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DRAFT 04/02/99
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee Required)
For the fiscal year ended December 31, 1998
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
(State or other jurisdiction of 93-1223879
incorporation or organization) (I.R.S. Employer Identification No.)
1776 SW Madison Street, Portland, OR 97205
(Address of principal executive offices) (Zip Code)
(503) 223-5600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
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. Yes X 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. ___
Trading in shares of Wilshire Financial Services Group Inc. common stock was
halted by NASDAQ on February 3, 1999. The last reported trade was on February
2, 1999 at a price of $ 0.375.
As of February 28, 1999, 11,070,000 shares, not including options to purchase
1,809,776 shares, of Wilshire Financial Services Group Inc.'s common stock, par
value $.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC.
FORM 10-K
INDEX
<TABLE>
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Item Page
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<S> <C>
PART I............................................................................................................ 4
1. Business.................................................................................................. 4
2. Properties................................................................................................ 16
3. Legal Proceedings......................................................................................... 16
4. Submission of Matters to a Vote of Security Holders....................................................... 16
PART II........................................................................................................... 16
5. Market for the Registrant's Common Equity and Related Stockholder Matters................................. 16
6. Selected Financial Data and Operating Statistics.......................................................... 17
7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 21
7A. Quantitative and Qualitative Disclosures About Market Risk............................................... 38
8. Financial Statements and Supplementary Data............................................................... 38
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................... 38
PART III.......................................................................................................... 39
10. Directors and Executive Officers of the Registrant....................................................... 39
11. Executive Compensation................................................................................... 41
12. Security Ownership of Certain Beneficial Owners and Management........................................... 48
13. Certain Relationships and Related Transactions........................................................... 48
PART IV........................................................................................................... 48
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................... 48
</TABLE>
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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 order, the availability of pools of
loans at acceptable prices, the availability of financing for existing assets
and 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.
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PART I.
ITEM 1. Business
General
The Company
Wilshire Financial Services Group Inc. and subsidiaries ("WFSG" or the
"Company") is a diversified financial services company. We conduct business in
the U.S. and Europe, specializing in acquisitions of loan portfolios and
mortgage-backed securities, securitization, correspondent lending and servicing.
We offer wholesale banking through our subsidiary, First Bank of Beverly Hills,
F.S.B. ("First Bank"). First Bank is a federally chartered savings institution
regulated by the Office of Thrift Supervision ("OTS") with one branch and a
merchant bankcard-processing center in Southern California. Our administrative
headquarters are located at 1776 S.W. Madison, Portland, Oregon 97205. Our
telephone number is (503) 223-5600.
Recent Events
As more fully described below under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Events," during the third
and fourth quarter of 1998, we were significantly and negatively impacted by
various market factors. These factors resulted in a dramatic reduction in
market valuations for certain of our mortgage-backed securities and other
assets, as well as a reduction in the availability of borrowings for securities
and certain of our loan assets, thereby reducing our liquidity.
Turmoil in the Russian financial markets, following a prolonged period of
uncertainty in Asian financial markets, caused investors to reassess their risk
tolerance. This resulted in a dramatic movement of liquidity toward less risky
assets (e.g., U.S. Treasury instruments) and away from higher risk assets,
including most non-investment grade assets and commercial and other mortgage and
asset-backed securities. This movement toward higher quality investments
dramatically reduced available liquidity to non-investment grade assets.
Without available funding sources, many investors in these assets, including
several well-known hedge funds, were forced to liquidate holdings at reduced
prices. With greater sales pressure and supply outpacing demand, prices
continued to fall as more lenders made collateral calls, demanding additional
collateral for their loan positions. Many companies were rapidly depleting
available cash reserves.
On October 12, 1998, another well-known hedge fund was liquidated. This event
triggered further collateral calls, forcing additional companies to sell assets
to cover lender collateral calls, and continuing the downward spiral in prices.
On October 15, 1998 the Federal Reserve lowered interest rates, largely in
response to this liquidity crisis.
During the fourth quarter of 1998, we sold approximately $580.0 million of
assets in response to the above conditions to meet collateral calls by lenders
and to increase liquidity. The downward pressure on prices and our need to sell
assets to meet these collateral calls resulted in the disposal of assets for
proceeds which resulted in significant losses for the year ended December 31,
1998. Had we not been forced to sell these assets, but rather been able to hold
these assets until market conditions stabilized, management believes our losses
would have been far less severe. As a result of these market conditions and the
resulting assets sales, total assets fell to $1.1 billion at December 31, 1998
and shareholders' equity was reduced from $99.1 million at December 31, 1997 to
a deficit of $92.8 million at December 31, 1998. Accordingly, the Company
reduced its workforce by approximately 33% during the fourth quarter, primarily
resulting from the elimination of certain loan origination activities and other
general decreases in the Company's overall infrastructure at the non-banking
subsidiaries.
Restructuring Plan
We concluded, in light of recent market events and the Company's liquidity and
capital needs, that the best alternative for recapitalizing the Company over the
long-term and maximizing the recovery of creditors and equity interest holders
of
4
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the Company is through a prepackaged plan of reorganization under Chapter 11 of
the Bankruptcy Code. Accordingly, management entered into discussions with an
unofficial committee of holders of a majority of the Company's $184.2 million in
outstanding publicly issued notes concerning a restructuring of the Company's
obligations under the notes. Following extensive discussions, the Company and
the unofficial committee agreed to a restructuring of the Company through a
prepackaged Chapter 11 bankruptcy filing (the "Prepackaged Plan") with a view to
enabling the reorganized company to continue as a going concern with adequate
capitalization. The Prepackaged Plan provides that (i) the holders of our senior
notes (the "Noteholders") would exchange the senior notes ("Old Notes") for new
common stock in the Company (the "New Common Stock"); (ii) our existing equity
securities (including options, warrants and similar securities) would be
extinguished; (iii) Noteholders would reallocate a portion of our New Common
Stock to the existing holders of Old Common Stock to foster the development of,
and improve conditions in the trading market for the New Common Stock; and (iv)
pending consummation of the restructure, the noteholders would forbear from
declaring certain defaults under the indentures governing the Old Notes. The
Prepackaged Plan provides for the incorporation of the servicing functions
currently performed for the Company by Wilshire Credit Corporation, a company
owned by Andrew A. Wiederhorn and Lawrence A. Mendelsohn ("WCC"), into a new
company controlled by WFSG, who will hold a 50.01% economic interest. Other
creditors, including trade creditors and secured creditors, are not expected to
be adversely affected by this restructuring. On March 1, 1999, this
restructuring plan was overwhelmingly approved by Noteholders and on March 3,
1999, this restructuring plan was filed with the bankruptcy court in Delaware
for approval. A confirmation hearing to approve the plan has been scheduled for
April 12, 1999. Despite the favorable vote by the Noteholders, there can be no
assurance that such plan will be approved on such date or at all. For additional
information, a copy of the Prepackaged Plan was filed with the Securities and
Exchange Commission on Form 8-K in February 1999.
On January 19, 1999, WREIT agreed to provide the Company interim financing in
the amount of $5.0 million (the "Interim Facility"). The Interim Facility bears
interest at 12% and is secured by the stock of the Bank. In addition, on March
3, 1999, WREIT agreed to provide the Company with debtor-in-possession financing
of $10.0 million (the "DIP Facility") of which $5 million has been provided.
The first proceeds of the DIP Facility were used to repay the Interim Facility.
The DIP Facility bears interest at 12% and is secured by the stock of the Bank.
The Company is also seeking to increase the DIP Facility to $25 million. If the
Company identifies a new lender for the DIP Facility, subject to certain
conditions, WREIT agrees to subordinate the priority of its lien and right of
repayment of the DIP Facility to the new lender. There can be no assurance that
the WREIT has the ability to fund the DIP facility.
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 and matched basis and (iv) manage interest rate
risk and liquidity. 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 in the U.S. and Europe;
. Expansion of Fee Based Income;
. Expansion of Loan Servicing; and
. Growth of Merchant Bankcard Processing Operations.
Acquisitions of Pools of Loans
We primarily acquire pools of performing, sub-performing and non-performing
residential and commercial mortgage loans, as well as foreclosed real estate and
mortgage-backed securities. We also acquire newly-originated residential
mortgage loans through correspondents. At December 31, 1998, we had total assets
of approximately $1.1 billion, including approximately $792.2 million of loans,
approximately $62.2 million of real estate owned, net and approximately $134.0
million of mortgage-backed and U.S. government securities.
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We acquire 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, 1998, we held approximately $52.0 million of Discounted Loans and
approximately $740.2 million of Non-Discounted Loans.
The following table sets forth the composition of our 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,
------------------------------------------
1998 (3) 1997 1996
------------ ------------- ------------
(Dollars in thousands)
Non-Discounted Loans:
<S> <C> <C> <C>
Single-family residential............................................. $ 458,452 $ 306,601 $ 74,895
Multi-family residential.............................................. 67,079 68,301 69,044
Commercial real estate................................................ 155,298 95,133 63,374
Consumer and other.................................................... 86,341 49,443 22,817
--------- --------- --------
Non-Discounted Loan portfolio........................................... 767,170 519,478 230,130
Premium, (unaccreted discount) and deferred fees........................ 7,850 (23,830) (6,232)
Valuation allowance(1)(4)............................................... (34,787) (31,046) (31,936)
--------- --------- --------
Total Non-Discounted Loans, net (3)................................... $ 740,233 $ 464,602 $191,962
========= ========= ========
Discounted Loans:
Single-family residential............................................. $ 93,133 $ 507,206 $276,759
Multi-family residential.............................................. 2,188 16,300 317
Commercial real estate................................................ 21,901 79,370 4,919
Consumer and other(2)................................................. 227,844 238,152 1,342
--------- --------- --------
Discounted Loan portfolio............................................... 345,066 841,028 283,337
Unaccreted discount and deferred fees(2)................................ (8,596) (290,444) (58,088)
Valuation allowance(1)(4)............................................... (284,481) (87,229) (5,619)
--------- --------
Total Discounted Loans, net (3)....................................... $ 51,989 $ 463,355 $219,630
========= ========= ========
</TABLE>
(1) For discussion of the valuation allowance allocation for purchase discount,
see ''Asset Quality--Allowances for Loan Losses.''
(2) In the first quarter of 1997, we 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.
(3) The substantial decline in Discounted Loans reflects substantial asset sales
to meet collateral calls by lenders in the third and fourth quarter of 1998.
Subsequent to December 31, 1998, the Company sold approximately $124.2
million principal amount of Discounted and Non-Discounted loans.
(4) Included in valuation allowance is $30,400 classified as market valuation
adjustments in the audited financial statements at December 31, 1998.
Balance represents other than temporary impairment recognized to reduce the
carrying value of certain Discounted and Non-Discounted Loans at December
31, 1998.
The real properties which secure our Non-Discounted Loans are located
throughout the United States. At December 31, 1998, the five states with the
greatest concentration of properties securing our Non-Discounted Loans were
California, Washington, Oregon, New York and Arizona, which had $411.2 million,
$89.0 million, $45.8 million, $24.4 million and $19.4 million principal amount
of loans, respectively. The real properties which secure our Discounted Loans
are located throughout the United States and Europe. At December 31, 1998, the
five states with the greatest concentration of properties securing our
Discounted Loans were New York, New Jersey, Connecticut, Massachusetts and
California, which had $23.0 million, $13.1 million, $12.0 million, $6.0 million
and $5.7 million principal amount of loans, respectively.
The following table sets forth certain information at December 31, 1998
regarding the dollar amount for Non-Discounted Loans based on their contractual
terms to maturity and includes scheduled payments but not potential
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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 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
unearned discounts and deferred loan fees and the allowance for loan losses.
Maturity of Non-Discounted Loans
<TABLE>
<CAPTION>
Maturing in
----------------------------------------------------
After One After Five
One Year Year Through Years Through After Ten
or less Five Years Ten Years Years
--------- ------------ ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Single-family residential................................................ $ 1,295 $ 3,206 $ 6,519 $447,432
Multi-family residential................................................. 2,478 14,794 32,574 17,233
Commercial and other mortgage loans...................................... 15,849 50,932 67,615 20,902
Consumer and other loans................................................. 8,783 5,600 7,729 64,229
Interest rate terms on amounts due after one year:
Fixed.................................................................. 41,763 70,242 300,002
Adjustable............................................................. 32,769 44,195 249,794
</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.
We granted a right of first refusal to Wilshire Real Estate Investment Trust
Inc. (''WREIT'') with respect to certain real estate investments in discounted
U.S. commercial mortgage loans and U.S. commercial properties. As a consequence
the opportunity for us to invest in such assets would be limited to the extent
WREIT takes advantage of such investment opportunities.
International Assets and Operations
In the fourth quarter of 1996, we expanded our loan acquisition activities to
the United Kingdom and France. We have established offices in London, Paris and
Dublin, and established loan servicing operations in the United Kingdom and
France. We believe 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. Our loan servicing operations
in Western Europe utilize WCC's servicing system, which has been adapted for
servicing loans in Western Europe.
We granted a right of first refusal to WREIT with respect to International
Discounted and Non-Discounted Loans and properties (''International
Investments''). As a consequence, the opportunity for us to invest in such
assets would be limited to the extent WREIT takes advantage of such investment
opportunities.
Acquisition of Securities
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We have 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, we retain or, in
certain cases, acquire in the secondary market subordinate and other classes of
mortgage-backed securities backed by loans that were previously held in the
portfolio of the Company or one of our affiliates and for which the Company is
continuing to act as servicer. First Bank has acquired government agency
securities (or quasi-government agency securities) to increase its liquidity
levels and earn net interest spread. The following table sets forth our
holdings of mortgage-backed and other securities at the dates indicated:
Mortgage-Backed Securities and Other Securities
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998(1) 1997 1996
--------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Available for sale:
Mortgage-backed securities...................................... $ 66,829 $223,185 $25,080
Agency mortgage-backed securities.............................. 47,634 75,779 6,190
Trading account securities:
Mortgage-backed securities...................................... 38,969 24,541
Held to maturity:
U.S. Government and other securities............................ 5,962 5,946 7,429
Mortgage-backed securities...................................... 13,580 18,468 21,724
---------- -------- -------
Total........................................................ 19,542 24,414 29,153
---------- -------- -------
Total investment securities.................................. $ 134,005 $362,347 $84,964
========== ======== =======
</TABLE>
__________
(1) The substantial decline in the value of subordinate mortgage-backed
securities in the third and fourth quarter of 1998 forced the Company to sell
significant amounts of subordinate mortgage-backed securities in order to meet
collateral calls by lenders.
During 1998, we sold to WREIT a portion of our mortgage-backed securities for
approximately $95.0 million. In addition, we granted a right of first refusal to
WREIT with respect to subordinate mortgage-backed securities (''MBS
Investments''). As a consequence, the opportunity for us to invest in MBS
Investments would be limited to the extent WREIT takes advantage of such
investment opportunity.
Fee-Based Income
Management of WREIT. In October 1997, the Company established WREIT. WREIT
issued 11,500,000 shares of common stock in April 1998 in connection with its
initial public offering of common stock. We retained a minority interest in
WREIT (approximately 8.6% with an option to acquire an additional 10%)
We formed WREIT in connection with our strategy of focusing our acquisition
activities on domestic residential and domestic non-discounted commercial
mortgage loans and expanding fee-based income. WREIT concentrates on the
acquisition of U.S. Commercial Investments, MBS Investments and International
Investments. The Company granted a right of first refusal to WREIT with respect
to U.S. Commercial Investments, MBS Investments and International Investments.
Upon the consummation of the initial public offering of WREIT, the Company
sold to WREIT (i) U.S. Commercial Investments for approximately $28.2 million,
(ii) MBS Investments for approximately $95.0 million, and (iii) International
Investments in the United Kingdom for approximately $3.3 million (the ''Initial
Investments'').
Wilshire Realty Services Corporation (''WRSC''), a wholly-owned subsidiary of
the Company, entered into a management agreement with WREIT, pursuant to which
WRSC manages WREIT for a management fee and an incentive fee. For the year ended
December 31, 1998, the Company earned $3.2 million in management fees for
services provided to
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WREIT. WREIT granted WRSC and certain of WREIT's directors options to purchase
up to 10% of the common stock of WREIT or units of limited partnership interest
in WREIT's operating partnership.
WREIT entered 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 WREIT acquires assets in other countries, WREIT
anticipates entering into similar servicing arrangements with the Company in
such countries. Under the servicing agreements, WREIT pays the Company a
servicing fee at market rates for each pool of loans or real estate assets that
it services for the WREIT and reimburse it for certain out-of-pocket costs
associated with servicing such assets.
Upon consummation of the restructuring plan, WREIT will own approximately
10.8% of our common stock. We understand that the independent directors of
WREIT are considering retaining a financial advisor to advise them as to whether
to retain, increase or dispose of its ownership interest in our common stock.
Servicing
U.S. Servicing. We currently subservice substantially all of our U.S.
servicing functions to Wilshire Credit Corporation, an affiliated company owned
by Andrew A. Wiederhorn and Lawrence A. Mendelsohn. At December 31, 1998, WCC
serviced approximately $3.0 billion of loans for us and other third parties. As
a part of the Prepackaged Plan, the servicing operations of WCC will be
incorporated into a new company controlled by WFSG and on consummation of the
Plan, we would receive a 50.01% economic interest in the company. WCC has
developed specialized procedures and proprietary software designed to
effectively service performing, non-performing and sub-performing loans and
foreclosed real estate. WCC 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 facilitate timely and accurate
payments over their remaining lives.
We are a party to a loan servicing agreement with WCC pursuant to which WCC
acts as sub-servicer for the Company and provides loan portfolio management
services, including billing, portfolio administration and collection services
for our pools of loans. We pay WCC a servicing fee equal to prevailing market
rates for each pool of loans that WCC is servicing for us. First Bank is also
party to a loan servicing agreement with WCC pursuant to which WCC provides loan
portfolio management services, including billing, portfolio administration and
collection services, for all loans owned, acquired or made by First Bank.
European Servicing. In 1996, we established loan servicing operations in the
United Kingdom and France to service loans for ourself and third parties. We
believe 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. Our loan servicing operations in Western Europe utilize WCC's
servicing system, which have been adapted for servicing loans in Western Europe.
Mortgage Loan Originations
We previously operated a mortgage loan origination program through
correspondents for the origination of residential mortgage loans and the
origination of commercial mortgage loans. In October 1998, due to difficult
market conditions the Company ceased origination activity through its retail
residential mortgage origination channel.
In October 1998, First Bank purchased George Elkins Mortgage Banking Company,
LP, a four branch commercial mortgage loan broker headquartered in Southern
California, for $3.7 million in cash and an additional $1.5 million, which is
contingent on certain operating performances through the Year 2000. For the
three month period since the time of acquisition through December 31, 1998,
George Elkins Mortgage Banking Company, LP, brokered approximately $125.8
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million of commercial mortgage loans and accounted for approximately $3.7
million of commercial mortgage loan originations for First Bank.
Merchant Bankcard Processing Operations
The Bank 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 Bank's bankcard processing
operations focus on certain higher risk market niches, including audio text and
internet transactions, where the Company believes it obtains higher returns. A
significant portion of this business involves processing Visa and Mastercard
transaction for e-commerce business on the internet.
The financial results of the Bank's merchant bankcard processing operations
for the years ended December 31, 1998, 1997 and 1996 have been as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Bankcard revenues............................... $13,801 $ 6,289 $ 6,790
Bankcard processing expense..................... (8,763) (4,294) (5,124)
Other expenses.................................. (2,653) (1,784) (1,205)
------- ------- -------
Net............................................. $ 2,385 $ 211 $ 461
======= ======= =======
</TABLE>
In addition to focusing on continued internal growth, the Bank is evaluating
strategic alternatives for the bankcard operations which may include
acquisitions of similar or complimentary businesses.
Funding Sources
General. In order to maximize the return on our investment in acquired loans,
we fund acquisitions with third party debt financing so that our invested
capital is a small percentage of the purchase price for the asset acquired. The
three principal sources for such funding are warehouse and repurchase agreements
with major investment and commercial banks, deposits at First Bank and the
securitization of loans. We closely monitor rates and terms of competing
sources of funds on a regular basis and generally utilize the source which is
the most cost effective. Due to the recent market volatility, some of these
funding sources may not be fully available as described under "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In addition, we have publicly sold Common Stock, sold 13% Notes due 2004 (the
''Notes'') and sold 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. We announced, that as part of our proposed
restructuring, all of the $184.2 million of outstanding Notes and Series B Notes
are expected to be converted to equity of WFSG.
The following table sets forth information relating to our borrowings and
other interest-bearing obligations at the dates indicated.
Borrowings and Interest-Bearing Obligations
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
(Dollars in thousands)
Deposits..................................................... $ 510,430 $ 362,598 $501,614
Warehouse and Repurchase Agreements (1)...................... 420,816 966,500 97,624
Notes Payable (2)............................................ 184,245 184,245 75,000
---------- ---------- --------
Total..................................................... $1,115,491 $1,513,343 $674,238
========== ========== ========
</TABLE>
10
<PAGE>
(1) Subsequent to December 31, 1998, the Company sold $124.2 million unpaid
principal amount of loans which resulted in a reduction in borrowings of
$106.8 million
(2) The Company's unsecured notes are currently in default and are in the
process of being restructured with the Noteholders. See "Business Recent
Events."
The following table sets forth certain information related to our 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,
1998 1997 1996
------------- ------------- -----------
<S> <C> <C> <C>
(Dollars in thousands)
FHLB advances:
Average amount outstanding during the period........................................ $ -- $ 479 $ 2,420
Maximum month-end balance outstanding during the period............................. -- 8,000 11,000
Weighted average rate:
During the period................................................................ % 5.67% 6.57%
At end of period................................................................. -- -- --
Warehouse and repurchase agreements:
Average amount outstanding during the period........................................ 972,376 586,370 51,316
Maximum month-end balance outstanding during the period............................. 1,248,797 966,500 190,000
Weighted average rate:
During the period................................................................ 7.65% 7.45% 6.88%
At end of period................................................................. 6.78% 7.32% 7.88%
</TABLE>
Warehouse and Repurchase Agreements. We had 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.
This facility matured on March 31, 1999 and the Company does not expect it to be
extended. The Company is currently in the process of selling the remaining
loans financed by this facility and expects to eliminate its borrowings on this
line in the near future. The Company has repurchase agreements outstanding that
mature monthly and roll into new 30 day repurchase agreements. The Company does
not meet all of the financial covenants of these transactions (including
stockholder equity requirements); however, the lenders have continued to roll
the repurchase agreements. In addition, the Company has discussed additional
lending arrangements with investment banks who may provide financing on a
transaction by transaction basis. There can be no assurance that lenders will
not change material terms, including, but not limited to, advance rates and
interest rates.
Securitizations. At December 31, 1998, the Company and its affiliates had
securitized $1.5 billion of securities through 10 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 our 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.
Given the recent volatility in financial markets, our ability to securitize
assets, however, may be limited for the foreseeable future.
11
<PAGE>
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, 1998, $176.1 million or
34.5% of First Bank's total deposits were brokered and $321.0 million or 62.9%
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 are 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 it
could not continue to offer deposit rates at levels above those of other banks
and savings institutions.
On February 8, 1999, the OTS rescinded the Cease and Desist Order (the
"Order") under which the Bank had previously been operating. The Order had
prohibited the Bank from: increasing total assets in excess of $750 million;
purchasing any loans or real estate, without the approval of the OTS, until
certain management, acquisition and servicing deficiencies identified by the OTS
had been corrected; and purchasing any non-performing assets or foreclosed real
estate until such time as the Bank was rated a composite "3" rating according to
the Uniform Financial Institutions Rating System. Management believes that the
Bank was in material compliance with the various provisions of the Order for
each period that it was in place.
In January 1999, the OTS issued a cease and desist order to WCC, WFSG, and
Wilshire Acquisitions Corporation ("WAC"), parent company of First Bank, that
prohibits these entities from entering into a transaction, directly or
indirectly, that would cause First bank to violate or be in violation of
transactions with affiliate regulations. The orders also require 30 day advance
notification before adding, replacing, or terminating any member of First Bank's
Board of Directors or senior executives.
The following table sets forth information relating to the First Bank's
deposits at the dates indicated.
Deposits
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
Avg. Avg. Avg.
Amount Rate Amount Rate Amount Rate
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Non-interest bearing checking accounts........................ $ 10,934 0.00% $ 5,959 0.00% $ 5,625 0.00%
NOW and money market checking accounts........................ 2,060 2.45 1,563 1.47 2,023 1.82
Savings accounts.............................................. 293 2.00 329 2.02 480 2.15
Certificates of deposit....................................... 497,143 5.70 354,747 6.02 493,486 5.92
-------- ---- -------- ---- -------- ----
Total deposits.............................................. $510,430 5.56% $362,598 5.83% $501,614 5.84%
======== ==== ======== ==== ======== ====
</TABLE>
12
<PAGE>
The following table sets forth, by various interest rate categories, First
Bank's certificates of deposit at December 31, 1998.
Interest Rates for Certificates of Deposit
<TABLE>
<CAPTION>
December 31, 1998
---------------------
(Dollars in thousands)
<S> <C>
3.51-4.50....................................................................... $ 575
4.51-5.50....................................................................... 142,630
5.51-6.50....................................................................... 353,838
6.51-7.50....................................................................... 100
--------
Total........................................................................ $497,143
========
</TABLE>
13
<PAGE>
The following table sets forth the amount and maturities of First Bank's
certificates of deposit at December 31, 1998.
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............... $74,881 $ 54,198 $ 893
Weighted Average................................. 5.58% 5.96% 5.37%
Balances Maturing in over 3 Months to 12
Months............................................ $51,541 $241,415 $ 200
Weighted Average................................. 5.42% 5.80% 6.13%
Balances Maturing in over 12 Months to 36
Months............................................ -- $ 65,502 $6,722
Weighted Average................................. -- 5.75% 5.77%
Balances Maturing in over 36 Months................. -- -- $1,791
Weighted Average................................. -- -- 5.86%
</TABLE>
At December 31, 1998, First Bank had outstanding an aggregate of approximately
$143.4 million of certificates of deposit in face amounts equal to or greater
than $100,000 maturing as follows: approximately $7.4 million within three
months; approximately $24.3 million over three months through six months;
approximately $74.8 million over six months through 12 months; and approximately
$36.9 million thereafter.
First Bank is party to a $225 million Master Repurchase Agreement with Bear
Stearns Mortgage Capital Corporation (''BSMCC''). 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, 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
We are exposed to certain credit risks related to the value of the collateral
that secures our loans and the ability of borrowers to repay their loans. We
closely monitor our pools of loans and foreclosed real estate for potential
problems on a periodic basis.
Non-Performing Loans. It is our 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. We carry our 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 it is 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
14
<PAGE>
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,
-----------------------------------
1998 1997 1996
---------- ------------ ---------
(Dollars in thousands)
<S> <C> <C> <C>
Discounted Loans(1):
Single-family residential........................................ $26,834 $111,316 $15,274
Multi-family residential......................................... 2,859 2,270 --
Commercial and other mortgage loans.............................. 4,812 10,248 200
------- -------- -------
Total......................................................... 34,505 123,834 15,474
Non-Discounted Loans:
Single-family residential........................................ 1,990 6,110 2,773
Multi-family residential......................................... 22 3,082 100
Commercial and other mortgage loans.............................. 2,666 950 124
------- -------- -------
Total......................................................... 4,678 10,142 2,997
Foreclosed real estate purchased directly:
Single-family residential........................................ 22,689 40,706 59,729
Commercial and other mortgage loans.............................. 2,011 -- --
Valuation allowance from losses..................................... (1,715) (5,070) --
------- -------- -------
Foreclosed real estate owned, net............................. $62,168 $169,612 $78,200
======= ======== =======
</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. The decrease in 1998 is due to sale of the
properties to third parties.
Allowance for Loan Losses. We maintain 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 loans, and allocations
of discounts on purchased loans, and is decreased by loan 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 evaluate all loans
individually and to classify loans as pass, 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. 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.
15
<PAGE>
In addition, the OTS, as part of its examination process, periodically reviews
First Bank's allowances for losses and the carrying values of its assets. There
can be no assurance that the OTS will not require additional reserves following
future examinations..
The following table sets forth information with respect to the Company's
allowance for loan losses by category of loan.
Allowance for Loan Losses by Loan Category
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1998 % of Total 1997 % of Total 1996 % of Total
---------- ----------- ---------- ----------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loan category:
Real estate...................................... $ 16,334 5.7% $ 27,534 23.3% $24,051 64.0%
Non-real estate.................................. 10,508 3.6 3,512 3.0 7,885 21.0
Discounted Loans................................. 262,026 90.7 87,229 73.7 5,619 15.0
-------- ----- -------- ----- ------- -----
Total allowance for loan losses.................. $288,868 100.0% $118,275 100.0% $37,555 100.0%
======== ===== ======== ===== ======= =====
</TABLE>
The following table sets forth the activity in the allowance for loan losses
during the periods indicated.
Activity in the Allowance for Loan Losses
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
------------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance, beginning of period......................... $ 118,275 $ 37,555 $ 25,651
Allocation of purchased loan discount:
at acquisition.................................... 372,136 174,920 10,751
at disposition.................................... (219,148) (97,397) (17,218)
Recoveries........................................... 2,818 1,206 1,822
Provision for loan losses............................ 13,338 1,991 16,549
Currency translation adjustment...................... 1,449
--------- ---------- -----------
$ 288,868 $118,275 $ 37,555
========= ======== ========
</TABLE>
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,
-----------------------------------------------------------------
1998 1997 1996
-------------------- --------------------- --------------------
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....................................... $ 6,253 0.8% $ 56,751 10.9% $ 7,613 3.3%
61-90 days....................................... 1,091 0.1 36,294 7.0 7,204 3.1
91 days or more(1)(2)............................ 25,098 3.3 66,643 12.8 54,524 23.7
------- --- -------- ---- ------- ----
Total loans delinquent........................ $32,442 4.2% $159,688 30.7% $69,341 30.1%
======= === ======== ==== ======= ====
</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. As
a result, the Company
16
<PAGE>
does not believe that the information is a meaningful indicator of the
delinquency experience on its non-discounted loans.
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 WREIT.
The lease agreement expires December 31, 2001. 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 November 30,
1999 and August 31, 1999, respectively. The Company also leases office space in
London, England, Dublin, Ireland and Paris, France.
The Company believes its facilities are suitable and adequate for its current
business purposes and for the foreseeable future.
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.
As described above in Item 1, the Company has filed a prepackaged plan of
reorganization under Chapter 11 of the Bankruptcy Code to restructure its
indebtedness and is currently operating as a debtor-in-possession. The
confirmation hearing to complete the bankruptcy process is scheduled for April
12, 1999.
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
The Company's common stock, par value $.01 per share (the ''Common Stock'') is
quoted on the National Association of Securities Dealers Automated Quotation
System (''NASDAQ'') under the symbol ''WFSG.'' On February 3, 1999 NASDAQ
halted trading in the Company's common stock and informed the Company that it
intended to delist the Company's Common Stock due to the Company's filing the
Prepackaged Plan. After discussions with the staff of NASDAQ, the Company
requested a formal hearing before NASDAQ to demonstrate that the Company would
still qualify for listing after approval of the Prepackaged Plan by the
bankruptcy court in Delaware. A hearing has been scheduled for April 23, 1999.
There can be no assurance that the Company will be able to convince NASDAQ to
maintain the Company's listing. The approximate number of record holders of the
Company's Common Stock at February 28, 1999 was 304.
The following table sets forth the range of high and low sales for Common
Stock for the periods indicated:
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
Year ended December 31, 1998:
First Quarter............................................... $27.00 $20.00
Second Quarter.............................................. $25.25 $19.81
Third Quarter............................................... $24.00 $ 6.25
Fourth Quarter.............................................. $ 6.00 $ 0.53
Year ended December 31, 1997:
First Quarter............................................... $18.00 $14.50
Second Quarter.............................................. $16.25 $13.50
Third Quarter............................................... $26.13 $16.25
Fourth Quarter.............................................. $33.50 $24.75
</TABLE>
17
<PAGE>
The Company has not paid any cash dividends on its Common Stock. It is the
current intention of the Company's Board of Directors 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, 1998, 1997, and 1996
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
1996 include the accounts of WAC and First Bank for periods prior to the
formation of WFSG.
18
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
------------ ------------- -----------
(Dollars in thousands,
except per share amounts)
<S> <C> <C> <C>
Income Statement Data:
Total interest income.............................................................. $ 140,516 $110,057 $48,422
Total interest expense............................................................. 125,458 86,836 29,277
--------- -------- -------
Net interest income.............................................................. 15,058 23,221 19,145
Provision for loan losses(1)....................................................... 13,338 1,991 16,549
--------- -------- -------
Net interest income after provision for estimated loan losses.................... 1,720 21,230 2,596
Other (Loss) Income:
Market valuation adjustments..................................................... (113,711)
Write-down of mortgage servicing rights.......................................... (13,704)
Gain on sale of loans............................................................ 19,240 39,049 11,538
Servicing revenue................................................................ 6,497 5,580 --
Real estate owned, net........................................................... 5,508 6,309 556
Bankcard income, net............................................................. 5,038 1,995 1,666
Gain on sale of securities....................................................... 4,024 3,742 --
Trading account gain, net........................................................ 1,630 2,330 1,833
Other (loss) income, net......................................................... (8,545) 2,298 2,349
--------- -------- -------
Total other (loss) income..................................................... (94,023) 61,303 17,942
--------- -------- -------
Other Expenses:
Compensation and employee benefits............................................... 36,787 14,404 4,464
Loan service fees and expenses paid to affiliate................................. 39,277 28,126 5,176
Professional services............................................................ 9,306 3,171 700
Occupancy........................................................................ 2,461 1,125 339
FDIC insurance premiums.......................................................... 896 1,049 2,381
Corporate travel and development................................................ 6,851 3,439 519
Depreciation and amoritization.................................................. 3,995 495 164
Other general and administrative expenses........................................ 13,839 4,923 1,703
--------- -------- -------
Total other expenses.......................................................... 113,412 56,732 15,446
--------- -------- -------
(Loss) income before income taxes................................................. (205,715) 25,801 5,092
Income tax (benefit) provision..................................................... (4,056) 10,637 125
--------- -------- -------
Net (loss) income.................................................................. $(201,659) $ 15,164 $ 4,967
========= ======== =======
Basic (loss) income per share(2)................................................... $(18.93) $1.79 $1.07
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1997 1996
------------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.......................................................... $ 23,468 $ 66,115 $152,298
Portfolio Assets:(3)
Discounted Loans, net (12)....................................................... 51,989 463,355 219,630
Non-Discounted Loans, net (12)................................................... 740,233 464,602 191,962
Mortgage-backed and other securities............................................. 134,005 362,347 84,964
Foreclosed real estate, net...................................................... 62,168 169,612 78,200
---------- ---------- --------
Total portfolio assets........................................................ $ 988,395 $1,459,916 $574,756
Total assets....................................................................... 1,084,253 1,629,027 753,849
Deposits........................................................................... 510,430 362,598 501,614
Short-term debt(12)................................................................ 420,816 966,500 97,624
Notes payable...................................................................... 184,245 184,245 75,000
Stockholders' equity (deficit) (4)................................................. (92,795) 99,122 61,022
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Financial Ratios and Other Data:
Return on average assets........................................................... (11.85)% 1.22% 0.95%
Return on average equity........................................................... (273.93)% 19.48% 13.68%
Average interest yield on total loans.............................................. 7.91 % 9.68% 9.41%
Net interest spread(5)(6).......................................................... 0.17 % 2.03% 3.07%
Net interest margin(6)(7).......................................................... 0.86 % 2.03% 3.63%
Ratio of earnings to fixed charges(8):
Including interest on deposits................................................... 1.30 1.17
Excluding interest on deposits................................................... 1.42 2.19
Long-term debt to total capitalization(9).......................................... 2.01 0.65 0.55
Total financial liabilities to equity.............................................. N/A 15.43 11.35
Average equity to average assets................................................... 4.33 % 6.25% 6.90%
Non-performing loans to loans at end of period(10)(11)............................. 3.27 % 12.83% 23.69%
Allowance for loan losses to total loans at end of period.......................... 4.57 % 5.98% 13.88%
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Operating Data:
Investments and originations:
Discounted Loans and foreclosed real estate...................................... $ 179,105 $ 584,014 $ 324,159
Non-Discounted Loans(10)......................................................... 907,328 673,234 254,517
Mortgage originations............................................................ 811,769 77,918 2,280
Mortgage-backed and other securities............................................. 133,092 310,220 67,604
----------- ---------- ---------
Total......................................................................... 2,031,294 1,645,386 648,560
Recoveries and repayments.......................................................... (327,785) (196,646) (66,160)
Loan sales and securitizations..................................................... (1,535,501) (486,109) (301,411)
Net change in portfolio assets..................................................... (471,521) 885,160 250,349
</TABLE>
- -------------
(1) Approximately $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 the period prior to
the formation of WFSG, WAC shares outstanding were converted to their WFSG
equivalent.
(3) During 1998 the Company sold to the Wilshire REIT (i) $44.1 million of
loans, (ii) MBS Investments for approximately $127.2 million, and (iii)
International Investments in the United Kingdom for approximately $3.3
million.
(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 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. During 1998, the Company sold
3,500,000 shares of common stock for net proceeds of approximately $61.8
million. A portion of the proceeds was used to redeem the 27,500
outstanding shares of preferred stock.
20
<PAGE>
(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 six to nine months 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. During 1998, earnings
were inadequate to cover fixed charges by $80.3 million.
(9) Total capitalization equals long-term debt plus equity.
(10) Non-performing loans include all non-discounted loans that have been placed
on non-accrual status by the Company. Non-discounted loans are placed on
non-accrual status when they became past due more than 90 days or sooner
when, in the judgement of management, the probability of collection of
interest is deemed to be insufficient to warrant further accrual.
(11) Discounted loans are not included in non-performing loans.
(12) Subsequent to December 31, 1998, the Company sold discounted and non-
discounted loans with a carrying value of $109.1 million and paid down
short term borrowings of $106.8 million.
21
<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.
Recent Events
During the third and fourth quarter of 1998, we were significantly and
negatively impacted by various market factors. These factors resulted in a
dramatic reduction in the availability of borrowings for securities and certain
of our loan assets, thereby reducing our liquidity.
Turmoil in the Russian financial markets, following a prolonged period of
uncertainty in Asian financial markets, caused investors to reassess their risk
tolerance. This resulted in a dramatic movement of liquidity toward less risky
assets (e.g., U.S. Treasury instruments) and away from higher risk assets,
including most non-investment grade assets and commercial and other mortgage and
asset-backed securities. This movement toward higher quality investments
dramatically reduced available liquidity to non-investment grade assets.
Without available funding sources, many investors in these assets, including
several well-known hedge funds, were forced to liquidate holdings at reduced
prices. With greater sales pressure and supply outpacing demand, prices
continued to fall as more lenders made margin calls, demanding additional
collateral for their loan positions. Many companies were rapidly depleting
available cash reserves.
On October 12, 1998, a well-known hedge fund was liquidated. This event
triggered further collateral calls, forcing additional companies to sell assets
to cover borrower collateral calls, and continuing the downward spiral in
prices. On October 15, 1998 the Federal Reserve lowered interest rates, largely
in response to this liquidity crisis.
During the fourth quarter of 1998, we sold approximately $580.0 million of
assets in response to the above conditions to meet collateral calls by lenders
and to increase liquidity. The downward pressure on prices and our need to sell
assets to meet these collateral calls resulted in the disposal of assets for
proceeds which resulted in significant losses for the year ended December 31,
1998. Had we not been forced to sell these assets, but rather been able to hold
these assets until market conditions stabilized, management believes our losses
would have been far less severe. As a result of these market conditions and the
resulting assets sales, total assets fell to $1.1 billion and shareholders'
equity was reduced from $99.1 million at December 31, 1997 to a deficit of $92.8
million at December 31, 1998.
Restructuring Plan
We concluded, in light of recent market events and the Company's liquidity and
capital needs, that the best alternative for recapitalizing the Company over the
long-term and maximizing the recovery of creditors and equity interest holders
of the Company is through a prepackaged plan of reorganization under Chapter 11
of the Bankruptcy Code. Accordingly, management entered into discussions with
an unofficial committee of holders of a majority of the Company's $184.2 million
in outstanding publicly issued notes concerning a restructuring of the Company's
obligations under the notes. Following extensive discussions, the Company and
the unofficial committee agreed to a restructuring of the Company through a
prepackaged Chapter 11 bankruptcy filing (the "Prepackaged Plan") with a view to
enabling the reorganized company to continue as a going concern with adequate
capitalization. The Prepackaged Plan provides that (i) the holders of our
senior notes (the "Noteholders") would exchange the senior notes ("Old Notes")
for new common stock in the Company (the "New Common Stock"); (ii) our existing
equity securities (including options, warrants and similar securities) would be
extinguished; (iii) noteholders would reallocate a portion of our New Common
Stock to the existing holders of Old Common Stock to foster the development of,
and improve conditions in the trading market for the New Common Stock; and (iv)
pending consummation of the restructure, the noteholders would forbear from
declaring certain defaults under the indentures governing the Old Notes. The
Prepackaged Plan provides for the incorporation of the servicing functions
currently performed for the Company by Wilshire Credit Corporation, a company
owned by Andrew A. Wiederhorn and Lawrence A. Mendelsohn ("WCC"), into a new
company controlled by WFSG, who will hold a 50.01% economic interest. Other
creditors, including trade creditors and secured creditors, are not expected to
be adversely affected by this restructuring. On March 1, 1999, this
restructuring plan was overwhelmingly approved by noteholders and on March 3,
1999, this restructuring plan was filed with the bankruptcy court in Delaware
for approval. A confirmation hearing to approve the plan has been scheduled for
April 12, 1999. Despite the favorable vote by the noteholders, there can be no
assurance that such
22
<PAGE>
plan will be approved on such date or at all. For additional information, a copy
of the Prepackaged Plan was filed with the Securities and Exchange Commission on
Form 8-K in February 1999.
Interest Income
A significant portion of our earnings comes from net interest income, which is
the difference between the interest income received (plus accreted 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.
23
<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,
------------------------------------------------------------------------
1998 1997
---------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
----------- -------- ----------- ------------ --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average Assets:
Mortgage-backed securities........... $ 256,298 $ 25,676 10.02% $ 196,218 $ 20,785 10.59%
Loan portfolio net of unaccreted 1,408,187 111,444 7.91
discounts/unamortized premium(1).... 878,846 85,090 9.68
Investment securities and other...... 80,062 3,396 4.24 67,804 4,182 6.17
---------- -------- ----- ---------- -------- -----
Total interest-earning assets...... 1,744,547 140,516 8.05 1,142,868 110,057 9.63
Non-interest earning cash............ 217 2,416 -- --
Allowance for loan losses............ (291,060) (75,939) -- --
Other assets......................... 247,599 176,533 -- --
---------- -------- ---------- --------
Total assets....................... $1,701,303 $140,516 $1,245,878 $110,057
========== ======== ========== ========
Average Liabilities and Stockholders'
Equity:
Interest-bearing deposits............ $ 434,572 $ 25,566 5.88% $ 429,289 $ 25,687 5.98%
FHLB advances........................ 479 27 5.67
Subordinated borrowings and other 972,376 74,374 7.65
interest-bearing obligations........ 586,370 43,682 7.45
Long-term debt....................... 184,245 25,518 13.85 125,912 17,440 13.85
---------- -------- ----- ---------- -------- -----
Total interest-bearing liabilities. 1,591,193 125,458 7.88 1,142,050 86,836 7.60
Non-interest bearing deposits........ 7,862 5,674 -- --
Escrow deposits...................... 1,488 330 -- --
Other liabilities.................... 27,144 19,993 -- --
---------- -------- ---------- --------
Total liabilities.................. 1,627,687 125,458 1,168,047 86,836 --
Stockholders' equity................. 73,616 77,831 -- --
---------- -------- ---------- --------
Total liabilities and stockholders' $1,701,303 $125,458
equity............................ ========== ======== $1,245,878 $ 86,836
========== ========
Net interest income.................. $ 15,058 $ 23,221
Net interest spread(2)(3)............ 0.17% 2.03%
Net interest margin(3)............... 0.86% 2.03
Ratio of average interest- earning 109.64%
assets to average interest-bearing
liabilities......................... 100.1%
<CAPTION>
1996
---------------------------------
Average Average
Balance Interest Yield/Rate
---------- -------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Average Assets:
Mortgage-backed securities........... $ 29,241 $ 1,797 6.15%
Loan portfolio net of unaccreted
discounts/unamortized premium(1).... 470,654 44,294 9.41
Investment securities and other...... 27,446 2,331 8.49
-------- ------- -----
Total interest-earning assets...... 527,341 48,422 9.18
Non-interest earning cash............ 6,019 -- --
Allowance for loan losses............ (39,675) -- --
Other assets......................... 32,061 -- --
-------- -------
Total assets....................... $525,746 $48,422
======== =======
Average Liabilities and Stockholders'
Equity:
Interest-bearing deposits............ $423,011 $25,270 5.97%
FHLB advances........................ 2,420 159 6.57
Subordinated borrowings and other
interest-bearing obligations........ 51,316 3,531 6.88
Long-term debt....................... 2,292 317 13.85
-------- ------- -----
Total interest-bearing liabilities. 479,039 29,277 6.11
Non-interest bearing deposits........ 2,822 -- --
Escrow deposits...................... 257 -- --
Other liabilities.................... 7,330 -- --
-------- -------
Total liabilities.................. 489,448 29,277 --
Stockholders' equity................. 36,298 -- --
-------- -------
Total liabilities and stockholders'
equity............................ $525,746 $29,277
======== =======
Net interest income.................. $19,145
Net interest spread(2)(3)............ 3.07%
Net interest margin(3)............... 3.63
Ratio of average interest- earning
assets to average interest-bearing
liabilities......................... 110.1%
</TABLE>
- -------------
(1) The average balances of the loan portfolio include Discounted Loans and non-
performing loans, on which interest 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 our
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 six to nine months following the acquisition of a
pool of Discounted Loans and we only recognize 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 B 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.
24
<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 our 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,
----------------------------------------------------------------
1998 v. 1997 1997 v. 1996
------------------------------ --------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------
Rate Volume Total Rate Volume Total
---------- -------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-Earning Assets:
Mortgage-backed securities............................. $ (1,053) $ 5,944 $ 4,891 $2,136 $16,852 $18,988
Loan portfolio......................................... (11,466) 37,820 26,354 1,310 39,486 40,796
Investment securities and other........................ (1,867) 1,081 (786) (423) 2,274 1,851
-------- ------- ------- ------ ------- -------
Total interest-earning assets....................... (14,386) 44,845 30,459 3,023 58,612 61,635
Interest-Bearing Liabilities:
Interest-bearing deposits.............................. (452) 331 (121) 41 376 417
FHLB advances.......................................... (27) (27) (19) (113) (132)
Short-term borrowings and other
interest-bearing obligations......................... 1,198 29,494 30,692 316 39,835 40,151
Long-term debt......................................... -- 8,078 8,078 -- 17,123 17,123
-------- ------- ------- ------ ------- -------
Total interest-bearing
liabilities........................................ 746 37,876 38,622 338 57,221 57,559
-------- ------- ------- ------ ------- -------
Increase (decrease) in net interest
income.................................................. $(15,132) $ 6,969 $(8,163) $2,685 $ 1,391 $ 4,076
======== ======= ======= ====== ======= =======
<CAPTION>
Year Ended December 31,
---------------------------
1996 v. 1995
---------------------------
Increase (Decrease) Due to
Rate Volume Total
-------- -------- -------
<S> <C> <C> <C>
Interest-Earning Assets:
Mortgage-backed securities............................. $ 127 $ 311 $ 438
Loan portfolio......................................... (1,246) 23,719 22,473
Investment securities and other........................ 6 1,124 1,130
------- ------- -------
Total interest-earning assets....................... (1,113) 25,154 24,041
Interest-Bearing Liabilities:
Interest-bearing deposits.............................. (218) 11,377 11,159
FHLB advances.......................................... (11) 66 55
Short-term borrowings and other
interest-bearing obligations......................... 63 3,236 3,299
Long-term debt......................................... 10 273 283
------- ------- -------
Total interest-bearing
liabilities........................................ (156) 14,952 14,796
------- ------- -------
Increase (decrease) in net interest
income.................................................. $ (957) $10,202 $ 9,245
======= ======= =======
</TABLE>
Results of Operations--1998 Compared to 1997
Net Loss
Our net loss was approximately $201.7 million for 1998 compared with net
income of approximately $15.2 million for 1997. The net loss for 1998 is
primarily attributable to the substantial declines in the value of assets in
which we invest and the forced sale of such assets due to collateral calls. The
net loss for 1998 includes $113.7 million of market valuation adjustments
recognized by us, write-down of mortgage servicing rights of $13.7 million and
provision for estimated losses on loans of $13.3 million, as further explained
below.
Net Interest
Our net interest income was approximately $15.1 million for 1998 compared
with approximately $23.2 million for 1997, a decrease of 35.2%. Average
interest-earning assets increased from $1.1 billion during the year ended
December 31, 1997 to $1.7 billion during the year ended December 31, 1998. The
increase in interest-earning assets is primarily attributable to acquisitions of
loans and mortgage-backed securities which in part were funded from the
Company's issuance of $100.0 million of 13% Series B Notes in August 1997 and
its offering of 3,500,000 shares of common stock in February 1998. Interest-
earning assets declined substantially in the fourth quarter due to asset sales.
Interest Income. Our interest income was approximately $140.5 million for
1998 compared with approximately $110.1 million for 1997, an increase of 27.7%.
The increase in our interest income was due primarily to an increase in our
average interest earning assets from approximately $1.1 billion during the year
ended December 31, 1997 to approximately
25
<PAGE>
$1.7 billion during the year ended December 31, 1998, partially offset by a
decline in the average earnings rate from 9.63% in 1997 to 8.05% in 1998. This
decline in the average rate resulted from proportionately higher investments in
non-discounted loans and a lower overall interest rate environment in the United
States.
Interest Expense. Our interest expense was approximately $125.5 million
for 1998 compared with approximately $86.8 million for 1997, an increase of
44.5%. The increase in interest expense resulted from an increase in our
average interest-bearing liabilities to approximately $1.6 billion during the
year ended December 31, 1998 from approximately $1.1 billion during the year
ended December 31, 1997 and includes the issuance of $100.0 million of our 13%
Series B Notes in the third quarter of 1997.
Provisions for Estimated Losses on Loans
Provision for estimated losses on loans for 1998 was approximately $13.3
million. A provision of approximately $21.4 million was taken on Discounted
Loans at our non-banking subsidiaries in the second half of 1998 as a result of
increasing market yields on loans, which have decreased market values on many
pools of loans (primarily Discounted Loans) in our portfolio. The provision for
estimated losses on loans for 1998 also includes additional reserves to the
extent market values for pools of loans have been reduced below book value,
offset by a negative provision at the Bank because the general valuation
allowance exceeded an adequate level. This compares with a net provision for
estimated losses on loans for 1997 of approximately $2.0 million resulting from
additional provision of approximately $4.5 million, which was partially offset
by the reversal of $2.5 million of excess reserves on loans previously sold.
Other (Loss) Income
Our other loss was approximately $94.0 million for 1998 compared with
income of approximately $61.3 million for 1997. The components of our non-
interest income are reflected in the following table:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------
1998 1997
------------ -----------
(Dollars in thousands)
<S> <C> <C>
Other (loss) income
Market Valuation Adjustments..................................... $(113,711) $ --
Write-down of mortgage servicing rights.......................... (13,704) --
Servicing revenue................................................ 6,497 5,580
Real estate owned, net........................................... 5,508 6,309
Bankcard income, net............................................. 5,038 1,995
Gain on sale of loans............................................ 19,240 39,049
Gain on sale of securities....................................... 4,024 3,742
Trading account gain, net........................................ 1,630 2,330
Other (loss) income, net......................................... (8,545) 2,298
--------- -------
Total other (loss) income...................................... $ (94,023) $61,303
========= =======
</TABLE>
The decrease in other income between the comparable periods was due
primarily to market valuation adjustments of $113.7 million, write-down of
mortgage servicing rights of $13.7 million, a $19.8 million reduction in gain on
sale of loans, and a $10.8 million decrease in other (loss) income, net.
Market Valuation Adjustments. The term "Market Valuation Adjustments" as
used herein refers to impairment losses recognized primarily on our subordinate
mortgage-backed securities and loan portfolios, as a result of the international
economic and financial marketplace turmoil during the third and early fourth
quarters of 1998. As a result of these conditions and reductions in market
values of these assets, lenders required additional collateral for their
outstanding
26
<PAGE>
loans to us. In order to satisfy these requirements, we were forced to sell
certain assets, resulting in significant losses. In addition, we also recognized
write-downs in asset values, which have been deemed to be other than temporary
in nature, related to mortgage-backed and other securities which, as of December
31, 1998, had not been sold.
Total market valuation adjustments for the year ended December 31, 1998
were $113.7 million. Of this amount, $22.2 million relates to sales of non-
agency subordinated mortgage-backed securities, $36.6 million relates to sales
of loans, $9.2 million relates to other than temporary impairment of unsold
mortgage-backed securities, $30.4 million relates to impairment of unsold loans
held for sale and discounted loans and $15.3 million relates to hedge losses.
The Company had hedged its asset portfolio's exposure to rising interest rates
by short-selling U.S. Treasury securities. However, as spreads between U.S.
Treasury Securities and the Company's portfolio assets widened, the hedge was
largely ineffective.
During the latter part of the fourth quarter of 1998, and continuing to
present, the marketplace for non-investment grade debt securities, including
subordinated mortgage-backed securities has stabilized. Yield spreads and
prices for these securities appear to have slowed or stopped their deterioration
in relation to investment grade investments. However, prices for such
securities have not recovered to levels experienced prior to the financial
market turmoil. This difference between our amortized cost of available-for-
sale securities and current market values, which was $25.6 million at December
31, 1998, is included in "Accumulated Other Comprehensive Loss" in stockholders'
equity. This amount, unlike "market value adjustments," represents a market
value decline that management believes is temporary. At this time, management's
expectations for the performance of the underlying loans in these securities has
not changed, and even if market values of these securities do not improve, we
expect to recapture our investment as the underlying collateral and securities
pay down.
Write-Down of Mortgage Servicing Rights. During the year ended December
31, 1998, we wrote-down capitalized servicing rights by approximately $13.7
million. The write-down is the result of faster than expected prepayments on
loans being serviced and revised estimates of future prepayments and other
factors.
Gain on Sale of Loans. Gain on sale of loans decreased $19.8 million
during the year ended December 31, 1998 as a result of lower than expected
securitization activity by us during the current year. As described under
"General Market Conditions," beginning in August 1998, turmoil in the financial
markets resulted in reduced demand for asset-backed securities and therefore, we
were unable to complete all planned securitization transactions, resulting in
lower than anticipated gain on sale of loans. During the year ended December
31, 1998, we completed three securitizations of approximately $507.7 million
aggregate unpaid principal balance and one whole loan sale of approximately
$72.3 million unpaid principal balance. These sale transactions resulted in
gains on sale of approximately $29.2 million. These gains were offset by net
losses of approximately $10.0 million, primarily resulting from sales of loans
originated through our retail and wholesale mortgage origination channels and
recognition of the related hedge losses previously deferred in our consolidated
statement of financial condition.
Gain on Sale of Securities. During the year ended December 31, 1998, we
sold primarily subordinate mortgage-backed securities with carrying values of
approximately $95.0 million to WREIT in conjunction with their initial public
offering of common stock in April 1998, resulting in gains of approximately $0.7
million. Additionally, we sold, to unrelated parties, securities with carrying
values of approximately $104.4 million, resulting in net gains of approximately
$3.3 million. A substantial amount of these sales were made by us in the fourth
quarter of 1998 to meet collateral calls and increase liquidity. A portion of
these securities were written-down through our recognition of permanent
impairment, which is included in market valuation adjustments in our
consolidated statement of operations.
Real Estate Owned, Net. 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 our portfolio of Discounted Loans, including European
assets.
Servicing Revenue. Servicing revenue increased $0.9 million or 16.4%
during 1998, primarily as a result of contracting for the servicing rights on
loan portfolios owned by unaffiliated third parties (including securitizations)
and arranging for such loans to be sub-serviced by WCC, an affiliated entity, at
a rate which is lower than the rate received by us.
27
<PAGE>
Other, Net. Other, net decreased $10.8 million during 1998. The net
decrease is attributable to a loss of approximately $8.2 million related to
write-off of costs capitalized in connection with proposed acquisition
activities, a loss of $4.8 million resulting from our ownership of WREIT, offset
by $4.2 million of loan fees and charges from origination activity and $3.2
million of management fee income associated with our management of WREIT. The
Company accounts for its investment in WREIT under the equity method of
accounting. As stockholders' equity at WREIT changes, the Company's investment
in WREIT changes in line with its proportionate ownership.
Other Expense
Our other expense totaled approximately $113.4 million for 1998 compared to
approximately $56.7 million for 1997, primarily attributable to an increase in
loan service fees and expenses paid to affiliates which results from increases
in our total loan portfolio and third party servicing (which is sub-serviced by
WCC) and increased compensation and employee benefits and other general and
administrative expenses resulting from the expansion of business operations and
infrastructure necessary to accommodate growth.
Loan Service Fees and Expenses Paid to Affiliate. The largest component of
other expense in 1998 was loan service fees and expenses, which includes
servicing fees paid to WCC and collection-related expenses incurred directly by
WCC and reimbursed by us. Loan service fees and expenses paid to affiliates
were approximately $39.3 million (of which approximately $25.5 million
represents collection related loan expenses) for 1998 compared to approximately
$28.1 million for 1997, an increase of approximately $11.2 million, or 39.6%.
The $11.2 million increase is primarily attributable to growth in the average
balance of total loans during 1998 and collection related expenses incurred in
the resolution of Discounted Loans.
Discounted Loans tend to reduce, in the first months after acquisition, net
interest margin and net interest spread, because the interest cost of debt
(which is higher than for Non-Discounted Loans) is not offset by a corresponding
increase in interest income. Relatively little cash flow from a pool of
Discounted Loans is generally received in the first six to nine months following
acquisition and we only recognize interest and discount on Discounted Loans in
income when those loans result in the receipt of cash. We also experience a
much higher level of collection related expenses associated with Discounted
Loans, requiring a higher level of cash investment prior to resolution. Due to
the capital-intensive nature of these investments and the related unpredictable
earnings stream, we believe that a reduced investment in Discounted Loans will
improve cash flow and provide more predictable earnings.
Compensation and Employee Benefits. Compensation and employee benefits
were approximately $36.8 million for 1998, compared with approximately $14.4
million for 1997, an increase of 155.4%. The increase was primarily due to an
increase in the average number of full-time equivalent employees during 1998,
reflecting the expansion of business activities, particularly loan acquisition
and origination activities, and European operations. In the fourth quarter of
1998, the Company reduced its workforce by approximately 33%, primarily
resulting from the Company's elimination of its retail residential and
manufactured housing origination activities and other general decreases in the
Company's infrastructure in response to decreased acquisition and securitization
activities during the fourth quarter at the non-banking subsidiaries.
Other General and Administrative Expenses. Other general and
administrative expenses increased from approximately $4.9 million for 1997 to
approximately $13.8 million for 1998, an increase of 181.1%, due primarily to
general corporate costs resulting from the expansion of business activities at
the non-bank subsidiaries, particularly loan acquisition activities such as due
diligence costs, European operations and origination activities.
Results of Operations--1997 Compared to 1996
Net Interest Income
Our net interest income was approximately $23.2 million for 1997 compared to
approximately $19.1 million for 1996, an increase of approximately 21.3%. Our
asset base was significantly larger in 1997 as a result of our initial public
offering in December 1996 and significantly higher levels of borrowing and
investment opportunities.
28
<PAGE>
Interest Income
Our 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 our
interest income was due primarily to an increase in our average interest earning
assets from approximately $527.3 million in 1996 to approximately $1.1 billion
in 1997.
Interest Expense
Our 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 our average interest-bearing
liabilities to approximately $1.1 billion in 1997 from approximately $479.0
million in 1996 and includes the issuance in the fourth quarter of 1996 and
early 1997 of $84.2 million of our Notes and the issuance in the third quarter
of 1997 of $100.0 million of our Series A Notes. Primarily as a result of our
$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
Our 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
our non-interest income are reflected in the following table:
29
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------
1997 1996
---------- ---------
(Dollars in thousands)
<S> <C> <C>
Other income:
Gain on sales 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 gain, net................................................. 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 our 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 our 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.
We believe 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.
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 our 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 WCC at a rate which is lower than the rate
received by us.
Other Expense
Our 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 our 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 WCC and collection-related expenses incurred directly
by WCC and reimbursed by us. Loan Service fees and expenses paid to affiliates
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 WCC on
30
<PAGE>
our behalf 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.
Changes in Financial Condition
Mortgage-Backed and Other Securities. For financial reporting purposes, our
mortgage-backed and other securities are classified as available for sale,
trading account securities and held to maturity. Our holdings of mortgage-
backed securities available for sale decreased approximately $184.5 million
during 1998 primarily as a result of the sale of approximately $252.7 million
carrying amount ($95.0 million of which was sold to WREIT in connection with its
initial public offering of common stock), purchases of approximately $133.1
million, market valuation adjustment of approximately $30.6 million, transfer
from trading account securities of approximately $16.9 million, an increase in
unrealized loss on available for sale securities of approximately $22.7 and net
other decrease of $28.5 million which primarily represents principal repayment.
Our holdings of trading account securities decreased $39.0 million during 1998
primarily as a result of the sale of certain subordinate securities and the
aforementioned transfer to available for sale.
Loans, Net. Our portfolio of performing and sub-performing loans ("Non-
Discounted Loans"), net of discounts and allowances, increased by approximately
$301.7 million during 1998. This increase is primarily attributable to the
acquisition of Non-Discounted Loans reflecting our emphasis on increasing the
level of investment in Non-Discounted Loans as a percentage of the total loan
portfolio. See "Discounted Loans" below.
Discounted Loans, Net. Our portfolio of Discounted Loans decreased by
approximately $411.4 million during 1998. During 1998, we reduced our
investment level in Discounted Loans, due to attrition resulting from resolution
of the loans either through workout with the borrower or acquisition of
properties securing the loans through foreclosure or deed-in-lieu thereof.
Discounted loans require significant capital resources prior to resolution,
which is typically six to nine months following acquisition. The Company
believes it can create a more predictable and less capital intensive earnings
stream by reducing the level of investment in these assets. In the fourth
quarter of 1998, we sold, in response to lender collateral calls, approximately
$223.1 million carrying value of Discounted Loans, which resulted in $29.5
million of the Company's $113.7 million of market valuation adjustments
recognized in 1998. During 1998, we transferred approximately $122.7 million
net basis of total loans to real estate owned, through foreclosure or deed-in-
lieu thereof, the majority of which represented transfers of Discounted Loans.
Loans Held for Sale, Net, at Lower of Cost or Market. Loans held for sale,
net, at lower of cost or market decreased by approximately $26.7 million during
1998 primarily as a result of discontinuing retail residential originations and
the sale of loans to increase liquidity and reduce outstanding borrowings. We
adopted the strategy of increasing Non-Discounted Loans and decreasing
Discounted Loans as a percentage of the total loan portfolio on a going forward
basis. Non-Discounted Loans provide more predictable and smoother cash flows
and earnings stream to the Company. In addition,
31
<PAGE>
Non-Discounted Loans are less capital intensive than Discounted Loans, which
often require the Company to expend cash to ready the loan for resolution, which
typically is six to eighteen months following acquisition. In the fourth quarter
of 1998, the Company sold approximately $277.6 million carrying value of loans
held for sale to increase the Company's liquidity. The Company did not acquire
any portfolios of loans held for sale during the fourth quarter of 1998.
Mortgage Servicing Rights. Mortgage servicing rights decreased by $6.0
million during 1998 primarily attributable to the net effect of the allocation
of basis of approximately $6.0 million of servicing rights relating to two
securitizations and the purchase of approximately $5.0 million of servicing
rights, offset by the write-down of approximately $13.7 million of servicing
rights resulting from faster than expected prepayments on loans being serviced
and revised estimates of future prepayments and other factors.
Investment in Wilshire Real Estate Investment Trust Inc. The increase of $6.0
million in investment in WREIT is due to an increase of $14.7 million resulting
from our acquisition of 9.9% of the original 10,000,000 shares of common stock
offered by WREIT as part of its initial public offering in April 1998, offset by
the Company's ownership share of losses and dividends received. The Company
accounts for its investment in WREIT under the equity method of accounting. As
stockholder's equity at WREIT changes, the Company's investment in WREIT changes
in line with its proportionate ownership.
Deposits. First Bank increased its deposits by approximately $147.8 million
or 40.8% during 1998 to fund the acquisition of Non-Discounted Loans. On
February 8, 1999, the OTS rescinded the Order under which the Bank had
previously been operating. The Order had prohibited the Bank from: increasing
total assets in excess of $750 million; purchasing any loans or real estate,
without the approval of the OTS, until certain management, acquisition and
servicing deficiencies identified by the OTS had been corrected; and purchasing
any non-performing assets or foreclosed real estate until such time as the Bank
was rated a composite "3" rating according to the Uniform Financial Institutions
Rating System.
Short-Term Borrowings. Short-term borrowings decreased by approximately
$545.7 million during 1998, resulting from the Company's reduction of total
loans and securities (primarily from sales of Discounted Loans and mortgage-
backed securities during the fourth quarter of 1998) from $1.3 billion at
December 31, 1997 to $926.2 million at December 31, 1998.
Due to Affiliates, Net. Due to affiliate, net primarily represents an $18.4
million payable to WREIT, offset by a $2.2 million net receivable from WCC for
payments received in the normal course of servicing our loans, which had not yet
been due for remittance to us. As part of the restructuring, the affiliate
payable to WREIT of $18.4 million has been restructured into a 6%, seven year
note. If WREIT fails to provide or provides only a portion of the DIP financing
(see Note 14 to the financial statements) the note would be treated pari passu
with the Noteholders and the amount of the note payable will be reduced
proportionately.
Asset and Liability Management
Asset and liability management analyzes the timing and magnitude of the
repricing of assets and liabilities. Our objective is to attempt to control
risks associated with interest rate movements. In general, management's strategy
is to limit our exposure to earnings variations and variations in the value of
assets and liabilities as interest rates change over time. Our 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 our 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 our assets and liabilities reprice relatively frequently, our
gap tends to be relatively easy to manage and our 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, we create a hedge which
matches the principal amortization of such asset against the maturity of our
liabilities generally by entering into short sales or forward sales of U.S.
Treasury securities, Government Securities, interest rate futures contracts or
32
<PAGE>
interest rate swap agreements. This is intended to result 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. We evaluate the
interest rate sensitivity of each pool of loans and decide whether to hedge the
interest rate exposure of a particular pool of loans. In general, we tend to
hedge pools of loans that have fixed rates. We generally do 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, we will determine
whether or not to hedge and, with respect to any sale or financing of any pool
of loans through securitization, we will determine whether or not to discontinue
its duration-matched hedging activities with respect to the relevant loans.
In the third and fourth quarters of 1998, the unusually volatile market
conditions affecting the value of hedged assets caused a breakdown of the
historical interest rate relationships with the related hedging instruments.
The correlation between hedged assets and hedging instruments was insufficient
to support continuation of this particular hedging strategy at that time. As a
result, all hedging instruments related to fixed-rate or lagging-index assets
held or available for sale were closed out in 1998. $19.2 million of previously
deferred hedging losses were considered ineffective and charged to net loss
during the year.
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 us
to protect against the narrowing of the interest spread between fixed rate loans
and associated liabilities funding those loans caused by changes in market
interest rates. First Bank had approximately $51.7 million notional principal
amount of interest rate swap agreements outstanding at December 31, 1998, which
had the effect of decreasing our net interest income by approximately $89
thousand during 1998.
First Bank of Beverly Hills
In addition, as required by OTS regulations, the Asset and Liability
Committees also regularly review interest rate risk by forecasting the impact of
alternative interest rate environments on net interest income and market value
of portfolio equity (''MVPE''), which is defined as the net present value of an
institution's existing assets, liabilities and off-balance sheet instruments,
and evaluating such impacts against the maximum potential changes in net
interest income and MVPE that is authorized by the Board of Directors of First
Bank. 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, 1998:
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........................................................... $ (775) $(54,806) (101)%
+300bp........................................................... 14,775 (39,256) (73)
+200bp........................................................... 30,034 (23,997) (44)
+100bp........................................................... 43,721 (10,310) (19)
0bp........................................................... 54,031
--100bp.......................................................... 62,147 8,116 15
--200bp.......................................................... 71,290 17,260 32
--300bp.......................................................... 81,722 27,692 51
--400bp.......................................................... 91,056 37,025 69
</TABLE>
First Bank's interest rate sensitivity of MVPE arising from fluctuations in
the interest rates in a rising 200 to 400 basis point interest rate environment
has increased since year end due to significant changes in the composition of
First Bank's
33
<PAGE>
loan portfolio, continued amortization of the notional amount of First Bank's
swap, as well as changes in the overall market interest rate environment. As of
December 31, 1998, the estimated change in MVPE was $24.0 million to $54.8
million for the corresponding change in interest rates. The Asset and Liability
Committees are in the process of reviewing the strategy to mitigate risk of this
additional exposure.
Management believes that the assumptions (including prepayment assumptions)
used by it to evaluate the vulnerability of First Bank's operations to changes
in interest rates approximate actual experience and considers them reasonable;
however, the interest rate sensitivity of First Bank's assets and liabilities
and the estimated effects of changes in interest rates on First Bank's net
interest income and MVPE could vary substantially if different assumptions were
used or actual experience differs from the historical experience on which they
are based. 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 our ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, purchase pools of loans, and fund newly originated loans, and for
general business purposes. Our sources of cash flow include certificates of
deposit, securitizations, net interest income and borrowings under warehouse and
repurchase financing facilities and from institutional investors and other
lenders and public and private debt offerings. We also have borrowed money from
WREIT and WCC. In addition, First Bank has available funding through FHLB
advances. Our liquidity is actively managed on a daily basis and reviewed
periodically by our Board of Directors. This process is intended to ensure the
maintenance of sufficient funds to meet the needs of the Company, including
adequate cash flows for off-balance sheet instruments.
The Company had 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. This facility
matured on March 31, 1999 and the Company does not expect it to be extended.
The Company is currently in the process of selling the remaining loans financed
by this facility and expects to eliminate its borrowings on this line in the
near future. The Company has repurchase agreements outstanding that mature
monthly and roll into new 30 day repurchase agreements. The Company does not
meet all of the financial covenants of these transactions (including
stockholders' equity requirements); however, the lenders have continued to roll
the repurchase agreements. In addition, the Company has discussed additional
lending arrangements with investment banks who may provide financing on a
transaction by transaction basis. There can be no assurance that lenders will
not change material terms, including, but not limited to, advance rates and
interest rates.
On January 19, 1999, WREIT agreed to provide the Company interim financing in
the amount of $5.0 million (the "Interim Facility"). The Interim Facility bears
interest at 12% and is secured by the stock of the Bank. In addition, on March
3, 1999, WREIT agreed to provide the Company with debtor-in-possession financing
of $10.0 million (the "DIP Facility"). The first proceeds of the DIP Facility
were used to repay the Interim Facility. The DIP Facility bears interest at 12%
and is secured by the stock of the Bank. The Company is also seeking to
increase the DIP Facility to $25 million. If the Company identifies a new
lender for the DIP Facility, subject to certain conditions, WREIT agrees to
subordinate the priority of its lien and right of repayment of the DIP Facility
to the new lender. There can be no assurance that the WREIT has the ability to
fund the DIP facility.
The dramatic events in the financial markets in late 1998, which included a
significant reduction in valuations of and liquidity for mortgage-backed
securities, has had a significant adverse impact on our liquidity and financial
condition. The decline in valuations resulted in collateral calls from our
lenders, which reduced our cash position and eventually prompted asset sales at
depressed prices to meet these calls and provide liquidity. While these asset
sales have improved our liquidity position, the market for mortgage-backed
securities, particularly subordinate mortgage-backed securities, remains
depressed and the financial markets generally continue to be volatile. Further,
certain of the Company's lenders have expressed concern about continued lending
given market conditions and the losses incurred by the Company. At December 31,
1998, our cash balances totaled approximately $23.5 million, however, $18.2
million of the balance was held at First Bank and is not available for use by
other than First Bank. Subsequent to December 31, 1998, the Company received
approximately $8.0 million of cash refunds for previously paid Federal and State
taxes, which are available for general corporate purposes.
34
<PAGE>
In order to address these liquidity concerns and improve the Company's
financial condition, management entered into discussions with the Unofficial
Noteholders' Committee holding a majority of the Company's $184.2 million in
outstanding publicly issued notes, concerning a restructuring of the Company's
obligations under the Old Notes. Following extensive discussions, the Company
and the Unofficial Noteholders' Committee agreed to a restructuring of the
Company substantially in the form of the Prepackaged Plan.
The Prepackaged Plan provides that (i) the holders of our old notes (the
"Noteholders") would exchange the old notes for new common stock in the Company
(the "New Common Stock"), (ii) our existing equity securities (including
options, warrants and similar securities) would be extinguished; (iii)
noteholders would reallocate a portion of our New Common Stock to the existing
holders of Old Common Stock, and (iv) pending consummation of the restructure,
the ntoeholders would forbear from declaring certain defaults under the
indentures governing the Old Notes.
We believe that this Plan will significantly improve our financial position by
reducing indebtedness by $184.2 million, the ongoing interest cost associated
with that indebtedness, and significantly increase our equity account and
provide additional liquidity through the DIP Facility. This restructuring is
subject to a number of conditions, including no material adverse change and
negotiation of definitive documents. We currently expect that this
restructuring will be completed during the second quarter of 1999. Other
creditors, including trade creditors and secured creditors, are not expected to
be adversely affected by this restructuring.
Following the losses incurred by the Company in the second half of 1998, the
Company began discussions with a number of potential new equity investors in
order to strengthen its diminished equity base and obtain additional capital to
operate and develop the business. It is currently anticipated that such
investments, if any, will be made after the effectiveness of the Plan. There
can be no assurance, however, that any such investments will be made.
As a part of the Restructuring, we and the Unofficial Noteholders Committee
anticipate incorporation of servicing functions currently performed by WCC into
a new subsidiary of WFSG.
The Company's European operations is currently operating at a monthly cash
flow deficit of approximately $300,000, which is funded from U.S. cash
liquidity. Infrastructure and staffing reduction measures, already taken, are
expected to eliminate this cash flow deficit by the end of the third quarter of
1999.
Based on the Company's current and expected asset size, capital levels, and
organizational infrastructure, management believes that operating cash flows
will be sufficient to meet its needs. However, the Company intends to
aggressively seek new capital to permit it to move fully and more efficiently
utilize its acquisition and loan servicing platforms. There is no assurance,
however, that it will be able to do so.
Our consolidated financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
the liquidation of liabilities in the normal course of business. The
appropriateness of using the going concern basis is dependent upon, among other
things, the adequate resolution of our long term liquidity shortfall, as well as
the successful consummation of the reorganization described above.
Sources of liquidity for First Bank include wholesale and brokered
certificates of deposit. At December 31, 1998, First Bank had approximately
$497.1 million of certificates of deposit. At December 31, 1998, scheduled
maturities of certificates of deposit during the 12 months ending December 31,
1999 and thereafter amounted to approximately $423.1 million and approximately
$74.0 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.
Primarily as a result of asset sales, we have had adequate cash and cash
equivalents to meet calls for additional collateral to repay a portion of the
related indebtedness or to meet our other operating and financing requirements.
In certain instances, repo lenders on our mortgage-backed securities assets have
withheld principal and/or interest payments on certain
35
<PAGE>
assets in order to reduce outstanding, unpaid margin calls. At December 31,
1998, there were approximately $7.9 million of outstanding collateral calls,
based on the dealers market valuation of the underlying collateral, net of
withheld principal and interest payments.
We are party to various off-balance sheet financial instruments in the normal
course of business to manage our interest rate risk. We conduct business with a
variety of financial institutions and other companies in the normal course of
business, including counterparties to our off-balance sheet financial
instruments. We are subject to potential financial loss if the counterparty is
unable to complete an agreed upon transaction. We seek to limit counterparty
risk through financial analysis and other monitoring procedures.
Adequate credit facilities and other sources of funding, including our ability
to securitize loans, are essential to the continuation of the Company's ability
to purchase pools of loans, mortgage-backed securities and newly originated
mortgages. During the third and fourth quarters, as described in General Market
Conditions, financial markets were severely and negatively impacted by various
factors which have resulted in reduced availability of liquidity and capital to
specialty finance companies and other holders of non-investment grade assets and
certain types of loans. This includes the ability to raise new equity capital
and long-term debt, as well as the ability to securitize or finance certain
types of loans.
The Company's growth strategy is dependent on its ability to raise additional
debt and/or equity financing. To the extent this market environment persists,
such growth is likely to be significantly curtailed or delayed.
To the extent permitted by regulations and deemed appropriate by management,
the Company is exploring available liquidity and capital resources at First Bank
to conduct certain activities through First Bank during this period of market
tightness.
First Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
Current OTS regulations require that a savings association maintain liquid
assets of not less than 4% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less, of which short-term
liquid assets must consist of not less that 1%. Monetary penalties may be
imposed for failure to meet applicable liquidity requirements. First Bank has
complied with these requirements.
Regulatory 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. While the Order was in place, the Bank was
required to maintain minimum capital ratios required of institutions to be
deemed "well capitalized". In connection with the 1998 examination the OTS
indicated that the capital level of the Bank exceeds the minimum requirement for
"well capitalized" status under provisions of the Prompt Corrective Action
Regulation.
36
<PAGE>
The following table sets forth the regulatory capital ratios of First Bank at
December 31, 1998.
Regulatory Capital Ratios
<TABLE>
<CAPTION>
Amount Required
For Capital
Actual Adequacy Purposes
--------------- ------------------------------
Amount Ratio Amount Ratio
------- ------ --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Total Capital to Risk-Weighted Assets (Risk- Based
Capital).............................................. $55,286 14.8% $29,894 greater than or equal to 8.0%
Tier 1 Capital to Risk-Weighted Assets................. 51,364 13.8 Not Applicable
Core Capital to Tangible Assets........................ 51,364 8.8 23,478 greater than or equal to 4.0%
Tangible Capital to Tangible Assets.................... 51,364 8.8 8,804 greater than or equal to 1.5%
<CAPTION>
To Be Categorized
as
''Well Capitalized''
under Prompt
Corrective
Action Provisions
---------------------------------------
Amount Ratio
---------- ---------
(Dollars in thousands)
<S> <C> <C>
Total Capital to Risk-Weighted Assets (Risk- Based
Capital).............................................. $37,368 greater than or equal to 10.0%
Tier 1 Capital to Risk-Weighted Assets................. 22,421 greater than or equal to 6.0%
Core Capital to Tangible Assets........................ 29,348 greater than or equal to 5.0%
Tangible Capital to Tangible Assets.................... Not Applicable
</TABLE>
- -------------
Because First Bank has minimum regulatory capital requirements at December 31,
1998, substantially all retained earnings of First Bank are restricted as to
distribution to WAC and, ultimately, to WFSG.
Regulation
On February 8, 1999, the OTS rescinded the Order under which the Bank had
previously been operating. The Order had prohibited the Bank from: increasing
total assets in excess of $750 million; purchasing any loans or real estate,
without the approval of the OTS, until certain management, acquisition and
servicing deficiencies identified by the OTS had been corrected; and purchasing
any non-performing assets or foreclosed real estate until such time as the Bank
was rate a composite "3" rating according to the Uniform Financial Institutions
Rating System. Management believes that the Bank was in material compliance
with the various provisions of the Order for each period that it was in place.
In January 1999, the OTS issued a cease and desist order to WFSG, WCC and WAC
that prohibits these entities from entering into a transaction, directly or
indirectly, that would cause First Bank to violate or be in violation of
transactions with affiliate regulations. The orders also require 30 day advance
notification before adding, replacing, or terminating any member of First Bank's
Board of Directors or senior executives.
Year 2000 Compliance
We rely on information technology for both general business operations and our
loan servicing system. We formed a committee to address year 2000 issues (the
"Committee") that reports directly to our executive committee. The Committee is
headed by the Chief Information Officer and includes representatives from across
the Company.
The Committee has conducted an inventory of all systems within the Company,
classifying each as either "critical" or "non-critical." For non-critical
systems, the Company has obtained a certification from the vendor that the
applicable package is "year 2000 compliant." For systems deemed "critical," the
Company has developed detailed test plans and created separate year 2000 test
environments.
We have begun the testing of critical systems and are scheduled to complete
all necessary testing by March 31, 1999. Testing of our internally developed
systems is near completion, and changes which have resulted from testing to date
are being coded and moved into production. Following the testing phase, each
department's executive management will be responsible for certifying that their
staff has tested critical code and deemed it adequate.
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Aside from limited hardware costs, the Company's primary expense related to
year 2000 compliance is allocation of existing staff. The Company estimates
that the total cost related to year 2000 compliance to be approximately $500
thousand, substantially all of which had been incurred by December 31, 1998.
The significant risk to the Company of year 2000 non-compliance is the
inability to perform necessary loan servicing activities. Currently, our loan
portfolio is serviced by WCC, an affiliated entity. We service loans for third
parties (including securitizations), and contracts with WCC for sub-servicing.
To the extent the loan servicing system is not year 2000 compliant, the ability
to service our loans and those of third parties would be in jeopardy.
Based on the results of testing performed to date, we are confident that we
are appropriately addressing the Year 2000 issues. Critical systems supplied by
outside vendors have undergone testing not only by us, but other customers of
the vendors as well. Our loan servicing system is an internally developed
system and therefore, information technology personnel are very familiar with
the system and believe their efforts will have favorable results. As a
contingency plan, the Committee is in the process of developing internal
operating procedures that would enable departments to function for a period of
time until the primary system could be restored to operations.
Accounting Matters
We classify 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 us, 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 six to nine months 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 our cost basis
allocated to the senior classes of mortgage-backed securities. Our 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 us 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). We carry 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 we have financed
38
<PAGE>
the holding of subordinate classes with a lender under a repurchase agreement,
the fair value used by us is based on the lender's determination of market value
for purposes of potential margin calls in determining fair value. In other
cases, we determine 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, our estimate of
fair value is subjective.
For accounting purposes, our 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 maturity
when management believes we have 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 us. 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 we 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'', we 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, 1998, we had capitalized servicing rights of
approximately $2.3 million.
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.
39
<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, 1999. In connection with the
restructuring plan it is anticipated that a new Board of Directors will be
named. Names and backgrounds of proposed directors are expected to be provided
to the Court prior to the April 12, confirmation hearing. 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 33, 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 37, 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 46, 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 41, 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 44, 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 50, 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.
Donald J. Berchtold, age 53, 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.
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<PAGE>
Kenneth R. Kepp, age 43, 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 44, 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., an affiliate of the Bank of New York.
Peter O'Kane, age 32, 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 32, 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.
R. Scott Stevenson, age 44, 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 56, 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.
Mark H. Peterman, age 51, is a Senior Vice President and legal counsel of the
Company. Mr. Peterman was a partner in the law firm of Stoel Rives LLP between
1975 and July 1998.
David Dale-Johnson, age 51, 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 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 60, 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 34, 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
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<PAGE>
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: Peter O'Kane (Form 4), Phillip Vincent (Form 4) and Alexander Hamilton (Form
4).
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. In addition, Don Coleman and David Dale-
Johnson receive $10,000 per month to sit as chairmen of various board
committees. 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, 1998 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, 1998 exceeded $100,000 (the "Named
Executive Officers").
<TABLE>
<CAPTION>
Long-Term
Actual Compensation Compensation
--------------------------------- ----------------
Securities
Underlying
Name and Principal Position Year Salary ($) Bonus ($) Options/SARs (#)
--------------------------- ---- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Andrew A. Wiederhorn...................................... 1998 $292,184 $1,546,027
Chairman, Chief Executive Officer, Secretary 1997 $300,000 $ -- --
and Treasurer 1996 $ 65,000 $ -- 730,000
Lawrence A. Mendelsohn.................................... 1998 $295,967 $ 867,720 --
President 1997 $300,000 $ -- --
1996 $ 73,494 $ -- 365,000
Bo G. Aberg............................................... 1998 $397,197 $ 100,000 25,000
Senior Vice President, European Operations 1997 $372,168 $ 246,765 5,000
1996 $ 51,420 $ 41,925 --
Chris Tassos.............................................. 1998 $180,630(1) $ 270,000(1) 62,500
Executive Vice President and 1997 $168,400(1) $ 90,000(1) 60,000
Chief Financial Officer 1996 $ 13,125(1) $ -- --
Sheryl A. Morehead........................................ 1998 $281,141 $ 150,000 15,000
Executive Vice President, S&L Group 1997 $277,655 $ 100,000 15,000
1996 $ 36,907(2) $ 25,000 --
</TABLE>
- ----------
(1) Represents amounts paid by the Company. Does not include amounts paid by
the Wilshire Private Companies.
(2) Ms. Morehead was hired in November 1996.
43
<PAGE>
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, 1998 to each of the Named
Executive Officers.
<TABLE>
<CAPTION>
% of Total Potential Realizable Value
Options/SARs at Assumed Annual Rates
Number of Granted to of Stock Price
Securities Employees in Exercise Appreciation for Option
Underlying Year Ended or Base Term(1)
Options/SARs December 31, Price Expiration --------------------------
Name Granted(#) 1998 ($/sh) Date 5% 10%
- ---- -------------- ------------ -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Andrew A. Wiederhorn............... -- -- -- -- -- --
Lawrence A. Mendelsohn............. -- -- -- -- -- --
Bo G. Aberg........................ 25,000 5.92% $23.65 2008 $284,281(2) $ 802,887(2)
Chris Tassos....................... 50,000 11.84% $23.65 2008 $568,562(2) $1,605,773(2)
Chris Tassos....................... 12,500 2.96% $25.37 2008 $152,404(2) $ 430,521(2)
Sheryl A. Morehead................. 15,000 3.55% $23.65 2008 $170,569(2) $ 481,732(2)
</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.
(2) As a result of the Company's proposed restructuring plan, as discussed
under Management's Discussion and Analysis of Financial Condition and
Results of Operations, all existing stock options of the Company have no
value. Based on the terms of the restructuring agreement, upon
confirmation, all existing options will be extinguished.
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.
Although these agreements were in place at December 31, 1998, upon consummation
of the reorganization, the agreements will be replaced with new agreements
described in the Prepackaged Plan.
The 1996 agreements provide 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.
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<PAGE>
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 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.
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<PAGE>
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 1998 for the Named Executive Officers generally
reflect this policy.
The base salaries for Andrew A. Wiederhorn and Lawrence A. Mendelsohn for 1998
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
1998. 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 First Bank was determined by the board of directors of First Bank.
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.
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 1998, the Company issued options for a total of 422,450 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.
46
<PAGE>
CEO Compensation and President Compensation
Andrew A. Wiederhorn was appointed the Company's chief executive officer and
Lawrence A. Mendelsohn was appointed its President, at its formation. The base
salary for each of these officers for 1998 was not determined by the Committee
and is set forth in an employment agreement. Mr. Wiederhorn and Mr. Mendelsohn
elected not to receive a bonus in 1997. Mr. Wiederhorn received a bonus of
$1.5 million and Mr. Mendelsohn received a bonus of $0.9 million in 1998.
Assuming the restructuring plan is completed, further decisions regarding these
officers' base salaries and bonuses will be determined by new employment
agreements.
COMPENSATION COMMITTEE
David Dale-Johnson
Don H. Coleman
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company is a party to a loan servicing agreement with the WCC pursuant to
which the WCC 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 WCC a servicing
fee at or below the prevailing market rates for each pool of loans the WCC is
servicing for the Company.
First Bank is party to a loan servicing agreement with the WCC pursuant to
which the WCC provides loan portfolio management services, including billing,
portfolio administration and collection services for all loans owned, acquired
or made by First Bank.
While the Company is obtaining necessary licensing approvals for its servicing
operations, certain executive officers of the Company, including Andrew
Wiederhorn, Lawrence Mendelsohn, Donald Berchtold, Chris Tassos, Phillip
Vincent, and Scott Stevenson are continuing to serve as executive officers of
the Wilshire Private Companies and receive compensation from the Wilshire
Private Companies.
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.
47
<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, 1998. The graph compares the performance of the Company's
Common Stock to the S&P 500 and a Financial Services Index ("FSI").
[GRAPHIC]
1998 Measurement Period(1)(2)
<TABLE>
<CAPTION>
December 19, December 31, December 31, December 31,
1996 1996 1997 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Company........................... $100.00 $154.76 $163.08 $ 2.36
FSI(3)............................ $100.00 $102.04 $100.58 $ 65.98
S&P 500........................... $100.00 $ 99.33 $131.01 $126.67
</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 through December 31, 1997 are Advanta
Corporation, Amresco Inc., Countrywide Credit Industries Inc., Green Tree
Financial Corporation and Ocwen Financial Corporation. In May 1998, Green
Tree Financial Corporation merged with a larger institution and therefore
was replaced with Imperial Thrift and Loan Capital for the December 31, 1998
measurement date.
48
<PAGE>
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table shows as of February 28, 1999, 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 Common Stock, (ii)
each director, (iii) each Named Executive Officer, and (iv) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Beneficial Owner(1) Beneficial Ownership Class (11)
- ------------------- -------------------- ----------
<S> <C> <C>
Andrew Wiederhorn...................................... 4,002,148(2) 33.9
Lawrence Mendelsohn.................................... 1,664,831(3) 14.6
Bo Aberg............................................... 30,010(4) *
Chris Tassos........................................... 127,271(5) 1.1
Sheryl Anne Morehead................................... 30,000(6) *
Don H. Coleman......................................... 41,771(7) *
Philip G. Forte........................................ 18,766(8) *
David Dale-Johnson..................................... 42,723(9) *
All directors and executive officers as a group (17 6,203,053(10) 48.9
persons)
</TABLE>
______________
(1) The address for each stockholder is c/o Wilshire Financial Services Group
Inc., 1776 S.W. Madison Street, Portland, OR 97205.
(2) Includes 5,000 shares of Common Stock held by his minor children and 25,000
shares of Common Stock held by a partnership controlled by Mrs. 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 and 500,000 shares held by his spouse. Mr.
Mendelsohn disclaims beneficial ownership except to the extent of his
pecuniary interest. Also includes 365,000 shares of Common Stock, which may
be acquired upon the exercise of options.
(4) Includes 30,000 shares of Common Stock, which may be acquired upon the
exercise of options.
(5) Includes 4,761 shares of Common Stock held jointly with his spouse. Also
includes 122,500 shares of Common Stock, which may be acquired upon the
exercise of options.
(6) Includes 30,000 shares of Common Stock, which may be acquired upon the
exercise of options.
(7) Includes 30,549 shares of Common Stock, which may be acquired upon the
exercise of options.
(8) Includes 16,814 shares of Common Stock, which may be acquired upon the
exercise of options.
(9) Includes 30,549 shares of Common Stock, which may be acquired upon the
exercise of options.
(10) Includes 1,593,368 shares of Common Stock, which may be acquired upon the
exercise of options.
(11) Subsequent to the restructuring, it is anticipated that management and all
common shareholders will own 0.50% of the new common stock.
*Less than 1%.
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
49
<PAGE>
Current report on Form 8-K, dated February 3, 1999.
(c) Exhibits
See Exhibit Index immediately following the signature page.
50
<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, 1998 and 1997................................................................................... F-4
Consolidated Statements of Operations
Years Ended December 31, 1998, 1997 and 1996.................................................................. F-5
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996................................................................. F-6
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1998, 1997 and 1996................................................................. 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 statements of financial
condition of Wilshire Financial Services Group Inc. and Subsidiaries (the
''Company'') as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years 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 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 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, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company experienced a
significant loss in 1998 and has a net capital deficiency of approximately $92.8
million at December 31, 1998. In addition, as described in Note 1 to the
accompanying consolidated financial statements, the Company filed a voluntary
petition for relief under Chapter 11 of the U.S. Bankruptcy Code on March 3,
1999. These matters, among others, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters, including its plan of reorganization, are also described in Note 1. In
the event the plan of reorganization is accepted, the continuation of the
business thereafter is dependent on the Company's ability to achieve successful
future operations. The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
/s/ Arthur Andersen LLP
Los Angeles, California
March 19, 1999
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Wilshire Financial Services Group Inc. and Subsidiaries
We have audited the consolidated statements of operations, stockholders'
equity and cash flows of Wilshire Financial Services Group Inc. and Subsidiaries
(the ''Company'') for the year ended December 31, 1996. 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
misstatements. 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 statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the result of operations and cash
flows of Wilshire Financial Services Group Inc. and Subsidiaries for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 13 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
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents..................................................................... $ 23,468 $ 66,115
Mortgage-backed securities available for sale, at fair value.................................. 114,463 298,964
Mortgage-backed securities held to maturity, at amortized cost................................ 13,580 18,468
Securities held to maturity, at amortized cost................................................ 5,962 5,946
Trading account securities.................................................................... 38,969
Loans, net.................................................................................... 455,561 153,908
Discounted loans, net......................................................................... 51,989 463,355
Loans held for sale, net, at lower of cost or market.......................................... 284,672 310,694
Stock in Federal Home Loan Bank of San Francisco, at cost..................................... 5,332 5,031
Real estate owned, net........................................................................ 62,168 169,612
Leasehold improvements and equipment, net..................................................... 6,694 2,507
Due from affiliate, net....................................................................... 42,171
Accrued interest receivable................................................................... 5,468 6,641
Investment in Wilshire Real Estate Investment Trust Inc....................................... 5,979
Mortgage servicing rights, net................................................................ 2,346 8,306
Income tax receivable......................................................................... 9,865
Prepaid expenses and other assets............................................................. 36,706 38,340
---------- ----------
TOTAL.................................................................................... $1,084,253 $1,629,027
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
Deposits.................................................................................... $ 510,430 $ 362,598
Short-term borrowings....................................................................... 420,816 966,500
Due to affiliates, net..................................................................... 16,166
Notes payable............................................................................... 184,245 184,245
Accounts payable and other liabilities...................................................... 45,391 16,562
---------- ----------
Total liabilities........................................................................ 1,177,048 1,529,905
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock $.01 par value, 10,000,000 shares authorized,
0 and 27,500 shares outstanding (1998 and 1997)........................................... 27,500
Common stock $.01 par value, 50,000,000 shares authorized, 117,708
11,070,000 and 7,570,000 shares outstanding (1998 and 1997)............................... 55,897
Treasury stock, 185,000 and 5,000 shares, at cost (1998 and 1997)........................... (2,852) (124)
Retained earnings (deficit)................................................................. (183,294) 18,782
Accumulated other comprehensive loss, net................................................... (24,357) (2,933)
---------- ----------
Total stockholders' equity (deficit)..................................................... (92,795) 99,122
---------- ----------
TOTAL.................................................................................... $1,084,253 $1,629,027
========== ==========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans.................................................................................... $ 111,444 $ 85,090 $ 44,294
Mortgage-backed securities............................................................... 25,676 20,785 1,797
Securities and federal funds sold........................................................ 3,396 4,182 2,331
----------- ---------- ----------
Total interest income.................................................................. 140,516 110,057 48,422
----------- ---------- ----------
INTEREST EXPENSE:
Deposits................................................................................ 25,566 25,687 25,002
Borrowings.............................................................................. 99,892 61,149 4,275
----------- ---------- ----------
Total interest expense................................................................. 125,458 86,836 29,277
----------- ---------- ----------
NET INTEREST INCOME........................................................................ 15,058 23,221 19,145
PROVISION FOR ESTIMATED LOSSES ON LOANS.................................................... 13,338 1,991 16,549
----------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
ESTIMATED LOSSES ON LOANS................................................................. 1,720 21,230 2,596
----------- ---------- ----------
OTHER (LOSS) INCOME:
Market valuation adjustments............................................................ (113,711) -- --
Write-down of mortgage servicing rights................................................. (13,704) -- --
Gain on sales of loans.................................................................. 19,240 39,049 11,538
Servicing revenue....................................................................... 6,497 5,580 --
Real estate owned, net.................................................................. 5,508 6,309 556
Bankcard income, net.................................................................... 5,038 1,995 1,666
Gain on sale of securities.............................................................. 4,024 3,742 --
Trading account gain, net............................................................... 1,630 2,330 1,833
Other (loss) income, net................................................................ (8,545) 2,298 2,349
----------- ---------- ----------
Total other (loss) income.............................................................. (94,023) 61,303 17,942
----------- ---------- ----------
OTHER EXPENSES:
Compensation and employee benefits...................................................... 36,787 14,404 4,464
Loan service fees and expenses paid to affiliate........................................ 39,277 28,126 5,176
Professional services................................................................... 9,306 3,171 700
Occupancy............................................................................... 2,461 1,125 339
FDIC insurance premiums................................................................. 896 1,049 2,381
Corporate travel and development........................................................ 6,851 3,439 519
Depreciation and amoritization.......................................................... 3,995 495 164
Other general and administrative expense................................................ 13,839 4,923 1,703
----------- ---------- ----------
Total other expenses................................................................... 113,412 56,732 15,446
----------- ---------- ----------
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT) PROVISION........................................ (205,715) 25,801 5,092
INCOME TAX (BENEFIT) PROVISION............................................................. (4,056) 10,637 125
----------- ---------- ----------
NET (LOSS) INCOME.......................................................................... $ (201,659) $ 15,164 $ 4,967
=========== ========== ==========
NET (LOSS) INCOME PER SHARE:
Basic................................................................................... $(18.93) $1.79 $1.07
Diluted................................................................................. $(18.93) $1.69 $1.07
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic................................................................................... 10,676,685 7,569,808 4,638,926
Diluted................................................................................. 10,676,685 8,019,299 4,647,068
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................................... $ (201,659) $ 15,164 $ 4,967
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Market valuation adjustments................................... 113,711 --
Provision for estimated losses on loans..................................... 13,338 1,991 16,549
Provision for real estate owned losses...................................... 6,225 1,944
Write-down of mortgage servicing rights..................................... 13,704 -- --
Depreciation and amortization............................................... 3,995 491 165
Provision (benefit) for deferred income taxes............................... 4,437 (524) (4,013)
Gain on sale of real estate owned........................................... (14,586) (8,574) (623)
Origination of loans held for sale.......................................... (745,940) (77,918)
Purchase of loans held for sale............................................. (507,046) (673,234) (28,826)
Proceeds from sale of loans held for sale................................... 361,548 476,890 --
Gain on sale of loans....................................................... (19,425) (39,049) (11,538)
Gain on sale of securities.................................................. (4,024) (3,742) --
Gain on trading securities.................................................. (1,630) (2,330) (1,833)
Amortization of discounts and deferred fees................................. (19,031) (28,952) (3,324)
FHLB stock dividend......................................................... (301) (241) (111)
Other....................................................................... 5,920
Change in:
Trading account securities.................................................. 23,730 (12,098) (22,708)
Accrued interest receivable................................................. 1,173 (3,124) (475)
Prepaid expenses and other assets........................................... (31,833) (29,030) (7,626)
Due from affiliate, net..................................................... 64,643 (11,224) (1,296)
Accounts payable and other liabilities...................................... 28,829 (2,027) 13,013
Other....................................................................... -- (600)
----------- --------- ---------
Net cash used in operating activities................................... (904,222) (395,587) (48,279)
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans and discounted loans......................................... (561,032) (519,451) (482,506)
Loan repayments................................................................ 284,376 175,297 56,460
Loan originations........................................................ (65,829) (2,280)
Proceeds from sale of loans.................................................... 1,193,378 31,150 312,949
Purchase of mortgage-backed securities available for sale...................... (133,092) (308,387) (24,537)
Repayments of mortgage-backed securities available for sale.................... 38,602 16,680 2,226
Proceeds from sale of mortgage backed securities available for sale............ 249,272 24,556 --
Proceeds from maturity of securities held to maturity.......................... 1,500 5,654
Purchase of mortgage-backed securities held to maturity........................ -- (16,079)
Repayments of mortgage-backed securities held to maturity...................... 4,807 3,169 1,820
Purchases of FHLB stock........................................................ (1,833) (2,447)
Purchases of real estate owned................................................. (18,355) (47,445) (67,344)
Proceeds from sale of real estate owned........................................ 254,216 97,868 16,482
Purchases of leasehold improvements and equipment.............................. (5,803) (2,681) (195)
Other, net..................................................................... (14,731) -- 81
---------- --------- ---------
Net cash provided by (used in) investing activities..................... $1,225,809 $(529,577) $(199,716)
---------- --------- ---------
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1998 1997 1996
-------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits............................................. $ 147,832 $ (139,016) $ 198,090
Net proceeds from issuance of common stock...................................... 61,811 -- 38,097
Repurchase of common stock...................................................... (2,728) (124) --
Proceeds from short-term borrowings............................................. 1,814,937 1,618,113 618,733
Repayments of short-term borrowings............................................. (2,356,565) (749,237) (534,109)
Proceeds from notes payable..................................................... 109,245 75,000
Redemption of preferred stock.................................................. (29,521)
----------- ------------ -----------
Net cash (used in) provided by financing activities.......................... (364,234) 838,981 395,811
----------- ---------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH (42,647)
EQUIVALENTS....................................................................... (86,183) 147,816
CASH AND CASH EQUIVALENTS:
Beginning of year............................................................... 66,115 152,298 4,482
----------- ---------- ---------
End of year..................................................................... $ 23,468 $ 66,115 $ 152,298
=========== ========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION--Cash paid during the year for:
Interest........................................................................ $ 52,655 $ 77,994 $ 21,746
Income taxes, net............................................................... 1,708 9,420 216
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned acquired in settlement of loans.................. 122,704 135,205 21,751
Transfer of securities previously classified as trading to available for sale... 16,869
NONCASH FINANCING ACTIVITIES:
Exchange of notes payable for common stock...................................... -- 11,000
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 (DEFICIT)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
------------------- --------------------- ------------------
Shares Amount Shares Amount Shares Amount
-------- --------- ---------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996 -- $ -- 1,300,863 $ 6,800 -- $ --
Comprehensive income:
Net income....................
Unrealized loss on available
for sale securities-net
of tax........................
Reclassification adjustment
for losses on
securities on securities
included in net income
Total comprehensive income.......
Exchange of subordinated debt 1,606,618 11,000
for common stock................
Issuance of common stock......... 4,662,519 38,097
------------------------------------------------------------
BALANCE, December 31, 1996........ -- -- 7,570,000 55,897 -- --
Comprehensive income:
Net income....................
Unrealized loss on
available-for- sale
securities....................
Reclassification adjustment
for losses on
securities on securities
included in net income........
Total comprehensive income.......
Treasury stock acquired.......... 5,000 (124)
Issuance of preferred stock...... 27,500 27,500
Preferred stock dividend.........
------------------------------------------------------------
BALANCE, December 31, 1997........ 27,500 27,500 7,570,000 55,897 5,000 (124)
Comprehensive loss:
Net loss......................
Unrealized loss on available
for sale securities...........
Foreign currency translation...
Reclassification adjustment
for losses on securities
on securities included in
net income....................
Total comprehensive loss.........
Treasury stock acquired.......... 180,000 (2,728)
Preferred stock dividend.........
Preferred stock redemption....... (27,500) (27,500)
Common stock issuance, net of 3,500,000 61,811
offering costs of $8,189........
------------------------------------------------------------
BALANCE, December 31, 1998 -- $ -- 11,070,000 $117,708 185,000 $(2,852)
<CAPTION>
Retained Accumulated Other
Earnings Comprehensive
(Deficit) Income (Loss) Total
------------------ ---------------------- ----------
<S> <C> <C> <C>
BALANCE, January 1, 1996 $ (16) $ 7,039
$ 255
Comprehensive income:
Net income.................... 4,967 4,967
Unrealized loss on available (1,914) (1,914)
for sale securities-net
of tax........................
Reclassification adjustment 1,833 1,833
for losses on ---------
securities on securities
included in net income
Total comprehensive income....... 4,886
Exchange of subordinated debt 11,000
for common stock................
Issuance of common stock......... 38,097
-----------------------------------------------------
BALANCE, December 31, 1996........ 5,222 (97) 61,022
Comprehensive income:
Net income.................... 15,164 15,164
Unrealized loss on (8,908) (8,908)
available-for-sale
securities....................
Reclassification adjustment 6,072 6,072
for losses on ---------
securities
included in net income........
Total comprehensive income....... 12,328
Treasury stock acquired.......... (124)
Issuance of preferred stock...... 27,500
Preferred stock dividend......... (1,604) (1,604)
-----------------------------------------------------
BALANCE, December 31, 1997........ 18,782 (2,933) 99,122
Comprehensive loss:
Net loss...................... (201,659) (201,659)
Unrealized loss on available (48,434) (48,434)
for sale securities...........
Foreign currency translation... 1,287 1,287
Reclassification adjustment 25,723 25,723
for losses on securities ---------
on securities included in
net income....................
Total comprehensive loss......... (223,083)
Treasury stock acquired.......... (2,728)
Preferred stock dividend......... (417) (417)
Preferred stock redemption....... (27,500)
Common stock issuance, net of 61,811
offering costs of $8,189........
-----------------------------------------------------
BALANCE, December 31, 1998 $(183,294) $(24,357) $ (92,795)
</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 share amounts)
1. PROPOSED RESTRUCTURING OF THE COMPANY
The recent dramatic events in the financial markets, as discussed below in
Notes 2 and 3, which included a significant reduction in valuations of, and
liquidity for, mortgage-backed securities and loans, have had a significant
adverse impact on the liquidity and financial condition of Wilshire Financial
Services Group Inc. and subsidiaries, collectively ("WFSG" or the "Company").
The decline in valuations resulted in substantial collateral calls from the
Company's lenders in 1998 and continuing into 1999, which reduced the Company's
cash position and eventually prompted asset sales at depressed prices to meet
these calls and to provide liquidity. While these asset sales have improved the
liquidity position of the Company, the market for mortgage-backed securities
(particularly subordinate mortgage-backed securities) and loans has not fully
recovered and the financial markets in which the company operates generally
continue to be volatile. Further, certain of the Company's lenders have
expressed concern about continued lending given these market conditions and
recent losses incurred by the Company.
In order to address these liquidity concerns and to improve the Company's
financial condition, management entered into discussions with an unofficial
committee of holders of a majority of the Company's $184.2 million in
outstanding publicly issued notes (the "Old Notes") and its financial advisors
in the Company and legal counselors concerning a restructuring of the Company's
obligations. Following extensive discussions, the Company and the unofficial
committee agreed to a restructuring of the Company whereby (i) the noteholders
would exchange their notes for new common stock in the Company; (ii) existing
holders of common stock in the Company would exchange all their shares for 0.50%
of new common stock and (iii) pending consummation of the restructure, the
noteholders would forbear from declaring certain defaults which resulted from
the net losses incurred by the Company and the actions taken by the Company to
meet collateral calls.
In connection with the restructuring, the Company filed a voluntary petition
for relief under Chapter 11 of the U.S. Bankruptcy Code on March 3, 1999. It is
currently anticipated that this reorganization plan will be confirmed by the
Bankruptcy Court in the District of Delaware on or about April 12, 1999. There
can be no assurance that confirmation of the plan will occur on that date or
whether the form and structure of the plan will materially change from its
current state or that the restructuring will achieve the intended economic
effect.
Management believes that this restructuring will significantly improve the
Company's financial position by reducing indebtedness by $184.2 million, the
interest cost associated with that indebtedness, and significantly increasing
the Company's stockholders' equity.
As part of the restructuring plan, the Company will exchange the stock or
assets of Wilshire Servicing Corporation ("WSC"), a wholly owned subsidiary of
the Company, for 100% of the voting common stock (representing 50.01% of the
economic value) of WCC Inc., a newly formed entity which will engage in
servicing operations previously performed by Wilshire Credit Corporation
("Credit") an affiliated entity which is currently owned by the two largest
stockholders of the Company and WSC. The remaining 49.99% economic interest of
WCC Inc. will be held by a designee of a third party financier, who has
previously provided approximately $160 million in loans to Credit. The designee
will take control of Credit as part of the restructuring. In exchange for its
49.99% interest in WCC Inc., the designee will contribute the assets of Credit
to WCC Inc.
The reorganization plan also contemplates the receipt of debtor-in-
possession ("DIP") financing of up to $10 million from Wilshire Real Estate
Investment Trust Inc. ("WREIT"). There can be no assurance that WREIT has the
ability to fund the DIP facility or that such transactions will ultimately be
consummated. The DIP financing will be secured by the stock of First Bank of
Beverly Hills, FSB, a wholly owned subsidiary of the Company (see Note 4).
In addition, prior to the reorganization, the Company and the unofficial
noteholders committee negotiated a compromise and settlement of a claim held by
WREIT (see Note 14) against the Company of approximately $18.4 million.
F-9
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
Under this compromise and settlement, WREIT will receive new 6% pay in kind
notes due 2006 of the reorganized company having a principal amount equal to
such claim only to the extent WREIT funds the DIP facility.
F-10
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
To the extent WREIT does not fund or only funds a portion of the DIP
facility, a proportionate amount of the WREIT claim will be treated pari passu
with the Old Notes and the amount of the new 6% notes will be proportionately
reduced. (see Note 14).
The matters discussed above and below in Notes 2 and 3 raise substantial
doubt about the Company's ability to continue as a going concern. In the event
the plan of reorganization is confirmed, the continuation of the business is
dependent on the Company's ability to achieve successful future operations. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
2. GENERAL MARKET CONDITIONS
Beginning in August 1998, and more significantly since mid-October 1998, the
global financial marketplace has experienced overwhelming changes and
volatility. The market for loans and mortgage-backed securities and, in
particular, subordinate credit related tranches of these securities, has
experienced dramatically widening spreads from U.S. Treasury instruments.
Liquidity problems affecting certain Wall Street firms, hedge funds and other
financial instruments investors have exacerbated this market phenomenon through
forced liquidation of their assets. This led to an increased need for liquidity
at the Company both to meet collateral margin calls on short term facilities
used to finance loans and mortgage-backed securities and as a preemptive measure
to protect against future mortgage-backed securities spread distortions.
As a result, the Company sold approximately $580.0 million of its loans and
mortgage-backed securities during the fourth quarter of 1998 in order to meet
collateral calls and reduce outstanding debt. The Company reported two major
dispositions of assets on Current Report Form 8-K during the fourth quarter of
1998. The first reported disposition included (a) 68 classes of subordinate
mortgage-backed securities for proceeds of approximately $63.3 million, (b) a
pool of discounted loans for proceeds of $211.8 million and (c) mortgage
servicing rights for proceeds of $1.4 million. The second disposition of assets
reported on Current Report Form 8-K was the sale of a pool of non-discounted
mortgage loans for proceeds of approximately $232.5 million. Subsequent to
December 31, 1998, the Company sold loans held for sale with carrying value of
approximately $78.8 million and discounted loans with carrying value of
approximately $30.3 million. As a result of these sales, short term borrowings
were reduced $106.8 million. The Company reflected the losses from these
transactions in Market Valuation Adjustments (see Note 3). Management believes
that the Company's losses would have been far less severe than those
experienced, had the Company not been forced to sell these assets, but rather
been able to hold these assets until market conditions stabilized.
In addition to these significant asset sales, the Company, as a result of
reviewing its current operations, reduced its workforce by approximately 33%
during the fourth quarter of 1998, primarily resulting from the Company's
strategic decision to eliminate its retail residential mortgage and manufactured
housing origination activity. During 1998, these origination activities
accounted for approximately $95.5 million of the Company's $811.8 million of
origination production. The Company has written-off approximately $1.2 million
of goodwill, included in depreciation and amortization in the Consolidated
Statements of Operations, established upon acquisition of the residential real
estate mortgage origination branches.
Additionally, during 1998, the Company was negotiating with a European
insurance company to acquire its wholly owned subsidiary, which holds a
portfolio of loans and other financial instruments. The Company had incurred
approximately $8.2 million of capitalized costs relating to the proposed
transaction, consisting of a non-refundable deposit of approximately $7.2
million and approximately $1.0 million of deal costs. In the fourth quarter of
1998, this transaction was not consummated. As a result, the $8.2 million of
costs were written-off at that time, which is included in other income (loss) in
the Consolidated Statements of Operations for the year ended December 31, 1998.
The Company has also reduced the carrying value of certain capitalized
mortgage servicing rights due to faster than expected prepayments of the
underlying loans and revised estimates of future prepayments and other factors.
The Company recorded total write-downs related to servicing rights of $13.7
million in determining net loss for the year ended December
F-11
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
31, 1998. The Company has also evaluated the impact of the current market
conditions on the estimated fair market values of the remainder of its mortgage-
backed securities portfolio and reflected in market valuation adjustments
discussed below that amount ($9.2 million) which has been deemed by management
to represent other than temporary impairment as of December 31, 1998.
3. MARKET VALUATION ADJUSTMENTS
As noted above, during the fourth quarter of 1998 and continuing into 1999,
the Company sold a significant amount of its loans and mortgage-backed
securities to meet collateral calls and increase liquidity. The declines in the
values of the assets included in these sales have been recognized and classified
as market valuation adjustments in the statement of operations in determining
net loss for the year ended December 31, 1998. In addition, the Company has
evaluated the impact of the current market conditions on the estimated fair
market values of the remainder of its mortgage-backed securities portfolio and
reflected in market valuation adjustments any impairment deemed by management to
represent other than temporary impairment as of December 31, 1998. Management's
evaluation of other than temporary impairment considers the magnitude and trends
in the decline of the fair market values of securities, and the Company's
ability to collect all amounts due according to the contractual terms. If
future market conditions continue to negatively impact the value of these
assets, additional other than temporary impairments may be incurred.
During the fourth quarter of 1998, the Company sold discounted loans with a
carrying value of $223.1 million, loans held for sale with a carrying value of
$277.6 million and mortgage-backed securities with carrying value of $77.9
million. As a result of these sales, short term borrowings were reduced $554.6
million at the time of these transactions.
Total market valuation adjustments recorded in net loss for the year ended
December 31, 1998 was approximately $113.7 million. Of this amount, $22.2
million relates to sales of mortgage-backed securities, $9.2 million relates to
other than temporary impairment of mortgage-backed securities remaining in the
portfolio, $36.6 million relates to sales of loans held for sale, discounted
loans and real estate owned, $15.3 million relates to hedge losses previously
deferred in the Company's Consolidated Statement of Financial Condition (see
Note 12, Commitments, Contingencies and Off-Balance Sheet Risk), and $30.4
million relates to valuation allowances provided by management relating to loans
held for sale and discounted loans held by the Company as of December 31, 1998.
Management cannot readily predict the impact of any future adverse market
conditions on asset sales and the impact of such potential future events on the
operations, financial condition and capital of the Company.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--The operations of 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''). See Notes 1 and 15 regarding the pledge of the stock
of FBBH to secure the DIP facility in 1999.
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 loans through correspondents and
operates a merchant bankcard processing business. The Company's primary sources
of revenue are from interest income from real estate and consumer loans acquired
in purchase transactions, mortgage-backed securities, income from loan sale and
securitization transactions, and, to a lesser extent, revenues from 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 and the United Kingdom and Ireland (the
''European Operations'') in 1996. The total assets of these operations as of
December 31, 1998 and 1997 were $48,226 and $63,665, respectively, consisting
F-12
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
primarily of real estate and real estate secured loans. Gross revenues from the
Company's European operations for 1998 and 1997 totaled $8,612 and $2,580
respectively. Amounts for Ireland have been combined with the United Kingdom.
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 estimates include valuation allowances for
loans, real estate owned and net deferred tax assets, 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, the evaluation of other than temporary impairment and the
selection of yields utilized to recognize interest income on certain mortgage-
backed securities. Estimates and assumptions also effect the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
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 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 market 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 market values with unrealized holding gains and losses on
securities reported, net of tax, when applicable, as a separate component of
comprehensive income in stockholders' equity (deficit). Holding gains and
losses on securities classified as available for sale that are determined by
management to be other than temporary in nature are reclassified from the
unrealized holding losses included in comprehensive (loss) income to current
operations. 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
F-13
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
(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 unaccreted discount and allowance for loan losses established
for those loans. Unaccreted discounts represent the portion of the difference
between the purchase price and the principal face amount on specific loans that
is available for accretion to interest income. The allowance for loan losses
includes valuation allowances for estimated losses against the cost of the loans
that are established at acquisition and for subsequent valuation adjustments
that are provided for through current period earnings and are based on
discounted future cash flows or the fair value of the underlying real estate
collateral for collateral dependent loans. 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. The
allocated specific valuation allowances are included in the allowance for loan
losses. Where appropriate, discounts are accreted into interest income on a
cash basis.
In addition, for loans purchased by the Bank, the initial discounts are
further segregated into a valuation allowance for inherent 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.
Loans other than discounted loans are presented in the Consolidated Statements
of Financial Condition in substantially the same manner as discounted loans.
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 value is less
than cost, a valuation allowance is recorded through a charge to earnings to
reduce the carrying value to fair value.
Gains or losses on loans sold through securitization or other transactions are
based on the difference between the cash proceeds received on the sales or
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 and the 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 portfolios.
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.
F-14
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
It is the Company's policy to establish an allowance for uncollectible
interest on 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.
Mortgage Servicing Rights--The Company capitilizes mortgage servicing rights
retained when the mortgage loans are either sold or securitized, based upon the
allocation of loan basis between the loans sold or securitized and the servicing
rights retained based on their relative fair market values. Servicing assets and
liabilities are subsequently amortized in proportion to and over the period of
estimated net servicing income. Impairment of mortgage servicing rights is
evaluated by comparing the carrying amounts to the estimated fair values. The
Company had mortgage servicing rights with a carrying value of $2,346 as of
December 31, 1998. During the year ended December 31, 1998, the Company wrote-
down mortgage servicing rights by $13,704 as a result of faster than expected
prepayments and management's revised estimates of future prepayments and other
factors.
The Company estimates the relative fair market values 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 1998 ranged from 4.0 to 6.0. The fair market values
of subordinated interests is determined by management based on market
assumptions for similar securitization transactions.
Interest-Rate Swaps--Interest-rate swap agreements used to manage interest-
rate risk are treated, where appropriate, 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 the
accumulated translation adjustments as a separate component of comprehensive
(loss) income within stockholders' equity (deficit). The Company had unrealized
gains from foreign currency translation adjustments of $1,287 included in
accumulated other comprehensive (loss) income, net, as of December 31, 1998. As
of December 31, 1997 such adjustments were not material to the consolidated
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.
F-15
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
Leasehold improvements are amortized over the lives of the respective leases or
the service lives of the improvements, whichever is shorter.
Income Taxes--The provision (benefit) for income taxes is based on income
(loss) recognized for financial statement purposes. The Company and its
eligible subsidiaries file a consolidated U.S. federal income tax return.
Certain foreign subsidiaries which are consolidated for financial reporting are
not eligible to be included in the consolidated U.S. federal income tax return
and separate provisions for income taxes have been determined for these
entities. Deferred income taxes result from temporary differences between
financial statement income and that recognized for tax return purposes,
carryforwards of losses and income tax credits. A valuation allowance is
recorded if it is more likely than not that a deferred tax asset will not be
realized.
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.
(Loss) Income per Share-- Basic (loss) income per share ("EPS") excludes
dilution and is computed by dividing income (loss) available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings (loss) of the Company.
New Accounting Pronouncements--SFAS No. 130, "Reporting Comprehensive Income,"
requires companies to report all changes in equity during a period, except those
relating to investment by owners and distributions to owners, in a financial
statement for the period in which they are recognized. The Company has adopted
this statement retroactively and chosen to disclose comprehensive income (loss)
for the years ended December 31, 1998, 1997 and 1996 which encompasses net
income (loss), unrealized holding losses on available for sale securities and
currency translation adjustments, on the face of the accompanying Consolidated
Statements of Stockholders' Equity (Deficit).
In 1998, the Company adopted SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," which establishes standards for the way
that public entities report selected 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. The segment information required by this pronouncement is
disclosed in the notes to the Company's consolidated financial statements (See
Note19).
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
consolidated statement of financial condition as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Accounting for qualifying hedges allows a
derivative's gain or loss to be offset with the related results on the hedged
item in the consolidated statement of operations, or in certain circumstances
can be deferred in other comprehensive income and later offset with the results
of the hedged item in the Consolidated Statement of Operations. A company must
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting. Management expects that the Company will adopt SFAS
No. 133 on January 1, 2000. Management has not yet quantified the impact of
adopting SFAS No. 133 on its financial statements and has not determined the
method of its adoption of SFAS No. 133. However, the Statement could increase
volatility in earnings and other comprehensive income.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise", an amendment of SFAS No. 65. This
Statement is effective for the first fiscal quarter beginning after December 15,
1998. This Statement standardizes how
F-16
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
mortgage banking firms account for certain securities and other interests they
retain after securitizing mortgage loans that were held for sale. Adoption of
this pronouncement is not expected to have a material impact on the Company's
consolidated financial condition or results of operations.
Reclassifications--Certain items in the consolidated financial statements for
1997 and 1996 were reclassified to conform to the 1998 presentation.
5. 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, 1998 and 1997 are shown below. Fair market value estimates were
obtained from independent parties.
<TABLE>
<CAPTION>
Estimated
Gross Gross Fair
Amortized Unrealized Unrealized Market
Cost Gains Losses Values
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1998
Available-for-sale mortgage-backed securities........................ $140,107 $2,317 $27,961 $114,463
======== ====== ======= ========
Held-to-maturity:
U.S. Treasury notes............................................... $ 5,962 $ 250 $ $ 6,212
Mortgage-backed securities........................................ 13,580 69 13,511
-------- ---------- ------- --------
Total held-to-maturity......................................... $ 19,542 $ 250 $ 69 $ 19,723
======== ====== ======= ========
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
======== ====== ======= ========
</TABLE>
During the year ended 1998, the Company reclassified securities with carrying
value of $16,869 from trading account to available for sale.
The amortized cost of the securities reflects the impairment adjustments
deemed to be other than temporary as discussed in Note 3, above. The total
amount of impairment write downs were $31.4 million for the year ending December
31, 1998, and have been reflected as market valuation adjustments in the
accompanying consolidated statement of operations. There were no impairment
write-downs recognized during the year ended December 31, 1997.
At December 31, 1998, the net unrealized loss on available-for-sale mortgage-
backed securities totaled approximately $25.6 million. In the opinion of
management, these losses represent temporary declines in the fair market values
of such securities and do not represent other than temporary declines in such
market values. Should the nature and duration of these market value declines
for such securities change in the future, such changes in management's estimates
will be reflected as losses in the Company's Consolidated Statements of
Operations at that time.
Securities held to maturity other than mortgage-backed securities at December
31, 1998 and 1997 had contractual maturities of one to five years.
F-17
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
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, 1998 and 1997, securities, with carrying values of $123,546
and $337,933, respectively, and market values of approximately $123,736 and
$338,043, respectively, were pledged to secure merchant bankcard transactions,
short-term borrowings and lines of credit (see Note 10). Of the total securities
pledged, securities with fair values of approximately $133,961 and $338,043,
were held by a third-party custodian as of December 31, 1998 and 1997,
respectively.
Gains and losses from the sale of securities available for sale were $10,062
and $6,038, respectively during the year ended December 31, 1998. 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 that period. There were no
gains or losses on sale of securities available for sale during the year ended
December 31, 1996.
6. 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,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Loans
Real estate loans:
One to four units.................................................................... $259,150 $ 46,968
Over four units...................................................................... 65,482 55,216
Commercial........................................................................... 125,809 62,781
Land................................................................................. 457 1,172
-------- --------
Total loans secured by real estate................................................... 450,898 166,137
Other loans............................................................................. 16,122 15,196
-------- --------
467,020 181,333
Less:
Allowance for loan losses............................................................ (18,163) (23,940)
Premium (discount) on purchased loans and deferred fees.............................. 6,704 (3,485)
-------- --------
$455,561 $153,908
======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Discounted Loans
Real estate loans:
One to four units.................................................................... $ 93,133 $ 507,206
Over four units...................................................................... 2,188 16,300
Commercial........................................................................... 17,964 67,474
Land................................................................................. 3,937 11,896
--------- ---------
Total loans secured by real estate................................................... 117,222 602,876
Other loans............................................................................. 227,844 238,152
--------- ---------
345,066 841,028
Less:
Market valuation adjustments......................................................... (22,455)
Allowance for loan losses............................................................ (262,026) (87,229)
Discount on purchased loans.......................................................... (8,596) (290,444)
--------- ---------
$ 51,989 $ 463,355
========= =========
</TABLE>
F-18
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Loans Held for Sale
Real estate loans:
One to four units.................................................................... $199,302 $259,633
Over four units...................................................................... 1,597 13,085
Commercial........................................................................... 25,598 25,521
Land................................................................................. 3,434 5,659
-------- --------
Total loans secured by real estate................................................... 229,931 303,898
Other loans............................................................................. 70,219 34,247
-------- --------
300,150 338,145
Less:
Market valuation adjustments......................................................... (7,945)
Allowance for loan losses, deferred fees, and discounts and premium on (7,533)
purchased loans.................................................................... -------- (27,451)
--------
$284,672 $310,694
======== ========
</TABLE>
As of December 31, 1998 and 1997 loans with adjustable rates of interest were
$383,264 and $388,783, respectively, and loans with fixed rates of interest were
$728,972 and $971,723, 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, 1998 and 1997, loans with unpaid principal balances of
approximately $380,393 and $832,242, respectively, were pledged to secure credit
line borrowings and repurchase agreements included in short-term borrowings (see
Note 10).
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year..................................................... $ 118,275 $ 37,555 $ 25,651
Allocations of purchased reserves:
at acquisition.............................................................. 372,136 174,920 10,751
at disposition.............................................................. (219,148) (97,397) (17,218)
Recoveries..................................................................... 2,818 1,206 1,822
Provision for estimated losses on loans........................................ 13,338 1,991 16,549
Currency translation adjustment................................................ 1,449
--------- ----------- -----------
Balance end of year............................................................ $ 288,868 $118,275 $ 37,555
========= ======== ========
</TABLE>
At December 31, 1998 and 1997, the Bank had impaired loans (other than
discounted loans) totaling $5,194 and $26,445, respectively, and had recorded
specific valuation allowances to measure the impairments of those loans totaling
$869 and $5,560, respectively. At December 31, 1998 and 1997, the Bank had
impaired loans totaling $6,963 and $15,771, respectively, with no recorded
specific valuation allowances. At December 31, 1998 and 1997, the nonbank
subsidiaries had impaired loans (other than discounted loans) with unpaid
principal balances of $10,445 and $48,762, respectively, and a carrying value,
net of purchase discount, of $7,890 and $28,866, respectively, which is below
fair value. The average unpaid principal balances of impaired loans during the
years ended December 31, 1998 and 1997 were $102,399 and $60,857, respectively.
Interest income recognized on impaired loans during 1998, 1997 and 1996 was $95,
$3,245 and $1,746, respectively, based on cash payments. These amounts exclude
consideration of single-family residential and other loan pools evaluated for
impairment on a pooled basis.
F-19
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
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.
Management's estimates are utilized to determine the adequacy of the allowance
for loan losses. Estimates are 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, 1998 and 1997 are adequate to absorb inherent losses 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.
7. 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,
-----------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Valuation allowance for losses on real estate owned, $ 5,070
beginning of year............................................................ $ -- $ 1,193
Valuation allowance on real estate sold.......................................... (4,548) (3,662) (3,322)
Allocation of purchase discount.................................................. (979) 6,788 2,129
Provision for losses............................................................. 2,136 1,944
------- ------- ---------
Valuation allowance for losses on real estate owned,
end of year.................................................................. $ 1,679 $ 5,070 $ --
======= ======= =======
</TABLE>
Real estate owned with a net carrying value of $31,414 and $40,706 at December
31, 1998 and 1997, respectively, collateralizes credit line borrowings (see Note
10).
8. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consist of:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
----------- ------------
<S> <C> <C>
Leasehold improvements........................................................................ $ 762 $ 698
Furniture and equipment....................................................................... 8,439 2,927
------- -------
Total cost.................................................................................... 9,201 3,625
Accumulated depreciation and amortization..................................................... (2,507) (1,118)
------- -------
$ 6,694 $ 2,507
======= =======
</TABLE>
F-20
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
9. DEPOSITS
Deposits consist of:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Passbook accounts.............................................................................. $ 293 $ 329
Money market accounts.......................................................................... 2,060 1,563
NOW/checking................................................................................... 10,934 5,959
Time deposits:
Less than $100.............................................................................. 353,736 280,260
$100 or more................................................................................ 143,407 74,487
-------- --------
Total deposits................................................................................. $510,430 $362,598
======== ========
</TABLE>
A summary of time deposits as of December 31, 1998, by maturity, is as
follows:
<TABLE>
<S> <C>
1999.......................................................................................... $423,127
2000.......................................................................................... 63,610
2001.......................................................................................... 8,615
2002........................................................................................... 1,791
--------
$497,143
========
</TABLE>
The interest rate characteristics of certain deposits have been changed
utilizing interest rate swaps. See Note 12 for the specific terms and rates on
instruments outstanding.
10. NOTES PAYABLE AND SHORT-TERM BORROWINGS
Notes payable at December 31, 1998 and December 31, 1997 are unsecured, bear
interest at 13% and mature in 2004. The costs associated with issuing the notes
have been capitalized and are included in prepaid expenses and other assets in
the consolidated statement of financial condition. As of December 31, 1998 these
costs totaled $11,874 and are being amortized over the life of the notes on a
straight-line basis. See Note 1 regarding the proposed restructuring of the
Company. Should the restructuring occur, the capitalized debt issuance costs
will be written off as part of the conversion of the Notes to equity of the
Company.
At December 31, 1997 the interest rate characteristics of a portion of these
notes had been altered using an interest rate swap. The terms of this swap are
discussed in Note 12. There was no such swap in effect as of December 31, 1998.
Short-term borrowings at December 31, 1998 and 1997 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,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Average balance during the period................................................... $ 972,376 $586,370
Highest amount outstanding during the period........................................ $1,248,797 $966,500
Average interest rate-during the period............................................. 7.6% 7.5%
Average interest rate-end of period................................................. 6.8% 7.3%
</TABLE>
F-21
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
The Company had 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. This facility
matured on March 31, 1999 and the Company does not expect it to be extended.
The Company has repurchase agreements outstanding that mature monthly and roll
into new 30 day repurchase agreements. The Company does not meet all of the
financial covenants of these transactions including stockholders' equity
requirements; however, the lenders have continued to roll the repurchase
agreements. As of December 31, 1998, the Company had approximately $7,854 of
outstanding lender collateral calls. In addition, the Company has discussed
additional lending arrangements with investment banks who may provide financing
on a transaction by transaction basis. There can be no assurance that lenders
will not change material terms, including, but not limited to, advance rates and
interest rates, or whether any such additional financing will materialize.
F-22
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
11. 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,
------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Domestic............................................................................ $(184,332) $29,689 $5,092
Foreign............................................................................. (21,383) (3,888) --
--------- ------- ------
Total............................................................................ $(205,715) $25,801 $5,092
========= ======= ======
</TABLE>
The components of income tax (benefit) provision were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
Current tax (benefit) provision::
Federal.......................................................................... $(7,963) $ 9,019 $ 3,208
State............................................................................ (530) 2,083 930
Foreign.......................................................................... 59 --
----------- ------- -------
Total current tax (benefit) provision......................................... (8,493) 11,161 4,138
------- ------- -------
Deferred tax (benefit) provision:
Federal.......................................................................... 3,390 (493) (3,135)
State............................................................................ 847 169 (878)
Foreign.......................................................................... 200 (200) --
------- ------- -------
Total deferred tax provision (benefit)........................................ 4,437 (524) (4,013)
------- ------- -------
Total income tax (benefit) provision.......................................... $(4,056) $10,637 $ 125
======= ======= =======
</TABLE>
The current tax benefit results from a carryback of the 1998 net operating
loss, net of taxes paid on REMIC excess inclusion income.
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,
-----------------------------------
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Federal income tax (benefit) provision at statutory rate............................ (35.0)% 35.0% 35.0%
State taxes, net of federal tax effect.............................................. (9.4) 5.7 8.5
Federal credit for foreign taxes.................................................... (0.2) --
Foreign losses with no federal tax benefit.......................................... 0.8 (2.5) --
Subpart F income.................................................................... 0.3
Valuation allowance for deferred tax asset.......................................... 42.0 1.9 (33.9)
Change in prior period estimate..................................................... -- (4.7)
Other............................................................................... (0.7) 1.3 (2.4)
------ ---- -----
Effective income tax rate........................................................... (2.0)% 41.2% 2.5%
====== ==== =====
</TABLE>
Deferred income taxes 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:
F-23
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Loans-purchase discounts, allowance for loan losses $ 8,875 $ 3,041
and market valuation adjustments.......................................................
Capitalized mortgage servicing rights.................................................... 1,935
Purchase accounting...................................................................... 217
Depreciation and amortization............................................................ 164 47
Unrealized loss on available for sale securities......................................... 9,901 2,225
Unrealized loss on investment in WREIT................................................... 1,367
Pass through income...................................................................... 2,686
Net operating loss carryforward.......................................................... 80,198 681
State taxes.............................................................................. 263
Accrued expenses......................................................................... 3,415
Capitalized costs........................................................................ 1,264
Goodwill................................................................................. 390
Capital loss carryforward................................................................ 6,203
Other.................................................................................... 207 223
-------- -------
Gross deferred tax assets............................................................. 114,182 9,120
-------- -------
Deferred tax liabilities:
Market adjustment on mortgage-backed securities and hedge instruments.................... (15,388)
Deferred loan fees....................................................................... (138) (196)
FHLB stock dividends..................................................................... (73) (443)
State taxes.............................................................................. (7)
Unrealized gains on trading securities................................................... (1,057)
Other.................................................................................... (587) --
-------- -------
Gross deferred tax liabilities........................................................ (16,186) (1,703)
-------- -------
Total deferred tax asset................................................................. 97,996 7,417
Valuation allowance...................................................................... (97,996) (485)
-------- -------
Net deferred tax asset................................................................ $ $ 6,932
========== =======
</TABLE>
The Company has not provided for U.S. deferred income taxes on undistributed
earnings of foreign subsidiaries as those earnings are intended to be
permanently reinvested in the foreign jurisdiction.
FASB Statement No. 109, "Accounting for Income Taxes," requires that deferred
tax assets be reduced by a valuation allowance if it is more likely than not
that some portion or all of the deferred tax asset will not be realized.
Management believes sufficient uncertainty exists regarding the realizability of
the U.S. and foreign items that a valuation allowance is required. During 1998,
the net increase in the valuation allowance was $97.5 million, $11.0 million of
this relates to unrealized losses recorded in stockholders' equity. The Company
will review the adequacy of the valuation allowance on an ongoing basis and will
recognize these benefits only as a complete reassessment indicates that it is
more likely than not that the benefits will be realized.
The Company has U.S. net operating loss carryforwards of approximately $158.9
which may be available to offset regular taxable U.S. income during the
carryforward period (through 2018). The Company also has a capital loss
carryforward of $13.9 for income tax purposes that expires in 2002 and 2003.
Should the Company's proposed restructuring occur as discussed in Note 1, the
future utilization of these losses will be subject to significant limitations as
a result of a shift in ownership of the Company to the bondholders. In
addition, the losses may be reduced by any cancellation of debt effects.
The Company has foreign tax net operating loss carryforwards of $5.9 in the
U.K., $1.7 in Ireland and $13.9 in France (expiring in 2002 and 2003). The
Company also has a capital loss carryforward of $4.3 in France expiring in 2007.
As noted
F-24
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
above, a valuation allowance has been established to offset all U.S., state and
foreign net operating loss and capital loss carryforwards.
12. 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 31,1998:
<TABLE>
<S> <C>
1999............................................................................. $1,388
2000............................................................................. 811
2001............................................................................. 606
2002............................................................................. 247
2003............................................................................. 69
Thereafter....................................................................... --
--------
Total......................................................................... $3,121
======
</TABLE>
Lease commitments include commitments to an affiliated company which require
annual lease payments of $489 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. As of December 31, 1998, the Company had
no outstanding short positions or associated deferred losses.
The unusually volatile market conditions affecting the value of hedged assets
caused a breakdown of the historical interest rate relationships with the
related hedging instruments. The correlation between hedged assets and hedging
instruments was insufficient to support continuation of this particular hedging
strategy at that time. As a result, all hedging instruments related to fixed-
rate or lagging-index assets held or available for sale were closed out in 1998.
$19.2 million of previously deferred hedging losses were considered ineffective
and charged to net loss during the year (see Note 3).
At December 31, 1998 and 1997 the Bank had approximately $51.7 million and
$194.9 million respectively, notional principal amount of interest rate swap
agreements outstanding. These interest rate swaps were designated as hedges to
convert fixed rate income streams on loans to variable rate. These swaps had
the effect of decreasing the Company's net interest income by approximately $0.1
million and $0.6 million for the years ended December 31, 1998 and 1997,
respectively. The market value of these swaps currently deferred was $0.2
million at December 31, 1998. The weighted average fixed payments and floating-
rate receipts of interest were 6.20% (1998) and 6.07% (1997) over USD LIBOR,
respectively.
The Company has also utilized interest rate swaps to convert certain fixed
rate borrowings to variable rate. The notional amounts of interest rate swaps
related to the 13% Series B Notes were $20.0 at December 31, 1997. The weighted
average fixed receipts and floating rate payments of interest were 13% and 1.25%
over USD LIBOR, respectively. The Company did not have any outstanding swap
agreements related to the 13% Series B Notes as of December 31, 1998.
F-25
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
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 consolidated
results of operations or financial position.
13. REGULATORY MATTERS
Regulatory Agreements-- First Bank of Beverly Hills On February 8, 1999, the
OTS rescinded the Cease and Desist Order (the "Order") under which the Bank had
previously been operating. The Order had prohibited the Bank from: increasing
total assets in excess of $750 million; purchasing any loans or real estate,
without the approval of the OTS, until certain acquisition and servicing
deficiencies identified by the OTS had been corrected; and purchasing any non-
performing assets or foreclosed real estate until such time as the Bank was
rated a composite "3" rating according to the Uniform Financial Institutions
Rating System.
Management believes that the Bank was in material compliance with the various
provisions of the Order for each period that it was in place.
Regulatory AgreementWFSG and WACOn January 7,1999, Cease and Desist Orders
were imposed on WFSG and WAC by the OTS. The orders prohibit theses entities
from entering into a transaction, directly or indirectly, that would cause the
Bank to violate or be in violation of transactions with affiliates regulations.
These Orders also require 30 day advance notification before adding, replacing,
or terminating any member of the Bank's Board of Directors or any senior
executive of the Bank.
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 While the Order was in place,
the Bank was required to maintain minimum capital ratios required of
institutions to be deemed ''well capitalized.'' In connection with the 1998
examination, the OTS indicated that the capital level of the Bank exceeds the
minimum requirement for ''well capitalized'' under the provisions of the Prompt
Corrective Action Regulation.
As of December 31, 1998 and 1997, the total core capital and total risk-based
capital amounts of the Bank, compared to the OTS minimum requirements are as
follows:
F-26
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
To Be
Categorized as
Amount Required ''Well Capitalized''
For Capital under
Adequacy Prompt Corrective
Actual Purposes(1) Action Regulations
---------------------- ---------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ----------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
Total Capital to Risk-Weighted Assets $55,286 14.8% $29,894 8.0% $37,368 10.0%
(Risk-Based Capital).......................
Tier 1 Capital to Risk-Weighted Assets....... 51,364 13.8 Not Applicable 22,421 6.0%
Core Capital to Tangible Assets.............. 51,364 8.8 23,478 4.0% 29,348 5.0%
Tangible Capital to Tangible Assets.......... 51,364 8.8 8,804 1.5% Not Applicable
December 31, 1997
Total Capital to Risk-Weighted Assets
(Risk-Based Capital)....................... $51,429 15.0% $27,447 8.0% $34,308 10.0%
Tier 1 Capital to Risk-Weighted Assets....... 46,930 13.7% Not applicable 20,585 6.0%
Core Capital to Tangible Assets.............. 46,930 10.1% 18,610 4.0% 23,262 5.0%
Tangible Capital to Tangible Assets.......... 46,930 10.1% 6,980 1.5% Not applicable
</TABLE>
- -------------
As of December 31, 1998 and 1997, the Bank's capital ratios were sufficient
for it to be categorized as ''well capitalized.'' If notified or otherwise
deemed to be categorized as less than "well capitalized," the Bank could be
subject to restrictions, including restrictions on the use of brokered deposits
as a funding source.
14. RELATED PARTY TRANSACTIONS
In February 1998, the Company utilized a portion of the proceeds from its
February 1998 issuance of 3,500,000 shares of common stock to redeem 27,500
shares of 14% cumulative pay in kind preferred stock held by WCC.
During the year ended December 31, 1998, the Company sold WREIT certain
assets totaling approximately $198.8 million. The sales were made on terms for
which prices approximated market value determined with either dealer marks,
third party appraisals or broker price opinions. The assets sold consisted of
$47.4 million of loans, $127.2 million of mortgage-backed securities and $24.2
million of investments in real estate.
In September of 1998, the Company created a series of notes receivable due
from WREIT totaling $15.6 million, which were collateralized by real estate
assets of the WREIT. These notes receivable were due on October 1, 2008 and
bear interest at 10% per annum. The offset to these notes receivable was an
intercompany payable to WREIT.
The intercompany payable to WREIT described above was combined with an
obligation to refund a deposit for a loan portfolio purchase transaction and
other intercompany balances due to WREIT and structured into an unsecured note
payable due to WREIT bearing an interest rate of 13%. The balance of this note
payable is $18.4 million and is included in due to affiliates, net in the
accompanying Consolidated Statements of Financial Condition as of December 31,
1998.
Prior to the solicitation of their reorganization plan, the Company and the
unofficial noteholders committee negotiated a compromise and settlement of the
note receivable held by the WREIT. Under this compromise and settlement, the
holder of the compromised WREIT claim will receive a new note, which bears
interest at 6% per annum, payable monthly in arrears. From the effective date
of the Company's confirmed reorganization plan ("Effective Date") to the first
anniversary of the Effective Date of the reorganization plan, at the option of
the Company, interest payments on the new note may be
F-27
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
payable in kind. Principal and all accrued but unpaid interest is due on the
seventh anniversary of the Effective Date. At any time within two years after
the Effective Date, the Company has the right to settle the note payable by
paying WREIT a discounted present value of the remaining scheduled interest and
principal payments using a discount rate of 13.5%. Should the Company chose to
settle the note payable, WREIT has the option to convert the note payable to
common stock of the Company. It is currently the intention of management of the
Company that the payable to WREIT will be paid in accordance with its original
terms.
On January 19, 1999, WREIT agreed to provide the Company interim financing in
the amount of $5.0 million (the "Interim Facility"). The Interim Facility bears
interest at 12% and is secured by the stock of the Bank. In addition, on March
3, 1999, WREIT agreed to provide the Company with debtor-in-possession financing
of $10.0 million (the "DIP Facility"). The first proceeds of the DIP Facility
were used to repay the Interim Facility. The DIP Facility bears interest at 12%
and is secured by the stock of the Bank. If the Company identifies a new lender
for the DIP Facility, subject to certain conditions, WREIT agrees to subordinate
the priority of its lien and right of repayment of the DIP Facility to the new
lender. There can be no assurance that the WREIT has the ability to fund the
DIP Facility.
To the extent WREIT only funds a portion of the DIP Facility, a proportionate
amount of the Company's note payable discussed above will be treated pari passu
with the noteholders and the amount of the note payable will be reduced
proportionately.
During 1998, in connection with borrowing funds from WCC, the Company and
WREIT jointly and severally guaranteed $35 million of indebtedness owed by WCC
to a third party financier. Management of the Company believes that the
Company's guarantee of WCC indebtedness was in the best interests of the
Company.
The Company received a fee of $94 from WREIT for guaranteeing a loan of
WREIT. The fee was 1% of the outstanding principal balance of the loan. The
loan was refinanced in 1999, at which time the guarantee of WFSG was no longer
required.
Substantially all of the Company's loans are serviced by WCC pursuant to a
servicing agreement. WCC is affiliated with the Company through 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. Payments collected by WCC but not yet remitted to
the Company are included in due to affiliate, net in the accompanying
Consolidated Statements of Financial Condition. Loan servicing fees and
expenses shown in the Consolidated Statements of Operations were paid to WCC and
include servicing fees of $ 13.8 million which are based on the servicing
agreement and reimbursements for direct expenses of $25.5 million borne by WCC
on behalf of the Company.
During 1998, the Company made payments of approximately $3.0 million to its
two principal stockholders pursuant to the related employment agreements.
Additional amounts were paid to these stockholders which were reimbursed to the
Company by offsetting other amounts due to an affiliated entity owned by the
principal stockholders.
The Company leases its employees from Wilshire Leasing Limited ("WLL")
pursuant to the Administrative Services Agreement dated November 1, 1996. The
consideration for the services provided by WLL has been determined by the
parties to be equivalent to amounts charged by independent third parties
providing similar services in an arm's length transaction. WLL is affiliated
with the Company through common ownership of the Company's principal
shareholders.
15. INVESTMENT IN WREIT
In April 1998, the Company sponsored the initial public offering of WREIT,
whereby WREIT received approximately $167.0 million of net proceeds. The
Company is the manager of WREIT and, as such, earns fee income from the
management of WREIT based on the level of WREIT's investment assets. During the
year ended December 31, 1998, the Company earned approximately $3.2 million in
management fee income.
F-28
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
The Company purchased 990,000 shares of WREIT common stock in conjunction
with the initial public offering. This investment is accounted for under the
equity method of accounting and therefore is not adjusted for fluctuations in
the market price of the underlying shares but rather, increases and decreases
based on earnings or losses of WREIT and the receipt of dividends paid by WREIT.
Additionally, the Company's pro rata interest in WREIT's unrealized holding
losses for available for sale securities ($2,617) is included in the Company's
unrealized holding losses for available for sale securities reflected as a
component of other comprehensive income in the Consolidated Statements of
Stockholders' Equity (Deficit) as of December 31, 1998.
WREIT has been significantly impacted by general market conditions (see Notes
2 and 3) in the same manner as the Company. As a result, WREIT sold a
significant amount of assets to increase liquidity and has experienced
significant losses during the year ended December 31, 1998. The Company's
investment in WREIT decreased approximately $8.8 million from the initial
investment in April 1998 due primarily to the Company's percentage ownership
share of WREIT's losses. The carrying amount of the Company's investment in
WREIT was approximately $6.0 million as of December 31, 1998.
16. NET (LOSS) INCOME PER SHARE
The Company has outstanding stock options which are considered common stock
equivalents in the calculation of diluted (loss) income per share. During the
year ended December 31, 1998, the Company experienced a net loss, which resulted
in common stock equivalents having an anti-dilutive effect on loss per share.
Weighted average shares outstanding is therefore equivalent for basic and
diluted loss per share for the year ended December 31, 1998. The following is a
reconciliation of net income available to common shareholders and weighted
average shares outstanding as used to calculate basic and diluted (loss) income
per share for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Per Share
(Loss) Income Shares Amount
------------- ------------ -----------
<S> <C> <C> <C>
December 31, 1998
Net loss........................................................................ $(201,659)
Preferred stock dividend........................................................ (417)
---------
Net loss available to common shareholders....................................... $(202,076)
=========
Basic loss per share............................................................ $(202,076) 10,676,685 $(18.93)
Dilution from common stock equivalents.......................................... -- --
--------- ------------
Diluted loss per share.......................................................... $(202,076) 10,676,685 $(18.93)
========= ==========
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
========= ==========
</TABLE>
17. 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, 1998, 1997 and 1996, the Company contributed $172, $119 and
$43, respectively, to the plan.
F-29
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
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. Bonuses paid
to these individuals, which were authorized by the Board of Directors, were $2.4
million during the year ended December 31, 1998. Upon confirmation of the
restructuring plan by the Bankruptcy Court, these agreements will be replaced by
different arrangements.
The 1996 agreements also provide 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.
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.
As a result of the recent events discussed in Notes 1,2 and 3 above, and the
related impact on the market value of the Company's outstanding common stock,
all existing stock options of the Company have no value. Based on the terms of
the restructuring agreement, upon confirmation, all existing options will be
extinguished. It is anticipated that the new Board of Directors will address
the matter of stock options, which might include the conversion of a portion of
the existing stock options to options to purchase common stock of the
reorganized company or the issuance of new stock options unrelated to the
existing options.
F-30
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
A summary of the Company's stock options as of December 31, 1998 and 1997, and
changes during the periods then ended is presented below:
<TABLE>
<CAPTION>
1998 1997
------------------------ -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of period.................................... 1,387,326 $13.58 1,126,225 $11.39
Granted............................................................... 422,450 22.34 263,909 23.73
Forfeited............................................................. (2,808) 13.88
----------- ----------- --------- ------
Outstanding at end of period.......................................... 1,809,776 $15.62 1,387,326 $13.58
========= ====== ========= ======
</TABLE>
Additional information regarding options outstanding as of December 31, 1998
is as follows:
<TABLE>
<CAPTION>
Weighted- Weighted-
Average Average
Range of Remaining Exercise
Exercise Prices Shares Life Price
--------------- ----------- ---------------- ---------
<S> <C> <C> <C>
$0.63..................................................................... 30,000 10.00 $ 0.63
$5.58 - 6.25.............................................................. 21,358 3.52 $ 5.67
$10.50-$11.55............................................................. 1,095,000 7.97 $11.31
$12.15-$14.90............................................................. 10,809 1.50 $13.64
$16.25-$18.70............................................................. 119,198 8.15 $18.68
$22.31-$25.25............................................................. 374,203 8.20 $23.56
$26.50-$29.15............................................................. 159,208 8.61 $28.93
</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, 1998 and 1997 would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
Net (loss) income to common shareholders:
As reported............................................................................... $(201,659) $13,560
Pro forma................................................................................. $(202,816) $13,218
Net (loss) income per common and common share equivalent:
Basic (loss) earnings per share:
As reported............................................................................ $ (18.93) $ 1.79
Pro forma.............................................................................. $ (19.04) $ 1.75
Diluted (loss) earnings per share:
As reported............................................................................ $ (18.93) $ 1.69
Pro forma.............................................................................. $ (19.04) $ 1.65
</TABLE>
There were no options granted in 1998 with exercise prices below the market
value of the stock at the grant date. The weighted average fair value at date of
grant of options granted during 1998 was $11.21 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.
F-31
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
18. 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.
<TABLE>
<CAPTION>
December 31, 1998
-------------------------
Carrying Estimated
Amount Fair Value
----------- ------------
<S> <C> <C>
Assets:
Cash and cash equivalents............................................................ $ 23,468 $ 23,468
Mortgage-backed securities available for sale........................................ 114,463 114,463
Mortgage-backed securities held to maturity.......................................... 13,580 13,511
Securities held to maturity.......................................................... 5,962 6,212
Loans, discounted loans, and loans held for sale, net................................ 792,222 800,535
Federal Home Loan Bank stock......................................................... 5,332 5,332
Liabilities:
Deposits............................................................................. 510,430 510,220
Short-term borrowings................................................................ 420,816 420,816
Notes payable........................................................................ 184,245 91,502
Off-balance-sheet liabilities:
Interest-rate swaps.................................................................. -- (663)
</TABLE>
<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
</TABLE>
F-32
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
The methods and assumptions used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate that value are
explained below:
Cash and Cash Equivalents--The carrying amounts 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 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.
19. OPERATING SEGMENTS
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," was issued effective for fiscal years beginning after
December 15, 1998. The Company opted not to adopt this statement prior to that
date.
F-33
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
The Company's reportable operating segments, as defined by the Company's
management, are thrift banking and non-banking operations. The operating
segments vary in terms of regulatory environment, funding sources and asset
acquisition focus. A description of the Company's operating segments is as
follows:
Thrift Banking The Company's thrift banking operations are conducted through
the Bank. During 1998, the Bank was engaged in the acquisitions of mortgage
loans, origination of mortgage loans, and merchant bankcard processing. The
primary source of financing for the Bank acquisitions and originations is
wholesale and brokered certificates of deposit, and to a lesser extent,
committed short-term line of credit facilities and FHLB advances. The Bank is a
federally chartered savings bank and is regulated by the Office of Thrift
Supervision.
Non-banking The Company's non-banking operations are conducted primarily
through WFC, and to a lesser extent, WSC and Wilshire Financial Services Group
Europe Inc. In addition to mortgage loan acquisition, the non-banking operating
segment also conducts loan sale and securitization and loan servicing
operations. Historically, the primary funding sources utilized for non-banking
operations were line of credit and repurchase agreement facilities with
nationally recognized investment banking firms.
Segment data for the years ended December 31, 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
Thrift Non-
1998 Segment Data Banking Banking Total
----------------- -------------- ---------------- --------------
<S> <C> <C> <C>
Interest income........................................ $ 41,813 $ 98,703 $ 140,516
Interest expense....................................... 29,775 95,683 125,458
-------------- ---------------- --------------
Net interest income.................................... 12,038 3,020 15,058
Provision for loan losses.............................. (5,100) 18,438 13,338
-------------- ---------------- --------------
Net interest income (loss) after 17,138 (15,418) 1,720
provision for loan losses.............................
Other income (loss).................................... 6,658 (100,681) (94,023)
Other expense.......................................... 13,008 100,404 113,412
-------------- ---------------- --------------
Income (loss) before taxes............................. 10,788 (216,503) (205,715)
Income tax provision (benefit)......................... 4,639 (8,695) (4,056)
-------------- ---------------- --------------
Net income (loss)...................................... $ 6,149 $(207,808) $ (201,659)
============== ================ ==============
Total assets........................................... $594,259 $ 489,994 $1,084,253
============== ================ ==============
</TABLE>
<TABLE>
<CAPTION>
Thrift Non-
1997 Segment Data Banking Banking Total
----------------- -------------- ---------------- --------------
<S> <C> <C> <C>
Interest income........................................ $ 34,647 $ 75,410 $ 110,057
Interest expense....................................... 26,377 60,459 86,836
-------------- ---------------- --------------
Net interest income.................................... 8,270 14,951 23,221
Provision for loan losses.............................. (550) 2,541 1,991
-------------- ---------------- --------------
Net interest loss after 8,820 12,410 21,230
provision for loan losses.............................
Other income (loss).................................... 12,723 48,580 61,303
Other expense.......................................... 16,729 40,003 56,732
-------------- ---------------- --------------
(Loss) income before taxes............................. 4,814 20,987 25,801
Income tax provision (benefit)......................... 2,070 8,567 10,637
-------------- ---------------- --------------
Net (loss) income...................................... $ 2,744 $ 12,420 $ 15,164
============== ================ ==============
Total assets........................................... $466,199 $1,162,828 $1,629,027
============== ================ ==============
</TABLE>
F-34
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Thrift Non-
1996 Segment Data Banking Banking Total
----------------- -------------- ---------------- --------------
<S> <C> <C> <C>
Interest income........................................ $ 48,221 $ 201 $ 48,422
Interest expense....................................... 28,778 499 29,277
-------------- ---------------- --------------
Net interest income (loss)............................. 19,443 (298) 19,145
Provision for loan losses.............................. 16,549 16,549
-------------- ---------------- --------------
Net interest income (loss) after
provision for loan losses............................. 2,894 (298) 2,596
Other income........................................... 17,096 846 17,942
Other expense.......................................... 14,770 676 15,446
-------------- ---------------- --------------
Income (loss) before taxes............................. 5,220 (128) 5,092
Income tax provision (benefit)......................... 179 (54) 125
-------------- ---------------- --------------
Net income (loss)...................................... $ 5,041 $ (74) $ 4,967
============== ================ ==============
Total assets........................................... $551,023 $202,826 $753,849
============== ================ ==============
</TABLE>
F-35
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
20. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------------------
December 31, September 30, June 30, March 31,
1998 1998 1998 1998
---------------- ---------------- ------------- -----------
<S> <C> <C> <C> <C>
Interest income................................................ $ 23,358 $ 41,017 $41,323 $34,818
Interest expense............................................... 26,151 35,054 33,793 30,460
Provision for loan losses...................................... 4,174 15,191 (1,500) (1,500)
-------- --------- ------- -------
Net interest (loss) income after provision for loan losses..... (6,967) (9,228) 9,030 5,858
Non-interest (loss) income..................................... (51,001) (87,103) 40,970 6,138
Non-interest expense........................................... 27,750 36,663 29,202 19,797
-------- --------- ------- -------
(Loss) income before income taxes.............................. (85,718) (132,994) 20,798 (7,801)
Income tax provision (benefit)................................. 4,136 (14,028) 8,972 (3,136)
-------- --------- ------- -------
Net (loss) income.............................................. $(89,854) $(118,966) $11,826 $(4,665)
======== ========= ======= =======
Earnings (loss) per share:
Basic........................................................ $ (8.25) $ (10.82) $ 1.07 $ (0.52)
Diluted...................................................... $ (8.25) $ (10.82) $ 1.07 $ (0.52)
</TABLE>
<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 for loan losses...................................... 1,065 2,350 445 (1,869)
------- ------- ------- -------
Net interest income after provision 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........................................................ $ 0.26 $ 0.85 $ 0.68 $ 0.01
Diluted...................................................... $ 0.24 $ 0.80 $ 0.66 $ 0.01
</TABLE>
<TABLE>
<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
</TABLE>
F-36
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
21. PARENT COMPANY INFORMATION
Condensed Statements of Financial Condition
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
------------ ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................................. $ 1,674 $ 38,522
Mortgage-backed securities available for sale, at fair value.......................... 13,395 70,097
Due from affiliate, net............................................................... 68,908 140,231
Investment in subsidiaries............................................................ 7,135 63,169
Prepaid expenses and other assets..................................................... 29,270 31,076
-------- --------
$120,382 $343,095
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities................................................ $ 15,187 $ 4,821
Short-term borrowings................................................................. 13,745 54,907
Notes payable......................................................................... 184,245 184,245
-------- --------
Total liabilities............................................................... 213,177 243,973
(Deficit) contributed and retained equity............................................. (92,795) 99,122
-------- --------
$120,382 $343,095
======== ========
</TABLE>
Condensed Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Interest income...................................................................... $ 6,152 $ 6,187 $ 45
Interest expense..................................................................... 29,419 18,337 421
--------- -------- ------
Net interest expense................................................................. (23,267) (12,150) (376)
Non-interest (loss) income........................................................... (14,056) (344) 563
Non-interest expense................................................................. 3,944 1,667 125
--------- -------- ------
(Loss) income before equity in earnings (losses) of subsidiaries and (41,267)
income tax (benefit) provision................................................... (14,161) 62
Income tax (benefit) provisions...................................................... 1,217 (5,947) (131)
Equity in earnings (losses) of subsidiaries.......................................... (159,175) 23,378 4,774
--------- -------- ------
Net (loss) income.................................................................... $(201,659) $ 15,164 $4,967
========= ======== ======
</TABLE>
F-37
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share amounts)
Condensed Statements of Cash
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.............................................................. $(201,659) $ 15,164 $ 4,967
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Market valuation adjustments.................................................. 12,443 -- --
Amortization and accretion of discounts....................................... 5,417 -- (1,045)
Gain on sale of mortgage backed securities,
available for sale.......................................................... (1,247) -- --
Equity in earnings of subsidiaries............................................ 161,609 (23,378) (4,774)
Change in:
Prepaid expenses and other assets........................................... 1,806 (8,823) (4,512)
Accounts payable and other liabilities...................................... 10,366 (10,939) 4,657
Due from affiliate, net..................................................... (46,656) (92,240) (22,670)
--------- --------- --------
Net cash used in operating activities...................................... (57,921) (120,216) (23,377)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of mortgage-backed Securities available
for sale.................................................................... (36,357) (82,949) --
Principal repayment of mortgage-backed securities
available for sale.......................................................... 12,056 12,452 --
Proceeds from sale of mortgage-backed securities,
available for sale 77,532 -- --
Net investment in subsidiaries................................................ (20,558) -- (24,514)
--------- --------- --------
Net cash provided by (used in) investing activities........................ 32,673 (70,497) (24,514)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of preferred stock................................................. (29,521) -- --
Issuance of notes payable..................................................... -- 109,245 75,000
Proceeds from short term borrowings........................................... 27,311 59,920 --
Repayments of short term borrowings........................................... (68,473) (5,013) --
Issuance of capital stock..................................................... 61,811 -- 38,097
Purchase of treasury stock.................................................... (2,728) (124) --
--------- --------- --------
Net cash provided by financing activities..................................... (11,600) 164,028 113,097
--------- --------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS.................................................................... (36,848) (26,685) 65,206
CASH:
Beginning of year............................................................. 38,522 65,207 1
--------- --------- --------
End of year................................................................... $ 1,674 $ 38,522 $ 65,207
========= ========= ========
NONCASH FINANCING ACTIVITIES:
Exchange of note payable for common stock..................................... -- -- $ 11,000
Conversion of affiliate receivable to
investment in subsidiary.................................................... 120,000 -- --
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-38
<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 April 2, 1999 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 April 2, 1999 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 Treasurer
Andrew A. Wiederhorn
/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>
2.1 Solicitation and Disclosure Statement dated February 1, 1998, (incorporated by reference to the Company's
current report on Form 8-K dated February 8, 1998).
2.2 Form of Plan of Reorganization (incorporated by reference to the Company's current report on form 8-K dated
February 8, 1998).
+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.
*10.11 Cease and Desist Order (Wilshire Financial Services Group Inc. and Wilshire Acquisition Corporation)
10.12 Purchase and Sale Agreement dated October 14, 1998 between Salomon Brothers Realty Corp. and WMFC 1997-4 Inc.
(Incorporated by reference to the Company's
1.13 Mortgage Loan Purchase Agreement dated October 30, 1998 between Wilshire funding Corporation and Bear Stearns
Mortgage Capital Corporation (Incorporated by reference to the Company's current report on Form 8-K dated
October 30, 1998).
*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 10.11
UNITED STATES OF AMERICA
Before the
OFFICE OF THRIFT SUPERVISION
- ----------------------------------------------
In the Matter of
Order No.: SF-99-001
WILSHIRE FINANCIAL SERVICES GROUP, INC., a Date: January 7, 1999
Savings and Loan Holding Company, Portland,
Oregon,
-and-
WILSHIRE ACQUISITIONS CORPORATION, a Savings
and Loan Holding Company, Portland, Oregon.
- ----------------------------------------------
ORDER TO CEASE AND DESIST
-------------------------
WHEREAS, Wilshire Financial Services Group, Inc., Portland, Oregon
("WFSG"), OTS Docket No. H-2801, owns one hundred percent (100%) of the
outstanding common stock of Wilshire Acquisitions Corporation ("WAC"), OTS
Docket No. H-2200; and
WHEREAS, WAC owns one hundred percent (100%) of the outstanding common
stock of First Bank of Beverly Hills, F.S.B., Beverly Hills, California ("First
Bank"), OTS Docket No. 07810, an insured savings association; and
WHEREAS, both WFSG and WAC are savings and loan holding companies as that
term is defined at 12 U.S.C. (S) 1467a(a)(l)(D); and
WHEREAS, WFSG and WAC, by and through their respective Boards of Directors
("the Boards"), have executed a Stipulation and Consent to the Issuance of an
Order to Cease and Desist ("Stipulation"); and
<PAGE>
WHEREAS, WFSG and WAC, in the Stipulation, have consented and agreed to the
issuance of this Order to Cease and Desist ("Order") pursuant to 12 U.S.C. (S)
1818(b); and
WHEREAS, the Director of the Office of Thrift Supervision ("'OTS") has
delegated to the Regional Directors of the OTS the authority to issue an Order
to Cease and Desist on behalf of the OTS where entities subject to OTS
jurisdiction have consented to the issuance of the order.
NOW, THEREFORE, IT IS ORDERED that:
1. Transactions With Affiliates.
----------------------------
(a) WFSG and WAC shall not enter into any transaction, with each other
or with others, or otherwise engage in any action which would cause, directly or
indirectly, First Bank to violate or be in violation of 12 C.F.R. (S)(S) 563.41
and 563.42.
(b) WFSG and WAC shall provide the OTS with at least thirty (30) days'
prior written notice of any transaction which would constitute a covered
transaction from the perspective of First Bank. The term "covered transaction"
shall have the meaning as set forth at 12 C.F.R. (S) 563.41(b)(7).
(c) WFSG and WAC shall provide the OTS with at least thirty (30) days'
prior written notice of any transaction, or series of transactions, between
First Bank and any third party where:
(i) WFSG and WAC, or any affiliates of WFSG and WAC, have a
financial interest in such third party; or
(ii) WFSG and WAC, or any affiliates of WFSG and WAC, are
participants in the transaction; or
2
<PAGE>
(iii) any proceeds of the transaction are used for the benefit
of, or transferred to, directly or indirectly, WFSG and WAC, or any
affiliate of WFSG and WAC.
For purposes of this subparagraph (c), the term "affiliate" as it relates
to WFSG and WAC shall have the meaning as set forth at 12 C.F.R. (S)
563.41(b)(1) as if the term "WFSG and WACO" were substituted for the word
"savings association."
(d) Upon written notice of objection by OTS during the notice period
set forth in paragraphs (b) and (c) above, WFSG and WAC shall not enter into any
of said transactions.
2. Changes in Senior Management and Directorate at First Bank.
----------------------------------------------------------
(a) WFSG and WAC shall take all necessary and reasonable steps to
cause First Bank to notify the OTS in writing at least thirty (30) days before
adding, replacing, or terminating any member of First Bank's Board of Directors
or any senior executive officer of First Bank, or changing the current
responsibilities of any director or senior executive officer.
(b) WFSG and WAC shall further take all necessary and reasonable steps
to ensure that the thirty (30) days' prior notice required by paragraph (a)
above contains the information specified in 12 C.F.R. (S) 563.570. The notice
period may be extended by the OTS following the procedure described in 12 C.F.R.
(S) 563.585.
(c) WFSG and WAC shall further take all necessary and reasonable steps
to ensure that any proposed member of the Board of Directors or any proposed
senior executive officer of First Bank shall not begin service until the OTS
notifies First Bank in writing of OTS's non-objection to the proposed director
or senior executive officer.
(d) The terms "director" and "senior executive officer" as used herein
shall have the meanings set forth at 12 C.F.R. (S) 563.555.
3
<PAGE>
3. Compliance With Order.
---------------------
(a) The Boards and the officers of WFSG and WAC shall take immediate
action to cause WFSG and WAC to comply with the terms of this Order, and shall
take all actions necessary or appropriate thereafter to cause the WFSG and WAC
to continue to comply with this order.
(b) The Boards, on a quarterly basis, shall each adopt a Board
resolution (the "Compliance Resolution") formally resolving that, following a
diligent inquiry of relevant information (including reports of management), to
the best of its knowledge and belief, during the immediate preceding quarter,
its respective corporation complied with each provision of this Order, except as
otherwise stated. The Compliance Resolution shall: (1) specify in detail how,
if at all, full compliance was not found to exist; and (2) identify all notices
of exemption issued by the OTS that were outstanding as of the date of its
adoption.
(c) The minutes of the meetings of the Boards shall set forth the
following information with respect to the adoption of the Compliance Resolution:
(1) the identity of each director voting in favor its adoption; and (2) the
identity of each director voting in opposition to its adoption or abstaining
from voting thereon, setting forth each such director's reasons for opposing or
abstaining.
(d) By February 28, 1999 (for calendar quarter ending December 31,
1998), and within sixty (60) days following the end of each calendar quarter
thereafter, WFSG and WAC shall provide to the OTS a certified true copy of the
Compliance Resolution adopted at the respective Board meeting. The Boards, by
virtue of WFSG's and WAC's submission of a certified true copy of each such
Compliance Resolution to the OTS, shall be deemed to have certified the accuracy
of the statements set forth in each Compliance Resolution, except as
4
<PAGE>
provided below. In the event that one or more directors do not agree with the
representations set forth in the Compliance Resolution, such disagreement shall
be noted in the minutes of WFSG or WAC, as the case may be.
(e) The Boards shall promptly respond to any request from the OTS for
documents that the OTS reasonably requests to demonstrate compliance with this
Order.
4. Stipulation.
-----------
The Stipulation is incorporated by reference into this Order.
5. Definitions.
-----------
All technical words or terms used in this Order and the Stipulation, for
which meanings are not specified or otherwise provided by the provisions of this
Order shall, insofar as applicable, have meanings as defined in Chapter V of
Title 12 of the Code of Federal Regulations, the Home Owners' Loan Act ("HOLA"),
FDIA, or OTS publications. Any such technical words or terms used in this Order
and the Stipulation and undefined in the Code of Federal Regulations, HOLA,
FDIA, or OTS publications shall have meanings that are in accordance with the
best custom and usage in the savings and loan industry.
6. Successor Statutes, Regulations, Guidance, Amendments.
-----------------------------------------------------
Any references in this Order and Stipulation to provisions of statutes,
regulations, OTS publications, and OTS regulatory guidance shall be deemed to
include references to all amendments to such provisions as have been made as of
the date of this Order and references to successor provisions as they become
applicable.
5
<PAGE>
7. Notices.
-------
Except as otherwise provided herein, any request, demand, authorization,
direction, notice, consent, waiver or other document provided or permitted by
the Order to be made upon, given or furnished to, delivered to, or filed with
the OTS or WFSG or WAC shall be in writing and mailed, first class or overnight
courier, or by facsimile transmission, or physically delivered, and addressed as
follows:
OTS
---
Office of Thrift Supervision
Attn: Timothy J. Lane
Assistant Regional Director
1551 N. Tustin Ave., Suite 1050
Santa Ana, CA 92705-8635
WFSG
----
Wilshire Financial Services Group, Inc.
Attn: Andrew A. Wiederhorn
1776 S.W. Madison Street
Portland, OR 97205
WAC
---
Wilshire Acquisitions Corporation
Attn: Andrew A. Wiederhorn
1776 S.W. Madison Street
Portland, OR 97205
Notices hereunder shall be effective upon receipt, if by mail, overnight
delivery service, or facsimile, and upon delivery, if by physical delivery. If
there is a dispute about the date on which a written notice has been received by
a party to this Order, then, in the event such notice was sent by the U.S. mail,
there shall be a presumption that the notice was received two (2) business days
after the date of the postmark on the envelope in which the notice was enclosed.
6
<PAGE>
8. Duration, Termination or Suspension of Order.
--------------------------------------------
(a) This Order shall: (1) become effective upon its execution by the
OTS, acting through its authorized representative whose signature appears below;
and (2) remain in effect until terminated, modified or suspended in writing by
the OTS, acting through its Director or Regional Director (including any
authorized designee thereof).
(b) The Regional Director of the OTS, in his or her sole discretion,
may, by written notice, suspend, modify, or terminate any or all provisions of
this Order.
9. Time Limits.
-----------
Time limitations for compliance with the terms of this Order run from the
Effective Date, unless otherwise noted.
10. Effect of Headings.
------------------
The section headings herein are for convenience only and shall not affect
the construction hereof.
11. Separability Clause.
-------------------
In case any provision of this Order is ruled to be invalid, illegal, or
unenforceable by the decision of any court of competent jurisdiction, the
validity, legality and enforceability of the remaining provisions hereof shall
not in any way be affected or impaired thereby, unless the Regional Director, in
his or her sole discretion, determines otherwise.
12. No Violations of Law, Rule, Regulation or Policy Statement Authorized;
----------------------------------------------------------------------
OTS Not Restricted.
- ------------------
Nothing in this Order shall be construed as: (1) allowing WFSG, WAC or
First Bank to violate any law, rule, regulation, or policy statement to which it
is subject; or (2) restricting or
7
<PAGE>
estopping the OTS from taking any action(s) that it deems appropriate in
fulfilling the responsibilities placed upon it by law.
13. Successors in Interest/Benefit.
------------------------------
The terms and provisions of this Order shall be binding upon and inure to
the benefit of the parties hereto and their successors in interest. Nothing in
this Order, express or implied, shall give to any person or entity, other than
the parties hereto, and the Federal Deposit Insurance Corporation, and their
successors hereunder, any benefit or any legal or equitable right, remedy or
claim under this Order.
Accepted by:
OFFICE OF THRIFT SUPERVISION
By:
------------------------------
Charles A. Deardorff
Regional Director
West Region
8
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
---------------- --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
Net (Loss) Income Available to Common Shareholders:
Net Income................................................................. $ (201,659) $ 15,164 $ 4,967
Redeemable Preferred Stock Dividends....................................... (417) (1,604) 0
----------- ---------- ----------
$ (202,076) $ 13,560 $ 4,967
----------- ---------- ----------
Weighted Average Number of Shares:
Average common shares outstanding.......................................... 10,676,685 7,569,808 4,638,926
Common share equivalents resulting from assumed exercise of
stock options............................................................ -- 449,491 8,142
----------- ---------- ----------
10,676,685 8,019,299 4,647,068
(Loss) Earnings per common share............................................. $(18.93) $1.69 $1.07
</TABLE>
<PAGE>
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Unaudited)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997 1996
------------ --------
(Dollars in Thousands)
<S> <C> <C> <C>
Earnings:
Pre-tax (loss) income................................................................... $(205,715) $ 25,801 $ 5,092
Add:
Interest and fixed charges........................................................... 125,458 86,836 29,277
Portion of rent under long-term operating leases representative of an
interest factor.................................................................... 0 0 0
--------- -------- -------
Total earnings available for fixed charges.............................................. (80,257) 112,637 34,369
--------- -------- -------
Fixed charges:
Interest and fixed charges........................................................... 125,458 86,836 29,277
Portion of rent under long-term leases representative of an interest
factor............................................................................. 0 0 0
--------- -------- -------
Total fixed charges..................................................................... 125,458 86,836 29,277
--------- -------- -------
Deficiency in earnings to cover fixed charges........................................... 80,257 -- --
Ratio of earnings to fixed charges...................................................... -- 1.30 1.17
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AS OF DECEMBER 31, 1998 AND STATEMENT OF EARNINGS FOR
THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 23,468
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 114,463
<INVESTMENTS-CARRYING> 19,542
<INVESTMENTS-MARKET> 19,753
<LOANS> 792,222
<ALLOWANCE> 288,868
<TOTAL-ASSETS> 1,084,253
<DEPOSITS> 510,430
<SHORT-TERM> 420,816
<LIABILITIES-OTHER> 61,557
<LONG-TERM> 184,245
0
0
<COMMON> 117,708
<OTHER-SE> (210,503)
<TOTAL-LIABILITIES-AND-EQUITY> 1,084,253
<INTEREST-LOAN> 119,444
<INTEREST-INVEST> 25,676
<INTEREST-OTHER> 3,396
<INTEREST-TOTAL> 140,516
<INTEREST-DEPOSIT> 25,566
<INTEREST-EXPENSE> 125,458
<INTEREST-INCOME-NET> 15,058
<LOAN-LOSSES> 13,338
<SECURITIES-GAINS> 4,024
<EXPENSE-OTHER> 113,412
<INCOME-PRETAX> (205,715)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (201,659)
<EPS-PRIMARY> 0
<EPS-DILUTED> (18.93)
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 118,275
<CHARGE-OFFS> 0
<RECOVERIES> 2,818
<ALLOWANCE-CLOSE> 288,868
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
