SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-21845
Wilshire Financial Services Group Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 93-1223879
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) No.)
1776 SW MADISON STREET, PORTLAND, OR 97205
(Address of principal executive offices) (Zip Code)
(503) 223-5600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT OCTOBER 31, 1998
Common Stock, par value $.01 per share 10,885,000 Shares
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Consolidated Statements of Financial Condition..........................3
Consolidated Statements of Operations...................................4
Consolidated Statements of Cash Flows...................................5
Consolidated Statements of Stockholders' Equity.........................6
Notes to Interim Financial Statements...................................7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.........27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................30
Item 2. Changes in Securities..............................................30
Item 3. Defaults Upon Senior Securities....................................30
Item 4. Submission of Matters to a Vote of Security Holders................30
Item 5. Other Information..................................................30
Item 6. Exhibits and Reports on Form 8-K...................................30
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER 31,
30, 1998 1997
UNAUDITED)
(dollars in thousands)
ASSETS
<S> <C> <C>
Cash and cash equivalents.................................................. $ 54,672 $ 66,115
Mortgage-backed securities available for sale, at fair value............... 245,901 298,964
Mortgage-backed securities held to maturity, at amortized cost............. 14,861 18,468
Securities held to maturity, at amortized cost............................. 6,728 5,946
Trading account securities................................................. -- 38,969
Loans, net................................................................. 438,785 153,908
Discounted loans, net...................................................... 247,199 463,355
Loans held for sale, net, at lower of cost or market....................... 592,227 310,694
Stock in Federal Home Loan Bank of San Francisco, at cost.................. 5,255 5,031
Real estate owned, net..................................................... 140,078 169,612
Leasehold improvements and equipment, net.................................. 5,287 2,507
Due from affiliate, net.................................................... 15,295 42,171
Accrued interest receivable................................................ 8,731 6,641
Investment in Wilshire Real Estate Investment Trust Inc.................... 9,164 --
Mortgage servicing rights, net............................................. 3,115 8,306
Income tax receivable, net................................................. 14,068 --
Prepaid expenses and other assets.......................................... 40,861 38,340
TOTAL...................................................................... $ 1,842,227 $ 1,629,027
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits.............................................................. $ 534,091 $ 362,598
Short-term borrowings................................................. 1,076,078 966,500
Notes payable......................................................... 184,245 184,245
Accounts payable and other liabilities................................ 31,507 16,562
Total liabilities.................................................. 1,825,921 1,529,905
Commitments and Contingencies
Stockholders' Equity:
Common stock.......................................................... 117,708 55,897
Preferred stock....................................................... -- 27,500
Treasury stock, at cost............................................... (2,852) (124)
(Deficit) retained earnings........................................... (93,440) 18,782
Accumulated other comprehensive loss, net............................. (5,110) (2,933)
Total stockholders' equity.......................................... 16,306 99,122
TOTAL.................................................................... $ 1,842,227 $ 1,629,027
</TABLE>
See notes to interim financial statements.
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
(dollars in thousands)
INTEREST INCOME:
<S> <C> <C> <C> <C>
Loans................................................ $ 33,557 $ 23,659 $ 92,603 $ 59,950
Mortgage-backed securities........................... 6,414 5,450 21,707 12,484
Securities and federal funds sold.................... 1,046 838 2,848 3,022
Total interest income.............................. 41,017 29,947 117,158 75,456
INTEREST EXPENSE:
Deposits............................................. 6,964 6,354 18,086 20,008
Borrowings........................................... 28,090 17,991 81,221 39,028
Total interest expense............................. 35,054 24,345 99,307 59,036
NET INTEREST INCOME.................................... 5,963 5,602 17,851 16,420
PROVISION FOR ESTIMATED LOSSES ON LOANS................ 15,191 2,350 12,191 926
NET INTEREST (LOSS) INCOME AFTER PROVISION
FOR ESTIMATED LOSSES ON LOANS........................ (9,228) 3,252 5,660 15,494
OTHER (LOSS) INCOME:
Market valuation adjustments......................... (76,580) -- (76,580) --
Write-down of mortgage servicing rights.............. (12,704) -- (13,704) --
Servicing revenue, net............................... 1,070 1,395 4,810 3,339
Real estate owned, net............................... 144 1,835 3,616 4,574
Bankcard income, net................................. 1,989 518 3,486 1,579
Gain on sale of loans................................ 1,460 20,036 27,904 31,252
Gain (loss) on sale of securities.................... (433) 3,053 7,768 3,053
Trading income....................................... -- 1,157 1,630 1,171
Other, net........................................... (2,049) 637 1,075 1,749
Total other income (loss)......................... (87,103) 28,631 (39,995) 46,717
OTHER EXPENSES:
Compensation and employee benefits................... 10,914 4,623 26,023 11,274
Loan service fees and expenses paid to affiliate..... 12,898 9,711 32,995 19,423
Professional services................................ 2,494 1,142 5,702 2,104
Occupancy............................................ 797 312 1,769 727
FDIC insurance premiums.............................. 212 268 656 791
Other general and administrative expenses............ 9,348 3,522 18,517 6,669
Total other expenses.............................. 36,663 19,578 85,662 40,988
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT)
PROVISION......................................... (132,994) 12,305 (119,997) 21,223
INCOME TAX (BENEFIT) PROVISION......................... (14,028) 5,237 (8,192) 8,981
NET (LOSS) INCOME $ (118,966) $ 7,068 $ (111,805) $ 12,242
(LOSS) EARNINGS PER SHARE:
Basic................................................ $ (10.82) $ 0.85 $ (10.58) $ 1.53
Diluted $ (10.82) $ 0.80 $ (10.58) $ 1.47
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic................................................ 10,997,880 7,570,000 10,604,798 7,570,000
Diluted.............................................. 10,997,880 8,014,230 10,604,798 7,882,555
</TABLE>
See notes to interim financial statements.
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
NET (LOSS) INCOME................................................$ (118,966) $ 7,068 $ (111,805) $ 12,242
ADJUSTMENTS TO RECONCILE NET CASH USED IN OPERATING ACTIVITIES:
MARKET VALUATION ADJUSTMENTS.................................. 76,580 -- 76,580 --
PROVISION FOR ESTIMATED LOSSES ON LOANS....................... 15,191 2,350 12,191 926
PROVISION FOR LOSSES ON REAL ESTATE OWNED..................... 418 -- 2,142 --
PROVISION FOR LOSSES ON MORTGAGE SERVICING RIGHTS............. 12,704 -- 13,704 --
DEPRECIATION AND AMORTIZATION................................. 458 99 1,075 302
(GAIN) LOSS ON SALE OF REAL ESTATE OWNED...................... 409 (1,164) (2,018) (4,275)
ORIGINATION OF LOANS HELD FOR SALE............................ (287,213) (21,220) (534,022) (50,962)
PURCHASE OF LOANS HELD FOR SALE............................... (128,104) (182,835) (507,046) (532,354)
PROCEEDS FROM SALE OF LOANS HELD FOR SALE..................... 141,752 184,214 361,548 375,565
GAIN ON SALE OF LOANS......................................... (1,460) (19,639) (27,904) (30,855)
(GAIN) LOSS ON SALE OF SECURITIES............................. 433 (3,053) (7,768) (3,053)
UNREALIZED GAIN ON TRADING SECURITIES......................... (146) -- (318) --
AMORTIZATION OF DISCOUNTS AND DEFERRED FEES................... (5,299) (16,208) (16,529) (27,123)
(INCOME) LOSS ON EQUITY INVESTMENTS........................... 4,764 (70) 4,314 (161)
DEFERRED TAXES, NET........................................... 2,915 5,245 8,172 4,041
OTHER......................................................... (443) -- (69) --
CHANGE IN:
TRADING ACCOUNT SECURITIES.................................... 177 (10,385) 22,418 (3,622)
ACCRUED INTEREST RECEIVABLE................................... (198) 865 (2,090) (2,865)
PREPAID EXPENSES AND OTHER ASSETS............................. (16,191) (18,940) (43,328) (26,732)
DUE TO AFFILIATES, NET........................................ 35,287 6,030 27,999 1,280
ACCOUNTS PAYABLE AND OTHER LIABILITIES........................ (5,240) (13,009) 7,079 (15,460)
NET CASH USED IN OPERATING ACTIVITIES......................... (272,172) (80,652) (715,675) (303,056)
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE OF LOANS............................................. (12,930) (26,903) (527,416) (340,808)
LOAN REPAYMENTS............................................... 92,795 50,606 221,911 116,969
LOAN ORIGINATIONS............................................. (22,862) -- (39,540) --
PROCEEDS FROM SALE OF LOANS................................... 191,083 -- 545,932 --
PROCEEDS FROM SALE OF MORTGAGE-BACKED SECURITIES AVAILABLE
FOR SALE................................................... 21,320 12,148 150,530 12,418
PURCHASE OF MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE..... (68,652) (76,739) (132,945) (184,393)
REPAYMENT OF MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE.... 8,645 3,733 32,599 4,163
REPAYMENTS OF MORTGAGE-BACKED SECURITIES HELD TO MATURITY..... 1,411 1,552 3,545 3,036
PURCHASE OF REAL ESTATE OWNED................................. (5,193) -- (18,263) --
PROCEEDS FROM SALE OF REAL ESTATE OWNED....................... 56,280 18,271 170,207 44,841
PURCHASE OF SECURITIES AND FHLB STOCK......................... -- -- (14,731) (1,833)
PURCHASES OF LEASEHOLD IMPROVEMENTS AND EQUIPMENT............. (2,561) (749) (4,160) (1,194)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES........... 259,336 (18,081) 387,669 (347,071)
CASH FLOWS FROM FINANCING ACTIVITIES:
NET INCREASE (DECREASE) IN DEPOSITS........................... 111,351 (37,565) 171,493 (93,845)
PROCEEDS FROM SHORT-TERM BORROWINGS........................... 406,156 373,961 1,733,984 1,073,009
REPAYMENTS OF SHORT-TERM BORROWINGS........................... (496,398) (299,382) (1,620,497) (512,587)
ISSUANCE OF COMMON STOCK...................................... -- -- 61,811 --
PURCHASE OF TREASURY STOCK.................................... (2,728) -- (2,728) --
PROCEEDS FROM NOTES PAYABLE................................... -- 100,000 -- 109,245
REDEMPTION OF PREFERRED STOCK................................. -- -- (27,500) --
NET CASH PROVIDED BY FINANCING ACTIVITIES................ 18,381 137,014 316,563 575,822
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. 5,545 38,281 (11,443) (74,305)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD........................................... 49,127 39,712 66,115 152,298
END OF PERIOD................................................. $ 54,672 $ 77,993 $ 54,672 $ 77,993
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--CASH PAID FOR:
INTEREST...................................................... $ 34,011 $ 24,026 $ 97,223 $ 51,577
INCOME TAXES.................................................. -- 600 5,690 6,350
NONCASH INVESTING ACTIVITIES:
ADDITIONS TO REAL ESTATE OWNED ACQUIRED IN SETTLEMENT OF
LOANS................................................... 18,848 27,588 121,878 108,831
TRANSFER OF SECURITIES CLASSIFIED AS TRADING TO AVAILABLE
FOR SALE 16,869 -- 16,869 --
EQUIPMENT ACQUIRED THROUGH CAPITAL LEASE...................... -- -- -- 493
NONCASH FINANCING ACTIVITIES:
PAY IN KIND PREFERRED STOCK DIVIDEND.......................... -- 652 417 652
PREFERRED STOCK ISSUED IN EXCHANGE FOR CANCELLATION OF
ACCOUNTS PAYABLE......................................... -- 27,500 -- 27,500
</TABLE>
SEE NOTES TO INTERIM FINANCIAL STATEMENTS.
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
(DEFICIT) OTHER
RETAINED COMPREHENSIVE
PREFERRED STOCK COMMON STOCK TREASURY STOCK EARNINGS INCOME (LOSS) TOTAL
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996...... -- $ -- 1,300,863 $ 6,800 -- $ -- $ 255 $ (16) $ 7,039
Comprehensive income:
Net income.................. 4,967 4,967
Unrealized loss on available-
for sale securities-net of tax (81) (81)
Total comprehensive income... 4,886
Exchange of subordinated debt
for common stock......... 1,606,618 11,000 1,000
Issuance of common stock..... 4,662,519 38,097 38,097
BALANCE, December 31, 1996.... -- -- 7,570,000 55,897 -- -- 5,222 (97) 61,022
Comprehensive income:
Net income................... 15,164 15,164
Unrealized loss on available
for-sale securities--net of
tax........................ (2,836) (2,836)
Total comprehensive income... 12,328
Treasury stock............... 5,000 (124) (124)
Issuance of preferred stock 27,500 27,500 27,500
Preferred stock dividend... (1,604) (1,604)
BALANCE, December 31,
1997....................... 27,500 27,500 7,570,000 55,897 5,000 (124) 18,782 (2,933) 99,122
Comprehensive loss:
Net loss................... (111,805) (111,805)
Unrealized loss on available
for-sale securities--net of
tax.................... (1,907) (1,907)
Unrealized loss on foreign
currency translation.... (270) (270)
Total comprehensive loss... (113,982)
Treasury stock............. 180,000 (2,728) (2,728)
Preferred stock dividend... (417) (417)
Preferred stock redemption. (27,500) (27,500) (27,500)
Common stock issuance...... 3,500,000 61,811 61,811
BALANCE, September 30, 1998 -- -- 11,070,000 $ 117,708 185,000$(2,852) $ (93,440) $ (5,110) $ 16,306
(unaudited)................
</TABLE>
See notes to interim financial statements.
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements of Wilshire Financial Services
Group Inc. and Subsidiaries (the "Company") are unaudited and should be read in
conjunction with the 1997 Annual Report on Form 10-K. A summary of the Company's
significant accounting policies is set forth in Note 1 to the Consolidated
Financial Statements in the 1997 Annual Report on Form 10-K.
In the opinion of management, all adjustments, other than the
adjustments described below, generally comprised of normal recurring accruals
necessary for fair presentations of the interim financial statements have been
included and all intercompany accounts and transactions have been eliminated in
consolidation. Operating results for the nine months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications of 1997 amounts were made in order to
conform to the 1998 presentation, none of which affect previously reported net
income.
2. GENERAL MARKET CONDITIONS
Beginning in August 1998, and more significantly since October 12,
1998, the global financial marketplace has experienced overwhelming changes and
volatility. The market for mortgages and mortgage-backed securities and, in
particular, subordinate credit related tranches of these securities, has
experienced dramatically widening spreads since August 1998. Liquidity problems
affecting certain Wall Street firms, hedge funds and other financial instruments
investors have exacerbated this market phenomenon through forced liquidation of
their assets. This has led to an increased need for liquidity at the Company
both to meet collateral calls and as a preemptive measure to protect against
future mortgage-backed securities spread distortions that the Company expects
may be experienced by the markets in general.
As a result, the Company sold a significant amount of its assets in
order to meet collateral calls, primarily by Salomon Smith Barney, and reduce
outstanding debt. The Company reported two major dispositions of assets on
Current Report Form 8-K subsequent to September 30, 1998. The first reported
disposition included (a) 68 classes of subordinate mortgage-backed securities
for proceeds of approximately $63.3 million, (b) a pool of non-performing
mortgage loans for proceeds of $211.8 million and (c) mortgage servicing rights
for proceeds of $1.4 million. The second disposition of assets reported on
Current Report Form 8-K was the sale of a pool of performing mortgage loans for
proceeds of approximately $232.5 million. The Company reduced the recorded
carrying amount of the assets in both sales to the amount realized upon
disposition and reflected a write-down (see footnote 3, Market Valuation
Adjustments) in determining net loss during the quarter ended September 30,
1998. Had the Company not been forced to sell these assets, primarily as a
result of collateral calls by certain affiliates of Salomon Smith Barney, Inc.
but rather held these assets until market conditions stabilized, management
believes the Company's losses would have been far less severe.
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
In addition to these significant asset sales, the Company, as a result
of reviewing its current operations, reduced its workforce by approximately 19%
during October 1998 (see additional discussion in footnote 11, Subsequent
Events). The Company has also reduced the carrying value of certain capitalized
mortgage servicing rights due to faster than expected prepayments of the
underlying loans and revised future estimates of prepayments. The Company has
recorded a total write-down related to servicing rights of $12,704 in
determining net loss for the quarter ended September 30, 1998. The Company has
also evaluated the impact of the current market conditions on the estimated fair
value of the remainder of its mortgage-backed securities portfolio and reflected
in market valuation adjustments that amount which has been deemed to be other
than temporary impairment.
3. MARKET VALUATION ADJUSTMENTS
As noted above, subsequent to September 30, 1998, the Company sold a
significant amount of its loans and mortgage-backed securities to meet
collateral calls, primarily by certain affiliates of Salomon Smith Barney, Inc.,
and increase liquidity as well as recorded other adjustments related to the
market conditions. The declines in values on the assets included in these sales
have been recognized as market valuation adjustments as of September 30, 1998
and recognized in determining net loss for the quarter then ended. In addition,
the Company has evaluated the impact of the current market conditions on the
estimated fair value of the remainder of its mortgage-backed securities
portfolio and reflected in market valuation adjustments that amount which has
been deemed to be other than temporary impairment. The evaluation of other than
temporary impairment considers the decline, as well as trends in the decline, of
the market values, the relative severity of the declines in market values, and
the Company's ability to collect all amounts due according to the contractual
terms. If current market conditions continue to negatively impact the value of
these assets, additional other than temporary impairment may be realized in the
future.
Subsequent to September 30, 1998, the Company sold, primarily as a
result of collateral calls by certain affiliates of Salomon Smith Barney, Inc.,
discounted loans with a carrying value of $211.8 million, loans held for sale
with a carrying value of $232.5 million and mortgage-backed securities with
carrying value of $63.3 million. As a result of these sales, short term
borrowings were reduced $500.2 million. These assets, and the related short term
financing, are reflected in the Company's consolidated statements of financial
condition as of September 30, 1998 net of the applicable market valuation
adjustments. The effect of these sales on the consolidated statements of
financial condition as of September 30, 1998 would be to reduce total assets
from approximately $1.8 billion to $1.3 billion. Discounted Loans would be
reduced from $247.2 million to $35.4 million, loans held for sale would be
reduced from $592.2 million to 359.7 million and mortgage-backed securities,
available for sale would be reduced from $245.9 million to $182.6 million. Short
term borrowings would be reduced from $1.1 billion to $575.9 million.
Total market valuation adjustments for the quarter ended September 30,
1998 was $76.6 million. Of this amount, $22.2 million relates to sales of
mortgage-backed securities, $5.2 million relates to other than temporary
impairment of remaining mortgage-backed securities, $34.9 million relates to
sales of loans held for sale, discounted loans and real estate owned, and $14.3
million relates to hedge losses previously deferred in the Company's
consolidated statement of financial condition (see footnote 5, Commitments,
Contingencies and Off-Balance Sheet Risk).
Based on the use of the current available data in the valuation of its
assets, the Company's management believes it is proper to reflect the decline of
these assets as an adjustment in the quarter ended September 30, 1998.
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
4. DEBT RESTRUCTURING
The recent dramatic events in the financial markets, which included a
significant reduction in valuations of, and liquidity for, mortgage-backed
securities, has had a significant adverse impact on the Company's liquidity and
financial condition. The decline in valuations resulted in collateral calls from
the Company's lenders, which reduced the Company's cash position and eventually
prompted asset sales at depressed prices to meet these calls and provide
liquidity. While these asset sales have improved the liquidity position of the
Company, the market for mortgage-backed securities -- particularly subordinate
mortgage-backed securities -- has not recovered and the financial markets
generally continue to be volatile. Further, certain of the Company's lenders
have expressed concern about continued lending given market conditions and
recent losses incurred by the Company.
In order to address these liquidity concerns and improve the Company's
financial condition, management entered into discussions with an unofficial
committee of holders of a majority of the Company's $184.2 million in
outstanding publicly issued notes and its financial advisors, Houlihan Lokey
Howard & Zukin, and legal counselors, Latham and Watkins, concerning a
restructuring of the Company's obligations under the notes. Following extensive
discussions, the Company and the unofficial committee agreed today to a
restructuring of the Company whereby (i) the noteholders would exchange their
notes for common stock in the Company; (ii) existing holders of common stock
would receive warrants or highly diluted new common stock in exchange for their
holdings; and (iii) pending consummation of the restructure, the noteholders
would forbear from declaring certain defaults which resulted from the net losses
incurred by the Company and actions taken by the Company to meet collateral
calls.
Management believes that this restructuring will significantly improve
the Company's financial position by reducing indebtedness by $184.2 million, the
interest cost associated with that indebtedness, and significantly increase the
Company's equity account. This restructuring is subject to a number of
conditions, including no material adverse change and negotiation of definitive
documents. The Company currently expects that this restructuring will be
completed at the end of the first quarter of 1999. Other creditors, including
trade creditors and secured creditors, are not expected to be adversely affected
by this restructuring.
As a part of this restructuring, the Company and the unofficial
committee of noteholders anticipate incorporation of servicing functions
currently performed by WCC into the servicing subsidiary of WFSG.
The Company's unaudited consolidated financial statements have been
prepared on a going concern basis, which contemplates continuity of operations,
realization of assets and the liquidation of liabilities in the normal course of
business. The appropriateness of using the going concern basis is dependent
upon, among other things, the adequate resolution of the Company's near and long
term liquidity shortfall, as well as the successful consummation of the
reorganization described above. The consolidated financial statements do not
include any adjustments relating to the Company's ability to continue as a going
concern.
5. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK
At September 30, 1998, the Company had open short positions on 875
5-year U.S. Treasury Notes and 450 French Franc futures contracts. To the extent
that aggregate net losses on these instruments were effective hedges of the
underlying assets to which they relate, the losses are deferred as an adjustment
to the basis of those assets and amortized using a method approximating the
interest method. The total amount of deferred losses as of September 30, 1998,
remaining in the consolidated statement of financial condition was $3.1 million.
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
During the third quarter, unusually volatile market conditions
affecting the value of hedged assets caused a breakdown of the historical
interest rate relationships with the related hedging instruments. The
correlation between hedged assets and hedging instruments was insufficient to
support continuation of this particular hedging strategy at that time. As a
result, all hedging instruments related to fixed-rate or lagging-index assets
held or available for sale were closed out before or shortly after September 30,
1998. $14.3 million of previously deferred hedging losses were considered
ineffective and charged to net loss during the quarter (see footnote 3, Market
Valuation Adjustments).
First Bank of Beverly Hills, F.S.B. ("First Bank"), the Company's
savings bank subsidiary, had approximately $129.0 million notional principal
amount of interest rate swap agreements outstanding at September 30, 1998, which
were designated as hedges of certain fixed rate loans in order to convert fixed
rate income streams to variable rate. These swaps had the effect of decreasing
the Company's net interest income by approximately $64 thousand during the nine
months ended September 30, 1998. The market value of these swaps currently
deferred was $(0.8) million at September 30, 1998.
From time to time, the Company enters into various commitments and
letters of intent relating to purchases of loans, foreclosed real estate
portfolios and discrete operating companies. There can be no assurance that any
of such transactions will ultimately be consummated. It is the Company's policy
to generally record such transactions in the financial statements in the period
in which such transactions are closed.
6. INCOME TAXES
The Company files consolidated federal income tax returns with its
domestic subsidiaries. Certain state and foreign tax returns are also filed on a
consolidated basis while others are filed on a separate entity basis. 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.
During the quarter ended September 30, 1998, the Company incurred a
substantial net operating loss for federal income tax purposes. A portion of the
federal loss will be carried back to the years 1996 and 1997. The refund from
the carryback claim plus refunds of taxes previously paid to the IRS and to
various state taxing authorities is expected to be approximately $14.8 million.
In addition, the Company expects to pay approximately $0.7 million of state and
foreign income taxes based on separate entity tax liabilities. The Company
recorded a tax benefit for the three and nine months ended September 30, 1998 in
the accompanying consolidated statements of operations in amounts sufficient to
reflect the net refund of $14.1 million as a current income tax receivable.
Due to uncertainty relating to the future profitability of the
Company, the net deferred tax asset of $30 to $40 million, consisting primarily
of federal, state and foreign net operating loss carryforwards, is completely
offset by a valuation allowance.
7. LOSS PER SHARE
The Company has outstanding stock options which are considered common
stock equivalents in the calculation of diluted earnings per share. During the
quarter and nine months ended September 30, 1998, the Company experienced a net
loss, which resulted in common stock equivalents having an anti-dilutive effect
on earnings per share. Weighted average shares outstanding is therefore
equivalent for basic and diluted earnings per share.
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
8. THIRD QUARTER SECURITIZATION
In September 1998, the Company completed a securitization sale of
approximately $177.7 million unpaid principal balance of loans resulting in gain
on sale of approximately $4.5 million. The gain on sale resulting from this
transaction is offset by net losses of approximately $3.0 million resulting
primarily from realized hedge losses associated with this securitization and the
Company's mortgage loan origination activity.
9. INVESTMENT IN WREIT
In April 1998, the Company sponsored the initial public offering of
Wilshire Real Estate Investment Trust Inc. ("WREIT"), whereby WREIT received
approximately $167.0 million of proceeds. The Company is the Manager of WREIT
and, as such, earns fee income from the management of WREIT based on the level
of WREIT's investment assets. During the quarter ended September 30, 1998, the
Company earned approximately $1.3 million in management fee income.
The Company purchased 990,000 shares of WREIT common stock in
conjunction with the initial public offering. This investment is accounted for
under the equity method of accounting and therefore , is not adjusted for
fluctuations in the market price of the underlying shares but rather, increases
and decreases based on earnings of WREIT and, receipt of dividends.
WREIT has been significantly impacted by general market conditions
(see footnote 2) in the same manner as the Company. As a result, WREIT has sold
assets to increase liquidity and experienced significant losses during the
quarter ended September 30, 1998. The Company's investment in WREIT decreased
approximately $4.3 million due primarily to the Company's percentage ownership
share of WREIT's losses. The carrying amount of the Company's investment in
WREIT was approximately $9.2 million as of September 30, 1998.
10. RELATED PARTY TRANSACTIONS
During the quarter ended September 30, 1998, the Company loaned
approximately $15.6 million to WREIT. These loans are secured by operating real
estate with loan to value ratios of up to 85%, are due on October 1, 2008 and
bear interest at 10% per annum. WREIT also made a loan to the Company in the
amount of $17.7 million during the quarter ended September 30, 1998. This loan
is included as an offset to due from affiliates, net in the Company's
consolidated statement of financial condition as of September 30, 1998, bears
interest at 13% per annum and is due with thirty days notice.
During 1998, the Company made payments of approximately $3.9 million
to its two principal stockholders. These amounts have been reimbursed to the
Company by offsetting other amounts due to an affiliated entity owned by the
principal stockholders.
11. SUBSEQUENT EVENTS
In addition to the significant events disclosed in footnotes 2, 3 and
4, the following significant events occurred subsequent to September 30, 1998.
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
During October 1998, the Company made a strategic decision to
eliminate its retail residential mortgage and manufactured housing origination
activity. During the nine months ended September 30, 1998, these origination
activities accounted for approximately $95.5 million of the Company's $573.6
million of origination production. The Company has written-off approximately
$1.2 million of goodwill (included in other expenses in the consolidated
statement of operations) established upon acquisition of the residential real
estate mortgage origination branches.
In October 1998 the Company reduced its workforce by approximately
19%, the majority of which related to these origination activities.
Management of the Company is currently negotiating with a European
insurance company to acquire its wholly owned subsidiary, which holds a
portfolio of loans and other financial instruments. The Company expects to
finance approximately 80% of the purchase price with unrelated third parties.
The Company has granted WREIT an option to purchase all or a portion of the
Company's interest in such assets. As of the date this Form 10-Q was required to
be filed with the Securities and Exchange Commission, it was uncertain whether
this transaction would ultimately be consummated. Management of the Company
remains committed to the ultimate consummation of this transaction. However, in
the event that this does not occur, the Company will be required to write-off
against the Company's earnings approximately $8.2 million of previously
capitalized costs, consisting of a non-refundable deposit of $7.2 million and
capitalized deal costs of approximately $1.0 million.
In October 1998, as the result of a recent examination, the Office of
Thrift Supervision agreed to lift the cease and desist order previously imposed
on First Bank.
Subsequent to September 30, 1998, the Office of Thrift Supervision
informed the Company and Wilshire Acquisitions Corporation, a subsidiary of the
Company, both savings and loan holding companies, that formal enforcement
actions may be imposed. These actions respond to alleged violations of certain
affiliated transactions regulations with First Bank. Management requested the
OTS consider less formal responses, as the alleged violations were induced by
external conditions. In the interim, the OTS notified First Bank that approval
would be required prior to entering into certain affiliated transactions.
Management believes these restrictions, as well as other related restrictions
that may be imposed, will have no material impact on its operations.
In October 1998, the Company purchased George Elkins Mortgage Company,
a four branch commercial mortgage loan originator headquartered in Southern
California for approximately $3.7 million in cash and an additional $1.5
million, which is contingent on certain operating performances through the year
2000. The purchase was consummated through First Bank.
12. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") recently issued
Statement of Financial Accounting Standards ("SFAS") No. 131 "DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION" which establishes standards
for the way public entities report information about operating segments in
annual financial statements and requires that those entities report selected
information about operating segments in interim financial reports issued to
stockholders. This Statement is effective for fiscal years beginning after
December 15, 1997 with interim periods presented following the initial
presentation in annual financial statements. The Company will incorporate
appropriate disclosures at the time these pronouncements are adopted.
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income", which requires companies to report all changes in equity during a
period, except those relating to investment by owners and
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
distributions to owners, in a financial statement for the period in
which they are recognized. The Company has chosen to disclose comprehensive loss
for the quarter and nine months ended September 30, 1998, which encompasses net
income, unrealized losses on available for sale securities and unrealized loss
on foreign currency translations, with no tax effect, on the face of the
accompanying consolidated statement of changes in stockholders' equity.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The Statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Management expects that the Company will adopt SFAS No. 133 on January
1, 2000. Management has not yet quantified the impact of adopting SFAS No. 133
on its financial statements and has not determined the method of its adoption of
SFAS No. 133. However, the Statement could increase volatility in earnings and
other comprehensive income.
The American Institute of Certified Public Accountants recently issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up
Activities," which has been cleared by the FASB. This SOP provides guidance on
the financial reporting of start-up and organizational costs. Specifically, it
requires costs of start-up activities and organizational costs to be expensed as
incurred and is effective for financial statements for fiscal years beginning
after December 15, 1998. The initial application of this SOP will be reported as
a cumulative effect of a change in accounting principle. As of September 30,
1998, the Company had no capitalized start-up or organizational costs.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise", an amendment of SFAS No. 65. This
statement is effective for the first fiscal quarter beginning after December 15,
1998. This statement standardizes how mortgage banking firms account for certain
securities and other interests they retain after securitizing mortgage loans
that were held for sale. Adoption of this pronouncement is not expected to have
a material impact on the Company's consolidated financial statements.
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND NOTES THERETO.
Wilshire Financial Services Group Inc. ("WFSG" or the "Company") is a
diversified financial services company. The Company conducts business in the
U.S. and Europe, specializing in loan portfolio acquisition and securitization,
correspondent lending and servicing. The Company offers wholesale banking
through its subsidiary, First Bank of Beverly Hills, F.S.B. ("First Bank").
First Bank is a federally chartered savings institution regulated by the Office
of Thrift Supervision ("OTS") with one branch and a merchant bankcard processing
center in Southern California. Administrative headquarters of the Company,
Wilshire Funding Corporation ("WFC") and First Bank are located in Portland,
Oregon.
GENERAL MARKET CONDITIONS
Beginning in August 1998, and more significantly since October 12,
1998, and continuing to the present, the Company has been significantly and
negatively impacted by various market factors. These factors, which are
discussed further below, resulted in a dramatic reduction in market valuations
for certain of the Company's mortgage-backed securities and other assets, as
well as a reduction in the availability of borrowings for those assets and
certain of the Company's loan assets, thereby reducing the Company's liquidity.
Turmoil in the Russian financial markets, following a prolonged period
of uncertainty in Asian financial markets, caused investors to reassess their
risk tolerance. This resulted in a dramatic movement of liquidity toward less
risky assets (e.g., U.S. Treasury instruments) and away from higher risk assets,
including most non-investment grade assets and commercial and other mortgage and
asset-backed securities. On October 7, 1998, the Company issued a press release
announcing changes in the expected results for the quarter ended September 30,
1998 as a result of market conditions through the date of that release. At the
time of that release, the Company had no indication of the events that would
transpire beginning the week of October 12, 1998, as further described below.
This movement toward higher quality investments dramatically reduced
available liquidity to non-investment grade assets. Without available funding
sources, many investors in these assets, including several well-known hedge
funds, were forced to liquidate holdings at reduced prices. With greater sales
pressure and supply outpacing demand, prices continued to fall as more lenders
made margin calls, demanding additional collateral for their loan positions.
Many companies were rapidly depleting available cash reserves.
On October 12, 1998, another well-known hedge fund was liquidated.
This event triggered further collateral calls, forcing additional companies to
sell assets to cover borrower collateral calls, and continuing the downward
spiral in prices. On October 15, 1998 the Federal Reserve lowered interest
rates, largely in response to this liquidity crisis.
During October and continuing into the month of November 1998, the
Company sold a significant amount of assets in response to the above conditions
to meet collateral calls by lenders, primarily certain affiliates of Salomon
Smith Barney, Inc., and to increase liquidity. The downward pressure on prices
and the Company's need to sell assets to meet these collateral calls resulted in
the Company disposing of certain assets for proceeds which resulted in
significant losses for the quarter and nine months ended September 30, 1998.
Beginning during the week of October 12, 1998, the Company sold, primarily as a
result of collateral calls, Discounted Loans with a carrying value of $211.8
million, Non-Discounted Loans with a carrying value of $232.5 million and
mortgage-backed securities with carrying value of $63.3 million. Had the Company
not been forced to sell these assets, but rather held these assets until market
conditions stabilized, management believes the Company's losses would have been
far less severe.
<PAGE>
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1997
NET LOSS
The Company had a net loss of approximately $111.8 million for the
nine months ended September 30, 1998 compared to net income of approximately
$12.2 million for the nine months ended September 30, 1997. The net loss for the
nine months ended September 30, 1998 is primarily attributable to $76.6 million
of market valuation adjustments recognized by the Company, write-down of
mortgage servicing rights of $13.7 million and provision for losses on loans of
$12.2 million, as further explained below.
NET INTEREST INCOME
The Company's net interest income was approximately $17.9 million for
the nine months ended September 30, 1998 compared to approximately $16.4 million
for the nine months ended September 30, 1997, an increase of 8.7%.
Interest-earning assets increased from $1.1 billion as of September 30, 1997 to
$1.6 billion as of September 30, 1998. The increase in interest-earning assets
is primarily attributable to acquisitions of loans and mortgage-backed
securities which in part were funded from the Company's issuance of $100.0
million of 13% Series B Notes due 2004 (the "Series B Notes") in August 1997 and
its offering of 3,500,000 shares of common stock in February 1998.
INTEREST INCOME. The Company's interest income was approximately
$117.2 million for the nine months ended September 30, 1998 compared to
approximately $75.5 million for the nine months ended September 30, 1997, an
increase of 55.3%. The increase in the Company's interest income was due
primarily to an increase in the Company's interest earning assets from
approximately $1.1 billion at September 30, 1997 to approximately $1.6 billion
at September 30, 1998. During the nine months ended September 30, 1998, the
Company purchased approximately $1.0 billion of interest-earning assets,
compared to approximately $875.0 million during the nine months ended September
30, 1997. In addition, the Company originated $573.6 million of loans during the
nine months ended September 30, 1998, compared to approximately $51.0 million
during the nine months ended September 30, 1997.
INTEREST EXPENSE. The Company's interest expense was approximately
$99.3 million for the nine months ended September 30, 1998 compared with
approximately $59.0 million for the nine months ended September 30, 1997, an
increase of 68.2%. The increase in interest expense resulted from an increase in
the Company's interest-bearing liabilities to approximately $1.8 billion at
September 30, 1998 from approximately $1.3 billion at September 30, 1997 and
includes the issuance of $100.0 million of the Company's 13% Series B Notes in
the third quarter of 1997.
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
Provision for estimated losses on loans for the nine months ended
September 30, 1998 was approximately $12.2 million resulting from provision of
approximately $15.2 million during the quarter ended September 30, 1998. The
provision of approximately $15.2 million results primarily from additional
provisions taken on Discounted Loans at the Company's non-banking subsidiaries.
The provision results from increasing market yields on loans, which have driven
down market values on many pools of loans (primarily Discounted Loans) in the
Company's portfolio. The Company has provided for additional reserves to the
extent market values for pools of loans have been reduced below book value. This
compares with a net provision for estimated losses on loans for the nine months
ended September 30, 1997 of approximately $0.9 million resulting from additional
provision of approximately $3.4 million, which was partially offset by the
reversal of $2.5 million of excess reserves on loans previously sold.
<PAGE>
OTHER INCOME
The Company's other loss was approximately $40.0 million for the nine
months ended September 30, 1998 compared to income of approximately $46.7
million for the nine months ended September 30, 1997. The components of the
Company's non-interest income are reflected in the following table:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
Other income: (Dollars in thousands)
<S> <C> <C>
Market Valuation Adjustments.............................. $ (76,580) $ --
Write-down of mortgage servicing rights................... (13,704) --
Servicing revenue......................................... 4,810 3,339
Real estate owned, net.................................... 3,616 4,574
Bankcard income, net...................................... 3,486 1,579
Gain on sale of loans..................................... 27,904 31,252
Gain on sale of securities................................ 7,768 3,053
Trading income............................................ 1,630 1,171
Other, net................................................ 1,075 1,749
Total other income................................. $ (39,995) $ 46,717
</TABLE>
The decrease in other income between the comparable periods was due
primarily to market valuation adjustments of $76.6 million, write-down of
mortgage servicing rights of $13.7 million, a $3.3 million reduction in gain on
sale of loans, offset by a $4.7 million increase in gain on sale of securities
and a $1.9 million increase in bankcard income, net.
MARKET VALUATION ADJUSTMENTS. Subsequent to September 30, 1998, the
Company sold a significant amount of its loans and mortgage-backed securities to
meet collateral calls, primarily by certain affiliates of Salomon Smith Barney,
Inc., and increase liquidity (see "General Market Conditions"). The declines in
values on the assets included in these sales have been recognized as market
valuation adjustments to the applicable assets as of September 30, 1998 and
recognized in determining net loss for the nine months and quarter then ended.
In addition, the Company has evaluated the impact of the current market
conditions on the remainder of its mortgage-backed securities portfolio and
reflected in market valuation adjustments that amount which has been deemed to
be other than temporary impairment.
Subsequent to September 30, 1998, the Company sold, primarily as a
result of collateral calls, discounted loans with a carrying value of $211.8
million, loans held for sale with a carrying value of $232.5 million and
mortgage-backed securities with carrying value of $63.3 million. As a result of
these sales, short term borrowings were reduced $500.2 million. These assets,
and the related short term financing, are reflected in the Company's
consolidated statements of financial condition as of September 30, 1998 net of
the applicable market valuation adjustments. The effect of these sales on the
consolidated statements of financial condition as of September 30, 1998 would be
to reduce total assets from approximately $1.8 billion to 1.3 billion.
Discounted Loans would be reduced from $247.2 million to $35.4 million, loans
held for sale would be reduced from $592.2 million to 359.7 million and
mortgage-backed securities available for the sale would be reduced from $245.9
million to $182.6 million. Short term borrowings would be reduced from $1.1
billion to $575.9 million.
Total market valuation adjustments for the quarter ended September 30,
1998 was $76.6 million. Of this amount, $22.2 million relates to sales of
mortgage-backed securities, $5.2 million relates to other than temporary
<PAGE>
impairment of unsold mortgage-backed securities, $34.9 million relates to sales
of loans held for sale and discounted loans and $14.3 million relates to hedge
losses previously deferred and classified in other assets in the statement of
financial condition.
Based on the use of current available data in the valuation of its
assets, the Company's management believes it is proper to reflect the decline of
these assets as an adjustment in the nine months ended September 30, 1998.
WRITE-DOWN OF MORTGAGE SERVICING RIGHTS. During the nine months ended
September 30, 1998, the Company wrote-down capitalized servicing rights by
approximately $13.7 million. The write-down is the result of faster than
expected prepayments on loans being serviced and revised estimates of future
prepayments.
GAIN ON SALE OF LOANS. Gain on sale of loans decreased $3.3 million
during the nine months ended September 30, 1998 as a result of lower than
expected securitization activity by the Company during the current year. As
described under "General Market Conditions," beginning in August 1998, turmoil
in the financial markets resulted in reduced demand for asset-backed securities
and therefore, the Company was unable to complete all planned securitization
transactions, resulting in lower than anticipated gain on sale of loans. During
the nine months ended September 30, 1998, the Company completed three
securitizations of approximately $507.7 million aggregate unpaid principal
balance and one whole loan sale of approximately $72.3 million unpaid principal
balance. These sale transactions resulted in gains on sale of approximately
$29.2 million. These gains were offset by net losses of $1.3 million, primarily
resulting from the sale of loans originated through the Company's retail and
wholesale residential mortgage channels. The loss on sale is the net effect of
$1.5 million of gains, offset by hedge losses of $2.8 million.
GAIN ON THE SALE OF SECURITIES. During the nine months ended September
30, 1998, the Company sold mortgage-backed securities with carrying values of
approximately $95.0 million to WREIT in conjunction with the initial public
offering of common stock in April 1998, resulting in gains of approximately $0.7
million. Additionally, the Company sold, to unrelated parties, securities with
carrying values of approximately $53.3 million, resulting in net gains of
approximately $7.1 million. Subsequent to September 30, 1998, the Company sold a
substantial amount of mortgage-backed securities to meet collateral calls and
increase liquidity, which resulted in the recognition of losses on such
securities. These losses are classified as market valuation adjustments in the
Company's consolidated statement of operations.
REAL ESTATE OWNED, NET. The decrease in real estate owned, net is
primarily due to gains on the disposition of real estate acquired through
foreclosure or deed in lieu thereof from the Company's portfolio of Discounted
Loans, including European assets.
SERVICING REVENUE. Servicing revenue increased $1.5 million or 44.1%
during the nine months ended September 30, 1998, primarily as a result of
contracting for the servicing rights on loan portfolios owned by unaffiliated
third parties (including securitizations) and arranging for such loans to be
sub-serviced by Wilshire Credit Corporation ("WCC"), an affiliated entity, at a
rate which is lower than the rate received by the Company.
OTHER, NET. Other net decreased $0.7 million or 38.5% during the nine
months ended September 30, 1998. The net decrease is primarily attributable to
loss of $4.3 million resulting from the Company's ownership of WREIT, offset by
$2.5 million of loan fees and charges from origination activity and $1.9 million
of management fee income associated with the Company's management of WREIT.
OTHER EXPENSE
The Company's other expense totaled approximately $85.7 million for
the nine months ended September 30, 1998 compared to approximately $41.0 million
for the nine months ended September 30, 1997, primarily attributable to an
increase in loan service fees and expenses paid to affiliates which results from
increases in the Company's total
<PAGE>
loan portfolio and third party servicing (which is sub-serviced by WCC) and
increased compensation and employeebenefits and other general and administrative
expenses resulting from the expansion of business operations and infrastructure
necessary to accommodate growth.
LOAN SERVICE FEES AND EXPENSES PAID TO AFFILIATE. The largest other
component of other expense in the nine months ended September 30, 1998 was loan
service fees and expenses, which includes servicing fees paid to WCC and
collection-related expenses incurred directly by WCC and reimbursed by the
Company. Loan service fees and expenses paid to affiliate were approximately
$33.0 million (of which approximately $21.3 million represents collection
related loan expenses) for the nine months ended September 30, 1998 compared to
approximately $19.4 million for the nine months ended September 30, 1997, an
increase of approximately $13.6 million, or 69.9%. The $13.6 million increase is
primarily attributable to growth in the average balance of total loans during
the nine months ended September 30, 1998 (considers the securitization of $507.7
unpaid principal balance of loans during June and September 1998 and the whole
loan sale of $72.3 million unpaid principal balance of loans during June 1998)
and collection related expenses incurred in the resolution of Discounted Loans.
Subsequent to September 30, 1998, in response to collateral calls by
certain affiliates of Salomon Smith Barney, Inc., the Company sold Discounted
Loans with unpaid principal balance of approximately $266.5 million.
Discounted Loans tend to reduce net interest margin and net interest
spread, because the interest cost of debt (which is higher than for
Non-Discounted Loans) is not offset by a corresponding increase in interest
income. Relatively little cash flow from a pool of Discounted Loans is generally
received in the first six to nine months following acquisition and the Company
only recognizes interest and discount on Discounted Loans in income when those
loans result in the receipt of cash. The Company also experiences a much higher
level of collection related expenses associated with Discounted Loans, requiring
a higher level of cash investment prior to resolution. Due to the
capital-intensive nature of these investments and the related unpredictable
earnings stream, the Company believes its reduced investment in Discounted Loans
will improve cash flow and provide more predictable earnings.
COMPENSATION AND EMPLOYEE BENEFITS. Compensation and employee benefits
were approximately $26.0 million for the nine months ended September 30, 1998,
compared to approximately $11.3 million for the nine months ended September 30,
1997, an increase of 130.8%. The increase was primarily due to an increase in
the average number of full-time equivalent employees from 205 for the nine
months ended September 30, 1997 to 360 for the nine months ended September 30,
1998, reflecting the expansion of business activities, particularly loan
acquisition and origination activities, European operations, and the growth of
activities at the non-bank subsidiaries. Subsequent to September 30, 1998, the
Company reduced it workforce by approximately 19%, primarily resulting from the
Company's elimination of its retail residential and manufactured housing
origination activities.
OTHER GENERAL AND ADMINISTRATIVE EXPENSES. Other general and
administrative expenses increased from approximately $6.7 million for the nine
months ended September 30, 1997 to approximately $18.5 million for the nine
months ended September 30, 1998, an increase of 177.7%, due primarily to travel
and entertainment expense of $5.5 million, depreciation and amortization of $3.1
million (includes the write-off of goodwill associated with retail residential
mortgage origination branches) and other general corporate costs resulting from
the expansion of business activities at the non-bank subsidiaries, particularly
loan acquisition activities such as due diligence costs, European operations and
origination activities.
RESULTS OF OPERATIONS--QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO QUARTER
ENDED SEPTEMBER 30, 1997
NET LOSS
The Company had a net loss of approximately $119.0 million for the
quarter ended September 30, 1998 compared to net income of approximately $7.1
million for the quarter ended September 30, 1997. The net loss for
<PAGE>
the quarter ended September 30, 1998 is primarily attributable to $76.6 million
of market valuation adjustments recognized by the Company, write-down of
mortgage servicing rights of $12.7 million and provision for losses on loans of
$15.2 million, as further explained below.
NET INTEREST INCOME
The Company's net interest income was approximately $6.0 million for
the quarter ended September 30, 1998 compared to approximately $5.6 million for
the quarter ended September 30, 1997, an increase of 6.4%. The Company's asset
base was larger at September 30, 1998 as a result of growth in the Company's
investment in loans, mortgage-backed securities and other real estate related
assets.
INTEREST INCOME. The Company's interest income was approximately $41.0
million for quarter ended September 30, 1998 compared to approximately $29.9
million for the quarter ended September 30, 1997, an increase of 37.0%. The
increase in the Company's interest income was due primarily to an increase in
the Company's interest earning assets from approximately $1.1 billion at
September 30, 1997 to approximately $1.6 billion at September 30, 1998.
INTEREST EXPENSE. The Company's interest expense was approximately
$35.1 million for the quarter ended September 30,1998 compared with
approximately $24.3 million for the quarter ended September 30, 1997, an
increase of 44.0%. The increase in interest expense resulted from an increase in
the Company's interest-bearing liabilities to approximately $1.8 billion at
September 30, 1998 from approximately $1.3 billion at September 30, 1997 and
includes the issuance of $100.0 million of the Company's Series B Notes in the
third quarter of 1997.
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
Provision for estimated losses on loans for the quarter ended
September 30, 1998 was approximately $15.2 million resulting primarily from
additional provision taken on Discounted Loans at the Company's non-banking
subsidiaries. The provision results from increasing market yields on loans,
which have driven down market values on many pools of loans (primarily
Discounted Loans) in the Company's portfolio. The Company has provided for
additional reserves to the extent market values for pools of loans have been
reduced below book value. This compares with a provision for estimated losses on
loans for the quarter ended September 30, 1997 of $2.4 million.
OTHER INCOME
The Company's other income was a loss of approximately $87.1 million
for the quarter ended September 30, 1998 compared to income of approximately
$28.6 million for the quarter ended September 30, 1997. The components of the
Company's non-interest income are reflected in the following table:
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
SEPTEMBER 30,
1998 1997
(Dollars in thousands
Other income:
<S> <C> <C>
Market Valuation Adjustments.............................. $ (76,580) $ --
Write-down of mortgage servicing rights................... (12,704) --
Servicing revenue......................................... 1,070 1,395
Real estate owned, net.................................... 144 1,835
Bankcard income, net...................................... 1,989 518
Gain on sale of loans..................................... 1,460 20,036
Gain on sale of securities................................ (433) 3,053
Trading income............................................ -- 1,157
Other, net................................................ (2,049) 637
Total other income........................ $ (87,103) $ 28,631
</TABLE>
The decrease in other income for the quarter ended September 30, 1998
was primarily attributable to market valuation adjustments of $76.6 million,
write-down of mortgage servicing rights of $12.7 million, an $18.6 million
reduction in gain on sale of loans, and a $1.7 million reduction in real estate
owned, net.
MARKET VALUATION ADJUSTMENTS. Subsequent to September 30, 1998, the
Company sold a significant amount of its loans and mortgage-backed securities to
meet collateral calls, primarily by certain affiliates of Salomon Smith Barney,
Inc., and increase liquidity (see "General Market Conditions"). The declines in
values on the assets included in these sales have been recognized as market
valuation adjustments to the applicable assets as of September 30, 1998 and
recognized in determining net loss for the nine months and quarter then ended.
In addition, the Company has evaluated the impact of the current market
conditions on the remainder of its mortgage-backed securities portfolio and
reflected in market valuation adjustments that amount which has been deemed to
be other than temporary impairment.
Subsequent to September 30, 1998, the Company sold, primarily as a
result of collateral calls by certain affiliates of Salomon Smith Barney, Inc.,
discounted loans with a carrying value of $211.8 million, loans held for sale
with a carrying value of $232.5 million and mortgage-backed securities with
carrying value of $63.3 million. As a result of these sales, short term
borrowings were reduced $500.2 million. These assets, and the related short term
financing, are reflected in the Company's consolidated statements of financial
condition as of September 30, 1998 net of the applicable market valuation
adjustments. The effect of these sales on the consolidated statements of
financial condition as of September 30, 1998 would be to reduce total assets
from approximately $1.8 billion to $1.3 billion. Discounted Loans would be
reduced from $247.2 million to $35.4 million, loans held for sale would be
reduced from $592.2 million to $359.7 million and mortgage-backed securities
available for sale would be reduced from $245.9 million to $182.6 million. Short
term borrowings would be reduced from $1.1 billion to $575.9 million
Total market valuation adjustments for the quarter ended September 30,
1998 was $76.6 million. Of this amount, $22.2 million relates to sales of
mortgage-backed securities, $5.2 million relates to other than temporary
impairment of unsold mortgage-backed securities, $34.9 million relates to sales
of loans held for sale and discounted loans and $14.3 million relates to hedge
losses previously deferred and classified in other assets in the statement of
financial condition.
Based on the use of current available data in the valuation of its
assets, the Company's management believes it is proper to reflect the decline of
these assets as an adjustment in the quarter ended September 30, 1998.
<PAGE>
WRITE-DOWN OF MORTGAGE SERVICING RIGHTS. During the quarter ended
September 30, 1998, the Company wrote-down capitalized servicing rights by
approximately $12.7 million. The write-down is the result of faster than
expected prepayments on loans being serviced and revised future estimates of
prepayments.
GAIN ON SALE OF LOANS. Gain on sale of loans for the quarter ended
September 30, 1998 decreased $18.6 million from $20.0 million during the quarter
ended September 30,1997. As described under "General Market Conditions,"
beginning in August 1998 and continuing to present, turmoil in the financial
markets resulted in reduced demand for asset-backed securities and therefore,
the Company was unable to complete all planned securitization transactions,
resulting in lower than expected gain on sale of loans. The Company completed
one securitization transaction of approximately $177.7 million unpaid principal
amount of loans, resulting in gain on sale of approximately $4.5 million. This
gain was offset by net losses of approximately $3.0 million, of which $2.2
million is attributable to the sale of loans originated by the Company through
its retail and wholesale residential mortgage channels. The net loss of $2.2
million attributable to these originations includes realized hedge losses of
approximately $3.7 million.
GAIN (LOSS) ON THE SALE OF SECURITIES. During the quarter ended
September 30, 1998, the Company sold securities with carrying values of
approximately $21.8 million, resulting in loss of approximately $0.4 million.
The loss on sale of securities results from the Company's need to sell certain
securities during the quarter ended September 30, 1998 in order to raise
liquidity in response to conditions in the financial marketplace (see General
Market Conditions).
REAL ESTATE OWNED, NET. The decrease in income from real estate owned,
net is the result of the ongoing disposition of previously acquired Discounted
Loans and real estate owned and a decrease in the Company's investment in these
types of non-performing assets. See the discussion related to Discounted Loans
in "Changes in Financial Condition".
SERVICING REVENUE. Servicing revenue decreased $0.3 million, or 23.3%,
during the quarter ended September 30, 1998, primarily as a result reduced
service fees due to faster than expected prepayment on loans being serviced.
OTHER, NET. Other, net decreased $2.7 million to a net loss of $2.0
million during the quarter ended September 30, 1998 from income of $0.6 million
during the quarter ended September 30, 1997. The net loss of $2.0 million is
primarily attributable to loss of $4.8 million resulting from the Company's
percentage ownership of WREIT, offset by loan fees and charges of $1.1 million
resulting from increased origination activity and management fee of $1.3 million
resulting from the Company's management of WREIT.
OTHER EXPENSE
The Company's other expense totaled approximately $36.7 million for
the quarter ended September 30, 1998 compared to approximately $19.6 million for
the quarter ended September 30, 1997, primarily attributable to an increase in
loan service fees and expenses paid to affiliates which results from increases
in the Company's total loan portfolio and third party servicing (which is
sub-serviced by WCC) and increased compensation and employee benefits and other
general and administrative expenses resulting from the expansion of business
operations and infrastructure necessary to accommodate growth.
LOAN SERVICE FEES AND EXPENSES PAID TO AFFILIATE. Loan service fees
and expenses, which includes servicing fees paid to WCC and collection-related
expenses incurred directly by WCC and reimbursed by the Company. Loan service
fees and expenses paid to affiliate were approximately $12.9 million (of which
approximately $8.7 million represents collection related loan expenses) for the
quarter ended September 30, 1998 compared to approximately $9.7 million for the
quarter ended September 30, 1997, an increase of approximately 32.8%. The $12.9
million increase is primarily attributable to growth in the average balance of
total loans during the nine months ended September 30, 1998
<PAGE>
(considers the securitization of $507.7 unpaid principal balance of loans during
June and September 1998 and the whole loan sale of $72.3 million unpaid
principal balance of loans during June 1998) and collection related expenses
incurred in the resolution of discounted loans.
Subsequent to September 30, 1998, in response to collateral calls by
certain affiliates of Salomon Smith Barney, Inc., the Company sold Discounted
Loans with unpaid principal balance of approximately $266.5 million.
Discounted Loans tend to reduce net interest margin and net interest
spread, because the interest cost of debt (which is higher that for
Non-Discounted Loans) is not offset by a corresponding increase in interest
income. Relatively little cash flow from a pool of Discounted Loans is generally
received in the first six to nine months following acquisition and the Company
only recognizes interest and discount on Discounted Loans in income when those
loans result in the receipt of cash. The Company also experiences at much higher
level of collection related expenses associated with Discounted Loans, requiring
a higher level of cash investment prior to resolution. Due to the
capital-intensive nature of these investments and the related unpredictable
earnings stream, the Company believes its reduced investment in Discounted Loans
will improve cash flow and provide more predictable earnings.
COMPENSATION AND EMPLOYEE BENEFITS. Compensation and employee benefits
were approximately $10.9 million for the quarter ended September 30, 1998,
compared to approximately $4.6 million for the quarter ended September 30, 1997,
an increase of 136.1%. The increase was primarily due to an increase in the
average number of full-time equivalent employees from 205 for the quarter ended
September 30, 1997 to 460 for the quarter ended September 30, 1998, reflecting
the expansion of business activities, particularly loan acquisition and
origination activities, European operations, and the growth of activities at the
non-bank subsidiaries. Subsequent to September 30, 1998, the Company reduced its
workforce by approximately 19%, primarily resulting from the Company's
elimination of its retail residential and manufactured housing origination
activities.
OTHER GENERAL AND ADMINISTRATIVE EXPENSES. Other general and
administrative expenses increased from approximately $3.5 million for the
quarter ended September 30, 1997 to approximately $9.3 million for the quarter
ended September 30, 1998, an increase of 165.4%, due primarily to travel and
entertainment expense of $2.9 million, depreciation and amortization of $2.3
million (includes the write-off of goodwill associated with retail residential
mortgage origination branches) and other general corporate costs resulting from
the expansion of business activities at the non-bank subsidiaries, particularly
loan acquisition activities such as due diligence costs, European operations and
origination activities.
CHANGES IN FINANCIAL CONDITION
MORTGAGE-BACKED AND OTHER SECURITIES. For accounting purposes, the
Company's mortgage-backed and other securities are classified as available for
sale, trading account securities and held to maturity. The Company's holdings of
mortgage-backed securities available for sale decreased approximately $53.1
million during the nine months ended September 30, 1998 primarily as a result of
the sale of approximately $142.8 million carrying amount ($95.0 million of which
was sold to WREIT in conjunction with its initial public offering of common
stock) purchases of approximately $132.9 million, realized market valuation
adjustment of approximately $27.4 million, transfer from trading account
securities of approximately $16.9 million, an increase in unrealized loss on
available for sale securities of approximately $2.7 and net other decrease of
$30.0 million which primarily represents principal repayment. The Company's
holdings of trading account securities decreased $39.0 million during the nine
months ended September 30, 1998 primarily as a result of the sale of certain
subordinate securities and the aforementioned transfer to available for sale.
The Company granted WREIT a right of first refusal with respect to future
investments in mortgage-backed securities primarily comprised of interests in
residential mortgage loans. As a consequence, the opportunity for the Company to
invest in such assets would be limited to the extent WREIT takes advantage of
such investment opportunities.
<PAGE>
LOANS, NET. The Company's portfolio of performing and sub-performing
loans ("Non-Discounted Loans"), net of discounts and allowances, increased by
approximately $284.9 million during the nine months ended September 30, 1998.
This increase is primarily attributable to the acquisition of Non-Discounted
Loans at First Bank, reflecting the Company's emphasis on increasing the level
of investment in Non-Discounted Loans as a percentage of the total loan
portfolio. See "Discounted Loans" below.
DISCOUNTED LOANS, NET. The Company's portfolio of Discounted Loans
decreased by approximately $216.2 million during the nine months ended September
30, 1998. During the nine months ended September 30, 1998, the Company has
reduced its investment level in Discounted Loans, resulting in a decrease in
balance due to attrition resulting from resolution of the loans either through
workout with the borrower or acquisition of properties securing the loans
through foreclosure or deed-in-lieu thereof. Discounted loans require
significant capital resources prior to resolution, which is typically six to
nine months following acquisition. The Company believes it can create a more
predictable and less capital intensive earnings stream by reducing the level of
investment in these assets. Subsequent to September 30, 1998, the Company sold,
in response to collateral calls by an affiliate of Salomon Smith Barney, Inc.,
approximately $266.5 million unpaid principal balance of Discounted Loans, which
resulted in $29.5 million of the Company's $76.6 million of market valuation
adjustments recognized in the Quarter ended September 30, 1998.
LOANS HELD FOR SALE, NET, AT LOWER OF COST OR MARKET. Loans held for
sale, net, at lower of cost or market increased by approximately $281.5 million
during the nine months ended September 30, 1998 primarily as the net result of
acquisition of Non-Discounted Loans, securitization and whole loan sale
activity, and the Company's expansion of its loan originations. The Company has
adopted the strategy of increasing Non-Discounted Loans and decreasing
Discounted Loans as a percentage of the total loan portfolio. Non-Discounted
Loans have the advantage of being financed at lower rates than Discounted Loans
and provide more predictable cash flows and earnings stream to the Company. In
addition, Non-Discounted Loans are less capital intensive than Discounted Loans,
which often require the Company to expend cash to ready the loan for resolution,
which typically is six to nine months following acquisition. Subsequent to
September 30, 1998, the Company sold loans held for sale with carrying value of
$232.5 million which are reflected in the consolidated statement of financial
condition as of September 30, 1998. The effect of this sale would be to reduce
loans held for sale from $592.2 million to $359.7 million.
DUE FROM AFFILIATE, NET. Due from affiliate, net primarily represents
payments received in the normal course of servicing operations by WCC, which had
not yet been remitted to the Company. As of September 30, 1998, due from
affiliate, net of approximately $15.3 million was net of $17.7 million due from
the Company to WREIT, resulting from a loan during the third quarter of 1998. In
addition, due to affiliates, net at December 31, 1997 included approximately
$1.6 million of PIK preferred stock dividend due to WCC from the Company, and
subsequently in February 1998.
MORTGAGE SERVICING RIGHTS. Mortgage servicing rights decreased by $5.2
million during the nine months ended September 30, 1998 primarily attributable
to the net effect of the allocation of basis of approximately $6.0 million of
servicing rights relating to two securitizations and the purchase of
approximately $5.0 million of servicing rights, offset by the write-down of
approximately $13.7 million of servicing rights resulting from faster than
expected prepayments on loans being serviced and revised future prepayment
estimates, and $2.5 million of amortization.
INVESTMENT IN WILSHIRE REAL ESTATE INVESTMENT TRUST INC. Investment in
WREIT increased $14.7 million as a result of the Company's purchase of 9.9% of
the original 10,000,000 shares of common stock offered by WREIT as part of its
initial public offering in April 1998, offset by the Company's ownership share
of losses and dividends received.
DEPOSITS. First Bank increased its deposits by approximately $171.5
million or 47.3% during the nine months ended September 30, 1998 to fund the
acquisition of Non-Discounted Loans. Pursuant to a Cease and Desist Order, as
amended (the "Order"), imposed on First Bank by the OTS, First Bank was
prohibited from increasing its total assets, as measured at the end of each
calendar quarter above $750 million (increased from previous limitation of $553
<PAGE>
million in April 1998), unless such increase was an amount that represents the
total net interest credited on deposit liabilities earned during that quarter
plus any increase permitted by the Order in prior quarters. First Bank has
complied with these requirements. In October 1998, as the result of a recent
examination, the OTS agreed to lift the Order.
Subsequent to September 30, 1998, the OTS informed the Company and
Wilshire Acquisition Corporation, a subsidiary of the Company, both savings and
loan holding companies, that formal enforcement actions may be imposed. These
actions respond to alleged violations of certain affiliated transactions
regulations with First Bank. Management requested the OTS consider less formal
responses, as the alleged violations were induced by external conditions. In the
interim, the OTS notified First Bank that approval would be required prior to
entering into certain affiliated transactions. Management believes these
restrictions, as well as other related restrictions that may be imposed, will
have no material impact on operations.
SHORT-TERM BORROWINGS. Short-term borrowings increased by
approximately $109.6 million during the nine months ended September 30, 1998,
resulting from use of repurchase agreements and warehouse financing to fund the
purchase of loans and securities.
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 pools of loans and fund newly originated loans, and
for general business purposes. The Company's sources of cash flow include
certificates of deposit, securitization, net interest income and borrowings
under its warehouse and repurchase financing facilities and from institutional
investors and other lenders and public and private debt offerings, including the
Notes and the Series B Notes. The Company has also borrowed money on an
unsecured basis from WREIT and WCC. In addition, First Bank obtains funding
through FHLB advances. The Company's liquidity is actively managed on a daily
basis and reviewed periodically by the Board of Directors of the Company. 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.
The recent dramatic events in the finanical markets, which included a
significant reduction in valuations of, and liquidity for, mortgage-backed
securities, has had a significant adverse impact on the Company's liquidity and
financial condition. The decline in valuations resulted in collateral calls from
the Company's lenders, which reduced the Company's cash position and eventually
prompted asset sales at depressed prices to meet these calls and provide
liquidity. While these asset sales have improved the liquidity position of the
Company, the market for mortgage-backed securities -- particularly subordinate
mortgage-backed securities -- has not recovered and the financial markets
generally continue to be volatile. Further, certain of the Company's lenders
have expressed concern about continued lending given market conditions and
recent losses incurred by the Company. At September 30, 1998, the Company's cash
balances totaled approximately approximately $54.7 million. However, a
significant portion of this balance was held at First Bank and is not generally
available for use by other than First Bank.
In order to address these liquidity concerns and improve the Company's
financial condition, management entered into discussions with an unofficial
committee of holders of a majority of the Company's $184.2 million in
outstanding publicly issued notes and its financial advisors, Houlihan Lokey
Howard & Zukin, and legal counselors, Latham and Watkins, concerning a
restructuring of the Company's obligations under the notes. Following extensive
discussions, the Company and the unofficial committee agreed today to a
restructuring of the Company whereby (i) the noteholders would exchange their
notes for common stock in the Company; and (ii) existing holders of common stock
would receive warrants or highly diluted new common stock in exchange for their
holdings; and (iii) pending consummation of the restructure, the noteholders
would forbear from declaring certain defaults which resulted from the net losses
incurred by the Company and actions taken by the Company to meet collateral
calls.
Management believes that this restructuring will significantly improve
the Company's financial position by reducing indebtedness by $184.2 million, the
interest cost associated with that indebtedness, and significantly increase
<PAGE>
the Company's equity account. This restructuring is subject to a number of
conditions, including no material adverse change and negotiation of definitive
documents. The Company currently expects that this restructuring will be
completed at the end of the first quarter of 1999. Other creditors, including
trade creditors and secured creditors, are not expected to be adversely affected
by this restructuring.
As a part of this restructuring, the Company and the unofficial
committee of noteholders anticipate incorporation of servicing functions
currently performed by WCC into the servicing subsidiary of WFSG.
The Company's unaudited consolidated financial statements have been
prepared on a going concern basis, which contemplates continuity of operations,
realization of assets and the liquidation of liabilities in the normal course of
business. The appropriateness of using the going concern basis is dependent
upon, among other things, the adequate resolution of the Company's near and long
term liquidity shortfall, as well as the successful consummation of the
reorganization described above.
Sources of liquidity for First Bank include wholesale and brokered
certificates of deposit, repurchase financing facilities and FHLB advances. At
September 30, 1998, First Bank had approximately $522.4 million of certificates
of deposit. At September 30, 1998, scheduled maturities of certificates of
deposit during the 12 months ending September 30, 1999 and thereafter amounted
to approximately $451.9 million and approximately $70.5 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 First Bank believes 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.
The Company's uses of cash include the funding of purchases of U.S.
residential Discounted Loans and Non- Discounted Loans, mortgage-backed
securities and newly originated mortgage and manufactured housing loans, payment
of interest expenses, repayment of loans, funding of initial
over-collateralization requirements for securitization, operating and
administrative expenses, income taxes and capital expenditures. The Company's
purchases of pools of loans and other assets are expected to utilize secured
borrowings and be highly leveraged. The actual dollar amount of secured
borrowings incurred by the Company will vary depending on a number of factors,
including the amount of leverage lenders are willing to make available (which
will be affected by market conditions), and management's determination as to the
appropriate amount of leverage. With respect to pools of Discounted Loans and
Non-Discounted Loans, the Company generally seeks to fund 90% and 95%,
respectively, of the purchase price of such pools of loans with borrowed money.
The Company draws on a number of sources to obtain such funds including
certificates of deposit and repurchase arrangements with major investment banks.
Capital expenditures by the Company have not been material.
The Company is party to various off-balance sheet financial
instruments in the normal course of business to manage its interest rate risk.
The Company conducts business with a variety of financial institutions and other
companies in the normal course of business, including counter parties to its
off-balance sheet financial instruments. The Company is subject to potential
financial loss if the counter party is unable to complete an agreed upon
transaction. The Company seeks to limit counter party 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 pools of loans, mortgage-backed securities and
fund newly originated loans. During the third quarter, as described in GENERAL
MARKET CONDITIONS, financial markets were severely and negatively impacted by
various factors which have resulted in reduced availability of liquidity and
capital to specialty finance companies and other holders of non-investment grade
assets and certain types
<PAGE>
of loans. This includes the ability to raise new equity capital and long term
debt, as well as the ability to securitize or finance certain types of loans.
The Company's growth strategy is dependent on its ability to raise
additional debt and/or equity financing. To the extent this market environment
persists, such growth is likely to be significantly curtailed or delayed.
The Notes and Series B Notes contain certain limitations on
indebtedness which may restrict the ability of the Company to issue additional
indebtedness in the future and the Company may be obligated to seek equity
financing. There can be no assurance that any such debt or equity financing will
be available to the Company on financially attractive terms in the future.
To the extent permitted by regulations and deemed appropriate by
management, the Company is exploring available liquidity and capital resources
at First Bank to conduct certain activities through First Bank during this
period of market tightness.
First Bank is 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 4% 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 has complied with these requirements. In addition, the Company has
been required to maintain funds sufficient to meet two semiannual interest
payments on the Notes and the Series B Notes in liquid assets. On August 12,
1998, the Company completed a Consent Solicitation, pursuant to which the
Company obtained the consents of holders of the Notes and Series B Notes to
certain amendments to the indentures relating to the Notes and Series B Notes,
including the elimination of the liquidity requirements.
YEAR 2000 COMPLIANCE
The Company is reliant on information technology for both general
business operations and its loan servicing system. The Company has formed a
committee to address year 2000 issues (the "Committee") that reports directly to
the Company's executive committee. The Committee is headed by the Chief
Information Officer and includes representatives from across the Company.
The Committee has conducted an inventory of all systems within the
Company, classifying each as either "critical" or "non-critical." For
non-critical systems, the Company has obtained a certification from the vendor
that the applicable package is "year 2000 compliant." For systems deemed
"critical," the Company has developed detailed test plans and created separate
year 2000 test environments.
The Company has begun testing of critical systems and is scheduled to
complete all necessary testing by the end of 1998. Testing of the Company's
internally developed systems is near completion, and changes which have resulted
from testing to date are being coded and moved into production. Of the testing
begun on critical systems supplied by outside vendors, one system's testing is
complete and the other is scheduled during November 1998. Following the testing
phase, each department's executive management will be responsible for certifying
that their staff has tested critical code and deemed it adequate.
Aside from limited hardware costs, the Company's primary expense
related to year 2000 compliance is allocation of existing staff. The Company
estimates that the total cost related to year 2000 compliance to be
approximately $500,000.
<PAGE>
The significant risk to the Company of year 2000 non-compliance is the
inability to perform necessary loan servicing activities. Currently, the
Company's loan portfolio is serviced by WCC, an affiliated entity. The Company
services loans for third parties (including securitizations), and contracts with
WCC for sub-servicing. To the extent the loan servicing system is not year 2000
compliant, the ability to service the Company's loans and those of third parties
would be in jeopardy.
Based on the results of testing performed to date, the Company is
confident that it is appropriately addressing the 2000 issues. Critical systems
supplied by outside vendors have undergone testing not only by the Company, but
other customers of the vendors as well. The Company's loan servicing system is
an internally developed system and therefore, information technology personnel
are very familiar with the system and believe their efforts will have favorable
results. As a contingency plan, the Company is in the process of identifying an
alternative servicer for the Company's loan portfolio and third party loans
currently serviced by the Company and its affiliate. To date the Company has not
formal agreement in place regarding back-up servicers.
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. All of the statements
contained in this Quarterly Report on Form 10-Q which are not identified as
historical should be considered forward-looking. In connection with certain
forward-looking statements contained in this Quarterly Report on Form 10-Q and
those that may be made in the future by or on behalf of the Company which are
identified as forward- looking, the Company notes that there are various factors
that could cause actual results to differ materially from those set forth in any
such forward-looking statements. Such factors include but are not limited to the
real estate market, the cease and desist order, the availability of loan
portfolios at acceptable prices, the availability of financing for loan
portfolio acquisitions, interest rates and expansion outside the U.S.
Accordingly, there can be no assurance that the forward-looking statements
contained in this Quarterly Report on Form 10-Q will be realized or that actual
results will not be significantly higher or lower. The forward-looking
statements have not been audited by, examined by or subjected to agreed-upon
procedures by independent accountants, and no third-party has independently
verified or reviewed such statements. Readers of this Quarterly Report on Form
10-Q should consider these facts in evaluating the information contained herein.
The inclusion of the forward-looking statements contained in this Quarterly
Report on Form 10-Q should not be regarded as a representation by the Company or
any other person that the forward-looking statements contained in this Quarterly
Report on Form 10-Q will be achieved. In light of the foregoing, readers of this
Quarterly Report on Form 10-Q are cautioned not to place undue reliance on the
forward-looking statements contained herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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 First Bank (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 First Bank's Board of Directors and the
Company's investment committees with respect to overall asset and liability
composition.
<PAGE>
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 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 to reduce the Company's exposure caused by the narrowing of the
interest spread between fixed rate loans held for investment and associated
liabilities funding those loans caused by changes in market interest rates.
First Bank had approximately $129.0 million notional principal amount of
interest rate swap agreements outstanding at September 30, 1998, which were
designated as hedges of certain fixed rate loans in order to convert fixed rate
income streams to variable rate. These swaps had the effect of decreasing the
Company's net interest income by approximately $64 thousand during the nine
months ended September 30, 1998.
The Company has also hedged the interest rate exposure of fixed-rate
or lagging-index loans or securities that are either held or available for sale.
The Company creates a hedge which matches the principal amortization of such
assets against the maturity of the Company's liabilities generally by entering
into short sales or forward sales of U.S. Treasury securities, Government
securities, interest rate futures contracts or interest rate swap agreements.
This results in market gains or losses on hedging instruments, in response to
interest rate increases or decreases, respectively, which approximate the amount
of corresponding market losses or gains, respectively, on assets being hedged.
The Company evaluates the interest rate sensitivity of each pool of loans or
securities in conjunction with the current interest rate environment and decides
whether to hedge the interest rate exposure of a particular pool. 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. In general, when a pool of loans
or securities are acquired, the Company will determine whether or not to hedge
and, with respect to any sale or financing of any pool of loans through
securitization, the Company will determine whether or not to discontinue its
duration-matched hedging activities with respect to the relevant loans. During
the third quarter, unusually volatile market conditions affecting the value of
hedged assets caused a breakdown of the historical interest rate relationships
with the related hedging instruments. The correlation between hedged assets and
hedging instruments was insufficient to support continuation of this particular
hedging strategy at this time. As a result, all hedging instruments related to
fixed-rate or lagging-index assets held or available for sale were closed out
before or shortly after September 30, 1998. $14.3 million of previously deferred
hedging losses were considered ineffective and charged to earnings during the
quarter.
In addition, as required by OTS regulations, First Bank's Asset and
Liability Committee also regularly reviews 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 board of directors of
First Bank.
First Bank's interest rate sensitivity of MVPE arising from
fluctuations in interest rates in a rising 200 to 400 basis point interest rate
environment has increased since year end due to significant changes in the
composition of First Bank's loan portfolio, continued amortization of the
notional amount of First Bank's swap, as well as changes in the overall market
interest rate environment. As of December 31, 1997, the estimated change in MVPE
as a result of a 200 to 400 basis point rise in interest rates was $2.9 million
to $12 million. As of September 30, 1998, the estimated change in MVPE was $13.5
million to $43.5 million for the corresponding change in interest rates. The
Asset and Liability Committees are in the process of reviewing the strategy to
mitigate risk of this additional exposure.
Management does not believe that First Bank's sensitivity of MVPE
arising from an increase in rates of 100 basis points or a decrease in rates
from 0 to 400 basis points has materially changed since December 31, 1997.
Management also believes that the assumptions (including prepayment assumptions)
used by it to evaluate the vulnerability of First Bank's operations to changes
in interest rates approximate actual experience and considers them reasonable;
however, the interest rate sensitivity of First Bank's assets and liabilities
and the estimated effects of
<PAGE>
changes in interest rates on First Bank'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.
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. 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.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The recent dramatic events in financial markets, which included a
significant reduction in valuations of, and liquidity for, mortgage-backed
securities, has had a significant adverse impact on the Company's liquidity and
financial condition. Primarily as a result of these market conditions and the
resulting losses, the Company expects to be unable to comply with the minimum
net worth requirements for certain of its outstanding indebtedness. As described
under Item 1 above, the Company and the unofficial committee of noteholders,
representing a majority of the noteholders, agreed to grant conditional
forbearance to the Company with respect to specified covenant defaults which
resulted from the net losses incurred by the Company during this period and from
other actions taken by the Company during this period to meet margin calls.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the
period covered by this report.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 10 Term Sheet
Exhibit 11 Statement re Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K, dated November 5, 1998; and
Current Report on Form 8-K dated November 11, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WILSHIRE FINANCIAL SERVICES GROUP INC.
Date: November 23, 1998
By: /S/ LAWRENCE A. MENDELSOHN
LAWRENCE A. MENDELSOHN
PRESIDENT
By: /S/ CHRIS TASSOS
CHRIS TASSOS
CHIEF FINANCIAL OFFICER
Exhibit 10
UNOFFICIAL COMMITTEE
OF
WILSHIRE FINANCIAL SERVICES GROUP
SENIOR NOTEHOLDERS
November 23, 1998
CONFIDENTIAL
Wilshire Financial Services Group Inc.
1776 SW Madison Street
Portland, OR 97205
Re:
Wilshire Financial Services Group Inc.
- --------------------------------------
Ladies/Gentlemen:
This letter is submitted by the signatories hereto, who comprise the
Unofficial Committee of Senior Noteholders of Wilshire Financial Services Group
Inc., a Delaware corporation ("WFSG" or the "Company"), in our capacity as
holders or representatives of a majority of the 13% Notes due 2004 of WFSG (the
"Majority Noteholders") issued pursuant to an indenture, dated as of December
24, 1996, between WFSG and Bankers Trust Company, a New York banking
corporation, as trustee (the "13% Notes") and the 13% Series B Notes due 2004
issued pursuant to an indenture, dated as of August 15, 1997, between WFSG and
Bankers Trust Company, as trustee (the "13% Series B Notes" and together with
the 13% Notes, the "Senior Notes"). This letter incorporates by reference the
term sheet (the "Term Sheet") attached as Exhibit "A" hereto.
Upon our countersignatures hereto, this letter constitutes (a) a
statement of our agreement as follows, so long as an Event of Termination shall
not have occurred: (i) to effect the restructuring as reflected in the Term
Sheet (the "Restructuring") to the fullest extent permitted by law, whether in
connection with or outside a bankruptcy proceeding, and, in the event a
bankruptcy proceeding with respect to the Company is commenced, to file (as to
the Company and its affiliates) and to support a plan of reorganization
embodying the restructuring (a "Plan") and to cooperate to obtain confirmation
and consummation of a Plan, subject to the terms and conditions set forth
therein; (ii) to proceed diligently with all reasonable effort to negotiate and
execute the definitive documents required to carry out the intent of the
Restructuring; and (iii) to undertake to cause companies directly or indirectly
owned by the Company or by the individual signatories to proceed diligently and
with all reasonable effort to consummate all transactions contemplated by the
Term Sheet to which they may be a party; and (b) a statement of the agreement of
each of the Majority Noteholders and Wilshire Real Estate Investment Trust, Inc.
("WREIT"), so long as an Event of Termination shall not have occurred, (i) to
sell or transfer its holdings of Senior Notes, in whole or in part, only to an
entity that has agreed to be bound hereby; and (ii) to provide written
directions to the indenture trustees for the Senior Notes in the form annexed
hereto as Exhibits A and B. As used herein, "Event of Termination" shall mean:
(i) breach by Andrew A. Wiederhorn, Lawrence A. Mendelsohn, WFSG or any
affiliate or the Majority Noteholders of any
<PAGE>
obligation hereunder or under the Term Sheet; (ii) any material adverse change
in the business or financial condition of the Company from the dates hereof as
compared to consolidated and consolidating financial projections of WFSG,
covering the 6 month period beginning December 1, 1998, to be designated in
writing by WFSG and the Majority Noteholder's financial advisors and delivered
to the Company and the Majority Noteholders; and (iii) failure to provide
documentation and due diligence satisfactory to the Majority Noteholders, or to
satisfy any other condition to the Restructuring, as set forth in the Term
Sheet.
You agree to keep this letter and the Term Sheet confidential, with
disclosure on a need to know, confidential basis only to your legal and
financial advisors, and you acknowledge that this letter and the Term Sheet
shall be considered to be "confidential" (or words of similar import); provided,
however, that you may make a public announcement regarding the execution of this
letter shortly after such execution and comply with Federal securities law and
similar reporting requirements as determined to be necessary by the Company's
counsel.
This agreement shall be governed by the laws of the state of New York,
without regard to the conflict of law provisions thereof.
Please confirm your acceptance of and agreement to the foregoing by
signing this letter where indicated below. This letter may be executed in
counterparts, each of which shall be deemed to be an original, and all of such
counterparts taken together shall be deemed to constitute one and the same
instrument.
Very truly yours,
CAPITAL RESEARCH AND MANAGEMENT
COMPANY, on behalf of:
The Income Fund of America, Inc.
The Bond Fund of America, Inc.
American Variable Insurance Series - High Yield
Bond Fund
Anchor Pathway Fund - High Yield Bond Fund
By: s/
--
Name: Paul G. Haaga, Jr.
--------------------------
Title: Executive Vice President
--------------------------------
CAPITAL GUARDIAN TRUST COMPANY,
on behalf of the following accounts: 9500, 012,
002, 2894 and 2905
By: s/
--
Name: Peter C. Kelly
----------------------
Title: Vice President
----------------------
<PAGE>
RYBACK MANAGEMENT CORPORATION
By: s/
--
Name: Eric Ryback
-------------------
Title: President
-----------------
The undersigned as investment advisor to various client
accounts with regard to the Restructuring of WFSG, hereby
confirms and accepts on behalf of such clients the documents
attached hereto which may include, but not necessarily be
limited to, letter agreements and term sheets.
AMERICAN EXPRESS FINANCIAL CORP.
By: s/
--
Name: Frederick C. Quirsfeld
------------------------------
Title: Senior Vice President - Fixed Income
--------------------------------------------
As Noteholder, but not as
as member of the Unofficial
Committee of Senior
Noteholders.
WILSHIRE REAL ESTATE INVESTMENT TRUST INC.
By: s/
--
Name: Lawrence A. Mendelsohn
-----------------------------
Title: President
----------------
Agreed and accepted:
WILSHIRE FINANCIAL SERVICES GROUP INC.
By: s/
--
Name: Andrew A. Wiederhorn
---------------------------
Title: Chairman and Chief Executive Officer
-------------------------------------------
UNOFFICIAL COMMITTEE
OF
WILSHIRE FINANCIAL SERVICES GROUP
SENIOR NOTEHOLDERS
<PAGE>
November 23, 1998
CONFIDENTIAL
- ------------
Andrew A. Wiederhorn
c/o Wilshire Financial Services Group Inc.
1776 SW Madison Street
Portland, OR 97205
Lawrence A. Mendelsohn
c/o Wilshire Financial Services Group Inc.
1776 SW Madison Street
Portland, OR 97205
Re:
Wilshire Financial Services Group Inc.
- --------------------------------------
Ladies/Gentlemen:
This letter is submitted by the signatories hereto, who comprise the
Unofficial Committee of Senior Noteholders of Wilshire Financial Services Group
Inc., a Delaware corporation ("WFSG" or the "Company"), in our capacity as
holders or representatives of a majority of the 13% Notes due 2004 of WFSG (the
"Majority Noteholders") issued pursuant to an indenture, dated as of December
24, 1996, between WFSG and Bankers Trust Company, a New York banking
corporation, as trustee (the "13% Notes") and the 13% Series B Notes due 2004
issued pursuant to an indenture, dated as of August 15, 1997, between WFSG and
Bankers Trust Company, as trustee (the "13% Series B Notes" and together with
the 13% Notes, the "Senior Notes"). This letter incorporates by reference the
term sheet (the "Term Sheet") attached as Exhibit "A" hereto.
Upon our countersignatures hereto, this letter constitutes (a) a
statement of our agreement as follows, so long as an Event of Termination shall
not have occurred, to cause the Company: (i) to effect the restructuring as
reflected in the Term Sheet (the "Restructuring") to the fullest extent
permitted by law, whether in connection with or outside a bankruptcy proceeding,
and, in the event a bankruptcy proceeding with respect to the Company is
commenced, to file (as to the Company and its affiliates) and support a plan of
reorganization embodying the restructuring (a "Plan") and to cooperate to obtain
confirmation and consummation of a Plan, subject to the terms and conditions set
forth therein; and (ii) to proceed diligently with all reasonable effort to
negotiate and execute the definitive documents required to carry out the intent
of the Restructuring; (b) a statement of agreement by each of Andrew A.
Wiederhorn and Lawrence A. Mendelsohn to cause the Company, companies directly
or indirectly owned by the Company, companies directly or indirectly owned by
them as individuals or companies directly or indirectly under their control, to
proceed diligently and with all reasonable effort to consummate all transactions
contemplated by the Term Sheet; and (c) a statement of the agreement of each of
the Majority Noteholders and Wilshire Real Estate Investment Trust, Inc.
("WREIT"), so long as an Event of Termination shall not have occurred, (i) to
sell or transfer its holdings of Senior Notes, in whole or in part, only to an
entity that has agreed to be bound hereby; and (ii) to provide written
directions to the indenture trustees for the Senior Notes in the form annexed
hereto as Exhibits A and B. As used herein, "Event of Termination" shall mean:
(i) breach by Andrew A. Wiederhorn, Lawrence A. Mendelsohn, WFSG or any
affiliate or the Majority Noteholders of any obligation hereunder or under the
Term Sheet; (ii) any material adverse change in the business or
<PAGE>
financial condition of the Company from the dates hereof as compared to
consolidated and consolidating financial projections of WFSG, covering the 6
month period beginning December 1, 1998, to be designated in writing by WFSG and
the Majority Noteholder's financial advisors and delivered to the Company and
the Majority Noteholders; and (iii) failure to provide documentation and due
diligence satisfactory to the Majority Noteholders as set forth in the Term
Sheet.
You agree to keep this letter and the Term Sheet confidential, with
disclosure on a need to know, confidential basis only to your legal and
financial advisors, and you acknowledge that this letter and the Term Sheet
shall be considered to be "confidential" (or words of similar import); provided,
however, that you may make a public announcement regarding the execution of this
letter shortly after such execution and comply with Federal securities law and
similar reporting requirements as determined to be necessary by the Company's
counsel.
This agreement shall be governed by the laws of the state of New York,
without regard to the conflict of law provisions thereof.
Please confirm your acceptance of and agreement to the foregoing by
signing this letter where indicated below. This letter may be executed in
counterparts, each of which shall be deemed to be an original, and all of such
counterparts taken together shall be deemed to constitute one and the same
instrument.
Very truly yours,
CAPITAL RESEARCH AND MANAGEMENT
COMPANY, on behalf of:
The Income Fund of America, Inc.
The Bond Fund of America, Inc.
American Variable Insurance Series - High Yield
Bond Fund
Anchor Pathway Fund - High Yield Bond Fund
By: s/
--
Name: Paul G. Haaga, Jr.
--------------------------
Title: Executive Vice President
--------------------------------
CAPITAL GUARDIAN TRUST COMPANY,
on behalf of the following accounts: 9500, 012,
002, 2894 and 2905
By: s/
--
Name: Peter C. Kelly
----------------------
Title: Vice President
----------------------
<PAGE>
RYBACK MANAGEMENT CORPORATION
By: s/
--
Name: Eric Ryback
-------------------
Title: President
-----------------
The undersigned as investment advisor to various client
accounts with regard to the Restructuring of WFSG, hereby
confirms and accepts on behalf of such clients the documents
attached hereto which may include, but not necessarily be
limited to, letter agreements and term sheets.
AMERICAN EXPRESS FINANCIAL CORP.
By: s/
--
Name: Frederick C. Quirsfeld
------------------------------
Title: Senior Vice President - Fixed Income
--------------------------------------------
As Noteholder, but not as
as member of the Unofficial
Committee of Senior
Noteholders.
WILSHIRE REAL ESTATE INVESTMENT TRUST INC.
By: s/
--
Name: Lawrence A. Mendelsohn
-----------------------------
Title: President
----------------
Agreed and accepted:
s/
--
Andrew A. Wiederhorn
--------------------
s/
--
Lawrence A. Mendelsohn
----------------------
WILSHIRE FINANCIAL SERVICES GROUP
Term Sheet
Financial Restructuring of the 13% Notes due 2004 and the 13% Series B Notes due
2004 (collectively, the "Senior Notes")
<PAGE>
Issuer: Wilshire Financial Services Group Inc.("WFSG")
Conditional Forbearance: Holders of 50% or more of the principal amount of
Senior Notes agree to direct the indenture
trustees to forbear from exercising any remedies
arising from scheduled known defaults existing as
of acceptance of this Term Sheet by WFSG (the
"Forbearance"), subject to stock pledges described
below and WFSG and all affiliates agreeing to be
bound by this Term Sheet, and to consummate the
transactions contemplated hereby (the "Prepack").
The Forbearance shall terminate upon any breach of
this Term Sheet (including, without limitation,
all deadlines set forth under "Timing" below) or
the letter agreement to which it is attached.
Transaction Structure: Senior Notes Exchanged for Common Stock:
- 100 % of the principal amount of Senior Notes
and other pari passu unsecured debt, if any,
exchanged for 8.75 million shares of the new
common stock of WFSG (the "New Stock").
- All existing common stock of WFSG or options,
warrants or other existing forms of
securities convertible into common stock of
WFSG ("Existing Stock") shall be
extinguished, provided, however, upon mutual
agreement of WFSG and the Senior Note
Majority (as defined below), holders of
Existing Stock may receive dilutive shares of
New Stock in lieu of the Series 1 and Series
2 warrants (as defined below) if necessary to
insure sufficient numerosity of holders of
the New Stock following the Restructuring.
- Existing common shareholders receive two
warrants ("Series 1" and "Series 2"), with
the following material terms:
Series 1 Series 2
- -------------------------------------------- ---------------- ---------------
Term 3 years 5 years1
- -------------------------------------------- ---------------- ---------------
Shares of common stock issued on exercise 500,000 750,000
- -------------------------------------------- ---------------- ---------------
Exercise Price Per Share P/8,750,000 (P+1)/8,750,000
- -------------------------------------------- ---------------- ---------------
P = Principal amount of debt plus accrued interest on the consummation
date of the transaction converted into common stock.
I = Amount of interest that would have accrued on the Senior Notes up to the
first day of the month of the exercise date had the Senior Notes not
been converted into common stock in the restructuring transaction.
Existing Equity Interests: Within 30 days of the consummation date of
the transaction, any shareholder may purchase
his/her pro-rata share of the New Stock at a
price per share which is 97% of the Series 1
warrant exercise price. All cash so raised
shall redeem, pro-rata, New Stock allocated
to unsecured creditors.
<PAGE>
Management Compensation/Stock Management compensation or severance terms,
Options: as applicable, to be acceptable Options: to
the Senior Note Majority. Stock options of up
to a maximum percentage of the fully diluted
post-restructuring common stock of WFSG may
be granted by the new board to continuing
employees with pricing, vesting and exercise
terms to be determined. If granted, such
options shall be on terms reflective of a
policy of rewarding the contribution of
management to the long-term financial
performance of the Company and shall be
consistent with employee incentive programs
for similarly situated companies.
Board: Board to be comprised of 7 members, 5 to be
appointed by holders of the Senior Notes in
connection with the restructuring transaction
and the other 2 to be Andrew A. Wiederhorn
and Lawrence A. Mendelsohn. The Majority
Noteholders shall give due consideration to
creating two (2) additional seats on the
Board to be filled by current, independent
directors of the Company.
Restricted Transactions: In addition to and without waiver of any of
the covenants contained in each of the
indentures, as supplemented, no incurrence of
indebtedness other than as reflected in the
consolidated and consolidating financial
projections of WFSG (as further described in
the attached letter agreement, paragraph 2,
definition of an "Event of Termination",
sub-section (ii) (the "Agreed Projections")),
without the approval of the holders of the
Senior Notes representing more than 50% of
the principal amount (the "Senior Note
Majority"). Indenture covenants governing
affiliate transactions remain in effect
except, where such covenants require the
approval of disinterested directors, such
covenants shall also require approval of the
Senior Note Majority.
Pledge of Bank Stock: In connection with granting the Forbearance
and agreeing to be bound by the Term Sheet,
WFSG shall grant a first priority pledge (the
"WAC Pledge") of the stock of Wilshire
Acquisition Corporation (the "WAC Stock") in
favor of the Senior Notes with such pledge
terminating upon consummation of the
restructuring transaction; provided, however,
that if in the written opinion of counsel to
WFSG such pledge would violate laws or
regulations governing the operations of First
Bank of Beverly Hills F.S.B. ("First Bank"),
then WFSG shall agree, in lieu of the
foregoing, not to transfer, pledge or
encumber all or any portion of the WAC Stock
(the "WAC Negative Pledge"); provided,
further, however, that the WAC Pledge shall
be released if an Event of Termination (as
such term is defined in the letter agreement
attached to this Term Sheet) occurs as a
result of a breach by the Majority
Noteholders of an obligation hereunder (a
"Bondholder Breach Termination"). The WAC
Pledge and the WAC Stock shall be held in a
mutually acceptable escrow account with an
independent escrow agent for the benefit of
the parties hereto. Upon the effective date
of the restructuring or upon a Bondholder
Breach Termination (as
<PAGE>
determined by a court of competent
jurisdiction (or mutually acceptable
arbitrator)), the WAC Pledge and the WAC
Stock shall be returned to WFSG. Upon an
Event of Termination other than a Bondholder
Breach Termination, or if the restructuring
does not occur within 180 days after the date
hereof, physical possession of the WAC Pledge
and the WAC Stock shall be delivered to the
indenture trustee for the benefit of the
holders of the Senior Notes; provided,
however, that if physical possession is
delivered solely by reason of the passage of
180 days, and a Bondholder Breach Termination
(but no other Event of Termination) shall
thereafter occur, then the Senior Note
Majority shall instruct the indenture trustee
to release the WAC Pledge and return the WAC
Stock to WFSG.
Pledge of WREIT Stock: In connection with granting the Forbearance
and agreeing to be bound by the Term Sheet,
WFSG shall grant a first priority pledge (the
"WREIT Pledge") of the stock of Wilshire Real
Estate Investment Trust Inc. ("WREIT") in
favor of the Senior Notes with such pledge
terminating upon consummation of the
restructuring transaction; provided, however,
that the WREIT Pledge shall be released if an
Event of Termination (as such term is defined
in the letter agreement attached to this Term
Sheet) occurs as a result of a breach by the
Majority Noteholders of an obligation
hereunder. The WREIT Pledge and the stock of
WREIT shall be held in a mutually acceptable
escrow account with an independent escrow
agent for the benefit of the parties hereto.
Upon the effective date of the restructuring
or upon a Bondholder Breach Termination (as
determined by a court of competent
jurisdiction (or mutually acceptable
arbitrator)), the WREIT Pledge and the stock
of WREIT shall be returned to WFSG. Upon an
Event of Termination other than a Bondholder
Breach Termination, or if the restructuring
does not occur within 180 days after the date
hereof, physical possession of the WREIT
Pledge and the stock of WREIT shall be
delivered to the indenture trustee for the
benefit of the holders of the Senior Notes;
provided, however, that if physical
possession is delivered solely by reason of
the passage of 180 days, and a Bondholder
Breach Termination (but no other Event of
Termination) shall thereafter occur, then the
Senior Note Majority shall instruct the
indenture trustee to release the WREIT Pledge
and return the stock of WREIT to WFSG.
DIP Financing: Provided that: (i) WFSG shall have timely
obtained the requisite formal consents of
holders of the Senior Notes to the conditions
of the Prepack; (ii) neither WFSG nor any
affiliate is otherwise in default of its
obligations hereunder or under any letter
agreement to which the Term Sheet is
attached; and (iii) WFSG seeks approval of
debtor in possession financing on terms
otherwise acceptable to the Senior Note
Majority (the "Approved DIP Financing"),
then, if
<PAGE>
required by the lender of the Approved DIP
Financing, each of the WAC Pledge (if
applicable) and the WREIT Pledge shall be
subordinated, and the WAC Negative Pledge (if
applicable) shall be waived as to the
Approved DIP Financing in an amount not to
exceed the amount reflected in the Agreed
Projections.
Tax Attributes: To the extent not inconsistent with the other
terms hereof, the parties agree to structure
the transaction in a way which preserves
favorable tax attributes of WFSG to the
fullest reasonable extent.
Consolidation of WCC: Acquisition of Wilshire Credit Corporation
("WCC") or its business assets by a new
subsidiary of WFSG on terms acceptable to the
Senior Note Majority.
Restructuring of CCI Loan: Restructuring of the approximately $155
million loan by CCI to WCC (the "CCI
Restructuring") on terms acceptable to the
Senior Note Majority.
Renegotiation (or approval) of current terms
of all affiliate servicing/subservicing
agreements on terms satisfactory to the
Senior Note Majority.
Due Diligence: Final agreement subject to definitive
documentation and continued legal and
financial due diligence by holders of Senior
Notes and their advisors. Full access to
management and books and records of WFSG,
WCC, WREIT, First Bank, and all affiliates.
Reorganization/Recapitalization All further discussions with
Discussion: strategic/financial partners to take place
with participation of advisors to the Senior
Note Majority. The Company will share all
offers, correspondence or other information
in connection with such discussions with the
Senior Note Majority and their advisors.
Releases: Mutual releases among holders of Senior Notes
and their advisors, WFSG, WCC, Andrew A.
Wiederhorn, Lawrence A. Mendelsohn and CCI
effective upon consummation of Prepack.
Timing: 1. Agreement on Term Sheet no later than
Monday, November 23, 1998.
2. Designation and delivery of the
Agreed Projections no later than
December 1, 1998.
3. Draft Restructuring documentation
to be circulated no later than
Friday, December 4, 1998.
<PAGE>
4. Solicitation period to begin
December 19, 1998.
5. Solicitation period to conclude
by January 19, 1999.
6. Prepack filing (if required) no
later than January 20, 1999,
with day one request to shorten
notice of confirmation hearing.
7. Plan confirmation (if required)
by February 1, 1999.
8. Effective date of Restructuring
no later than February 11, 1999.
All dates subject to extension only by mutual
agreement of the Senior Note Majority and
WFSG.
EXHIBIT A
UNOFFICIAL COMMITTEE
OF
WILSHIRE FINANCIAL SERVICES GROUP
SENIOR NOTEHOLDERS
November 23, 1998
CONFIDENTIAL
- ------------
Bankers Trust Company
4 Albany Street
New York, New York 10006
Attention: Corporate Trust & Agency Group
<PAGE>
Re:
13% Notes due 2004 issued by Wilshire Financial Services Group Inc. (the
"Notes")
Ladies/Gentlemen:
This letter is submitted by the signatories hereto, who comprise the
Unofficial Committee of Senior Noteholders of Wilshire Financial Services Group
Inc., a Delaware corporation ("WFSG" or the "Company"), in our capacity as
holders or representatives of a majority of the 13% Notes due 2004 of WFSG (the
"Majority Noteholders") issued pursuant to an indenture, dated as of December
24, 1996 (the "13% Note Indenture"), between WFSG and Bankers Trust Company, a
New York banking corporation, as trustee (the "Trustee"). The amount of notes
issued under the 13% Note Indenture which are held, represented or advised by
the Majority Noteholders is provided on Schedule 1 attached hereto.
Under Section 316 of the Trust Indenture Act of 1939 and pursuant to
Section 5.12 of the 13% Note Indenture, we the Majority Noteholders hereby
direct the Trustee not to exercise any remedies with respect to defaults
resulting from breaches of the following covenants: (i) Section 9.9, "Net Worth
Maintenance"; (ii) Section 9.10 (a), the Leverage Ratio restriction; (iii)
existing defaults under Section 9.10 (b) by reason of the Company's guarantee of
the indebtedness of WCC pursuant to the Guaranty, dated October 15, 1998, by
WFSG and WREIT for the benefit of CCI and entry in to the Pledge and Security
Agreement, dated October 15, 1998, by WFSG for the benefit of CCI; and (iv)
Section 9.10 (d) due to Subsidiary guarantees of Guaranteed Indebtedness by
reason of the Guarantee, dated October 15, 1998, by Andrew A. Wiederhorn,
Lawrence Mendelsohn, Wilshire Leasing Limited, Wilshire Properties 1
Incorporated, Wilshire Properties 2 Incorporated, Portland Servicing
Corporation, and Wilshire Securities Corporation to and for the benefit of CCI;
and (v) Section 9.14, "Limitations on Transactions with Affiliates" by reason of
the transactions described in Item 11 to the Company's unaudited financial
statements for the nine month period ended September 30, 1998.
Please be on notice that, upon the occurrence of an Event of Termination as
that term is defined in the attached Term Sheet, dated November 23, 1998,
between the Unofficial Committee of Senior Noteholders of WFSG, Wilshire Real
Estate Investment Trust Inc., the Company and the individuals named therein,
this direction may be terminated by written notice of the holders of a majority
of the 13% Notes due 2004. This letter may be executed in counterparts, each of
which shall be deemed to be an original, and all of such counterparts taken
together shall be deemed to constitute one and the same instrument.
Very truly yours,
CAPITAL RESEARCH AND MANAGEMENT
COMPANY, on behalf of:
The Income Fund of America, Inc.
The Bond Fund of America, Inc.
American Variable Insurance Series - High Yield
Bond Fund
<PAGE>
By: s/
--
Name: Paul G. Haaga, Jr.
--------------------------
Title: Executive Vice President
--------------------------------
RYBACK MANAGEMENT CORPORATION
By: s/
--
Name: Eric Ryback
-------------------
Title: President
-------------------
The undersigned as investment advisor to various
client accounts with regard to the Restructuring
of WFSG, hereby confirms and accepts on behalf
of such clients the documents attached hereto
which may include, but not necessarily be
limited to, letter agreements and term sheets.
AMERICAN EXPRESS FINANCIAL CORP.
By: s/
--
Name: Frederick C. Quirsfeld
-----------------------------
Title: Senior Vice President - Fixed
Income
------------------------------------
SCHEDULE I
Wilshire Financial Services Group Inc.
13% Notes due 2004
Cusip: 971867 - AA - 4 Outstanding: $84,245,000
Noteholder Principal Amount Percentage of Total
- ------------------------------------- ----------------- --------------------
American Express Financial Advisors $19,000,000 22.6%
Capital Research and Management Co. 13,500,000 16.0
Lindner Dividend Fund 10,000,000 11.9
- ------------------------------------- ----------------- -------------------
<PAGE>
Total $42,500,000 50.4%
- ------------------------------------ ----------------- -------------------
EXHIBIT B
UNOFFICIAL COMMITTEE
OF
WILSHIRE FINANCIAL SERVICES GROUP
SENIOR NOTEHOLDERS
November 23, 1998
CONFIDENTIAL
- ------------
Bankers Trust Company
4 Albany Street
New York, New York 10006
Attention: Corporate Trust & Agency Group
Re:
13% Series B Notes due 2004 issued by Wilshire Financial Services Group Inc.
(the "Notes")
Ladies/Gentlemen:
This letter is submitted by the signatories hereto, who comprise the
Unofficial Committee of Senior Noteholders of Wilshire Financial Services Group
Inc., a Delaware corporation ("WFSG" or the "Company"), in our capacity as
holders or representatives of a majority of the 13% Series B Notes due 2004 of
WFSG (the "Majority Noteholders") issued pursuant to an indenture, dated as of
August 15, 1997 (the "13% Series B Note Indenture"), between WFSG and Bankers
Trust Company, a New York banking corporation, as trustee ("the Trustee"). The
amount of notes issued under the 13% Series B Note Indenture which are held,
represented or advised by the Majority Noteholders is provided on Schedule 1
attached hereto.
Under Section 316 of the Trust Indenture Act of 1939 and pursuant to
Section 5.12 of the 13% Series B Note Indenture, we the Majority Noteholders
hereby direct the Trustee not to exercise any remedies with respect to defaults
resulting from breaches of the following covenants: (i) Section 9.9, "Net Worth
Maintenance"; (ii) Section 9.10 (a), the Leverage Ratio restriction; (iii)
existing defaults under Section 9.10 (b) by reason of the Company's guarantee of
the indebtedness of WCC pursuant to the
<PAGE>
Guaranty, dated October 15, 1998, by WFSG and WREIT for the benefit of CCI and
entry in to the Pledge and Security Agreement, dated October 15, 1998, by WFSG
for the benefit of CCI; and (iv) Section 9.10 (d) due to Subsidiary guarantees
of Guaranteed Indebtedness by reason of the Guarantee, dated October 15, 1998,
by Andrew A. Wiederhorn, Lawrence Mendelsohn, Wilshire Leasing Limited, Wilshire
Properties 1 Incorporated, Wilshire Properties 2 Incorporated, Portland
Servicing Corporation, and Wilshire Securities Corporation to and for the
benefit of CCI; and (v) Section 9.14, "Limitations on Transactions with
Affiliates" by reason of the transactions described in Item 11 to the Company's
unaudited financial statements for the nine month period ended September 30,
1998.
Please be on notice that, upon the occurrence of an Event of Termination as
that term is defined in the attached Term Sheet, dated November 23, 1998,
between the Unofficial Committee of Senior Noteholders of WFSG, Wilshire Real
Estate Investment Trust Inc., the Company and the individuals named therein,
this direction may be terminated by written notice of the holders of a majority
of the 13% Series B Notes due 2004.
This letter may be executed in counterparts, each of which shall be deemed
to be an original, and all of such counterparts taken together shall be deemed
to constitute one and the same instrument.
Very truly yours,
CAPITAL RESEARCH AND MANAGEMENT
COMPANY, on behalf of:
The Income Fund of America, Inc.
The Bond Fund of America, Inc.
American Variable Insurance Series - High Yield
Bond Fund
Anchor Pathway Fund - High Yield Bond Fund
By: s/
--
Name: Paul G. Haaga, Jr.
--------------------------
Title: Executive Vice President
--------------------------------
CAPITAL GUARDIAN TRUST COMPANY, on behalf of the
following accounts: 9500, 012, 002, 2894 and 2905
By: s/
--
Name: Peter C. Kelly
----------------------
Title: Vice President
----------------------
<PAGE>
WILSHIRE REAL ESTATE INVESTMENT TRUST INC.
By: s/
--
Name: Lawrence A. Mendelsohn
------------------------------
Title: President
------------------------------
The undersigned as investment advisor to various
client accounts with regard to the Restructuring
of WFSG, hereby confirms and accepts on behalf
of such clients the documents attached hereto
which may include, but not necessarily be
limited to, letter agreements and term sheets.
AMERICAN EXPRESS FINANCIAL CORP.
By: s/
--
Name: Frederick C. Quirsfeld
-----------------------------
Title: Senior Vice President - Fixed
Income
------------------------------------
SCHEDULE I
Wilshire Financial Services Group Inc.
13% Series B Notes due 2004
Cusip: 971867 - AE - 6 Outstanding: $100,000,000
Noteholder Principal Amount Percentage of Total
- ------------------------------------------ ---------------- -------------------
Capital Research and Management Co. $31,600,000 31.6%
American Express Financial Advisors 21,200,000 21.2
Wilshire Real Estate Investment Trust Inc. 20,000,000 20.0
- ------------------------------------------ ----------------- -------------------
Total $72,800,000 72.8%
- ------------------------------------------ ----------------- -------------------
Exhibit 11
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
Diluted net income (loss) per share:
<S> <C> <C>
Net income (loss)........................................................ $ (111,805) $ 12,242
Preferred Stock dividend................................................. 417 652
Net income (loss) available to common shareholders....................... $ (112,222) $ 11,590
Average number of shares outstanding..................................... 10,604,798 7,570,000
Net effect of dilutive stock options-based on treasury stock method...... $ -- $ 312,555
Total average shares................................................ 10,604,798 7,882,555
Diluted net income (loss) per share...................................... $ (10.58) $ 1.47
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's balance sheet as of September 30, 1998 and statement of earnings for
the nine months ended September 30, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 54,672
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,589
<INVESTMENTS-CARRYING> 245,901
<INVESTMENTS-MARKET> 245,901
<LOANS> 1,278,211
<ALLOWANCE> 0
<TOTAL-ASSETS> 1,842,227
<DEPOSITS> 534,091
<SHORT-TERM> 1,076,078
<LIABILITIES-OTHER> 31,507
<LONG-TERM> 184,245
0
0
<COMMON> 117,708
<OTHER-SE> (101,402)
<TOTAL-LIABILITIES-AND-EQUITY> 1,842,227
<INTEREST-LOAN> 92,603
<INTEREST-INVEST> 21,707
<INTEREST-OTHER> 2,848
<INTEREST-TOTAL> 117,158
<INTEREST-DEPOSIT> 18,086
<INTEREST-EXPENSE> 81,221
<INTEREST-INCOME-NET> 17,851
<LOAN-LOSSES> 12,191
<SECURITIES-GAINS> 7,768
<EXPENSE-OTHER> 85,662
<INCOME-PRETAX> (119,997)
<INCOME-PRE-EXTRAORDINARY> (119,997)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (111,805)
<EPS-PRIMARY> (10.27)
<EPS-DILUTED> (10.27)
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
