<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
(Mark One)
[XANNUAL]REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 (Fee Required)
For the fiscal year ended December 31, 1997
OR
[_TRANSITION]REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required)
For the transition period from to
Commission file number 0-21845
WILSHIRE FINANCIAL SERVICES GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 93-1223879
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
97205
1776 SW MADISON STREET, PORTLAND, OR (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(503) 223-5600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE NAME OF EACH
OF EXCHANGE
EACH ON WHICH
CLASS REGISTERED
----- ------------
<S> <C>
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing sales price as quoted on
NASDAQ on February 28, 1998 was $112,320,739.
As of February 28, 1998, 11,070,000 shares, not including options to
purchase 1,419,530 shares, of Wilshire Financial Services Group Inc.'s common
stock, par value $.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
PART I.................................................................... 3
1. Business............................................................. 3
2. Properties........................................................... 14
3. Legal Proceedings.................................................... 15
4. Submission of Matters to a Vote of Security Holders.................. 15
PART II................................................................... 15
5. Market for the Registrant's Common Equity and Related Stockholder
Matters................................................................ 15
6. Selected Financial Data and Operating Statistics..................... 15
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 19
7A. Quantitative and Qualitative Disclosures About Market Risk.......... 35
8. Financial Statements and Supplementary Data.......................... 35
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 35
PART III.................................................................. 36
10. Directors and Executive Officers of the Registrant.................. 36
11. Executive Compensation.............................................. 38
12. Security Ownership of Certain Beneficial Owners and Management...... 46
13. Certain Relationships and Related Transactions...................... 47
PART IV................................................................... 47
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 47
</TABLE>
2
<PAGE>
PART I.
ITEM 1. BUSINESS
GENERAL
Wilshire Financial Services Group Inc. ("WFSG" or the "Company") is a
financial services holding company for certain companies and businesses
previously held as part of, and operated by, the Wilshire group of companies
(the "Wilshire Companies") pursuant to a reorganization of the Wilshire
Companies. As part of the reorganization, certain companies forming part of
the Wilshire Companies became subsidiaries of WFSG and certain companies,
notably Wilshire Credit Corporation (the "U.S. Servicer"), did not become
subsidiaries of WFSG and remain privately held (the "Wilshire Private
Companies").
For the year ended December 31, 1997, the principal operations of WFSG were
conducted through a nonbank subsidiary, Wilshire Funding Corporation ("WFC")
and two second-tier subsidiary savings banks, Girard Savings Bank, F.S.B.
("GSB" or "Girard") and First Bank of Beverly Hills, F.S.B. ("FBBH" or "First
Bank") (collectively, the "Savings Banks"). On December 31, 1997, First Bank
was merged into Girard and the surviving entity was renamed First Bank of
Beverly Hills, F.S.B. As a result, the Company's operations are currently
conducted primarily through WFC and 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, WFC and First Bank are located in
Portland, Oregon. The Company's primary sources of revenue are real estate and
consumer loans acquired in purchase transactions, mortgage-backed securities,
loan securitization and whole loan sale transactions, and merchant bankcard
processing operations.
BUSINESS ACTIVITIES
Business Strategy. The Company believes that its success depends on its
ability to (i) properly evaluate credit risk, (ii) efficiently service pools
of loans, (iii) fund acquisitions on a cost effective basis and (iv) manage
interest rate risk. The Company's objective is to expand in markets where it
can capitalize on its core competence in these areas through a strategy
consisting of the following key elements:
. Growth of Acquisitions of Loan Pools;
. Expansion of Fee Based Income;
. Expansion of Mortgage Loan Origination Network and Products;
. Opportunistic Acquisitions from Specialty Finance Companies; and
. Growth of Merchant Bankcard Processing Operations.
ACQUISITIONS OF POOLS OF LOANS
The Company primarily acquires pools of performing, sub-performing and non-
performing residential and commercial mortgage loans, as well as foreclosed
real estate and mortgage-backed securities. The Company also acquires newly-
originated residential mortgage and manufactured housing loans through
correspondents. At December 31, 1997, the Company had total assets of
approximately $1.6 billion, including approximately $928.0 million of loans,
approximately $169.6 million of foreclosed real estate and approximately
$362.3 million of mortgage-backed and U.S. government securities.
The Company acquires pools of loans that, at the time of acquisition,
consist primarily of either (a) non-performing loans that, because of their
delinquent status, are available for purchase at prices that reflect a
significant discount from their unpaid principal balances ("Discounted Loans")
or (b) performing and sub-performing loans that are available for purchase at
prices that more closely approximate their unpaid principal balances ("Non-
Discounted Loans"). At December 31, 1997, the Company held approximately
$463.4 million of Discounted Loans and approximately $464.6 million of Non-
Discounted Loans.
3
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The following table sets forth the composition of the Company's portfolio of
Non-Discounted Loans and Discounted Loans by type of loan at the dates
indicated.
COMPOSITION OF THE NON-DISCOUNTED LOANS AND DISCOUNTED LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1997 1996 1995 1994
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
NON-DISCOUNTED LOANS:
Single-family residential............ $306,601 $ 74,895 $139,566 $ 53,095
Multi-family residential............. 68,301 69,044 71,239 77,884
Commercial real estate(1)............ 95,133 63,374 53,458 57,881
Consumer and other................... 49,443 22,817 19,753 6,733
-------- -------- -------- --------
Non-Discounted Loan portfolio.......... 519,478 230,130 284,016 195,593
Unaccreted discount and deferred fees.. (23,830) (6,232) (14,362) (8,946)
Valuation allowance(2)................. (31,046) (31,936) (10,237) (7,270)
-------- -------- -------- --------
Total Non-Discounted Loans, net...... $464,602 $191,962 $259,417 $179,377
======== ======== ======== ========
DISCOUNTED LOANS:
Single-family residential............ $507,206 $276,759 $ 50,937 $ 348
Multi-family residential............. 16,300 317 -- --
Commercial real estate............... 79,370 4,919 1,523 432
Consumer and other(3)................ 238,152 1,342 979 2,215
-------- -------- -------- --------
Discounted Loan portfolio.............. 841,028 283,337 53,439 2,995
Unaccreted discount and deferred
fees(3)............................... (290,444) (58,088) (6,671) (470)
Valuation allowance(2)................. (87,229) (5,619) (15,414) (431)
-------- -------- -------- --------
Total Discounted Loans, net.......... $463,355 $219,630 $ 31,354 $ 2,094
======== ======== ======== ========
</TABLE>
- --------
(1) The Company or its affiliates intend to sell to the Wilshire REIT (as
defined below) certain U.S. Commercial Investments (as defined below)
having an aggregate principal balance of approximately $46.1 million.
(2) For discussion of the valuation allowance allocation for purchase
discount, see "Asset Quality--Allowances for Losses."
(3) In the first quarter of 1997, the Company acquired approximately $174.2
million of consumer loans for less than 1.1% of their face amount.
Accordingly, the amounts shown for "Consumer and other" and "Unaccreted
discount and deferred fees" increased substantially.
The real properties which secure the Company's Non-Discounted Loans are
located throughout the United States. At December 31, 1997, the five states
with the greatest concentration of properties securing the Company's Non-
Discounted Loans were California, New Jersey, New York, Massachusetts and
Maryland, which had $252.5 million, $42.8 million, $32.2 million, $13.9
million and $10.2 million principal amount of loans, respectively. The real
properties which secure the Company's Discounted Loans are located throughout
the United States and Europe. At December 31, 1997, the five states with the
greatest concentration of properties securing the Company's Discounted Loans
were New York, New Jersey, California, Connecticut and Pennsylvania, which had
$129.5 million, $82.4 million, $45.4 million, $31.3 million and $27.4 million
principal amount of loans, respectively.
The following table sets forth certain information at December 31, 1997
regarding the dollar amount for Non-Discounted Loans based on their
contractual terms to maturity and includes scheduled payments but not
potential prepayments, as well as the dollar amount of those loans which have
fixed or adjustable interest rates. No information is shown with respect to
Discounted Loans because those loans, by definition, are in default and
4
<PAGE>
unlikely to mature in accordance with their stated amortization schedules.
Demand loans, loans having no stated schedule of repayments and no stated
maturity and overdrafts are reported as due in one year or less. Loan balances
have not been reduced for undisbursed loan proceeds, unearned discounts and
the allowance for loan losses.
MATURITY OF NON-DISCOUNTED LOANS
<TABLE>
<CAPTION>
MATURING IN
--------------------------------------------
AFTER ONE AFTER FIVE AFTER
ONE YEAR YEAR THROUGH YEARS THROUGH TEN
OR LESS FIVE YEARS TEN YEARS YEARS
-------- ------------ ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Single-family residential........ $ 5,149 $ 5,659 $10,390 $285,403
Multi-family residential......... 14,127 23,173 14,014 16,987
Commercial and other mortgage
loans........................... 26,151 31,194 17,321 20,467
Consumer and other loans......... 10,058 10,498 3,579 25,308
Interest rate terms on amounts
due after one year:
Fixed.......................... -- 32,074 30,527 140,614
Adjustable..................... -- 38,450 14,777 207,551
</TABLE>
Scheduled contractual principal repayments do not reflect the actual
maturities of Non-Discounted Loans because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses. The average life of mortgage
loans, particularly fixed-rate loans, tends to increase when current mortgage
loan rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgages are substantially higher
than prevailing mortgage loan rates.
The Company intends to grant a right of first refusal to Wilshire Real
Estate Investment Trust Inc. (the "Wilshire REIT") with respect to discounted
U.S. commercial mortgage loans and U.S. commercial properties ("U.S.
Commercial Investments"). 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.
International Assets and Operations
The Company in the fourth quarter of 1996 expanded its loan acquisition
activities to the United Kingdom and France. At December 31, 1997, the Company
had established offices in London and Paris. The Company also established loan
servicing operations in the United Kingdom and France to service loans for
itself and third parties. The Company believes that there is a demand in the
European market for U.S.-style servicing with its automated systems and
detailed investor reporting and aggressive servicing and work out approaches.
Most of the purchasers of distressed assets in the United Kingdom and France
are U.S.-based companies and have utilized U.S.-style servicing and investor
reporting in connection with the purchase of distressed loans in the United
States. With the exception of recently originated loans, the prevailing loan
servicing and reporting systems in the United Kingdom and France are less
technologically developed and more labor intensive than those in the United
States. The Company's loan servicing operations in Western Europe utilize the
U.S. Servicer's servicing system, which has been adapted for servicing loans
in Western Europe.
The Company intends to sell to the Wilshire REIT a participation interest in
two pools of loans in the United Kingdom for a purchase price of approximately
$3.4 million. The Company intends to grant the Wilshire REIT an option to
purchase all or a portion of the Company's two portfolios of international
investments in France for a purchase price of up to $110.0 million, subject to
the Company's acquiring such interests. The Wilshire REIT is currently
evaluating the suitability of such investments under U.S. tax and French law.
The Company intends to grant a right of first refusal to the Wilshire REIT
with respect to international Discounted and Non-Discounted Loans and
properties ("International Investments"). 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.
5
<PAGE>
Acquisition of Securities
The Company has acquired mortgage-backed securities, consisting primarily of
subordinate interests in private-label securities backed by loans that were
originated by and are being serviced by unaffiliated third parties as well as
certain governmental agency and other securities. In addition, the Company
retains or, in certain cases, acquires in the secondary market subordinate and
other classes of mortgage-backed securities backed by loans that were
previously held in a portfolio of the Company or the Wilshire Private
Companies and for which the Company is continuing to act as servicer. The
following table sets forth the Company's holdings of mortgage-backed and other
securities at the dates indicated:
MORTGAGE-BACKED SECURITIES AND OTHER SECURITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Available for sale:
Mortgage-backed securities.................... $298,964 $31,270 $ 9,083
Trading account securities:
Mortgage-backed securities.................... 38,969 24,541 --
Held to maturity:
U.S. Government and other securities.......... 5,946 7,429 6,470
Mortgage-backed securities.................... 18,468 21,724 13,119
-------- ------- -------
Total....................................... 24,414 29,153 19,589
-------- ------- -------
Total investment securities................. $362,347 $84,964 $28,672
======== ======= =======
</TABLE>
The Company intends to sell to the Wilshire REIT a portion of its mortgage-
backed securities for approximately $95.0 million. In addition, the Company
intends to grant a right of first refusal to the Wilshire REIT with respect to
mortgage-backed securities primarily comprised of interests in residential
mortgage loans ("MBS Investments"). As a consequence, the opportunity for the
Company to invest in MBS Investments would be limited to the extent the
Wilshire REIT takes advantage of such investment opportunity.
MORTGAGE LOAN ORIGINATIONS
The Company operates a mortgage loan origination program through its
mortgage loan origination subsidiary and the U.S. Servicer for the
origination, through correspondents, of related first and second lien mortgage
loans and manufactured housing loans. The Company does not seek to compete
broadly with other mortgage and secured loan originators but, instead, targets
market niches where management believes its experience in evaluating credit
risk and servicing non-conforming loans gives it a competitive advantage. The
Company believes that the higher risk generally associated with non-conforming
loans is offset by the Company's strong credit underwriting guidelines and the
higher pricing associated with these loans.
The U.S. Servicer originates residential mortgage loans in accordance with
the Company's credit underwriting guidelines through its correspondent
relationships and transfers the newly-originated mortgage loans to the
Company, which simultaneously provides the funding for those loans. The U.S.
Servicer is reimbursed for fees and expenses incurred in connection with its
origination activities but does not receive any compensation.
Since commencing its mortgage loan origination program through December 31,
1997, the Company has purchased loans totaling approximately $110.4 million in
principal amount. Approximately 30.0%, 13.0%, 5.2%, 4.6% and 4.6% of the
original principal amount of those loans were collateralized by properties in
California, Oregon, Texas, Colorado and Arizona, respectively.
In December 1997, the Company purchased certain assets of a mortgage loan
originator located in California for a purchase price of approximately $2.8
million. The Company expects to conduct a substantial portion of its mortgage
origination program through its mortgage loan origination subsidiary in future
periods.
MERCHANT BANKCARD PROCESSING OPERATIONS
The Company is continuing to develop its merchant bankcard processing
operations, which generate revenues through merchant discounts and processing
fees for Visa(R) and MasterCard(R) transactions. The
6
<PAGE>
Company's bankcard processing operations focus on certain higher risk market
niches, principally audio-text transactions, where the Company believes it
obtains higher returns. Bankcard revenues, net of processing expense, have
increased from approximately $1.2 million in 1995 to approximately $1.7
million in 1996 and totaled approximately $2.0 million in 1997.
SERVICING
The U.S. Servicer. The U.S. Servicer has developed specialized procedures
and proprietary software designed to effectively service performing, non-
performing and sub-performing loans and foreclosed real estate. The U.S.
Servicer designs a servicing plan for each underlying loan and property in a
pool that it has been requested to service and as part of the acquisition
analysis on a pool that is intended to maximize cash flow from that loan or
property. Discounted Loans are generally resolved within one to two years
through foreclosure, compromise, a discounted payoff or reinstatement. Non-
Discounted Loans are actively serviced to ensure timely and accurate payments
over their remaining lives.
The Company is a party to a loan servicing agreement with the U.S. Servicer
pursuant to which the U.S. Servicer acts as sub-servicer for the Company and
provides loan portfolio management services, including billing, portfolio
administration and collection services for the Company's pools of loans. The
Company pays the U.S. Servicer a servicing fee equal to or below prevailing
market rates for each pool of loans that the U.S. Servicer is servicing for
the Company. The Company is considering acquiring the Wilshire Private
Companies (including the U.S. Servicer), but at this time, no decision has
been made to proceed with the potential acquisition of the Wilshire Private
Companies.
First Bank is party to a loan servicing agreement with the U.S. Servicer
pursuant to which the U.S. Servicer provides loan portfolio management
services, including billing, portfolio administration and collection services,
for all loans owned, acquired or made by First Bank.
European Servicing. In the fourth quarter of 1996, the Company established
loan servicing operations in the United Kingdom and France to service loans
for itself and third parties. The Company believes that there is a demand in
the European market for U.S.-style loan servicing, with its automated systems
and detailed investor reporting and aggressive workout approaches. Most
purchasers of distressed loans in the United Kingdom and France are U.S. based
and have utilized U.S.-style servicing and investor reporting in connection
with the purchase of distressed loans in the United States. With the exception
of recently originated loans, management believes that the prevailing loan
servicing systems in the United Kingdom and France are less technologically
developed and more labor intensive than those in the United States. The
Company's loan servicing operations in Western Europe utilize the U.S.
Servicer's servicing system, which has been adapted for servicing loans in
Western Europe.
FUNDING SOURCES
General. In order to maximize the return on its investment in acquired
loans, the Company funds acquisitions with third party debt financing so that
the Company's invested capital is generally 10% or less of the purchase price
for the loans. The three principal sources for such funding are warehouse and
repurchase agreements with major investment banks, deposits at First Bank and
the securitization of loans. In addition, the Company has publicly sold its
Common Stock, sold its 13% Notes due 2004 (the "Notes") and sold its 13%
Series A Notes due 2004 (the "Series A Notes"). In the first quarter of 1998,
the Company completed an exchange offer, pursuant to which the holders of the
Series A Notes exchanged their Series A Notes for 13% Series B Notes due 2004
of the Company (the "Series B Notes"), which contain substantially identical
terms as the Series A Notes, except with respect to restrictions on transfer.
In certain limited circumstances, the Company has also borrowed money from the
Wilshire Private Companies in order to fund the acquisition of loans. The
Company repaid such borrowings with the issuance of its Cumulative Redeemable
PIK Preferred Stock (the "PIK Preferred Stock") on July 31, 1997. The Company
redeemed the PIK Preferred Stock in February 1998. Management of the Company
closely monitors rates and terms of competing sources of funds on a regular
basis and generally utilizes the source which is the most cost effective.
7
<PAGE>
The following table sets forth information relating to the Company's
borrowings and other interest-bearing obligations at the dates indicated.
BORROWINGS AND INTEREST-BEARING OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996 1995
---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Deposits.................................... $ 362,598 $501,614 $303,524
Warehouse and Repurchase Agreements......... 966,500 97,624 13,000
Notes Payable and Subordinated Debt......... 184,245 75,000 11,000
---------- -------- --------
Total..................................... $1,513,343 $674,238 $327,524
========== ======== ========
</TABLE>
The following table sets forth certain information related to the Company's
short-term borrowings having average balances during the period of greater
than 30% of stockholders' equity at the end of the period. During each
reported period, FHLB advances and repurchase agreements are the only
categories for borrowings meeting this criteria. Averages are determined by
utilizing month-end balances.
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED DECEMBER 31,
------------------------
1997 1996 1995
------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Average amount outstanding during the period....... $ 479 $ 2,420 $1,381
Maximum month-end balance outstanding during the
period............................................ 8,000 11,000 8,000
Weighted average rate:
During the period................................ 5.67% 6.57% 7.53%
At end of period................................. -- -- --
Warehouse and repurchase agreements:
Average amount outstanding during the period....... 586,370 51,316 4,122
Maximum month-end balance outstanding during the
period............................................ 966,500 190,000 14,950
Weighted average rate:
During the period................................ 7.45% 6.88% 5.62%
At end of period................................. 7.32% 7.88% 6.70%
</TABLE>
Repurchase Facilities. The Company has entered into a master repurchase
agreement with Credit Suisse First Boston Mortgage Capital LLC ("CSFBMC").
CSFBMC has agreed to lend up to $350 million to the Company for the purchase
of portfolios of performing and non-performing mortgage loans. Subsequent to
December 31, 1997, the facility was increased to $425 million.
The Company has entered into several master repurchase agreements with
Salomon Brothers Realty Corp., pursuant to which Salomon Brothers has lent the
Company $357.5 million as of December 31, 1997.
The Company has entered into a master repurchase agreement with Bear,
Stearns International Limited. Though such master repurchase agreement does
not specify a maximum amount available under such agreement, the parties have
currently agreed that such agreement may be used for up to $100 million of
acquisitions.
The Company has entered into a master repurchase agreement with CS First
Boston (Hong Kong) Limited for the purchase of portfolios of subordinate
securities. Though such master repurchase agreement does not specify a maximum
amount available under such agreement, the parties have currently agreed that
such agreement may be used for up to $200 million of acquisitions.
The Company has entered into a master repurchase agreement with Salomon
Brothers Realty Corp. Though such agreement does not specify a maximum amount
available under such agreement, the parties have currently agreed that such
agreement may be used for up to $100 million of acquisitions.
8
<PAGE>
Warehouse Facilities. The Company has a secured warehouse financing facility
with Prudential Securities Credit Corporation of up to $150 million for the
origination or purchase of residential first and second lien mortgage loans.
Securitizations. At December 31, 1997, the Company and its affiliates had
securitized $1.0 billion of securities through six publicly offered and three
privately placed securitizations, including non-performing and sub-performing
mortgage loans, manufactured housing loans, consumer loans, non-conforming
mortgage loans and foreclosed real estate. Securitizations are expected to
allow the Company to increase its loan acquisition and origination volume,
reduce the risks associated with interest rate fluctuations and provide access
to longer term funding sources. The Company currently intends to complete
securitizations either through private placements or in public offerings when
advantageous.
Funding Sources for First Bank. The primary source of deposits for First
Bank currently is "wholesale" certificates of deposit. To a lesser extent
First Bank obtains brokered certificates of deposit from national investment
banking firms which pursuant to agreements with First Bank, solicit funds from
their customers for deposit with First Bank. At December 31, 1997, $112.4
million or 31.0% of First Bank's total deposits were brokered and $242.3
million or 66.8% were wholesale deposits. Wholesale deposits generally are
obtained on more economically attractive terms to First Bank than brokered
deposits.
First Bank's funding strategy has been to offer deposit rates above those
customarily offered by banks and savings and loans in its markets. First Bank
has been able to pursue this strategy because the general and administrative
costs associated with operating First Bank is significantly lower than
traditional banks and savings institutions with branch office networks. First
Bank has generally accumulated deposits by participating in deposit rate
surveys which list First Bank among the higher rate paying insured
institutions, and periodically advertising in various local market newspapers
and other media. However, because First Bank competes for deposits primarily
on the basis of rates, First Bank could experience difficulties in attracting
deposits if they could not continue to offer deposit rates at levels above
those of other banks and savings institutions.
On October 27, 1997, First Bank and Girard consented to separate but similar
cease and desist orders (the "Orders") issued by the OTS, which among other
things prohibited the Savings Banks from increasing their total assets, as
measured at the end of each calendar quarter in excess of certain specified
amounts. The Orders superseded previously existing cease and desist orders
between the institutions and the OTS issued on October 31, 1996. With the
approval of the OTS, First Bank and Girard were merged on December 31, 1997.
Management believes that First Bank must continue to meet the requirements of
the Orders (hereinafter, referred to as the "Order"). The Order prohibits
First Bank from increasing total assets, as measured at the end of each
calendar quarter in excess of $553 million plus total net interest credited on
deposit liabilities. On March 27, 1998, the OTS provided First Bank conceptual
approval to increase its total assets to $750 million. There can be no
assurance as to when or if the OTS will amend the Order to reflect such
increase.
The following table sets forth information relating to the First Bank's
deposits at the dates indicated.
DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
AVG. AVG. AVG.
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing checking
accounts......................... $ 5,959 0.00% $ 5,625 0.00% $ 5,111 0.00%
NOW and money market checking
accounts......................... 1,563 1.47 2,023 1.82 1,267 2.99
Savings accounts.................. 329 2.02 480 2.15 304 2.38
Certificates of deposit........... 354,747 6.02 493,486 5.92 296,842 6.15
-------- ---- -------- ---- -------- ----
Total deposits.................. $362,598 5.83% $501,614 5.84% $303,524 6.03%
======== ==== ======== ==== ======== ====
</TABLE>
9
<PAGE>
The following table sets forth, by various interest rate categories, First
Bank's certificates of deposit at December 31, 1997.
INTEREST RATES FOR CERTIFICATES OF DEPOSIT
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
3.50% or less...................................... $ 150
3.51-4.50.......................................... 220
4.51-5.50.......................................... 8,674
5.51-6.50.......................................... 343,176
6.51-7.50.......................................... 1,243
7.51-8.50.......................................... 1,284
--------
Total............................................ $354,747
========
</TABLE>
The following table sets forth the amount and maturities of First Bank's
certificates of deposit at December 31, 1997.
MATURITIES OF CERTIFICATES OF DEPOSIT
<TABLE>
<CAPTION>
ORIGINAL MATURITY IN MONTHS
--------------------------------
12 OR LESS OVER 12 TO 36 OVER 36
---------- ------------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balances Maturing in 3 Months or Less... $44,850 $ 59,358 $1,365
Weighted Average...................... 5.72% 5.96% 7.67%
Balances Maturing in over 3 Months to 12
Months................................. $31,562 $177,300 $2,187
Weighted Average...................... 5.87% 6.11% 6.48%
Balances Maturing in over 12 Months to
36 Months.............................. -- $ 36,601 $1,424
Weighted Average...................... -- 6.18% 5.97%
Balances Maturing in over 36 Months..... -- -- $ 100
Weighted Average...................... -- -- 6.05%
</TABLE>
At December 31, 1997, First Bank had outstanding an aggregate of
approximately $74.5 million of certificates of deposit in face amounts equal
to or greater than $100,000 maturing as follows: approximately $25.4 million
within three months; approximately $16.8 million over three months through six
months; approximately $24.9 million over six months through 12 months; and
approximately $7.4 million thereafter.
First Bank is party to a Master Repurchase Agreement with Bear Stearns
Mortgage Capital Corporation ("BSMCC"). Though the master repurchase agreement
does not specify a maximum amount available under such agreements, the parties
have currently agreed that such agreement may be used for up to $210 million
of acquisitions in the aggregate. This agreement enables First Bank to
purchase pools of loans with immediate financing from BSMCC which can then be
repaid as deposits are increased.
First Bank obtains advances from the FHLB of San Francisco upon the security
of certain of its assets, including FHLB stock, provided certain standards
related to the creditworthiness of First Bank have been met. FHLB advances are
available to member financial institutions such as First Bank for investment
and lending activities and other general business purposes. FHLB advances are
made pursuant to several different credit programs (each of which has its own
interest rate, which may be fixed or adjustable).
ASSET QUALITY
The Company is exposed to certain credit risks related to the value of the
collateral that secures its loans and the ability of borrowers to repay their
loans. Management of the Company closely monitors the Company's
10
<PAGE>
pools of loans and foreclosed real estate for potential problems on a periodic
basis and reports to the Board of Directors at regularly scheduled meetings.
Non-Performing Loans. It is the Company's policy to establish an allowance
for uncollectible interest on loans that are over 90 days past due or sooner
when, in the judgment of management, the probability of collection of interest
is deemed to be insufficient to warrant further accrual. Upon such a
determination, those loans are placed on non-accrual status and deemed to be
non-performing. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is reversed by a charge to interest income.
Foreclosed Real Estate. The company carries its holdings of foreclosed real
estate at the lower of cost or fair value. Foreclosed real estate held by the
company is periodically re-evaluated to determine that they are being carried
at the lower of cost or fair value less estimated costs to sell. Holding and
maintenance costs related to properties are recorded as expenses in the period
incurred. Deficiencies resulting from valuation adjustments to foreclosed real
estate subsequent to acquisition are recognized as a valuation allowance.
Subsequent increases related to the valuation of real estate owned are
reflected as a reduction in the valuation allowance, but not below zero.
Increases and decreases in the valuation allowance are charged or credited to
income, respectively. The following table sets forth the aggregate carrying
value of the Company's holdings of foreclosed real estate (by source of
acquisition) at the dates indicated.
FORECLOSED REAL ESTATE BY LOAN TYPE
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996 1995
-------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Discounted Loans(1):
Single-family residential..................... $111,316 $15,274 $3,226
Multi-family residential...................... 2,270 -- --
Commercial and other mortgage loans........... 10,248 200 66
-------- ------- ------
Total....................................... 123,834 15,474 3,292
Non-Discounted Loans:
Single-family residential..................... 6,110 2,773 1,676
Multi-family residential...................... 3,082 100 611
Commercial and other mortgage loans........... 950 124 578
-------- ------- ------
Total....................................... 10,142 2,997 2,865
Foreclosed real estate purchased directly:
Single-family residential..................... 40,706 59,729 --
Valuation allowance from losses................. (5,070) -- (1,193)
-------- ------- ------
Foreclosed real estate owned, net........... $169,612 $78,200 $4,964
======== ======= ======
</TABLE>
- --------
(1) The increase in foreclosed real estate in 1997 was due to the substantial
growth of the Company's portfolio of Discounted Loans and purchases of
foreclosed real estate.
Allowances for Loan Losses. The Company maintains an allowance for loan
losses at a level believed adequate by management to absorb estimated incurred
losses in the loan portfolios. The allowance is increased by provisions for
loan losses charged against operations, recoveries of previously charged off
credits, and allocations of discounts on purchased loans, and is decreased by
charge-offs. Loans are charged off when they are deemed to be uncollectible,
or in the case of automobile and other consumer loans, when payments are
delinquent by more than 120 days (60 days for First Bank's automobile loans).
First Bank uses its internal asset review system to identify and evaluate
impaired loans and to classify loans as special mention, substandard, doubtful
or loss. These terms correspond to varying degrees of risk that the loans will
not be collected in part or in full. First Bank's policies are to evaluate
smaller-balance, homogenous pools of loans for impairment on a pooled basis.
These are primarily single-family residential and automobile and other
consumer loans. All other loans are evaluated for impairment on a loan-by-loan
basis. All of First Bank's loans
11
<PAGE>
are subject to potential classification as special mention, substandard,
doubtful, or loss. The frequency at which a specific loan is subjected to
internal asset review depends on the type and size of the loan and the
presence or absence of other risk factors, such as delinquency and changes in
collateral values. The allowance for loan losses comprises specific valuation
allowances established for impaired loans and for certain other classified
loans, and general valuation allowances. Specific valuation allowances are
based on the estimated fair value of the collateral for impaired or troubled
collateral dependent loans, in most cases. General valuation allowances for
First Bank are based on management's periodic analysis of the composition of
the loan portfolio, delinquencies, loan classifications, historical loss
experience, peer group data, OTS guidelines, economic factors and other
relevant information.
When the Company increases the allowance for loan losses related to loans
other than Discounted Loans, it records a corresponding increase to the
provision for loan losses in the statement of operations. For Discounted
Loans, increases to the allowance for loan losses are recorded shortly after
each acquisition of a pool by allocating a portion of the purchase discount
deemed to be associated with measurable credit risk. The allocation is based
on the analyses of specific and general valuation allowances discussed above.
Amounts allocated to the allowance for loan losses from purchase discounts do
not increase the provision for loan losses recorded in the statement of
operations; rather they decrease the amounts of the purchase discounts that
are accreted into the interest income over the lives of the loans. If, after
the initial allocation of the purchase discount to the allowance for loan
losses, management subsequently identifies the need for additional allowances
against Discounted Loans, the additional allowances are established through
charges to the provision for loan losses.
In addition, the OTS, as part of its examination process, periodically
reviews First Bank's allowances for losses and the carrying values of their
assets. There can be no assurance that the OTS will not require substantial
reserves following future examinations. It is likely that the nontraditional
nature of First Bank's activities (in terms of both funding sources and
investments) will cause First Bank to be subject for the foreseeable future to
heightened regulatory scrutiny.
The following table sets forth information with respect to the Company's
allowances for loan losses by category of loan.
ALLOWANCES FOR LOAN LOSSES BY LOAN CATEGORY
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1997 % OF TOTAL 1996 % OF TOTAL 1995 % OF TOTAL
-------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loan category:
Real estate........... $ 27,534 23.3% $24,051 64.0% $ 9,830 38.3%
Non-real estate....... 3,512 3.0 7,885 21.0 407 1.6
Discounted Loans...... 87,229 73.7 5,619 15.0 15,414 60.1
-------- ----- ------- ----- ------- -----
Total allowances for
loan losses.......... $118,275 100.0% $37,555 100.0% $25,651 100.0%
======== ===== ======= ===== ======= =====
</TABLE>
The following table sets forth the activity in the allowance for loan losses
during the periods indicated.
ACTIVITY IN THE ALLOWANCES FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1996 1995 1994
-------- -------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of period....... $ 37,555 $ 25,651 $ 7,701 $4,314
Allocation of purchased loan dis-
count:
at acquisition................... 174,920 10,751 19,007 2,809
at disposition................... (97,397) (17,218) (5,404) (1,666)
Recoveries......................... 1,206 1,822 81 71
Provision for loan losses.......... 1,991 16,549 4,266 2,173
-------- -------- ------- ------
Balance, end of period............. $118,275 $ 37,555 $25,651 $7,701
======== ======== ======= ======
</TABLE>
12
<PAGE>
The table below sets forth the delinquency status of the Company's Non-
Discounted Loans at the dates indicated.
DELINQUENCY EXPERIENCE FOR NON-DISCOUNTED LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995
------------------- ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF
BALANCE PORTFOLIO BALANCE PORTFOLIO BALANCE PORTFOLIO
-------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Period of Delinquency:
31-60 days............ $ 56,751 10.9% $ 7,613 3.3% $ 3,726 1.3%
61-90 days............ 36,294 7.0 7,204 3.1 3,037 1.1
91 days or more(1)(2). 66,643 12.8 54,524 23.7 12,679 4.5
-------- ---- ------- ---- ------- ---
Total loans
delinquent......... $159,688 30.7% $69,341 30.1%(3) $19,442 6.9%
======== ==== ======= ==== ======= ===
</TABLE>
- --------
(1) All loans delinquent over 90 days were on nonaccrual status.
(2) The Company classifies loans as discounted or non-discounted on a pool
basis. Each pool is designated as discounted or non-discounted based on
whether the pool consists primarily of Discounted or Non-Discounted Loans
at the time of acquisition. For example, a pool of Non-Discounted Loans
may contain non-performing loans at the time of acquisition as long as the
non-performing loans were not the primary component of the pool at the
time.
(3) Increase in Percent of Portfolio reflects the securitization and sale of
$259.9 million of the Company's performing loans in the fourth quarter of
1996.
FEE-BASED INCOME
Management of the Wilshire REIT. In October 1997, the Company established
the Wilshire REIT, which intends to qualify and will elect to be taxed as a
Real Estate Investment Trust. The Wilshire REIT has filed a registration
statement with the Securities and Exchange Commission in connection with a
proposed underwritten public offering of its common stock. The Company
currently owns 100% of the Wilshire REIT and expects to retain a minority
interest (currently expected to be approximately 9.9%, with options to acquire
an additional 10%) in the Wilshire REIT following the Wilshire REIT's proposed
initial public offering. There can be no assurance as to when or if the
Wilshire REIT's proposed initial public offering will be completed.
The Company formed the Wilshire REIT in connection with the Company's
strategy of focusing its acquisition activities on domestic residential and
domestic non-discounted commercial mortgage loans and expanding fee-based
income. The Wilshire REIT will conduct certain business activities that
management believes are more efficiently operated in a REIT tax advantaged
format. The Wilshire REIT intends to concentrate on the acquisition of U.S.
Commercial Investments, MBS Investments and International Investments. The
Company intends to grant a right of first refusal to the Wilshire REIT with
respect to U.S. Commercial Investments, MBS Investments and International
Investments.
Upon the consummation of the proposed initial public offering of the
Wilshire REIT, the Company intends to sell to the Wilshire REIT (i) U.S.
Commercial Investments for approximately $29.6 million, (ii) MBS Investments
for approximately $95.0 million, and (iii) International Investments in the
United Kingdom for approximately $3.4 million (the "Initial Investments"). The
Company expects to realize a book gain as a result of the sale of the Initial
Investments. The Company intends to grant the Wilshire REIT an option to
purchase all or a portion of the Company's interest in two portfolios of
International Investments in France for a purchase price of up to $110.0
million, subject to the Company's acquiring such interests. The Wilshire REIT
is currently evaluating the suitability of such investments under U.S. tax and
French law.
13
<PAGE>
Wilshire Realty Services Corporation ("WRSC"), a wholly-owned subsidiary of
the Company, intends to enter into a management agreement with the Wilshire
REIT, pursuant to which WRSC will manage the Wilshire REIT for a management
fee and an incentive fee. The Wilshire REIT intends to grant WRSC and certain
of the Wilshire REIT's directors options to purchase up to 10% of the common
stock of the Wilshire REIT or units of limited partnership interest in the
Wilshire REIT's operating partnership.
Servicing. In the fourth quarter of 1996, the Company established loan
servicing operations in the United Kingdom and France to service loans for
itself and third parties. The Company believes that there is a demand in the
European market for U.S.-style loan servicing, with its automated systems and
detailed investor reporting and aggressive workout approaches. Most purchasers
of distressed loans in the United Kingdom and France are U.S.-based and have
utilized U.S.-style servicing and investor reporting in connection with the
purchase of distressed loans in the United States. With the exception of
recently originated loans, management believes that the prevailing loan
servicing systems in the United Kingdom and France are less technologically
developed and more labor intensive than those in the United States. The
Company's loan servicing operations in Western Europe utilize the U.S.
Servicer's servicing system, which has been adapted for servicing loans in
Western Europe. The Wilshire REIT intends to enter into servicing agreements
with the Company, pursuant to which the Company will provide loan and real
property management services in France and the United Kingdom. As the Wilshire
REIT acquires assets in other countries, the Wilshire REIT anticipates
entering into similar servicing arrangements with the Company in such
countries. Under the servicing agreements, the Wilshire REIT will pay the
Company a servicing fee at market rates for each pool of loans or real estate
assets that they service for the Wilshire REIT and reimburse them for certain
out-of-pocket costs associated with servicing such assets.
COMPUTER SYSTEMS AND OTHER EQUIPMENT
The Company believes that its use of information technology is a key factor
in achieving a competitive advantage in acquiring pools of loans, minimizing
operating costs, managing merchant cash reserves and increasing overall
profitability. In addition to standard industry software applications,
management has developed applications designed to provide decision support and
automation of portfolio tracking and reporting.
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 estimates that its Year 2000 plan
will be completed by December 31, 1998 and estimates that the total cost for
implementation of the Year 2000 plan will be approximately $200,000.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Portland, Oregon, where
the Company leases approximately 18,000 square feet of office space from
Wilshire Properties 1, Incorporated ("WPI"), a corporation which is
beneficially owned by Andrew A. Wiederhorn and Lawrence A. Mendelsohn. The
lease agreement provides for an aggregate annual rental of approximately
$276,000 and expires December 31, 2001. In addition to base rent the Company
is required to pay its proportionate share of operating expenses incurred by
WPI in connection with the operations of the building. First Bank sub-leases
approximately 8,000 sq. ft. of office space in two locations in Portland,
Oregon from the Company for an aggregate annual rental of $4. The term of the
sub-lease is year to year. Messrs. Wiederhorn and Mendelsohn have indicated
that they intend to sell the properties to the Wilshire REIT.
First Bank leases its branch office in Beverly Hills, California and office
space for its merchant bankcard operations in Calabasas, California pursuant
to leases expiring February 29, 2000 and November 30, 1999, respectively. The
Company also leases office space in London, England and Paris, France pursuant
to leases expiring from April 2006 to April 2007 and maintains month to month
leases on loan origination branch facilities.
14
<PAGE>
The Company believes its facilities are suitable and adequate for its
current business purposes.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Effective December 18, 1996, the Company's common stock, par value $.01 per
share (the "Common Stock") became quoted on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") under the symbol
"WFSG." The initial public offering price was $10.50 per share. Through
February 28, 1998, the Company's Common Stock has traded between $13.50 and
$33.50 per share. The approximate number of record holders of the Company's
Common Stock at February 28, 1998 was 24. Prior to December 18, 1996, there
was no public market for the Company's Common Stock.
The Company has not paid any cash dividends on its Common Stock and it is
the current intention of the Company's Board of Directors to continue to
retain earnings to finance the growth of the Company's business rather than to
pay dividends. Future payment of cash dividends will depend upon the financial
condition, results of operations and capital commitments of the Company as
well as other factors deemed relevant by the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA AND OPERATING STATISTICS
The following tables present selected financial information for the Company
at the dates and for the periods indicated. The historical income statement
and balance sheet data at and for the years ended December 31, 1997, 1996, and
1995 have been derived from the audited consolidated financial statements of
the Company.
WFSG was incorporated in 1996 to be the holding company for Wilshire
Acquisitions Corporation ("WAC"). WFSG formed certain nonbank subsidiaries,
including WFC, and completed an initial public offering of Common Stock and
Notes in the fourth quarter of 1996. The consolidated financial statements for
1995 and 1996 include the accounts of WAC and the Savings Banks (prior to the
merger between Girard and First Bank on December 31, 1997) for periods prior
to the formation of WFSG.
15
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
---------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income............................ $ 110,057 $ 48,422 $ 24,381
Total interest expense........................... 86,836 29,277 14,481
---------- -------- --------
Net interest income............................ 23,221 19,145 9,900
Provision for loan losses(1)..................... 1,991 16,549 4,266
---------- -------- --------
Net interest income after provision for
estimated loan losses......................... 21,230 2,596 5,634
---------- -------- --------
Other Income:
Gain on sale of loans.......................... 39,049 11,538 642
Servicing revenue.............................. 5,580 -- --
Real estate owned, net......................... 6,309 556 (170)
Bankcard income, net........................... 1,995 1,666 1,232
Gain on sale of securities..................... 3,742 -- --
Trading account--unrealized gain............... 2,330 1,833 --
Other, net..................................... 2,298 2,349 1,233
---------- -------- --------
Total other income........................... 61,303 17,942 2,937
---------- -------- --------
Other Expenses:
Compensation and employee benefits............. 14,404 4,464 2,516
Loan service fees and expenses................. 28,126 5,176 1,958
Professional services.......................... 3,171 700 1,028
Occupancy...................................... 1,125 339 385
FDIC insurance premiums........................ 1,049 2,381 721
Other general and administrative expenses...... 8,857 2,386 1,324
---------- -------- --------
Total other expenses......................... 56,732 15,446 7,932
---------- -------- --------
Income before income taxes....................... 25,801 5,092 639
Income tax provision............................. 10,637 125 47
---------- -------- --------
Net Income....................................... $ 15,164 $ 4,967 $ 592
========== ======== ========
Basic earnings per share(2)...................... $ 1.79 $ 1.07 $ 0.46
========== ======== ========
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996 1995
---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 66,115 $152,298 $ 4,482
Portfolio Assets:(3)
Discounted Loans, net.......................... 463,355 219,630 31,354
Non-Discounted Loans, net...................... 464,602 191,962 259,417
Mortgage-backed and other securities........... 362,347 84,964 28,672
Foreclosed real estate, net.................... 169,612 78,200 4,964
---------- -------- --------
Total portfolio assets....................... $1,459,916 $574,756 $324,407
Total assets..................................... 1,629,027 753,849 340,695
Deposits......................................... 362,598 501,614 303,524
Short-term debt(3)............................... 966,500 97,624 13,000
Long-term debt................................... 184,245 75,000 11,000
Stockholders' equity(4).......................... 99,122 61,022 7,039
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
--------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FINANCIAL RATIOS AND OTHER DATA:
Return on average assets......................... 1.22% 0.95% 0.24%
Return on average equity......................... 19.48% 13.68% 8.65%
Average interest yield on total loans............ 9.68% 9.41% 10.02%
Net interest spread(5)(6)........................ 2.03% 3.07% 3.44%
Net interest margin(6)(7)........................ 2.03% 3.63% 3.87%
Ratio of earnings to fixed charges(8):
Including interest on deposits................. 1.30 1.17 1.04
Excluding interest on deposits................. 1.42 2.19 2.19
Long-term debt to total capitalization(9)........ 0.65 0.55 0.61
Total financial liabilities to equity............ 15.43 11.35 47.40
Average equity to average assets................. 6.25% 6.90% 2.72%
Non-performing loans to loans at end of peri-
od(10)(11)(12).................................. 12.83% 23.69% 4.46%
Allowance for loan losses to total loans at end
of period(12)................................... 5.98% 13.88% 3.60%
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
--------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING DATA:
Investments and originations:
Discounted Loans and foreclosed real estate.... $ 584,014 $324,159 $29,224
Non-Discounted Loans(10)....................... 673,234 254,517 157,671
Mortgage originations.......................... 77,918 2,280 8,748
Mortgage-backed and other securities........... 310,220 67,604 2,965
--------- -------- -------
Total........................................ 1,645,386 648,560 198,608
Recoveries and repayments........................ (196,646) (66,160) (61,135)
Loan sales and securitizations................... (486,109) (301,411) (16,031)
Net change in portfolio assets................... 885,160 250,349 111,841
</TABLE>
- --------
(1) Approximately $8.6 million of the increase in the provisions from 1995 to
1996 related to certain sub-prime auto loans and $4.8 million of the 1996
provision related to the loans inherited by the Company upon the
acquisition of the Savings Banks.
(2) Earnings per share amounts are based on weighted average number of shares
outstanding of WFSG during the applicable periods. For period prior to
the formation of WFSG, WAC shares outstanding were converted to their
WFSG equivalent.
(3) The Company intends to sell to the Wilshire REIT (i) U.S. Commercial
Investments for approximately $29.6 million, (ii) MBS Investments for
approximately $95.0 million, and (iii) International Investments in the
United Kingdom for approximately $3.4 million. This will reduce the
corresponding amount on the Company's balance sheet for such assets,
decrease short-term debt and increase cash. In addition, the Company
intends to grant the Wilshire REIT an option to purchase all or a portion
of the Company's interest in two portfolios of International Investments
in France, for a purchase price of up to $110.0 million, subject to the
Company's acquiring such interests. The Wilshire REIT is currently
evaluating the suitability of such investments under U.S. tax and French
law.
(4) Effective January 1, 1996, $11.0 million of Common Stock was issued in
exchange for subordinated debt. Prior to the Company's initial public
offering, an additional $17.8 million of Common Stock was issued for
cash. In December 1996, the Company completed its initial public
offering, which resulted in $20.9 million of new capital. Effective July
31, 1997, the Company issued to the Wilshire Private Companies 27,500
shares of PIK Preferred Stock having an aggregate liquidation value of
$27.5 million in exchange for the cancellation of certain accounts
payable to the Wilshire Private Companies aggregating
17
<PAGE>
approximately $27.1 million and cash in the amount of approximately
$400,000, resulting in an increase in stockholders' equity of
approximately $27.5 million
(5) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(6) The reduction in net interest margin and net interest spread in the year
ended December 31, 1997 primarily reflects the significant increase in
the Company's holdings of Discounted Loans. The acquisition of a pool of
Discounted Loans tends to reduce net interest margin and net interest
spread, because the interest cost of the debt used to fund the
acquisition is not offset by a corresponding increase in interest income.
Relatively little cash flow from a pool of Discounted Loans is generally
received during the first two quarters following the acquisition of a
pool of Discounted Loans and the Company only recognizes interest and
discount on Discounted Loans when those loans result in the receipt of
cash. In addition, a significant portion of the income associated with
Discounted Loans generally results from gains on sales of foreclosed real
estate, which are not reflected in interest income. The reduction also
reflected a full year of interest expense on the $84.2 million of Notes
and part of the third quarter and all of the fourth quarter of interest
expense on approximately $100.0 million of Series A Notes, the proceeds
of which were held for part of such periods in a lower-yielding liquid
investment prior to their use by the Company to fund acquisitions.
(7) Net interest margin represents net interest income divided by total
average earning assets.
(8) The ratios of earnings to fixed charges were computed by dividing (x)
income from continuing operations before income taxes, extraordinary
gains and cumulative effect of a change in accounting principle plus
fixed charges by (y) fixed charges. Fixed charges represent total
interest expense, including and excluding interest on deposits, as
applicable, as well as the interest component of rental expense.
(9) Total capitalization equals long-term debt plus equity.
(10) It is the Company's policy to establish an allowance for uncollectible
interest on Non-Discounted Loans that are past due more than 90 days or
at such earlier time when, in the judgment of management, the probability
of collection of interest is deemed to be insufficient to warrant further
accrual at which time those loans are placed on non-accrual status and
deemed non-performing.
(11) The Company classifies loans as discounted or non-discounted on a pool
basis. Each pool is designated as discounted or non-discounted based on
whether that pool consists primarily of Discounted or Non-Discounted
Loans at the time of acquisition. For example, a pool of Non-Discounted
Loans may contain non-performing loans at the time of acquisition as long
as the non-performing loans were not the primary component of the pool at
that time.
(12) Relates only to the Company's Non-Discounted loan portfolio.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Selected
Financial Information and the Consolidated Financial Statements of the Company
and the notes thereto.
ACCOUNTING MATTERS
The Company classifies loans as discounted or non-discounted on a pool
basis. Each pool is designated as discounted or non-discounted based on
whether that pool consists primarily of Discounted or Non-Discounted Loans at
the time of acquisition. For example, a pool of Non-Discounted Loans may
contain non-performing loans at the time of acquisition as long as the non-
performing loans were not the primary component of the pool at that time. As
used herein, the term "performing loan" means a loan as to which payments have
been and are being made substantially in accordance with its contractual
terms, the term "sub-performing loan" means a loan as to which payments are
delinquent for 90 days or less or has a history of delinquencies, and the term
"non-performing loan" means a loan as to which payments are generally 91 or
more days delinquent.
Discounted Loans are presented in the Consolidated Financial Statements net
of unamortized discount and an allowance for loan losses established for those
loans. For each pool of loans acquired by the Company, purchased discounts are
allocated into (a) valuation allowances for estimated losses against face
value on specific loans ("specific valuation allowances") and (b) portions of
the discounts available for accretion to interest as yield adjustments. In
addition, for Discounted Loans purchased by First Bank, the initial discounts
are further segregated into a valuation allowance for the inherent risk of
losses in the loan portfolio that have yet to be specifically identified
("general valuation allowance") as required by OTS regulations. The allocated
specific and general valuation allowances are included in the allowance for
loan losses. Where appropriate, discounts are accreted into interest income
generally on a cash basis.
The acquisition of a pool of Discounted Loans tends to reduce net interest
margin and net interest spread, because the interest cost of the debt used to
fund the acquisition is not offset by a corresponding increase in interest
income. Relatively little cash flow from a pool of Discounted Loans is
generally received during the first two quarters following an acquisition of a
pool of Discounted Loans and the Company only recognizes interest and discount
on Discounted Loans in income when those loans result in the receipt of cash.
Non-Discounted Loans are presented in the Consolidated Financial Statements
in substantially the same manner as Discounted Loans, except that interest
income is recognized on an accrual basis.
Gains or losses on loans sold through securitization transactions are based
on the difference between the cash proceeds received from the sale of the
senior classes of mortgage-backed securities to outside investors and the
Company's cost basis allocated to the senior classes of mortgage-backed
securities. The Company's cost basis in loans sold is allocated between the
senior classes of mortgage-backed securities and the subordinate classes of
mortgage-backed securities retained by the Company based on the relative fair
values of the two types of securities. The cost basis of the loans securitized
is determined by their acquisition cost, adjusted for any discount accretion
(for purchased loans) or net carrying value (for originated loans). The
Company carries subordinate classes of mortgage-backed securities at fair
value. As such, the carrying value of these securities is impacted by changes
in market interest rates and prepayment and loss experiences of these and
similar securities. In cases where the Company has financed the holding of
subordinate classes with a lender under a repurchase agreement, the fair value
used by the Company is based on the lender's determination of market value for
purposes of potential margin calls in determining fair value. In other cases,
the Company determines the fair value of the subordinate classes of mortgage-
backed securities utilizing prepayment and credit loss assumptions it deems
appropriate for each particular securitization. The range of values
attributable to the factors used in determining fair value is broad.
Accordingly, the Company's estimate of fair value is subjective.
For accounting purposes, the Company's mortgage-backed and other securities
are classified as "held to maturity," "trading account securities" and
"available for sale securities." Securities are classified as held to
19
<PAGE>
maturity when management believes the Company has the ability and the positive
intent to hold the securities to maturity. Securities classified as held to
maturity are carried on an historical cost basis, adjusted for the
amortization of premiums and accretion of discounts using a method that
approximates the interest method. Trading account securities include
subordinate classes of mortgage-backed securities issued in loan
securitization transactions initiated by the Company. Such securities are
carried at estimated fair value as described above, and unrealized gains and
losses are recorded in current operations. Securities are classified as
available for sale when the Company intends to hold the securities for an
indefinite period of time, but not necessarily to maturity. Securities
classified as available for sale are reported at their fair values. Unrealized
holding gains and losses on securities available for sale are reported, net of
tax, as a separate component of stockholders' equity. Realized gains and
losses from the sales of available for sale securities are reported separately
in the consolidated statements of operations and are calculated using the
specific identification method.
Real estate acquired in settlement of loans is originally recorded at fair
value less estimated costs to sell. Loan balances in excess of the fair value
of real estate acquired are charged against the allowance for loan losses at
the date of acquisition. Allowances are recorded to provide for estimated
declines in the fair value subsequent to the date of acquisition. Any
subsequent operating expenses or income, as well as gains or losses on
disposition of such properties, are charged to current operations.
Prior to the adoption of SFAS No. 122, "Accounting for Mortgage Servicing
Rights", the Company did not record on its balance sheet the servicing rights
retained to loans sold in securitizations, which would have had the effect of
increasing other income and total assets. The Company now capitalizes
servicing rights it purchases from third parties and on loans it sells on a
servicing retained basis. At December 31, 1997, the Company had capitalized
approximately $8.7 million of servicing rights.
INTEREST INCOME
A significant portion of the Company's earnings come from net interest
income, which is the difference between the interest income received plus
accreted or received purchase discount on its financial assets and the
interest expense paid on its outstanding interest-bearing liabilities. Net
interest income is affected by the relative amount of interest-earning assets
and interest-bearing liabilities, the degree of mismatch in the maturity and
repricing characteristics of its interest-earning assets and interest-bearing
liabilities, the percentage of Discounted Loans included in the portfolio and
the timing of receipt or accretion of purchase discount. In addition, net
interest income reflects the full interest cost of funding the acquisition of
Discounted Loans and foreclosed real estate but does not reflect any accretion
of purchase discount on those assets until cash is collected (which generally
occurs later in the life of a pool of Discounted Loans) and does not reflect
any gain on sales of foreclosed real estate.
20
<PAGE>
The following table sets forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resultant average yields, the interest expense associated with interest-
bearing liabilities, expressed in dollars and rates, and the net interest
spread and net interest margin. Information is based on monthly balances
during the indicated periods.
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
---------- -------- ---------- -------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ASSETS:
Mortgage-backed
securities............. $ 196,218 $ 20,785 10.59% $ 29,241 $ 1,797 6.15% $ 24,054 $ 1,359 5.65%
Loan portfolio net of
Unaccreted
discounts(1)........... 878,846 85,090 9.68 470,654 44,294 9.41 217,716 21,821 10.02
Investment securities
and other.............. 67,804 4,182 6.17 27,446 2,331 8.49 14,216 1,201 8.45
---------- -------- -------- ------- -------- -------
Total interest-earning
assets................ 1,142,868 110,057 9.63 527,341 48,422 9.18 255,986 24,381 9.52
Non-interest earning
cash................... 2,416 -- -- 6,019 -- -- 1,868 -- --
Allowance for loan
losses................. (75,939) -- -- (39,675) -- -- (21,591) -- --
Other assets............ 176,533 -- -- 32,061 -- -- 15,277 -- --
---------- -------- -------- ------- -------- -------
Total assets........... $1,245,878 $110,057 $525,746 $48,422 $251,540 $24,381
========== ======== ======== ======= ======== =======
AVERAGE LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing
deposits............... $ 429,289 $ 25,687 5.98% $423,011 $25,270 5.97% $232,510 $14,111 6.07%
FHLB advances........... 479 27 5.67 2,420 159 6.57 1,381 104 7.53
Subordinated borrowings
and other interest-
bearing obligations.... 586,370 43,682 7.45 51,316 3,531 6.88 4,122 232 5.62
Long-term debt.......... 125,912 17,440 13.85 2,292 317 13.85 306 34 11.00
---------- -------- -------- ------- -------- -------
Total interest-bearing
liabilities........... 1,142,050 86,836 7.60 479,039 29,277 6.11 238,319 14,481 6.08
Non-interest bearing
deposits............... 5,674 -- -- 2,822 -- -- 2,196 -- --
Escrow deposits......... 330 -- -- 257 -- -- 106 -- --
Other liabilities....... 19,993 -- -- 7,330 -- -- 4,077 -- --
---------- -------- -------- ------- -------- -------
Total liabilities...... 1,168,047 86,836 -- 489,448 29,277 -- 244,698 14,481
Stockholders' equity.... 77,831 -- -- 36,298 -- -- 6,842 -- --
---------- -------- -------- ------- -------- -------
Total liabilities and
stockholders' equity.. $1,245,878 $ 86,836 $525,746 $29,277 $251,540 $14,481
========== ======== ======== ======= ======== =======
Net interest income..... $ 23,221 $19,145 $ 9,900
Net interest
spread(2)(3)........... 2.03% 3.07% 3.44%
Net interest margin(3).. 2.03 3.63 3.87
Ratio of average
interest-- earning
assets to average
interest-bearing
liabilities............ 100.1% 110.1% 107.4%
</TABLE>
- -------
(1) The average balances of the loan portfolio include Discounted Loans and
non-performing loans, interest on which is recognized on a cash basis.
(2) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(3) The reduction in net interest margin and net interest spread in the year
ended December 31, 1997 primarily reflects the significant increase in the
Company's holdings of Discounted Loans during the year then ended. The
acquisition of a pool of Discounted Loans tends to reduce net interest
margin and net interest spread, because the interest cost of the debt used
to fund the acquisition is not offset by a corresponding increase in
interest income. Relatively little cash flow from a pool of Discounted
Loans is generally received during the first two quarters following the
acquisition of a pool of Discounted Loans and the Company only recognizes
interest and discount on Discounted Loans when those loans result in the
receipt of cash. In addition, a significant portion of the income
associated with Discounted Loans generally results from gains on sales of
foreclosed real estate, which are not reflected in interest income. The
reduction also reflected a full year of interest expense on the $84.2
million of Notes and part of the third quarter and all of the fourth
quarter of interest expense on approximately $100.0 million of Series A
Notes, the proceeds of which were held for part of such period in a lower-
yielding liquid investment prior to their use by the Company to fund
acquisitions.
21
<PAGE>
The following table describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (i)
changes in volume (change in volume multiplied by prior rate), (ii) changes in
rate (change in rate multiplied by prior volume) and (iii) total change in
rate and volume. Changes attributable to both volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1997 V. 1996 1996 V. 1995 1995 V. 1994
------------------------------ --------------------------- ---------------------------
INCREASE (DECREASE) DUE
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO TO
------------------------------ --------------------------- ---------------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL RATE VOLUME TOTAL
-------- --------- --------- -------- ----------------- ------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Mortgage-backed
securities............ $ 2,136 $ 16,852 $ 18,988 $ 127 $ 311 $ 438 $ (52) $ 50 $ (2)
Loan portfolio......... 1,310 39,486 40,796 (1,246) 23,719 22,473 2,485 11,413 13,898
Investment securities
and other............. (423) 2,274 1,851 6 1,124 1,130 582 334 916
-------- --------- --------- -------- -------- -------- ------- -------- --------
Total interest-
earning assets...... 3,023 58,612 61,635 (1,113) 25,154 24,041 3,015 11,797 14,812
Interest-Bearing
Liabilities:
Interest-bearing
deposits.............. 41 376 417 (218) 11,377 11,159 2,806 6,288 9,094
FHLB advances.......... (19) (113) (132) (11) 66 55 (631) 507 (124)
Short-term borrowings
and other interest-
bearing obligations... 316 39,835 40,151 63 3,236 3,299 40 (20) 20
Long-term debt......... -- 17,123 17,123 10 273 283 -- 34 34
-------- --------- --------- -------- -------- -------- ------- -------- --------
Total interest-
bearing liabilities. 338 57,221 57,559 (156) 14,952 14,796 2,215 6,809 9,024
-------- --------- --------- -------- -------- -------- ------- -------- --------
Increase (decrease) in
net interest income.... $ 2,685 $ 1,391 $ 4,076 $ (957) $ 10,202 $ 9,245 $ 800 $ 4,988 $ 5,788
======== ========= ========= ======== ======== ======== ======= ======== ========
</TABLE>
RESULTS OF OPERATIONS--1997 COMPARED TO 1996
NET INTEREST INCOME
The Company's net interest income was approximately $23.2 million for 1997
compared to approximately $19.1 million for 1996, an increase of approximately
21.3%. The Company's asset base was significantly larger in 1997 as a result
of the Company's initial public offering in December 1996 and significantly
higher levels of borrowing and investment opportunities.
Interest Income
The Company's interest income was approximately $110.1 million for 1997
compared to approximately $48.4 million for 1996, an increase of 127.3%. The
increase in the Company's interest income was due primarily to an increase in
the Company's average interest earning assets from approximately $527.3
million in 1996 to approximately $1.1 billion in 1997.
Interest Expense
The Company's interest expense was approximately $86.8 million for 1997
compared with approximately $29.3 million for 1996, an increase of 196.6%. The
increase in interest expense resulted from an increase in the Company's
average interest-bearing liabilities to approximately $1.1 billion in 1997
from approximately $479.0
22
<PAGE>
million in 1996 and includes the issuance in the fourth quarter of 1996 and
early 1997 of $84.2 million of the Company's Notes and the issuance in the
third quarter of 1997 of $100.0 million of the Company's Series A Notes.
Primarily as a result of the Company's $184.2 million of 13% notes, the
average rate paid on interest-bearing liabilities increased from 6.11% in 1996
to 7.6% in 1997.
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
Provision for estimated losses on loans for 1997 was approximately $2.0
million resulting from additional provisions of approximately $4.5 million,
which was partially offset by the reversal of approximately $2.5 million of
excess reserves on loans previously sold. This compares with a provision for
estimated losses on loans of approximately $16.5 million for 1996 from
reserves established primarily for certain sub-prime auto loans and loans held
by the Savings Banks at the time they were acquired.
OTHER INCOME
The Company's other income was approximately $61.3 million for 1997 compared
to approximately $17.9 million for 1996, an increase of 241.7%. The components
of the Company's non-interest income are reflected in the following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other income:
Gain on sale of loans.......................... $ 39,049 $ 11,538
Servicing revenue.............................. 5,580 --
Real estate owned, net......................... 6,309 556
Bankcard income, net........................... 1,995 1,666
Gain on sale of securities..................... 3,742 --
Trading account-unrealized gain................ 2,330 1,833
Other, net..................................... 2,298 2,349
----------- -----------
Total other income........................... $ 61,303 $ 17,942
=========== ===========
</TABLE>
The increase in other income for 1997 is primarily attributable to (i) sales
of loans, which resulted in gains of approximately $39.0 million, (ii) the
sale of securities, which resulted in a gain of approximately $3.7 million,
(iii) income from real estate owned, net, resulting from the ongoing
disposition of assets from a $72.3 million pool of properties acquired in the
fourth quarter of 1996 and from disposition of real estate relating to
Discounted Loans, and (iv) an increase in servicing fees paid by unaffiliated
third parties.
Gains on Sale of Loans The gain on the sale of loans for 1997 is the result
of the sale of loans with a book value of approximately $469.0 million, of
which approximately $204.2 million were sold through whole loan sales and
approximately $264.8 million were sold through securitizations. For 1997, gain
on the sale of whole loans totaled approximately $15.5 million and gains from
securitizations totaled approximately $23.5 million. Gains or losses on loan
portfolios sold as whole loans or through securitization transactions are
based on the difference between the cash proceeds received on the loans sold
to outside investors and the Company's cost basis allocated to the loans
(excluding any cost basis attributable to servicing rights retained).
Gain on the Sale of Securities The gain on the sale of securities for 1997
is a result of the sale of approximately $20.8 million of mortgage-backed
securities which resulted in a gain of approximately $3.7 million. This gain
reflects the Company's strategy of investing in subordinate classes of
mortgage-backed securities which the Company believes are likely to experience
a ratings upgrade as a result of payment history, prepayment or default
experience or otherwise. The Company believes that its experience in acquiring
pools of loans allows it to more effectively evaluate the risks associated
with a pool of loans that supports an issue of mortgage-backed securities
being considered for purchase and price those securities.
23
<PAGE>
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 or from the properties acquired in the fourth quarter of 1996.
Servicing Revenue The increase in servicing revenue of approximately $5.6
million in 1997 was primarily the result of contracting for servicing rights
on loan portfolios owned by unaffiliated third parties and arranging for such
loan portfolios to be serviced by the U.S. servicer at a rate which is lower
than the rate received by the Company.
OTHER EXPENSE
The Company's other expense totaled approximately $56.7 million for 1997
compared to approximately $15.4 million for 1996, an increase of 267.3%, which
reflects the significant growth of the Company's asset base and operations.
Loan Service Fees and Expenses Paid to Affiliate The largest component of
other expense in 1997 was loan service fees and expenses, which includes
servicing fees paid to the U.S. Servicer and collection-related expenses
incurred directly by the U.S. Servicer and reimbursed by the Company. Loan
Service fees and expenses paid to affiliate were approximately $28.1 million
for 1997 compared to approximately $5.2 million for 1996, an increase of
approximately 443.4%. The increase in loan servicing fees and expenses paid to
affiliate was primarily the result of the increase in the unpaid principal
balance of loans being serviced by the U.S. Servicer on behalf of the Company
to approximately $1.4 billion at December 31, 1997 from approximately $513.5
million at December 31, 1996 and an increase in sub-servicing fees of
approximately $4.6 million. Also, collection-related expense increased from
1996 to 1997 due to the substantial increase in Discounted Loans. Discounted
Loans generally require more significant expenditures than performing and sub-
performing loans.
Compensation and Employee Benefits Compensation and employee benefits was
approximately $14.4 million for 1997, compared to approximately $4.5 million
for 1996, an increase of 222.7%. The increase was primarily due to an increase
in the average number of full-time equivalent employees from 56 for 1996 to
184 for 1997, reflecting the expansion of business activities, particularly
loan acquisition activities and the growth of activities at the non-bank
subsidiaries.
Other general administrative expenses increased from approximately $2.4
million for 1996 to approximately $8.9 for 1997 due primarily to the expansion
of business activities at the non-bank subsidiaries, particularly loan
acquisition activities such as due diligence costs.
INCOME TAX PROVISION
Income tax provision was approximately $10.6 million for 1997 compared with
approximately $0.1 million for 1996. The change was primarily due to the
utilization of net operating loss deductions in 1996 and a normalized tax
provision in 1997.
RESULTS OF OPERATIONS--1996 COMPARED TO 1995
NET INTEREST INCOME
The Company's net interest income increased by approximately $9.2 million or
93.4% during 1996, as compared to the same period in the prior year. This
increase resulted from an approximately $24.0 million or 98.6% increase to
interest income due to an approximately $278.3 million or 104.5% increase in
average interest-earning assets from period to period. The increase in
interest income was offset in part by an approximately $14.8 million or 102.2%
increase in interest expense due to an approximately $240.7 million or 101.0%
increase in average interest-bearing liabilities, primarily certificates of
deposit, and, to a lesser extent, a 10 basis point increase in the weighted
average rate paid on interest-bearing liabilities. The increase in interest
income during 1996, as compared to the same period in the prior year, reflects
substantial increases in the average balances of the Company's loans and
mortgage-backed securities.
24
<PAGE>
PROVISIONS FOR LOAN LOSSES
Provisions for loan losses are charged to operations to maintain an
allowance for losses at a level that management considers adequate based upon
an evaluation of known and inherent risks, historical loss experience, current
economic conditions and other relevant factors.
The Savings Banks recorded provisions for losses on loans totaling
approximately $16.5 million for 1996, as compared to approximately $4.3
million for the prior year, an increase of 287.9%. The following table sets
forth the Savings Banks' provision for loan losses for the year ended December
31, 1996:
<TABLE>
<CAPTION>
PROVISION % OF TOTAL
--------- ----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Inherited Loans...................................... $ 4,845 29.3%
Sub-Prime Auto Loans................................. 8,583 51.8%
Other Purchase Loans................................. 3,121 18.9%
------- -----
Total provision for loan losses.................... $16,549 100.0%
======= =====
</TABLE>
Approximately $6.1 million of the increase in the provisions from 1995 to
1996 was made after discussions between the OTS and the Savings Banks
concerning the appropriate provision for the Sub-Prime Auto Loans acquired by
the Savings Banks in the fourth quarter of 1995 and the first quarter of 1996.
The Company also increased the provision by approximately $4.8 million in 1996
related to the Inherited Loans owned by First Bank or Girard at the time the
Savings Banks were acquired by the Company.
Although management attempts to utilize its best judgment in providing for
possible loan losses, changing economic and business conditions, fluctuations
in local markets for real estate, future changes in non-performing asset
trends, large movements in market interest rates or other factors could affect
the Company's future provisions for loan losses. In addition, the OTS as an
integral part of its examination process, periodically reviews the adequacy of
the Savings Banks' allowances for losses on Non-Discounted Loans and
Discounted Loans and may require adjustments to the Savings Banks' allowances
for loan losses.
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOSSES ON LOANS
The Company's net interest income after provision for estimated losses on
loans decreased 53.9% to approximately $2.6 million for 1996 from income of
approximately $5.6 million for 1995. This decrease was due to the substantial
increase in provisions for estimated losses on loans.
OTHER INCOME
The Company's other income was approximately $17.9 million for 1996 compared
to approximately $2.9 million for 1995, an increase of 510.9%. This increase
was primarily attributable to gains on the sale of loans. The components of
the Company's non-interest income are reflected in the following table:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1996 1995
------- ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Other income:
Gain on sale of loans................................... $11,538 $ 642
Real estate owned, net.................................. 556 (170)
Bankcard income, net.................................... 1,666 1,232
Trading account-unrealized gain......................... 1,833 --
Other, net.............................................. 2,349 1,233
------- ------
Total other income.................................... $17,942 $2,937
======= ======
</TABLE>
25
<PAGE>
Bankcard Income, net. The increase in other income for 1996 was due in part
to an increase of approximately $2.1 million in bankcard income, from
approximately $4.7 million for 1995 to approximately $6.8 million for 1996.
The large increase in income from the Company's merchant bankcard operations
was primarily due to the development of new accounts. Bankcard processing
expense increased by approximately $1.6 million from approximately $3.5
million for 1995 to approximately $5.1 million for 1996. This increase
resulted primarily from an increase in bankcard processing due to growth in
merchant transactions evidenced by the growth in bankcard income.
Gains on Sale of Loans. The increase in other income in 1996 was due
primarily to an increase of approximately $10.9 million in gains on sales of
loans, from $0.6 million for 1995 to approximately $11.5 million for 1996.
This increase was due to gains from the sale of approximately $287.8 million
of loans. For the year ended December 31, 1996, gain on sale of whole loans
totaled $5.4 million and gains from securitizations totaled $6.1 million.
Other income also includes loan fees and charges (e.g. late fees, commitment
fees). Loan fees and charges increased approximately $1.1 million, from
approximately $0.6 million for 1995 to approximately $1.7 million for 1996.
The increase was primarily due to an increase in loan volume.
OTHER EXPENSE
The Company's other expense totaled approximately $15.4 million for 1996
compared to approximately $7.9 million for 1995, an increase of 94.7%.
Loan Service Fees and Expenses. The largest component of other expense in
1996 was loan service fees and expense which increased by approximately $3.2
million from approximately $2.0 million for 1995 to approximately $5.2 million
for 1996. Loan servicing fees and charges are paid to the US. Servicer and
include (a) servicing fees, and (b) collection-related expenses incurred
directly by the U.S. Servicer and reimbursed by the Company. Servicing fees
for Discounted Loans have been based on a percentage of cash flows collected.
Therefore, when Discounted Loans are sold, servicing fees increase
substantially. The volume of loans, particularly Discounted Loans, being
serviced by the U.S. Servicer, increased substantially during 1996 compared to
1995 due to substantial growth in the Company's loan pool acquisition
activity. In addition, due to a securitization of non-performing loans
(primarily Discounted Loans) in March 1996, higher fees associated with the
accelerated cash flows to the Savings Banks were paid to the U.S. Servicer in
the first quarter of that year.
Compensation and Employee Benefits. Other expense relating to compensation
and employee benefits also increased from approximately $2.5 million for 1995
to approximately $4.5 million for 1996, an increase of approximately $2.0
million (or 77.4%). The increase in compensation and employee benefits during
this period reflected normal salary adjustments and an increase in the average
number of full-time equivalent employees from 37 for 1995 to 54 for 1996,
reflecting the expansion of business activities, particularly loan acquisition
activities and the growth of merchant bankcard activities. In addition, the
Savings Banks' administrative offices were relocated to Portland, Oregon in
August 1996 which resulted in approximately $0.7 million of additional
employee compensation.
FDIC Insurance Premiums. FDIC insurance premiums increased from
approximately $0.7 million for 1995 to approximately $2.4 million for 1996, an
increase of approximately $1.7 million (or 230.2%), as a result of growth in
deposits outstanding and the SAIF special assessment.
INCOME TAX PROVISION
Income taxes amounted to approximately $0.1 million during 1996 compared to
a provision of less than $0.1 million during 1995. This increase was due
primarily to assessment of the valuation allowances against deferred tax
assets. The Company's effective tax rate amounted to 2.5% and 7.4% during 1996
and 1995, respectively. Differences in the Company's effective tax rates in
recent periods compared to combined Federal and State statutory rates were
primarily attributable to changes in assessments of the realization of
deferred tax assets. Exclusive of such amounts, the Company's effective tax
rate amounted to 41% during 1996 and 1995.
26
<PAGE>
CHANGES IN FINANCIAL CONDITION
Mortgage-Backed and Other Securities.
The Company's holdings of mortgage-backed securities and other securities
increased approximately $277.4 million during 1997 primarily as a result of
purchasing certain subordinated 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. At December 31, 1997,
securities classified as available for sale consisted primarily of subordinate
classes of mortgage-backed securities issued by unaffiliated third parties and
certain mortgage-backed securities originated by the Wilshire Private
Companies. Securities classified as trading account securities consisted
primarily of Retained Securities. At December 31, 1997, securities classified
as held to maturity consisted primarily of Government Securities that were
acquired for liquidity purposes. The Company intends to sell to the Wilshire
REIT a portion of its mortgage-backed securities for approximately $95.0
million. In addition, the Company intends to grant the Wilshire REIT a right
of first refusal with respect to MBS Investments. 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.
The following table sets forth the Company's mortgage-backed and other
securities available for sale and held to maturity at the dates indicated:
MORTGAGE-BACKED AND OTHER SECURITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Available for sale:
Mortgage-backed securities.................... $298,964 $31,270 $ 9,083
Trading account securities:
Mortgage-backed securities.................... 38,969 24,541 --
Held to maturity:
U.S Government and other securities........... 5,946 7,429 6,470
Mortgage-backed securities.................... 18,468 21,724 13,119
-------- ------- -------
Total....................................... 24,414 29,153 19,589
-------- ------- -------
Total investment securities................. $362,347 $84,964 $28,672
======== ======= =======
</TABLE>
The following table sets forth the Company's securities which exceed 10
percent of stockholders' equity at December 31, 1997:
SECURITIES EXCEEDING 10 PERCENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ISSUER CARRYING VALUE MARKET VALUE
----------------------------------------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Credit Suisse First Boston Mortgage Secu-
rity Certificates REMIC 97-1R CL 1-B1... $10,925(1)(2) $10,925
Securitized Asset Sales, Inc. 94-4 M2.... 11,035(2) 11,035
First Plus Home Loan Owners Trust 1997-2
B4...................................... 21,159 21,159
Salomon Brothers Private Placement Senior
Mortgage Pass Through Certificate VII 96
LB3 10.................................. 15,574(2) 15,574
Salomon Brothers Mortgage Pass Through
Certificate VII 1997-LB1 CE............. 17,960(2) 17,960
Structured Asset Securities Corporation,
Series 1996-3 .......................... 9,972 9,972
Wilshire Consumer Obligation Trust 1995-
A....................................... 17,002(2) 17,002
</TABLE>
(1) Subsequent to December 31, 1997, the Company sold one-half of its
interest in these securities.
(2) The Company intends to sell to the Wilshire REIT one-half of its
interests in these securities.
Loans, Net. Since January 1, 1995, the Company has substantially increased
the level of its acquisition of pools of Non-Discounted Loans and Discounted
Loans. As a result, the average balance of the Company's portfolio of Non-
Discounted Loans and Discounted Loans has increased significantly as
illustrated by the following table:
27
<PAGE>
AVERAGE UNPAID PRINCIPAL BALANCE OF THE PORTFOLIO OF NON-DISCOUNTED LOANS AND
DISCOUNTED LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996 1995
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Single-family residential.................. $ 674,682 $327,014 $ 93,350
Multi-family residential................... 95,386 73,470 70,631
Commercial and other mortgage loans........ 159,580 58,227 53,852
Consumer and other (1)..................... 223,735 29,110 10,137
--------- -------- --------
Total loans.............................. 1,153,383 487,821 227,970
Unaccreted discount........................ (274,537) (17,167) (10,254)
Allowance for loan losses.................. (75,939) (39,675) (21,591)
--------- -------- --------
Total.................................... $ 802,907 $430,979 $196,125
========= ======== ========
</TABLE>
- --------
(1) In the first quarter of 1997, the Company acquired approximately $174.2
million of consumer loans for less than 1.1% of their face amount.
Accordingly, the amount shown for "Consumer and other" increased
substantially.
The Company's portfolio of Non-Discounted Loans and Discounted Loans, net of
discounts and allowances, increased by approximately $516.4 million during
1997 primarily as a result of the Company's business strategy of aggressively
acquiring Discounted Loans and other mortgage loans.
The Company intends to sell to the Wilshire REIT (i) U.S. Commercial
Investments for approximately $29.6 million and (ii) International Investments
in the United Kingdom for approximately $3.4 million. In addition, the Company
intends to grant the Wilshire REIT a right of first refusal with respect to
U.S. Commercial Investments and International Investments. 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.
Foreclosed Real Estate, Net. Foreclosed real estate consists of properties
acquired through foreclosure or deed-in-lieu thereof on loans held by the
Company or properties that were purchased directly. Foreclosed real estate
increased by approximately $91.4 million during 1997 primarily due to the
increase in the Company's Discounted Loans and purchases of foreclosed real
estate. The Company actively manages its portfolio of foreclosed real estate
with a view to accelerating and maximizing the realization of cash from the
disposition of that real estate.
Due from Affiliate, Net. Due from affiliate, net of approximately $42.2
million at December 31, 1997 was primarily attributable to payments received
in the normal course of servicing operations by U.S. Servicer, which had not
yet been remitted to the Company.
Deposits. Deposits decreased by approximately $139.0 million or 27.7% during
1997. Pursuant to the Order, First Bank is prohibited from increasing its
total assets, as measured at the end of each calendar quarter above $553
million 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. Accordingly, First Bank has allowed deposits to pay
off to the extent not necessary to fund asset growth.
Notes Payable. In the fourth quarter of 1996 and the first quarter of 1997,
the Company issued $84.2 million of Notes. In the third quarter of 1997, the
Company issued $100.0 million of Series A Notes. In the first quarter of 1998,
the Company completed an exchange offer, pursuant to which the holders of the
Series A Notes exchanged their Series A Notes for 13% Series B Notes due 2004
of the Company (the "Series B Notes"), which contain substantially identical
terms as the Series A Notes, except with respect to restrictions on transfer.
Short-Term Borrowings. Short-term borrowings increased by approximately
$868.9 million during 1997, resulting from increased use of repurchase
agreements and warehouse financing instead of deposits to fund the purchase of
loans and securities.
28
<PAGE>
ASSET AND LIABILITY MANAGEMENT
Asset and liability management analyzes the timing and magnitude of the
repricing of assets and liabilities. It is the objective of the Company to
attempt to control risks associated with interest rate movements. In general,
management's strategy is to limit the Company's exposure to earnings
variations and variations in the value of assets and liabilities as interest
rates change over time. The Company's asset and liability management strategy
is formulated and monitored by the asset and liability committees for the
Company and 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.
Since most of the Company's assets and liabilities reprice relatively
frequently, the Company's gap tends to be relatively easy to manage and the
Company's interest rate risk analysis focuses less on managing the overall gap
and more on ensuring that individual pools of loans are properly hedged. In
hedging the interest rate exposure of a fixed-rate or lagging-index asset that
is held for sale, the Company creates a hedge which matches the principal
amortization of such asset against the maturity of the Company's liabilities
generally by entering into short sales or forward sales of U.S. Treasury
securities, 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 loans
being hedged. The Company evaluates the interest rate sensitivity of each pool
of loans and decides whether to hedge the interest rate exposure of a
particular pool of loans. 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 is 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 will seek to purchase interest only securities ("IOs") to hedge
against maturity extension risk in the Company's loan and securities portfolio
in the event that the Company encounters slower than anticipated prepayments
while still anticipating an acceptable return on the purchase of such IOs.
Accordingly, if the underlying mortgage collateral prepays (including
prepayments as a result of default and repurchases by the seller) at a rate
faster than anticipated, the weighted average life of the IO will be reduced,
and the yield to maturity 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.
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. The Company had
approximately $214.9 million notional principal amount of interest rate swap
agreements outstanding at December 31, 1997, which had the effect of
decreasing the Company's net interest income by approximately $0.6 million
during 1997.
In addition, as required by OTS regulations, the Asset and Liability
Committees also regularly review interest rate risk by forecasting the impact
of alternative interest rate environments on net interest income and market
value of portfolio equity ("MVPE"), which is defined as the net present value
of an institution's existing assets, liabilities and off-balance sheet
instruments, and evaluating such impacts against the maximum potential
29
<PAGE>
changes in net interest income and MVPE that is authorized by the board of
directors of First Bank. In addition, at December 31, 1997, management
estimates based upon the MVPE analysis prepared by the OTS that the estimated
percentage change in the Company's MVPE over the ensuing four-quarter period
as a result of a 200 basis point increase or decrease in interest rates would
be an approximate 5% decrease or 3% decrease, respectively. The following
table highlights the interest rate sensitivity of the OTS's models of MVPE of
a change in rates from 0 to 400 basis points ("bp") as of December 31, 1997:
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE
--------------------------
CHANGE IN RATES AMOUNT $ CHANGE % CHANGE
--------------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
+400bp........................................ $43,463 $(12,010) (22)%
+300bp........................................ 48,575 (6,898) (12)%
+200bp........................................ 52,563 (2,910) (5)%
+100bp........................................ 54,880 (594) (1)%
0bp.......................................... 55,473 -- --
-100bp........................................ 54,983 (490) (1)%
-200bp........................................ 53,952 (1,521) (3)%
-300bp........................................ 53,010 (2,463) (4)%
-400bp........................................ 52,663 (2,810) (5)%
</TABLE>
Management of First Bank believes that the assumptions (including pre-
payment 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. Additionally, the OTS's model
does not incorporate all of the terms and features of the hedging instruments.
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 the Wilshire
Private Companies in order to fund the acquisition of loans. The Company
repaid such borrowings with PIK Preferred Stock on July 31, 1997. The Company
redeemed the PIK Preferred Stock in February 1998. 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. At December 31, 1997, First Bank had approximately
$354.7 million of certificates of deposit. At December 31, 1997, scheduled
maturities of certificates of deposit during the 12 months ending December 31,
1998 and thereafter amounted to approximately $316.6 million and approximately
$38.1 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.
30
<PAGE>
At December 31, 1997, the Company's sources of borrowing included (i) an
uncommitted master repurchase agreement between First Bank and Bear Stearns
Mortgage Capital Corporation as to which the parties have orally agreed that
approximately $210 million would be available for the purchase of loans, (ii)
a committed $150 million warehouse lending agreement with Prudential
Securities Credit Corporation, and (iii) certain repurchase arrangements with
major investment banks, including $350 million (committed) under a repurchase
agreement with Credit Suisse First Boston Mortgage Capital LLC (subsequent to
December 31, 1997, the facility was increased to $425 million) 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 December 31, 1997, First Bank had no FHLB advances
outstanding, and was eligible to borrow up to an aggregate of $4.3 million
from the FHLB of San Francisco and had $4.5 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, U.S. commercial 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 U.S. Discounted Loans and U.S. 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.
After utilizing available working capital, deposits and any securitization
proceeds, the Company borrows money to fund its loan purchases and
originations. At December 31, 1997, 1996 and 1995, the Company used borrowings
under various repurchase arrangements and FHLB advances in the approximate
amounts of $966.5 million, $97.6 million and $13.0 million, respectively, for
new loan purchases and originations, purchases of real estate owned, and
subordinated securities. The Company's business plan generally calls for using
a high degree of leverage in acquiring loan portfolios. With respect to loan
portfolios of discounted loans and performing loans, the Company generally
seeks to fund 90% and 95%, respectively, of the market value of such loan
portfolios with borrowed money. The Company draws on a number of sources to
obtain such funds including certificates of deposit and repurchase
arrangements with Wall Street investment banks.
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
31
<PAGE>
once a substantial portion of the Company's equity offering, which was
completed in February 1998, are invested. 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.
The Company is required to maintain funds sufficient to meet two semiannual
interest payments on the Notes and the Series B Notes in liquid assets. In
addition, 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. The Company and First Bank have complied with these
requirements.
REGULATORY CAPITAL REQUIREMENTS
Federally-insured savings associations such as First Bank are required to
maintain minimum levels of regulatory capital. These standards generally are
as stringent as the comparable capital requirements imposed on national banks.
The OTS also is authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis. In connection
with the 1997 examination, prior to the merger between First Bank and Girard,
the OTS indicated that the capital level of Girard was less than satisfactory
and the capital level of First Bank was not adequate in view of their risk
profiles, despite the fact that the Savings Banks had capital levels that
would otherwise have qualified them as "well capitalized" under OTS regulatory
capital requirements. The OTS also indicated that the Savings Banks' current
capital requirements may not be appropriate given the deficiencies noted in
the examination. As a result, the Order required First Bank to maintain core
capital and risk-based capital equal to the dollar amount of capital at First
Bank and Girard at March 31, 1997, as measured at the end of each calendar
quarter. The Order provided that in the event capital falls below the levels
required by the Order as a result of any determination by the OTS or otherwise
that adversely affects First Bank's financial condition, First Bank would have
to raise additional capital. If the OTS were to impose higher capital
requirements on First Bank or additional capital were required as a result of
an adverse determination by the OTS or otherwise, the Company might inject
additional capital into First Bank, whether or not such usage of capital is
optimal for the Company.
First Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by the regulators that, if undertaken, could have a
direct material effect on First Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
First Bank must meet specific capital guidelines that involve quantitative
measures of First Bank's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. First Bank's
capital amounts and classification are also subject to qualitative judgements
by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require First Bank to maintain minimum amounts and ratios of total tangible
capital, core capital and risk-based capital, as these terms are defined in
OTS regulations. Under the regulatory framework for prompt corrective action,
quantitative and qualitative measures are used by the OTS to determine whether
an institution is categorized as "well capitalized," "adequately capitalized,"
"undercapitalized," or " significantly undercapitalized." Certain regulatory
actions are mandated by law, depending on an institution's category.
Quantitative measures include total capital to risk-weighted assets, Tier I
capital to risk-weighted assets, and Tier I capital to tangible assets, as
these terms are defined in OTS regulations.
32
<PAGE>
At December 31, 1997, the total core capital and total risk-based capital
amounts of First Bank compared to the OTS requirements contained in the Order
was as follows:
<TABLE>
<CAPTION>
ACTUAL OTS REQUIREMENT EXCESS
------- --------------- ------
<S> <C> <C> <C>
Total Core Capital.............................. $46,930 $45,018 $1,912
Total Risk-Based Capital........................ $51,429 $50,780 $ 649
</TABLE>
The following table sets forth the regulatory capital ratios of First Bank
at December 31, 1997.
REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
TO BE CATEGORIZED
AS
"WELL CAPITALIZED"
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES (1) ACTION PROVISIONS
------------- ----------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------------ ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk-
Weighted Assets (Risk-
Based Capital)......... $51,429 15.0% $ 27,447 (greater than or = to)8.0% $ 34,308 (greater than or = to)10.0%
Tier 1 Capital to Risk-
Weighted Assets........ 46,930 13.7% Not Applicable 20,585 (greater than or = to) 6.0%
Core Capital to Tangible
Assets................. 46,930 10.1% 18,610 4.0% 23,262 (greater than or = to) 5.0%
Tangible Capital to
Tangible Assets........ 46,930 10.1% 6,979 (greater than or = to)1.5% Not Applicable
</TABLE>
- --------
(1) These capital adequacy ratios represent the requirements for all savings
institutions. First Bank's minimum capital requirements are the ratios
specified in the Orders and those in the column containing the "well-
capitalized" requirements as well as the capital amounts indicated in the
preceding table.
As of December 31, 1997, First Bank's capital ratios were sufficient for it
to be categorized as "well capitalized" based solely on quantitative
measurement and the OTS orally indicated that the Bank is considered to be
"well capitalized" at this time. First Bank has not been notified by the OTS
as to its capital category. If notified or otherwise deemed to be categorized
as less than "well capitalized," First Bank could be subject to restrictions
in addition to those specified in the Order, including restrictions on holding
brokered deposits. As of December 31, 1997, First Bank had brokered deposits
of $112.5 million.
Because First Bank has minimum regulatory capital requirements and the
additional requirements under the Order discussed above, substantially all
retained earnings of First Bank are restricted as to distribution to WAC and,
ultimately, to WFSG.
REGULATION
Following examinations of the Savings Banks and WAC, the holding company for
the Savings Banks, by the OTS in 1994, 1995, 1996 and 1997, the OTS issued
Reports of Examination that were critical of the Savings Banks and WAC in a
number of respects. These regulatory concerns initially resulted in the OTS
requiring First Bank to enter into a Supervisory Agreement on June 8, 1995.
The Supervisory Agreement required First Bank to take actions to achieve
compliance with certain laws and regulations and safe and sound practices and
to (a) develop plans and procedures concerning (i) reduction of non-performing
assets, (ii) internal asset review, (iii) asset monitoring, (iv) appraisals,
(v) loan underwriting, (vi) loan purchases; (b) enhance record keeping; (c)
develop requirements to ensure that the servicing of loans by the Wilshire
Private Companies is satisfactory; and (d) maintain its separate corporate
existence. In addition, the Supervisory Agreement required First Bank to
maintain certain minimum capital ratios and prohibited First Bank from
increasing total assets beyond specified levels and acquiring non-performing
assets without the prior written consent of OTS.
In July 1996, the OTS advised First Bank that it had not fully complied with
the terms of the Supervisory Agreement and that the Savings Banks had failed
in a number of respects to address regulatory concerns raised
33
<PAGE>
in the 1994 and 1995 examination reports. The OTS also expressed continuing
concerns regarding the adequacy of management of First Bank in light of its
business activities. As a result of these issues, the OTS replaced the
Supervisory Agreement with a cease and desist order, effective October 31,
1996. Given the similar nature of Girard's business activities, the OTS has
also issued a cease and desist order to Girard similar to the order issued to
First Bank, also effective October 31, 1996. The issuance of a cease and
desist order is generally evidence of an increased level of regulatory concern
regarding the subject institution. In October 1997, the Savings Banks entered
into amended Orders with the OTS which modified certain provisions of the
original Cease and Desist Orders, effective October 27, 1997. With the
approval of the OTS, First Bank and Girard merged in December 1997. Management
believes that First Bank must continue to meet the aggregate requirements of
the Orders.
The Order prohibits First Bank from increasing its total assets, as measured
at the end of each calendar quarter, in excess of $553 million plus total net
interest credited on deposit liabilities. On March 27, 1998, the OTS provided
First Bank conceptual approval to increase its total assets to $750 million.
There can be no assurance as to when or if the OTS will amend the Order to
reflect such increase. The Order also prohibits First Bank from purchasing (i)
any loans or real estate, without the approval of the OTS, until certain
acquisition and servicing deficiencies identified by the OTS have been
corrected, and (ii) any non-performing assets or foreclosed real estate until
such time as First Bank is rated a composite "3" rating according to the
Uniform Financial Institutions Rating System.
The Order requires First Bank to (i) maintain an effective internal asset
review system that provides for adequate internal controls to ensure that
management timely reviews and classifies assets pursuant to their policies;
(ii) fully comply with all policies and procedures submitted to the OTS
pursuant to the previous cease and desist orders; (iii) operate pursuant to
and comply with their business plans; (iv) submit to the OTS a written plan to
develop or obtain the internal expertise and resources necessary to measure,
monitor and model net interest income and net portfolio value (the "IRR
Plan"); (v) review and analyze the terms of all existing loan servicing or
other agreements with affiliates, to confirm that such agreements comply with
the Order and that there are formal written agreements with respect to all
transactions with affiliates; and (vi) compare the results of profitability
models with the performance of purchased assets. The Order also requires First
Bank to submit to the OTS after each calendar quarter, reports (i) detailing
their progress in implementing their Allowance for Loan Losses policies and
the results of their reserve analysis for the preceding calendar quarter; (ii)
detailing any violations of the policies and procedures submitted to the OTS
that occurred during the preceding quarter, together with an explanation as to
what caused or contributed to the act or practice constituting such violation,
and what, if any, corrective action has been undertaken; (iii) detailing any
variances from the business plans that occurred during the preceding quarter,
showing actual and planned results, and explaining any variances greater than
5 percent; and (iv) detailing the progress in implementing the IRR Plan during
the preceding quarter.
The Order also requires First Bank to elect at least two additional new
outside directors with specific financial institution industry experience.
Such outside directors cannot have any association with affiliates of First
Bank, the Company or institution-affiliated parties. One director has been
added and another is currently pending OTS approval.
To address regulatory concerns, First Bank submitted to the OTS a bankcard
plan (the "Bankcard Plan") which (i) established a method by which First Bank
will estimate the appropriate level of reserves for its bankcard operations;
(ii) established internal controls; (iii) created an overdraft policy that
requires timely recognition of overdraft losses and identifies employees with
authority to approve overdrafts; and (iv) ensures that First Bank will comply
with all applicable statutes and regulations. After each calendar quarter,
First Bank is required to report to the OTS, in writing, any variances to the
Bankcard Plan.
The Order is enforceable by the OTS as written agreements under the Federal
Deposit Insurance Act. Therefore, failure to comply with the requirements of
the Order could subject First Bank and its directors and officers to further
enforcement actions, including termination of Federal Deposit Insurance
Corporation insurance or civil money penalties.
Management believes that First Bank is in material compliance with the
various provisions of the Orders.
34
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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 Annual Report on Form 10-K which are not
identified as historical should be considered forward-looking. In connection
with certain forward-looking statements contained in this Annual Report on
Form 10-K 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 orders,
the availability of pools of loans at acceptable prices, the availability of
financing for loan pool acquisitions, interest rates and European expansion.
Accordingly, there can be no assurance that the forward-looking statements
contained in this Annual Report on Form 10-K 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 Annual Report on Form
10-K should consider these facts in evaluating the information contained
herein. The inclusion of the forward-looking statements contained in this
Annual Report on Form 10-K should not be regarded as a representation by the
Company or any other person that the forward-looking statements contained in
this Annual Report on Form 10-K will be achieved. In light of the foregoing,
readers of this Annual Report on Form 10-K are cautioned not to place undue
reliance on the forward-looking statements contained herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See Item 7--Asset and Liability Management--of Part II of this Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 of Part IV of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth information about the executive officers and
directors of the Company as of February 28, 1998. The business address of each
executive officer and director is the address of the Company, 1776 SW Madison
Street, Portland, OR 97205, and each executive officer and director is a
United States Citizen, unless otherwise noted.
Andrew A. Wiederhorn, age 32, has been the Chairman of the Board of
Directors and Chief Executive Officer of the Company since its formation. Mr.
Wiederhorn founded the Wilshire Companies in 1987 and continues to serve as
the Chief Executive Officer, Treasurer, Secretary and sole director of the
Wilshire Private Companies.
Lawrence A. Mendelsohn, age 36, has been a director and the President of the
Company since its formation. Since October 1996, Mr. Mendelsohn has been
President of the Wilshire Private Companies. Mr. Mendelsohn was the Executive
Vice President of the Wilshire Companies from February 1993 until December
1996. From January 1992 until February 1993 Mr. Mendelsohn was Vice President,
Principal and Head of Capital Markets for Emerging Markets of Bankers Trust
New York Corporation/BT Securities Corporation. From August 1987 until January
1992, Mr. Mendelsohn was the Vice President, Senior Options Principal and Head
of Proprietary Trading for Equities, Equity Options and Distressed Debt for
J.P. Morgan and Co./J.P. Morgan Securities.
Sheryl Anne Morehead, age 45, is Executive Vice President, S&L Group of the
Company and Chief Executive Officer of First Bank. Ms. Morehead was Senior
Vice President, S&L Group of the Company and Chief Executive Officer of First
Bank from November 1996 until June 1997. From December 1993 until October
1996, Ms. Morehead was the Chief Credit Officer/Chief Operating Officer of
First Los Angeles Bank/San Paulo Bank Group, a commercial banking institution.
From August 1990 until December 1993, Ms. Morehead was the Chief Credit
Officer/Executive Vice President of First Federal Bank of Santa Monica, a
savings bank.
Chris Tassos, age 40, is Executive Vice President and Chief Financial
Officer of the Company. Mr. Tassos was Senior Vice President and Chief
Financial Officer of the Company from October 1996 until June 1997. Mr. Tassos
is Executive Vice President of the Wilshire Private Companies and from August
1995 until June 1997 was Senior Vice President of the Wilshire Private
Companies. From March 1992 until February 1995 he was the Chief Financial
Officer and/or Senior Vice President of Finance of Long Beach Mortgage Company
(formerly Long Beach Bank).
Phillip D. Vincent, age 43, is Executive Vice President, Loan Servicing of
the Company. Mr. Vincent was Senior Vice President, Loan Servicing of the
Company from October 1996 until June 1997. Mr. Vincent is Executive Vice
President of the Wilshire Private Companies and from August 1996 until June
1997 was Senior Vice President of the Wilshire Private Companies. Mr. Vincent
was Senior Vice President and Chief Administrative Officer of The J.E. Robert
Company, Inc., one of the largest real estate and mortgage investment managers
in the U.S. from April 1995 until July 1996, Senior Vice President and
Managing Officer of The J.E. Robert Company, Inc. from June 1992 until
September 1995, and Vice President and Division Manager of The J.E. Robert
Company, Inc. from 1991 until May 1992. Mr. Vincent is a member of the
American Institute of Certified Public Accountants.
Bo G. Aberg, age 49, is Senior Vice President, in charge of European
Operations of the Company. From November 1994 to September 1996, Mr. Aberg was
Chief Executive Officer of Securum Holding B.V., a Kingdom of Sweden owned
work-out company in Europe. From September 1992 to November 1994, Mr. Aberg
was Chief Executive Officer of Securum Real Estate Group, Malmo, Sweden. From
January 1982 to September 1992 Mr. Aberg held several positions within the PK
Group (a Swedish banking group), and from September 1974 to January 1982 he
was a Chartered Accountant for Hagstroms Revisions Byra AB Sweden (now Ernst &
Young). Mr. Aberg is a citizen of Sweden.
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<PAGE>
Donald J. Berchtold, age 52, is Senior Vice President, Administration. Since
March 1992 Mr. Berchtold has been Senior Vice President of the Wilshire
Private Companies. From February 1991 until November 1992 he was a consultant
to Entertainment Publications Inc.--CUC International Inc. Mr. Berchtold is
Mr. Wiederhorn's father-in-law by marriage.
Kenneth R. Kepp, age 42, is Senior Vice President, Operations. Since
November 1991, Mr. Kepp has been Senior Vice President of the Wilshire
Priviate Companies. From June 1991 until November 1991, Mr. Kepp was the
Managing Director of Network Associates International, a consulting company to
the leasing industry.
Glenn J. Ohl, age 43, is Senior Vice President of the Company and Chief
Financial Officer of WFC. Since November 1996, Mr. Ohl has been the Chief
Financial Officer of the Wilshire Private Companies. From August 1995 until
October 1996, Mr. Ohl was the Senior Vice President and Corporate Treasurer of
CWM Mortgage Holdings, Inc., an affiliate of Countrywide Credit Industries
Inc., a residential financing company. From September 1992 until August 1995,
Mr. Ohl was the Executive Vice President and Chief Financial Officer of ARCS
Mortgage, Inc., a financing company.
Peter O'Kane, age 31, is Senior Vice President, Loan Acquisitions. Mr.
O'Kane was Vice President, Loan Acquisitions from October 1996 until June
1997. Since May 1994, Mr. O'Kane has been the Senior Vice President or Vice
President, Loan Acquisitions of the Wilshire Private Companies. From September
1992 until April 1994, Mr. O'Kane was an Asset Manager, Investment Division of
J.E. Robert Company, Inc. From September 1991 until September 1992, Mr. O'Kane
was a staff consultant with Arthur Andersen and Company. From March 1990 until
August 1991, Mr. O'Kane was an analyst for GranCorp, Inc., a real estate
investment company.
Robert G. Rosen, age 31, is Senior Vice President, Asset Securitization and
Capital Markets of the Company. Mr. Rosen was the Vice President of
Securitization at BTM Capital Corp., a wholly owned subsidiary of the Bank of
Tokyo-Mitsubishi, Ltd. from March 1997 until October 1997. From January 1995
until March 1997 Mr. Rosen was a Director of Black Diamond Advisors, Inc., a
firm specializing in securitization and capital markets needs of finance
companies. From January 1994 to January 1995 Mr. Rosen was with Kidder Peabody
and Co. in the Asset-Backed Securitization Group. From 1991 to 1994 Mr. Rosen
was the Assistant Vice President and Manager of Securitization and Commercial
Paper within the Corporate Trust Department at Bankers Trust Company.
James B. Svinth, age 35, is Senior Vice President, Secondary Markets of the
Company. Mr. Svinth was Group Senior Vice President of Norwest Mortgage, Inc.,
a wholly owned subsidiary of Norwest Corporation from September 1996 to
January 1998. Mr Svinth was Senior Vice President of Structured Finance of
Norwest Mortgage, Inc. from September 1996 to January 1998. From January 1994
to May 1996, Mr. Svinth was Senior Vice President of Capital Markets of
Prudential Home Mortgage, a wholly owned subsidiary of The Prudential
Insurance Company of America. From 1987 until 1994, Mr. Svinth held Secondary
Marketing positions with Prudential Home Mortgage.
R. Scott Stevenson, age 40, is Senior Vice President of the Company. Mr.
Stevenson was Vice President of the Company and President of Girard and First
Bank from October 1996 until September 1997. From June 1991 until October
1996, he was the President and Chief Executive Officer of Girard. From January
1986 until June 1991, he held various positions at Girard including Chief
Operating Officer, Chief Financial Officer and Loan Officer. Since October
1997, Mr. Stevenson has been Senior Vice President of the Wilshire Private
Companies.
Geoffrey B. Davis, age 55, is Chief Information Officer of the Company.
Since 1970 Mr. Davis has held various senior management positions in
information systems with Bank of America in Venezuela, Panama, Spain, Canada,
Mexico and Brazil.
David Dale-Johnson, age 50, has been a director of the Company since its
formation. Mr. Dale-Johnson has been the Director, Program in Real Estate,
School of Business Administration, University of Southern California
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<PAGE>
since 1988. Mr. Dale-Johnson also is Vice-Chairman and a director of Century
Center for Economic Opportunity, Inc., a non-profit corporation. Mr. Dale-
Johnson also is a consultant for several public and private companies and
government agencies.
Don H. Coleman, age 59, has been a director of the Company since its
formation. Since March 1994, Mr. Coleman has been the President of
International Manufacturing and Licensing, Inc., a subsidiary of the ICT
Group, Inc., a worldwide supplier of wireless phone equipment. From January
1988 until March 1994, Mr. Coleman was President of Liquid Spring Corporation,
a manufacturer of automobile components. Mr. Coleman is a director of ICT
Group, Inc. and Fabricated Metals, Inc., a materials handling equipment
manufacturer.
Philip G. Forte, age 33, has been a director of the Company since its
formation. Mr. Forte has been the Chief Executive Officer of Travelers
Telecommunications, Inc., a provider of value added communication services to
the travel industry, since June 1994. From March 1992 until June 1994, Mr.
Forte was the Vice President, Sales and Marketing of Vinyl Chem International,
Inc., a specialty chemical company. From September 1989 until March 1992 Mr.
Forte was the Vice President, Sales and Marketing of Pacific Western
University.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires a company's
directors and executive officers, and beneficial owners of more than 10% of
the common stock of such company to file with the Securities and Exchange
Commission initial reports of ownership and periodic reports of changes in
ownership of the company's securities. Based solely on a review of Forms 3, 4
and 5 and amendments thereto furnished to the Company for the year ended
December 31, 1996, the following directors, officers, or beneficial owners of
more than 10% of the Company's Common Stock, failed to timely furnish reports
on Form 3, 4 and 5: Robert G. Rosen (Form 3) and Donald J. Berchtold (Form 5).
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Each member of the Board of Directors who is not an officer or employee of
the Company is paid a per meeting fee of $1,000 for each Board of Directors'
meeting and a fee of $100 per hour for each committee meeting attended which
is not held on a regularly scheduled meeting date. Officers and employees of
the Company who also serve as directors do not receive any retainer or
additional fees for serving as a director. Under the Company's Stock Plan, on
the last trading day of each calendar quarter, the Company automatically
grants each director who is not also an employee of the Company or a
subsidiary of the Company an option to purchase the number of shares of Common
Stock equal to $6,250 divided by the fair market value per share of the Common
Stock (it's market price) on the date of grant. In addition, each director who
is not also an employee of the Company or a subsidiary of the Company is
eligible for annual grants of options.
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<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth the total compensation paid or accrued by the
Company for services rendered during the year ended December 31, 1997 to the
Chief Executive Officer of the Company, and to each of the four other most
highly compensated executive officers of the Company whose total cash
compensation for the year ended December 31, 1997 exceeded $100,000 (the
"Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------- ----------------
SECURITIES
NAME AND PRINCIPAL UNDERLYING
POSITION YEAR SALARY ($) BONUS ($) OPTIONS/SARS (#)
------------------ ---- ---------- --------- ----------------
<S> <C> <C> <C> <C>
Andrew A. Wiederhorn...... 1997 $300,000 -- --
Chairman, Chief Executive 1996 65,000(1) -- 730,000
Officer, Secretary and
Treasurer
Lawrence A. Mendelsohn.... 1997 $300,000 -- --
President 1996 73,494(1) -- 365,000
Bo G. Aberg............... 1997 $372,168 $246,765 5,000
Senior Vice President,
European Operations 1996 $ 51,420(3) $ 41,925(3) --
Sheryl A. Morehead........ 1997 $277,655 $100,000 15,000
Executive Vice President,
S&L Group 1996 $ 36,907(2) $ 25,000 --
Chris Tassos.............. 1997 $168,400(3) $ 90,000(3) 60,000
Executive Vice President
and 1996 $ 13,125(3) --(3) --
Chief Financial Officer
</TABLE>
- --------
(1) Mr. Wiederhorn and Mr. Mendelsohn elected in the past to receive minimal
compensation from the Wilshire Companies to maintain capital in the
Wilshire Private Companies and have received shareholder loans from the
Wilshire Companies to fund the acquisition and growth of First Bank of
Beverly Hills, F.S.B., a wholly-owned subsidiary of the Company and Girard
Savings Bank, F.S.B., a wholly-owned subsidiary of the Company and certain
other expenses. On December 31, 1997, First Bank was merged into Girard
and the surviving entity was renamed First Bank of Beverly Hills, F.S.B.
(2) Ms. Morehead was hired in November 1996.
(3) Represents amounts paid by the Company. Does not include amounts paid by
the Wilshire Private Companies.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information concerning stock options granted by
the Company during the year ended December 31, 1997 to each of the Named
Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL
% OF TOTAL REALIZABLE VALUE AT
OPTIONS/SARS ASSUMED ANNUAL
NUMBER OF GRANTED TO RATES OF STOCK
SECURITIES EMPLOYEES IN EXERCISE PRICE APPRECIATION
UNDERLYING YEAR ENDED OR BASE FOR OPTION TERM(1)
OPTIONS/SARS DECEMBER 31, PRICE EXPIRATION -------------------
NAME GRANTED(#) 1997 ($/SH) DATE 5% 10%
---- ------------ ------------ -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Andrew A. Wiederhorn.... -- -- -- -- -- --
Lawrence A. Mendelsohn.. -- -- -- -- -- --
Bo G. Aberg............. 15,000 5.7% $25.48 2007 $ 44,407 $ 125,298
Sheryl A. Morehead...... 15,000 5.7% $25.48 2007 $181,545 $ 512,247
Chris Tassos............ 60,000 22.7% $27.18 2007 $774,504 $2,185,343
</TABLE>
- --------
(1) These amounts represent hypothetical gains that could be achieved for the
options if they are exercised at the end of their terms. The assumed 5%
and 10% rates of stock price appreciation are mandated by rules of the
Securities and Exchange Commission. They do not represent the Company's
estimate or projection of future prices of the Common Stock.
39
<PAGE>
EMPLOYMENT AND OTHER ARRANGEMENTS
The Company has entered into substantially similar employment agreements,
effective November 1, 1996, with Andrew A. Wiederhorn (as Chief Executive
Officer) and Lawrence A. Mendelsohn (as President) (each individually, an
"Executive" and collectively, the "Executives"). Each agreement provides for
an initial three-year term which is automatically renewable for successive
two-year terms (the "Employment Term") unless either party gives written
notice to the other at least ninety days prior to the expiration of the then
Employment Term.
The agreement provides for an annual base salary of $300,000 for Mr.
Wiederhorn and $300,000 for Mr. Mendelsohn (which may be increased, but not
decreased, by the Compensation Committee of the Board of Directors) and an
annual bonus. The bonus payable to Mr. Wiederhorn and Mr. Mendelsohn will be
determined by the Compensation Committee of the Board of Directors and may not
exceed in the aggregate 20% of the pre-tax profits of the Company. Mr.
Wiederhorn and Mr. Mendelsohn will share equally in the first $400,000 of any
such bonus and thereafter their respective bonus will be two-thirds and one-
third. The agreement also provides that Mr. Wiederhorn and Mr. Mendelsohn may
participate in the Company's Incentive Stock Plan.
The agreement also provides that during the Employment Term and thereafter,
the Company will indemnify the Executive to the fullest extent permitted by
law, in connection with any claim against the Executive as a result of the
Executive serving as an officer or director of the Company or in any capacity
at the request of the Company in or with regard to any other entity, employee
benefit plan or enterprise. Following the Executive's termination of
employment, the Company will continue to cover the Executive even if the
Executive has ceased to serve in such capacity.
If any payment to the Executive together with certain other amounts paid to
the Executive, exceeds certain threshold amounts and results from a change in
ownership as defined in Section 280G(b)(2) of the Code, the agreements provide
that the Executive will receive an additional amount to cover the federal
excise tax and any interest, penalties or additions to tax with respect
thereto on a "grossed up" basis.
The agreement may be terminated at any time by the Executive for Good Reason
or with or without Good Reason during the Change in Control Protection Period
(if a Change in Control occurs) or by the Company with or without Cause (as
each capitalized term is defined in the agreement).
If the Executive terminates his employment with the Company for Good Reason,
with or without Good Reason during the Change in Control Protection Period (if
a Change in Control occurs), the Executive is terminated without Cause, or the
Executive's employment terminates as a result of the Company giving notice of
nonextension of the Employment Term, he will receive severance pay (i) in an
amount equal to three times Base Salary in effect at termination and three
times the highest annual bonus paid or payable for any of the previous three
years, (ii) accelerated full vesting under all outstanding equity-based and
long-term incentive plans, (iii) any other amounts or benefits due under then
applicable employee benefit plans of the Company (in accordance with such
plan, policy or practice), (iv) three years of additional service credit that
the Executive would otherwise have been credited under any pension type
qualified or nonqualified pension plan, (v) three years of the maximum Company
contribution under any qualified or nonqualified 401(k) type plan and (vi)
continued medical benefits for three years. The agreement provides that the
Executive will have no obligation to mitigate the Company's financial
obligations in the event of his termination due to death, disability,
termination for Good Reason, termination with or without Good Reason during
the Change in Control Protection Period or termination without Cause, and
there will be no offset against the Company's financial obligations for other
amounts earned by the Executive.
If termination is the result of Executive's death, the Company will pay to
the Executive (or his estate), an amount equal (i) any earned but not yet paid
compensation, (ii) a pro-rated bonus, (iii) any other amounts or benefits due
under then applicable employee benefit plans of the Company (in accordance
with such plan, policy or practice), (iv) payment on a monthly basis of 6
months of base salary to Executive's spouse or dependents
40
<PAGE>
and (v) continued medical coverage for the Executive's spouse and dependents
for three years. In addition, the Executive will receive accelerated full
vesting under all outstanding equity-based and long-term incentive plans. If
Executive's employment is terminated by reason of disability, the Executive
will be entitled to receive payments and benefits to which his representatives
would be entitled in the event of his termination by reason of death, provided
that the payment of base salary will be reduced by any long-term disability
payments under any policy maintained by the Company.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee report below shall not be deemed incorporated by
reference by any general statement incorporating by reference this Annual
Report on Form 10-K into any filing under the Securities Act of 1933, as
amended (the "Securities Act") or under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), except to the extent the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under the Securities Act or Exchange Act. The Compensation Committee of
the Board of Directors of the Company (the "Committee") is made up exclusively
of non-employee directors. The Committee administers the executive
compensation programs of the Company. All actions of the Committee pertaining
to executive compensation are submitted to the Board of Directors for
approval.
The Company's executive compensation program is designed to attract, retain,
and motivate high caliber executives and to focus the interests of the
executives on objectives that enhance stockholder value. These goals are
attained by emphasizing "pay for performance" by having a portion of the
executive's compensation dependent upon business results and by providing
equity interests in the Company. The principal elements of the Company's
executive compensation program are base salary and stock options. In addition,
the Company recognizes individual contributions as well as overall business
results, using a discretionary bonus program.
Base Salary
Base salaries for the Company's executives are intended to reflect the scope
of each executives' responsibilities, the success of the Company, and
contributions of each executive to that success. Executive salaries are
adjusted gradually over time and only as necessary to meet this objective.
Increases in base salary may be moderated by other considerations, such as
geographic or market data, industry trends or internal fairness within the
Company. The salary increases in calendar year 1997 for the Named Executive
Officers generally reflect this policy.
The base salaries for Andrew A. Wiederhorn and Lawrence A. Mendelsohn for
1997 are set forth in their respective employment agreements, which are
described under "Employment and Other Arrangements." In the future, their base
salaries will be reviewed annually by the Committee.
Bonuses
Annual discretionary bonuses were paid by the Company and the Savings Banks
in 1997. The amount of the annual discretionary bonuses paid by the Company
was determined by the Committee and the amount of the annual discretionary
bonuses paid by the Savings Banks was determined by the board of directors of
First Bank and Girard.
Incentive Stock Option Plan
Prior to its initial public offering in December 1996, the Company adopted
an Incentive Stock Option Plan, (the "Stock Plan"). The purpose of the Stock
Plan is to enable the Company to attract, retain and motivate key employees,
directors and, on occasion, consultants, by providing them with equity
participation in the Company. Accordingly, the Stock Plan permits the Company
to grant incentive stock options ("ISOs"), non-statutory stock options
("NSOs"), restricted stock and stock appreciation rights (collectively
"Awards") to employees, directors and consultants of the Company and
subsidiaries of the Company. The Board of Directors has delegated
administration of the Stock Plan to the Committee.
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<PAGE>
Under the Stock Plan, the Committee may grant ISOs and NSOs. The option
exercise price of both ISOs and NSOs may not be less than the fair market
value of the shares covered by the option on the date the option is granted.
However, the exercise price of ISOs granted to holders of more than 10% of the
Company's outstanding stock may not be less than 110% of that fair market
value. The Committee may also grant Awards of restricted shares of Common
Stock. Each restricted stock Award would specify the number of shares of
Common Stock to be issued to the recipient, the date of issuance, any
consideration for such shares and the restrictions imposed on the shares
(including the conditions of release or lapse of such restrictions). The
Committee may also grant Awards of stock appreciation rights. A stock
appreciation right entitles the holder to receive from the Company, in cash or
Common Stock, at the time of exercise, the excess of the fair market value at
the date of exercise of a share of Common Stock over a specified price fixed
by the Committee in the Award, multiplied by the number of shares as to which
the right is being exercised. The specified price fixed by the Committee will
not be less than the fair market value of shares of Common Stock at the date
the stock appreciation right was granted.
In 1997, the Company issued options for a total of 263,909 shares of Common
Stock to executive officers and employees.
Policy of Deductibility of Compensation
Section 162(m) of the Internal Revenue Code limits the Company's tax
deduction to $1 million for compensation paid to the Named Executive Officers,
unless certain requirements are met. One of these requirements is that
compensation over $1 million must be performance based. The Committee intends
to continue to use performance-based compensation, which should minimize the
effect of these regulations. However, the Committee strongly believes that its
primary responsibility is to provide a compensation program that will attract,
retain and reward the executive talent necessary to maximize the return to
stockholders, and that the loss of a tax deduction may be necessary in some
circumstances. Base salary does not qualify as performance-based compensation
under IRS regulations.
CEO Compensation
Andrew A. Wiederhorn was appointed the Company's chief executive officer at
its formation. Mr. Wiederhorn's base salary for 1997 was not determined by the
Committee and is set forth in an employment agreement. Mr. Wiederhorn elected
not to receive a bonus in 1997. Future decisions regarding Mr. Wiederhorn's
base salary and bonus will be determined by the Committee, using criteria
similar to that used for the other executive officers of the Company.
COMPENSATION COMMITTEE
David Dale-Johnson
Don H. Coleman
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Determinations regarding compensation of the Company's employees are made by
the Committee. David Dale-Johnson and Don H. Coleman are the members of the
Committee. Neither David Dale-Johnson nor Don Coleman participated in the
compensation decisions relating to Messrs. Wiederhorn's and Mendelsohn's base
salary for fiscal 1997. Messrs. Wiederhorn and Mendelsohn actively
participated in such decisions.
The Company leases office space for its corporate headquarters from Wilshire
Properties I, Incorporated, an Oregon corporation ("WPI"). Andrew A.
Wiederhorn and Lawrence A. Mendelsohn are the beneficial owners of WPI. The
lease agreement provides for an aggregate annual rent payment in 1998 of
approximately $276,000 and expires December 31, 2001. In addition to base rent
the Company is required to pay its proportionate share of operating expenses
incurred by WPI in connection with the operations of the building. First Bank
and Girard
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<PAGE>
sub-lease approximately 8,000 sq. ft. of office space in two locations from
the Company for an aggregate annual rental payment in 1998 of $4. The term of
the sub-lease is year-to-year. Messrs. Wiederhorn and Mendelsohn have
indicated that they intend to sell the property to the Wilshire REIT. The
Company currently owns 100% of the Wilshire REIT and expects to maintain a
minority interest (currently expected to be approximately 9.9%, with options
to acquire an additional 10%) in the Wilshire REIT following the Wilshire
REIT's proposed initial public offering.
In connection with the formation of WFSG, on December 24, 1996, certain
executive officers and directors exchanged 5.1% of the capital stock of
Girard, 5.1% of the capital stock of First Bank, and approximately 99% of the
capital stock of WAC, for 5,447,901 shares of Common Stock of the Company.
The Company is a party to a loan servicing agreement with the U.S. Servicer
pursuant to which the U.S. Servicer acts as a sub-servicer for the Company and
provides loan portfolio management services, including billing, portfolio
administration and collection services for the Company's pools of loans. The
Company pays the U.S. Servicer a servicing fee at or below the prevailing
market rates for each pool of loans the U.S. Servicer is servicing for the
Company.
First Bank is party to a loan servicing agreement with the U.S. Servicer
pursuant to which the U.S. Servicer provides loan portfolio management
services, including billing, portfolio administration and collection services
for all loans owned, acquired or made by First Bank.
On December 31, 1997, First Bank was merged into Girard and the surviving
entity was renamed First Bank of Beverly Hills, F.S.B.
While the Company is obtaining necessary licensing approvals for its
servicing operations, certain executive officers of the Company, including
Andrew Wiederhorn, Lawrence Mendelsohn, Kenneth Kepp, Donald Berchtold, Chris
Tassos and Phillip Vincent are continuing to serve as executive officers of
the Wilshire Private Companies and receive compensation from the Wilshire
Private Companies.
While the Company is obtaining the necessary regulatory approvals, the U.S.
Servicer is originating residential mortgage loans for the Company's account
through its correspondent relationships and transferring the newly originated
loans to the Company, which simultaneously provides funding for those loans.
The Company and the Wilshire Private Companies are parties to an
Administrative Services Agreement pursuant to which the Wilshire Private
Companies and the Company have agreed to provide certain services to each
other, including, among other things, certain financial reporting functions,
legal compliance, banking, risk management and operational and strategic
services. The agreement provides for the payment of a market rate fee plus
reimbursement of any out-of-pocket expenses for any services rendered by one
party for another. The initial term of the agreement expires on December 31,
1997, subject to renewal for successive one-year periods.
In the first quarter of 1997, the U.S. Servicer assigned the servicing
rights to a portfolio of home equity loans, second lien mortgages, consumer
loans and mortgage-backed securities (the "Institutional Portfolio") to the
Company. Thereafter, the Company purchase the Institutional Portfolio from a
major institutional investor at a discount that resulted in the Company's
receipt of a servicing fee of approximately $5.6 million, the recognition of
which is being deferred and amortized over the life of the Institutional
Portfolio.
From January 1, 1997 through March 31, 1997, the Company purchased $128.4
million aggregate principal amount of mortgage and other loans from the U.S.
Servicer. The indentures for the Company's Notes and Series A Notes contain an
exception to the prohibition on transactions with affiliates for purchases on
or before March 31, 1997 of loan portfolios acquired by an affiliate of the
Company after July 31, 1996, where the purchase price does not exceed the
lower of two independent bids for the acquired loan portfolios. Management
believes that the Company's loan purchases were made in compliance with the
indentures.
43
<PAGE>
Effective July 31, 1997, the Company issued to the Wilshire Private
Companies 27,500 shares of its PIK Preferred Stock having an aggregate
liquidation value of $27.5 million in exchange for the cancellation of certain
accounts payable to the Wilshire Private Companies aggregating approximately
$27.1 million and cash in the amount of approximately $400,000. In February
1998, the Company redeemed $27.5 million of PIK Preferred Stock, plus accrued
dividends.
The Company loaned Kenneth R. Kepp $295,000 which is secured by a mortgage
on Mr. Kepp's principal residence. The Company has a first priority lien on
$235,143.20 of such indebtedness which bears interest at 8.75% per annum and a
second lien on $57,467.34 of such indebtedness which bears interest at 10% per
annum.
Through December 31, 1997, the Company loaned David Dale-Johnson $130,000 to
complete construction of his principal residence. Such indebtedness bears
interest at 10.5% per annum.
The Company loaned Robert G. Rosen $435,000 which is secured by a mortgage
on Mr. Rosen's principal residence. Such indebtedness bears interest at 7.78%
per annum.
44
<PAGE>
PERFORMANCE GRAPH
The Performance Graph shall not be deemed incorporated by reference by any
general statement incorporating by reference this Annual Report on Form 10-K
into any filing under the Securities Act or under the Exchange Act, except to
the extent the Company specifically incorporates this information by reference,
and shall not otherwise be deemed filed under the Securities Act or the
Exchange Act.
The following Performance Graph covers the period beginning December 19, 1996
when the Company's Common Stock was first traded on the NASDAQ Stock Market
through December 31, 1997. The graph compares the performance of the Company's
Common Stock to the S&P 500 and a Financial Services Index ("FSI").
LOGO
1997 MEASUREMENT PERIOD(1)(2)
<TABLE>
<CAPTION>
DECEMBER 19, DECEMBER 31, DECEMBER 31,
1996 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Company............................ $100.00 $154.76 $163.08
FSI(3)............................. $100.00 $102.04 $100.58
S&P 500............................ $100.00 $ 99.33 $131.01
</TABLE>
- --------
(1) Assumes all distributions to stockholders are reinvested on the payment
dates.
(2) Assumes $100 invested on December 19, 1996 in the Company's Common Stock,
the S&P 500 Index and the FSI.
(3) The companies included in the FSI are Advanta Corporation, Amresco Inc.,
Countrywide Credit Industries Inc., Green Tree Financial Corporation and
Ocwen Financial Corporation.
45
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows as of January 31, 1998 the beneficial ownership of
Common Stock with respect to (i) each person who was known by the Company to
own beneficially more than 5% of the outstanding shares of the Company's
Common Stock, (ii) each director and nominee for director, (iii) each
executive officer named in the Summary Compensation Table, and (iv) directors
and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
BENEFICIAL OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP CLASS
--------------------------------------- ---------- -------
<S> <C> <C>
Andrew A. Wiederhorn............................... 4,002,131(2) 33.9
Lawrence A. Mendelsohn............................. 2,003,330(3) 17.5
Bo G. Aberg........................................ 5,000(7) *
Donald J. Berchtold................................ 16,417(5) *
Kenneth E. Kepp.................................... 9,245(6) *
Sheryl Anne Morehead............................... 15,000(4) *
Glenn J. Ohl....................................... 7,857(7) *
Peter O'Kane....................................... 13,133(8) *
Robert G. Rosen.................................... 23,000(9) *
R. Scott Stevenson................................. 8,504(10) *
Chris Tassos....................................... 64,761(11) *
Phillip D. Vincent................................. 39,285(12) *
Don H. Coleman..................................... 33,760(13) *
Philip G. Forte.................................... 12,255(14) *
David Dale-Johnson................................. 34,682(13) *
Wellington Management Company, LLP................. 996,400(15) 9.0
All executive officers and directors as a group (15
persons).......................................... 6,288,360 50.9
</TABLE>
- --------
(1) The address for each stockholder, other than Wellington Management
Company, LLP is c/o Wilshire Financial Services Group Inc., 1776 SW
Madison Street, Portland, OR 97205. The address for Wellington Management
Company, LLP is 75 State Street, Boston, Massachusetts 02109.
(2) Includes 5,004 shares of Common Stock held by his minor children and
25,000 shares of Common Stock held by a partnership controlled by Mr.
Wiederhorn. Also includes 730,000 shares of Common Stock which may be
acquired upon the exercise of options.
(3) Includes 125,000 shares of Common Stock held by a partnership controlled
by Mr. Mendelsohn and his spouse. Also includes 365,000 shares of Common
Stock which may be acquired upon the exercise of options.
(4) Includes 15,000 shares of Common Stock which may be acquired upon the
exercise of options.
(5) Includes 2,571 held by his spouse and 952 shares held by his minor
children. Also includes 8,133 shares of Common Stock which may be
acquired upon the exercise of options.
(6) Includes 6,845 shares of Common Stock which may be acquired upon the
exercise of options.
(7) Includes 5,000 shares of Common Stock which may be acquired upon the
exercise of options.
(8) Includes 8,000 shares of Common Stock which may be acquired upon the
exercise of options.
(9) Includes 20,000 shares of Common Stock which may be acquired upon the
exercise of options. Also includes 3,000 shares of Common Stock held in
his mother's IRA account, with respect to which Mr. Rosen has
discretionary authority.
(10) Includes 26 shares of Common Stock held in a trust controlled by Mr.
Stevenson and his spouse. Also includes 8,478 shares of Common Stock
which may be acquired upon the exercise of options.
46
<PAGE>
(11) Includes 4,761 shares of Common Stock held jointly with his spouse and
60,000 shares of Common Stock which may be acquired upon the exercise of
options.
(12) Includes 3,333 shares of Common Stock held jointly with his spouse and
952 shares of Common Stock held by his minor children. Also includes
35,000 shares of Common Stock which may be acquired upon the exercise of
options.
(13) Includes 22,538 shares of Common Stock which may be acquired upon the
exercise of options.
(14) Includes 11,303 shares of Common Stock which may be acquired upon the
exercise of options.
(15) Based upon information obtained from a Schedule 13G filed with the
Securities and Exchange Commission on or about February 11, 1998.
* less than one (1) percent
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 12. Executive Compensation--Compensation Committee Interlocks and
Insider Participation.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
See Index to Financial Statements immediately following Exhibit Index.
(b) Reports on Form 8-K
(i) Current report on Form 8-K, dated January 16, 1997;
(ii) Current report on Form 8-K, dated April 10, 1997; and
(iii) Current report on Form 8-K, dated August 14, 1997.
(c) Exhibits
See Exhibit Index immediately following the signature page.
47
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................... F-2
Independent Auditors' Report............................................... F-3
Consolidated Financial Statements:
Consolidated Statements of Financial Condition
December 31, 1997 and 1996.............................................. F-4
Consolidated Statements of Operations
Years Ended December 31, 1997, 1996 and 1995............................ F-5
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995............................ F-6
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1997, 1996 and 1995............................ F-8
Notes to Consolidated Financial Statements............................... F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wilshire Financial Services Group Inc. and Subsidiaries:
We have audited the accompanying consolidated statement of financial
condition of Wilshire Financial Services Group Inc. and Subsidiaries (the
"Company") as of December 31, 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
As discussed in Note 10 to the consolidated financial statements, the
Company's subsidiary, First Bank of Beverly Hills, F.S.B. (the "Bank") is
operating under a regulatory agreement with the Office of Thrift Supervision
that includes, among other things, limitations on asset growth and asset
acquisition activity, requirements to enhance the internal control environment
of the Bank and the maintenance of specific regulatory capital requirements.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wilshire Financial
Services Group Inc. and Subsidiaries as of December 31, 1997, and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Los Angeles, California
March 12, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders Wilshire Financial Services Group
Inc. and Subsidiaries
We have audited the accompanying consolidated statement of financial
condition of Wilshire Financial Services Group Inc. and Subsidiaries (the
"Company") as of December 31, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended December
31, 1996 and 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Wilshire Financial
Services Group Inc. and Subsidiaries as of December 31, 1996, and the
consolidated results of their operations and cash flows for the years ended
December 31, 1996 and 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 10 to the consolidated financial statements, as of
March 14, 1997, the Company's subsidiaries, First Bank of Beverly Hills F.S.B.
and Girard Savings Bank F.S.B. are operating under regulatory agreements with
the Office of Thrift Supervision that require them to meet certain prescribed
requirements.
/s/ Deloitte & Touche LLP
March 14, 1997
Los Angeles, California
F-3
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents.............................. $ 66,115 $ 152,298
Mortgage-backed securities available for sale, at fair
value................................................. 298,964 31,270
Mortgage-backed securities held to maturity, at
amortized cost........................................ 18,468 21,724
Securities held to maturity, at amortized cost......... 5,946 7,429
Trading account securities............................. 38,969 24,541
Loans, net............................................. 153,908 176,026
Discounted loans, net.................................. 463,355 206,740
Loans held for sale, net, at lower of cost or market... 310,694 28,826
Stock in Federal Home Loan Bank of San Francisco, at
cost.................................................. 5,031 2,958
Real estate owned, net................................. 169,612 78,200
Leasehold improvements and equipment, net.............. 2,507 317
Due from affiliate, net................................ 42,171 5,051
Accrued interest receivable............................ 6,641 3,517
Prepaid expenses and other assets...................... 46,646 14,952
------------ ----------
TOTAL.............................................. $ 1,629,027 $ 753,849
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Deposits............................................. $ 362,598 $ 501,614
Short-term borrowings................................ 966,500 97,624
Notes payable........................................ 184,245 75,000
Accounts payable and other liabilities............... 16,562 18,589
------------ ----------
Total liabilities.................................. 1,529,905 692,827
------------ ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par value, 10,000,000
authorized, 27,500 outstanding (1997)............... 27,500 --
Common stock $.01 par value, 50,000,000 shares
authorized, 7,570,000 outstanding (1997 and 1996)... 55,897 55,897
Treasury stock, 5,000 shares, at cost (1997)......... (124) --
Retained earnings.................................... 18,782 5,222
Unrealized loss on securities available for sale,
net................................................. (2,933) (97)
------------ ----------
Total stockholders' equity......................... 99,122 61,022
------------ ----------
TOTAL.............................................. $ 1,629,027 $ 753,849
============ ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C>
INTEREST INCOME:
Loans...................................... $ 85,090 $ 44,294 $ 21,821
Mortgage-backed securities................. 20,785 1,797 1,359
Securities and federal funds sold.......... 4,182 2,331 1,201
---------- ---------- ----------
Total interest income.................... 110,057 48,422 24,381
---------- ---------- ----------
INTEREST EXPENSE:
Deposits................................... 25,687 25,002 13,944
Borrowings................................. 61,149 4,275 537
---------- ---------- ----------
Total interest expense................... 86,836 29,277 14,481
---------- ---------- ----------
NET INTEREST INCOME.......................... 23,221 19,145 9,900
PROVISION FOR ESTIMATED LOSSES ON LOANS...... 1,991 16,549 4,266
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
ESTIMATED LOSSES ON LOANS................... 21,230 2,596 5,634
---------- ---------- ----------
OTHER INCOME
Gain on sales of loans..................... 39,049 11,538 642
Servicing revenue.......................... 5,580 -- --
Real estate owned, net..................... 6,309 556 (170)
Bankcard income, net....................... 1,995 1,666 1,232
Gain on sale of securities................. 3,742 -- --
Trading account unrealized gain, net....... 2,330 1,833 --
Other, net................................. 2,298 2,349 1,233
---------- ---------- ----------
Total other income....................... 61,303 17,942 2,937
---------- ---------- ----------
OTHER EXPENSES:
Compensation and employee benefits......... 14,404 4,464 2,516
Loan service fees and expenses paid to
affiliate................................. 28,126 5,176 1,958
Professional services...................... 3,171 700 1,028
Occupancy.................................. 1,125 339 385
FDIC insurance premiums.................... 1,049 2,381 721
Other general and administrative expense... 8,857 2,386 1,324
---------- ---------- ----------
Total other expenses..................... 56,732 15,446 7,932
---------- ---------- ----------
INCOME BEFORE INCOME TAX PROVISION........... 25,801 5,092 639
INCOME TAX PROVISION......................... 10,637 125 47
---------- ---------- ----------
NET INCOME................................... $ 15,164 $ 4,967 $ 592
========== ========== ==========
EARNINGS PER SHARE:
Basic...................................... $ 1.79 $ 1.07 $ 0.46
Diluted.................................... $ 1.69 $ 1.07 $ 0.46
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic...................................... 7,569,808 4,638,926 1,300,863
Diluted.................................... 8,019,299 4,647,068 1,300,863
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 15,164 $ 4,967 $ 592
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Provision for estimated loan losses....... 1,991 16,549 4,266
Provision for real estate owned losses.... 1,944 -- 598
Depreciation and amortization............. 491 165 241
Benefit for deferred income taxes......... (524) (4,013) (419)
Gain on sale of real estate owned......... (8,574) (623) (97)
Purchase of loans held for sale........... (673,234) (28,826) --
Proceeds from sale of loans held for sale. 476,890 -- --
Gain on sale of loans..................... (39,049) (11,538) (642)
Gain on sale of securities................ (3,742) -- --
Unrealized gain on trading securities..... (2,330) (1,833) --
Amortization of discounts and deferred
fees..................................... (28,952) (3,324) (1,246)
FHLB stock dividend....................... (241) (111) (40)
Change in:
Trading account securities................ (12,098) (22,708) --
Accrued interest receivable............... (3,124) (475) (1,443)
Prepaid expenses and other assets......... (29,030) (7,626) (1,094)
Due from affiliate, net................... (11,224) (1,296) (345)
Accounts payable and other liabilities.... (2,027) 13,013 1,386
Other..................................... -- (600) (168)
--------- --------- ---------
Net cash (used in) provided by operating
activities............................. (317,669) (48,279) 1,589
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans and discounted loans...... $(519,451) $(482,506) $(186,895)
Loan repayments, net of originations........ 97,379 54,180 49,035
Proceeds from sale of loans................. 31,150 312,949 16,673
Purchase of mortgage-backed securities
available for sale......................... (308,387) (24,537) --
Repayments of mortgage-backed securities
available for sale......................... 16,680 2,226 1,528
Proceeds from sale of mortgage backed
securities available for sale.............. 24,556 -- 2,150
Proceeds from maturity of securities held to
maturity................................... 1,500 5,654 1,000
Purchase of mortgage-backed securities held
to maturity................................ -- (16,079) --
Repayments of mortgage-backed securities
held to maturity........................... 3,169 1,820 824
Purchases of securities and FHLB stock...... (1,833) (2,447) (2,965)
Proceeds from sale of FHLB stock............ -- -- 231
Purchases of real estate owned.............. (47,445) (67,344) --
Proceeds from sale of real estate owned..... 97,868 16,482 5,254
Purchases of leasehold improvements and
equipment.................................. (2,681) (195) (349)
Other, net.................................. -- 81 (654)
--------- --------- ---------
Net cash used in investing activities... (607,495) (199,716) (114,168)
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
---------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits........ $ (139,016) $ 198,090 $107,731
Issuance of common stock................... -- 38,097 --
Repurchase of common stock................. (124) -- --
Issuance of subordinated debt.............. -- -- 9,000
Proceeds from short-term borrowings........ 1,618,113 618,733 77,419
Repayments of short-term borrowings........ (749,237) (534,109) (85,919)
Proceeds from notes payable................ 109,245 75,000 --
---------- --------- --------
Net cash provided by financing
activities............................ 838,981 395,811 108,231
---------- --------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS................................. (86,183) 147,816 (4,348)
CASH AND CASH EQUIVALENTS:
Beginning of year.......................... 152,298 4,482 8,830
---------- --------- --------
End of year................................ $ 66,115 $ 152,298 $ 4,482
========== ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION--Cash paid during the year for:
Interest................................... $ 77,994 $ 21,746 $ 13,833
Income taxes............................... 9,420 216 365
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned acquired in
settlement of loans....................... 135,205 21,751 9,878
Loans to facilitate the sale of real estate
owned..................................... -- -- 367
NONCASH FINANCING ACTIVITIES:
Exchange of notes payable for common stock. -- 11,000 --
Exchange of preferred stock for notes
payable................................... -- -- 1,000
Pay in kind preferred stock dividend....... 1,604 -- --
Preferred stock issued in exchange for
cancellation of accounts payable.......... 27,500 -- --
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED GAIN
(LOSS) ON
RETAINED AVAILABLE-
PREFERRED STOCK COMMON STOCK TREASURY STOCK EARNINGS FOR-SALE
------------------- ----------------- ---------------- (ACCUMULATED SECURITIES,
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT) NET OF TAX TOTAL
---------- ------- --------- ------- ------- ------- ------------ --------------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1995................... 1,000,000 $ 1,000 1,300,863 $ 6,800 -- $ -- $ (337) $ (670) $ 6,793
Net income............. 592 592
Net change in
unrealized loss on
available for sale
securities............ 654 654
Exchange of preferred
stock for subordinated
debt.................. (1,000,000) (1,000) (1,000)
---------- ------- --------- ------- ------- ------ ------- ------- -------
BALANCE, December 31,
1995................... -- -- 1,300,863 6,800 -- -- 255 (16) 7,039
Net income............. 4,967 4,967
Net change in
unrealized loss on
available for sale
securities............ (81) (81)
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
Net change in
unrealized loss on
available for sale
securities............ (2,836) (2,836)
Issuance of preferred
stock................. 27,500 27,500 27,500
Preferred stock
dividend.............. (1,604) (1,604)
Treasury stock......... (5,000) (124) (124)
---------- ------- --------- ------- ------- ------ ------- ------- -------
BALANCE, December 31,
1997................... 27,500 $27,500 7,570,000 $55,897 (5,000) $ (124) $18,782 $(2,933) $99,122
========== ======= ========= ======= ======= ====== ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--The operations of Wilshire Financial Services Group
Inc. ("WFSG") and subsidiaries (collectively, the "Company") are conducted
primarily through a nonbank subsidiary, Wilshire Funding Corporation ("WFC")
and through a second-tier subsidiary savings bank, First Bank of Beverly Hills
F.S.B., ("FBBH" or the "Bank").
The Company is primarily engaged in the acquisition of pools of performing,
sub-performing and non-performing residential and commercial mortgage loans,
as well as foreclosed real estate and mortgage-backed securities. The Company
also acquires newly originated residential mortgage and manufactured housing
loans through correspondents and operates a merchant bankcard process
business. The Company's primary sources of revenue are from real estate and
consumer loans acquired in purchase transactions, mortgage-backed securities,
loan sale and securitization transactions, and, to a lesser extent, loan
origination and merchant bankcard operations. Administrative headquarters of
the Company, the Bank and WFC are located in Portland, Oregon. The Bank is a
federally chartered savings institution regulated by the Office of Thrift
Supervision ("OTS"). The Bank conducts its operations through a branch and a
merchant bankcard center in Southern California.
The Company began operations in France, the United Kingdom and Ireland (the
"European Operations") in 1996. The total assets from these operations as of
December 31, 1997 were $63,700, consisting primarily of real estate and real
estate secured loans. Revenue from the Company's European Operations for 1997
totaled $2,104.
Bank Merger--On December 31, 1997, FBBH was merged into its affiliate,
Girard Savings Bank F.S.B. ("GSB") and the surviving entity was renamed First
Bank of Beverly Hills, F.S.B. The merger of the two affiliates was
accomplished in an all stock transaction and, due to their common ownership,
has been accounted for as a reorganization of affiliates under common control
in a manner similar to the pooling-of-interests method.
The assets, liabilities, equity and results of operations for all prior
periods presented have been restated to reflect FBBH and GSB as if they had
been combined from the beginning of the earliest period presented. There were
no material intercompany eliminations or adjustments that were required in the
accompanying financial statements.
Principles of Consolidation--WFSG was incorporated in 1996 to be the holding
company for Wilshire Acquisitions Corporation ("WAC"), which is the holding
company for the Bank. WFSG formed certain nonbank subsidiaries, including WFC,
and completed an initial public offering of common stock and a public debt
offering in the fourth quarter of 1996. The accompanying consolidated
financial statements include the accounts of WAC and the Bank for periods
prior to the formation of WFSG. Intercompany accounts have been eliminated in
consolidation.
For purposes of presenting information about WFSG's common stock, weighted
average number of shares outstanding and earnings per share, outstanding
shares of common stock of WAC prior to its combination with WFSG have been
retroactively restated to their WFSG equivalents based on the conversion ratio
at the time of the combination discussed above.
Use of Estimates in the Preparation of the Consolidated Financial
Statements--The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements. Significant
F-9
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
estimates include valuation allowances for loans and real estate owned,
merchant bankcard charge-back reserves, the determination of fair values of
certain financial instruments for which there is not an active market, the
allocation of basis between assets sold and retained and the selection of
yields utilized to recognize interest income on certain mortgage-backed
securities.
Cash and Cash Equivalents--For purposes of reporting financial condition and
cash flows, cash and cash equivalents include cash and due from banks, federal
funds sold, and securities with original maturities less than 90 days.
Securities and Mortgage-Backed Securities--The Company's securities
portfolios consist of mortgage-backed and other debt securities that are
classified as held-to-maturity, trading and available-for-sale securities.
Securities are classified as held-to-maturity when management has the ability
and the positive intent to hold the securities to maturity. Securities
classified as held-to-maturity are carried at their historical cost basis,
adjusted for the amortization of premiums and accretion of discounts using a
method that approximates the interest method. Securities classified as trading
account securities include subordinated securities and the residual interests
in loan securitization transactions initiated by the Company. Trading account
securities are carried at estimated fair value, with unrealized gains and
losses reported in current operations. Securities are classified as available-
for-sale when the Company intends to hold the securities for an indefinite
period of time, but not necessarily to maturity. Securities classified as
available-for-sale are reported at their fair values with unrealized holding
gains and losses on securities reported, net of tax, as a separate component
of stockholders' equity. Realized gains and losses from the sales of
available-for-sale securities are reported separately in the consolidated
statements of operations and are calculated using the specific identification
method.
Loans, Discounted Loans, Loans Held for Sale and Allowance for Loan Losses--
The Company's principal business involves acquiring performing, sub-performing
and non-performing loan portfolios, for prices generally at or below face
value (i.e., unpaid principal balances plus accrued interest). Nonperforming
loans are generally acquired at deep discounts to face value and are
classified as discounted loans in the consolidated statements of financial
condition. Loans that have been identified as likely to be sold are classified
as held for sale in the consolidated statements of financial condition. Loans
other than discounted loans and loans held for sale are classified simply as
loans.
Discounted loans are presented in the consolidated statements of financial
condition net of unamortized discount and an allowance for loan losses
established for those loans. For each pool of loans acquired by the Company,
purchased discounts are allocated into (a) valuation allowances for estimated
losses against face value on specific loans ("specific valuation allowances")
and (b) portions of the discounts available for accretion to interest income.
If total cash received on a pool of loans exceeds original estimates, excess
specific valuation allowances are recorded as additional discount accretion on
the cost-recovery method. In addition, for discounted loans purchased by the
Bank, the initial discounts are further segregated into a valuation allowance
for the inherent risk of losses in the loan portfolio that have yet to be
specifically identified ("general valuation allowance") as required by the OTS
regulations. The allocated specific and general valuation allowances are
included in the allowance for loan losses. Where appropriate, discounts are
accreted into interest income on a cash basis.
Loans other than discounted loans are presented in the consolidated
statements of financial condition in substantially the same manner as
discounted loans except that interest income is recognized on an accrual
basis. Originated loans are carried net of unamortized deferred origination
fees and costs. Deferred fees and costs are recognized in interest income over
the terms of the loans using a method that approximates the interest method.
Certain loans and discounted loans are designated as loans held for sale
(including loans originated by the Company) and are presented at the lower of
cost or fair value. Cost is determined as described above. If fair
F-10
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
value is less than cost, a valuation allowance is recorded through a charge to
earnings to reduce the carrying value.
Gains or losses on loans sold through securitization or other transactions
are based on the difference between the cash proceeds received on the
certificates sold to outside investors and the Company's cost basis allocated
to such interests in the loans. The percentage allocation of the loans' cost
basis between the portions sold, subordinated interests and servicing rights
retained, if any, is based on their relative fair values.
The Company evaluates commercial and multi-family real estate loans (whether
purchased or originated and whether classified as loans or discounted loans)
for impairment. Commercial and multi-family real estate loans are considered
to be impaired, for financial reporting purposes, when it is probable that the
Company will be unable to collect all principal or interest when due. Specific
valuation allowances are established, either at acquisition or through
provisions for losses, as described above, for impaired loans based on the
fair value of the underlying real estate collateral.
The Company evaluates single-family real estate, consumer and other smaller
balance, homogeneous loans for impairment on a collective basis. Management
evaluates these loans for impairment by comparing management's estimate of net
realizable value to the net carrying value of the portfolio.
All specific and general valuation allowances established for pools of loans
and discounted loans are recorded in the allowance for loan losses. The
allowance for each pool is decreased by the amount of loans charged off and is
increased by the provision for estimated losses on loans and recoveries of
previously charged-off loans. The allowance for each pool is maintained at a
level believed adequate by management to absorb probable losses. Management's
determination of the adequacy of the allowance is based on an evaluation of
the portfolio, previous loan loss experience, current economic conditions,
volume, growth and composition of the portfolio and other relevant factors.
Actual losses may differ from management's estimates.
It is the Company's policy to establish an allowance for uncollectible
interest on performing loans that are past due more than 90 days or sooner
when, in the judgment of management, the probability of collection of interest
is deemed to be insufficient to warrant further accrual. Upon such a
determination, those loans are placed on non-accrual status and deemed to be
non-performing. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is reversed by a charge to interest income.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities--The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," on a prospective
basis beginning January 1, 1997. The new Statement established criteria to
determine whether a transfer of a financial asset is a sale or a secured
borrowing for accounting purposes. A sale is recognized when the Company
legally relinquishes control over a financial asset and is compensated for
such asset. The difference between the net proceeds received and the carrying
amount of the financial asset(s) being sold or securitized is recognized as a
gain or loss on sale. The adoption of the new Statement did not have a
material impact on the consolidated financial position or financial results of
the Company.
Mortgage Servicing Rights--The Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights," on January 1, 1996. This Statement amended the
prior accounting rules by requiring originated mortgage servicing rights
retained to be capitalized where the mortgage loans are either sold or
securitized, based upon the allocation of the cost between the loans sold or
securitized and the servicing rights retained based on their relative fair
values. Servicing assets and liabilities are subsequently amortized in
proportion to and over the period of estimated net servicing income or loss.
Possible impairment of mortgage servicing rights is evaluated by comparing the
carrying amounts to the estimated fair values. SFAS No. 125 superseded SFAS
No. 122 and in
F-11
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
general applies the accounting for mortgage servicing rights under SFAS No.
122 to servicing rights of all assets. Mortgage servicing rights with a
carrying value of $8.7 are included in prepaid expenses and other assets as of
December 31, 1997.
The Company estimates the relative fair value of mortgage servicing rights
retained in a whole loan sale or securitization by applying a market multiple
for similar servicing rights traded in the public market to the servicing fee
and the unpaid principal balance of the loans to be serviced. The market
multiples used during 1997 ranged from 4.0 to 5.0. The fair value of
subordinated interests is determined based on market assumptions for similar
securitization transactions.
Interest-Rate Swaps--Interest-rate swap agreements used to manage interest-
rate risk are treated as hedges of specified assets or liabilities for
accounting and tax purposes and are accounted for on a settlement basis. That
is, the periodic net settlement with the counterparties to the swap agreements
of the interest paid/received is recorded as an adjustment to interest income
or expense derived from the hedged assets or liabilities. Any gain or loss
generated by the early termination or sale of an interest rate swap agreement
is deferred and recorded in the cost basis of the hedged item.
Futures--Interest rate futures contracts are used as hedges against future
fluctuations in the market value of loans held for sale and available for sale
securities resulting from changes in interest rates. Contracts are designated
as a hedge of specific loans or a portfolio of homogeneous loans and exhibit a
high degree of correlation with the assets being hedged. Changes in the market
value of these instruments are deferred as adjustments to the cost basis of
the hedged loans and securities and thus are amortized as an adjustment to the
yield using a method approximating the interest method or are recognized in
connection with the ultimate sale of such loans. Foreign exchange currency
futures contracts are used as hedges against fluctuations in prevailing
currency exchange rates for certain foreign assets. Changes in the market
value of these instruments are deferred as adjustments to the cost basis of
the hedged assets.
Foreign Currency Translation--All assets and liabilities relating to the
Company's foreign activities are translated at current exchange rates. The
results of the Company's foreign operations are translated at the average
exchange rate for each reporting period. Translation adjustments, related
hedging results and applicable income taxes are included, when material, in
accumulated translation adjustment within stockholders' equity. At December
31, 1997, such adjustments were not material to the financial statements.
Real Estate Owned--Real estate acquired in settlement of loans or purchased
directly is originally recorded at the lower of fair value less estimated
costs to sell, or purchase price, respectively. Any excess of net loan cost
basis over the fair value less estimated selling costs of real estate acquired
through foreclosure is charged to the allowance for loan losses. Any
subsequent operating expenses or income, reductions in estimated fair values,
as well as gains or losses on disposition of such properties, are recorded in
current operations.
Leasehold Improvements and Equipment--Office leasehold improvements and
equipment are stated at cost, less accumulated depreciation and amortization,
computed on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever is shorter.
Income Taxes--The Company files consolidated federal income and applicable
state tax returns with its subsidiaries. Deferred tax assets and liabilities
represent the tax effects, based on current tax law, of future deductible or
taxable amounts attributable to events that have been recognized in the
financial statements. A valuation allowance is recorded against deferred tax
assets when there is not presumptive evidence that it is more likely than not
that the deferred tax assets will be realized.
F-12
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Bankcard Operations--Bankcard income, net, includes merchant discounts and
transaction fees for processing Visa and Mastercard transactions and is offset
by bankcard expense consisting primarily of fees paid to the Company's third-
party processors and interchange fees paid to card-issuing banks. Other direct
and indirect costs of Bankcard operations are included in various other
categories of expenses and are not specifically allocated separately from
other operating expenses of the Company.
Earnings per Share--The Financial Accounting Standards Boards (FASB) has
issued SFAS No. 128, "Earnings per Share" (EPS). This statement is effective
for both interim and annual reporting periods ending after December 15, 1997.
SFAS No. 128 replaces primary EPS with basic EPS, and fully diluted EPS with
diluted EPS. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed in a similar manner
as fully diluted EPS, and reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common or resulted in the issuance of common stock that then
shared in the earnings of the Bank. All periods presented in the accompanying
consolidated financial statements have been restated to conform with SFAS No.
128.
New Accounting Pronouncements--The FASB recently issued SFAS No. 129,
"Disclosure of Information about Capital Structure," SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information". SFAS No. 129 applies to all entities that
issue any securities other than ordinary common stock and continues the
existing requirements to disclose the pertinent rights and privileges of all
securities. SFAS No. 130 provides guidance for reporting and display of
comprehensive income and its components in the financial statements and SFAS
No. 131 establishes standards for the way that 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 shareholders. These Statements
are effective for fiscal years beginning after December 15, 1997. The Company
will incorporate appropriate disclosures at the time these pronouncements are
adopted.
Reclassifications--Certain items in the consolidated financial statements
for 1996 and 1995 were reclassified to conform to the 1997 presentation.
2. SECURITIES
The amortized cost, fair value and gross unrealized gains and losses on U.S.
Treasury notes and mortgage-backed securities (excluding trading securities)
as of December 31, 1997 and 1996 are shown below. Fair value estimates were
obtained from independent parties.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Available-for-sale mortgage-backed
securities........................ $304,122 $5,198 $10,356 $298,964
======== ====== ======= ========
Held-to-maturity:
U.S. Treasury notes.............. $ 5,946 $ 148 $ -- $ 6,094
Mortgage-backed securities....... 18,468 54 238 18,284
-------- ------ ------- --------
Total held-to-maturity......... $ 24,414 $ 202 $ 238 $ 24,378
======== ====== ======= ========
DECEMBER 31, 1996
Available-for-sale mortgage-backed
securities........................ $ 31,367 $ 23 $ 120 $ 31,270
======== ====== ======= ========
Held-to-maturity:
U.S. Treasury notes.............. $ 7,429 $ 89 $ -- $ 7,518
Mortgage-backed securities....... 21,724 29 501 21,252
-------- ------ ------- --------
Total held-to-maturity......... $ 29,153 $ 118 $ 501 $ 28,770
======== ====== ======= ========
</TABLE>
F-13
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Securities held to maturity other than mortgage-backed securities at
December 31, 1997 and 1996 had contractual maturities of one to five years.
The Company expects to receive payments on all mortgage-backed securities
over periods that are considerably shorter than the contractual maturities of
the securities, which range from 6 to 30 years.
At December 31, 1997 and 1996, securities, including trading account
securities, with carrying values of $337,933 and $67,073, respectively, and
market values of approximately $338,043 and $66,909, respectively, were
pledged to secure merchant bankcard transactions, short-term borrowings and
lines of credit (see Note 7), and interest-rate swaps. Of the total securities
pledged, securities with fair values of approximately $338,043 and $59,391,
were held by a third-party custodian as of December 31, 1997 and 1996,
respectively.
Gains from the sale of securities available for sale were $3,742 during the
year ended December 31, 1997, and there were no losses during the period.
There were no gains or losses on sales of securities available for sale during
the years ended December 31, 1996 and 1995.
3. LOANS, DISCOUNTED LOANS AND LOANS HELD FOR SALE
The Company's loans are comprised of loans, discounted loans and loans held
for sale. Following is a summary of each loan category by type:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
LOANS
Real estate loans:
One to four units...................................... $ 46,968 $ 63,562
Over four units........................................ 55,216 68,897
Commercial............................................. 62,781 54,013
Land................................................... 1,172 2,558
-------- --------
Total loans secured by real estate..................... 166,137 189,030
Other loans.............................................. 15,196 22,768
-------- --------
181,333 211,798
Less:
Allowance for loan losses.............................. (23,940) (31,936)
Discount on purchased loans and deferred fees.......... (3,485) (3,836)
-------- --------
$153,908 $176,026
======== ========
</TABLE>
F-14
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
--------- --------
<S> <C> <C>
DISCOUNTED LOANS
Real estate loans:
One to four units..................................... $ 507,206 $260,672
Over four units....................................... 16,300 --
Commercial............................................ 67,474 935
Land.................................................. 11,896 46
--------- --------
Total loans secured by real estate.................... 602,876 261,653
Other loans............................................. 238,152 946
--------- --------
841,028 262,599
Less:
Allowance for loan losses............................. (87,229) (5,619)
Discount on purchased loans........................... (290,444) (50,240)
--------- --------
$ 463,355 $206,740
========= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
LOANS HELD FOR SALE
Real estate loans:
One to four units..................................... $259,633 $ 27,420
Over four units....................................... 13,085 464
Commercial............................................ 25,521 9,061
Land.................................................. 5,659 1,680
-------- --------
Total loans secured by real estate.................... 303,898 38,625
Other loans............................................. 34,247 445
-------- --------
338,145 39,070
Less:
Allowance for loan losses, deferred fees, and discount
on purchased loans................................... (27,451) (10,244)
-------- --------
$310,694 $ 28,826
======== ========
</TABLE>
As of December 31, 1997 and 1996 loans with adjustable rates of interest
were $388,783 and $230,983, respectively, and loans with fixed rates of
interest were $971,723 and $282,484, respectively. Adjustable-rate loans are
generally indexed to U.S. Treasury Bills, the FHLB's Eleventh District Cost of
Funds Index, LIBOR or Prime and are subject to limitations on the timing and
extent of adjustment. Most loans adjust within six months of changes in the
index.
At December 31, 1997 and 1996, loans with unpaid principal balances of
approximately $832,242 and $43,615, respectively, were pledged to secure
credit line borrowings and repurchase agreements included in short-term
borrowings (see Note 7).
F-15
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Balance, beginning of period.................... $ 37,555 $ 25,651 $ 7,701
Allocations of purchased loan discounts:
at acquisition................................ 174,920 10,751 19,007
at disposition................................ (97,397) (17,218) (5,404)
Recoveries...................................... 1,206 1,822 81
Provision for loan losses....................... 1,991 16,549 4,266
-------- -------- -------
$118,275 $ 37,555 $25,651
======== ======== =======
</TABLE>
At December 31, 1997 and 1996, the Bank had impaired loans (other than
discounted loans) totaling $26,445 and $12,553, respectively, and had recorded
specific valuation allowances to measure the impairments of those loans
totaling $5,560 and $4,173, respectively. At December 31, 1997 and 1996, the
Bank had impaired loans totaling $15,771 and $13,711, respectively, with no
recorded specific valuation allowances. At December 31, 1997 and 1996, the
nonbank subsidiaries had impaired loans (other than discounted loans) with
unpaid principal balances of $48,762 and $4,472, respectively, and a carrying
value, net of purchase discount, of $28,866 and $2,768, respectively, which is
below fair value. The average unpaid principal balances of impaired loans
during the years ended December 31, 1997 and 1996 were $60,857 and $25,049,
respectively. Interest income recognized on impaired loans during 1997, 1996
and 1995 was $3,245, $1,746 and $1,631, respectively, based on cash payments.
These amounts exclude consideration of single-family residential and other
loan pools evaluated for impairment on a pooled basis.
The above amounts do not include impaired discounted loans. Management has
determined that generally all discounted loans meet the criteria for
impairment and collectively evaluates these loans for impairment.
The Company has a geographic concentration of mortgage loans in Southern
California and in the northeastern United States. Substantially all loans
originated or acquired by the Bank prior to its acquisition by the Company
were collateralized by Southern California real estate.
Management estimates are utilized to determine the adequacy of the allowance
for loan losses. Estimation is also involved in determining the ultimate
recoverability of purchased loans and, consequently, the pricing of purchased
loans. These estimates are inherently uncertain and depend on the outcome of
future events. Although management believes the levels of the allowance as of
December 31, 1997 and 1996 are adequate to absorb losses probable in the loan
portfolio, rising interest rates, various other economic factors and
regulatory requirements may result in increasing levels of losses. Those
losses will be recognized if and when these events occur.
F-16
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. REAL ESTATE OWNED
Real estate owned consists of property that was obtained through foreclosure
or was purchased directly. Activity in the valuation allowance on real estate
owned is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Valuation allowance for losses on real estate
owned, beginning of period................... $ -- $ 1,193 $ 123
Valuation allowance on real estate sold....... (3,662) (3,322) (82)
Allocation of purchase discount............... 6,788 2,129 554
Provision..................................... 1,944 -- 598
-------- -------- -------
Valuation allowance for losses on real estate
owned, end of period......................... $ 5,070 $ -- $ 1,193
======== ======== =======
</TABLE>
Real estate owned purchased directly by WFC with a net carrying value of
$40,706 and $59,729 at December 31, 1997 and 1996, respectively,
collateralizes credit line borrowings (see Note 7).
5. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- ------
<S> <C> <C>
Leasehold improvements...................................... $ 698 $ 319
Furniture and equipment..................................... 2,927 837
------- ------
Total cost.................................................. 3,625 1,156
Accumulated depreciation and amortization................... (1,118) (839)
------- ------
$ 2,507 $ 317
======= ======
</TABLE>
6. DEPOSITS
Deposits consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
<S> <C> <C>
Passbook accounts.......................................... $ 329 $ 480
Money market accounts...................................... 1,563 2,023
NOW/checking............................................... 5,959 5,625
Time deposits:
Less than $100........................................... 280,260 382,018
$100 or more............................................. 74,487 111,468
-------- --------
Total deposits............................................. $362,598 $501,614
======== ========
</TABLE>
F-17
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
A summary of time deposits, by maturity, at December 31, 1997 is as follows:
<TABLE>
<S> <C>
1998................................................................ $316,622
1999................................................................ 37,209
2000................................................................ 916
--------
$354,747
========
</TABLE>
The interest rate characteristics of certain deposits have been changed
utilizing interest rate swaps. See Note 9 for the specific terms and rates on
instruments outstanding.
7. NOTES PAYABLE AND SHORT-TERM BORROWINGS
Notes payable at December 31, 1997 and December 31, 1996 are unsecured, bear
interest at 13% and mature in 2004. The cost associated with issuing the notes
has been capitalized and is included in prepaid expenses and other assets in
the consolidated statement of financial condition. As of December 31, 1997
these costs totaled $9,327 and are being amortized over the life of the notes
on a straight-line basis.
The interest rate characteristics of a portion of these notes have been
altered using an interest rate swap. The terms of this swap are discussed in
Note 9. Short-term borrowings at December 31, 1997 and 1996 include repurchase
agreements and line of credit borrowings. Proceeds from the various credit
facilities are used primarily for the acquisition of loan pools. Following is
information about short-term borrowings:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Average balance during the period.................. $ 586,370 $ 51,316
Highest amount outstanding during the period....... $ 966,500 $ 190,000
Average interest rate-during the period............ 7.5% 6.9%
Average interest rate-end of period................ 7.3% 7.9%
</TABLE>
As of December 31, 1997 and 1996, the Company had committed lines of credit,
including repurchase agreement lines, totaling $1,010,363 and $350,000,
respectively, and uncommitted lines totaling $510,000 and $360,000,
respectively. $966,500 and $97,624 were drawn on these lines and included in
short-term borrowings at December 31, 1997 and 1996, respectively.
8. INCOME TAXES
The domestic and foreign components of income (loss) before domestic and
foreign income and other taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
--------- -------- -------
<S> <C> <C> <C>
Domestic.......................................... $ 29,689 $ 5,092 $ 639
Foreign........................................... (3,888) -- --
--------- -------- ------
Total........................................... $ 25,801 $ 5,092 $ 639
========= ======== ======
</TABLE>
F-18
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The components of income tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Current tax provision:
Federal........................................ $ 9,019 $ 3,208 $ 434
State.......................................... 2,083 930 32
Foreign........................................ 59 -- --
-------- -------- ------
Total current tax provision.................. 11,161 4,138 466
-------- -------- ------
Deferred tax benefit:
Federal........................................ (493) (3,135) (250)
State.......................................... 169 (878) (169)
Foreign........................................ (200) -- --
-------- -------- ------
Total deferred tax benefit................... (524) (4,013) (419)
-------- -------- ------
Total income tax provision................... $10,637 $ 125 $ 47
======== ======== ======
</TABLE>
The difference between the effective tax rate in the consolidated financial
statements and the statutory federal income tax rate can be attributed to the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Federal income tax provision at statutory
rate......................................... 35.0% 35.0% 35.0%
State taxes, net of federal tax effect........ 5.7 8.5 4.0
Federal credit for foreign taxes.............. (0.2) -- --
Foreign tax benefit........................... (2.5) -- --
Valuation allowance........................... 1.9 (33.9) (25.1)
Change in prior period estimate............... -- (4.7) (7.8)
Other......................................... 1.3 (2.4) 1.3
------- -------- --------
Effective income tax rate..................... 41.2% 2.5% 7.4%
======= ======== ========
</TABLE>
F-19
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Deferred income taxes, included in prepaid expenses and other assets, are
provided for temporary differences between income tax and financial statement
recognition of revenue and expenses. Deferred income tax assets and
liabilities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Purchase discounts....................................... $ 5,718 $ 2,884
Purchase accounting...................................... 217 483
Depreciation............................................. 47 73
Allowance for loan loss.................................. -- 2,291
Unrealized loss on available for sale securities......... 2,225 --
Pass through income...................................... 2,686 --
Net operating loss carryforward ......................... 681 --
Other.................................................... 223 --
------- -------
Gross deferred tax assets.............................. 11,797 5,731
------- -------
Deferred tax liabilities:
Deferred loan fees....................................... (196) (217)
FHLB stock dividends..................................... (443) (268)
State taxes.............................................. (7) (42)
Allowance for loan losses................................ (2,677) --
Unrealized gains on trading securities................... (1,057) (744)
Other.................................................... -- (277)
------- -------
Gross deferred tax liabilities......................... (4,380) (1,548)
------- -------
Total deferred tax asset................................. 7,417 4,183
Valuation allowance...................................... (485) --
------- -------
Net deferred tax asset................................. $ 6,932 $ 4,183
======= =======
</TABLE>
The Company has not provided for deferred income taxes on undistributed
earnings of foreign subsidiaries as those earnings are intended to be
permanently reinvested in the foreign jurisdictions.
Realization of deferred tax assets associated with foreign tax net operating
loss carryforwards of $706 in the United Kingdom and $1,093 in France is
dependent upon generating sufficient taxable income prior to their expiration
in the year 2002 and beyond. Management believes that there is a risk that
certain of these tax net operating loss carryforwards may expire unused and,
accordingly, has established a partial valuation allowance against them.
Although realization is not assured for the remaining deferred tax assets,
management believes it is more likely than not that they will be realized
through future taxable earnings.
F-20
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK
Lease Commitments--The following is a schedule of future minimum rental
payments under operating leases for the period ended December 31,:
<TABLE>
<S> <C>
1998.............................................................. $1,072
1999.............................................................. 1,041
2000.............................................................. 793
2001.............................................................. 707
2002.............................................................. 419
Thereafter........................................................ 1,406
------
Total........................................................... $5,438
======
</TABLE>
Lease commitments include commitments to an affiliated company which require
annual lease payments of $276 through 2001.
Financial Instruments Involving 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 an 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 futures contracts. This results in market gains or
losses on hedging instruments, in response to interest rate increases or
decreases, respectively, which approximate the amount of the corresponding
market losses or gains, respectively, on loans being hedged.
At December 31, 1997 the Company also had open short positions on 40 U.S.
Treasury Bond, 440 10-year U.S. Treasury Note, 250 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.
The total amount deferred as of December 31, 1997 in the consolidated
statement of financial condition was $4.1 million. The Bank 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 December 31, 1997 and 1996, the notional amounts of interest
rate swaps related to deposits were $194.9 million and $234.3 million,
respectively. The weighted average fixed payments and floating-rate receipts
of interest were 6.07% (1997) and 6.07% (1996) and 0.29% (1997) and 0.28%
(1996) over USD LIBOR, respectively.
The Company also utilizes interest rate swaps to convert certain fixed rate
borrowings to variable rate. The notional amounts of interest rate swaps
related to the 13% Series A Notes were $20.0 million and $0 at December 31,
1997 and 1996, respectively. The weighted average fixed receipts and floating
rate payments of interest were 13% and 1.25% over USD LIBOR, respectively.
Purchase Commitments--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.
Litigation--The Company is a defendant in legal actions arising from
transactions conducted in the ordinary course of business. Management, after
consultation with legal counsel, believes the ultimate liability, if any,
arising from such actions will not materially affect the Company's results of
operations or financial position.
10. REGULATORY MATTERS
Regulatory Agreement--On October 27, 1997, FBBH and GSB consented to
separate but similar Orders to Cease and Desist (the "Orders") issued by the
OTS. The Orders superceded a previously existing Cease and Desist Orders
between the institutions and the OTS issued October 31, 1996. As discussed
more fully in Note 1,
F-21
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
with the approval of the OTS, the Bank's were merged effective December 31,
1997. Management believes, based on oral communications with the OTS, that the
Bank must continue to meet the aggregate requirements of both agreements (the
aggregate requirements of both agreements are hereafter referred to as the
"Order").
The Order prohibits the Bank from increasing total assets, as measured at
the end of each calendar quarter in excess of $553 million plus total net
interest credited on deposit liabilities. The Order also prohibits the Bank
from purchasing (i) any loans or real estate, without the approval of the OTS,
until certain acquisition and servicing deficiencies identified by the OTS
have been corrected and (ii) any non-performing assets or foreclosed real
estate until such time as the Bank is rated a composite "3" rating according
to the Uniform Financial Institutions Rating System.
The Order requires the Bank to (i) maintain an effective internal asset
review system that provides for adequate internal controls to ensure that
management timely reviews and classifies assets pursuant to their policies;
(ii) fully comply with all policies and procedures submitted to the OTS
pursuant to previous Cease and Desist Orders; (iii) operate pursuant to and
comply with its business plan; (iv) submit to the OTS a written plan to
develop or obtain the internal expertise and resources to measure, monitor and
model net interest income and net portfolio value (the "IRR Plan"); (v) review
and analyze the terms of all existing loan servicing or other agreements with
affiliates, to confirm that such agreements comply with the Order and that
there are formal written agreement with respect to all transactions with
affiliates; and (vi) compare the results of profitability models with the
performance of purchased assets. The Order also requires the Bank to submit to
the OTS after each calendar quarter, reports (i) detailing their progress in
implementing their Allowance for Loan Losses policies and the results of their
reserve analysis for the preceding calendar quarter; (ii) detailing any
violations of the policies and procedures submitted to the OTS that occurred
during the preceding quarter, together with an explanation as to what caused
or contributed to the act or practice constituting such violation and what, if
any, corrective actions has been undertaken; (iii) detailing any variances
from the business plan that occurred during the preceding quarter, showing
actual and planned results, and explaining variances greater than 5 percent;
(iv) detailing the progress in implementing the IRR Plan during the preceding
quarter.
The Order requires the Bank to elect at least two additional new outside
directors with specific financial institution industry experience. Such
outside directors cannot have an association with the affiliates of the Bank,
Wilshire Financial Services Group Inc. or institution-affiliated parties. One
director has been added and another is currently pending OTS approval.
To address regulatory concerns, the Bank was also required to submit to the
OTS a bankcard plan (the "Bankcard Plan") which shall (i) establish a method
by which the Bank will estimate the appropriate level of reserves for its
bankcard operations; (ii) establish internal controls; (iii) create an
overdraft policy that requires timely recognition of overdraft losses and
identifies employees with authority to approve overdrafts; and (iv) ensure
that the Bank complies with all applicable statutes and regulations. After
each calendar quarter, the Bank is required to report to the OTS, in writing,
any variances to the Bankcard Plan.
The Order is enforceable by the OTS as written agreements under the Federal
Deposit Insurance Act. Therefore, failure to comply with the requirements of
the Order could subject the Bank and its directors and officers to further
enforcement actions, including termination of Federal Deposit Insurance
Corporation insurance or civil money penalties.
Management believes that the Bank is in material compliance with the various
provision of the Order as of December 31, 1997 and beyond.
F-22
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Capital Requirements--Federally insured savings associations such as the
Bank are required to maintain minimum levels of regulatory capital. Those
standards generally are as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on a case-by-case basis. Under the
Order, the Bank was required to maintain minimum capital ratios required of
institutions to be deemed "well capitalized" beginning December 31, 1996. In
connection with the 1997 examination, the OTS indicated that the capital level
of GSB was less than satisfactory and the capital level of FBBH was not
adequate in view of their risk profiles, despite the fact that the Bank had
capital levels that would otherwise have qualified them as "well capitalized"
under the OTS regulatory capital requirements. The OTS also indicated that the
Bank's current capital levels might not be appropriate given the deficiencies
noted in the examination. As a result, the Order requires the Bank to maintain
core capital and risk-based capital equal to the total dollar amount of
capital at FBBH and GSB at March 31, 1997, as measured at the end of each
calendar quarter. The Order provides that in the event capital falls below the
levels required by the Order as a result of any determination by the OTS or
otherwise, the Bank would have to raise additional capital. If the OTS were to
impose higher capital requirements on the Bank or additional capital were
required as a result of an adverse determination by the OTS or otherwise, the
Company might inject additional capital into the Bank, whether or not such
usage of capital is optimal for the Company.
As of December 31, 1997, the total core capital and total risk-based capital
amounts of the Bank, compared to the OTS requirements contained in the Order
is as follows:
<TABLE>
<CAPTION>
OTS
ACTUAL REQUIREMENT EXCESS
------- ----------- ------
<S> <C> <C> <C>
Total Core Capital............................... $46,930 $45,018 $1,912
Total Risk-Based Capital......................... $51,429 $50,780 $ 649
</TABLE>
The Bank's actual and required amounts and ratios were as follows:
<TABLE>
<CAPTION>
TO BE
CATEGORIZED AS
AMOUNT REQUIRED "WELL CAPITALIZED"
FOR CAPITAL UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES(1) ACTION PROVISIONS
------------- ----------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- --------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Total Capital to Risk-
Weighted Assets (Risk-
Based Capital)......... $51,429 15.0% $ 27,447 (greater than or = to)8.0% $ 34,308 (greater than or = to)10.0%
Tier 1 Capital to Risk-
Weighted Assets........ 46,930 13.7% Not applicable 20,585 (greater than or = to) 6.0%
Core Capital to Tangible
Assets................. 46,930 10.1% 18,610 (greater than or = to)4.0% 23,262 (greater than or = to) 5.0%
Tangible Capital to
Tangible Assets........ 46,930 10.1% 6,980 (greater than or = to)1.5% Not applicable
DECEMBER 31, 1996
Total Capital to Risk-
Weighted Assets (Risk-
Based Capital)......... $49,561 10.5% $ 37,724 (greater than or = to)8.0% $ 47,155 (greater than or = to)10.0%
Tier 1 Capital to Risk-
Weighted Assets........ 43,572 9.2% Not applicable 28,292 (greater than or = to) 6.0%
Core Capital to Tangible
Assets................. 43,572 7.9% 22,021 (greater than or = to)4.0% 27,527 (greater than or = to) 5.0%
Tangible Capital to
Tangible Assets........ 43,572 7.9% 8,258 (greater than or = to)1.5% Not Applicable
</TABLE>
- --------
(1) The minimum requirements for capital adequacy purposes reflected are those
applicable to the Bank. Institutions with a CAMEL rating of 1 that are not
anticipating or experiencing significant growth and have well-diversified
use are required to maintain a minimum leverage ratio of 3 percent. The
Bank's minimum required ratios specified in its Order are those in the
column containing the "well capitalized" requirements.
F-23
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
As of December 31, 1997 and 1996, the Bank's capital ratios were sufficient
for it to be categorized as "well capitalized" based solely on quantitative
measurement and the OTS has orally indicated that the Bank is considered to be
"well capitalized" at this time. If notified or otherwise deemed to be
categorized as less than "well capitalized," the Bank could be subject to
restrictions in addition to those specified in the Order, including
restrictions on holding brokered deposits. As of December 31, 1997, the Bank
had brokered deposits of $112,461.
Because the Bank has minimum regulatory capital requirements and the
additional requirements under the Order discussed above, substantially all
retained earnings of the Bank are restricted as to distribution to WAC and,
ultimately, to WFSG.
SAIF Assessment--During the fourth quarter of 1996, the Company paid
approximately $1,413 for a special SAIF deposit insurance fund assessment
resulting from legislation enacted to recapitalize the SAIF fund.
11. SIGNIFICANT TRANSACTIONS
In December 1997, the Company completed a securitization of approximately
$131.8 million unpaid principal balance of loans resulting in a gain of
approximately $6.8 million. At the sale date, the Company allocated
approximately $2.3 million of original cost basis to retained servicing
rights. Such amount is included in other assets in the consolidated statement
of financial condition as of December 31, 1997.
In September 1997, the Company completed a securitization of approximately
$146 million of unpaid principal balance of loans resulting in a gain of
approximately $11.9 million. At the sale date, the Company allocated
approximately $1.7 million of original cost basis to retained servicing
rights. Such amount is included in other assets in the consolidated statement
of financial condition as of December 31, 1997.
In June 1997, the Company completed a sale of approximately $175 million of
loans, resulting in a gain of approximately $11.2 million. At the sale date,
the Company allocated $3.5 million of original cost basis to retained
servicing rights. Such amount is included in other assets in the consolidated
statement of financial condition as of December 31, 1997.
The Company sold approximately $26.8 million of loans in September 1997,
which resulted in a gain of approximately $8.1 million.
In August 1997, the Company acquired 100% of the stock of a French company
which owns portfolios of discounted, non-discounted and foreclosed real estate
for a purchase price of $40.6 million.
On August 15, 1997, the Company issued $100.0 million aggregate principal
amount of its 13% Series A Notes due 2004.
12. RELATED PARTY TRANSACTIONS
Substantially all loans are serviced by Wilshire Credit Corporation ("WCC")
pursuant to a servicing agreement. WCC is affiliated with the Company through
the common ownership of the Company's principal shareholders. Management
believes that the terms of the servicing agreement are no less favorable to
the Company than terms offered by other servicers. Due from affiliate in the
accompanying consolidated statements of financial condition substantially
represents the amount of payments collected by WCC but not yet remitted to the
Company at that date. Loan servicing fees and expenses shown in the
consolidated statements of operations were paid to WCC and include the
servicing fees which are based on the servicing agreement and reimbursements
for direct expenses borne by WCC on behalf of the Company.
F-24
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On July 31, 1997, the Company issued to WCC shares of 14% cumulative, pay in
kind preferred stock with an aggregate liquidation value of $27,500 in
exchange for the cancellation of certain payables to that affiliate
aggregating approximately $27,100 and $400 in cash. In February 1998, the
preferred stock was redeemed from the proceeds of a common stock offering.
(see Note 18).
Loans with carrying values of $128,389 and mortgage-backed securities with
carrying values of $8,767 were transferred to WFSG from WCC during the year
ended December 31, 1997. These assets were transferred at a price equal to
their net book value at the date of transfer. Any gain or loss from any sale
or securitization of such assets by WSFG will be recorded in the consolidated
financial statements of WSFG when any such transaction is consummated.
In November and December 1996, rights to servicing fees related to loans
held by WCC, including a profit participation element, were transferred to
WFSG at WCC's historical cost basis of $0.
13. EARNINGS PER SHARE
The following is a reconciliation of net income available to common
shareholders and weighted average shares outstanding as used to calculate
basic and diluted earnings per share for the years ended December 31, 1997 and
1996. There were no common stock equivalents during the year ended December
31, 1995 and accordingly, weighted average shares outstanding were equivalent
for basic and diluted earnings per share.
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
------- --------- ---------
<S> <C> <C> <C>
DECEMBER 31, 1997
Net income...................................... $15,164
Preferred stock dividend........................ (1,604)
-------
Net income available to common shareholders..... $13,560
=======
Basic earnings per share........................ $13,560 7,569,808 $1.79
Dilution from common stock equivalents.......... 449,491
------- --------- -----
Diluted earnings per share...................... $13,560 8,019,299 $1.69
======= ========= =====
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
------- --------- ---------
<S> <C> <C> <C>
DECEMBER 31, 1996
Net income...................................... $ 4,967
Net income available to common shareholders..... $ 4,967
Basic earnings per share........................ $ 4,967 4,638,926 $1.07
Dilution from common stock equivalents.......... 8,142
------- --------- -----
Diluted earnings per share...................... $ 4,967 4,647,068 $1.07
======= ========= =====
</TABLE>
F-25
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. EMPLOYEE BENEFITS AND AGREEMENTS
Profit Sharing Plan--The Company's employees participate in a defined
contribution profit sharing and 401(k) plan sponsored by companies included in
the Company's "control group." At the discretion of the Company's Board of
Directors, the Company may elect to contribute to the plan based on profits of
the Company or based on matching participants' contributions. For the years
ended December 31, 1997, 1996 and 1995, the Company contributed $119, $43 and
$28, respectively, to the plan.
Employment Agreements--The Company has entered into substantially similar
employment agreements, effective November 1, 1996, with its Chief Executive
Officer and its President, who are also the principal shareholders of the
Company. Each agreement provides for an initial three-year term that is
automatically renewable for successive two-year periods unless either party
gives written notice to the other at least ninety days prior to the expiration
of the employment term. Each agreement provides for an annual base salary of
$300, which may be increased, but not decreased, by the Compensation Committee
of the Board of Directors, and an annual bonus. The annual bonuses may not
exceed in the aggregate 20% of the pre-tax profits of the Company. No bonuses
were paid in 1997 or 1996 pursuant to these employment agreements.
Stock Options--The Company adopted a new Stock Plan on October 28, 1996.
Under the Stock Plan, the Company may grant options and other awards not to
exceed 1,825,000 shares of common stock over a ten-year term. The options may
be either incentive stock options or nonstatutory stock options granted at
exercise prices between 100% and 110% of the fair value of WFSG common stock
at the grant date. Restricted stock and stock appreciation rights may also be
granted under the Stock Plan. The initial awards under the new Stock Plan were
granted at the date of the initial public offering. Options for 1,095,000
shares were granted to the Company's two largest stockholders. The Stock Plan
also provides that non-employee Company directors receive automatic
nonstatutory stock option grants.
In 1994 and 1995, the Bank issued stock options for the benefit of certain
directors, executives and consultants. All grants were made with exercise
prices equal to or greater than the book value of the relevant Bank's shares
on the grant dates. In the fourth quarter of 1996, these options were
converted into 31,225 options to purchase the stock of WFSG.
A summary of the Company's stock options as of December 31, 1997 and 1996,
and changes during the periods then ended is presented below:
<TABLE>
<CAPTION>
1997 1996
------------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of period.... 1,126,225 $11.39 31,225 $ 8.80
Granted............................... 263,909 23.73 1,095,000 11.46
Forfeited............................. (2,808) 13.88 -- --
--------- ---------
Outstanding at end of period.......... 1,387,326 13.58 1,126,225 11.39
========= =========
</TABLE>
F-26
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Additional information regarding options outstanding as of December 31, 1997
is as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE
EXERCISE PRICES SHARES LIFE PRICE
--------------- --------- --------- ---------
<S> <C> <C> <C>
$5.58....................................... 18,358 2.50 years $ 5.58
$10.50-$11.55............................... 1,095,000 8.97 11.31
$12.15-$14.90............................... 10,809 1.50 13.64
$16.25-$18.70............................... 119,198 9.15 18.68
$22.31-$24.88............................... 20,753 9.74 22.40
$26.50-$28.88............................... 123,208 9.77 28.87
---------
1,387,326
=========
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
its Stock Plan. Accordingly, no compensation expense has been recognized for
grants under the Stock Plan. Had compensation expense for the Company's Stock
Plan been determined based on the fair value at the grant date consistent with
the methods of SFAS No. 123, the Company's net income and earnings per share
for the years ended December 31, 1997 and 1996 would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1997 1996
------- ------
<S> <C> <C>
Net income to common shareholders:
As reported................................................ $13,560 $4,967
Pro forma.................................................. $13,218 $2,775
Net income per common and common share equivalent:
Basic earnings per share:
As reported.............................................. $ 1.79 $ 1.07
Pro forma................................................ $ 1.75 $ 0.60
Diluted earnings per share:
As reported.............................................. $ 1.69 $ 1.07
Pro forma................................................ $ 1.65 $ 0.60
</TABLE>
There were no options granted in 1997 with exercise prices below the market
value of the stock at the grant date. The weighted average fair value of
options granted during 1997 was $1,799 for options with exercise prices
exceeding the market price of the stock at the grant date. Fair values were
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions used: no dividend yield, expected volatility of
25%, risk-free interest rate of 6.6% and expected lives of three to five
years.
15. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
F-27
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and cash
equivalents............ $ 66,115 $ 66,115
Mortgage-backed
securities available
for sale............... 298,964 298,964
Mortgage-backed
securities held to
maturity............... 18,468 18,284
Securities held to
maturity............... 5,946 6,094
Trading account
securities............. 38,969 38,969
Loans, discounted loans,
and loans held for
sale, net.............. 927,957 936,846
Federal Home Loan Bank
stock.................. 5,031 5,031
Liabilities:
Deposits................ 362,598 362,571
Short-term borrowings... 966,500 966,500
Notes payable........... 184,245 193,918
Off-balance-sheet
instruments:
Interest-rate swaps..... -- 991
Interest-rate futures... -- (724)
Foreign currency
futures................ -- 495
<CAPTION>
DECEMBER 31, 1996
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Assets:
Cash and cash
equivalents............ $152,298 $152,298
Mortgage-backed
securities available
for sale............... 31,270 31,270
Mortgage-backed
securities held to
maturity............... 21,724 21,252
Securities held to
maturity............... 7,429 7,518
Trading account
securities............. 24,541 24,541
Loans, discounted loans,
and loans held for
sale, net.............. 411,592 424,450
Federal Home Loan Bank
stock.................. 2,958 2,958
Liabilities:
Deposits................ 501,614 504,629
Short-term borrowings... 97,624 97,624
Notes payable........... 75,000 75,000
Off-balance-sheet
liabilities:
Interest-rate swaps..... -- (500)
</TABLE>
The methods and assumptions used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate that value are
explained below:
Cash and Cash Equivalents--The carrying amounts approximate fair values due
to the short-term nature of these instruments.
Securities and Mortgage-Backed Securities--The fair values of securities are
generally obtained from market bids for similar or identical securities, or
are obtained from independent security brokers or dealers.
Loans, Discounted Loans and Loans Held for Sale--The fair value of
discounted loans, which are predominately non-performing loans, is more
difficult to estimate due to uncertainties as to the nature, timing and extent
to which the loans will be either collected according to original terms,
restructured, or foreclosed upon. Discounted loans fair values were estimated
using the Company's best judgement for these factors in
F-28
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
determining the estimated present value of future net cash flows discounted at
a risk-adjusted market rate of return. For other loans, fair values are
estimated for portfolios of loans with similar financial characteristics.
Loans are segregated by type, such as fixed- and adjustable-rate interest
terms. The fair values of fixed-rate mortgage loans are based on discounted
cash flows utilizing applicable risk-adjusted spreads relative to the current
pricing of similar fixed-rate loans as well as anticipated prepayment
schedules. The fair values of adjustable-rate mortgage loans are based on
discounted cash flows utilizing discount rates that approximate the pricing of
available mortgage-backed securities having similar rate and repricing
characteristics, as well as anticipated prepayment schedules. No value
adjustments have been made for changes in credit within the loan portfolio. It
is management's opinion that the allowance for estimated loan losses
pertaining to loans results in a fair value adjustment of the credit risk of
such loans.
Federal Home Loan Bank Stock--The carrying amounts approximate fair values
because the stock may be sold back to the Federal Home Loan Bank at carrying
value.
Deposits--The fair values of deposits are estimated based on the type of
deposit products. Demand accounts, which include passbook and transaction
accounts, are presumed to have equal book and fair values, since the interest
rates paid on these accounts are based on prevailing market rates. The
estimated fair values of time deposits are determined by discounting the cash
flows of settlements of deposits having similar maturities and rates,
utilizing a yield curve that approximated the prevailing rates offered to
depositors as of the reporting date.
Short-Term Borrowings--The carrying amounts of short-term borrowings
approximate fair value due to the short-term nature of these instruments.
Notes Payable--The fair value of notes payable is obtained from market bids
from independent securities dealers.
Off-Balance-Sheet Liabilities--The fair values of interest-rate swaps are
estimated at the net present value of the future payable, based on the current
spread, discounted at a current rate. The fair values of interest rate and
foreign currency futures are generally obtained from market bids for similar
or identical instruments. Fair values of off-balance-sheet commitments to lend
are estimated based on deferred fees associated with such commitments, which
are immaterial as of the reporting date.
The fair value estimates presented herein are based on pertinent information
available to management as of each reporting date. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
F-29
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1997 1997 1997 1997
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Interest income.................. $34,601 $29,947 $27,892 $17,617
Interest expense................. 27,800 24,345 20,717 13,974
Provision (recovery) for loan
losses.......................... 1,065 2,350 445 (1,869)
------- ------- ------- -------
Net interest income after
provision (recovery) for loan
losses.......................... 5,736 3,252 6,730 5,512
Non-interest income.............. 14,586 28,631 15,585 2,501
Non-interest expense............. 15,744 19,578 13,502 7,908
------- ------- ------- -------
Income before income taxes....... 4,578 12,305 8,813 105
Income tax provision............. 1,656 5,237 3,702 42
------- ------- ------- -------
Net income....................... $ 2,922 $ 7,068 $ 5,111 $ 63
======= ======= ======= =======
Earnings per share:
Basic.......................... $ 0.01 $ 0.68 $ 0.85 $ 0.26
Diluted........................ $ 0.01 $ 0.66 $ 0.80 $ 0.24
<CAPTION>
QUARTERS ENDED
----------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1996 1996 1996
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Interest income.................. $14,285 $12,186 $12,407 $ 9,544
Interest expense................. 9,685 7,572 7,046 4,974
Provision for loan losses........ 798 4,883 5,483 5,385
------- ------- ------- -------
Net interest income (loss) after
provision for loan losses....... 3,802 (269) (122) (815)
Non-interest income.............. 11,796 1,140 817 4,189
Non-interest expense............. 4,772 5,298 2,525 2,851
------- ------- ------- -------
Income (loss) before income
taxes........................... 10,826 (4,427) (1,830) 523
Income tax provision (benefit)... 4,777 (3,373) (805) (474)
------- ------- ------- -------
Net income (loss)................ $ 6,049 $(1,054) $(1,025) $ 997
======= ======= ======= =======
Earnings (loss) per share:
Basic.......................... $ 1.05 $ (0.19) $ (0.24) $ 0.34
Diluted........................ $ 1.05 $ (0.19) $ (0.24) $ 0.34
<CAPTION>
QUARTERS ENDED
----------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Interest income.................. $ 7,329 $ 6,173 $ 5,776 $ 5,103
Interest expense................. 4,070 3,704 3,573 3,134
Provision for loan losses........ 1,045 1,020 1,028 1,173
------- ------- ------- -------
Net interest income after
provision for loan losses....... 2,214 1,449 1,175 796
Non-interest income.............. 353 1,591 526 467
Non-interest expense............. 2,795 2,052 1,629 1,456
------- ------- ------- -------
Income (loss) before income
taxes........................... (228) 988 72 (193)
Income tax provision (benefit)... (21) 78 4 (14)
------- ------- ------- -------
Net (loss) income................ $ (207) $ 910 $ 68 $ (179)
======= ======= ======= =======
Earnings (loss) per share:
Basic.......................... $ (0.16) $ 0.70 $ 0.05 $ (0.14)
Diluted........................ $ (0.16) $ 0.70 $ 0.05 $ (0.14)
</TABLE>
F-30
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. PARENT COMPANY INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash...................................................... $ 38,522 $ 65,207
Mortgage-backed securities available for sale, at fair
value.................................................... 70,097 --
Due from affiliate, net................................... 140,231 22,095
Investment in subsidiaries................................ 63,169 48,065
Prepaid expenses and other assets......................... 31,076 4,665
-------- --------
$343,095 $140,032
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities.................... $ 4,821 $ 4,010
Short-term borrowings..................................... 54,907 --
Notes payable............................................. 184,245 75,000
-------- --------
Total liabilities..................................... 243,973 79,010
Contributed and retained equity........................... 99,122 61,022
-------- --------
$343,095 $140,032
======== ========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
--------- ------- -------
<S> <C> <C> <C>
Interest income................................ $ 6,187 $ 45 $ 9
Interest expense............................... 18,337 421 243
--------- ------- -------
Net interest expense........................... (12,150) (376) (234)
Non-interest (loss) income..................... (344) 563 1,155
Non-interest expense........................... 1,667 125 363
--------- ------- -------
(Loss) income before equity in earnings of
subsidiaries and income tax benefit........... (14,161) 62 558
Income tax benefit............................. 5,947 131 --
Equity in earnings of subsidiaries............. 23,378 4,774 34
--------- ------- -------
Net income..................................... $ 15,164 $ 4,967 $ 592
========= ======= =======
</TABLE>
F-31
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONDENSED STATEMENTS OF CASH
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
--------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 15,164 $ 4,967 $ 592
Adjustments to reconcile net income to net
cash used in operating activities:
Amortization of purchase accounting
adjustments................................ -- (1,045) (1,045)
Equity in earnings of subsidiaries.......... (23,378) (4,774) (34)
Change in:
Prepaid expenses and other assets.......... (8,823) (4,512) 51
Accounts payable and other liabilities..... (10,939) 4,657 90
Due from affiliate, net.................... (92,240) (22,670) (71)
Other...................................... -- -- 33
--------- -------- -------
Net cash used in operating activities..... (120,216) (23,377) (384)
--------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Mortgage-backed Securities
available for sale......................... (82,949) -- --
Principal repayment of Mortgage-backed
securities available for sale.............. 12,452 -- --
Net investment in subsidiaries.............. -- (24,514) (9,000)
--------- -------- -------
Net cash used in investing activities..... (70,497) (24,514) (9,000)
--------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of notes payable................... 109,245 75,000 --
Proceeds from short term borrowings......... 59,920 -- --
Repayments of short term borrowings......... (5,013) -- --
Issuance of capital stock................... -- 38,097 --
Purchase of treasury stock................ (124) -- --
Issuance of subordinated debt............... -- -- 9,000
Dividends from subsidiary................... -- -- 65
--------- -------- -------
Net cash provided by financing activities. 164,028 113,097 9,065
--------- -------- -------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS.................................. (26,685) 65,206 (319)
CASH:
Beginning of year........................... 65,207 1 320
--------- -------- -------
End of year................................. $ 38,522 $ 65,207 $ 1
========= ======== =======
NONCASH FINANCING ACTIVITIES:
Conversion of capital stock to notes
payable.................................... -- -- $ 1,000
Exchange of note payable for common stock... -- $ 11,000 --
Issuance of preferred stock in exchange for
cancellation of certain payables due to
affiliate.................................. $ 27,500 -- --
Pay-in-kind preferred stock dividend........ 1,604 -- --
</TABLE>
F-32
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
18. SUBSEQUENT EVENTS
The Company has established Wilshire Real Estate Investment Trust, Inc.
("Wilshire REIT"), which intends to qualify and will elect to be taxed as a
Real Estate Investment Trust. The Wilshire REIT has filed a registration
statement with the Securities and Exchange Commission in connection with a
proposed underwritten public offering of its common stock. The Company expects
to retain a minority interest (currently expected to be approximately 9.9%,
with options to acquire an additional 10%) in the Wilshire REIT following the
Wilshire REIT's proposed initial public offering. The Company intends to sell
loans and mortgage-backed securities to the Wilshire REIT following the
initial public offering at their estimated fair values.
During 1997, the Company entered into a commitment to acquire a
participating interest in a portfolio of loans from a European insurance
company for a purchase price of approximately $140.0 million. The Company
expects to finance approximately 80% of the purchase price with an unrelated
third party. The Company has granted the Wilshire REIT an option to purchase
all or a portion of the Company's interest in such assets.
Subsequent to December 31, 1997, the Company purchased certain assets of an
unaffiliated mortgage originator for approximately $2.8 million.
Effective February 9, 1998, the Company issued 3,500,000 shares of its
common stock for proceeds of approximately $65,700. A portion of the proceeds
from this offering were used to redeem the Company's $27,500 of Pay-in-Kind
Preferred Stock. The remaining proceeds provide capital for the Company's
leveraged acquisition of pools of loans and other investments.
In the first quarter of 1998, the Company completed an exchange offer,
pursuant to which the holders of the Series A Notes exchanged their Series A
Notes for 13% Series B Notes due 2004 of the Company, which contain
substantially identical terms as the Series A Notes, except with respect to
restrictions on transfer.
Subsequent to December 31, 1997 the Company acquired or committed to acquire
approximately $550 million unpaid principal of loans, discounted loans and
loans held for sale.
F-33
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF ON MARCH 27, 1997 BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
WILSHIRE FINANCIAL SERVICES GROUP
INC.
/s/ Lawrence A. Mendelsohn
-------------------------------------
Lawrence A. Mendelsohn
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW ON MARCH 27, 1997 BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Andrew A. Wiederhorn Chairman of the Board, Chief
____________________________________ Executive Officer, Secretary and
Andrew A. Wiederhorn Treasurer
/s/ Lawrence A. Mendelsohn President and Director
____________________________________
Lawrence A. Mendelsohn
/s/ Chris Tassos Executive Vice President and Chief
____________________________________ Financial Officer
Chris Tassos
/s/ Don H. Coleman Director
____________________________________
Don H. Coleman
/s/ Philip G. Forte Director
____________________________________
Philip G. Forte
/s/ David Dale-Johnson Director
____________________________________
David Dale-Johnson
</TABLE>
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this report.
<TABLE>
<C> <S>
+3.1 Certificate of Incorporation
++3.2 Certificate of Designation of Cumulative Redeemable PIK Preferred Stock
+3.3 By-laws
+10.1 Form of Employment Agreement dated November 15, 1996 among the Company
and Andrew A. Wiederhorn
+10.2 Form of Employment Agreement dated November 15, 1996 among the Company
and Lawrence A. Mendelsohn
+10.3 Incentive Stock Plan
+10.5 Master Repurchase Agreement between First Bank of Beverly Hills, F.S.B.
and Bear Sterns Mortgage Capital Corporation dated as of May 22, 1996
+10.6 Supplemental Terms and Conditions dated as of May 22, 1996 between
First Bank of Beverly Hills, F.S.B. and Bear Sterns Mortgage Capital
Corporation
+10.7 Master Repurchase Agreement between Girard Savings Bank FSB and Bear
Stearns Mortgage Capital Corporation dated as of December 22, 1995
+10.8 Master Repurchase Agreement dated as of November 15, 1996 between CS
First Boston Mortgage Capital Corp. and Wilshire Funding Corp.
x10.9 Servicing Agreement between Wilshire Financial Services Group Inc. and
Wilshire Credit Corporation dated November 15, 1996
x10.10 Form of Amended and Restated Interim Warehouse and Security Agreement
by and between Prudential Securities Credit Corporation and WMFC 1997-
2, Inc.
x10.11 Cease and Desist Order (Girard Savings Bank, F.S.B.)
x10.12 Cease and Desist Order (First Bank of Beverly Hills, F.S.B.)
*11 Statement regarding earnings per share
*12 Statement regarding the computation of the ratio of earnings to fixed
charges
#16 Letter on Change in certifying Accountant
x21.1 Subsidiaries
*27 Financial Data Schedule
</TABLE>
- --------
* Filed herewith
+ Incorporated by reference to the Company's Registration Statement on Form
S-1 dated December 19, 1996 (Registration No. 333-15263)
++Incorporated by reference to the Company's Registration Statement on Form
S-4 dated October 10, 1997 (Registration No. 333-37575)
# Incorporated by reference to the Company's Current Report on Form 8-K dated
April 7, 1997
x Incorporated by reference to the Company's Registration Statement on Form
S-1 dated February 2, 1998 (Registration No. 333-42779)
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Income Available to Common Shareholders:
Net Income................................. $ 15,164 $ 4,967 $ 592
Redeemable Preferred Stock Dividends....... (1,604) 0 0
---------- ---------- ----------
$ 13,560 $ 4,967 $ 592
---------- ---------- ----------
Weighted Average Number of Shares:
Average common shares outstanding.......... 7,569,808 4,638,926 1,300,863
Common share equivalents resulting from
assumed exercise of stock options......... 449,491 8,142 0
---------- ---------- ----------
8,019,299 4,647,068 1,300,863
Earnings per common share.................... $ 1.69 $ 1.07 $ 0.46
</TABLE>
<PAGE>
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996 1995
------- ------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Earnings:
Pre-tax income......................................... $25,801 $5,092 $ 639
Add:
Interest and fixed charges........................... 86,836 29,277 14,481
Portion of rent under long-term operating leases
representative of an interest factor................ 0 0 0
------- ------ ------
Total earnings available for fixed charges............. 112,637 34,369 15,120
------- ------ ------
Fixed charges:
Interest and fixed charges........................... 86,836 29,277 14,481
Portion of rent under long-term leases representative
of an interest factor............................... 0 0 0
------- ------ ------
Total fixed charges.................................... 86,836 29,277 14,481
------- ------ ------
Deficiency in earnings to cover fixed charges.......... -- -- --
Ratio of earnings to fixed charges..................... 1.30 1.17 1.04
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 66,115
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 38,969
<INVESTMENTS-HELD-FOR-SALE> 298,964
<INVESTMENTS-CARRYING> 24,414
<INVESTMENTS-MARKET> 24,378
<LOANS> 927,957
<ALLOWANCE> 118,275
<TOTAL-ASSETS> 1,629,027
<DEPOSITS> 362,598
<SHORT-TERM> 966,500
<LIABILITIES-OTHER> 16,562
<LONG-TERM> 184,245
0
27,500
<COMMON> 55,897
<OTHER-SE> 15,725
<TOTAL-LIABILITIES-AND-EQUITY> 1,629,027
<INTEREST-LOAN> 85,090
<INTEREST-INVEST> 24,967
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 110,057
<INTEREST-DEPOSIT> 25,687
<INTEREST-EXPENSE> 86,836
<INTEREST-INCOME-NET> 23,221
<LOAN-LOSSES> 1,991
<SECURITIES-GAINS> 6,072
<EXPENSE-OTHER> 56,732
<INCOME-PRETAX> 25,801
<INCOME-PRE-EXTRAORDINARY> 15,164
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,164
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.69
<YIELD-ACTUAL> 9.68
<LOANS-NON> 66,643
<LOANS-PAST> 31,984
<LOANS-TROUBLED> 227,019
<LOANS-PROBLEM> 268
<ALLOWANCE-OPEN> 37,555
<CHARGE-OFFS> 97,397
<RECOVERIES> 1,206
<ALLOWANCE-CLOSE> 118,275
<ALLOWANCE-DOMESTIC> 118,275
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
