<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-21845
WILSHIRE FINANCIAL SERVICES GROUP INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 93-1223879
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
1776 SW Madison Street, Portland, OR 97205
(Address of principal executive offices) (Zip Code)
</TABLE>
(503) 223-5600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at October 31, 1999
Common Stock, par value $.01 per share 20,033,600 Shares
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited):
Consolidated Statements of Financial Condition...........................................3
Consolidated Statements of Operations....................................................4
Consolidated Statements of Cash Flows....................................................6
Consolidated Statements of Stockholders' Equity (Deficit)................................8
Notes to Interim Financial Statements....................................................9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................................19
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................37
Item 2. Changes in Securities......................................................................37
Item 3. Defaults Upon Senior Securities............................................................37
Item 4. Submission of Matters to a Vote of Security Holders........................................38
Item 5. Other Information..........................................................................38
Item 6. Exhibits and Reports on Form 8-K...........................................................38
</TABLE>
2
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR
REORGANIZED COMPANY COMPANY
----------------------------- ---------------
SEPTEMBER 30, MAY 31, DECEMBER 31,
1999 1999 1998
----------- -------------- ----------------
(UNAUDITED) (UNAUDITED)
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents............................................... $ 28,016 $ 26,552 $ 23,468
Mortgage-backed securities available for sale, at fair value............ 73,840 99,647 114,463
Mortgage-backed securities held to maturity, at amortized cost.......... 10,737 11,993 13,580
Securities held to maturity, at amortized cost.......................... 5,975 5,969 5,962
Loans, net.............................................................. 510,174 491,576 455,561
Discounted loans, net................................................... 13,178 29,058 51,989
Loans held for sale, net, at lower of cost or market.................... 43,148 45,757 284,672
Stock in Federal Home Loan Bank of San Francisco, at cost............... 4,719 4,655 5,332
Real estate owned, net.................................................. 15,228 35,374 62,168
Leasehold improvements and equipment, net............................... 5,890 6,156 8,185
Accrued interest receivable............................................. 4,315 5,138 5,468
Investment in Wilshire Real Estate Investment Inc....................... 2,610 4,218 5,979
Servicer advances....................................................... 15,620 7,552 5,007
Mortgage servicing rights, net.......................................... -- -- 2,346
Income tax receivable................................................... -- -- 9,865
Prepaid expenses and other assets....................................... 11,576 15,723 30,208
----------- ------------ ----------------
TOTAL $ 745,026 $ 789,368 $ 1,084,253
========== ============ ================
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits........................................................... $ 459,708 $ 497,424 $ 510,430
Short-term borrowings.............................................. 156,499 164,854 420,816
Notes payable...................................................... -- -- 184,245
Notes payable to Wilshire Real Estate Investment Inc............... 10,819 10,748 16,973
Accounts payable and other liabilities............................. 31,495 27,442 44,584
Minority interest in Wilshire Credit Corporation................... 5,422 -- --
----------- ------------ ----------------
Total liabilities............................................... 663,943 700,468 1,177,048
----------- ------------ ----------------
Commitments and Contingencies (see Note 5)
Stockholders' Equity (Deficit):
Common stock....................................................... 88,900 88,900 117,708
Treasury stock, at cost............................................ -- -- (2,852)
Retained deficit................................................... (7,938) -- (183,294)
Accumulated other comprehensive gain (loss), net................... 121 -- (24,357)
----------- ------------ ----------------
Total stockholders' equity (deficit)............................ 81,083 88,900 (92,795)
----------- ------------ ----------------
TOTAL $ 745,026 $ 789,368 $ 1,084,253
========== ============ ================
</TABLE>
See notes to interim financial statements
3
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
------------------- -------------------
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------- -------------------
<S> <C> <C>
INTEREST INCOME:
Loans........................................................ $ 13,108 $ 33,557
Mortgage-backed securities................................... 2,833 6,414
Securities and federal funds sold............................ 732 1,046
----------------- ---------------
Total interest income.................................... 16,673 41,017
--------------- --------------
INTEREST EXPENSE:
Deposits..................................................... 6,495 6,964
Borrowings................................................... 2,924 28,090
---------------- ---------------
Total interest expense................................... 9,419 35,054
---------------- ---------------
NET INTEREST INCOME............................................... 7,254 5,963
PROVISION FOR ESTIMATED LOSSES ON LOANS........................... (741) 15,191
----------------- ---------------
NET INTEREST INCOME (LOSS) AFTER PROVISION
FOR ESTIMATED LOSSES ON LOANS................................ 7,995 (9,228)
--------------- ----------------
OTHER INCOME (LOSS):
Servicing revenue............................................ 1,922 1,070
Real estate owned, net....................................... 2,622 144
Bankcard (loss) income, net.................................. (139) 1,989
Gain on sale of loans........................................ 158 1,460
Gain (loss) on sale of securities............................ 292 (433)
Minority interest in WCC..................................... 434 --
Market valuation losses and impairments...................... (8,615) (76,580)
Write-down of mortgage servicing rights...................... -- (12,704)
Other, net................................................... 3,197 (2,049)
---------------- ----------------
Total other loss......................................... (129) (87,103)
------------------ ----------------
OTHER EXPENSES:
Compensation and employee benefits........................... 8,696 10,914
Loan service fees and expenses............................... 139 12,898
Professional services........................................ 1,654 2,494
Occupancy.................................................... 568 797
FDIC insurance premiums...................................... 105 212
Corporate travel and development............................. 1,025 2,935
Depreciation and amortization................................ 415 2,364
Other general and administrative expenses.................... 2,096 4,049
---------------- ----------------
Total other expenses..................................... 14,698 36,663
--------------- ----------------
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT).......................... (6,832) (132,994)
INCOME TAX EXPENSE (BENEFIT)...................................... 304 (14,028)
----------------- ----------------
NET LOSS.......................................................... $ (7,136) $ (118,966)
================= ================
LOSS PER SHARE.................................................... $ (0.36) $ (10.82)
WEIGHTED AVERAGE SHARES OUTSTANDING............................... 20,033,600 10,997,880
</TABLE>
See notes to interim financial statements
4
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
------------------ --------------------------------------
FOUR MONTHS ENDED FIVE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 MAY 31, 1999 SEPTEMBER 30, 1998
------------------ --------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans.................................................. $ 17,508 $ 21,710 $ 92,603
Mortgage-backed securities............................. 4,008 5,481 21,707
Securities and federal funds sold...................... 1,038 674 2,848
------------- -------------- --------------
Total interest income.............................. 22,554 27,865 117,158
------------ ------------ -------------
INTEREST EXPENSE:
Deposits............................................... 8,640 11,206 18,086
Borrowings............................................. 3,731 11,923 81,221
------------ ------------ --------------
Total interest expense............................. 12,371 23,129 99,307
----------- ------------ --------------
NET INTEREST INCOME......................................... 10,183 4,736 17,851
PROVISION FOR ESTIMATED LOSSES ON LOANS..................... (660) 2,697 12,191
------------- ------------- --------------
NET INTEREST INCOME AFTER PROVISION
FOR ESTIMATED LOSSES ON LOANS.......................... 10,843 2,039 5,660
----------- ------------- --------------
OTHER INCOME (LOSS):
Servicing revenue...................................... 3,364 3,309 4,810
Real estate owned, net................................. 2,775 1,466 3,616
Bankcard income, net................................... 268 2,335 3,486
Gain on sale of loans.................................. 170 3,165 27,904
Gain on sale of securities............................. 292 -- 7,768
Trading income......................................... -- -- 1,630
Minority interest in WCC............................... 594 -- --
Market valuation losses and impairments................ (8,615) -- (76,580)
Write-down of mortgage servicing rights................ -- -- (13,704)
Other, net............................................. 4,394 3,484 1,075
------------ ------------- --------------
Total other income (loss).......................... 3,242 13,759 (39,995)
------------ ------------ --------------
OTHER EXPENSES:
Compensation and employee benefits..................... 11,906 11,796 26,023
Loan service fees and expenses......................... 1,342 8,523 32,995
Professional services.................................. 2,257 2,752 5,702
Occupancy.............................................. 772 1,385 1,769
FDIC insurance premiums................................ 202 501 656
Corporate travel and development....................... 1,546 775 5,731
Depreciation and amortization.......................... 631 1,161 3,256
Other general and administrative expenses.............. 2,938 4,481 9,530
------------ ------------ --------------
Total other expenses............................... 21,594 31,374 85,662
----------- ------------ --------------
LOSS BEFORE REORGANIZATION ITEMS, INCOME TAX
EXPENSE (BENEFIT) AND EXTRAORDINARY ITEM............... (7,509) (15,576) (119,997)
REORGANIZATION ITEMS (see Note 2)........................... -- (52,034) --
-------------- ------------ --------------
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT) AND
EXTRAORDINARY ITEM..................................... (7,509) (67,610) (119,997)
INCOME TAX EXPENSE (BENEFIT)................................ 429 658 (8,192)
-------------- -------------- --------------
LOSS BEFORE EXTRAORDINARY ITEM.............................. (7,938) (68,268) (111,805)
EXTRAORDINARY ITEM, NET OF TAX (see Note 4)................. -- 225,606 --
-------------- -------------- ---------------
NET (LOSS) INCOME........................................... $ (7,938) $ 157,338 $ (111,805)
============== ============= ===============
(LOSS) EARNINGS PER SHARE:
Loss before extraordinary item......................... $ (0.40) $ (6.28) $ (10.58)
Extraordinary item, net of tax......................... N/A 20.73 N/A
Net (loss) income...................................... (0.40) 14.45 (10.58)
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 20,033,600 10,885,000 10,604,798
</TABLE>
See notes to interim financial statements
5
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
------------------ -------------------------------------
FOUR MONTHS ENDED FIVE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 MAY 31, 1999 SEPTEMBER 30, 1998
------------------ ----------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................ $ (7,938) $ 157,338 $ (111,805)
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:........................
Market valuation losses and impairments................. 8,615 -- 76,580
Provision for estimated losses on loans................. (660) 2,697 12,191
Provision for losses on real estate owned............... 132 -- 2,142
Provision for losses on mortgage servicing rights....... -- -- 13,704
Asset valuation adjustments............................. -- 647 --
Depreciation and amortization........................... 631 1,161 1,075
Gain on sale of real estate owned....................... (1,783) (2,192) (2,018)
Loss on disposal of equipment........................... -- 62 --
Origination of loans held for sale...................... (229) (169) (534,022)
Purchase of loans held for sale......................... -- (1,629) (507,046)
Proceeds from sale of loans held for sale............... 5,844 255,845 361,548
Gain on sale of loans................................... (170) (3,165) (27,904)
Gain on sale of securities.............................. (292) -- (7,768)
Unrealized gain on trading securities................... -- -- (318)
Amortization of discounts and deferred fees............. (103) 869 (16,529)
Income on equity investments............................ (64) (291) 4,314
Deferred taxes, net..................................... -- -- 8,172
Other................................................... -- -- (69)
Reorganization items:
Write-off of unamortized debt issuance costs.......... -- 11,319 --
European reorganization costs......................... -- 2,492 --
Adjustments to carrying amounts of assets and liabilities
pursuant to fresh-start reporting.................. -- 37,601 --
Gain on extinguishment of debt........................ -- (225,606) --
Change in:
Trading account securities.............................. -- -- 22,418
Servicer advances....................................... (8,068) (2,545) --
Accrued interest receivable............................. 823 330 (2,090)
Prepaid expenses and other assets....................... 2,491 9,039 (43,328)
Due to affiliates, net.................................. -- -- 27,999
Accounts payable and other liabilities.................. 4,098 12,893 7,079
Minority interest in WCC................................ 5,422 -- --
---------- ----------- ------------
Net cash provided by (used in) operating activities..... 8,749 256,696 (715,675)
---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans....................................... (46,637) (87,988) (527,416)
Loan repayments......................................... 48,748 70,412 221,911
Loan originations....................................... (8,211) (11,746) (39,540)
Proceeds from sale of loans............................. 815 -- 545,932
Proceeds from sale of mortgage-backed securities available
for sale.............................................. 16,411 -- 150,530
Purchase of mortgage-backed securities available for sale -- -- (132,945)
Repayment of mortgage-backed securities available for sale 3,501 9,010 32,599
Repayments of mortgage-backed securities held to maturity 1,242 1,544 3,545
Proceeds from FHLB stock dividend....................... -- 750 --
Purchase of real estate owned........................... -- (708) (18,263)
Proceeds from sale of real estate owned................. 22,616 28,359 170,207
Purchase of equity securities........................... -- -- (14,731)
Purchases of leasehold improvements and equipment....... (332) (768) (4,160)
------------ ---------- ------------
Net cash provided by investing activities............... 38,153 8,865 387,669
------------ ---------- ------------
</TABLE>
See notes to interim financial statements
6
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
------------------ --------------------------------------
FOUR MONTHS ENDED FIVE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 MAY 31, 1999 SEPTEMBER 30, 1998
------------------ ----------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits..................... $ (37,716) $ (13,256) $ 171,493
Proceeds from short-term borrowings..................... 144,428 99,579 1,733,984
Repayments of short-term borrowings..................... (152,150) (353,800) (1,620,497)
Proceeds from debtor-in-possession financing............ -- 5,000 --
Issuance of common stock................................ -- -- 61,811
Purchase of treasury stock.............................. -- -- (2,728)
Redemption of preferred stock........................... -- -- (27,500)
-------------- ----------- -------------
Net cash (used in) provided by financing activities (45,438) (262,477) 316,563
-------------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................................. 1,464 3,084 (11,443)
CASH AND CASH EQUIVALENTS:
Beginning of period..................................... 26,552 23,468 66,115
------------- ------------- -------------
End of period........................................... $ 28,016 $ 26,552 $ 54,672
============ ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION-- Cash paid for:
Interest................................................ $ 7,950 $ 17,083 $ 97,223
Income taxes............................................ 240 1,327 5,690
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned acquired in settlement of
loans................................................ 742 3,547 121,878
Transfer of securities classified as trading to available
for sale............................................. -- -- 16,869
Transfer of loans classified as discounted to available
for sale............................................. 11,629 -- --
NONCASH FINANCING ACTIVITIES:
Pay in kind preferred stock dividend.................... -- -- 417
NONCASH REORGANIZATION ITEMS:
Cancellation of old common stock........................ -- 114,856 --
Issuance of new common stock in exchange for notes payable
and accrued interest thereon....................... -- 88,900 --
</TABLE>
See notes to interim financial statements
7
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock Retained
--------------- -------------------- ------------------ Earnings
Shares Amount Shares Amount Shares Amount (Deficit)
------ ------ ------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1999 -- $ -- 11,070,000 $117,708 185,000 $ (2,852) (183,294)
Comprehensive income:
Net income............... 157,338
Unrealized holding losses
on available for sale
securities - net of tax
Unrealized loss on foreign
currency translation...
Total comprehensive income.
Impact of reorganization:
Elimination of former
equity in connection with
bankruptcy plan.......... (11,070,000 (117,708) (185,000) 2,852 25,956
Issuance of new equity in
connection with bankruptcy
plan..................... 20,033,600 88,900
--------------------------------------------------------------------------------
BALANCE, May 31, 1999
(Fresh-start reporting date) -- $ -- 20,033,600 $ 88,900 -- $ -- $ --
Comprehensive loss:
Net loss................. (7,938)
Unrealized holding losses
on available for sale
securities - net of tax
Unrealized gain on foreign
currency translation...
Total comprehensive loss...
--------------------------------------------------------------------------------
BALANCE, September 30, 1999 -- $ -- 20,033,600 $ 88,900 -- $ -- $ (7,938)
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Loss Total
------------- -----
<S> <C> <C>
BALANCE, January 1, 1999 (24,357) (92,795)
Comprehensive income:
Net income............... 157,338
Unrealized holding losses
on available for sale
securities - net of tax (720) (720)
Unrealized loss on foreign
currency translation... (1,662) (1,662)
----------
Total comprehensive income. 154,956
Impact of reorganization:
Elimination of former
equity in connection with
bankruptcy plan.......... 26,739 (62,161)
Issuance of new equity in
connection with bankruptcy
plan..................... 88,900
-----------------------
BALANCE, May 31, 1999
(Fresh-start reporting date)$ -- 88,900
Comprehensive loss:
Net loss................. (7,938)
Unrealized holding losses
on available for sale
securities - net of tax (59) (59)
Unrealized gain on foreign
currency translation... 180 180
----------
Total comprehensive loss... (7,817)
------------------------
BALANCE, September 30, 1999 $ 121 $ 81,083
=======================
</TABLE>
See notes to interim financial statements
8
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED)
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements of Wilshire
Financial Services Group Inc. and Subsidiaries (the "Company" or "WFSG") are
unaudited and should be read in conjunction with the report on Form 8-K dated
June 10, 1999 relating to the emergence from bankruptcy and change in control of
the Company. A summary of the Company's significant accounting policies is set
forth in Note 4 to the Consolidated Financial Statements in the Company's 1998
Annual Report on Form 10-K.
On June 10, 1999, the Company completed its plan of reorganization
under Chapter 11 of the United States Bankruptcy Code and emerged from
bankruptcy, as discussed further in Note 2. The Company adopted fresh-start
reporting (see Note 3), and restated its assets and liabilities to reflect their
estimated fair values as of the close of business on May 31, 1999, the day
management concluded that substantially all conditions precedent to the plan of
reorganization had been satisfied. Under the provisions of fresh-start
reporting, the Company's retained deficit and other equity accounts were
reclassified to common stock. The financial statements presented include
consolidated statements of financial condition of the predecessor company as of
December 31, 1998 and the reorganized company as of May 31, 1999 and September
30, 1999; consolidated statements of operations of the predecessor company for
the nine-month period ended September 30, 1998 and for the five-month period
ended May 31, 1999; and consolidated statements of operations of the reorganized
company for the three-month and four-month periods ended September 30, 1999.
In the opinion of management, all adjustments, other than the
adjustments described below, generally comprised of normal recurring accruals
necessary for fair presentation of the interim consolidated financial
statements, have been included and all intercompany accounts and transactions
have been eliminated in consolidation. Operating results for the four months
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the period ending December 31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications of 1998 amounts were made in order to conform
to the 1999 presentation, none of which affect previously reported net income.
2. RESTRUCTURING OF THE COMPANY
In order to address liquidity concerns and to improve the Company's
financial condition, the Company and an unofficial committee of holders of a
majority of the Company's $184.2 million in outstanding publicly issued notes
agreed, in November 1998, to a restructuring of the Company whereby (i) the
noteholders would exchange their notes for new common stock in the Company; (ii)
the Company's existing common stock and options would be canceled; and (iii)
noteholders would reallocate up to 0.6% of the new common stock to the then
existing stockholders of the Company.
9
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)
(Unaudited)
In connection with the plan of reorganization (the "Plan"), the Company
filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy
Code in the Federal Court of Wilmington, Delaware on March 3, 1999. On April 12,
1999, the Plan was approved by the bankruptcy court. On June 10, 1999, the Plan
became effective, the Company emerged from bankruptcy and a new Board of
Directors was seated. However, there can be no assurance that the reorganization
of the Company will have the desired economic effect.
Pursuant to the Plan, the holders of the Company's $184.2 million in
outstanding publicly issued notes received approximately 96.16 shares of new
common stock for every $1,000 of notes, including accrued interest through March
2, 1999 (see Note 4 - Extraordinary Item). A portion of the new common stock was
reallocated by the noteholders so that holders of the old common stock received
approximately 0.6% of the outstanding shares of new common stock. The principal
stockholders, Andrew A. Wiederhorn and Lawrence A. Mendelsohn, received 1 share
of new common stock for every 136.07 shares of old common stock held by them.
The registered holders other than the principal stockholders received
approximately 1 share of new common stock for every 77.28 shares of old common
stock. Wilshire Real Estate Investment Inc. ("WREI," formerly Wilshire Real
Estate Investment Trust Inc.), holds 2,874,791 shares of new common stock,
representing a 14.4% ownership interest in the Company (see Note 8--Investment
in WREI).
In addition, as part of the Plan, the servicing of the Company's
assets are currently conducted by Wilshire Credit Corporation ("WCC"
(formerly WCC Inc.)), a newly formed, majority-owned subsidiary of the
Company. Prior to the reorganization, the Company's assets were serviced by
Wilshire Credit Corporation (now known as Capital Wilshire Holdings Inc.
("CWH")), a company previously owned by Andrew A. Wiederhorn and Lawrence A.
Mendelsohn, formerly the Company's principal stockholders. As part of the
Plan, the Company entered into concurrent negotiations with the owners of CWH
and the principal creditor of CWH, Capital Consultants Inc. ("CCI"), to
incorporate the servicing operations of CWH into WFSG. Messrs. Wiederhorn and
Mendelsohn were in default on a loan from CWH's principal creditor, CCI. A
portion of that loan had been guaranteed by the Company. In exchange for
releases from such debt, Messrs. Wiederhorn and Mendelsohn contributed WCC to
WFSG and, in exchange for CCI's release of the Company's loan guaranty to
CCI, WFSG transferred 49.99% of the equity of WCC to CCI. As a result, the
Company currently owns 100% of the voting common stock (representing 50.01%
of the economic value) of WCC, and 100% of the Class B non-voting common
stock and the remaining 49.99% economic interest of WCC are held by CCI.
In January 1999, WREI agreed to provide the Company
debtor-in-possession financing of up to $10.0 million (the "DIP Facility") as
part of a compromise and settlement of a $17.0 million obligation payable from
the Company to WREI. The DIP Facility bears interest at 12% and is secured by
the stock of First Bank of Beverly Hills, FSB ("First Bank"), WFSG's savings
bank subsidiary. WREI funded $5.0 million of the DIP Facility on March 3, 1999,
but did not provide the remaining balance. The remaining 50%, or approximately
$8.5 million, of the Company's obligation to WREI was treated pari passu with
WFSG's noteholders and converted to newly issued common stock of WFSG on the
effective date of the Plan. Following the completion of WFSG's reorganization,
the DIP Facility became an ordinary secured lending facility with no special
priority accorded by bankruptcy law.
Revenues and expenses resulting from the reorganization of the Company
while it was in Chapter 11 have been segregated and recorded as Reorganization
Items in the consolidated statements of operations and include the following for
the five months ended May 31, 1999:
10
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Five Months Ended
May 31, 1999
(Dollars in thousands)
----------------------
<S> <C>
Write-off of unamortized debt issuance costs..................... $ 11,319
Professional services............................................ 609
European restructuring costs..................................... 2,492
Fresh-start reporting adjustments to assets and liabilities...... 37,601
Other general and administrative expenses........................ 13
-----------------
$ 52,034
-----------------
-----------------
</TABLE>
Costs incurred to issue the notes were previously capitalized and were
being amortized over the life of the notes. The remaining unamortized balance of
such costs associated with the notes have been written-off. Professional
services included in Reorganization Items represent services provided in
connection with the Plan after the March 3, 1999 Chapter 11 filing date.
In March 1999, WFSG developed and communicated a plan to restructure
its European operations and reduce its workforce. Costs included in
Reorganization Items as of May 31, 1999 consist primarily of severance related
compensation, the write-off of certain leasehold improvements and other office
closure related costs.
The effects of the fresh-start reporting adjustments are detailed on
the following page in reconciling the predecessor Company's balance sheet to the
successor Company's balance sheet as of May 31, 1999.
Due to the reorganization of the Company, management of the Company
does not believe that the results of operations of the predecessor company for
the five months ended May 31, 1999 are indicative of the performance of the
reorganized company following the effective date of the Plan.
3. FRESH-START REPORTING
The Company's Plan was accounted for in accordance with the American
Institute of Certified Public Accountants Statement of Position 90-7, FINANCIAL
REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE ("SOP 90-7").
The accounting of SOP 90-7 resulted in the creation of a new entity for
financial reporting purposes. The Company adopted fresh-start reporting because
holders of the Company's existing common stock immediately before filing and
confirmation of the Plan received less than 50% of the new common stock of the
emerging entity and the Company's reorganized value is less than its
postpetition liabilities and allowed claims. The reorganization value of the
Company was determined by estimating the fair value of its net assets as of the
fresh-start reporting date.
For financial reporting purposes, the Company accounted for the
consummation of the reorganization effective May 31, 1999. The periods prior to
this date have been designated "Predecessor Company" and the period subsequent
to this date has been designated "Reorganized Company." As a result of the
adoption of the fresh-start reporting, the reorganized Company's consolidated
financial statements are not comparable to the predecessor Company's
consolidated financial statements.
11
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)
(Unaudited)
The effect of the plan of reorganization and the implementation of
fresh-start reporting on the Company's balance sheet as of May 31, 1999 is as
follows (unaudited):
<TABLE>
<CAPTION>
ADJUSTMENTS TO RECORD CONFIRMATION OF PLAN
PREDECESSOR -------------------------------------------------------
COMPANY'S FORGIVENESS FRESH-START CANCELLATION ISSUANCE OF
BALANCE SHEET OF DEBT ADJUSTMENTS OF OLD STOCK NEW STOCK
------------- ----------- ----------- ------------ -----------
ASSETS (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents................... $ 26,552 $ $ $ $
Mortgage-backed securities available for sale 99,124 523
Mortgage-backed securities held to maturity. 11,993
Securities held to maturity................. 5,969
Loans, net.................................. 490,498 1,078
Discounted loans, net....................... 29,058
Loans held for sale, net, at lower of
cost or market........................... 45,757
Stock in Federal Home Loan Bank of
San Francisco, at cost.................. 4,655
Real estate owned, net...................... 33,966 1,408
Leasehold improvements and equipment, net... 6,474 (318)
Accrued interest receivable................. 5,138
Investment in Wilshire Real Estate
Investment Trust Inc.................... 6,370 (2,152)
Servicer advances........................... 7,552
Mortgage servicing rights, net.............. 2,192 (2,192)
Prepaid expenses and other assets........... 19,219 -- (3,496) -- --
----------- ----------- ------------ --------------- -----------
TOTAL ASSETS $ 794,517 $ -- $ (5,149) $ -- $ --
========== =========== ============ =============== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Liabilities not subject to compromise:
Deposits $ 497,174 $ $ 250 $ $
Short-term borrowings.................. 163,064 1,790
Notes payable to Wilshire Real Estate
Investment Trust Inc................. 13,486 (2,738)
Accounts payable and other liabilities. 26,165 1,277
Liabilities subject to compromise........ 225,606 (225,606) -- -- --
----------- -------- ------------ -------------- -------------- -
Total liabilities................... 925,495 (225,606) 579 -- --
----------- -------- ---------- -------------- --------------
Stockholders' Equity:
Common stock........................... 117,708 (117,708) 88,900
Treasury stock......................... (2,852) 2,852
Retained deficit....................... (213,961) 225,606 (37,601) 114,856 (88,900)
Accumulated other comprehensive loss,
net................................. (31,873) -- 31,873 -- --
----------- -------- ---------- -------------- --------------
Total stockholders' (deficit) equity (130,978) 225,606 (5,728) -- --
----------- -------- ---------- -------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 794,517 $ -- $ (5,149) $ -- $ --
=========== ======== ========== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
REORGANIZED
COMPANY'S
BALANCE SHEET
-------------
ASSETS
<S> <C>
Cash and cash equivalents................... $ 26,552
Mortgage-backed securities available for sale 99,647
Mortgage-backed securities held to maturity. 11,993
Securities held to maturity................. 5,969
Loans, net.................................. 491,576
Discounted loans, net....................... 29,058
Loans held for sale, net, at lower of cost or 45,757
market
Stock in Federal Home Loan Bank of
San Francisco, at cost.................. 4,655
Real estate owned, net...................... 35,374
Leasehold improvements and equipment, net... 6,156
Accrued interest receivable................. 5,138
Investment in Wilshire Real Estate
Investment Trust Inc.................... 4,218
Servicer advances........................... 7,552
Mortgage servicing rights, net.............. --
Prepaid expenses and other assets........... 15,723
-----------
TOTAL ASSETS $ 789,368
===========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Liabilities not subject to compromise:
Deposits $ 497,424
Short-term borrowings.................. 164,854
Notes payable to Wilshire Real Estate
Investment Trust Inc................. 10,748
Accounts payable and other liabilities. 27,442
Liabilities subject to compromise........ --
-------------
Total liabilities................... 700,468
----------
Stockholders' Equity:
Common stock........................... 88,900
Treasury stock......................... --
Retained deficit....................... --
Accumulated other comprehensive loss, net... --
----------
Total stockholders' (deficit) equity 88,900
----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 789,368
==========
</TABLE>
12
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)
(Unaudited)
4. EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT
In connection with its restructuring, the Company exchanged its notes
payable and certain other outstanding claims for new common stock in the
Company. This gain on extinguishment of debt is reported in the consolidated
statements of operations for the five-month period ended May 31, 1999 as an
extraordinary item in the amount of $225.6 million, and is comprised of the
following liabilities:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Notes payable........................................................................ $ 184,245
Accrued interest on notes payable.................................................... 14,536
Payable to Wilshire Credit Corporation............................................... 18,338
Payable to Wilshire Real Estate Investment Inc....................................... 8,487
-------
$ 225,606
============
</TABLE>
The above debt was cancelled as part of the Plan, and the Notes
payable, accrued interest thereon and payable to Wilshire Real Estate Investment
Inc. were converted into equity of the Reorganized Company. No funds were
expended in the extinguishment of such debt.
It is anticipated that the gain on extinguishment of debt will cause a
reduction of tax attributes, such as net operating losses, capital losses and
the tax basis of assets.
5. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK
First Bank had approximately $34.0 million notional principal amount in
an interest rate swap agreement outstanding at September 30, 1999, which was
designated as a hedge of certain fixed rate loans in order to convert fixed rate
income streams on loans to variable rate. This swap had the effect of decreasing
the Company's net interest income by approximately $66 thousand and $94
thousand, respectively for the three-month and four-month periods ended
September 30, 1999, and $182 thousand for the five months ended May 31, 1999.
The mark-to-market position of this swap was approximately ($43 thousand) at
September 30, 1999.
The Company and its directors are currently defendants to a lawsuit
brought on behalf of each of Andrew A. Wiederhorn, the Company's former Chief
Executive Officer, and Lawrence A. Mendelsohn, the Company's former President.
On August 18, 1999, the Board of Directors of the Company notified each of
Messrs. Wiederhorn and Mendelsohn of the Company's intention to terminate him
for "cause" pursuant to his employment agreement with the Company. The Company
suspended each of Messrs. Wiederhorn and Mendelsohn that same day. On September
3, 1999, the Company terminated the employment of each of them for cause. Mr.
Wiederhorn and Mr. Mendelsohn have brought suit alleging, inter alia, that they
were wrongfully terminated and defamed by the Company's and the directors'
actions.
The Company is also currently a party to a lawsuit with WREI. In August
1999, WREI filed suit against the Company alleging that the aforementioned
suspensions of Mr. Wiederhorn and Mr. Mendelsohn caused the facilities sharing
agreement between the Company and WREI to come into effect, thereby suspending
WREI's obligations under the management agreement between WREI and Wilshire Real
Estate Services Corporation ("WRSC"), a subsidiary of the Company (Messrs.
Wiederhorn and Mendelsohn were simultaneously serving as the senior executive
officers of WREI). WREI's motion for preliminary injunctive relief to prevent
the Company from ousting Messrs. Wiederhorn and Mendelsohn from the Company's
headquarters facilities and for other relief was denied in a written ruling.
WREI thereafter amended its complaint to assert that, as a result of the
termination of Messrs. Wiederhorn and Mendelsohn, (i) the Company had breached
the management agreement with WREI (which permitted WREI to terminate that
agreement) and (ii) the facilities sharing agreement between the Company and
WREI had been triggered, requiring WREI to pay the Company only for the cost of
the management provided by the Company's employees (and no further fees would be
payable under the management agreement). The Company has counterclaimed,
alleging that (i) WREI has failed to pay management fees owed to
13
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)
(Unaudited)
the Company under the management agreement, (ii) WREI is not entitled to
terminate the management agreement (because WRSC had not breached the agreement)
and any purported termination of that agreement by WREI entitles the Company to
a termination fee in excess of $3 million, and (iii) the facilities sharing
agreement is inapplicable and/or invalid.
The Company will continue to vigorously contest the claims made by
Messrs. Wiederhorn and Mendelsohn and WREI and assert its counterclaims against
the same. Management, after consulting legal counsel, believes that the Company
will likely prevail on its claims and its defenses and will likely be awarded
significant damages as a result. The Company, Messrs. Wiederhorn and Mendelsohn
and WREI have held discussions concerning the possible disposition of these
lawsuits. However, there can be no assurance as to whether such discussions will
result in the successful resolution of either or both of these lawsuits.
As part of the restructuring the Company issued a Liquidation Bond to
CCI which is a non-interest bearing obligation to pay CCI, upon any liquidation
or dissolution of WCC, $19.3 million less any distributions that CCI receives
from its 49.99% ownership interest in WCC. WCC is obligated to keep the bond
collateralized with assets of WCC or WFSG having a fair market value equal to
the bond and, to the extent that it does not do so, WFSG is responsible for the
deficiency.
6. INCOME TAXES
The Company files consolidated federal income tax returns with its
domestic subsidiaries. Certain state and foreign tax returns are also filed on a
consolidated basis while others are filed on a separate entity basis. Deferred
tax assets and liabilities represent the tax effects, based on current tax law,
of future deductible or taxable amounts attributable to events that have been
recognized in the consolidated financial statements.
In connection with the Plan, the Company recorded gains relating to the
extinguishment of certain debt, which are expected to reduce or eliminate the
Company's net operating loss carryforward. Any remaining net operating loss
carryforward and any net built-in loss as of the effective date of the Plan will
be subject to limitations based on the fair value of the Company on the
effective date of the Plan.
The Company has established a valuation allowance against all deferred
tax assets, consisting primarily of federal, state and foreign net operating
loss carryforwards, as there is not presumptive evidence that it is more likely
than not that the deferred tax assets will be realized. Benefits realized from
the ultimate utilization of such deferred tax assets subsequent to the effective
date will be recorded as direct additions to equity.
The future utilization of the loss carryforwards will be subject to
significant limitations as a result of the Company's reorganization. In
addition, the net operating loss carryforwards, and possibly other tax
attributes, will be reduced by the cancellation of the Company's notes payable
and other indebtedness.
7. MARKET VALUATION LOSSES AND IMPAIRMENTS
The Company evaluates, on an ongoing basis, the carrying value of its
securities portfolio. To the extent differences between the book bases of the
securities accounted for as available-for-sale and their current market values
are deemed to be temporary in nature, such unrealized gains or losses are
reflected directly in equity, as "other comprehensive income or loss."
Impairments that are deemed to be other than temporary are charged to income, as
"market valuation losses and impairments." In evaluating impairments as other
than temporary, the Company considers the magnitude and trend in the decline of
the market value of securities, the Company's ability to collect all amounts due
according to the contractual terms and the Company's expectations at the time of
purchase.
During the quarter and four months ended September 30, 1999, market
valuation losses and impairments of $8.6 million were recorded. This amount
includes a write-down of approximately $5.1 million related to the
14
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Company's portfolio of mortgage-backed securities; a $1.6 million write-down of
its investment in WREI, as this investment is now being accounted for as an
available-for-sale security (see Note 8); and write-downs of other assets of
approximately $1.9 million. The Company believes that the decline in the value
of these assets is other than temporary.
8. INVESTMENT IN WREI
In April 1998, the Company sponsored the initial public offering of
WREI, whereby WREI received approximately $167.0 million of proceeds. The
Company purchased approximately 990,000 shares of WREI common stock in
connection with the initial public offering. Through June 30, 1999 this
investment was accounted for by the equity method of accounting and was not
adjusted for changes in the market price of the underlying shares but rather,
for increases and decreases based on the stockholders' equity of WREI. During
the third quarter, as discussed further in Note 9, the Company terminated
Messrs. Wiederhorn and Mendelsohn from their executive positions with WFSG
(although they remain executives of WREI), and subsequently, WREI notified the
Company that it was purporting to terminate or otherwise decline to renew its
management agreement with WRSC. As a result, the Company discontinued accounting
for its investment in WREI on the equity method, and is now accounting for the
investment as a security available-for-sale under Statement of Financial
Accounting Standards ("SFAS") No. 115, which requires that the investment be
reported at its current fair value. At September 30, 1999 the Company's
investment in WREI was written down to approximately $2.6 million, based on
management's evaluation of other than temporary impairment for this security. A
charge of approximately $1.6 million was recorded as a market valuation loss and
impairment for the three- and four-month periods ended September 30, 1999 as a
result of this write-down to fair value.
9. RELATED PARTY TRANSACTIONS
At September 30, 1999, the Company had notes payable to WREI totaling
$10.8 million which included a $5.0 million note payable bearing interest at 12%
(funded under the DIP Facility - see Note 2) and an $8.5 million unsecured
pay-in-kind ("PIK") note due in 2006 and bearing interest at 6%. WREI may elect
to convert the PIK note into common stock of WFSG upon receipt of a notice of
redemption of the PIK note by WFSG. In October 1999, WFSG sold mortgage-backed
securities with a book value of $20.9 million at September 30, 1999, and
transferred related debt of $18.5 million to WREI for net proceeds of
approximately $2.4 million. Such amount will be applied to the $5.8 million
discounted present value (book value) of the PIK Notes payable to WREI at
September 30, 1999. No gain or loss will be recorded on this sale, as the
mortgage-backed securities had been written down to the sales price in the
financial statements for the quarter ended September 30, 1999. WREI owns 14.4%
of the Company's outstanding common stock at September 30, 1999.
From WREI's inception until September 1999, WRSC was the manager of
WREI and earned a management fee based on the level of WREI's investment assets.
The Company, through WRSC, earned management fee income of $0.7 million and $0.9
million for the three months and four months ended September 30, 1999,
respectively, and $1.5 million for the five months ended May 31, 1999.
On September 3, 1999, the Company terminated the employment of Andrew
A. Wiederhorn, its former Chief Executive Officer, and Lawrence A. Mendelsohn,
its former President, for "cause" pursuant to their employment agreements with
the Company. Messrs. Wiederhorn and Mendelsohn have served as senior management
of WREI since the formation of that company. Subsequent to the Company's
termination of Messrs. Wiederhorn and Mendelsohn, WREI notified the Company (i)
that WREI was terminating the management agreement between WREI and WRSC as a
result of WRSC's breach of that agreement, and (ii) in the event that WREI had
no right to terminate the management agreement, WREI would not renew the
agreement when it expires by its terms in April 2000. As discussed in Note 5,
the Company takes the position that WRSC has performed all of its obligations
under the management agreement, the agreement is in full force and effect, and
WREI owes the Company for the management that are continuing to be provided by
WRSC under the agreement.
15
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)
(Unaudited)
10. SIGNIFICANT TRANSACTIONS
During the quarter ended September 30, 1999, the Company sold real
estate owned with a carrying value of approximately $16.5 million for proceeds
of approximately $18.2 million; mortgage-backed securities with a carrying value
of approximately $16.1 million for proceeds of approximately $16.4 million; and
loans held for sale with a carrying value of approximately $6.5 million for
proceeds of $6.7 million. These sales were made primarily to repay short-term
borrowing facilities for which the assets served as collateral and to provide
liquidity.
11. REGULATORY MATTERS
On June 3, 1999, the OTS issued a directive letter that indicates that
it considers First Bank to be in "troubled condition." This directive letter
places restrictions on First Bank's ability to engage in certain activities
without prior approval of the OTS, including, but not limited to: increasing
asset size; making new loans, investments or capital expenditures; paying
dividends or making other capital distributions; and hiring senior executive
officers, directors or consultants. On September 2, 1999, the OTS completed a
safety and soundness examination of First Bank. As a result of this examination,
the OTS directive letter will remain in force until First Bank corrects items
noted in the examination report, including developing and implementing an
interest rate risk reduction plan; developing a more detailed business plan
under various interest rate scenarios; and improving controls in the Bankcard
division. First Bank is currently cooperating with the OTS to have the "troubled
institution" designation lifted. However, there can be no assurance as to
whether such attempts will be successful.
12. OPERATING SEGMENTS
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 First Bank. First Bank engages in the acquisitions of mortgage loans,
origination of mortgage loans, and merchant bankcard processing. The primary
source of financing for First Bank's 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. First Bank is a
federally chartered savings bank and is regulated by the Office of Thrift
Supervision.
NON-BANKING - The Company's non-banking operations consist primarily
of loan servicing, acquisition and sales conducted primarily through WCC, its
majority-owned servicing subsidiary, Wilshire Funding Corporation, and to a
lesser extent, Wilshire Financial Services Group Europe Inc. Historically,
the primary funding sources utilized for non-banking operations were line of
credit and repurchase agreement facilities with nationally recognized
investment banking firms.
16
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Segment data for the three months ended September 30, 1999, and
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
----------------------------------------
THRIFT NON-
BANKING BANKING TOTAL
------- -------- ----------
<S> <C> <C> <C>
Interest income................... $ 11,903 $ 4,770 $ 16,673
Interest expense.................. 7,451 1,968 9,419
---------- ---------- -----------
Net interest income............... 4,452 2,802 7,254
Provision for loan losses......... (1,250) 509 (741)
---------- ---------- -----------
Net interest income after
provision for loan losses....... 5,702 2,293 7,995
Other income (loss)............... 1,434 (1,563) (129)
Other expense..................... 4,552 10,146 14,698
---------- ---------- -----------
Income (loss) before taxes........ 2,584 (9,416) (6,832)
Income tax provision (benefit).... 1,111 (807) 304
---------- ----------- -----------
Net income (loss)................. $ 1,473 $ (8,609) $ (7,136)
========== =========== ===========
Total assets...................... $ 612,743 $ 132,283 $ 745,026
========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------
THRIFT NON-
BANKING BANKING TOTAL
------- -------- ----------
<S> <C> <C> <C>
Interest income................... $ 11,505 $ 29,512 $ 41,017
Interest expense.................. 8,347 26,707 35,054
---------- ------------- ------------
Net interest income............... 3,158 2,805 5,963
Provision for loan losses......... -- 15,191 15,191
------------ ------------- ------------
Net interest income (loss) after
provision for loan losses....... 3,158 (12,386) (9,228)
Other income (loss)............... 1,851 (88,954) (87,103)
Other expense..................... 3,691 32,972 36,663
---------- ------------- ------------
Income (loss) before taxes........ 1,318 (134,312) (132,994)
Income tax provision (benefit).... 625 (14,653) (14,028)
----------- -------- --------
Net income (loss)................. $ 693 $ (119,659) $ (118,966)
=========== =========== ===========
Total assets...................... $622,634 $ 1,219,593 $ 1,842,227
======== =========== ===========
</TABLE>
17
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)
(Unaudited)
Segment data for the four months ended September 30, 1999, five months
ended May 31, 1999 and nine months ended September 30, 1998 are as follows:
<TABLE>
<CAPTION>
FOUR MONTHS ENDED FIVE MONTHS ENDED
SEPTEMBER 30, 1999 MAY 31, 1999
---------------------------------- --------------------------------------
THRIFT NON- THRIFT NON-
BANKING BANKING TOTAL BANKING BANKING TOTAL
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income................... $ 16,110 $ 6,444 $ 22,554 $ 17,771 $ 10,094 $ 27,865
Interest expense.................. 9,849 2,522 12,371 $ 11,680 $ 11,449 23,129
--------- -------- ---------- ---------- ------------ ----------
Net interest income (loss)........ 6,261 3,922 10,183 6,091 (1,355) 4,736
Provision for loan losses......... (1,250) 590 (660) -- 2,697 2,697
--------- -------- ---------- ---------- ------------ ----------
Net interest income (loss) after
provision for loan losses....... 7,511 3,332 10,843 6,091 (4,052) 2,039
Other income...................... 2,355 887 3,242 4,232 9,527 13,759
Other expense..................... 6,166 15,428 21,594 7,632 23,742 31,374
--------- -------- ---------- ---------- ------------ ----------
Income (loss) before reorganization
items, taxes and extraordinary
item............................ 3,700 (11,209) (7,509) 2,691 (18,267) (15,576)
Reorganization items.............. -- -- -- -- (52,034) (52,034)
--------- -------- ---------- ---------- ------------ ----------
Income (loss) before taxes and
extraordinary item.............. 3,700 (11,209) (7,509) 2,691 (70,301) (67,610)
Income tax provision (benefit).... 1,591 (1,162) 429 1,357 (699) 658
--------- -------- ---------- ---------- ------------ ----------
Income (loss) before extraordinary
item............................ 2,109 (10,047) (7,938) 1,334 (69,602) (68,268)
Extraordinary item, net of tax.... -- -- -- -- 225,606 225,606
--------- -------- ---------- ---------- ------------ ----------
Net income (loss)................. $ 2,109 (10,047) (7,938) 1,334 $ 156,004 $157,338
========= ======== ========== ========== ============ ==========
Total assets...................... $ 612,743 $132,283 $ 745,026 $ 606,954 $ 182,414 $789,368
========= ======== ========== ========== ============ ==========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
---------------------------------------
THRIFT NON-
BANKING BANKING TOTAL
---------- ------------ -------------
<S> <C> <C> <C>
Interest income................... $ 31,119 $ 86,039 $ 117,158
Interest expense.................. 22,199 77,108 99,307
--------- ------ ------
Net interest income............... 8,920 8,931 17,851
Provision for loan losses......... (5,100) 17,291 12,191
---------- ------ ------
Net interest income (loss) after
provision for loan losses....... 14,020 (8,360) 5,660
Other income (loss)............... 3,297 (43,292) (39,995)
Other expense..................... 10,788 74,874 85,662
--------- ------ ------
Income (loss) before taxes........ 6,529 (126,526) (119,997)
Income tax provision (benefit).... 2,896 (11,088) (8,192)
---------- ------- ------
Net income (loss)................. $ 3,633 (115,438) (111,805)
======== =========== ===========
Total assets...................... $ 622,634 $ 1,219,593 $ 1,842,227
======== =========== ===========
</TABLE>
18
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF WILSHIRE FINANCIAL SERVICES GROUP
INC. AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS FILING. REFERENCES IN THIS
FILING TO "WILSHIRE FINANCIAL SERVICES GROUP INC.," "WFSG," THE "COMPANY," "WE,"
"OUR," AND "US" REFER TO WILSHIRE FINANCIAL SERVICES GROUP INC., OUR WHOLLY
OWNED SUBSIDIARIES, AND WILSHIRE CREDIT CORPORATION ("WCC"), OUR MAJORITY-OWNED
SUBSIDIARY, UNLESS THE CONTEXT INDICATES OTHERWISE.
Wilshire Financial Services Group Inc. is a diversified financial
services company. We conduct business in the U.S. and Europe, specializing in
loan portfolio acquisition 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. Administrative headquarters of WFSG and First Bank are
located in Portland, Oregon.
OVERVIEW AND RESTRUCTURING OF WFSG
In response to adverse market conditions in the second half of 1998 and
the resulting effect on our operations, we focused our efforts during the nine
months ended September 30, 1999 on stabilizing the assets remaining at our
non-banking subsidiaries and restructuring WFSG through a voluntary prepackaged
Chapter 11 bankruptcy filing. First Bank remained focused on the execution of
its primary business plan as it was relatively unaffected by the severe market
conditions which dramatically affected the Company's non-banking subsidiaries
during the second half of 1998.
In connection with the plan of reorganization (the "Plan"), we filed a
voluntary petition for relief under Chapter 11 Bankruptcy Code in the Federal
Court of Wilmington, Delaware on March 3, 1999. On April 12, 1999, the Plan was
approved by the bankruptcy court. On June 10, 1999, the Plan became effective,
we emerged from bankruptcy and a new Board of Directors was seated. Upon the
Plan becoming effective, we adopted fresh start reporting (as described in Note
3 to the interim consolidated financial statements), which had the effect of
revaluing our assets and liabilities to fair value and eliminating the
stockholders' deficit as of the Plan's effective date of May 31, 1999. Due to
our reorganization, management believes that the financial results for the
quarter and nine months ended September 30, 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999.
Wilshire Credit Corporation, now known as Capital Wilshire Holdings
("CWH"), a former affiliate of the Company, provided loan servicing to us
prior to the reorganization. As part of the Plan, the loan servicing
operations of CWH, and the assets and stock of a wholly-owned subsidiary,
Wilshire Servicing Corporation, were transferred to Wilshire Credit
Corporation ("WCC"), a newly formed, majority-owned subsidiary. This transfer
allows us to service our own assets and provide third-party servicing. We own
50.01% of WCC with the remaining 49.99% owned by an unaffiliated third party.
On June 3, 1999, the OTS issued a directive that indicates that it
considers First Bank to be in "troubled condition." This directive places
restrictions on First Bank's ability to engage in certain activities without
first obtaining OTS approval, including, but not limited to: increasing asset
size; making new loans, investments or capital expenditures; paying dividends or
making other capital distributions; and hiring senior executive officers,
directors or consultants. On September 2, 1999, the OTS completed a safety and
soundness examination of First Bank. As a result of this examination, the OTS
directive letter will remain in force until First Bank corrects items noted in
the examination report, including developing and implementing an interest rate
risk reduction plan; developing a more detailed business plan under various
interest rate scenarios; and improving controls in the Bankcard division. First
Bank is cooperating with the OTS to have the "troubled institution" designation
lifted and
19
<PAGE>
is working with the OTS to satisfy certain of its concerns, including addressing
First Bank's asset and liability management process and current interest rate
sensitivity positions.
During the nine months ended September 30, 1999, and continuing to
the present, we remain committed to reducing corporate overhead where deemed
appropriate by management. During the third quarter and continuing into
October 1999, as discussed more fully below, we took steps which will reduce
corporate overhead in our non-bank U.S. operations in excess of $8 million
annually. We have made and are examining additional reductions in overhead
related to our operations in Europe, as well as exploring strategic
alternatives for those operations. In addition, the Company is selling and
pursuing the additional sale of certain non-bank loans, mortgage-backed
securities and other assets, with a view to reducing or eliminating related
debt.
On October 11, 1999, pursuant to an agreement between the Company
and WREI, six employees of the Company terminated their
employment and entered into the employment of WREI. Those employees included
several of the most highly compensated officers of the Company. WREI has assumed
all bonus obligations owed to such employees, and the Company has no other
financial obligations with respect to such terminations.
The Company intends to focus on business growth opportunities at First
Bank and WCC and utilize the holding company to supplement or further such
efforts, where possible, including potential securitizations of certain assets.
RESULTS OF OPERATIONS--FOUR MONTHS ENDED SEPTEMBER 30, 1999
For financial reporting purposes, we accounted for the consummation of
our restructuring effective May 31, 1999 (though the restructuring was completed
on June 10, 1999). The following discussion relates to the operating results of
the "Reorganized Company" for the four-month period subsequent to our
restructuring.
NET LOSS
Our net loss for the four months ended September 30, 1999 was
approximately $7.9 million, or $0.40 per share. The net loss is primarily
attributable to other operating expenses of $21.6 million, partially offset by
net interest income after provision for loan losses of $10.8 million and other
income of $3.2 million.
NET INTEREST INCOME
Our net interest income for the four months ended September 30, 1999
was approximately $10.2 million, which consisted of interest income of $22.6
million, offset by interest expense of $12.4 million. Approximately $17.5
million, or 78%, of our interest income was derived from our portfolio of loans
and discounted loans, with $4.0 million, or 18%, from mortgage-backed and other
securities. Our interest expense consisted of $8.6 million of interest on
deposits at First Bank and $3.7 million of interest on short-term debt
facilities. We no longer incur interest expense on our 13% Notes and 13% Series
B Notes (the "Notes") payable, as the Notes were cancelled and converted to
equity as part of our restructuring.
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
During the four months ended September 30, 1999, we reversed
approximately $1.2 million of provision for loan losses previously taken at
First Bank as reserves were deemed to be excessive based on current analysis,
resulting from improved credit quality due to continued seasoning and
performance of the portfolio. This provision reversal was partially offset by
additional provisions of approximately $0.5 million taken on discounted loans in
our non-banking operations.
OTHER INCOME
20
<PAGE>
Our other income was approximately $3.2 million for the four months
ended September 30, 1999, consisting primarily of servicing revenue of $3.4
million, income from real estate owned of $2.8 million, bankcard income, net, of
$0.3 million, and other, net, of $4.4 million, partially offset by market
valuation losses and impairments of $8.6 million.
The servicing revenue was derived from the loan servicing operations of
WCC, a newly formed, majority-owned subsidiary. These operations were previously
conducted by a former affiliate, CWH, but were transferred to WCC as part of our
restructuring (see Note 2 to the interim consolidated financial statements).
During the four months ended September 30, 1999, gross bankcard
processing revenue was $5.9 million, of which $1.9 million was attributable to
internet commerce, $3.2 million was from mail order transaction processing, and
$0.8 million resulted from audiotext transactions. These bankcard revenues were
offset by bankcard processing expenses of $5.6 million, which include a
provision for bankcard losses of $1.2 million.
Real estate owned, net, consisted primarily of gains on sales of
property acquired in foreclosure or deed-in-lieu thereof.
Other, net, includes primarily $2.8 million of loan fees and charges
and $0.9 million of management fees earned from WREI. WREI notified the Company
of its purported termination and non-renewal of the management agreement in
September 1999, as discussed further in Note 9 to the interim consolidated
financial statements.
As discussed in Note 7 to the interim consolidated financial
statements, the market valuation losses and impairments of $8.6 million are
comprised primarily of write-downs of approximately $5.1 million in the
carrying value of our portfolio of mortgage-backed securities, approximately
$1.6 million in the carrying value of our investment in WREI, and write-downs
of other assets of approximately $1.9 million.
OTHER EXPENSES
Our other expenses totaled approximately $22.5 million for the four
months ended September 30, 1999. These expenses consisted primarily of
compensation and employee benefits expenses of $11.9 million, other general
and administrative expenses of approximately $3.8 million (consisting
primarily of insurance, taxes and general corporate overhead), professional
services of $2.3 million, corporate travel and development of $1.5 million
and loan service fees and expenses of $1.3 million. In September 1999 and
continuing into October, we implemented changes that will further reduce
overhead at the corporate level, including a reduction in workforce, the
termination of our corporate jet lease agreement, and the transfer of several
employees to WREI. We anticipate that these cost-saving measures will result
in savings in excess of $8 million annually.
21
<PAGE>
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1998
In the following discussion, the amounts for the nine months ended
September 30, 1999 represent the sum of the Predecessor Company's operations for
the five months ended May 31, 1999 and the Reorganized Company's operations for
the four months ended September 30, 1999, as reported in the accompanying
consolidated statements of operations.
NET INCOME (LOSS)
Our net income for the nine months ended September 30, 1999 was
approximately $149.4 million, which included an extraordinary gain on the
extinguishment of debt of $225.6 million (see Note 4 - Extraordinary Item).
Excluding the extraordinary gain, our net loss for the nine months ended
September 30, 1999 was approximately $76.2 million, compared with a net loss of
approximately $111.8 million for the nine months ended September 30, 1998. The
smaller operating loss for the 1999 period is primarily attributable to an
increase in other income of $57.0 million, a decrease in other expenses of $32.7
million and a decrease in provision for estimated losses on loans of $10.2
million, partially offset by $52.0 million of costs related to our restructuring
and a decline in net interest income of $2.9 million.
NET INTEREST INCOME
Our net interest income was approximately $14.9 million for the nine
months ended September 30, 1999, compared with approximately $17.8 million for
the nine months ended September 30, 1998. This decrease was due to a decline in
interest income of $66.7 million, partially offset by a decline in interest
expense of $63.8 million, reflecting our reduction in the levels of loans and
other interest-earning assets and paydown of the related short-term borrowing
facilities and the reduction of interest expense on the Notes, as discussed
further below.
INTEREST INCOME. Our interest income was approximately $50.4 million
for the nine months ended September 30, 1999 compared with approximately $117.1
million for the nine months ended September 30, 1998, a decrease of $66.7
million. This decrease was primarily due to a decrease in our interest-earning
assets from approximately $1.6 billion at September 30, 1998, to approximately
$657 million at September 30, 1999, resulting from the sale of certain loans and
other assets to provide liquidity and repay certain short-term borrowing
facilities.
INTEREST EXPENSE. Our interest expense was approximately $35.5 million
for the nine months ended September 30, 1999, compared with approximately $99.3
million for the nine months ended September 30, 1998, a decrease of $63.8
million. The decrease in interest expense was primarily due to a decrease in our
interest-bearing liabilities from approximately $1.8 billion at September 30,
1998 to approximately $627 million at September 30, 1999, resulting primarily
from the repayments of short-term borrowing facilities with proceeds from the
asset sales described above. In addition, during the nine months ended September
30, 1999, we recognized interest on the Notes only through March 3, 1999, the
date on which we filed our voluntary Chapter 11 petition. As a result, the
amount of interest expense recognized on the Notes for the nine months ended
September 30, 1999 was approximately $4.2 million, compared with approximately
$18.0 million for the nine months ended September 30, 1998. Upon the completion
of our restructuring, the Notes were cancelled and converted to equity of WFSG.
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
Provision for estimated losses on loans for the nine months ended
September 30, 1999 was approximately $2.0 million, compared with approximately
$12.2 million for the nine months ended September 30, 1998. The decrease results
primarily from a reduction in provision taken on discounted loans in our
non-banking operations and the reversal of $1.25 million of excess reserves at
First Bank. The higher provision for the 1998 period was due to the requirement
for higher loan loss reserves resulting from the effects of increasing spreads
and reduced market values.
22
<PAGE>
OTHER INCOME (LOSS)
Our other income increased to approximately $17.0 million for the nine
months ended September 30, 1999, compared with a loss of approximately $40.0
million for the nine months ended September 30, 1998. The components of our
other income (loss) are reflected in the following table:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other income (loss):
Servicing revenue............................................. $ 6,673 $ 4,810
Real estate owned, net........................................ 4,241 3,616
Bankcard income, net.......................................... 2,603 3,486
Gain on sale of loans......................................... 3,335 27,904
Gain on sale of securities.................................... 292 7,768
Trading income................................................ -- 1,630
Minority interest in WCC...................................... 594 --
Market valuation losses and impairments....................... (8,615) (76,580)
Write-down of mortgage servicing rights....................... -- (13,704)
Other, net.................................................... 7,878 1,075
------------ ------------
Total other income (loss)............................ $ 17,001 $ (39,995)
============ ============
</TABLE>
The net increase in other income was primarily attributable to a $68.0
million decline in market valuation losses and impairments and the absence of
write-downs of mortgage servicing rights in 1999, compared with such write-downs
of $13.7 million for the 1998 period. In addition, the increase resulted from a
$6.8 million increase in other, net and a $1.9 million increase in servicing
revenue, partially offset by a $24.6 million decrease in gain on sale of loans
and a $7.5 million decrease in gain on sale of securities. The components of
other income are further described below.
SERVICING REVENUE. Servicing revenue for the nine months ended
September 30, 1999 was $6.7 million, compared with $4.8 million for the
comparable period in 1998, an increase of $1.9 million. The increase reflects
the servicing activity of WCC, a newly formed, majority-owned subsidiary. Such
operations were previously performed by a former affiliate, Capital Wilshire
Holdings Inc. (CWH), which was formerly known as Wilshire Credit Corporation.
Certain assets and liabilities of Wilshire Credit corporation were transferred
to WCC effective June 8, 1999 as part of our reorganization (see Note 2 to the
interim consolidated financial statements).
REAL ESTATE OWNED, NET. Real estate owned, net, increased approximately
$0.6 million from the nine months ended September 30, 1998 to the nine months
ended September 30, 1999, primarily due to an increase in gains on the sale of
properties acquired through foreclosure or deed-in-lieu thereof, reflecting our
decision to focus more on non-discounted loans.
BANKCARD INCOME, NET. Bankcard income, net, was approximately $2.6
million for the nine months ended September 30, 1999, compared with $3.5 million
for the comparable 1998 period. This decrease is primarily attributable to a
$3.2 million increase in processing expenses, including $1.2 million of
provisions for losses, which offset the increase in revenues. During the nine
months ended September 30, 1999, gross bankcard processing revenue was $12.2
million, of which $5.7 million was attributable to internet commerce and $1.9
million was attributable to audio text transactions. The remainder of
approximately $4.6 million is primarily attributable to mail order transaction
processing.
The financial results of First Bank's bankcard processing operations
for the nine months ended September 30, 1999 and 1998 have been as follows:
23
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------------------------
1999 1998
--------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Bankcard revenues...................................................... $ 12,190 $ 9,894
Bankcard processing expenses........................................... (9,587) (6,408)
Other expenses......................................................... (2,212) (1,794)
-------------- -------------
Net.................................................................... $ 391 $ 1,692
=============== =============
</TABLE>
GAIN ON SALE OF LOANS. Gain on sale of loans decreased by approximately
$24.6 million from the nine months ended September 30, 1998 to the nine months
ended September 30, 1999. The decrease is primarily due to gains of $27.9
million on sales of approximately $580.0 million unpaid principal balance of
loans during the nine months ended September 30, 1998 and reduced sales activity
during the same period in 1999.
GAIN ON SALE OF SECURITIES. The gain on sale of securities of $0.3
million for the nine months ended September 30, 1999 resulted from sales of
approximately $16.1 million in carrying value of securities for proceeds of
approximately $16.4 million. For the nine months ended September 30, 1998, we
realized gains of $7.8 million on sales of approximately $53.3 million carrying
value of securities.
MARKET VALUATION LOSSES AND IMPAIRMENTS. For the nine months ended
September 30, 1999, the market valuation losses and impairments of $8.6 million
are comprised primarily of write-downs of approximately $1.6 million in the
carrying value of our investment in WREI and approximately $7.0 million in the
carrying value of our portfolio of mortgage-backed securities and other assets.
Subsequent to September 30, 1998, we sold a significant amount of our
loans and mortgage-backed securities to meet collateral calls from our lenders
and to increase liquidity. The declines in values of the assets included in
these sales were recognized as market valuation losses and impairments to the
applicable assets as of September 30, 1998 and recognized in determining net
loss for the nine months then ended. Total market valuation losses and
impairments for the nine months ended September 30, 1998 was $76.6 million. Of
this amount, $22.2 million related to sales of mortgage-backed securities, $5.2
million related to other than temporary impairment of unsold mortgage-backed
securities, $34.9 million related to sales of loans held for sale and discounted
loans and $14.3 million related to hedge losses previously deferred and
classified in other assets in the statement of financial condition.
WRITE-DOWN OF MORTGAGE SERVICING RIGHTS. During the nine months ended
September 30, 1998, we wrote-down capitalized servicing rights by approximately
$13.7 million. The write-down was the result of faster than expected prepayments
on loans being serviced and revised estimates of future prepayments. No
write-downs were recorded in 1999.
OTHER, NET. Other, net, increased by approximately $6.8 million from
the nine months ended September 30, 1998 to the nine months ended September
30, 1999. The increase is primarily attributable to an increase of $2.0
million in loan fees and charges, an increase of $0.5 million in management
fees earned from WREI, and a $2.6 million decrease in the loss from our
investment in WREI (loss of $1.6 million for the 1999 period compared with
a loss of $4.2 million for the 1998 period). As discussed in Note 8 to the
consolidated financial statements, we no longer account for our investment in
WREI by the equity method but rather as a security available for sale. The
$1.6 million loss reflects an adjustment for permanent impairment of the
investment in WREI. In addition, WREI has asserted that it does not owe the
Company management fees payable under the management agreement with WRSC as a
result of WRSC's purported breach of the agreement. As described in Notes 5
and 9 to the interim consolidated financial statements, the Company believes
that the management agreement is in full force and effect, that management
fees are owing and will continue to be owed under that agreement, and that
any attempted termination by WREI of that agreement will result in WREI owing
the Company a termination fee in excess of $3 million. The status of the
management agreement is currently the subject of litigation between the
24
<PAGE>
Company and WREI, and the disposition of that litigation will have an impact on
the extent to which management fee income from WREI will recur in subsequent
periods.
OTHER EXPENSES
Our other expenses totaled approximately $53.0 million for the nine
months ended September 30, 1999, compared with approximately $85.7 million for
the nine months ended September 30, 1998, a decrease of $32.7 million. This
decrease was primarily due to decreases in loan service fees and expenses of
$23.1 million, corporate travel and development of $3.4 million, compensation
and employee benefits of $2.3 million and depreciation and amortization of $1.5
million.
LOAN SERVICE FEES AND EXPENSES. Loan service fees and expenses
decreased from approximately $33.0 million for the nine months ended September
30, 1998 to approximately $9.9 million for the nine months ended September 30,
1999. The decrease is primarily from the inclusion of WCC's operating results
with WFSG in the 1999 period resulting from the restructuring (see Note 2 to the
consolidated financial statements). This decrease was also due to a decline in
the balance of loans from $1.3 billion at September 30, 1998 to $566 million at
September 30, 1999, as we sold a large portion of our loan portfolio to increase
liquidity and reduce outstanding debt.
CORPORATE TRAVEL AND DEVELOPMENT. Corporate travel and development
decreased from approximately $5.7 million for the nine months ended September
30, 1998 to approximately $2.3 million for the nine months ended September
30, 1999, primarily due to substantially reduced travel activity in 1999 as
acquisition activity declined. Corporate travel and development expenses are
expected to decline further in future periods due to the termination of the
lease of our corporate jet, which had a minimum monthly charge of
approximately $0.1 million.
COMPENSATION AND EMPLOYEE BENEFITS. Compensation and employee benefits
totaled approximately $23.7 million for the nine months ended September 30,
1999, compared with approximately $26.0 million for the nine months ended
September 30, 1998. The decrease was primarily due to the reduction of our
workforce in the fourth quarter of 1998, the effects of which were realized
during 1999. In addition, due to the transfer of several employees to WREI (see
"Overview and Restructuring of WFSG") and a recent additional reduction in our
workforce, we anticipate that compensation and employee benefits expenses will
decline further in future periods.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
from approximately $3.3 million for the nine months ended September 30, 1998 to
approximately $1.8 million for the nine months ended September 30, 1999. The
decrease was primarily attributable to higher amortization for the 1998 period
due to the write-off of goodwill associated with retail residential mortgage
origination branches.
REORGANIZATION ITEMS
During the nine months ended September 30, 1999, we incurred
approximately $52.0 million of expenses related to the WFSG restructuring (see
Note 2 to the interim consolidated financial statements). These expenses
primarily consisted of net write-downs of the reported amounts of assets and
liabilities of approximately $37.6 million, the write-off of unamortized debt
issuance costs of $11.3 million, professional services of $0.6 million and costs
related to the restructuring of our European operations of $2.5 million. There
were no such reorganization items for the nine months ended September 30, 1998.
The $52.0 million of reorganization expenses, as well as $4.2 million of
interest expense recognized during the period related to the Notes, will be
non-recurring due to WFSG's reorganization. We recognized interest expense on
the Notes only through March 3, 1999, the date WFSG filed its petition under
Chapter 11 of the Bankruptcy Code.
25
<PAGE>
RESULTS OF OPERATIONS--QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER
ENDED SEPTEMBER 30, 1998
The following discussion compares the results of operations of the
Reorganized Company for the quarter ended September 30, 1999 with those of the
Predecessor Company for the quarter ended September 30, 1998.
NET LOSS
Our net loss for the quarter ended September 30, 1999 was approximately
$7.1 million, compared with a loss of approximately $119.0 million for the
quarter ended September 30, 1998. The smaller net loss for the 1999 period is
primarily attributable to a decrease in other loss of $87.0 million, a decrease
in other expenses of $22.0 million, a decrease in provision for losses on loans
of $15.9 million, and an increase in net interest income of $1.3 million.
NET INTEREST INCOME
Our net interest income was approximately $7.3 million for the quarter
ended September 30, 1999, compared with approximately $6.0 million for the
quarter ended September 30, 1998. This increase was due to a decline in interest
expense of $25.6 million, partially offset by a decline in interest income of
$24.3 million, reflecting our reduction in the levels of loans and other
interest-earning assets and paydown of the related short-term borrowing
facilities.
INTEREST INCOME. Our interest income was approximately $16.7 million
for the quarter ended September 30, 1999, compared with approximately $41.0
million for the quarter ended September 30, 1998, a decrease of $24.3 million.
This decrease was primarily due to a decrease in our interest-earning assets
from approximately $1.6 billion at September 30, 1998, to approximately $657
million at September 30, 1999, resulting from the sale of certain loans and
other assets to provide liquidity and repay certain short-term borrowing
facilities.
INTEREST EXPENSE. Our interest expense was approximately $9.4 million
for the quarter ended September 30, 1999, compared with approximately $35.0
million for the quarter ended September 30, 1998, a decrease of $25.6 million.
The decrease in interest expense was primarily due to a decrease in our
interest-bearing liabilities from approximately $1.8 billion at September 30,
1998, to approximately $627 million at September 30, 1999, resulting primarily
from the repayments of short-term borrowing facilities with proceeds from the
asset sales described above. In addition, during the quarter ended September 30,
1999, we did not incur interest on our Notes, as they were cancelled and
converted to equity of WFSG during the second quarter of 1999, as part of our
restructuring. During the quarter ended September 30, 1998, we incurred interest
expense on the Notes of approximately $6.0 million.
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
Provision for estimated losses on loans for the quarter ended
September 30, 1999 was a net recovery of approximately $0.7 million, compared
with a provision of approximately $15.2 million for the three months ended
September 30, 1998. During the quarter ended September 30, 1999, we reversed
approximately $1.2 million of provisions for loan losses previously taken at
First Bank as reserves were deemed to be excessive based on current analysis,
resulting from improved credit quality due to continued seasoning and
performance of the portfolio. This provision reversal was partially offset by
additional provisions of approximately $0.5 million taken on discounted loans
in our non-banking operations. The higher provision for the 1998 period was
attributable to increasing market yields on loans, which drove down market
values on many pools of loans in our portfolio.
OTHER INCOME (LOSS)
Our other loss decreased to approximately $0.1 million for the quarter
ended September 30, 1999, compared with a loss of approximately $87.1 million
for the quarter ended September 30, 1998. The components of our other loss are
reflected in the following table:
26
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------
SEPTEMBER 30,
1999 1998
-------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Other income (loss):
Servicing revenue............................................. $ 1,922 $ 1,070
Real estate owned, net........................................ 2,622 144
Bankcard (loss) income, net................................... (139) 1,989
Gain on sale of loans......................................... 158 1,460
Gain (loss) on sale of securities............................. 292 (433)
Minority interest in WCC...................................... 434 --
Market valuation losses and impairments....................... (8,615) (76,580)
Write-down of mortgage servicing rights....................... -- (12,704)
Other, net.................................................... 3,197 (2,049)
-------------- -------------
Total other loss..................................... $ (129) $ (87,103)
============= =============
</TABLE>
The net decrease in other loss was primarily attributable to a $68.0
million decline in market valuation losses and impairments and the absence of
write-downs of mortgage servicing rights in 1999, compared with such write-downs
of $12.7 million for the 1998 period. In addition, the smaller loss for the 1999
period resulted from a $5.2 million increase in other, net, and a $2.5 million
increase in real estate owned, net, partially offset by a $2.1 million decrease
in bankcard income, net, and a $1.3 million decrease in gain on sale of loans.
The components of other loss are further described below.
SERVICING REVENUE. Servicing revenue for the three months ended
September 30, 1999 was $1.9 million, compared with $1.1 million for the
comparable period in 1998, an increase of $0.8 million. The increase reflects
the servicing activity of WCC, a newly formed, majority-owned subsidiary. Such
operations were previously performed by a former affiliate, Wilshire Credit
Corporation, but were transferred to WCC effective May 31, 1999 as part of our
reorganization (see Note 2 to the interim consolidated financial statements).
REAL ESTATE OWNED, NET. Real estate owned, net increased approximately
$2.5 million from the quarter ended September 30, 1998 to the quarter ended
September 30, 1999 due to an increase in gains on the sale of properties
acquired through foreclosure or deed-in-lieu thereof.
BANKCARD (LOSS) INCOME, NET. Bankcard loss, net, was approximately $0.1
million for the quarter ended September 30, 1999, compared with bankcard income,
net, of approximately $2.0 million for the quarter ended September 30, 1998.
This decrease is attributable to a $1.4 million increase in processing expenses,
including $1.2 million of provisions for losses, and a $0.7 million decrease in
revenues. During the quarter ended September 30, 1999, gross bankcard processing
revenue was $4.4 million, of which $1.2 million was attributable to internet
commerce and $0.6 million was attributable to audio text transactions. The
remainder of approximately $2.6 million is primarily attributable to mail order
transaction processing.
The financial results of First Bank's bankcard processing operations
for the quarters ended September 30, 1999 and 1998 have been as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
SEPTEMBER 30,
------------------------------
1999 1998
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Bankcard revenues........................................................ $ 4,440 $ 5,171
Bankcard processing expenses............................................. (4,579) (3,182)
Other expenses........................................................... (800) (700)
------------ ------------
Net...................................................................... $ (939) $ 1,289
============ ============
</TABLE>
27
<PAGE>
GAIN ON SALE OF LOANS. Gain on sale of loans decreased by approximately
$1.3 million from the quarter ended September 30, 1998 to the quarter ended
September 30, 1999. The decrease is primarily due to gains of $1.5 million on
sales during the quarter ended September 30, 1998 (including one securitization
transaction of approximately $178 million unpaid principal balance of loans) and
reduced sales activity during the quarter ended September 30, 1999.
GAIN (LOSS) ON SALE OF SECURITIES. Gain on sale of securities was
approximately $0.3 million during the quarter ended September 30, 1999 due to
sales of $16.1 million in carrying value of securities for proceeds of
approximately $16.4 million. During the quarter ended September 30, 1998, we
sold securities with carrying values of approximately $21.8 million, resulting
in a loss of approximately $0.4 million. This loss resulted from our need to
sell certain securities during the quarter ended September 30, 1998 in order to
raise liquidity in response to conditions in the financial marketplace.
MARKET VALUATION LOSSES AND IMPAIRMENTS. For the quarter ended
September 30, 1999, the market valuation losses and impairments of $8.6 million
are comprised primarily of write-downs of approximately $1.6 million in the
carrying value of our investment in WREI and approximately $7.0 million in the
carrying value of our portfolio of mortgage-backed securities and other assets.
Subsequent to September 30, 1998, we sold a significant amount of our
loans and mortgage-backed securities to meet collateral calls and to increase
liquidity. The declines in values of the assets included in these sales were
recognized as market valuation losses and impairments to the applicable assets
as of September 30, 1998 and recognized in determining net loss for the quarter
then ended. Total market valuation losses and impairments for the quarter ended
September 30, 1998 was $76.6 million. Of this amount, $22.2 million related to
sales of mortgage-backed securities, $5.2 million related to other than
temporary impairment of unsold mortgage-backed securities, $34.9 million related
to the sale of loans held for sale and discounted loans and $14.3 million
related to hedge losses previously deferred and classified in other assets in
the statement of financial condition.
WRITE-DOWN OF MORTGAGE SERVICING RIGHTS. During the quarter ended
September 30, 1998, we wrote-down mortgage servicing rights by approximately
$12.7 million. The write-down was the result of faster than expected prepayments
on loans being serviced and revised future estimates of prepayments.
OTHER, NET. Other, net, increased by approximately $5.2 million, from a
loss of $2.0 million for the three months ended September 30, 1998 to income of
$3.2 million for the three months ended September 30, 1999. The increase is
primarily attributable to the absence of a loss from our investment in WREI for
the 1999 period, compared with such loss of $4.8 million for the 1998 period. As
discussed in Note 8 to the consolidated financial statements, we no longer
account for our investment in WREI by the equity method but rather as a security
available for sale. The $1.6 million loss reflects an adjustment for permanent
impairment of the investment in WREI. The increase in other, net, is also due to
an increase in loan fees and charges of $0.9 million, partially offset by a
decrease in management fees from WREI of $0.4 million. In addition, WREI has
asserted that it does not owe the Company management fees payable under the
management agreement with WRSC as a result of WRSC's purported breach of the
agreement. As described in Notes 5 and 9 to the interim consolidated financial
statements, the Company believes that the management agreement is in full force
and effect, that management fees are owing and will continue to be owed under
that agreement, and that any attempted termination by WREI of that agreement
will result in WREI owing the Company a termination fee in excess of $3 million.
The status of the management agreement is currently the subject of litigation
between the Company and WREI, and the disposition of that litigation will have
an impact on the extent to which management fee income from WREI will recur in
subsequent periods.
28
<PAGE>
OTHER EXPENSES
Our other expenses totaled approximately $14.7 million for the quarter
ended September 30, 1999, compared with approximately $36.7 million for the
quarter ended September 30, 1998, a decrease of $22.0 million. This decrease was
primarily due to decreases in loan service fees and expenses of $12.8 million,
compensation and employee benefits of $2.2 million, depreciation and
amortization of $2.0 million, and corporate travel and development of $1.9
million.
LOAN SERVICE FEES AND EXPENSES. Loan service fees and expenses
decreased from $12.9 million for the quarter ended September 30, 1998 to
approximately $0.1 million for the quarter ended September 30, 1999. The
decrease is primarily from the inclusion of WCC's operating results with WFSG in
the 1999 period resulting from the restructuring (see Note 2 to the consolidated
financial statements). This decrease was also due to a decline in the balance of
loans from $1.3 billion at September 30, 1998 to $566 million at September 30,
1999, as we sold a large portion of our loan portfolio to increase liquidity and
reduce outstanding debt.
COMPENSATION AND EMPLOYEE BENEFITS. Compensation and employee benefits
totaled approximately $8.7 million for the quarter ended September 30, 1999,
compared with approximately $10.9 million for the quarter ended September 30,
1998. The decrease was primarily due to the reduction in our workforce in the
fourth quarter of 1998, the effects of which were realized during 1999. In
addition, due to the transfer of several employees to WREI (see "Overview and
Restructuring of WFSG," above) and a recent additional reduction in our
workforce, we anticipate that compensation and employee benefits expenses will
decline further in future periods.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
from approximately $2.4 million for the three months ended September 30, 1998 to
approximately $0.4 million for the three months ended September 30, 1999. The
decrease was primarily due to higher amortization for the 1998 period due to the
write-off of goodwill associated with retail residential mortgage origination
branches.
CORPORATE TRAVEL AND DEVELOPMENT. Corporate travel and development
decreased from approximately $2.9 million for the three months ended
September 30, 1998 to approximately $1.0 million for the three months ended
September 30, 1999 due to substantially reduced travel activity in 1999 as
acquisition activity declined. Corporate travel and development expenses are
expected to decline further in future periods due to the termination of the
lease of our corporate jet, which had a minimum monthly charge of
approximately $0.1 million.
CHANGES IN FINANCIAL CONDITION
The following discussion compares the balances of certain asset,
liability and stockholders' equity (deficit) amounts of the Reorganized Company
as of September 30, 1999 with those of the Predecessor Company as of December
31, 1998 as reported in the accompanying consolidated statements of financial
condition.
MORTGAGE-BACKED AND OTHER SECURITIES. For accounting purposes, our
mortgage-backed and other securities are classified as available for sale or
held to maturity. Our holdings of mortgage-backed securities available for sale
decreased approximately $40.6 million during the nine months ended September 30,
1999. This decrease was primarily due to sales of approximately $16.1 million in
carrying value of securities, principal repayments of $12.5 million and
write-downs to fair value of $11.8 million. Our holdings of mortgage-backed
securities held to maturity decreased approximately $2.8 million during the nine
months ended September 30, 1999 primarily due to principal repayments. The
following table sets forth our holdings of mortgage-backed and other securities
as of September 30, 1999 and December 31, 1998:
29
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Available for sale:
Mortgage-backed securities........................................ $ 38,501 $ 66,829
Agency mortgage-backed securities................................. 35,339 47,634
Held to maturity:
U.S. Government and other securities.............................. 5,975 5,962
Mortgage-backed securities........................................ 10,737 13,580
-------------- ------------
Total investment securities.................................. $ 90,552 $ 134,005
============= ===========
</TABLE>
LOANS, NET. Our portfolio of loans, net of discounts and allowances,
increased by approximately $54.6 million during the nine months ended September
30, 1999. This increase is primarily attributable to the acquisition of
non-discounted loans at First Bank, reflecting our emphasis on increasing the
level of investment in non-discounted loans as a percentage of the total loan
portfolio. The increase in loans, net was also a result of a $1.7 million
decrease in the allowance for loan losses, from $16.5 million at December 31,
1998 to $14.8 million at September 30, 1999. This decrease in the allowance for
loan losses was primarily due to the reversal of $1.25 million of excess
reserves at First Bank, reflecting improved credit quality due to continued
seasoning and performance of the portfolio. See "Discounted Loans, net" below.
DISCOUNTED LOANS, NET. Our portfolio of Discounted Loans decreased by
approximately $38.8 million during the nine months ended September 30, 1999. The
decrease is primarily attributable to our sale of Discounted Loans to repay
certain short-term borrowing facilities and provide liquidity. In addition,
during the quarter ended September 30, 1999, we reclassified an additional $11.6
million of discounted loans to loans held for sale. It is anticipated that our
future investments in Discounted Loans as a percentage of our total loan
portfolio will be reduced. Discounted Loans require significant capital
resources prior to resolution, which is generally six to nine months following
acquisition. We believe we can create a more predictable and less capital
intensive earnings stream by reducing the level of investment in these assets.
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 $241.5 million
during the nine months ended September 30, 1999 primarily as a result of the
sale of loans to increase liquidity and reduce outstanding borrowings. These
decreases were partially offset by the reclassification of $11.6 million of
discounted loans to loans held for sale during the quarter ended September 30,
1999.
REAL ESTATE OWNED, NET. Real estate owned, net decreased by
approximately $46.9 million during the nine months ended September 30, 1999. The
decrease was primarily due to sales of properties for proceeds of approximately
$51.0 million, partially offset by acquisitions of real estate through
foreclosure or deed-in-lieu thereof from our portfolio of discounted loans.
INVESTMENT IN WILSHIRE REAL ESTATE INVESTMENT INC. Investment in WREI
decreased by approximately $3.4 million during the nine months ended September
30, 1999. This decrease was primarily due to impairments in the carrying value
of the investment to reflect the sustainable market value of the underlying
shares.
SERVICER ADVANCES. Servicer advances increased by approximately $10.6
million during the nine months ended September 30, 1999. The increase was
primarily due to the transfer of WCC's assets to WFSG as part of our
restructuring (see Note 2 to the interim consolidated financial statements), as
WCC had made reimbursable advances on loans owned by third parties.
MORTGAGE SERVICING RIGHTS, NET. Mortgage servicing rights, net
decreased by $2.3 million during the nine months ended September 30, 1999,
primarily due to the write-off of previously capitalized or purchased servicing
rights due to faster than expected prepayments on loans being serviced and
revised future estimates of prepayments.
30
<PAGE>
DEPOSITS. First Bank's deposits decreased by approximately $50.7
million during the nine months ended September 30, 1999. This decrease is a
result of First Bank utilizing FHLB advances to fund loan acquisitions and
provide liquidity. On June 3, 1999, the OTS issued a directive which, among
other things, prohibits First Bank, without prior OTS approval, from increasing
total assets during any quarter in excess of an amount equal to net interest
credited on deposits for the quarter.
SHORT-TERM BORROWINGS. Short-term borrowings decreased by approximately
$264.3 million during the nine months ended September 30, 1999, resulting
primarily from our sales of loans held for sale and mortgage-backed securities
and subsequent paydowns of the related debt facilities.
NOTES PAYABLE. The Notes payable of $184.2 million at December 31, 1998
were cancelled in June 1999. Pursuant to our prepackaged Chapter 11 bankruptcy
filing, these Notes were converted into equity of WFSG, as described more fully
in Note 2 to the interim consolidated financial statements.
ACCOUNTS PAYABLE AND OTHER LIABILITIES. WREI has prepaid certain
servicing fees to WCC. These amounts are included in accounts payable and other
liabilities as deferred revenue. The initial amount of the prepaid fees is in
dispute between WREI and WCC with WCC contending that the initial amount is as
low as $2.3 million and WREI contending the amount is $3.2 million. Without
admission, the Company initially recorded the amount at $3.2 million and is
carrying the prepaid fee at $2.9 million at September 30, 1999.
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 for general business purposes. Our
sources of cash flow include certificates of deposit, securitizations, whole
loan and mortgage-backed securities sales, net interest income and borrowings
under warehouse and repurchase financing facilities (if available) and from
institutional investors and other lenders and public and private debt offerings.
We also have borrowed from WREI. In addition, First Bank has available funding
through FHLB advances. Our liquidity is actively managed on a daily basis and is
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.
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. Many of our lenders determined that the value
of these assets had decreased and demanded cash or securities to continue
lending, which reduced our cash position and eventually prompted asset sales at
depressed prices to meet these demands 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 our lenders have expressed concern about continued lending to this
industry given market conditions and to us given recent operating losses. It is
not clear to what extent we can rely on short-term warehouse or repurchase
agreements as a source of liquidity. At September 30, 1999, our cash balances
totaled approximately $28.0 million; however, $17.3 million of the balance was
held at First Bank and is not available for use by any Wilshire entity other
than First Bank.
Our restructuring, which was effective on June 10, 1999 and is
described in Note 2 to the consolidated financial statements, significantly
improved our financial position by reducing indebtedness, eliminating the
ongoing interest cost associated with that indebtedness, and significantly
increasing our equity account.
Based on our current and expected asset size, capital levels, and
organizational infrastructure, we believe there will be sufficient available
cash to meet our needs. We intend to aggressively seek new capital and financing
to permit us to more fully and more efficiently utilize our banking and loan
servicing platforms. There can be no assurance, however, that we will be able to
obtain new capital or will have sufficient cash flows.
Sources of liquidity for First Bank include wholesale and brokered
certificates of deposit and FHLB advances. At September 30, 1999, First Bank
had approximately $444.0 million of certificates of deposit. At September 30,
1999, scheduled
31
<PAGE>
maturities of certificates of deposit during the 12 months ending September 30,
2000 and thereafter amounted to approximately $395.8 million and approximately
$48.2 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. In addition, First Bank
management is currently increasing the amount of its FHLB advance borrowings
as a percentage of its total borrowings and deposits and is exploring new
ways to reduce its exposure to changes in interest rates, including efforts to
develop core deposits and sales of fixed-rate loans with simultaneous
purchases of variable-rate loans.
We have repurchase agreements outstanding that mature monthly and, with
the parties' agreement, may be rolled into new 30-day repurchase agreements.
There can be no assurance that lenders will continue to roll the repurchase
agreements or will not change material terms, including, but not limited to,
advance rates and interest rates on these financing arrangements. In addition,
given current market conditions, we may not be able to securitize loans as a
source of liquidity.
The Company is negotiating with one of the Company's primary lenders
to provide a one-year committed financing facility for all loans and
mortgage-backed securities currently outstanding under previous agreements
with such lender, totaling $15.3 million and $16.6 million, respectively, at
September 30, 1999. The execution and closing of these new agreements are
contingent on the Company's payment of all outstanding margin calls with
respect to such loans and mortgage backed securities. However, it is not
certain that this facility will be consummated. Concurrent with discussions
with the above-mentioned lender, the Company is pursuing the sales of the
loans and mortgage-backed securities underlying the proposed facilities to
various parties. The Company is currently determining whether to complete the
sales of such assets and/or to pay some or all of the applicable margin calls.
Mortgage-backed securities which are subject to repurchase agreements,
as well as loans and real estate which secure other indebtedness, periodically
are revalued by the lender, and a decline in the value that is recognized by the
lender (whether or not the lender recognized the full fair value of the
security) may result in the lender requiring us to provide additional collateral
to secure the indebtedness. 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 most instances, lenders under repurchase agreements
secured by mortgage-backed securities have withheld principal and/or interest
payments on such securities in order to reduce outstanding, unpaid margin calls.
At September 30, 1999, there were approximately $5.6 million of outstanding
collateral calls, as determined by our lenders, net of withheld principal and
interest payments. If we are unable to fund additional collateral requirements
or to repay, renew or replace maturing indebtedness on terms reasonably
satisfactory to us, we may be required to sell (on short notice) a portion of
our assets, and could incur losses as a result. Furthermore, since, from time to
time, there is extremely limited liquidity in the market for subordinate and
residual interests in mortgage-related securities, there can be no assurance
that we will be able to dispose of such securities promptly for fair value in
such situations.
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 are
essential to the continuation of the Company's ability to purchase pools of
loans. During the third and fourth quarters of 1998, 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 and growth at First Bank and to find equity
partners for our servicing operation. To the extent that the current market
environment persists, such growth will depend largely on the Company's
ability to find and use equity partners for growth of our servicing operation
and growth at First Bank. Otherwise, such growth may be significantly
curtailed or delayed.
32
<PAGE>
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.
Federally insured savings associations such as First 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. In connection with the 1998 examination, the
OTS indicated that the capital level of First Bank exceeds the minimum
requirement for "well capitalized" status under provisions of the Prompt
Corrective Action Regulation. On June 3, 1999, the OTS issued a directive letter
that indicates that it considers First Bank to be in "troubled condition." This
directive places restrictions on First Bank's ability to engage in certain
activities, including, but not limited to: increasing asset size; making new
loans, investments or capital expenditures; paying dividends or making other
capital distributions; and hiring senior executive officers, directors or
consultants. On September 2, 1999, the OTS completed a safety and soundness
examination of First Bank. As a result of this examination, the OTS directive
letter will remain in force until First Bank corrects items noted in the
examination report, including developing and implementing an interest rate risk
reduction plan; developing a more detailed business plan under various interest
rate scenarios; and improving controls in the Bankcard division. First Bank is
cooperating with the OTS to have the "troubled institution" designation lifted.
OTHER-YEAR 2000 COMPLIANCE
Many existing computer software programs and other technologically
dependent systems use two digits to indicate the year in date fields and, as
such, could fail or create erroneous results by or at the Year 2000. We utilize
a number of technologically dependent systems to operate, service mortgage loans
and manage mortgage assets. WFSG, together with WCC (a subsidiary controlled by
WFSG) and Wilshire Servicing Company U.K. Limited (a wholly-owned subsidiary of
WFSG), who are our two Servicers, formed a committee to address year 2000 issues
("the Committee") that reports directly to WFSG's executive committee. The
Committee is headed by WFSG's Chief Information Officer and includes
representatives from across departments within WFSG and our Servicers as well as
our management.
The Committee established and completed a project plan with respect to
Year 2000 readiness. In the first phase of the project, the Committee conducted
an inventory of all systems for WFSG and our Servicers, classifying each as
either "critical" or "non-critical." For systems deemed "critical," the
Committee developed detailed test plans and created separate Year 2000 test
environments. After the testing phase, in which Year 2000 issues were
identified, phases of resolution, re-testing, implementation and certification
were completed.
We began testing of all critical systems in 1997 and completed all
necessary testing of such systems, including both systems supplied by outside
vendors and internally developed systems, by the end of February 1999. In each
case, issues which were identified were resolved. Changes which resulted from
testing were coded, retested and implemented and moved into production.
Following these phases, each department's executive management certified that
their staff had tested critical code and deemed it adequate. In addition, for
all critical systems supplied by outside vendors, the Committee obtained a
written certification from the vendor that the applicable package is "Year 2000
compliant." With respect to non-critical systems supplied by outside vendors,
the Committee has consulted substantially all of the vendors' Internet sites and
has obtained copies of Year 2000 compliance certifications from those sites. All
phases of the Committee's Year 2000 readiness project were completed by the end
of April 1999. As a result, WFSG's management believes that the Company is Year
2000 compliant in all material respects.
In addition to the information technology systems ("IT systems"),
various "environmental systems" ("non-IT systems") used for the Company's
business, including the telephone, elevator and security systems, incorporate
33
<PAGE>
technology that could be impaired by the year 2000 date change. The Committee
has received written certification that each significant non-IT system is Year
2000 compliant.
The financial impact of becoming Year 2000 compliant has not been and
is not expected to be material to our financial condition or results of
operations. Aside from limited hardware costs, our primary expense related to
Year 2000 compliance is allocation of existing staff. The Committee estimates
the total cost related to Year 2000 compliance to be approximately $0.5 million,
substantially all of which had been incurred by December 31, 1998.
Our most likely worst case Year 2000 scenario would be one in which we
are unable to perform necessary loan servicing activities. To the extent the
loan servicing system is not Year 2000 compliant, the ability to service loans
would be in jeopardy. This, in turn, would limit the collections of payments on
mortgage loans, which would, further, hinder the Company's ability to meet its
own debt service and other cash requirements. Although we do not believe that it
is reasonably likely that the Year 2000 date change will cause such a scenario
to occur, the Committee has developed a contingency plan with procedures for
manual loan servicing, for up to a week, should the loan servicing system cease
to be operational. The loan servicing system was developed internally, and we
believe that, in the event of an unexpected Year 2000 issue, the source of the
issue could be isolated, and the issue could be rapidly corrected by our
existing staff without significant cost. Accordingly, we do not believe that
such a failure of the loan servicing system would result in any material loss of
revenue or have any other material impact on the Company.
Based on the results of the Committee's Year 2000 readiness project, we
are confident that we are appropriately addressing the Year 2000 issues.
Critical IT systems supplied by outside vendors have undergone testing not only
by us, but by other customers of the vendors as well. Our loan servicing system
is an internally developed system, and therefore, our information technology
personnel are very familiar with the system and believe their efforts will have
favorable results.
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. All of the statements
contained in this Quarterly Report on Form 10-Q which are not identified as
historical should be considered forward-looking. In connection with certain
forward-looking statements contained in this Quarterly Report on Form 10-Q and
those that may be made in the future by or on behalf of the Company which are
identified as forward-looking, the Company notes that there are various factors
that could cause actual results to differ materially from those set forth in any
such forward-looking statements. Such factors include but are not limited to the
real estate market, the cease and desist order and "troubled institution"
directive, the availability of loan portfolios at acceptable prices, the
availability of financing for loan portfolio acquisitions, interest rates and
expansion outside the U.S. Accordingly, there can be no assurance that the
forward-looking statements contained in this Quarterly Report on Form 10-Q will
be realized or that actual results will not be significantly higher or lower.
The forward-looking statements have not been audited by, examined by or
subjected to agreed-upon procedures by independent accountants, and no
third-party has independently verified or reviewed such statements. Readers of
this Quarterly Report on Form 10-Q should consider these facts in evaluating the
information contained herein. The inclusion of the forward-looking statements
contained in this Quarterly Report on Form 10-Q should not be regarded as a
representation by the Company or any other person that the forward-looking
statements contained in this Quarterly Report on Form 10-Q will be achieved. In
light of the foregoing, readers of this Quarterly Report on Form 10-Q are
cautioned not to place undue reliance on the forward-looking statements
contained herein.
34
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
It is our objective 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.
The Asset and Liability Committees are authorized to utilize a wide
variety of off-balance sheet financial techniques to assist them in the
management of interest rate risk. These techniques include interest rate swap
agreements, pursuant to which the parties exchange the difference between
fixed-rate and floating-rate interest payments on a specified principal amount
(referred to as the "notional amount") for a specified period without the
exchange of the underlying principal amount. Interest rate swap agreements are
utilized to reduce our exposure caused by the narrowing of the interest spread
between fixed rate loans held for investment and associated liabilities funding
those loans caused by changes in market interest rates. First Bank had
approximately $34.0 million notional principal amount in an interest rate swap
agreement outstanding at September 30, 1999, which was designated as a hedge of
certain fixed rate loans in order to convert variable rate liabilities to fixed
rate. This swap had the effect of decreasing our net interest income by
approximately $0.3 million during the nine months ended September 30, 1999.
At times, we have also hedged the interest rate exposure of fixed-rate
or lagging-index loans or securities that are either held or available for sale.
The Company creates a hedge which matches the principal amortization of such
assets against the maturity of our liabilities generally by entering into short
sales or forward sales of U.S. Treasury securities, Government securities,
interest rate futures contracts or interest rate swap agreements. This results
in market gains or losses on hedging instruments, in response to interest rate
increases or decreases, respectively, which approximate the amount of
corresponding market losses or gains, respectively, on assets being hedged. We
evaluate the interest rate sensitivity of each pool of loans or securities in
conjunction with the current interest rate environment and decide whether to
hedge the interest rate exposure of a particular pool. 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 or securities are acquired, we
will determine whether or not to hedge and, with respect to any sale or
financing of any pool of loans through securitization, will determine whether or
not to discontinue its duration-matched hedging activities with respect to the
relevant loans.
In addition, as required by OTS regulations, First Bank's Asset and
Liability Committee also regularly reviews interest rate risk by forecasting the
impact of alternative interest rate environments on net interest income and
market value of portfolio equity ("MVPE"), which is defined as the net present
value of an institution's existing assets, liabilities and off-balance sheet
instruments, and evaluating such impacts against the maximum potential changes
in net interest income and MVPE that is authorized by the board of directors of
First Bank.
35
<PAGE>
The following table quantifies the potential changes in First Bank's
net portfolio value, at September 30, 1999, should interest rates go up or down
(shocked) by 100 to 300 basis points, assuming the yield curves of the rate
shocks will be parallel to each other.
<TABLE>
<CAPTION>
CHANGE IN RATES NET PORTFOLIO VALUE
------------------ ------------------------------------------------------------
$ AMOUNT $ CHANGE % CHANGE
-------------- ----------- --------
<S> <C> <C> <C>
300 Basis Points $ 7,529 $ (44,209) -85%
200 Basis Points 23,745 (27,993) -54%
100 Basis Points 38,943 (12,795) -25%
0 Basis Points 51,738 -- --
-100 Basis Points 60,425 8,687 17%
-200 Basis Points 64,458 12,720 25%
-300 Basis Points 65,568 13,830 27%
</TABLE>
Management also believes that the assumptions (including prepayment
assumptions) used by it to evaluate the vulnerability of First Bank's operations
to changes in interest rates approximate actual experience and considers them
reasonable; however, the interest rate sensitivity of First Bank's assets and
liabilities and the estimated effects of 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.
First Bank is presently exploring several alternatives to reduce its
current interest rate sensitivity, as the current levels of interest rate risk
are in excess of the limits approved by First Bank's board of directors. It is
not currently determinable which alternative will be selected nor what impact
such steps, if taken, will have on operating results or resulting capital levels
of First Bank. However, management currently believes that interest rate
sensitivity can be substantially reduced while continuing to meet OTS capital
guidelines for classification as "Well Capitalized."
36
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company and its directors are currently defendants to a
lawsuit brought on behalf of each of Andrew A. Wiederhorn, the
Company's former Chief Executive Officer, and Lawrence A.
Mendelsohn, the Company's former President. On August 18, 1999, the
Board of Directors of the Company notified each of Messrs.
Wiederhorn and Mendelsohn of the Company's intention to terminate
him for "cause" pursuant to his employment agreement with the
Company. The Company suspended each of Messrs. Wiederhorn and
Mendelsohn that same day. On September 3, 1999, the Company
terminated the employment of each of them for cause. Mr. Wiederhorn
and Mr. Mendelsohn have brought suit alleging, inter alia, that
they were wrongfully terminated and defamed by the Company's and
the directors' actions.
The Company is also currently a party to a lawsuit with WREI.
In August 1999, WREI filed suit against the Company alleging that
the aforementioned suspensions of Mr. Wiederhorn and Mr. Mendelsohn
caused the facilities sharing agreement between the Company and
WREI to come into effect, thereby suspending WREI's obligations
under the management agreement between WREI and Wilshire Real
Estate Services Corporation ("WRSC"), a subsidiary of the Company
(Messrs. Wiederhorn and Mendelsohn were simultaneously serving as
the senior executive officers of WREI). WREI's motion for
preliminary injunctive relief to prevent the Company from ousting
Messrs. Wiederhorn and Mendelsohn from the Company's headquarters
facilities and for other relief was denied in a written ruling.
WREI thereafter amended its complaint to assert that, as a result
of the termination of Messrs. Wiederhorn and Mendelsohn, (i) the
Company had breached the management agreement with WREI (which
permitted WREI to terminate that agreement) and (ii) the facilities
sharing agreement between the Company and WREI had been triggered,
requiring WREI to pay the Company only for the cost of the
management provided by the Company's employees (and no further fees
would be payable under the management agreement). The Company has
counterclaimed, alleging that (i) WREI has failed to pay management
fees owed to the Company under the management agreement, (ii) WREI
is not entitled to terminate the management agreement (because WRSC
had not breached the agreement) and any purported termination of
that agreement by WREI entitles the Company to a termination fee in
excess of $3 million, and (iii) the facilities sharing agreement is
inapplicable and/or invalid.
The Company will continue to vigorously contest the claims
made by Messrs. Wiederhorn and Mendelsohn and WREI and assert its
counterclaims against the same. Management, after consulting legal
counsel, believes that the Company will likely prevail on its
claims and its defenses and will likely be awarded significant
damages as a result. The Company, Messrs. Wiederhorn and Mendelsohn
and WREI have held discussions concerning the possible disposition
of these lawsuits. However, there can be no assurance as to whether
such discussions will result in the successful resolution of either
or both of these lawsuits.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
37
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during
the period covered by this report.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K during the three months ended September 30,
1999:
(i) Report on Form 8-K dated August 25, 1999, reporting
the Company's notification of its Chief Executive
Officer and President of its intention to terminate
their employment, and the resignation of the Interim
Chief Executive Officer of First Bank.
(ii) Report on Form 8-K dated September 9, 1999 reporting
the termination of the employment of the Company's
Chief Executive Officer and President and the
appointment of a new Chief Executive Officer.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WILSHIRE FINANCIAL SERVICES GROUP INC.
Date: November 15, 1999
By: /s/ STEPHEN P. GLENNON
------------------------
STEPHEN P. GLENNON
CHIEF EXECUTIVE OFFICER
By: /S/ GLENN J. OHL
-------------------
GLENN J. OHL
CHIEF FINANCIAL OFFICER
39
<PAGE>
Exhibit 11
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
------------------- -------------------
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------- -------------------
(Dollars in thousands, except share data)
<S> <C> <C>
Diluted net loss per share:
Net loss....................................................... $ (7,136) $ (118,966)
--------------- -------------
Average number of shares outstanding........................... 20,033,600 10,997,880
Net effect of dilutive stock options-based on
treasury stock method........................................ -- --
----------------- ----------------
Total average shares....................................... 20,033,600 10,997,880
================= ================
Diluted net loss per share..................................... $ (0.36) $ (10.82)
================= ================
</TABLE>
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
----------------- --------------------------------------
FOUR MONTHS ENDED FIVE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 MAY 31, 1999 SEPTEMBER 30, 1998
----------------- ----------------- ------------------
(Dollars in thousands, except share data)
<S> <C> <C>
Diluted net (loss) income per share:
Net (loss) income......................................... $ (7,938) $ 157,338 $ (111,805)
Preferred Stock dividend.................................. -- -- (417)
------------------ ----------------- ---------------
Net (loss) income available to common shareholders..... $ (7,938) $ 157,338 $ (112,222)
=============== ============= ==============
Average number of shares outstanding...................... 20,033,600 10,885,000 10,604,798
Net effect of dilutive stock options-based on treasury
stock method........................................... -- -- --
------------------ ----------------- ---------------
Total average shares................................... 20,033,600 10,885,000 10,604,798
=============== ============= ==============
Diluted net (loss) income per share....................... $ (0.40) $ 14.45 $ (10.58)
=============== ============= ==============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND STATEMENT OF EARNINGS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 28,016
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 73,840
<INVESTMENTS-CARRYING> 16,712
<INVESTMENTS-MARKET> 0
<LOANS> 566,500
<ALLOWANCE> 0
<TOTAL-ASSETS> 745,026
<DEPOSITS> 459,708
<SHORT-TERM> 156,499
<LIABILITIES-OTHER> 47,736
<LONG-TERM> 0
0
0
<COMMON> 88,900
<OTHER-SE> (7,817)
<TOTAL-LIABILITIES-AND-EQUITY> 745,026
<INTEREST-LOAN> 39,218
<INTEREST-INVEST> 9,489
<INTEREST-OTHER> 1,712
<INTEREST-TOTAL> 50,419
<INTEREST-DEPOSIT> 19,846
<INTEREST-EXPENSE> 35,500
<INTEREST-INCOME-NET> 14,919
<LOAN-LOSSES> 2,037
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 52,965
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 225,606
<CHANGES> 0
<NET-INCOME> 149,400
<EPS-BASIC> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
