:
Title:
PRUDENTIAL SECURITIES REALTY
FUNDING CORPORATION
By: /s/
----------------------------------------
Name: Elizabeth W. Castagna
Title: Treasurer
-23-
<PAGE>
EXHIBIT 10.16
AMENDMENT TO INTERIM WAREHOUSE AND SECURITY AGREEMENT
Dated June 28, 1996
Reference is made to (i) the Interim Warehouse and Security Agreement,
dated as of December 1, 1995, as amended on June 14, 1996 (the "Agreement"),
---------
between Prudential Securities Realty Funding Corporation (the "Lender") and
------
Wilshire Funding Company, L.L.C. (the "Borrower"), and (ii) each of the two
--------
Secured Notes dated December 8, 1995 (the "Notes") from the Borrower to the
Lender.
The Lender and the Borrower do hereby agree as follows:
1. The first two recitals of the Agreement are hereby deleted in their
entirety and replaced by the following:
WHEREAS, the Lender intends to lend and the Borrower intends to borrow up
to $75,000,000 (Seventy-five 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 its
purchase or origination of fixed and adjustable rate, second lien,
residential mortgage loans shall at no time exceed $15,000,000 (Fifteen
Million dollars); and
WHEREAS, it is intended that the amount loaned to the Borrower to fund its
purchase or origination of mortgage loans under Borrower's 80/20 program
and not purchased in bulk shall at no time exceed $15,000,000 (Fifteen
Million dollars); and
2. Section 1(a)(i) of the Agreement is hereby deleted in its entirety and
replaced by the following:
(i) The Lender agrees to lend to the Borrower up to $75,000,000 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 $15,000,000
(Fifteen Million dollars). In addition, the Borrower agrees that at no time
shall the aggregate amount of the Loans made with respect of Mortgage Loans
originated under Borrower's 80/20 program and not purchased in bulk ("Non-Bulk
--------
Mortgage Loans") be
- --------------
<PAGE>
greater than $15,000,000 (Fifteen Million dollars). 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 financed 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 Loan(s) which the
Lender in its sole discretion believes will not be eligible for inclusion in any
securitized pool.
3. The following shall be added as a new section l(a)(ii)(D) and sections
1(a)(ii)(D) and (E) shall be re-numbered as l(a)(ii)(E) and (F), respectively:
(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.
4. The period at the end of the second sentence of Section l(a)(iii) is
hereby deleted and replaced by the following:
; provided, however, if, by the close of business on August 1, 1996, the
outstanding principal amount of the Mortgage Loans delivered or arranged to
be originated or purchased shall not be at least $30,000,000, the interest
rate shall be LIBOR plus 2.50% per annum.
5. Section 1(b) of the Agreement is hereby amended by inserting the clause
"in respect of Non-Bulk Mortgage Loans" between the words "Advance" and "shall"
in the first line.
2
<PAGE>
6. The Agreement is hereby amended by adding new Section 1(h) as follows:
(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.
7. The definition of "A Collateral Deficiency Situation" in Section l(b) of
---------------------------------
the Agreement is hereby deleted in its entirety and replaced by the following:
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
3
<PAGE>
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 (11)
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 Percentile" 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 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.
8. The definition of "Maturity Date" in Section l(b) of the Agreement is
-------------
hereby deleted in its entirety and replaced by the following:
Maturity Date means, the earlier of (i) September 30, 1996, (ii)
-------------
September 1, 1996, but only if, on or before August 31, 1996, the aggregate
of (x) the outstanding principal amount of the Loans and (y) Advances to be
made in respect of Mortgage Loans that the Borrower has arranged to
purchase or originate, shall not have been at least $75,000,000, and (iii)
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.
9. The definition of "Restoration Amount" in Section l(b) of the Agreement
------------------
is hereby deleted in its entirety and replaced by the following:
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,
4
<PAGE>
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 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.
10. All provisions of the Agreement and of the Notes (as amended hereby)
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 Agreement.
* * * * * * * * * * * * * *
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year first above written.
WILSHIRE FUNDING COMPANY, L.L.C.
By Wilshire Credit Corporation, a Member
By: /s/
---------------------------------------
Name: Andrew Wiederhorn
Title: CEO
PRUDENTIAL SECURITIES REALTY FUNDING
CORPORATION
By:/s/
---------------------------------------
Name:
Title:
6
<PAGE>
EXHIBIT 10.17
AMENDMENT NO. 2 TO INTERIM WAREHOUSE AND SECURITY AGREEMENT
Dated September 27, 1996
Reference is made to (i) the Interim Warehouse and Security Agreement,
dated as of December 1, 1995, as amended on June 14, 1996 and June 28, 1996 (the
"Agreement"), between Prudential Securities Realty Funding Corporation (the
---------
"Lender") and Wilshire Funding Company, L.L.C. (the "Borrower"), and (ii) each
- ------- --------
of the two Secured Notes dated December 8, 1995 (the "Notes") from the Borrower
-----
to the Lender.
The Lender and the Borrower do hereby agree as follows:
1. The first two recitals of the Agreement are hereby deleted in their
entirety and replaced by the following:
"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 its
purchase or origination 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 Borrower's 80/20 program and not
purchased in bulk shall at no time exceed $20,000,000 (Twenty Million dollars);
and".
2. The reference to $75,000,000 in the first sentence of Section 1(a)(i)
of the Agreement is hereby deleted in its entirety and replaced by $100,000,000
and the reference to $15,000,000 in the proviso to the first sentence of Section
1(a)(i) of the Agreement is hereby deleted in its entirety and replaced by
$20,000,000. The reference to $15,000,000 in the second sentence of Section
1(a)(i) of the Agreement is hereby deleted in its entirety and replaced by
$20,000,000.
3. The proviso at the end of the second sentence of Section 1(a)(iii) is
hereby deleted and the parties acknowledge and agree that the interest rate did
not increase to LIBOR plus 2.50% per annum on August 1, 1996 as contemplated by
such proviso.
4. The definition of "Maturity Date" in Section 1(b) of the Agreement is
-------------
hereby deleted in its entirety and replaced by the following:
"Maturity Date means, the earlier of (i) December 31, 1996, 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."
5. All provisions of the Agreement and of the Notes (as amended hereby)
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 Agreement.
* * * * * * * * * * * * * *
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement the day and year
first above written.
WILSHIRE FUNDING COMPANY, L.L.C.
By Wilshire Credit Corporation, a Member
By:________________________________________
Name:
Title
PRUDENTIAL SECURITIES REALTY FUNDING
CORPORATION
By:________________________________________
Name:
Title
<PAGE>
EXHIBIT 10.18
Public Securities Association
40 Broad Street, New York, NY 10004-2373
Telephone (212) 809-7000 PSA
MASTER REPURCHASE AGREEMENT
DATED AS OF MAY 22, 1996
-----------------------
BETWEEN:
First Bank of Beverly Hills ("Seller")
- ---------------------------------------------------
AND
Bear Stearns Mortgage Capital Corporation ("Buyer")
- ---------------------------------------------------
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
transfer 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 maybe 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;
<PAGE>
(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);
(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.
<PAGE>
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 int 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.
4. MARGIN MAINTENANCE
(a) If at any time the aggregate Market Value of all Purchased Securities
subject to all Transactions in which 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 thereto 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.
<PAGE>
(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 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.
<PAGE>
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.
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)406.5(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 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
<PAGE>
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 with 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, 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.
<PAGE>
(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.
(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
<PAGE>
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.
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 any 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.
<PAGE>
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.
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
<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.
[NAME OF PARTY] [NAME OF PARTY]
FIRST BANK OF BEVERLY HILLS ("SELLER") BEAR STEARNS MORTGAGE CAPITAL
CORPORATION ("BUYER")
BY /s/ David N. Spahlinger BY /s/ Richard S. Landau
---------------------------------- ----------------------------------
TITLE President & CEO TITLE Richard S. Landau, President
------------------------------- -------------------------------
DATE May 22, 1996 DATE May 22, 1996
-------------------------------- --------------------------------
<PAGE>
EXHIBIT 10.19
ANNEX I
SUPPLEMENTAL TERMS AND CONDITIONS
The MASTER REPURCHASE AGREEMENT between Bear Stearns Mortgage Capital
Corporation ("Buyer") and First Bank of Beverly Hills ("Seller") is amended and
supplemented as set forth below. All capitalized terms used herein which are
defined in the Master Repurchase Agreement are used herein as defined therein
except to the extent such terms are amended or supplemented herein.
1. Paragraph 1 of the Master Repurchase Agreement is amended by inserting
in the second line after the word "securities" and before "or financial" the
following:
", loans secured by mortgages or deeds of trust on residential dwellings
together with all the rights, privileges and benefits under all sales agreements
pursuant to which Seller acquired the Loans and all servicing agreements
pursuant to which the loans are serviced (such loans together with such rights,
privileges and benefits, "Mortgage Loans" and such dwellings "Residential
Dwellings")",
2. Subparagraph 2(h) of the Master Repurchase Agreement is amended by
adding at the end thereof:
except that the Market Value of any Securities which are Mortgage
------
Loans as of any date shall be the fair market value of such Mortgage
Loans on that date as determined by Bear, Stearns & Co. Inc., or an
affiliate of Bear, Stearns & Co. Inc., in its reasonable discretion,
and shall not include any Income on such Mortgage Loans paid to and
held by Seller pursuant to Paragraph 5 hereof;
3. Subparagraph 3(b) of the Master Repurchase Agreement is amended by
adding at the end of the first sentence of subparagraph 3(b):
<PAGE>
In the case of Transactions involving Securities which are
Mortgage Loans, the Purchased Securities shall be identified on a
detailed listing to be provided by Seller to Buyer (a "Mortgage Loan
Schedule") and may be identified in the related Confirmation by
reference to the Mortgage Loan Schedule.
4. Subparagraph 3(c) of the Master Repurchase Agreement is amended by
adding at the end of the first sentence of subparagraph 3(c):
In the case of Transactions involving Securities which are
Mortgage Loans, such demand shall be made no later than the business
day prior to the business day on which such termination will be
effective.
5. Paragraph 4 of the Master Repurchase Agreement is amended by adding a
new subparagraph (f) as follows:
(f) In the case of Transactions involving Securities which are
Mortgage Loans, (i) the right of Buyer under subparagraph (a) of this
Paragraph to require the elimination of a Margin Deficit may be
exercised whenever such a Margin Deficit exists with respect to any
single such Transaction; (ii) the calculations required by
subparagraph (a) of this Paragraph to determine the existence of a
Margin Deficit shall be performed separately for each Transaction
involving Securities which are Mortgage Loans, without regard to any
other Transaction outstanding under this Agreement, and no Securities
or cash under any Transaction involving Purchased Securities which are
Mortgage Loans shall be included in the calculations required under
subparagraphs (a) and (b) of this Paragraph to determine the existence
of a Margin Deficit or Margin Excess with respect to any other
Transaction outstanding under this Agreement, (iii) the percentage
used in calculating the Buyer's Margin Amount for such Transaction
shall be as set forth in the Confirmation with respect to such
Transaction, (iv) in the event of a Margin Deficit, Seller must
transfer cash to Buyer and not any Purchased Securities, and (v) the
provisions of subparagraph (b) of this Paragraph shall apply only as
described in a Confirmation of a Transaction.
6. Paragraph 7 of the Master Repurchase Agreement is
2
<PAGE>
amended by adding the following at the end of the last sentence of Paragraph 7:
In the case of Transactions involving Securities which are
Mortgage Loans, transfer of such Mortgage Loans for the purposes of
this Paragraph 7 shall be accomplished as set forth in the agreement
(the "Custodial Agreement"), dated as of May 22, 1996, among the
Seller, the Buyer, Wilshire Credit Corporation and State Street Bank
and Trust Company of California, N.A. as Custodian (the "Custodian").
7. Paragraph 8 of the Master Repurchase Agreement is amended by deleting
the last sentence of Paragraph 8 and substituting the following:
Title to all Purchased Securities (except for Securities which
are Mortgage Loans) shall pass to Buyer. In the case of Purchased
Securities which are Mortgage Loans, upon transfer of the Mortgage
Loans to Buyer as set forth in Paragraph 3(a) of this Agreement and
until termination of any Transactions as set forth in subparagraph
3(c) or Paragraph 11 of this Agreement, beneficial ownership of each
Mortgage Loan, including (i) each mortgage, deed of trust or other
instrument (the "Mortgage") creating a first lien on the underlying
property securing the Mortgage Loan (the "Mortgaged Property") and
(ii) each note or other evidence of indebtedness (the "Mortgage Note")
evidencing the indebtedness of an obligor thereon (each such obligor,
a "Mortgagor") under a Mortgage Loan shall be vested in the Buyer.
Upon transfer of the Mortgage Loans to Buyer as set forth in
subparagraph 3(a) of this Agreement and until termination of any
Transactions as set forth in subparagraph 3(c) or Paragraph 11 of this
Agreement, each Mortgage Note shall be endorsed in blank and an
assignment of each Mortgage in blank shall be retained by the
Custodian in trust, for the benefit of the Buyer. Unless otherwise
agreed by the 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 (i) 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 principal prepayments or Income it has received to, or
3
<PAGE>
apply principal prepayments or Income it has received to the
obligations of, Seller pursuant to Paragraph 5 hereof or (ii) affect
Seller's obligation to repurchase the Purchased Securities. In the
case of Transactions involving Securities which are Mortgage Loans,
the transfer and delivery of each specific Mortgage Loan identified on
the related Mortgage Loan Schedule to the Seller or its agent provided
for in subparagraph 3(c) and Paragraph 11 of this Agreement is
mandatory, it being specifically understood that each Mortgage Loan
identified thereon is unique and identifiable on the date hereof and
that an award of money damages would be insufficient to compensate the
Seller for the losses and damages incurred by Seller in the event of
Buyer's failure to transfer and deliver the Mortgage Loans as provided
in subparagraph 3(c) or Paragraph 11.
8. Paragraph 10 of the Master Repurchase Agreement is amended by the
addition of "(a)" at the beginning thereof and the following at the end of
sub-paragraph 10(a): :
Seller represents and warrants to Buyer that the transaction to which this
Master Repurchase Agreement relates was approved by the board of directors
of the Seller or its loan committee, which approval shall be reflected in
the minutes of said board or committee, and will be from the time of its
execution, retained as an official record of the Seller.
Paragraph 10 is further amended by the addition of the following after sub-
paragraph 10(a):
(b) In addition to the foregoing, in the case of Transactions
involving Securities which are Mortgage Loans, the Seller represents and
warrants to the Buyer that, as to each Mortgage Loan and the related
Mortgage:
(A) the information set forth on the related Mortgage Loan Schedule is
complete, true and correct;
(B) The Seller is sole owner of beneficial title and holder of the
Mortgage free and clear of any and all liens, claims, encumbrances,
participation interests, equities, pledges, charges or security interests
of any nature and has full right and authority, subject to no interest or
participation of, or agreement with, any other party, to sell and assign
the same pursuant to this Agreement;
(C) the Mortgage is a valid and subsisting first lien
4
<PAGE>
on the Mortgaged Property therein described, and the Mortgaged Property is
free and clear of all encumbrances and liens having priority over the first
lien of the Mortgage except for liens for real estate taxes and special
assessments not yet due and payable. Any security agreement, chattel
mortgage or equivalent document related to the Mortgage establishes in the
Seller a valid and subsisting first lien on the property described therein
and Seller has full right to sell and assign the same pursuant to this
Agreement;
(D) The Seller has not impaired, altered or modified the Mortgage in
any respect, except by a written instrument which has been recorded (if
necessary to protect the interests of the Buyer) and delivered to the
Custodian. The substance of any such alteration or modification has been
reflected on the Mortgage Loan Schedule and has been approved by the
primary mortgage guaranty insurer, if any, and title insurer;
(E) Seller has not executed any instrument of release or waiver in
connection with the Mortgage Loan, and Seller has not released any
Mortgagor in whole or in part;
On the Purchase Date for any Transaction, Seller shall be deemed to repeat
all of the foregoing representations and warranties made by it in this
subparagraph 10(b).
9. Paragraph 11 of the Master Repurchase Agreement is amended by deleting
the "or" which appears before "(vi)" in the fifth line of the first sentence,
and inserting the following after the word "hereunder" in-the sixth line of the
first sentence:
(vii) Seller shall admit its intention not to perform or Seller
fails to perform in any material respect any of its obligations
relating to the Purchased Securities set forth herein, or in a
Confirmation, or (viii) any event or circumstance shall occur
which in the reasonable judgment of either party materially
impairs the creditworthiness of the other party.
10. Paragraph 15 of the Master Repurchase Agreement is amended by adding
to the end of the first sentence the phrase,
5
<PAGE>
"and any purported assignment in violation of this provision shall be void." and
by adding after the end of such sentence as modified the following:
Notwithstanding the foregoing, without the consent of Seller,
Buyer may assign this Agreement and all Transactions it has
entered into with Seller to any of its affiliates, which
assignment shall be evidenced by a confirmation of such
assignment being sent to Seller. Further, notwithstanding the
foregoing, without the consent of Buyer, in the event Seller
merges with Girard Savings Bank ("Girard"), Seller may assign
this Agreement and all transactions it has entered into with
Seller to Girard, which assignment shall be evidenced by a
confirmation of such assignment being sent to Buyer.
11. This Annex I is executed and shall be construed as an agreement
supplemental to the Master Repurchase Agreement and, as provided in the Master
Repurchase Agreement, this Annex I forms a part thereof.
12. All of the covenants, stipulations, promises and agreements in this
Annex I shall bind and be for the benefit of the successors and assigns of the
parties hereto, whether expressed or not.
13. The Master Repurchase Agreement is further amended by adding the
following:
21. Counterparts. This Agreement may be executed in one or more
------------
counterparts and by the different parties hereto on separate
counterparts; such counterparts, together, shall constitute one and
the same Agreement.
14. This Annex I may be executed in any number of counterparts, each of
which shall be an original but such counterparts shall together constitute but
one and the same
6
<PAGE>
instrument.
7
<PAGE>
15. This Annex I shall supersede any existing annex to or modification of
the Master Repurchase Agreement.
BEAR STEARNS MORTGAGE FIRST BANK OF BEVERLY HILLS
CAPITAL CORPORATION
By: /s/ By: /s/
------------------------- --------------------------------
Name: Richard S. Landau Name: DAVID A. SPAHLINGER
Title: President ---------------------------
Date: May 22 , 1996 Title: President & CEO
------ ---------------------------
Date: May 22, 1996
---------------------------
8
<PAGE>
ANNEX II
Names and Addresses for Communications Between Parties
If to the Seller:
First Bank of Beverly Hills
23901 Calabasas Road
Suite 1050
Calabasas, CA 91302
Copy to: James M. Waddington, Esq.
Proskauer Rose Goetz & Mendelsohn, LLP
1585 Broadway
New York, NY 11036-8299
If to the Buyer:
Bear Stearns Mortgage Capital
Corporation
c/o Bear Stearns & Co. Inc
Government Operations
2 Broadway 11th Floor
New York, NY 10004
Attn: Managing Director
9
<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)....... $(1,629) $ 592 $ (1,252) $ 915
Redeemable Preferred
Stock Dividends........ 0 0 0 0
------- ------ -------- -------
$(1,629) $ 592 $ (1,252) $ 915
Weighted Average number
of Shares:
Average common shares
outstanding............ 77,175 23,596 9,245 6,138
Common shares
equivalents resulting
from assumed exercise
of stock options....... 0 0 0 0
------- ------ -------- -------
77,175 23,596 9,245 6,138
Earnings (Loss) per com-
mon share............... $(21.11) $25.09 $(135.42) $149.07
</TABLE>
<PAGE>
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 1, 1992 JULY 1 TO OCTOBER 8 TO DECEMBER 31, JUNE 30,
TO JUNE 30, OCTOBER 7, DECEMBER 31, --------------- ------------------
1993 1993 1993 1994 1995 1996 1996
------------ ---------- ------------ ------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Pre-tax income
(loss)............... ($1,162) ($525) $202 ($1,778) $639 ($130) ($2,908)
------- ----- ----- ------- ------ ------- ---------
Add:
Interest and fixed
charges............ 4,055 956 849 5,457 14,481 6,707 12,020
Portion of rent
under long-term
operating leases
representative of
an interest
factor............. 0 0 0 0 0 0 0
Total earnings
available for fixed
charges.............. 2,893 431 1,051 3,679 15,120 6,577 9,112
------- ----- ----- ------- ------ ------- ---------
Fixed charges:
Interest and fixed
charges.............. 4,055 956 849 5,457 14,481 6,707 12,020
Portion of rent under
long-term operating
losses representative
of an interest
factor............... 0 0 0 0 0 0 0
Total fixed charges... 4,055 956 849 5,457 14,481 6,707 12,020
------- ----- ----- ------- ------ ------- ---------
Deficiency in earnings
to cover fixed
charges................ 1,162 525 -- 1,778 -- 130 2,908
Ratio of earnings to
fixed charges.......... 1.24 1.04
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES
Wilshire Funding Corporation
Wilshire Servicing Corporation
Wilshire Acquisitions Corporation
First Bank of Beverly Hills, F.S.B.
Girard Savings Bank, F.S.B.
<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 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 September 30, 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 March 15, 1996 on the combined financial statement 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.
Deloitte & Touche LLP
October 30, 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 Registration Statement of Wilshire Financial
Services Group, Inc. and subsidiaries on Form S-1 for an offering of Common
Stock of our report dated September 30, 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 March 15, 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.
Deloitte & Touche LLP
October 30, 1996
Los Angeles, California
<PAGE>
EXHIBIT 23.4
The Board of Directors
Girard Savings Bank:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
The Savings Bank changed its method of accounting for income taxes in 1993 to
adopt the provisions of Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
San Diego, California
October 30, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Balance Sheet as of June 30, 1996 and Statement of Earnings for the
six months ended June 30, 1996 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 8253
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14431
<INVESTMENTS-CARRYING> 30921
<INVESTMENTS-MARKET> 30208
<LOANS> 509405
<ALLOWANCE> 31988
<TOTAL-ASSETS> 543198
<DEPOSITS> 433769
<SHORT-TERM> 66771
<LIABILITIES-OTHER> 7584
<LONG-TERM> 0
0
0
<COMMON> 35550
<OTHER-SE> (476)
<TOTAL-LIABILITIES-AND-EQUITY> 543198
<INTEREST-LOAN> 20436
<INTEREST-INVEST> 1515
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 21951
<INTEREST-DEPOSIT> 10633
<INTEREST-EXPENSE> 12020
<INTEREST-INCOME-NET> 9931
<LOAN-LOSSES> 10868
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5507
<INCOME-PRETAX> (2908)
<INCOME-PRE-EXTRAORDINARY> (2908)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1629)
<EPS-PRIMARY> (21.11)
<EPS-DILUTED> (21.11)
<YIELD-ACTUAL> 9.27
<LOANS-NON> 48200
<LOANS-PAST> 0
<LOANS-TROUBLED> 18415
<LOANS-PROBLEM> 3800
<ALLOWANCE-OPEN> 25651
<CHARGE-OFFS> 12766
<RECOVERIES> 1374
<ALLOWANCE-CLOSE> 31988
<ALLOWANCE-DOMESTIC> 31988
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
