<PAGE>
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- -------------------------------------------------------------------------------
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 June 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 0-17292
WILSHIRE FINANCIAL SERVICES GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 93-1223879
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1776 SW MADISON STREET, PORTLAND, OR 97205
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(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 JULY 31, 1998
Common Stock, par value $.01 per 11,070,000 Shares
share
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<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
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........................................... 10
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 20
Item 2. Changes in Securities........................................ 20
Item 3. Defaults Upon Senior Securities.............................. 20
Item 4. Submission of Matters to a Vote of Security Holders.......... 20
Item 5. Other Information............................................ 20
Item 6. Exhibits and Reports on Form 8-K............................. 20
</TABLE>
2
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- -------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................... $ 49,127 $ 66,115
Mortgage-backed securities available for sale, at
fair value........................................ 218,789 298,964
Mortgage-backed securities held to maturity, at
amortized cost.................................... 16,180 18,468
Securities held to maturity, at amortized cost..... 6,777 5,946
Trading account securities......................... 16,728 38,969
Loans, net......................................... 457,380 153,908
Discounted loans, net.............................. 301,181 463,355
Loans held for sale, net, at lower cost or market.. 561,438 310,694
Stock in Federal Home Loan Bank of San Francisco,
at cost........................................... 5,180 5,031
Real estate owned, net............................. 171,699 169,612
Leasehold improvements and equipment, net.......... 3,572 2,507
Due from affiliate, net............................ 49,042 42,171
Accrued interest receivable........................ 8,533 6,641
Investment in Wilshire Real Estate Investment Trust
Inc............................................... 14,449 --
Mortgage servicing rights.......................... 17,428 8,306
Prepaid expenses and other assets.................. 51,365 38,340
---------- ----------
TOTAL.......................................... $1,948,868 $1,629,027
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits......................................... $ 422,740 $ 362,598
Short-term borrowings............................ 1,170,229 966,500
Notes payable.................................... 184,245 184,245
Accounts payable and other liabilities........... 33,924 16,562
---------- ----------
Total liabilities.............................. 1,811,138 1,529,905
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock..................................... 117,708 55,897
Preferred stock.................................. -- 27,500
Treasury stock................................... (124) (124)
Retained earnings................................ 25,526 18,782
Accumulated other comprehensive income (loss),
net............................................. (5,380) (2,933)
---------- ----------
Total stockholders' equity..................... 137,730 99,122
---------- ----------
TOTAL.............................................. $1,948,868 $1,629,027
========== ==========
</TABLE>
See notes to interim financial statements.
3
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans......................... $ 34,157 $ 20,655 $ 59,046 $ 34,574
Mortgage-backed securities.... 6,186 4,275 15,293 7,034
Securities and federal funds
sold......................... 980 1,244 1,802 2,184
---------- --------- ---------- ---------
Total interest income....... 41,323 26,174 76,141 43,792
---------- --------- ---------- ---------
INTEREST EXPENSE:
Deposits...................... 5,736 6,647 11,122 13,654
Borrowings.................... 28,057 14,070 53,131 21,037
---------- --------- ---------- ---------
Total interest expense...... 33,793 20,717 64,253 34,691
---------- --------- ---------- ---------
NET INTEREST INCOME............. 7,530 5,457 11,888 9,101
PROVISION FOR ESTIMATED LOSSES
ON LOANS....................... (1,500) 445 (3,000) (1,424)
---------- --------- ---------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR ESTIMATED LOSSES
ON LOANS....................... 9,030 5,012 14,888 10,525
---------- --------- ---------- ---------
OTHER INCOME:
Servicing revenue............. 1,369 1,784 2,740 1,944
Real estate owned, net........ 3,399 1,557 3,472 2,739
Bankcard income, net.......... 997 595 1,497 1,061
Gain on sale of loans......... 26,444 11,216 26,444 11,216
Gains on sale of securities... 6,116 -- 8,201 --
Trading income................ 172 -- 1,630 14
Other, net.................... 2,473 434 3,124 1,112
---------- --------- ---------- ---------
Total other income.......... 40,970 15,586 47,108 18,086
---------- --------- ---------- ---------
OTHER EXPENSES:
Compensation and employee ben-
efits........................ 9,192 3,609 15,109 6,651
Loan service fees and expenses
paid to affiliate............ 11,239 5,049 20,097 7,995
Professional services......... 1,815 649 3,208 962
Occupancy..................... 539 254 972 415
FDIC insurance premiums....... 208 293 444 523
Other general and administra-
tive expenses................ 6,209 1,931 9,169 3,147
---------- --------- ---------- ---------
Total other expenses........ 29,202 11,785 48,999 19,693
---------- --------- ---------- ---------
INCOME BEFORE INCOME TAX PROVI-
SION........................... 20,798 8,813 12,997 8,918
INCOME TAX PROVISION............ 8,972 3,701 5,836 3,744
---------- --------- ---------- ---------
NET INCOME...................... $ 11,826 $ 5,112 $ 7,161 $ 5,174
========== ========= ========== =========
EARNINGS PER SHARE:
Basic......................... $ 1.07 $ 0.68 $ 0.65 $ 0.68
Diluted....................... $ 1.01 $ 0.66 $ 0.61 $ 0.66
WEIGHTED AVERAGE SHARES OUT-
STANDING:
Basic......................... 11,065,000 7,570,000 10,403,889 7,570,000
Diluted....................... 11,672,711 7,775,729 11,019,162 7,852,328
</TABLE>
See notes to interim financial statements.
4
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIV-
ITIES:
Net income.................... $ 11,826 $ 5,112 $ 7,161 $ 5,174
Adjustments to reconcile net
cash used in operating activ-
ities:
(Recovery) provision for es-
timated loan losses......... (1,500) 445 (3,000) (1,424)
Provision for losses on real
estate owned................ 734 -- 1,724 --
Depreciation and amortiza-
tion........................ 350 92 617 203
Gain on sale of real estate
owned....................... (977) (1,838) (2,427) (3,111)
Origination of loans held for
sale........................ (161,087) (16,727) (246,809) (29,742)
Purchase of loans held for
sale........................ (299,957) (162,032) (378,942) (349,519)
Proceeds from sale of loans
held for sale............... 219,796 191,351 219,796 191,351
Gain on sale of loans........ (26,444) (11,216) (26,444) (11,216)
Gain on sale of securities... (6,116) -- (8,201) --
Unrealized gain on trading
securities.................. 1,286 -- (172) --
Amortization of discounts and
deferred fees............... (6,100) (3,744) (11,230) (10,915)
Dividends on investments..... (375) (44) (450) (91)
Deferred taxes, net.......... 4,175 326 5,257 (1,154)
Other........................ 548 -- 374 --
Change in:
Trading account securities... 2,203 (20) 22,241 6,763
Accrued interest receivable.. (3,151) 1,321 (1,892) (3,730)
Prepaid expenses and other
assets...................... (9,745) (7,757) (26,137) (7,792)
Accounts payable and other
liabilities................. 4,549 (14,751) 12,319 (4,750)
Due to affiliate, net........ (5,270) (34,990) (7,288) (2,451)
--------- --------- ----------- ---------
Net cash used in operating
activities................. (275,255) (54,472) (443,503) (222,404)
========= ========= =========== =========
CASH FLOWS FROM INVESTING ACTIV-
ITIES:
Purchase of loans............. $(371,180) $(129,508) $ (514,486) $(313,905)
Loan repayments............... 81,603 30,929 129,116 66,363
Loan originations............. (10,802) -- (16,678) --
Proceeds from sale of loans... 249,586 -- 354,849 --
Proceeds from sale of mort-
gage-backed securities avail-
able for sale................ 129,210 -- 129,210 --
Purchase of mortgage-backed
securities available for
sale......................... (27,211) (13,939) (64,293) (107,654)
Repayment of mortgage-backed
securities available for
sale......................... 15,732 190 23,954 430
Repayments of mortgage-backed
securities held to maturity.. 1,279 769 2,134 1,484
Purchase of real estate
owned........................ (1,215) -- (13,070) --
Proceeds from sale of real es-
tate owned................... 71,485 13,563 113,927 26,570
Purchase of equity securi-
ties......................... (14,731) (1,833) (14,731) (1,833)
Purchases of leasehold im-
provements and equipment..... (550) (400) (1,599) (445)
--------- --------- ----------- ---------
Net cash provided by (used
in) investing activities... 123,206 (100,229) 128,333 (328,990)
========= ========= =========== =========
CASH FLOWS FROM FINANCING ACTIV-
ITIES:
Net increase (decrease) in de-
posits....................... $ 53,750 $ (17,656) $ 60,142 $ (56,281)
Issuance of common stock...... (627) -- 61,811 --
Proceeds from short-term
borrowings................... 864,145 338,903 1,327,828 699,049
Repayments of short-term
borrowings................... (762,007) (185,608) (1,124,099) (213,205)
Proceeds from notes payable... -- -- -- 9,245
Redemption of preferred
stock........................ -- -- (27,500) --
--------- --------- ----------- ---------
Net cash provided by financ-
ing activities............. 155,261 135,639 298,182 438,808
--------- --------- ----------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS........... 3,212 (19,062) (16,988) (112,586)
CASH AND CASH EQUIVALENTS:
Beginning of period........... 45,915 58,774 66,115 152,298
--------- --------- ----------- ---------
End of period................. $ 49,127 $ 39,712 $ 49,127 $ 39,712
========= ========= =========== =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION--Cash paid
during the quarter for:
Interest...................... $ 32,763 $ 16,885 $ 63,212 $ 27,551
Income taxes.................. 675 650 5,690 4,150
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned
acquired in settlement of
loans........................ 56,801 61,631 102,324 81,243
Pay in kind preferred stock
dividend..................... 417 -- 417 --
</TABLE>
See notes to interim financial statements.
5
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED STOCK COMMON STOCK TREASURY STOCK OTHER
---------------- ------------------- ---------------- RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT EARNINGS INCOME (LOSS) TOTAL
------- ------- ---------- -------- ------- ------- --------- -------------- --------
(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
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 11,000
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
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
Net income................. 7,161 7,161
Unrealized loss on
available-for-sale
securities--net of tax.... (2,270) (2,270)
Unrealized loss on foreign
currency translation...... (177) (177)
--------
Total comprehensive
income.................... 4,714
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, June 30, 1998
(unaudited)................ -- $ -- 11,070,000 $117,708 5,000 $ (124) $25,526 $ (5,380) $137,730
======= ======= ========== ======== ======= ======= ======= ======== ========
</TABLE>
See notes to interim financial statements.
6
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
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 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 six months
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
Certain reclassifications of 1997 amounts were made in order to conform to
the 1998 presentation, none of which affect previously reported net income.
2. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK
In hedging the interest rate exposure of a fixed-rate or lagging-index
asset, the Company may create a hedge which matches the principal amortization
of such asset against the maturity of the Company's liabilities generally by
entering into short sales or forward sales of U.S. Treasury securities,
Government Securities or interest rate future contracts. This results in
market gains or losses on hedging instruments, in response to interest rate
increases or decreases, respectively, which approximate the amount of the
corresponding market losses or gains, respectively, on assets being hedged.
At June 30, 1998, the Company had open short positions on 40 U.S. Treasury
Bond, 690 10-year U.S. Treasury Note, 759 2-year U.S. Treasury Note, 2,301 5-
year U.S. Treasury Note, and 450 French Franc futures contracts. The aggregate
net losses on these instruments are deferred as an adjustment to the basis of
the hedged assets and amortized using a method approximating the interest
method. The total amount deferred as of June 30, 1998 in the consolidated
statement of financial condition was $4,676. First Bank of Beverly Hills,
F.S.B., a subsidiary of the Company, utilizes interest rate swaps to convert
deposits to fixed rate liabilities to maintain a more predictable spread
between the fixed income on loans and the interest expense on borrowings. At
June 30, 1998, the notional amount of interest rate swaps related to deposits
was $151,214. The weighted average fixed payments and floating-rate receipts
of interest were 6.08 % and 0.28% over USD LIBOR, respectively.
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.
3. 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 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
7
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS--(CONTINUED)
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 timing of or 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. If the
Company were to adopt this SOP as of June 30, 1998, the estimated effect on
the Company's operations would be $439.
4. FOREIGN OPERATIONS
As a result of start-up operations in the United Kingdom, France and
Ireland, the Company has incurred foreign operating losses. Additional loan
portfolios will be acquired and the Company expects the foreign operations to
be profitable and will utilize these losses for tax purposes. The Company
recorded deferred tax assets associated with the foreign tax losses in the
United Kingdom, France and Ireland. Although realization of these assets is
not assured, management believes it is more likely than not that these losses
will be realized by offsetting future taxable earnings in these countries.
5. COMPREHENSIVE INCOME
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 from investment by owners and distributions to owners,
in a financial statement for the period in which they are recognized. The
Company has elected to reflect Comprehensive Income in the consolidated
statements of stockholders' equity. Comprehensive Income which encompasses net
income, unrealized gains (losses) on available for sale securities and foreign
currency translation as presented below:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------- ------------------
1998 1997 1998 1997
------- ------ -------- --------
<S> <C> <C> <C> <C>
Net income................................ $11,826 $5,112 $ 7,161 $ 5,174
Other comprehensive (loss) income:
Unrealized holding gain (loss) on
available for sale securities, net of
tax provision (benefit) of $(2,041) and
$1,143 for the three months ended June
30, 1998 and 1997, respectively, and
$(976) and $1,174 for the six months
ended June 30, 1998 and 1997,
respectively........................... (4,746) 2,657 (2,270) 2,731
Unrealized loss on foreign currency
translation............................ (29) -- (177) --
------- ------ -------- -------
Total comprehensive income............ $ 7,051 $7,769 $ 4,714 $ 7,905
======= ====== ======== =======
</TABLE>
8
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS--(CONTINUED)
6. SIGNIFICANT TRANSACTIONS
In October 1997, the Company established Wilshire Real Estate Investment
Trust Inc. (the "Wilshire REIT"), which intends to qualify and will elect to
be taxed as a Real Estate Investment Trust. On April 6, 1998 the Wilshire
REIT, for which a subsidiary of the Company acts as manager, completed an
initial public offering of its common stock, resulting in net proceeds to the
Wilshire REIT of approximately $167.0 million. On April 6, 1998, in connection
with such initial public offering, the Company sold to the Wilshire REIT
certain of its (i) U.S. commercial real estate assets for approximately $26.9
million, (ii) certain U.S. commercial properties for $2.7 million, (iii)
certain international investments for $3.3 million and (iv) certain mortgage-
backed securities for $95.0 million.
In May 1998, the Company executed a letter of intent, pursuant to which the
Company has agreed to acquire a small commercial mortgage banker in Southern
California. There can be no assurances as to when or if such acquisition will
occur.
In June 1998 the Company completed two securitizations of approximately
$330.0 million unpaid principal balance of loans and a whole loan sale of
approximately $72.3 million unpaid principal balance of loans. Completion of
these securitization and whole loan sale transactions resulted in gains on
sale of loans of approximately $24.7 million.
7. SUBSEQUENT EVENTS
The Company has entered into negotiations to form a joint venture
arrangement to originate single family residential loans in Mexico. There can
be no assurance as to when or if such arrangement will occur.
The Company has entered into negotiations and has executed a letter of
intent to acquire a mortgage originator with approximately 30 branches. There
can be no assurances as to when or if such acquisition will occur.
The Company has entered into negotiations and has executed a letter of
intent to acquire a residential mortgage originator in France. There can be no
assurances as to when or if such acquisition will occur.
9
<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 center in Southern California. Administrative headquarters
of the Company, Wilshire Funding Corporation ("WFC") and First Bank are
located in Portland, Oregon.
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1997
NET INCOME
The Company had net income of approximately $7.2 million for the six months
ended June 30, 1998 compared to net income of approximately $5.2 million for
the six months ended June 30, 1997, an increase of 38.4%. The increase in net
income was primarily attributable to a $4.4 million increase in net interest
income resulting from growth in the Company's asset portfolio and a net
recapture of loan loss reserves and a $29.0 million increase in other income
resulting from an increase in gain on sale of loans and gain on sale of
securities.
NET INTEREST INCOME
The Company's net interest income was approximately $11.9 million for the
six months ended June 30, 1998 compared to approximately $9.1 million for the
six months ended June 30, 1997, an increase of 30.6%. Interest-earning assets
increased from $1.0 billion as of June 30, 1997 to $1.6 billion as of June 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 $76.1
million for six months ended June 30, 1998 compared to approximately $43.8
million for the six months ended June 30, 1997, an increase of 73.9%. The
increase in the Company's interest income was due primarily to an increase in
the Company's interest earning assets from approximately $1.0 billion at June
30, 1997 to approximately $1.6 billion at June 30, 1998. During the six months
ended June 30, 1998, the Company purchased approximately $972.5 million of
interest-earning assets, compared to approximately $772.9 million during the
six months ended June 30, 1997. In addition, the Company originated $263.5
million of loans during the six months ended June 30, 1998, compared to
approximately $29.7 million during the six months ended June 30, 1997.
Interest Expense. The Company's interest expense was approximately $64.3
million for the six months ended June 30, 1998 compared with approximately
$34.7 million for the six months ended June 30, 1997, an increase of 85.2%.
The increase in interest expense resulted from an increase in the Company's
interest-bearing liabilities to approximately $1.8 billion at June 30, 1998
from approximately $1.1 billion at June 30, 1997 and includes the issuance of
$100.0 million of the Company's 13% Series B Notes in the third quarter of
1997. The increase in interest expense was partially offset by the decrease in
the Company's weighted average cost of funds from 7.44% at June 30, 1997 to
7.00% at June 30, 1998. The decrease was primarily the result of decreases in
the Company's financing costs related to warehouse and repurchase facilities.
10
<PAGE>
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
Provision for estimated losses on loans for the six months ended June 30,
1998 was a net recovery of approximately $3.0 million resulting from the
recapture during the quarter ended March 31, 1998 of reserves on loans
previously sold or paid off and the recapture during the quarter ended June
30, 1998 of excess reserves by First Bank which is attributable to the
transfer of non-performing loans ("Discounted Loans") to WFC. This compares
with a provision for estimated losses on loans for the six months ended June
30, 1997, which was a net recovery of approximately $1.4 million resulting
from the reversal of $2.5 million of excess reserves on loans previously sold,
which was partially offset by an additional provision of approximately $1.1
million.
OTHER INCOME
The Company's other income was approximately $47.1 million for the six
months ended June 30, 1998 compared to approximately $18.1 million for the six
months ended June 30, 1997, an increase of 160.5%. The components of the
Company's non-interest income are reflected in the following table:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other income:
Servicing revenue................................. $ 2,740 $ 1,944
Real estate owned, net............................ 3,472 2,739
Bankcard income, net.............................. 1,497 1,061
Gain on sale of loans............................. 26,444 11,216
Gain on sale of securities........................ 8,201 --
Trading income.................................... 1,630 14
Other, net........................................ 3,124 1,112
----------- -----------
Total other income.............................. $ 47,108 $ 18,086
=========== ===========
</TABLE>
The increase in other income for the six months ended June 30, 1998 is
primarily attributable to (i) the sale of loans, which resulted in gains of
approximately $26.4 million, (ii) the sale of securities, which resulted in a
gain of approximately $8.2 million, (iii) income from real estate owned, net,
resulting from the ongoing disposition of real estate relating to Discounted
Loans, (iv) an increase in servicing fees paid by unaffiliated third parties,
and (v) loan fees and charges resulting from the Company's origination
activity.
Gain on Sale of Loans. Approximately $24.7 million of gain on sale of loans
for the six months ended June 30, 1998 is the result of the Company's
completion of two securitizations totaling approximately $330.0 million unpaid
principal balance of loans and a whole loan sale of approximately $72.3
million unpaid principal balance of loans. The remaining balance of gain on
sale of loans is attributable to the Company's servicing released sale of
originated loans and sale of certain loans to Wilshire Real Estate Investment
Trust Inc. (the "Wilshire REIT").
Gain on the Sale of Securities. During the six months ended June 30, 1998,
the Company sold mortgage-backed securities with carrying values of
approximately $95.0 million to the Wilshire REIT, resulting in gains of
approximately $0.7 million. Additionally, the Company sold securities with
carrying values of approximately $31.5 million, resulting in gains of
approximately $7.5 million. The gains on sales of securities to unrelated
parties reflects the Company's strategy of investing in subordinate classes of
mortgage-backed securities which the Company believes are likely to increase
in value as a result of payment history, prepayment or default experience or
otherwise.
Real Estate Owned, net. The increase 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.
11
<PAGE>
Servicing Revenue. The increase in servicing revenue was primarily the
result of contracting for the servicing rights on loan portfolios owned by
unaffiliated third parties (including securitizations) and arranging for such
loan portfolios to be serviced by Wilshire Credit Corporation ("WCC"), an
affiliate of the Company at a rate which is lower than the rate received by
the Company from unaffiliated third parties.
Other, net. The increase in Other, net is primarily due to loan fees and
charges related to origination activity. During the six months ended June 30,
1998, the Company originated approximately $263.5 million of loans.
OTHER EXPENSE
The Company's other expense totaled approximately $49.0 million for the six
months ended June 30, 1998 compared to approximately $19.7 million for the six
months ended June 30, 1997, an increase of 148.8%, 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
anticipated growth.
Loan Service Fees and Expenses Paid to Affiliate. The largest component of
other expense in the six months ended June 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 $20.1 million for the
six months ended June 30, 1998 compared to approximately $8.0 million for the
six months ended June 30, 1997, an increase of approximately 151.4%. The
increase in loan service fees and expenses paid to affiliate resulted
primarily from the increase in total loans from $788.0 million at June 30,
1997 to $1.3 billion at June 30, 1998 (reflects the securitization of
approximately $330.0 million unpaid principal balance of loans and whole loan
sale of approximately $72.3 million unpaid principal balance of loans in June
1998). Also, collection-related expense increased from the six months ended
June 30, 1997 to the six months ended June 30, 1998 due to an increase in the
resolution of Discounted Loans. Collection-related expenses were approximately
$11.4 million of loan service fees and expenses paid to affiliate during the
six months ended June 30, 1998. Discounted Loans generally require more
significant expenditures than performing and sub-performing loans.
Compensation and Employee Benefits. Compensation and employee benefits was
approximately $15.1 million for the six months ended June 30, 1998, compared
to approximately $6.7 million for the six months ended June 30, 1997, an
increase of 127.2%. The increase was primarily due to an increase in the
average number of full-time equivalent employees from 166 for the six months
ended June 30, 1997 to 313 for the six months ended June 30, 1998, reflecting
the expansion of business activities, particularly loan acquisition
activities, European operations, and the growth of activities at the non-bank
subsidiaries.
Other general administrative expenses increased from approximately $3.1
million for the six months ended June 30, 1997 to approximately $9.2 million
for the six months ended June 30, 1998, an increase of 191.4%, due primarily
to increases in travel and entertainment expense, depreciation and
amortization 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 and European operations.
RESULTS OF OPERATIONS--QUARTER ENDED JUNE 30, 1998 COMPARED TO QUARTER ENDED
JUNE 30, 1997
NET INCOME
The Company had net income of approximately $11.8 million for the quarter
ended June 30, 1998 compared to net income of approximately $5.1 million for
the quarter ended June 30, 1997, an increase of 131.3%. The increase in net
income is primarily attributable to a $4.0 million increase in net interest
income after provision for estimated losses on loans resulting from growth in
the Company's asset portfolio and a net recapture of excess reserves during
the second quarter of 1998 as well as $25.4 million increase in other income
attributable to an increase in gain on sale of loans and gain on sale of
securities.
12
<PAGE>
NET INTEREST INCOME
The Company's net interest income was approximately $7.5 million for the
quarter ended June 30, 1998 compared to approximately $5.5 million for the
quarter ended June 30, 1997, an increase of 37.9%. The Company's asset base
was significantly larger in the quarter ended June 30, 1998 as a result of
continued 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 $41.3
million for quarter ended June 30, 1998 compared to approximately $26.2
million for the quarter ended June 30, 1997, an increase of 57.9%. The
increase in the Company's interest income was due primarily to an increase in
the Company's interest earning assets from approximately $1.0 billion at June
30, 1997 to approximately $1.6 billion at June 30, 1998. During the quarter
ended June 30, 1998, the Company acquired approximately $713.1 million of
interest-earning assets, compared to approximately $307.3 million during the
quarter ended June 30, 1997. In addition, the Company originated $171.9
million of loans during the quarter ended June 30, 1998, compared to
approximately $16.7 million during the quarter ended June 30, 1997.
Interest Expense. The Company's interest expense was approximately $33.8
million for the quarter ended June 30,1998 compared with approximately $20.7
million for the quarter ended June 30, 1997, an increase of 63.1%. The
increase in interest expense resulted from an increase in the Company's
interest-bearing liabilities to approximately $1.8 billion at June 30, 1998
from approximately $1.1 billion at June 30, 1997 and includes the issuance of
$100.0 million of the Company's Series B Notes in the third quarter of 1997.
The increase in interest expense was partially offset by the decrease in the
Company's weighted average cost of funds from 7.44% at June 30, 1997 to 7.00%
at June 30, 1998. The decrease was primarily the result of decreases in the
Company's financing costs related to warehouse and repurchase facilities.
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
Provision for estimated losses on loans for the quarter ended June 30, 1998
was a net recovery of approximately $1.5 million resulting from recapture of
$3.0 million of excess reserves on loans offset by additional provision of
$1.5 million. This compares with a provision for estimated losses on loans for
the quarter ended June 30, 1997 of $0.4 million.
13
<PAGE>
OTHER INCOME
The Company's other income was approximately $41.0 million for the quarter
ended June 30, 1998 compared to approximately $15.6 million for the quarter
months ended June 30, 1997, an increase of 162.9%. The components of the
Company's non-interest income are reflected in the following table:
<TABLE>
<CAPTION>
QUARTER ENDED
JUNE 30,
-----------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other income:
Servicing revenue................................. $ 1,369 $ 1,784
Real estate owned, net............................ 3,399 1,557
Bankcard income, net.............................. 997 595
Gain on sale of loans............................. 26,444 11,216
Gain on sale of securities........................ 6,116 --
Trading income.................................... 172 --
Other, net........................................ 2,473 434
----------- -----------
Total other income.............................. $ 40,970 $ 15,586
=========== ===========
</TABLE>
The increase in other income for the quarter ended June 30, 1998 is
primarily attributable to (i) the sale of loans, which resulted in gains of
approximately $26.4 million, (ii) the sale of securities, which resulted in a
gain of approximately $6.1 million, (iii) income from real estate owned, net,
resulting from the ongoing disposition of real estate relating to Discounted
Loans, and (v) loan fees and charges resulting from the Company's origination
activity.
Gain on Sale of Loans. Approximately $24.7 million of gain on sale of loans
for the quarter ended June 30, 1998 is the result of the Company's completion
of two securitizations totaling approximately $330.0 million unpaid principal
balance of loans and a whole loan sale of approximately $72.3 million unpaid
principal balance of loans. The remaining balance of gain on sale of loans is
attributable to the Company's servicing released sales of originated loans and
sale of certain loans to the Wilshire REIT.
Gain on the Sale of Securities. During the quarter ended June 30, 1998, the
Company sold mortgage-backed securities with carrying values of approximately
$95.0 million to the Wilshire REIT, resulting in gains of approximately $0.7
million. Additionally, the Company sold securities with carrying values of
approximately $29.8 million, resulting in gains of approximately $5.4 million.
The gains on sales of securities to unrelated parties reflects the Company's
strategy of investing in subordinate classes of mortgage-backed securities
which the Company believes are likely to experience an increase in value as a
result of payment history, prepayment or default experience or otherwise.
Real Estate Owned, net. The increase in income from 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. The decrease in service revenue is primarily attributable
to one-time service fees earned by the Company of approximately $0.6 million
during the quarter ended June 30, 1997, partially offset by an increase in
third party service revenue resulting primarily from the Company's servicing
for its securitization transactions.
Other, net. The increase in Other, net is primarily due to loan fees and
charges related to origination activity. During the quarter ended June 30,
1998, the Company originated approximately $171.9 million of loans.
OTHER EXPENSE
The Company's other expense totaled approximately $29.2 million for the
quarter ended June 30, 1998 compared to approximately $11.8 million for the
quarter ended June 30, 1997, an increase of 147.8%, primarily attributable to
an increase in loan service fees and expenses paid to affiliates which results
from increases in the
14
<PAGE>
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 anticipated growth.
Loan Service Fees and Expenses Paid to Affiliate. The largest component of
other expense in the quarter ended June 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 $11.2 million for the
quarter ended June 30, 1998 compared to approximately $5.0 million for the
quarter ended June 30, 1997, an increase of approximately 122.6%. The increase
in loan service fees and expenses paid to affiliates resulted primarily from
the increase in total loans from $788.0 million at June 30, 1997 to $1.3
billion at June 30, 1998 (reflects the securitization of approximately $330.0
million unpaid principal balance of loans and whole loan sale of approximately
$72.3 million unpaid principal balance of loans in June 1998). Also,
collection-related expense increased from the quarter ended June 30, 1997 to
the quarter ended June 30, 1998 due to the resolution of Discounted Loans.
Discounted Loans generally require more significant expenditures than
performing and sub-performing loans.
Compensation and Employee Benefits. Compensation and employee benefits were
approximately $9.2 million for the quarter ended June 30, 1998, compared to
approximately $3.6 million for the quarter ended June 30, 1997, an increase of
154.7%. The increase was primarily due to an increase in the average number of
full-time equivalent employees from 148 for the quarter ended June 30, 1997 to
370 for the quarter ended June 30, 1998, reflecting the expansion of business
activities, particularly loan acquisition activities, European operations, and
the growth of activities at the non-bank subsidiaries.
Other general administrative expenses increased from approximately $1.9
million for the quarter ended June 30, 1997 to approximately $6.2 million for
the quarter ended June 30, 1998, an increase of 221.5%, due primarily to
increases in travel and entertainment expense, depreciation and amortization
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 and European operations.
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 $80.2
million during the six months ended June 30, 1998 primarily as a result of the
sale of certain subordinated securities, including sales to the Wilshire REIT.
The Company's holdings of trading account securities decreased $22.2 million
during the six months ended June 30, 1998 primarily as a result of the sale of
certain subordinate securities. The Company granted the Wilshire REIT a right
of first refusal with respect to 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 the Wilshire REIT takes advantage of such investment opportunities.
Loans, net. The Company's portfolio of performing and sub-performing loans
("Non-Discounted Loans") and Discounted Loans, net of discounts and
allowances, increased by approximately $303.5 million during the six months
ended June 30, 1998 primarily as a result of the Company's business strategy
of aggressively acquiring mortgage loan portfolios.
Discounted Loans, net. The Company's portfolio of Discounted Loans decreased
by approximately $162.2 million during the six months ended June 30, 1998
primarily as a result of the acquisition of properties securing Discounted
Loans through foreclosure or deed-in-lieu thereof and the June 1998 whole loan
sale of approximately $72.3 million of Discounted Loans.
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 $250.7 million
during the six months ended June 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.
15
<PAGE>
Due from Affiliate, net. Due from affiliate, net of approximately $49.0
million at June 30, 1998 was primarily attributable to payments received in
the normal course of servicing operations by WCC, which had not yet been
remitted to the Company.
Mortgage Servicing Rights. Mortgage servicing rights increased by $9.1
million during the six months ended June 30, 1998 primarily attributable to
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 and/or amortization of
approximately $2.0 million of servicing rights.
Investment in Wilshire Real Estate Investment Trust Inc. Investment in the
Wilshire REIT increased $14.4 million primarily as a result of the Company's
purchase of 9.9% of the original 10,000,000 shares of common stock offered by
Wilshire REIT as part of its initial public offering in April 1998.
Deposits. First Bank increased its deposits by approximately $60.1 million
or 16.6% during the six months ended June 30, 1998 to fund the acquisition of
Non-Discounted Loans. Pursuant to the Cease and Desist Order, as amended (the
"Order"), imposed on First Bank by the OTS, First Bank is prohibited from
increasing its total assets, as measured at the end of each calendar quarter
above $750 million (increased from previous limitation of $553 million in
April 1998), unless such increase is 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.
Short-Term Borrowings. Short-term borrowings increased by approximately
$203.7 million during the six months ended June 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 newly originated mortgage and
manufactured housing loans, and for general business purposes. The Company's
sources of cash flow include certificates of deposit, securitizations, net
interest income and borrowings under its warehouse and repurchase financing
facilities and from institutional investors and other lenders and public and
private debt offerings, including the Notes and the Series A Notes. In certain
limited circumstances, the Company also has borrowed money from WCC in order
to fund the acquisition of loans. 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.
Sources of liquidity for First Bank include wholesale and brokered
certificates of deposit, repurchase financing facilities and FHLB advances. At
June 30, 1998, First Bank had approximately $422.7 million of certificates of
deposit. At June 30, 1998, scheduled maturities of certificates of deposit
during the 12 months ending June 30, 1999 and thereafter amounted to
approximately $360.1 million and approximately $49.7 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.
At June 30, 1998, the Company's sources of borrowing included (i) a
committed $225.0 million master repurchase agreement between First Bank and
Bear Stearns Mortgage Capital Corporation, (ii) a committed $150 million
warehouse lending agreement with Prudential Securities Credit Corporation,
(iii) a committed $75 million warehouse lending agreement with PNC, and (iv)
certain repurchase arrangements with major investment
16
<PAGE>
banks, including $425 million (committed) under a repurchase agreement with
Credit Suisse First Boston Mortgage Capital LLC and $357.5 million (committed)
under several repurchase agreements with Salomon Brothers Realty Corp. Sources
of borrowings also include FHLB advances, which are required to be secured by
eligible securities collateral, and reverse repurchase agreements. At June 30,
1998, First Bank had no FHLB advances outstanding, and was eligible to borrow
up to an aggregate of $3.8 million from the FHLB of San Francisco and had $4.0
million of unencumbered mortgage-backed and related securities which could be
pledged to secure such borrowings.
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 securitizations, 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 counterparties to its off-balance
sheet financial instruments. The Company is subject to potential financial
loss if the counterparty is unable to complete an agreed upon transaction. The
Company seeks to limit counterparty risk through financial analysis and other
monitoring procedures.
Adequate credit facilities and other sources of funding, including the
ability of the Company to securitize loans, are essential to the continuation
of the Company's ability to purchase pools of loans, mortgage-backed
securities and newly originated mortgage and manufactured housing loans. The
Company believes that cash flow from operations, the proceeds of certificates
of deposit, the availability under the warehouse financing facility and other
borrowings, and the net proceeds from securitizations will be sufficient to
fund current operating needs, commitments and capital expenditures in the near
term.
Given the Company's rapid growth and assuming that the Company continues to
experience such growth, management believes that additional debt and/or equity
financing may be required to sustain this level of growth. 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.
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. Among other things, the amendments provide for the
elimination of the liquidity requirements.
17
<PAGE>
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.
In hedging the interest rate exposure of a fixed-rate or lagging-index asset
that is held for sale, the Company creates a hedge which matches the principal
amortization of such asset against the maturity of the Company's liabilities
generally by entering into short sales or forward sales of U.S. Treasury
securities, Government securities, interest rate futures contracts, interest
rate swap agreements or the purchase of interest only mortgage securities. This
results in market gains or losses on hedging instruments, in response to
interest rate increases or decreases, respectively, which approximate the
amount of the corresponding market losses or gains, respectively, on assets
being hedged. The Company evaluates the interest rate sensitivity of each pool
of loans or securities 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.
The Company has purchased interest only securities ("IOs") to offset maturity
extension risk in the Company's loan and securities portfolio in the event that
the Company encounters slower than anticipated prepayments. Accordingly, if the
underlying mortgage collateral prepays (including prepayments as a result of
18
<PAGE>
default and repurchases by the seller) at a rate faster than anticipated, the
weighted average life of the IO will be reduced, and the market value of the
IO adversely affected. Conversely, if the underlying mortgage collateral
prepays at a rate slower than anticipated, the weighted average life of the IO
will be extended, with a consequent positive effect on the anticipated yield
to maturity and market value of the IO.
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 by the
Company to protect against the narrowing of the interest spread between fixed
rate loans and associated liabilities funding those loans. First Bank had
approximately $151.2 million notional principal amount of interest rate swap
agreements outstanding at June 30, 1998, which had the effect of decreasing
the Company's net interest income by approximately $64,000 during the six
months ended June 30, 1998.
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. Management does not believe that First Bank's
interest rate sensitivity of MVPE arising from a change in rates from 0 to 400
basis points has materially changed since December 31, 1997.
Management of First Bank 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 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.
19
<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 Company is not in material default with respect to any indebtedness
exceeding 5% of the total assets of the Company and its consolidated
subsidiaries.
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.
The Company is currently considering the acquisition of WCC in part to (i)
integrate servicing operations and eliminate servicing fees being paid to WCC,
(ii) increase fee based revenues, through servicing for unaffiliated third
parties, (iii) acquire the revenue stream in excess of the Company's servicing
costs that would otherwise have been payable to the WCC, (iv) reduce potential
regulatory concerns regarding the relationship between First Bank and WCC, and
(v) eliminate the potential conflicts of interest between the Company and WCC.
WCC is wholly-owned by the Company's principal shareholders, Andrew A.
Wiederhorn and Lawrence A. Mendelsohn. In light of Messrs. Wiederhorn's and
Mendelsohn's ownership of WCC, the acquisition would be subject to the
approval of the independent members of the Company's Board of Directors and
the receipt of a fairness opinion from a nationally recognized investment
banking firm. No final decision has been made regarding the acquisition. There
can be no assurance as to when or if the acquisition will occur.
The Company has formed a "Year 2000 review team" to (i) assess the risks in
the Company's computer systems as the calendar rolls over into the next
century, (ii) develop a Company-wide Year 2000 plan and (iii) implement the
Company-wide Year 2000 plan. The Company is currently in the advanced stages
of testing critical systems for Year 2000 compliance. Management believes the
project will be completed prior to the turn of the century. It is currently
anticipated that the cost of implementing the Year 2000 plan will be
approximately $500,000. As a contingency plan, the Company has identified, and
is on contact with, venders capable of providing back-up to critical systems
in the event of non-compliance.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<C> <S>
Exhibit 10.1 Form of Management Agreement among the Wilshire Realty
Services Corporation and Wilshire Real Estate Investment Trust
Inc.
Exhibit 11 Statement re Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
</TABLE>
20
<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: August 14, 1998
/s/ Lawrence A. Mendelsohn
By: _________________________________
LAWRENCE A. MENDELSOHN
PRESIDENT
/s/ Chris Tassos
By: _________________________________
CHRIS TASSOS
CHIEF FINANCIAL OFFICER
21
<PAGE>
EXHIBIT 10.1
FORM OF MANAGEMENT AGREEMENT
THIS AGREEMENT, dated as of April ___, 1998 by and between WILSHIRE REAL
ESTATE INVESTMENT TRUST INC., a Maryland corporation ("WREIT" and, together with
its subsidiaries and partnerships, and as the General Partner of Wilshire Real
Estate Partnership, L.P., a Delaware limited partnership (the "Company"), and
WILSHIRE REALTY SERVICES CORPORATION, a Delaware corporation (the "Manager");
WITNESSETH:
___________
WHEREAS, the Company intends to invest, through a subsidiary partnership,
in U.S. Commercial Investments, Mortgage-Backed Securities, International
Investments and Other Real Estate Related Assets ("Investments") and expects to
qualify for the tax benefits accorded by Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Company desires to retain the Manager to acquire, sell and
otherwise manage the Investments of the Company and to perform administrative
services for the Company in the manner and on the terms set forth herein;
NOW THEREFORE, in consideration of the mutual agreements herein set forth,
the parties hereto agree as follows:
SECTION 1. Definitions.
-----------
Except as the context otherwise requires, capitalized terms used but not
defined herein shall have the respective meanings assigned them in the WREIT
preliminary prospectus dated March 13, 1998. In addition, the following terms
have the meanings assigned them:
(a) "Agreement" means this Management Agreement, as amended from time to
time.
(b) "Closing Date" means the date of closing of the Company's initial
public offering of common stock.
(c) "Governing Instruments" means, in the case of a corporation, the
articles of incorporation and bylaws, in the case of a partnership, the
certificate of partnership or similar document and partnership agreement and, in
the case of a limited liability company, the certificate of formation and
operating agreement.
(d) "International Investments" means international performing, sub-
performing and non-performing mortgage loans and real properties.
(e) "Mortgage-Backed Securities" means interests in mortgage-backed
securities.
<PAGE>
(f) "Subsidiary" means any subsidiary of the Company and any partnership
or limited liability company, a general partner or managing member which is the
Company or a subsidiary of the Company.
(g) "U.S. Commercial Investments" means non-performing, sub-performing and
performing commercial and multi-family mortgage loans and commercial and multi-
family real properties in the United States.
SECTION 2. Duties of the Manager.
---------------------
(a) The Manager at all times will be subject to the supervision of the
Company's Board of Directors and will have only such functions and authority as
the Company may delegate to it. The Manager will be responsible for the day-to-
day operations of the Company and will perform (or cause to be performed) such
services and activities relating to the assets and operations of the Company as
the Manager deems to be appropriate, including:
(i) serving as the Company's consultant with respect to formulation
of investment criteria and preparation of policy guidelines by the Board of
Directors. A copy of the initial policy guidelines is attached hereto as Exhibit
A (such guidelines as are in effect from time to time, the "Guidelines");
(ii) representing the Company in connection with the purchase and
commitment to purchase assets, the sale and commitment to sell assets, and the
maintenance and administration of its portfolio of assets;
(iii) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for the
Company by the Manager;
(iv) monitoring and providing to the Board of Directors on an
ongoing basis price information and other data obtained from certain nationally
recognized dealers that maintain markets in assets identified by the Board of
Directors from time to time, and providing data and advice to the Board of
Directors in connection with the identification of such dealers;
(v) providing executive and administrative personnel, office space
and office services required in rendering services to the Company;
(vi) except for servicing operations to be conducted by Wilshire
Credit Corporation ("WCC") and certain European affiliates of the Manager (the
"European Servicers") pursuant to certain servicing agreements dated the date
hereof with the Company (the "Servicing Agreements"), administering the day-to-
day operations of the Company and performing and supervising the performance of
such other administrative functions necessary in the management of the Company
as may be agreed upon by the Manager and the Board of Directors, including the
collection of revenues (other than servicing) and the payment of the Company's
debts and obligations and maintenance of appropriate computer services to
perform such administrative functions;
(vii) communicating on behalf of the Company with the holders of any
equity or debt securities of the Company as required to satisfy the reporting
and other requirements of any governmental bodies or agencies or trading markets
and to maintain effective relations with such holders;
-2-
<PAGE>
(viii) to the extent not otherwise subject to the Servicing Agreements
executed by the Company, designating a servicer for mortgage loans sold to the
Company by originators that have elected not to service such loans and arranging
for the monitoring and administering of such servicers;
(ix) advising the Company in connection with policy decisions to be
made by the Board of Directors and in connection with the Company's borrowings
and leverage;
(x) engaging in hedging activities on behalf of the Company,
consistent with the Company's status as a REIT and with the Guidelines;
(xi) upon request by, or in accordance with the directions of, the
Board of Directors, investing or reinvesting any money of the Company; and
(xii) advising the Company regarding the maintenance of its status as
a REIT and monitoring compliance with the various REIT qualification tests and
other rules set out in the Code and Treasury Regulations thereunder.
(b) Real Estate Asset Portfolio Management. The Manager will perform
--------------------------------------
portfolio management services on behalf of the Company and the Operating
Partnership with respect to the Company's Investments. Such services will
include, but not be limited to, consulting with the Company on purchase and sale
opportunities, collection of information and submission of reports pertaining to
the Company's assets, interest rates, and general economic conditions, periodic
review and evaluation of the performance of the Company's portfolio of assets,
acting as liaison between the Company and banking, mortgage banking, investment
banking and other parties with respect to the purchase, financing and
disposition of assets, and other customary functions related to real estate
portfolio management. The Manager may enter into subcontracts with other
parties, including its Affiliates, to provide any such services to the Company.
(c) Monitoring Special Servicing. To the extent not otherwise subject to
----------------------------
the Servicing Agreements executed by the Company, the Manager will perform
monitoring services on behalf of the Company with respect to the Company's
Special Servicing rights. Such monitoring services will include, but not be
limited to, the following activities: negotiating Special Servicing agreements;
serving as the Company's consultant with respect to the Special Servicing of
mortgage loans; collection of information and submission of reports pertaining
to the mortgage loans and to moneys remitted to the Manager or the Company by
the Servicers; acting as a liaison between the servicers of the mortgage loans
and the Company and working with servicers to the extent necessary to improve
their servicing performance; with respect to mortgage loans for which the
Company is Special Servicer, periodic review and evaluation of the performance
of each servicer to determine its compliance with the terms and conditions of
the related servicing agreement. The parties acknowledge that the Company
intends to grant any Special Servicing rights obtained by it (other than the
right to foreclose) to the servicers under the Servicing Agreements.
(d) Monitoring of Primary Servicing. The Manager will monitor and
-------------------------------
administer the servicing of the Company's assets. Such monitoring and
administrative services will include, but not be limited to, the following
activities: serving as the Company's consultant with respect to the servicing of
loans; collection of information pertaining to the mortgage loans and to moneys
remitted to the Manager or the Company by servicers; periodic review and
evaluation of the performance of each servicer to determine its compliance with
the terms and conditions of the servicing agreement;
-3-
<PAGE>
and acting as a liaison between servicers and the Company; review of and
recommendations as to fire losses, easement problems and condemnation,
delinquency and foreclosure procedures with regard to mortgage loans; review of
servicers' delinquency, foreclosures and other reports on mortgage loans;
supervising claims filed under any mortgage insurance policies; and enforcing
the obligation of any servicer to repurchase mortgage loans with respect
thereto.
(e) Commercially Reasonable Efforts. The Manager agrees to use
--------------------------------
commercially reasonable efforts at all times in performing services for the
Company hereunder.
SECTION 3. Additional Activities of Manager. Nothing herein shall prevent
--------------------------------
the Manager or any of its Affiliates from engaging in other businesses or from
rendering services of any kind to any other person or entity, including
investment in, or advisory service to others investing in, any type of real
estate investment (including investments which constitute Primary Investments
for the Company); provided, however, that the Manager and its subsidiaries will
grant a right of first refusal with respect to the Company's Primary Investments
on the terms and conditions set forth below.
Directors, officers, employees and agents of the Manager or Affiliates of
the Manager may serve as directors, officers, employees, agents, nominees or
signatories for the Company or any Subsidiary, to the extent permitted by their
Governing Instruments, as from time to time amended, or by any resolutions duly
adopted by the Board of Directors pursuant to the Company's Governing
Instruments. When executing documents or otherwise acting in such capacities
for the Company, such persons shall use their respective titles in the Company.
SECTION 4. Right of First Refusal. So long as this Agreement remains in
----------------------
full force and effect, the Manager and its subsidiaries do hereby grant a right
of first refusal ("Right of First Refusal") to the Company with respect to real
estate investments which constitute Primary Investments for the Company;
provided, however, that neither the Manager nor any Affiliate of the Manager is
required to provide such Right of First Refusal with respect to Primary
Investments that consist of mortgage-backed securities where the mortgage loans
collateralizing such mortgage-backed securities were previously owned by the
Manager or an Affiliate of the Manager until they were so securitized. In
addition, the foregoing Right of First Refusal does not apply to the acquisition
of real property by the Manager or an Affiliate in connection with foreclosure
(or deed in lieu of foreclosure) on property securing a mortgage loan owned by
the Manager or an Affiliate of the Manager. With respect to acquisitions of
pools of assets consisting of both Primary Investments and Other Real Estate
Related Assets, the Right of First Refusal will only apply to the Primary
Investments contained in such pool and it is expressly agreed that the Manager
or one of its Affiliates may acquire the non-Primary Assets contained in such
pool. Further, from time to time, mortgage lenders or others offer for sale
large pools of mortgage loans and real properties pursuant to a competitive
bidding process. In such a case, the Manager or its Affiliates may choose an
unaffiliated entity with which to submit a joint bid for the pool, as long as
the Manager or its Affiliates takes title only to assets as to which it has not
given the Company the Right to First Refusal. The parties acknowledge and agree
that the Manager and its Affiliates have no obligation to reveal to the Company
or its Subsidiaries any business opportunities involving non-Primary Investments
and Other Real Estate Related Assets.
The Manager agrees that it will not invest in any Primary Assets for its
own account or that of one of its Affiliates unless a majority of the
Independent Directors of the Company have decided that the Company should not
invest in such asset. The Company agrees that it and such Independent Directors
shall use their commercially reasonable efforts to make any such decision in
sufficient time
-4-
<PAGE>
to allow the Manager or one of its affiliates to bid on and acquire such asset
if the Company determines not to invest in such asset.
The parties agree that because the market in which the Company expects to
purchase assets is characterized by rapid evolution of products and services,
and, thus, there may in the future be relationships between the Company, the
Manager, and its Affiliates in addition to those described herein, the Company
may change its policies in connection with any of the foregoing (including the
definition of Primary Investments) with the approval of the majority of the
Independent Directors.
Except for the acquisition of the Initial Investments (which have already
been approved by the Independent Director, the Manager agrees that any Primary
Investments or Other Real Estate Related Assets to be acquired by the Company
(or one of its Subsidiaries) from the Manager (or one of its Affiliates) shall
require the approval of a majority of the Independent Directors of the Company.
SECTION 5. Commitments. In order to meet the investment requirements of
-----------
the Company, as determined by the Board of Directors from time to time, the
Manager agrees at the direction of the Board of Directors to issue on behalf of
the Company commitments on such terms as are established by the Board of
Directors, including a majority of the Independent Directors, for the purchase
of Investments.
SECTION 6. Bank Accounts. At the direction of the Board of Directors, the
-------------
Manager may establish and maintain one or more bank accounts in the name of the
Company or any Subsidiary, and may collect and deposit into any such account or
accounts, and disburse funds from any such account or accounts, under such terms
and conditions as the Board of Directors may approve; and the Manager shall from
time to time render appropriate accountings of such collections and payments to
the Board of Directors and, upon request, to the auditors of the Company or any
Subsidiary.
SECTION 7. Records; Confidentiality. The Manager shall maintain
------------------------
appropriate books of accounts and records relating to services performed
hereunder, and such books of account and records shall be accessible for
inspection by representatives of the Company or any Subsidiary at any time
during normal business hours. The Manager shall keep confidential any and all
information obtained in connection with the services rendered hereunder and
shall not disclose any such information to nonaffiliated third parties except
with the prior written consent of the Board of Directors.
SECTION 8. Obligations of Manager.
----------------------
(a) The Manager shall require each seller or transferor of Investments to
the Company to make such representations and warranties regarding such
Investments as may, in the judgment of the Manager, be necessary and
appropriate. In addition, the Manager shall take such other action as it deems
necessary or appropriate with regard to the protection of the Company's
Investments and other assets.
(b) The Manager shall refrain from any action that would adversely affect
the status of the Company as a real estate investment trust or exempt from
regulations under the Investment Company Act or that, in its sole judgment made
in good faith, would violate any law, rule or regulation of any governmental
body or agency having jurisdiction over the Company or any Subsidiary or that
would
-5-
<PAGE>
otherwise not be permitted by the Company's or Subsidiary's Governing
Instruments. If the Manager is ordered to take any such action by the Board of
Directors, the Manager shall promptly notify the Board of Directors of the
Manager's judgment that such action would adversely affect such status or
violate any such law, rule or regulation or the Governing Instruments.
Notwithstanding the foregoing, the Manager, its directors, officers,
stockholders and employees shall not be liable to the Company, any Subsidiary,
the Independent Directors, or the Company's or a Subsidiary's stockholders or
partners for any act or omission by the Manager, its directors, officers,
stockholders or employees except as provided in Section 11 of this Agreement.
(c) Absent written direction from the Board of Directors, the Manager
shall use reasonable efforts to comply with the Guidelines, as they may be
revised from time to time.
SECTION 9. Compensation.
------------
(a) For each calendar quarter (or portion thereof) commencing with the
calendar quarter ending June 30, 1998, the Company shall pay to the Manager, for
services rendered under this Agreement, a base management fee calculated as a
percentage of the Average Invested Assets of the Company for such calendar
quarter (pro rated based on the number of days elapsed during any partial
calendar quarter) and equal to 1% per annum of the first $1.0 billion of Average
Invested Assets, 0.75% of the next $500.0 million of Average Invested Assets,
and 0.50% per annum of the Average Invested Assets above $1.5 billion. The term
"Average Invested Assets" for any period means the average of the aggregate book
value of the assets of the Company, including the assets of all of its direct
and indirect subsidiaries, before reserves for depreciation or bad debts or
other similar noncash reserves, computed by taking the daily average of such
values during such period. The Manager will not receive any management fee for
the period prior to the sale of the shares of Common Stock offered pursuant to
the Company's initial public offering. The base management fee is intended to
compensate the Manager for its costs in providing management services to the
Company.
(b) The Company shall pay to the Manager incentive compensation for each
calendar quarter, commencing in the calendar quarter ending June 30, 1998, in an
amount equal to the product of (A) 25% of the dollar amount by which (1)(a)
Funds from Operations (before the incentive fee) of the Company per share of
Common Stock (based on the weighted average number of shares outstanding) (b)
plus gains (or minus losses) from debt restructuring and sales of property per
share of Common Stock (based on the weighted average number of shares
outstanding), exceed (2) an amount equal to (a) the weighted average of the
price per share at the initial public offering and the prices per share at any
secondary offerings by the Company multiplied by (b) the Ten-Year U.S. Treasury
Rate plus five percent per annum multiplied by (B) the weighted average number
of shares of Common Stock outstanding during such period. "Funds from
Operations" as defined by the National Association of Real Estate Investment
Trusts ("NAREIT"), on the date hereof means net income (computed in accordance
with GAAP) excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization on real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. As used in
calculating the Manager's compensation, the term "Ten Year U.S. Treasury Rate"
means the arithmetic average of the weekly average yield to maturity for
actively traded current coupon U.S. Treasury fixed interest rate securities
(adjusted to constant maturities of ten years) published by the Federal Reserve
Board during a quarter, or, if such rate is not published by the Federal Reserve
Board, any Federal Reserve Bank or agency or department of the federal
government selected by the Company. If the Company determines in good faith that
the Ten Year U.S. Treasury Rate cannot be calculated as provided
-6-
<PAGE>
above, then the rate shall be the arithmetic average of the per annum average
yields to maturities, based upon closing asked prices on each business day
during a quarter, for each actively traded marketable U.S. Treasury fixed
interest rate security with a final maturity date not less than eight nor more
than twelve years from the date of the closing asked prices as chosen and quoted
for each business day in each such quarter in New York City by at least three
recognized dealers in U.S. government securities selected by the Company.
(c) The Manager shall compute the compensation payable under Sections 8(a)
and 8(b) of this Agreement within 45 days after the end of each quarter. A copy
of the computations made by the Manager to calculate its compensation shall
thereafter promptly be delivered to the Board of Directors and, upon such
delivery, payment of the compensation earned under Sections 8(a) and 8(b) of
this Agreement shown therein shall be due and payable within 60 days after the
end of such fiscal quarter.
(d) The Manager may charge the Company for any out-of-pocket expenses that
the Manager incurs in connection with any due diligence on assets considered for
purchase by the Company. Moreover, the Manager shall document the time spent by
the Manager's employees in performing such due diligence and shall be entitled
to reimbursement for the allocable portion of such employees' salaries and
benefits, which shall be reimbursed quarterly.
SECTION 10. [RESERVED]
SECTION 11. [RESERVED]
SECTION 12. Limits of Manager Responsibility. The Manager assumes no
--------------------------------
responsibility under this Agreement other than to render the services called for
hereunder in good faith and shall not be responsible for any action of the Board
of Directors in following or declining to follow any advice or recommendations
of the Manager, including as set forth in Section 7(b) of this Agreement. The
Manager, its directors, officers, stockholders and employees will not be liable
to the Company, any Subsidiary, the directors or the Company's or any
Subsidiary's stockholders or partners for any acts or omissions by the Manager,
its directors, officers, stockholders or employees under or in connection with
this Agreement, except by reason of acts constituting bad faith, willful
misconduct, gross negligence or reckless disregard of their duties. The Company
or any Subsidiary shall reimburse, indemnify and hold harmless the Manager, its
stockholders, directors, officers and employees of and from any and all
expenses, losses, damages, liabilities, demands, charges and claims of any
nature whatsoever, (including attorneys' fees) in respect of or arising from any
acts or omissions of the Manager, its stockholders, affiliates, directors,
officers and employees made in good faith in the performance of the Manager's
duties under this Agreement and not constituting bad faith, willful misconduct,
gross negligence or reckless disregard of its duties.
SECTION 13. No Joint Venture. The Company and the Manager are not
----------------
partners or joint venturers with each other and nothing herein shall be
construed to make them such partners or joint venturers or impose any liability
as such on either of them.
SECTION 14. Term; Termination. This Agreement shall commence on the
-----------------
Closing Date and shall continue in force until the second anniversary of the
Closing Date, and thereafter, will automatically renew for successive one-year
periods unless either party delivers a notice of termination at least 120 days
prior to the end of the then current term.
-7-
<PAGE>
Notwithstanding any other provision to the contrary, this Agreement after
the second anniversary of the Closing Date, or any extension hereof may be
terminated by the Company, or the Company may decline to extend the term of this
Agreement as provided above, upon 60 days' written notice, without cause by
majority vote of the Independent Directors or by vote of the holders of a
majority of the outstanding shares of the Company's common stock; provided that
a termination fee, equal to the sum of the base management fee and incentive
management fee earned during the twelve months preceding such termination, will
be due (and will be in addition to the base management fee and incentive
management fee paid or payable during such period).
If this Agreement is terminated pursuant to this Section 13, such
termination shall be without any further liability or obligation of either party
to the other, except as provided in Section 16 of this Agreement. If this
Agreement is terminated pursuant to this Section 13, the unvested Options
granted to the Manager and directors and executive officers of the Manager
pursuant to Section 8(c) shall continue to vest in the manner described in
Section 8(c) and in the Company's Stock Option Plan.
SECTION 15. Assignments.
-----------
(a) Except as set forth in Section 14(b) of this Agreement, this Agreement
shall terminate automatically in the event of its assignment, in whole or in
part, by the Manager, unless such assignment is consented to in writing by the
Company with the consent of a majority of the Independent Directors. Any such
assignment shall bind the assignee hereunder in the same manner as the Manager
is bound. In addition, the assignee shall execute and deliver to the Company a
counterpart of this Agreement naming such assignee as manager. The Management
Agreement shall be void upon (i) the sale of all or substantially all of the
assets of the Manager, or (ii) the recapitalization, restructuring, merger,
consolidation, combination or sale of the stock of the Manager as a result of
which WFSG or a direct or indirect subsidiary of WFSG is not the holder of
securities representing the majority of the outstanding capital stock entitled
to vote in an election of the director of the Manager. This Agreement shall not
be assigned by the Company without the prior written consent of the Manager,
except in the case of assignment by the Company to another real estate
investment trust or other organization which is a successor (by merger,
consolidation or purchase of assets) to the Company, in which case such
successor organization shall be bound hereunder and by the terms of such
assignment in the same manner as the Company is bound hereunder.
(b) Notwithstanding any provision of this Agreement, the Manager may
subcontract any or all of its responsibilities under Section 2 of this Agreement
to any of its Affiliates, which Affiliate shall be approved by the Company's
Board of Directors if such Affiliate is not a direct or indirect subsidiary of
WFSG, and the Company hereby consents to any such assignment and subcontracting
provided, however, that no such arrangement between the Manager and any
Affiliate of the Manager shall relieve the Manager of its duties or obligations
hereunder.
SECTION 16. Termination by the Company for Cause. At the option of the
------------------------------------
Company, this Agreement, or any extension hereof, shall be and become terminated
for cause immediately upon 60 days' written notice of termination from a
majority of the Independent Directors to the Manager, without payment of any
termination fee, if any of the following events shall occur:
-8-
<PAGE>
(a) if the Manager shall breach any provision of this Agreement in
any material respect and, after notice of such material breach, shall not
cure such violation within 30 days of such notice; or
(b) there is entered an order for relief or similar decree or order
with respect to the Manager by a court having competent jurisdiction in an
involuntary case under the federal bankruptcy laws as now or hereafter
constituted or under any applicable federal or state bankruptcy, insolvency
or other similar laws; or the Manager (i) ceases, or admits in writing its
inability, to pay its debts as they become due and payable, or makes a
general assignment for the benefit of, or enters into any composition or
arrangement with, creditors; (ii) applies for, or consents (by admission of
material allegations of a petition or otherwise) to the appointment of a
receiver, trustee, assignee, custodian, liquidator or sequestrator (or
other similar official) of the Manager or of any substantial part of its
properties or assets, or authorizes such an application or consent, or
proceedings seeking such appointment are commenced without such
authorization, consent or application against the Manager and continue
undismissed for 30 days; (iii) authorizes or files a voluntary petition in
bankruptcy, or applies for or consents (by admission of material
allegations of a petition or otherwise) to the application of any
bankruptcy, reorganization, arrangement, readjustment of debt, insolvency,
dissolution, liquidation or other similar law of any jurisdiction, or
authorizes such application or consent, or proceedings to such end are
instituted against the Manager without such authorization, application or
consent and are approved as properly instituted and remain undismissed for
30 days or result in adjudication of bankruptcy or insolvency; or (iv)
permits or suffers all or any substantial part of its properties or assets
to be sequestered or attached by court order and the order remains
undismissed for 30 days.
(c) If any of the events specified in Section 15(b) of this Agreement
shall occur, the Manager shall give prompt written notice thereof to the
Board of Directors upon the happening of such event.
SECTION 17. Action Upon Termination. From and after the effective date of
-----------------------
termination of this Agreement, pursuant to Sections 13, 14, or 15 of this
Agreement, the Manager shall not be entitled to compensation for further
services hereunder, but shall be paid all compensation accruing to the date of
termination and, if terminated pursuant to Section 13, the applicable
termination fee. Upon such termination, the Manager shall forthwith:
(a) pay over to the Company or a Subsidiary all money collected and held
for the account of the Company or a Subsidiary pursuant to this Agreement;
(b) deliver to the Board of Directors a full accounting, including a
statement showing all payments collected by it and a statement of all money held
by it, covering the period following the date of the last accounting furnished
to the Board of Directors with respect to the Company or a Subsidiary; and
(c) deliver to the Board of Directors all property and documents of the
Company or any Subsidiary then in the custody of the Manager.
(d) if the Company terminates this Management Agreement, the Manager may
require the Company, at the Company's expense, to register for public resale
shares of Common Stock acquired
-9-
<PAGE>
by the Manager or its affiliates within two (2) years of the termination of the
Management Agreement.
SECTION 18. Release of Money or Other Property Upon Written Request. The
-------------------------------------------------------
Manager agrees that any money or other property of the Company or any Subsidiary
held by the Manager under this Agreement shall be held by the Manager as
custodian for the Company or any Subsidiary, and the Manager's records shall be
appropriately marked clearly to reflect the ownership of such money or other
property by the Company or such Subsidiary. Upon the receipt by the Manager of
a written request signed by a duly authorized officer of the Company requesting
the Manager to release to the Company or any Subsidiary any money or other
property then held by the Manager for the account of the Company or any
Subsidiary under this Agreement, the Manager shall release such money or other
property to the Company or any Subsidiary within a reasonable period of time,
but in no event later than 60 days following such request. The Manager shall
not be liable to the Company, any Subsidiary, the directors, or the Company's or
a Subsidiary's stockholders or partners for any acts performed or omissions to
act by the Company or any Subsidiary in connection with the money or other
property released to the Company or any Subsidiary in accordance with this
Section. The Company and any Subsidiary shall indemnify the Manager, its
directors, officers, stockholders and employees against any and all expenses,
losses, damages, liabilities, demands, charges and claims of any nature
whatsoever, which arise in connection with the Manager's release of such money
or other property to the Company or any Subsidiary in accordance with the terms
of this Section 19 of this Agreement. Indemnification pursuant to this provision
shall be in addition to any right of the Manager to indemnification under
Section 11 of this Agreement.
SECTION 19. Representations and Warranties.
------------------------------
(a) The Company and the Operating Partnership hereby represents and
warrants to the Manager as follows:
(i) The Company is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has the
corporate power to own its assets and to transact the business in which it is
now engaged and is duly qualified as a foreign corporation and in good standing
under the laws of each jurisdiction where its ownership or lease of property or
the conduct of its business requires such qualification, except for failures to
be so qualified, authorized or licensed that could not in the aggregate have a
material adverse effect on the business operations, assets or financial
condition of the Company and its subsidiaries, taken as a whole. The Company
does not do business under any fictitious business name.
(ii) The Company has the corporate power and authority to execute,
deliver and perform this Agreement and all obligations required hereunder and
has taken all necessary corporate action to authorize this Agreement on the
terms and conditions hereof and the execution, delivery and performance of this
Agreement and all obligations required hereunder. No consent of any other person
including, without limitation, stockholders and creditors of the Company, and no
license, permit, approval or authorization of, exemption by, notice or report
to, or registration, filing or declaration with, any governmental authority is
required by the Company in connection with this Agreement or the execution,
delivery, performance, validity or enforceability of this Agreement and all
obligations required hereunder. This Agreement has been, and each instrument or
document required hereunder will be, executed and delivered by a duly authorized
officer of the Company, and this Agreement constitutes, and each instrument or
document required hereunder when executed and
-10-
<PAGE>
delivered hereunder will constitute, the legally valid and binding obligation of
the Company enforceable against the Company in accordance with its terms.
(iii) The execution, delivery and performance of this Agreement and
the documents or instruments required hereunder will not violate any provision
of any existing law or regulation binding on the Company, or any order,
judgment, award or decree of any court, arbitrator or governmental authority
binding on the Company, or the Governing Instruments of, or any securities
issued by the Company or of any mortgage, indenture, lease, contract or other
agreement, instrument or undertaking to which the Company is a party or by which
the Company or any of its assets may be bound, the violation of which would have
a material adverse effect on the business operations, assets or financial
condition of the Company and its subsidiaries, taken as a whole, and will not
result in, or require, the creation or imposition of any lien on any of its
property, assets or revenues pursuant to the provisions of any such mortgage,
indenture, lease, contract or other agreement, instrument or undertaking.
(b) The Manager hereby represents and warrants to the Company and the
Operating Partnership as follows:
(i) The Manager is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its formation, has the corporate
power to own its assets and to transact the business in which it is now engaged
and is duly qualified to do business and is in good standing under the laws of
each jurisdiction where its ownership or lease of property or the conduct of its
business requires such qualification, except for failures to be so qualified,
authorized or licensed that could not in the aggregate have a material adverse
effect on the business operations, assets or financial condition of the Manager
and its subsidiaries, taken as a whole. The Manager does not do business under
any fictitious business name.
(ii) The Manager has the corporate power and authority to execute,
deliver and perform this Agreement and all obligations required hereunder and
has taken all necessary corporate action to authorize this Agreement on the
terms and conditions hereof and the execution, delivery and performance of this
Agreement and all obligations required hereunder. No consent of any other person
including, without limitation, partners and creditors of the Manager, and no
license, permit, approval or authorization of, exemption by, notice or report
to, or registration, filing or declaration with, any governmental authority is
required by the Manager in connection with this Agreement or the execution,
delivery, performance, validity or enforceability of this Agreement and all
obligations required hereunder. This Agreement has been, and each instrument or
document required hereunder will be, executed and delivered by a duly authorized
agent of the Manager, and this Agreement constitutes, and each instrument or
document required hereunder when executed and delivered hereunder will
constitute, the legally valid and binding obligation of the Manager enforceable
against the Manager in accordance with its terms.
(iii) The execution, delivery and performance of this Agreement and the
documents or instruments required hereunder, will not violate any provision of
any existing law or regulation binding on the Manager, or any order, judgment,
award or decree of any court, arbitrator or governmental authority binding on
the Manager, or the Governing Agreements of, or any securities issued by the
Manager or of any mortgage, indenture, lease, contract or other agreement,
instrument or undertaking to which the Manager is a party or by which the
Manager or any of its assets may be bound, the violation of which would have a
material adverse effect on the business operations, assets or financial
condition of the Manager and its subsidiaries, taken as a whole, and will not
result in,
-11-
<PAGE>
or require, the creation or imposition of any lien on any of its property,
assets or revenues pursuant to the provisions of any such mortgage, indenture,
lease, contract or other agreement, instrument or undertaking.
SECTION 20. Notices. Unless expressly provided otherwise herein, all
-------
notices, requests, demands and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been duly given,
made and received when delivered against receipt or upon actual receipt of
registered or certified mail, postage prepaid, return receipt requested,
addressed as set forth below:
(a) If to the REIT:
Wilshire Real Estate Investment Trust Inc.
1776 SW Madison St.
Portland, Oregon 97205
Attention: President
with a copy given in the manner prescribed
above, to:
James M. Waddington, Esq.
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
(b) If to the Manager:
Wilshire Realty Services Corporation
1776 SW Madison St.
Portland, Oregon 97205
Attention: President
with a copy given in the manner prescribed
above, to:
James M. Waddington, Esq.
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
Any party may alter the address to which communications or copies are to be
sent by giving notice of such change of address in conformity with the
provisions of this Section 21 for the giving of notice.
SECTION 21. Binding Nature of Agreement; Successors and Assigns. This
---------------------------------------------------
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, personal representatives, successors and assigns as
provided herein.
-12-
<PAGE>
SECTION 22. Entire Agreement. This Agreement contains the entire
----------------
agreement and understanding among the parties hereto with respect to the subject
matter hereof, and supersedes all prior and contemporaneous agreements,
understandings, inducements and conditions, express or implied, oral or written,
of any nature whatsoever with respect to the subject matter hereof. The express
terms hereof control and supersede any course of performance and/or usage of the
trade inconsistent with any of the terms hereof. This Agreement may not be
modified or amended other than by an agreement in writing.
SECTION 23. Controlling Law. This Agreement and all questions relating to
---------------
its validity, interpretation, performance and enforcement shall be governed by
and construed, interpreted and enforced in accordance with the laws of the State
of New York, without reference to its choice of law principles.
SECTION 24. Schedules and Exhibits. All Schedules and Exhibits referred
----------------------
to herein or attached hereto are hereby incorporated by reference into, and made
a part of, this Agreement.
SECTION 25. Indulgences, Not Waivers. Neither the failure nor any delay
------------------------
on the part of a party to exercise any right, remedy, power or privilege under
this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any other right, remedy, power or privilege,
nor shall any waiver of any right, remedy, power or privilege with respect to
any occurrence be construed as a waiver of such right, remedy, power or
privilege with respect to any other occurrence. No waiver shall be effective
unless it is in writing and is signed by the party asserted to have granted such
waiver.
SECTION 26. Costs and Expenses. Each party hereto shall bear its own
------------------
costs and expenses (including the fees and disbursements of counsel and
accountants) incurred in connection with the negotiations and preparation of and
the closing under this Agreement, and all matters incident thereto.
SECTION 27. Titles Not to Affect Interpretation. The titles of paragraphs
-----------------------------------
and subparagraphs contained in this Agreement are for convenience only, and they
neither form a part of this Agreement nor are they to be used in the
construction or interpretation hereof.
SECTION 28. Execution in Counterparts. This Agreement may be executed in
-------------------------
any number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
SECTION 29. Provisions Separable. The provisions of this Agreement are
--------------------
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
SECTION 30. Gender. Words used herein regardless of the number and gender
------
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
-13-
<PAGE>
SECTION 31. Computation of Interest. Interest will be computed on the
-----------------------
basis of a 360-day year consisting of twelve months of thirty days each.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
WILSHIRE REAL ESTATE INVESTMENT TRUST INC.,
a Maryland corporation and the General Partner of
Wilshire Real Estate Partnership L.P.
By: __________________________________________
Its: _________________________________________
WILSHIRE REALTY SERVICES CORPORATION, a
Delaware corporation
By: __________________________________________
Its: _________________________________________
-14-
<PAGE>
Exhibit A
WILSHIRE REAL ESTATE INVESTMENT TRUST INC.
Form of Guidelines
------------------
The following guidelines set forth certain parameters for the
operations of Wilshire Real Estate Investment Trust Inc. (the "Company"):
1. Geographical: Without in any way limiting the ability of the Company
------------
and its advisors to invest in specific assets and once the Company is fully
invested, the Company and its advisors will seek, in making investments in real
estate assets or real estate related assets, to avoid the concentration of
assets in geographic regions. For purposes hereof, unless the Company or its
advisors (after reviewing the potential risks to the Company and return on an
investment) determine otherwise, "concentration of assets" means more than 50%
of the Company's assets being invested in any one geographic region (e.g. a
state in the United States or the South-Eastern region of the United Kingdom).
2. Portfolio Composition: Without in any way limiting the ability of the
---------------------
Company and its advisors to invest in specific assets and once the Company is
fully invested, the Company and its advisors will seek, in making investments in
real estate assets or real estate related assets, to maintain a portfolio
composition which will generally further the aims of the Company, such as
maintaining its status as a real estate investment trust and generating current
income and long term gains.
3. Legal and Tax Matters: In making investments in real estate assets or
---------------------
real estate related assets, the Company and its advisors will at all times use
their respective best efforts to invest in a manner that will enable the Company
to satisfy the requirements for being classified as a real estate investment
trust for federal tax purposes, to avoid any federal income or excise tax
liability imposed by the Internal Revenue Code (the "Code"), and to ensure that
neither the Operating Partnership nor any portion thereof will be classified as
a "publicly traded partnership" for purposes of section 7704 of the Code or
otherwise as an association taxable as a corporation.
4. Transactions with Affiliates: In purchasing investments in real estate
----------------------------
assets or real estate related assets from Affiliates, the Company and its
advisors will comply (to the extent provided therein) with the provisions of the
Management Agreement between Wilshire Realty Services Corporation and the
Company requiring approval of the Independent Directors.
Dated: April ___, 1998
-15-
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Diluted net income per share:
Net income............................................. $ 7,161 $ 5,174
Preferred Stock dividend............................... (417) --
---------- ---------
Net income available to common shareholders.......... $ 6,744 $ 5,174
========== =========
Average number of shares outstanding................... 10,403,889 7,570,000
Net effect of dilutive stock options-based on treasury
stock method.......................................... 615,273 282,328
---------- ---------
Total average shares............................... 11,019,162 7,852,328
========== =========
Diluted net income per share........................... $ 0.61 $ 0.66
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AS OF JUNE 30, 1998 AND STATEMENT OF EARNINGS FOR THE
SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 49,127
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 16,728
<INVESTMENTS-HELD-FOR-SALE> 218,789
<INVESTMENTS-CARRYING> 22,957
<INVESTMENTS-MARKET> 0
<LOANS> 1,319,999
<ALLOWANCE> 0
<TOTAL-ASSETS> 1,948,868
<DEPOSITS> 422,740
<SHORT-TERM> 1,170,229
<LIABILITIES-OTHER> 33,924
<LONG-TERM> 184,245
0
0
<COMMON> 117,708
<OTHER-SE> 20,022
<TOTAL-LIABILITIES-AND-EQUITY> 1,948,868
<INTEREST-LOAN> 59,046
<INTEREST-INVEST> 15,293
<INTEREST-OTHER> 1,802
<INTEREST-TOTAL> 76,141
<INTEREST-DEPOSIT> 11,122
<INTEREST-EXPENSE> 64,253
<INTEREST-INCOME-NET> 11,888
<LOAN-LOSSES> (3,000)
<SECURITIES-GAINS> 9,831
<EXPENSE-OTHER> 48,999
<INCOME-PRETAX> 12,997
<INCOME-PRE-EXTRAORDINARY> 12,997
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,161
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.61
<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>
