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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
[X]
For the fiscal year ended December 31, 1996
OR
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission file number 0-21845
WILSHIRE FINANCIAL SERVICES GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 93-1223879
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NO.)
1776 SW MADISON STREET, PORTLAND, OR 97205
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(503) 223-5600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
REGISTERED
_____________________________________ _____________________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
[X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing sales price as quoted on
NASDAQ on February 28, 1997 was $35,202,219.
As of February 28, 1997, 7,570,000 shares of Wilshire Financial Services
Group Inc.'s common stock, par value $.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Wilshire Financial Services Group Inc.'s proxy statement, to be
filed not later than 120 days after the end of the fiscal year covered by this
report, are incorporated by reference into Part III.
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TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I. .................................................................. 3
1. Business........................................................... 3
2.Properties........................................................... 13
3.Legal Proceedings.................................................... 14
4.Submission of Matters to a Vote of Security Holders.................. 14
PART II. ................................................................. 16
5.Market for the Registrant's Common Equity and Related Stockholder
Matters................................................................ 16
6.Selected Financial Data and Operating Statistics..................... 16
7.Management's Discussion and Analysis of Financial Condition and Re-
sults of Operations ................................................... 20
8.Financial Statements and Supplementary Data.......................... 36
9.Changes in and Disagreements with Accountants on Accounting and Fi-
nancial Disclosure..................................................... 36
PART III. ................................................................ 37
10.Directors and Executive Officers of the Registrant................... 37
11.Executive Compensation............................................... 37
12.Security Ownership of Certain Beneficial Owners and Management....... 37
13.Certain Relationships and Related Transactions....................... 37
PART IV. ................................................................. 37
14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 37
2
PART I.
ITEM 1. BUSINESS
GENERAL
Wilshire Financial Services Group Inc. ("WFSG" or the "Company") is a
financial services holding company for certain companies and businesses
previously held as part of, and operated by, the Wilshire group of companies
(the "Wilshire Companies") pursuant to a reorganization of the Wilshire
Companies. As part of the reorganization, certain companies forming part of
the Wilshire Companies became subsidiaries of WFSG and certain companies,
notably Wilshire Credit Corporation ("WCC"), did not become subsidiaries of
WFSG and remain privately held (the "Wilshire Private Companies").
The principal operations of WFSG are conducted through two second-tier
subsidiary savings banks, Girard Savings Bank F.S.B. ("GSB") and First Bank of
Beverly Hills F.S.B. ("FBBH") (collectively, the "Banks" or "Savings Banks"),
and a nonbank subsidiary, Wilshire Funding Corporation ("WFC"). The Banks are
federally chartered savings institutions regulated by the Office of Thrift
Supervision ("OTS") with two branches and a merchant bankcard center in
Southern California. Administrative headquarters of the Company, the Banks and
WFC are located in Portland, Oregon. The Company's primary sources of revenue
are real estate and consumer loans acquired in purchase transactions,
mortgage-backed securities, loan securitization and whole loan sale
transactions, and merchant bankcard processing operations.
BUSINESS ACTIVITIES
Business Strategy. The Company's strategy is to aggressively pursue loan
portfolio acquisitions where it believes it can receive acceptable rates of
return on invested capital and effectively utilize extensive leverage. Key
elements of this strategy include:
. significant growth in loan portfolio investments;
. utilize varied funding sources;
. expansion into European markets;
. utilize servicing expertise;
. growth of non-traditional bankcard processing operations; and
. develop wholesale origination network.
LOAN PORTFOLIO
General. The Company's total loan portfolio includes residential mortgage
loans, multi-family residential loans, commercial real estate loans,
manufactured housing loans, commercial and business loans, auto loans, boat
loans and other consumer loans (the "Total Loan Portfolio"). As of December
31, 1996, the Company's Total Loan Portfolio, net of unaccreted discount and
allowance for loan losses amounted to $411.6 million or 54.6% of the Company's
total assets. The Company expects to utilize its available funding sources to
continue to aggressively expand its loan portfolio through the acquisition of
loan portfolios in the United States and Europe, a substantial portion of
which are expected to be non-performing loans ("Discounted Loans"). The
Company expects to acquire loan portfolios from government agencies and
private sector entities and through its mortgage conduit program. The Company
securitizes its loan portfolios when advantageous. The Company may also from
time to time engage in whole loan sales or determine to hold loans until
maturity.
3
Composition of Total Loan Portfolio. The following table sets forth the
composition of the Company's Total Loan Portfolio by type of loan at the dates
indicated.
COMPOSITION OF THE COMPANY'S TOTAL LOAN PORTFOLIO
DECEMBER 31,
-------------------------------------
1996 1995 1994 1993
-------- -------- -------- -------
(DOLLARS IN
THOUSANDS)
LOAN PORTFOLIO:
Single-family residential.............. $ 74,895 $139,566 $ 53,095 $20,657
Multi-family residential............... 69,044 71,239 77,884 26,076
Commercial real estate................. 63,374 53,458 57,881 26,921
Consumer and other..................... 22,817 19,753 6,733 391
-------- -------- -------- -------
Loan portfolio........................... 230,130 284,016 195,593 74,045
Unaccreted discount and deferred fees.... (6,232) (14,362) (8,946) (988)
Valuation allowance...................... (31,936) (10,237) (7,270) (4,314)
-------- -------- -------- -------
Loan portfolio, net...................... $191,962 $259,417 $179,377 $68,743
======== ======== ======== =======
DISCOUNTED LOAN PORTFOLIO:
Single-family residential.............. $276,759 $ 50,937 $ 348 $ --
Multi-family residential............... 317 -- -- --
Commercial real estate................. 4,919 1,523 432 --
Consumer and other..................... 1,342 979 2,215 --
-------- -------- -------- -------
Discounted Loan Portfolio................ 283,337 53,439 2,995 --
Unaccreted discount and deferred fees.... (58,088) (6,671) (470) --
Valuation allowance(1)................... (5,619) (15,414) (431) --
-------- -------- -------- -------
Discounted Loan Portfolio, net........... $219,630 $ 31,354 $ 2,094 $ --
======== ======== ======== =======
- --------
(1) For discussion of the valuation allowance allocation for purchase
discount, see "--Asset Quality--Allowances for Losses."
The real properties which secure the Company's Loan Portfolio are located
throughout the United States. As of December 31, 1996, the five states with
the greatest concentration of properties securing the Company's Loans were
California, New York, Florida, Pennsylvania and Rhode Island, which had $148.3
million, $10.4 million, $10.1 million, $10.1 million and $9.6 million
principal amount of loans, respectively. The real properties which secure the
Company's Discounted Loans are located throughout the United States. As of
December 31, 1996, the five states with the greatest concentration of
properties securing the Company's Discounted Loans were New York, New Jersey,
Connecticut, California and Arizona, which had $120.3 million, $42.4 million,
$24.0 million, $20.0 million and $10.8 million principal amount of loans,
respectively. The Company believes that the broad distribution of the real
property in its Total Loan Portfolio reduces the risks associated with
concentrating such loans in limited geographic areas.
4
Contractual Principal Repayments. The following table sets forth certain
information as of December 31, 1996 regarding the dollar amount of loans
maturing in the Company's Loan Portfolio (excluding Discounted Loans) based on
their contractual terms to maturity and includes scheduled payments but not
potential prepayments, as well as the dollar amount of loans which have fixed
or adjustable interest rates. Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one
year or less. Loan balances have not been reduced for undisbursed loan
proceeds, unearned discounts and the allowance for loan losses.
MATURITY OF THE COMPANY'S LOAN PORTFOLIO(1)
MATURING IN
-------------------------------------------
AFTER ONE AFTER FIVE AFTER
ONE YEAR YEAR THROUGH YEARS THROUGH TEN
OR LESS FIVE YEARS TEN YEARS YEARS
-------- ------------ ------------- -------
(DOLLARS IN THOUSANDS)
Single-family residential..... $ 6,229 $ 3,174 $ 6,241 $59,251
Multi-family residential...... 9,104 25,635 19,955 14,350
Commercial and other mortgage
loans........................ 21,898 29,683 8,338 3,455
Consumer and other loans...... 1,733 15,805 377 4,902
Interest rate terms on amounts
due after one year:
Fixed....................... -- 25,218 6,284 21,087
Adjustable.................. -- 49,079 28,627 60,871
- --------
(1) Excludes Discounted Loans.
Scheduled contractual principal repayments do not reflect the actual
maturities of loans because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses. The average life of mortgage loans,
particularly fixed-rate loans, tends to increase when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgages are substantially higher
than current mortgage loan rates.
LOAN ORIGINATION
In late 1995, WCC launched a mortgage conduit program for the purchase of
newly-originated residential mortgage loans on a nationwide basis through
correspondents. While the Company is obtaining necessary regulatory approvals,
WCC will continue to originate residential mortgage loans for the Company's
account through its correspondent relationships and will then transfer the
newly originated loans to the Company. The Company will simultaneously provide
the funding for the newly originated residential mortgage loans. Although WCC
will be originating mortgage loans for the Company's account while the Company
obtains necessary licenses, the mortgage conduit program will be conducted by
the Company.
The mortgage conduit program currently focuses on the origination of
manufactured housing loans, and conforming and non-conforming first and
related second lien mortgage loans. All borrowers and the collateral must meet
the Company's credit underwriting guidelines. The Company believes that the
higher risk generally associated with non-agency borrowers is partially offset
by the Company's strong credit underwriting guidelines and the better pricing
associated with these loans. The Company expects to further expand the
mortgage conduit program as it identifies market niches in the mortgage
lending market where the Company believes it has a competitive advantage.
The Company expects to securitize loans that it originates when
advantageous. The Company may also from time to time sell whole loans or
determine to hold loans until maturity.
5
EUROPEAN OPERATIONS
The Company recently decided to expand its loan acquisition and servicing
activities to encompass the United Kingdom and France with a view towards
future expansion in Western Europe. The Company's expansion strategy involves
understanding each new market's regulatory requirements and tailoring the
Company's acquisitions and servicing to comply with such requirements and
identifying and training management and employees to run the Company's
European operations. The Company has established its own servicing operation
in the United Kingdom and France. Management believes that conditions in the
French real estate market and in the United Kingdom real estate market are
similar to conditions in the United States real estate market in the late
1980's and early 1990's. The decline in the real estate market which began in
the United States in 1987 and continued through the early 1990's occurred in
the United Kingdom in late 1989 and France in 1992. Since the decline began in
France in 1992 the value of real estate has fallen further than it did in the
United States. In addition, there are currently only a few purchasers of
distressed assets in the United Kingdom and France, which is similar to the
way the market for distressed assets was in the United States when the
Resolution Trust Company first began selling loans in the late 1980s. Based on
these facts management believes that there may be opportunities to acquire
Loan Portfolios at favorable prices. In addition, management believes that
there is a demand in the European market for U.S.-style servicing with its
automated systems and detailed investor reporting and aggressive servicing and
work-out approaches. Most of the purchasers of distressed assets in the United
Kingdom and France are U.S. based companies, which have utilized U.S.-style
servicing and investor reporting in connection with the purchase of distressed
assets in the United States and with the exception of recently originated
loans, the servicing and reporting system in the United Kingdom and France for
loans is generally less technologically developed and more labor intensive.
FUNDING SOURCES
General. The Company, in addition to deposits at the Savings Banks, has
extensive funding sources available for investment and lending activities from
investment banking firms and institutional investors, including secured term
loans, warehouse lines of credit, repurchase facilities and sales of
participation interests in Loan Portfolios. Substantially all of the Company's
loan portfolio investments are expected to utilize borrowed funds, minimizing
the Company's equity investment to the extent possible. Management of the
Company closely monitors rates and terms of competing sources of funds on a
regular basis and generally utilizes the source which is the most cost
effective.
Deposits. The primary source of deposits for the Banks currently is
"wholesale" certificates of deposit. To a lesser extent the Banks obtain
brokered certificates of deposit from national investment banking firms which
pursuant to agreements with the Banks, solicit funds from their customers for
deposit with the banks. As of December 31, 1996, $172.4 million or 34% of the
Banks' total deposits were brokered and $321.1 million or 64% were wholesale
deposits. Wholesale deposits generally are obtained on more economically
attractive terms to the Savings Banks than brokered deposits.
The Banks' funding strategy has been to offer deposit rates above those
customarily offered by banks and savings and loans in its markets. The Banks
have been able to pursue this strategy because the general and administrative
costs associated with operating the Banks is significantly lower than
traditional banks and savings institutions with branch office networks. The
Banks have generally accumulated deposits by participating in deposit rate
surveys which list the Banks among the higher rate paying insured
institutions, and periodically advertising in various local market newspapers
and other media. However, because the Banks compete for deposits primarily on
the basis of rates, the Banks could experience difficulties in attracting
deposits if they could not continue to offer deposit rates at levels above
those of other banks and savings institutions. FBBH and GSB are currently
subject to cease-and-desist orders (the "Orders") issued by the OTS which
prohibit FBBH and GSB from increasing their total assets, as measured at the
end of each calendar quarter, in excess of $145 million and $408 million,
respectively, plus total net interest credited on deposit liabilities.
6
The following table sets forth information relating to the Company's
deposits at the dates indicated.
THE COMPANY'S DEPOSITS
DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
AMOUNT AVG. RATE AMOUNT AVG. RATE AMOUNT AVG. RATE
-------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Non-interest
bearing checking
accounts.......... $ 5,625 0.00% $ 5,111 0.00% $ 3,045 0.00%
NOW and money
market checking
accounts......... 2,023 1.82% 1,267 2.99 3,170 3.28
Savings accounts.. 480 2.15% 304 2.38 215 2.25
Certificates of
deposit........... 493,486 5.92% 296,842 6.15 189,859 5.48
-------- ---- -------- ---- -------- ----
Total deposits.. $501,614 5.84% $303,524 6.03% $196,289 5.35%
======== ==== ======== ==== ======== ====
The following table sets forth by various interest rate categories the
certificates of deposit in the Company at December 31, 1996.
INTEREST RATE CATEGORIES FOR THE COMPANY'S CERTIFICATES OF DEPOSIT
DECEMBER 31, 1996
----------------------
(DOLLARS IN THOUSANDS)
3.50% or less.................................. $ 942
3.51-4.50...................................... 134
4.51-5.50...................................... 54,034
5.51-6.50...................................... 422,873
6.51-7.50...................................... 12,993
7.51-8.50...................................... 2,510
--------
Total........................................ $493,486
========
The following table sets forth the amount and maturities of the certificates
of deposit in the Company as of December 31, 1996.
MATURITIES OF THE COMPANY'S CERTIFICATES OF DEPOSIT
ORIGINAL MATURITY IN MONTHS
-----------------------------
12 OR 13 TO
LESS 36 37 OR MORE
-------- ------- ----------
(DOLLARS IN THOUSANDS)
Balances Maturing in 3 Months or Less............. $129,783 $10,482 $ 347
Weighted Average................................ 5.69% 6.82% 7.00%
Balances Maturing in 4 to 12 Months............... $259,726 $46,145 $ 99
Weighted Average................................ 5.94% 6.08% 5.50%
Balances Maturing in 13 to 36 Months.............. -- $46,392 $ 397
Weighted Average................................ -- 6.10% 6.91%
Balances Maturing in 37 or More Months............ -- -- $ 115
Weighted Average................................ -- -- 5.69%
As of December 31, 1996, the Company had $111.5 million of certificates of
deposit in amounts equal to or greater than $100,000 maturing as follows:
$35.9 million within three months; $30.6 million over three months through six
months; $36.1 million over six months through 12 months; and $8.9 million
thereafter.
7
Borrowings. The following table sets forth information relating to the
Company's borrowings and other interest-bearing obligations at the dates
indicated.
DECEMBER 31,
------------------------
1996 1995 1994
-------- ------- -------
(DOLLARS IN THOUSANDS)
FHLB Advances......................................... $ -- $ -- $13,000
Repurchase agreements and line of credit.............. 97,624 13,000 8,500
Notes Payable......................................... 75,000 -- --
-------- ------- -------
Total............................................... $172,624 $13,000 $21,500
======== ======= =======
The following table sets forth certain information related to the Company's
short-term borrowings having average balances during the period of greater
than 30% of stockholders' equity at the end of the period. During each
reported period, FHLB advances and repurchase agreements are the only
categories for borrowings meeting this criteria. Averages are determined by
utilizing month-end balances.
SHORT-TERM BORROWINGS OF THE COMPANY
AT OR FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1996 1995 1994
-------- ------- -------
(DOLLARS IN THOUSANDS)
FHLB advances:
Average amount outstanding during the period..... $ 2,420 $ 1,381 $ 5,916
Maximum month-end balance outstanding during the
period.......................................... $ 11,000 $ 8,000 $13,000
Weighted average rate:
During the period.............................. 6.57% 7.53% 3.85%
At end of period............................... -- -- 4.33%
Repurchase agreements:
Average amount outstanding during the period..... $ 51,316 $ 4,122 $ 4,757
Maximum month-end balance outstanding during the
period.......................................... $154,000 $14,950 $11,377
Weighted average rate:
During the period.............................. 6.88% 5.62% 4.46%
At end of period............................... 7.88% 6.70% 5.81%
Repurchase Facilities. Each of FBBH and GSB entered into a Master Repurchase
Agreement with Bear Stearns Mortgage Capital Corporation ("BSMCC"). Though
such master repurchase agreements do not specify a maximum amount available
under such agreements, the parties have currently agreed that such agreement
may be used for up to $210 million of acquisitions in the aggregate. These
agreements enable FBBH and/or GSB to purchase Loan Portfolios with immediate
financing from BSMCC which can then be repaid as FBBH and/or GSB increases its
deposits. See "--Deposits" for a discussion of certain limitations on the
ability of the Banks to increase deposits.
WFC has entered into a master repurchase agreement with CS First Boston
Mortgage Capital Corporation ("FBMCC"). FBMCC has agreed to lend up to $250
million to WFC for the purchase of portfolios of performing and non-performing
mortgage loans.
WFC has entered into a master repurchase agreement with an affiliate of
Bear, Stearns & Co., Inc. Though such master repurchase agreement does not
specify a maximum amount available under such agreement, the parties have
currently agreed that such agreement may be used for up to $100 million of
acquisitions.
WFC has entered into a master repurchase agreement with CS First Boston
(Hong Kong) Limited for the purchase of portfolios of subordinate securities.
Though such master repurchase agreement does not specify a
8
maximum amount available under such agreement, the parties have currently
agreed that such agreement may be used for up to $50 million of acquisitions.
Warehouse Facilities. WFC has a secured warehouse financing facility with
Prudential Securities Realty Funding Corp. of up to $100 million for the
origination or purchase of residential first and second lien mortgage loans.
FHLB Advances. The Banks obtain advances from the FHLB of San Francisco upon
the security of certain of its assets, including FHLB stock, provided certain
standards related to the creditworthiness of the Banks have been met. FHLB
advances are available to member financial institutions such as the Banks for
investment and lending activities and other general business purposes. FHLB
advances are made pursuant to several different credit programs, each of which
has its own interest rate, which may be fixed or adjustable, and a range of
maturities.
Securitizations. Since the Wilshire Companies initial use of securitization
in 1995 through December 1996, the Wilshire Companies have issued $712.2
million of securities through four publicly underwritten and three privately
placed securitizations, including non-performing and sub-performing mortgage
loans, real estate owned, manufactured housing loans, consumer loans and
conventional and non-conforming mortgage loans. Securitizations are expected
to allow the Company to increase its loan acquisition and origination volume,
reduce the risks associated with interest rate fluctuations and provide access
to longer term funding sources. The Company currently intends to complete
securitizations either through private placements or in public offerings when
advantageous. On December 24, 1996, GSB and FBBH completed the sale of an
aggregate of $212.8 million and $47.1 million respectively of performing
residential mortgage loans to Wilshire Mortgage Funding Company IV, Inc. who
sold the loans to CS First Boston Mortgage Securities Corp., who contributed
them to a securitized trust.
SERVICING RELATIONSHIPS
The Company, WFC and WCC entered into a loan servicing agreement (the "Loan
Servicing Agreement") pursuant to which WCC will provide loan portfolio
management services, including billing, portfolio administration and
collection services for all loans owned, acquired or made by the Company or
its affiliates (including new third party servicing) (the "Loans"). Pursuant
to the Loan Servicing Agreement, the Company is required to pay a servicing
fee equal to a market rate.
After December 24, 1998, the Company will have the option to begin servicing
its newly acquired Loan Portfolios and WCC's loans and assume certain assets
and liabilities of WCC relating thereto (the "Servicing Transfer"), provided
that, the Company or one of its subsidiaries has obtained the appropriate
regulatory approvals. Notwithstanding the foregoing, the Company may request
that the Servicing Transfer occur on an earlier date, provided that the
foregoing conditions are met. WCC, in its sole discretion may refuse to effect
the Servicing Transfer prior to the end of the second year. The Servicing
Transfer will occur automatically on December 24, 1999, unless prohibited by
applicable law. The fees and costs to be paid by WCC for the servicing of its
loans shall be the Company's average costs for such collection as specified in
the Loan Servicing Agreement.
GSB and FBBH have each entered into loan servicing agreements with WCC
pursuant to which WCC provides loan portfolio management services, including
billing, portfolio administration and collection services for all loans owned,
acquired or made by the Banks. It is anticipated that the Banks will terminate
their agreements with WCC once WCC's servicing operations have been
transferred to Wilshire Servicing Corporation, a wholly-owned subsidiary of
the Company ("WSC"). At such time the Banks would enter into an agreement with
WSC pursuant to which WSC would service the mortgage loans and other assets of
the Banks.
NON-TRADITIONAL BANKCARD PROCESSING OPERATIONS
The Company plans to continue development of its non-traditional bankcard
processing operations, which generate revenues through merchant discounts and
processing fees for Visa and MasterCard transactions. The
9
Company's bankcard processing operations focus on certain higher risk market
niches, principally mail order/telephone order and audio-text where the
Company believes it obtains higher returns on processing transactions.
Revenues from the bankcard operation have demonstrated strong growth
increasing from $0.6 million in 1994 to $4.7 million in 1995 and to $6.8
million during the year ended December 31, 1996. Management believes that
there are opportunities to expand this business using its existing
infrastructure and through acquisitions.
ASSET QUALITY
The Company, like all financial institutions, is exposed to certain credit
risks related to the value of the collateral that secures its loans and the
ability of borrowers to repay their loans. Management of the Company closely
monitors the Company's loan and investment portfolios and the Company's real
estate owned for potential problems on a periodic basis and reports to the
Board of Directors at regularly scheduled meetings.
Non-Performing Loans. It is the Company's policy to establish an allowance
for uncollectible interest on loans in its Loan Portfolio (excluding
Discounted Loans) which are past due 90 days or more and to place such loans
on non-accrual status. The Company does not accrue interest on Discounted
Loans (unless such loan later becomes performing). Loans also may be placed on
non-accrual status when, in the judgment of management, the probability of
collection of interest is deemed to be insufficient to warrant further
accrual. When a loan is placed on non-accrual status, previously accrued but
unpaid interest is reversed by a charge to interest income.
Real Estate Owned. Properties acquired through foreclosure, or by deed-in-
lieu thereof are valued at the lower of cost or fair value. Properties
included in the Company's real estate owned are periodically re-evaluated to
determine that they are being carried at the lower of cost or fair value less
estimated costs to sell. Holding and maintenance costs related to properties
are recorded as expenses in the period incurred. Deficiencies resulting from
valuation adjustments to real estate owned subsequent to acquisition are
recognized as a valuation allowance or are charged off. Subsequent increases
related to the valuation of real estate owned are reflected as a reduction in
the valuation allowance, but not below zero. Increases and decreases in the
valuation allowance are charged or credited to income, respectively. WFC
purchases real estate owned directly, and accounts for acquired properties in
the same manner as described in the preceding paragraph. Cost is equivalent to
purchase price.
The following table sets forth certain information relating to the Company's
real estate owned (by source of acquisition) at the dates indicated.
REAL ESTATE OWNED BY THE COMPANY
DECEMBER 31,
-------------------------
1996 1995 1994
------- ------ ------
(DOLLARS IN
THOUSANDS)
Discounted Loan Portfolio:
Single-family residential.......................... $15,274 $3,226 $ --
Commercial and other mortgage loans................ 200 66 --
------- ------ ------
Total Discounted Loans........................... 15,474 3,292 --
Loan portfolio:
Singe-family residential........................... 2,773 1,676 613
Multi-family residential........................... 100 611 254
Commercial and other mortgage loans................ 124 578 464
------- ------ ------
Total loan portfolio............................. 2,997 2,865 1,331
Real estate owned purchased directly:
Single-family residential.......................... 59,729(1) -- --
Total real estate................................ 78,200 6,157 1,331
Allowance for real estate losses..................... -- (1,193) (123)
------- ------ ------
Real estate owned, net............................... $78,200 $4,964 $1,208
======= ====== ======
- --------
(1) The increase between the balance at December 31, 1995 and December 31,
1996 reflects the purchase of certain single-family residential properties
in the fourth quarter of 1996 by WFC.
10
Allowances for Losses. The Company maintains an allowance for loan losses at
a level believed adequate by management to absorb potential losses in the
Total Loan Portfolio. The allowance is increased by provisions for loan losses
charged against operations, recoveries of previously charged off credits, and
allocations of discounts on purchased loans, and is decreased by charge-offs.
Loans are charged off when they are deemed to be uncollectible, or in the case
of automobile and other consumer loans, when payments are delinquent by more
than 120 days.
The Banks use their internal asset review systems to identify and evaluate
impaired loans and to classify loans as special mention, substandard,
doubtful, loss. These terms correspond to varying degrees of risk that the
loans will not be collected in part or in full. The Banks' policies are to
evaluate smaller-balance, homogenous pools of loans for impairment on a pooled
basis. These are primarily single-family residential and automobile and other
consumer loans. All other loans, whether Discounted Loans or other loans, are
evaluated for impairment on a loan-by-loan basis. All loans are subject to
potential classification as special mention, substandard, doubtful, or loss.
The frequency at which a specific loan is subjected to internal asset review
depends on the type and size of the loan and the presence or absence of other
risk factors, such as delinquency and changes in collateral values.
The allowance for loan losses comprises specific valuation allowances
established for impaired loans and for certain other classified loans, and
general valuation allowances. Specific valuation allowances are based on the
estimated fair value of the collateral for impaired or troubled collateral
dependent loans, in most cases. General valuation allowances are based on
management's periodic analysis of the composition of the loan portfolio,
delinquencies, loan classifications, historical loss experience, peer group
data, OTS guidelines, economic factors and other relevant information. These
estimation techniques apply to allowances established for both loans and
Discounted Loans.
When the Company increases the allowance for loan losses related to loans
other than Discounted Loans, it records a corresponding increase to the
provision for loan losses in the statement of operations. For Discounted
Loans, increases to the allowance for loan losses are recorded shortly after
each acquisition of a pool by allocating a portion of the purchase discount
deemed to be associated with measurable credit risk. The allocation is based
on the analyses of specific and general valuation allowances discussed above.
Amounts allocated to the allowance for loan losses from purchase discounts do
not increase the provision for loan losses recorded in the statement of
operations; rather they decrease the amounts of the purchase discounts that
are accreted into the interest income over the lives of the loans. If, after
the initial allocation of the purchase discount to the allowance for loan
losses, management subsequently identifies the need for additional allowances
against Discounted Loans, the additional allowances are established through
charges to the provision for loan losses.
Accretion of purchase discounts (excluding amounts allocated to the
allowance for loan losses) and interest income on Discounted Loans are
recorded based on a method which approximates a level yield. The same income
recognition policies apply to loans other than Discounted Loans when they are
deemed to be non-performing, generally when they are 90 days or more
delinquent.
The Banks were acquired at substantial discounts to their respective book
values, reflecting the poor quality of their assets and in the case of FBBH,
an expected imminent regulatory takeover. As part of the acquisition, the
Company acquired a substantial volume of impaired loans, which required the
Banks to establish allowances for loan losses (the "Inherited Loans"). In
addition, the OTS, as part of its examination process, periodically reviews
the Banks' allowances for losses and the carrying values of assets.
FBBH and GSB increased their allowances for loan losses with respect to the
Inherited Loans by $4.8 million through December 31, 1996. In the fourth
quarter of 1995 and the first quarter of 1996, the Banks acquired
approximately $24.5 million of sub-prime auto loans (the "Sub-Prime Auto
Loans"). Under OTS regulations the Banks have been required to write-off all
auto loans in excess of 120 days delinquent, notwithstanding that the Banks
retain the cars as collateral. The Banks have established reserves aggregating
$8.6 million through the fourth quarter of 1996, including a 10% reserve on
such loans which are current. The total reserve for losses as a percentage of
the unpaid principal balance of these loans was 53.0% at December 31, 1996.
11
Although the Company believes its allowances for loan losses are now
adequate, future additions to these allowances, in the form of provisions for
losses on loans, may be necessary due to changes in economic conditions,
increases in the size of the Company's Loan Portfolio and the performance of
the Loan Portfolio. The following table sets forth the Company's provision for
estimated losses on loans, net of recoveries, for the year ended December 31,
1996.
PROVISIONS % OF TOTAL
---------- ----------
(DOLLARS IN
THOUSANDS)
Inherited Loans........................................... $ 4,845 29.28%
Sub-Prime Auto Loans...................................... 8,583 51.86%
Other Purchased Loans..................................... 3,121 18.86%
------- ------
Total provision for estimated losses on loans............. $16,549 100.00%
======= ======
The following table sets forth the breakdown of the Company's allowances for
losses on the Company's Loan Portfolio and Discounted Loan Portfolio by
category of loan and the percentage of loans in each category to total loans
in the respective portfolios at the dates indicated. The Company's allowances
for losses includes purchased discount.
COMPANY'S TOTAL ALLOWANCES FOR LOSSES
DECEMBER 31,
-------------------------------------------------------
1996 % OF TOTAL 1995 % OF TOTAL 1994 % OF TOTAL
------- ---------- ------- ---------- ------ ----------
(DOLLARS IN THOUSANDS)
Loan portfolio:
Real estate............. $24,051 64.0% $ 9,830 38.3% $6,948 90.2%
Non-real estate......... 7,885 21.0% 407 1.6% 322 4.2%
Discounted Loan Portfo-
lio.................... 5,619 15.0% 15,414 60.1% 431 5.6%
------- ----- ------- ----- ------ -----
Total Allowances........ $37,555 100.0% $25,651 100.0% $7,701 100.0%
======= ===== ======= ===== ====== =====
The following table sets forth an analysis of activity in the allowance for
losses relating to the Company's total loan portfolio during the periods
indicated.
ACTIVITY IN COMPANY'S ALLOWANCES FOR LOSSES
DECEMBER 31,
----------------------------
1996 1995 1994
-------- ------- -------
(DOLLARS IN THOUSANDS)
Balance, beginning of period.................... $ 25,651 $ 7,701 $ 4,314
Provision for loan losses....................... 16,549 4,266 2,173
Allocation from purchased loan discounts........ 10,752 19,007 2,809
Charge-offs:
Real estate................................... 14,336 5,096 1,620
Non-real estate............................... 2,883 308 46
-------- ------- -------
Total charge-offs............................. 17,219 5,404 1,666
Recoveries:
Real estate................................... 1,735 81 71
Non-real estate............................... 87 -- --
-------- ------- -------
Total Recoveries.............................. 1,822 81 71
-------- ------- -------
Net (charge-offs) recoveries.................... (15,397) (5,323) (1,595)
-------- ------- -------
Balance, end of period.......................... $ 37,555 $25,651 $ 7,701
======== ======= =======
Net (charge-offs) recoveries as a percentage of
average loan portfolio......................... (3.6)% (2.2)% (1.4)%
12
Delinquency. The table below sets forth the delinquency status of the
Company's loan portfolio (excluding Discounted Loans) at each of the dates
indicated.
DELINQUENCY IN THE COMPANY'S LOAN PORTFOLIO(1)
DECEMBER 31,
---------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
PERCENT OF PERCENT OF PERCENT OF
BALANCE PORTFOLIO BALANCE PORTFOLIO BALANCE PORTFOLIO
------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Period of Delinquency:
30-59 days............ $ 7,613 3.3% $ 3,726 1.3% $ 4,513 2.4%
60-89 days............ 7,204 3.1 3,037 1.1 2,202 1.1
90 days or more(2)(3). 54,524 23.7 12,679 4.5 11,632 6.0
------- ---- ------- --- ------- ---
Total loans
delinquent.......... $69,341 30.1%(4) $19,442 6.9% $18,347 9.5%
======= ==== ======= === ======= ===
- --------
(1) This table excludes Discounted Loans.
(2) All loans delinquent 90 days or more were on nonaccrual status.
(3) Increase is primarily due to Inherited Loans, Sub-Prime Auto Loans and
purchased sub-performing residential loans.
(4) Increase in Percent of Portfolio reflects the securitization and sale of
$259.9 million of the Company's performing Loan Portfolio in the fourth
quarter of 1996.
INVESTMENT ACTIVITIES
Investment Securities. Investment securities consist primarily of U.S.
Government securities and required investment in FHLB stock and subordinate
securities.
The following table sets forth the Company's investment securities available
for sale and held to maturity at the dates indicated:
THE COMPANY'S INVESTMENT SECURITIES
DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
Available for sale:
Mortgage-backed securities........................... $31,270 $ 9,083 $10,943
Held to maturity
U.S. Government securities........................... 7,429 6,470 4,505
Mortgage-backed securities........................... 21,724 13,119 14,439
------- ------- -------
Total.............................................. 29,153 19,589 18,944
------- ------- -------
Total investment securities.......................... $60,423 $28,672 $29,887
======= ======= =======
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Portland, Oregon, where
the Company leases approximately 18,000 square feet of office space from
Wilshire Properties I, Incorporated ("WPI"), a corporation which is
beneficially owned by Andrew A. Wiederhorn and Lawrence A. Mendelsohn. The
lease agreement provides for an aggregate annual rent payment in 1997 of
approximately $276,000 and expires December 31, 2001. In addition to base rent
the Company is required to pay its proportionate share of operating expenses
incurred by WPI in connection with the operations of the building. The Banks
sub-lease approximately
13
8,000 sq. ft. of office space in two locations in Portland, Oregon from the
Company for an aggregate annual rental in 1997 of $4. The term of the sub-
lease is year to year. GSB leases its branch office in La Jolla, California
pursuant to a lease expiring May 31, 1997. FBBH leases its branch office in
Beverly Hills, California and office space for its merchant bankcard
operations in Calabasas, California pursuant to leases expiring February 29,
2000 and November 30, 1999, respectively. The Company also leases office space
in London, England and Paris, France pursuant to month-to-month leases. The
Company believes its facilities are suitable and adequate for its current
business purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings occurring in the
ordinary course of business which management of the Company believes will not
have a material adverse effect on the financial condition or operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, no matters were submitted to a vote of
security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT AND PRINCIPAL SUBSIDIARIES
The following sets forth information about the executive officers of the
Company as of February 28, 1996. The business address of each executive
officer is the address of the Company, 1776 SW Madison Street, Portland, OR
97205, and each executive officer is a United States Citizen, unless otherwise
noted.
Andrew A. Wiederhorn, age 31, has been the Chairman of the Board of
Directors and Chief Executive Officer of the Company since its formation. Mr.
Wiederhorn founded the Wilshire Companies in 1987 and continues to serve as
the Chief Executive Officer of the Wilshire Private Companies.
Lawrence A. Mendelsohn, age 35, has been the President of the Company since
its formation. Since October 1996 Mr. Mendelsohn has been President of the
Wilshire private companies. From February 1993 to October, 1996 Mr. Mendelsohn
was the Executive Vice President of the Wilshire Companies. From January 1992
until February 1993 Mr. Mendelsohn was Vice President, Principal and Head of
Capital Markets for Emerging Markets of Bankers Trust New York Corporation/BT
Securities Corporation. From August 1987 until January 1992 Mr. Mendelsohn was
the Vice President, Senior Options Principal and Head of Proprietary Trading
for Equities, Equity Options and Distressed Debt for JP Morgan and Co./JP
Morgan Securities.
Bo G. Aberg, age 48, has been the Senior Vice President, in charge of
European Operations of the Company since October 1996. From November 1994 to
September 1996, Mr. Aberg was Chief Executive Officer of Securum Holding B.V.,
a Kingdom of Sweden owned work-out company in Europe. From September 1992 to
November 1994, Mr. Aberg was Chief Executive Officer of Securum Real Estate
Group, Malmo, Sweden. From January 1982 to September 1992 Mr. Aberg held
several positions within the PK Group (a Swedish banking group), and from
September 1974 to January 1982 he was a Chartered Accountant for Hagstroms
Revisions Byra AB Sweden (now Ernst & Young). Mr. Aberg is a citizen of
Sweden.
Donald J. Berchtold, age 51, has been the Senior Vice President, in charge
of Administration since October 1996. From March 1992 until October 1996 Mr.
Berchtold was the Senior Vice President, in charge of Administration of the
Wilshire Companies. From February 1991 until November 1992 he was a consultant
to Entertainment Publications Inc.--CUC International Inc. Mr. Berchtold is
Mr. Wiederhorn's father-in-law by marriage.
Kenneth R. Kepp, age 41, has been the Senior Vice President, in charge of
Operations since its formation. From November 1991 until October 1996 Mr. Kepp
was the Senior Vice President--Operations of the Wilshire
14
Companies. From June 1990 until November 1991 Mr. Kepp was the Managing
Director of Network Associates International, a consulting company to the
leasing industry.
Sheryl Anne Morehead, age 44, has been the Senior Vice President, S&L Group
of the Company and Chief Executive Officer of the Savings Banks since October
1996. From December 1993 until October 1996, Ms. Morehead was the Chief Credit
Officer/Chief Operating Officer of First Los Angeles Bank/San Paulo Bank
Group, a savings bank. From August 1990 until December 1993, Ms. Morehead was
the Chief Credit Officer/Executive Vice President of First Federal Bank, a
savings bank.
Chris Tassos, age 39, has been the Senior Vice President and Chief Financial
Officer of the Company since its formation. Since August 1995 Mr. Tassos has
been the Senior Vice President of Finance of the Wilshire Companies. From
March 1992 until February 1995 he was the Chief Financial Officer and/or
Senior Vice President of Finance of Long Beach Mortgage Company (formerly Long
Beach Bank). From July 1979 until April 1984 and May 1985 until September 1990
Mr. Tassos was an auditor for Deloitte & Touche LLP.
Phillip D. Vincent, age 42, has been the Senior Vice President, in charge of
Loan Servicing of the Company since its formation. Mr. Vincent was Senior Vice
President and Chief Administrative Officer of The J.E. Robert Company, Inc.,
one of the largest real estate and mortgage investment managers in the U.S.
from April 1995 until July 1996, Senior Vice President and Managing Officer of
The J.E. Robert Company, Inc. from June 1992 until September 1995, and Vice
President and Division Manager of The J.E. Robert Company, Inc. from 1991
until May 1992. Mr. Vincent is a member of the American Institute of Certified
Public Accountants.
15
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Effective December 18, 1996, the Company's common stock, par value $.01 per
share (the "Common Stock") became listed on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") under the symbol
"WFSG." The initial public offering price was $10.50 per share. Through
February 28, 1997, the Company's Common Stock has traded between $10.50 and
$18.00 per share. The approximate number of record holders of the Company's
Common Stock at February 28, 1997 was 28. Prior to December 18, 1996, there
was no public market for the Company's Common Stock.
The Company has not paid any cash dividends on its Common Stock and it is
the current intention of the Company's Board of Directors to continue to
retain earnings to finance the growth of the Company's business rather than to
pay dividends. Future payment of cash dividends will depend upon the financial
condition, results of operations and capital commitments of the Company as
well as other factors deemed relevant by the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA AND OPERATING STATISTICS
The following tables present selected financial information for the Company
at the dates and for the periods indicated. The historical income statement
and balance sheet data at and for the years ended December 31, 1996, 1995 and
1994 have been derived from the audited consolidated financial statements of
the Company.
On October 7, 1993, Wilshire Acquisition Corporation, a wholly-owned
subsidiary of the Company ("WAC") acquired 94.9% of the common stock of FBBH
in a purchase accounting transaction. On November 9, 1994, a newly-formed
entity with ownership and management common to WAC, Wilshire Acquisitions
Corporation II ("WACII") acquired 94.9% of the common stock of GSB in a
purchase accounting transaction.
Because WAC and WACII were under common control, the accompanying financial
statements are presented on a combined basis as of December 31, 1994 and for
the period from November 9 through December 31, 1994. On December 27, 1995,
WAC and WACII were merged and WAC was named as the surviving entity.
WSFG was incorporated in 1996 to be the holding company for WAC. WFSG formed
certain nonbank subsidiaries, including WFC, and completed an initial public
offering of common stock and notes payable in the fourth quarter of 1996. The
consolidated financial statements for 1995 and 1996 include the accounts of
WAC and the Banks for periods prior to the formation of WFSG.
16
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
INCOME STATEMENT DATA:
Interest Income:
Loans............................................. $44,294 $21,821 $ 7,923
Mortgage-backed securities........................ 1,797 1,359 1,361
Investments and federal funds sold................ 2,331 1,201 285
------- ------- -------
Total interest income........................... 48,422 24,381 9,569
------- ------- -------
Interest expense:
Deposits.......................................... 25,002 13,944 5,017
Borrowings........................................ 4,275 537 440
------- ------- -------
Total interest expense.......................... 29,277 14,481 5,457
------- ------- -------
Net interest income................................. 19,145 9,900 4,112
Provision for estimated losses on loans............. 16,549 4,266 2,173
------- ------- -------
Net interest income after provision for estimated 2,596 5,634 1,939
losses on loans.................................... ------- ------- -------
Other Income:
Bankcard income(1)................................ 6,790 4,694 635
Bankcard processing expense....................... (5,124) (3,462) (274)
Gain on sale of loans............................. 11,538 642 --
Loan fees and charges............................. 1,747 610 43
Trading account--unrealized gain.................. 1,833 -- --
Amortization of deferred credits.................. 461 460 388
Real estate owned, net............................ 556 (170) (241)
Other, net........................................ 141 163 435
------- ------- -------
Total other income.............................. 17,942 2,937 986
------- ------- -------
Other Expenses:
Compensation and employee benefits................ 4,464 2,516 1,922
FDIC insurance premiums........................... 2,381 721 261
Occupancy......................................... 339 385 319
Professional services............................. 700 1,028 507
Data processing and equipment rentals............. 229 232 162
Loan service fees and expenses.................... 5,176 1,958 242
Other general and administrative expenses......... 2,157 1,092 1,290
------- ------- -------
Total other expenses............................ 15,446 7,932 4,703
------- ------- -------
Income (loss) before income tax provision (benefit). 5,092 639 (1,778)
Income tax provision (benefit)...................... 125 47 (526)
------- ------- -------
Net Income (loss)................................... $ 4,967 $ 592 $(1,252)
======= ======= =======
Earnings (loss) per share(2)........................ $ 1.07 $ 0.46 $ (2.52)
======= ======= =======
17
DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Total assets..................................... $753,849 $340,695 $230,636
Cash and cash equivalents........................ 152,298 3,382 4,880
Federal funds sold............................... -- 1,100 3,950
Mortgage-backed securities available for sale, at
fair value...................................... 31,270 9,083 10,943
Mortgage-backed securities held to maturity, at
amortized cost.................................. 21,724 13,119 14,439
Investment securities held to maturity, at
amortized cost.................................. 7,429 6,470 4,505
Trading account securities....................... 24,541 -- --
Loan portfolio, net(3)........................... 176,026 258,827 179,377
Discounted Loan Portfolio:
Total loans.................................... 262,599 20,210 2,995
Discount....................................... (50,240) (3,008) (470)
Allowance for loan losses...................... (5,619) (3,855) (431)
Discounted Loans, net.......................... 206,740 13,347 2,094
Loans held for sale, net, at lower of cost or
market.......................................... 28,826 18,597 --
Stock in FHLB of San Francisco, at cost.......... 2,958 1,421 1,612
Real estate owned, net........................... 78,200 4,964 1,208
Leasehold improvements and equipment............. 317 275 167
Due from affiliate(4)............................ 5,051 3,755 3,410
Accrued interest receivable...................... 3,517 3,042 1,599
Prepaid expenses and other assets................ 10,769 3,143 1,026
Deferred tax asset, net.......................... 4,183 170 774
Deposits......................................... 501,614 303,524 196,289
Short-term borrowings............................ 97,624 13,000 21,500
Notes payable.................................... 75,000 -- --
Deferred credits(5).............................. 717 1,134 1,772
Subordinated debt(6)............................. -- 11,000 --
Minority interest................................ -- 600 574
Preferred stock in subsidiary held by others..... -- -- 1,000
Accounts payable and other liabilities........... 17,872 4,398 2,056
Stockholders' equity............................. 61,022 7,039 6,793
18
YEAR ENDED DECEMBER
31,
------------------------
1996 1995 1994
------- ------- ------
(DOLLARS IN THOUSANDS)
FINANCIAL RATIOS AND OTHER DATA:
Return on average assets............................ .95% .24% (.92)%
Return on average equity............................ 13.68% 8.65% (31.03)%
Average interest rate on total loans................ 9.08% 9.57% 7.65%
Average equity to average assets.................... 6.90% 2.72% 2.96%
Net interest spread(7).............................. 2.78% 3.08% 2.85%
Net interest margin(8).............................. 3.52% 3.72% 3.04%
Ratio of earnings to fixed charges(9):
Including interest on deposits.................... 1.17 1.04
Excluding interest on deposits.................... 2.19 2.19
Non-performing loans to loans at end of period(3)... 23.69% 4.46% 5.95%
Allowance for loan losses to total loans at end of
period.............................................. 7.3% 7.6% 3.9%
LOAN ORIGINATIONS................................... $ 2,280 $ 8,748 $4,345
LOAN ACQUISITION DATA:
LOAN PORTFOLIO:
Single-family residential......................... 239,263 121,883 36,462
Multi-family residential.......................... 507 -- 61,247
Commercial and other mortgage loans............... 6,803 2,126 31,091
Consumer and other loans(10)...................... 18,791 11,012 10,847
DISCOUNTED LOANS:
Single-family residential......................... 336,614 49,662 1,542
Multi-family residential.......................... 464 96 --
Commercial and other mortgage loans............... 10,741 869 1,843
Consumer and other loans.......................... 444 5,368 239
LOANS SOLD.......................................... 326,236 16,673 --
- --------
(1) The Company began its bankcard operations in 1994.
(2) Earnings (loss) per share amounts are based on weighted average number of
shares outstanding of WFSG during the applicable periods. For periods
prior to the formation of WFSG, WAC shares outstanding were converted to
their WFSG equivalent.
(3) This item does not include Discounted Loans.
(4) Due from affiliate primarily consists of amounts received by WCC from
mortgagors on loans it is servicing for the Company and has not yet
transferred to the Company.
(5) Deferred credits represent negative goodwill--the excess of the net fair
values of the Banks' assets and liabilities over the purchases prices
paid by WAC for the Banks.
(6) Effective January 1, 1996, $11.0 million of Common Stock was issued in
exchange for subordinated debt.
(7) Net interest spread represents average yield on interest-earning assets
minus average rate paid on interest-bearing liabilities.
(8) Net interest margin represents net interest income divided by total
average earning assets.
(9) The ratios of earnings to fixed charges were computed by dividing (x)
income from continuing operations before income taxes, extraordinary
gains and cumulative effect of a change in accounting principle plus
fixed charges by (y) fixed charges. Fixed charges represent total
interest expense, including and excluding interest on deposits, as
applicable, as well as the interest component of rental expense. Earnings
for the year ended December 31, 1994 were inadequate to cover fixed
charges by $1,778.
(10) Includes $24.5 million of Sub-Prime Auto Loans acquired in late 1995 and
early 1996.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Selected
Financial Information and the Consolidated Financial Statements of the Company
and the notes thereto.
OVERVIEW
The Company reported a net income of approximately $5.0 million for the year
ended December 31, 1996, compared to net income of $0.6 million for the fiscal
year ended December 31, 1995 and a loss of $1.3 million in calendar 1994.
The Company's net interest income has increased substantially during the
last three years primarily due to the growth in the Company's Total Loan
Portfolio resulting from the Company's strategy of aggressively acquiring loan
portfolios and by the acquisition of GSB in 1994. The Company's Total Loan
Portfolio, net as of December 31, 1996, 1995 and 1994 was $411.6 million,
$290.8 million and $181.5 million, respectively. Net interest income for the
years ended December 31, 1996, 1995 and 1994 was $19.1 million, $9.9 million
and $4.1 million, respectively.
Provisions for loan losses totaled approximately $16.5 million for the year
ended December 31, 1996, $4.3 million for the year ended December 31, 1995 and
$2.2 million in 1994. These loss provisions resulted primarily from
deterioration in the Company's Inherited Loans and Sub-Prime Auto Loans. These
loss provisions reflect the poor quality of the assets of the Banks at the
time they were acquired by the Company and loan loss provisions taken with
respect to Sub-Prime Auto Loans. Following the addition of approximately $4.5
million of reserves taken in the third quarter of 1996, allowances for Sub-
Prime Auto Loans as a percentage of the unpaid principal balances were 53.0%
at December 31, 1996.
Noninterest income of $17.9 million during the year ended December 31, 1996
increased from $2.9 million in fiscal 1995 and $1.0 million in fiscal 1994.
This increase is primarily a result of gains on sales of loans of $11.5
million, loan fees and charges of $1.7 million and unrealized gains on trading
activity of $1.8 million.
PRINCIPAL SOURCES OF REVENUE
The principal component of the Company's revenues is interest income, with
additional contributions from gains on sales of loans and income from bankcard
processing operations. The following table sets forth the components of the
Company's revenues for the periods indicated:
SOURCES OF REVENUE
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
Interest income......................................... $48,422 $24,381 $ 9,569
Gains on sale of loans.................................. 11,538 642 --
Bankcard income......................................... 6,790 4,694 635
Other, net(1)........................................... 4,738 1,063 625
------- ------- -------
Total revenue......................................... $71,488 $30,780 $10,829
======= ======= =======
- --------
(1) Other consists primarily of loan fees and charges, the amortization of
negative goodwill and unrealized gain on trading securities.
Net Interest Income. The operations of the Company are substantially
dependent on its net interest income, which is the difference between the
interest income received plus accreted purchase discount from its assets and
20
the interest expense paid on its interest-bearing liabilities. Net interest
income is affected by the relative amount of interest-earning assets and
interest-bearing liabilities, the degree of mismatch in the maturity and
repricing characteristics of its interest-earning assets and interest-bearing
liabilities and timing of receipt of purchased principal discount. With
respect to the Company's Discounted Loan Portfolio, the Company treats
accreted discount on Discounted Loans as interest for accounting purposes.
The following table sets forth, for the periods indicated, information
regarding the total amount of income from interest-earning assets and the
resultant average yields, the interest expense associated with interest-
bearing liabilities, expressed in dollars and rates, and the net interest
spread and net interest margin. Information is based on quarterly balances
during the indicated periods.
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
-------- -------- ---------- -------- -------- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
AVERAGE ASSETS:
Mortgage-backed securi-
ties................... $ 29,241 $ 1,797 6.15% $ 24,054 $ 1,359 5.65% $ 23,515 $1,361 5.79%
Loan portfolio(1)....... 487,821 44,294 9.08 227,970 21,821 9.57 103,583 7,923 7.65
Investment securities
and other.............. 27,446 2,331 8.49 14,216 1,201 8.45 $ 7,969 285 3.58
Total interest-earning
assets,
interest income........ 544,508 48,422 8.89 266,240 24,381 9.16 135,067 9,569 7.08
Non-interest earning
cash................... 6,019 -- -- 1,868 -- -- 2,053 -- --
Allowance for loan
losses and unaccreted
discount............... (56,842) -- -- (31,845) -- -- (8,595) -- --
Other assets............ 32,061 -- -- 15,277 -- -- 7,646 -- --
-------- ------- -------- ------- -------- ------
Total assets............ $525,746 $48,422 $251,540 $24,381 $136,171 $9,569
======== ======= ======== ======= ======== ======
AVERAGE LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing depos-
its.................... $425,303 $25,002 5.88 $231,555 $13,944 6.02 $118,277 $5,017 4.24
FHLB advances........... 2,420 159 6.57 1,381 104 7.53 5,916 228 3.85
Subordinated debentures
and other interest-
bearing
obligations............ 51,316 4,116 8.02 5,383 433 8.04 4,757 212 4.46
-------- ------- -------- ------- -------- ------
Total interest-bearing
liabilities, interest
expense................ 479,039 29,277 6.11 238,319 14,481 6.08 128,950 5,457 4.23
Non-interest bearing de-
posits................. 2,822 -- -- 2,196 -- -- 1,537 -- --
Escrow deposits......... 257 -- -- 106 -- -- 74 -- --
Other liabilities....... 7,330 -- -- 4,077 -- -- 582 -- --
-------- ------- -------- ------- -------- ------
Total liabilities...... 489,448 29,277 -- 244,698 14,481 132,143 5,457
Stockholders' equity.... 36,298 -- -- 6,842 -- -- 4,028 -- --
-------- ------- -------- ------- -------- ------
Total liabilities and
stockholders' equity... $525,746 $29,277 $251,540 $14,481 $136,171 $5,457
======== ======= ======== ======= ======== ======
Net interest income..... $19,145 $ 9,900 $4,112
Net interest spread..... 2.78 3.08 2.85
Net interest margin..... 3.52 3.72 3.04
Ratio of average inter-
est--
earning assets to aver-
age
interest-bearing lia-
bilities............... 113.7% 111.7% 104.7%
- --------
(1) The average balances of the loan portfolio include Discounted Loans and
non-performing loans, interest on which is recognized on a cash basis.
21
The following table describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (i)
changes in volume (change in volume multiplied by prior rate), (ii) changes in
rate (change in rate multiplied by prior volume) and (iii) total change in
rate and volume. Changes attributable to both volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
CHANGES IN NET INTEREST INCOME
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1996 V. 1995 1995 V. 1994 1994 V. 1993
------------------------ ----------------------- -----------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
------------------------ ----------------------- -----------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL RATE VOLUME TOTAL
------- ------- ------- ------ ------- ------- ------- ------ ------
(DOLLARS IN THOUSANDS)
Interest-Earning Assets:
Mortgage-backed
securities............. $ 127 $ 311 $ 438 $ (37) $ 35 $ (2) $ 168 $ 975 $1,143
Loan portfolio......... (1,061) 23,534 22,473 2,405 11,493 13,898 60 6,480 6,540
Investment securities
and other.............. 6 1,124 1,130 581 335 916 (112) 344 232
------- ------- ------- ------ ------- ------- ------- ------ ------
Total interest-
earning assets....... (928) 24,969 24,041 2,949 11,863 14,812 116 7,799 7,915
Interest-Bearing
Liabilities:
Interest-bearing
deposits............... (324) 11,382 11,058 2,723 6,204 8,927 1,368 2,885 4,253
FHLB advances.......... (11) 66 55 (626) 502 (124) -- 228 228
Other interest-bearing
obligations............ (1) 3,684 3,683 191 30 221 146 (19) 127
------- ------- ------- ------ ------- ------- ------- ------ ------
Total interest-
bearing liabilities.. (336) 15,132 14,796 2,288 6,736 9,024 1,514 3,094 4,608
------- ------- ------- ------ ------- ------- ------- ------ ------
Increase (decrease) in
net interest income..... $ (592) $ 9,837 $ 9,245 $ 661 $ 5,127 $ 5,788 $(1,398) $4,705 $3,307
======= ======= ======= ====== ======= ======= ======= ====== ======
RESULTS OF OPERATIONS 1996 COMPARED TO 1995
NET INTEREST INCOME
The Company's net interest income increased by approximately $9.2 million or
93.4% during fiscal year 1996, as compared to the same period in the prior
year. This increase resulted from an approximately $24.0 million or 98.6%
increase to interest income due to an approximately $278.3 million or 104.5%
increase in average interest-earning assets from period to period. The
increase in interest income was offset in part by an approximately $14.8
million or 102.2% increase in interest expense due to an approximately $240.7
million or 101.0% increase in average interest-bearing liabilities, primarily
certificates of deposit, and, to a lesser extent, a 10 basis point increase in
the weighted average rate paid on interest-bearing liabilities.
The increase in interest income during the fiscal year 1996, as compared to
the same period in the prior year, reflects substantial increases in the
average balances of the loan portfolio. The Company's business strategy
currently contemplates continued strong growth in its Total Loan Portfolio,
with a particular emphasis on increasing its Discounted Loan Portfolio. For
information on the growth in the Company's Total Loan Portfolio, including its
Discounted Loan Portfolio, see "--Changes in Financial Condition" below.
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
Provisions for losses on loans are charged to operations to maintain an
allowance for losses on each of the Loan Portfolio and the Discounted Loan
Portfolio at a level which management considers adequate based upon an
evaluation of known and inherent risks in such Loan Portfolio and the
Discounted Loan Portfolio, historical loss experience, current economic
conditions and other relevant factors. See "Business--Asset Quality--
Allowances for Loan Losses" for a discussion of management's methods of
estimating loan loss provisions.
22
The Company recorded provisions for estimated losses on loans totaling
approximately $16.5 million for the fiscal year 1996, as compared to
approximately $4.3 million for the prior year, an increase of 287.9%. The
following table sets forth the Company's provision for estimated losses on
loans for the year ended December 31, 1996:
PROVISIONS % OF TOTAL
----------- -----------
(DOLLARS IN THOUSANDS)
Inherited Loans............................... $ 4,845 29.28%
Sub-Prime Auto Loans.......................... 8,583 51.86%
Other Purchased Loans......................... 3,121 18.86%
----------- ----------
Total provision for estimated losses on
loans....................................... $ 16,549 100.00%
=========== ==========
Approximately $6.1 million of the increase in the provisions from 1995 to
1996 was made after discussions between the OTS and the Banks concerning the
appropriate provision for the Sub-Prime Auto Loans acquired by the Banks in
the fourth quarter of 1995 and the first quarter of 1996.
The Company also made a provision of approximately $4.8 million in fiscal
year 1996 related to Inherited Loans owned by FBBH or GSB at the time the
Banks were acquired by the Company. Both Banks were acquired at substantial
discounts to their respective book values, reflecting the poor quality of
their assets.
Although management attempts to utilize its best judgment in providing for
possible loan losses, changing economic and business conditions, fluctuations
in local markets for real estate, future changes in non-performing asset
trends, large movements in market interest rates or other factors could affect
the Company's future provisions for loan losses. In addition, the OTS, as an
integral part of its examination process, periodically reviews the adequacy of
the Bank's allowances for losses on loans and Discounted Loans and such agency
may require the Company to recognize changes to such allowances for losses
based on its judgment about information available to it at the time of
examination.
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOSSES ON LOANS
The Company's net interest income after provision for estimated losses on
loans decreased 53.9% to approximately $2.6 million for fiscal year 1996 from
income of approximately $5.6 million for fiscal year 1995. This decrease was
due to the substantial increase in provisions for estimated losses on loans.
OTHER INCOME
The Company's other income was approximately $17.9 million for fiscal year
1996 compared to approximately $2.9 million for fiscal year 1995, an increase
of 510.9%. This increase was primarily attributable to gains on the sale of
loans. The components of the Company's non-interest income are reflected in
the following table:
DECEMBER 31,
------------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
Other income:
Bankcard income................................ $ 6,790 $ 4,694
Bankcard processing expense.................... (5,124) (3,462)
Gain on sale of loans.......................... 11,538 642
Loan fees and charges.......................... 1,747 610
Amortization of deferred credits............... 461 460
Trading account-unrealized gain................ 1,833 --
Real estate owned, net......................... 556 (170)
Other, net..................................... 141 163
----------- ----------
Total other income........................... $ 17,942 $ 2,937
=========== ==========
23
Bankcard Income and Processing Expense. The increase in other income for
fiscal year 1996 was due in part to an increase of approximately $2.1 million
in bankcard income, from approximately $4.7 million for fiscal year 1995 to
approximately $6.8 million for fiscal year 1996. The large increase in income
from the Company's bankcard operations was primarily due to the development of
a number of new accounts. Bankcard processing expense increased by
approximately $1.6 million from approximately $3.5 million for fiscal year
1995 to approximately $5.1 million for fiscal year 1996. This increase
resulted primarily from an increase in bankcard processing due to growth in
merchant transactions evidenced by the growth in bankcard income.
Gains on Sale of Loans. The increase in other income in fiscal year 1996 was
due primarily to an increase of approximately $10.9 million in gains on sales
of mortgage loans, from $.6 million for fiscal year 1995 to approximately
$11.5 million for fiscal year 1996. This increase was due to gains from the
sale of approximately $287.8 million of mortgage loans. For the year ended
December 31, 1996, gain on sale of whole loans totaled $5.4 million and gains
from securitizations totaled $6.1 million.
Gains or losses on loan portfolios sold through securitization transactions
are based on the difference between the cash proceeds received on the
certificates sold to outside investors (the "Senior Securities") and the
Company's cost basis allocated to the Senior Securities. The Company's cost
basis in loan portfolios sold is allocated between the Senior Securities and
the subordinate securities retained by the Company based on the relative fair
values of the two types of securities. The cost basis of the loans securitized
is determined by their acquisition cost (for purchased loans) or net carrying
value (for originated loans). The Company carries Subordinate Securities at
fair value. As such, the carrying value of these securities is impacted by
changes in market interest rates and prepayment and loss experiences of these
and similar securities. The Company determines the fair value of the
subordinate securities utilizing prepayment and credit loss assumptions
appropriate for each particular securitization. The range of values
attributable to the factors used in determining fair value is broad.
Accordingly, the Company's estimate of fair value is subjective.
Other income also includes loan fees and charges (e.g. late fees, commitment
fees). Loan fees and charges increased approximately $1.1 million, from
approximately $0.6 million for fiscal year 1995 to approximately $1.7 million
for fiscal year 1996. The increase was primarily due to an increase in loan
volume.
OTHER EXPENSE
The Company's other expense totaled approximately $15.4 million for fiscal
year 1996 compared to approximately $7.9 million for fiscal year 1995, an
increase of 94.7%.
Loan Service Fees and Expenses. The largest component of other expense in
fiscal year 1996 was loan service fees and expense which increased by
approximately $3.2 million from approximately $2.0 million for fiscal year
1995 to approximately $5.2 million for fiscal year 1996. Loan servicing fees
and charges are paid to WCC and include (a) "normal" servicing fees, and (b)
collection-related expenses incurred directly by WCC and reimbursed by the
Company. Servicing fees for Discounted Loans have been based on a percentage
of cash flows collected. Therefore, when Discounted Loans are sold, servicing
fees increase substantially. The Banks' volume of loans being serviced by WCC,
and particularly the volume of Discounted Loans, increased substantially
during 1996 compared to 1995 resulting from substantial growth in the Banks'
Total Loan Portfolio. Also, due to a securitization of non-performing loans
(primarily Discounted Loans) in March, higher fees associated with the
accelerated cash flows to the Banks were paid to WCC in the first quarter.
These factors accounted for the increase in servicing fees and charges in
fiscal year 1996 compared to fiscal year 1995.
Compensation and Employee Benefits. Other expense relating to compensation
and employee benefits also increased from approximately $2.5 million for
fiscal year 1995 to approximately $4.5 million for fiscal year 1996, an
increase of approximately $2.0 million (or 77.4%). The increase in
compensation and employee benefits during this period reflected normal salary
adjustments and an increase in the average number of full-time equivalent
employees from 37 for fiscal year 1995 to 54 for fiscal year 1996, reflecting
the expansion of business activities, particularly loan acquisition activities
and the growth of non-traditional bankcard activities. In
24
addition, the Banks' administrative offices were relocated to Portland, Oregon
in August 1996 which resulted in approximately $0.7 million of additional
employee compensation.
FDIC Insurance Premiums. FDIC insurance premiums increased from
approximately $0.7 million for fiscal year 1995 to approximately $2.4 million
for fiscal year 1996, an increase of approximately $1.7 million (or 230.2%),
as a result of growth in deposits outstanding and the SAIF special assessment.
INCOME TAX PROVISION
Income tax provision amounted to approximately $0.1 million during fiscal
year 1996 compared to a provision of less than $0.1 million during fiscal year
1995. This increase was due primarily to assessment of the valuation
allowances against deferred tax assets. The Company's effective tax rate
amounted to 2.5% and 7.4% during fiscal year 1996 and 1995, respectively.
Differences in the Company's effective tax rates in recent periods compared to
combined Federal and State statutory rates were primarily attributable to
changes in assessments of the realization of deferred tax assets. Exclusive of
such amounts, the Company's effective tax rate amounted to 41% during fiscal
year 1996 and 1995.
RESULTS OF OPERATIONS--1995 COMPARED TO 1994
NET INTEREST INCOME
The Company's net interest income was $9.9 million for fiscal year 1995
compared to $4.1 million for the fiscal year 1994, an increase of 140.8%. The
components of the Company's net interest income for these fiscal years are
discussed below.
Interest Income. The Company's interest income was approximately $24.4
million for fiscal year 1995 compared to $9.6 million for fiscal year 1994, an
increase of 154.8%. The increase in the Company's interest income from 1994 to
1995 was due primarily to an increase in interest received on loans from $7.9
million in 1994 to $21.8 million in 1995. The increase in interest received on
loans was a result of an increase in the gross principal amount of the
Company's total Loan Portfolio from $198.6 million in 1994 to $337.5 million
in 1995, an increase of 69.9%. The Banks made substantial acquisitions of
Discounted Loans in June 1995 and performing single-family loans in the fourth
quarter of 1995. In addition, the Company acquired GSB in November 1994 and,
as a result, the Company's 1994 results of operations only reflect two months
of GSB's operations while 1995 results reflect a full year of operations by
GSB. In addition, the average rate earned by the Company on its interest-
bearing assets increased from 7.08% in 1994 to 9.16% in 1995.
Interest Expense. The Company's interest expense was approximately $14.5
million for fiscal year 1995 compared to approximately $5.5 million in fiscal
year 1994, an increase of 165.4%. The increase in interest expense from 1994
to 1995 was due primarily to an increase in average certificates of deposit
outstanding from approximately $118.3 million in 1994 to approximately $231.6
million in 1995 (an increase of 104.4%), which occurred in order to fund the
growth of the loan portfolio noted above. In addition, interest expense
increased due to the inclusion of GSB's results of operations for the full
year ending December 31, 1995, compared to fiscal year 1994 which only
reflected two months of GSB's operations. In addition, the average interest
rate on the Company's borrowings increased from 4.23% to 6.08% from 1994 to
1995.
PROVISIONS FOR ESTIMATED LOSSES ON LOANS
In connection with its provision for estimated losses on loans the Company
recorded an expense totaling approximately $4.3 million for fiscal year 1995
compared to approximately $2.2 million for fiscal year 1994, an increase of
96.3%.
The increase in the provisions from 1994 to 1995 was primarily attributable
to higher provisions related to the Inherited Loans and having a full year of
GSB's operations presented in 1995. The increase in the provisions from 1994
to 1995 was also to a lesser degree attributable to the earthquake in Southern
California in January
25
1994, which affected delinquency and collateral values in 1995. For a
discussion of the Company's methods for establishing provisions for loan
losses, see "Business--Asset Quality--Allowances for Loan Losses."
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOSSES ON LOANS
The Company's net interest income after provision for estimated losses on
loans increased 190.6% to approximately $5.6 million for fiscal year 1995 from
approximately $1.9 million for fiscal year 1994.
OTHER INCOME
The Company's other income was approximately $2.9 million for fiscal year
1995 compared to approximately $1.0 million for fiscal year 1994, an increase
of 197.9%. This increase was primarily attributable to growth in the Company's
bankcard operation and gains from the sale of loans. The components of the
Company's non-interest income are reflected in the following table:
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994
------------ -----------
(DOLLARS IN THOUSANDS)
Other Income:
Bankcard income..................................... $ 4,694 $ 635
Bankcard processing expense......................... (3,462) (274)
Gain on sale of loans............................... 642 --
Loan fees and charges............................... 610 43
Amortization of deferred credits.................... 460 388
Real estate owned, net.............................. (170) (241)
Other, net.......................................... 163 435
------------ ----------
Total other income................................ $ 2,937 $ 986
============ ==========
The increase in other income in 1995 was due primarily to an increase of
approximately $4.1 million in bankcard income, from approximately $0.6 million
for fiscal year 1994 to approximately $4.7 million for fiscal year 1995. The
large increase in income from the Company's bankcard operations reflects a
full year of Bankcard operations in 1995 compared to a partial year for 1994,
since bankcard operations commenced in mid-1994. Bankcard processing expense
increased by approximately $3.2 million from approximately $0.3 million for
fiscal year 1994 to approximately $3.5 million for fiscal year 1995. The
increase in bankcard processing expense was primarily the result of the same
factors. The increase in other income in 1995 was also due in part to
approximately $0.6 million in gains on sales of loans in fiscal year 1995 from
no gains on sales of loans for fiscal 1994. This increase was due to gains
from the 1995 sale of approximately $7.9 million of mortgage loans into a
securitization. The increase in other income in 1995 was also due in part to
an increase of approximately $0.6 million in loan fees and charges, from less
than $0.1 million in 1994 to approximately $0.6 million in 1995. The increases
in loan fees and charges are primarily attributable to an increase in the
average Loan Portfolio from $103.6 million in 1994 to $228.0 million in 1995,
an increase of 120.1%.
OTHER EXPENSE
The Company's other expense totaled approximately $7.9 million for fiscal
year 1995 compared to approximately $4.7 million for fiscal year 1994, an
increase of 68.7%. The largest component of other expense was loan service
fees and expenses which increased by approximately $1.8 million from
approximately $0.2 million in fiscal year 1994 to $2.0 million in fiscal year
1995. This increase resulted from the substantially higher volume of loans
being serviced in 1995, including a full year of operations of GSB, and the
purchase of a portfolio of Discounted Loans in June 1995 which was serviced at
higher fees. All of the key items of other expense (including loan service
fees and expenses, compensation and employee benefits, FDIC insurance
26
premiums and professional services) showed an increase from 1994 to 1995
except for other general and administrative expenses. This increase was
primarily attributable to growth in the Savings Banks.
Other expense relating to compensation and employee benefits increased from
approximately $1.9 million in 1994 to approximately $2.5 million in 1995, an
increase of $0.6 million (or 30.9%), primarily as a result of an increase in
the average number of full-time equivalent employees from 31 in 1994 to 37 in
1995 (including an entire year's compensation expenses for GSB in 1995).
FDIC insurance premiums increased from $0.3 million in 1994 to $0.7 million
in 1995, an increase of approximately $0.4 million (or 176.2%), as a result of
growth in certificates of deposit outstanding. Other expense relating to
professional services also increased from approximately $0.5 million in 1994
to approximately $1.0 million in 1995 primarily as a result of legal and
accounting expenses incurred in connection with a proposed acquisition of
another savings bank in 1995, which was not completed due to a failure of the
principals ultimately to agree on terms.
Other general and administrative expenses decreased from approximately $1.3
million in 1994 to approximately $1.1 million in 1995, a decrease of 15.3%.
INCOME TAX PROVISION (BENEFIT)
Income tax provision (benefit) amounted to an expense of less than $0.1
million in 1995 compared to a benefit of approximately $0.5 million for 1994.
The Company's effective tax rate amounted to 7.4% and (29.6)% during 1995 and
1994, respectively. Differences in the Company's effective tax rates in recent
periods compared to combined Federal and State statutory rates were primarily
attributable to changes in assessments of the realization of deferred tax
assets. Exclusive of such amounts, the Company's effective tax rate amounted
to 41% and (41)% during 1995 and 1994, respectively.
CHANGES IN FINANCIAL CONDITION
Mortgage-Backed and Other Securities. The Company's mortgage-backed
securities available for sale and trading account securities increased $46.7
million during the year ended December 31, 1996 primarily as a result of
purchasing certain subordinated bonds. Investment securities and mortgage-
backed securities held to maturity increased by approximately $1.0 million and
$8.6 million, respectively, during the year ended December 31, 1996. United
States Treasury securities are generally held for the purpose of meeting
regulatory liquidity requirements. As the amount of deposits and borrowings
increases, the regulatory liquidity requirement increases proportionately. The
increase in mortgage-backed securities held to maturity resulted primarily
from purchases of GNMA adjustable-rate mortgage-backed securities to secure
certain representations and warranties under a mortgage loan securitization
and for collateral securing an interest-rate swap contract.
27
Loans Receivable, Net. Since 1994, the Company has emphasized the
acquisition of traditional performing mortgage loans as well as under-
performing and non-performing loans which generally are purchased at a
discount to both unpaid principal amount of the loan and the estimated value
of the property securing the loan. As a result, the average balance of the
Company's Total Loan Portfolio has increased significantly since 1993 as
illustrated by the following table:
AVERAGE BALANCE OF THE COMPANY'S TOTAL LOAN PORTFOLIO
DECEMBER 31,
----------------------------
1996 1995 1994
--------- -------- -------
(DOLLARS IN THOUSANDS)
Single-family residential....................... $ 327,014 $ 93,350 $31,414
Multi-family residential........................ 73,470 70,631 36,089
Commercial and other mortgage loans............. 58,227 53,852 33,163
Consumer and other.............................. 29,110 10,137 2,917
--------- -------- -------
Total loans................................... 487,821 227,970 103,583
Unaccreted discount............................. (17,167) (10,254) (4,086)
Allowance for loan losses....................... (39,675) (21,591) (4,509)
--------- -------- -------
$ 430,979 $196,125 $94,988
========= ======== =======
The Company's Total Loan Portfolio, net of discounts and allowances,
increased by approximately $120.8 million during the year ended December 31,
1996 primarily as a result of the Company's business strategy of aggressively
acquiring loan portfolios of Discounted Loans and other mortgage loans. The
Company's Total Loan Portfolio, net of discounts and allowances, increased by
approximately $109.3 million during 1995 primarily as a result of the
Company's loan purchase strategy. Included in the amount of increases in the
Company's Total Loan Portfolio in the year ended December 31, 1996 and the
year ended December 31, 1995 are increases of $188.3 million and $29.3
million, respectively, in the net carrying amount of Discounted Loans. The
increase in 1995 reflected the initial implementation of the discounted loan
acquisition strategy at the Savings Banks. The increase in 1996 reflects the
acquisition of approximately $265 million of performing loans and $348 of
Discounted Loans. These purchases were partially offset by the sale of
approximately $326 million of loans in 1996.
Real Estate Owned, Net. Real estate owned, net consists of properties
acquired by foreclosure or deed-in-lieu thereof on loans in the Company's
total loan portfolio or purchased directly. Real estate owned increased by
approximately $73.2 million during the year ended December 31, 1996 primarily
as a result of the acquisition of a portfolio of properties for $67.3 million.
The approximately $3.8 million increase in the Company's net real estate owned
during 1995 primarily reflects increases in real estate owned related to the
Company's Discounted Loan Portfolio, which reflects the growth in the
Company's discounted loan acquisition and resolution activities in recent
periods.
The Company actively manages its real estate owned. During the year ended
December 31, 1996, the Company sold 77 properties of real estate owned related
to its total loan portfolio with a carrying value of approximately $15.9
million. During 1995, the Company sold 17 properties of real estate owned
related to its total loan portfolio with a carrying value of approximately
$5.2 million, as compared to the sale of properties of real estate owned
related to its Total Loan Portfolio with carrying values of approximately $1.0
million during 1994.
Due from Affiliate. Due from affiliate increased by approximately $1.3
million or 34.5% during the year ended December 31, 1996 primarily as a result
of growth in loan portfolios. The balance in the account as of
28
any month-end primarily reflects the lag between receipts of loan payments by
WCC, as servicer, and payment to the Company.
Deposits. Deposits increased by approximately $198.1 million or 65.3% during
the year ended December 31, 1996 primarily as a result of the Company's
strategy to increase deposits to permit the Banks to acquire loan portfolios.
Deposits increased by approximately $107.2 million during 1995 primarily for
the same reason.
Notes Payable. In December 1996, the Company issued $75.0 million of 13%
unsecured notes due in 2004. Net proceeds after underwriting and other
expenses were approximately $70.7 million.
Short-Term Borrowings. Short-term borrowings increased by approximately
$84.6 million during 1996, resulting from increased use of repurchase
agreements and warehouse financing to fund the purchases of loans and
securities.
Subordinated Debt. Subordinated debt decreased by approximately $11.0
million during the year ended December 31, 1996 because on January 1, 1996,
the subordinated debt was exchanged for common stock.
Stockholders' Equity. Stockholders' equity increased by $54.0 million during
the year ended December 31, 1996 primarily as a result of the Company's
issuance of 2,070,000 shares of common stock at a price of $10.50 per share,
totaling $21.7 million. The net proceeds of this initial public offering
totaled approximately $20.3 million. In addition, stockholders' equity also
increased during 1996 as a result of the exchange of $11.0 million of
outstanding subordinated debt for common stock and the infusion of
approximately $17.8 million to support growth and maintain required regulatory
capital ratios at the Banks. Stockholders' equity increased during 1996 and
1995, primarily as a result of the Company's net income of $5.0 million and
$.6 million, respectively, during the periods.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude of
the repricing of assets and liabilities. It is the objective of the Company to
attempt to control risks associated with interest rate movements. In general,
management's strategy is to limit the Company's exposure to earnings
variations and variations in the value of assets and liabilities as interest
rates change over time. The Company's asset and liability management strategy
is formulated and monitored by the asset and liability committees for the
Company and the Banks (the "Asset and Liability Committees") which meet
regularly to review, among other things, the sensitivity of the Company's
assets and liabilities to interest rate changes, the book and market values of
assets and liabilities, unrealized gains and losses, including those
attributable to hedging transactions, purchase and securitization activity,
and maturities of investments and borrowings. The Asset and Liability
Committees coordinate with the Banks' boards of directors and the Company's
investment committees with respect to overall asset and liability composition.
Since most of the Company's assets and liabilities reprice relatively
frequently, the Company's gap tends to be relatively easy to manage and the
Company's interest rate risk analysis focuses less on managing the overall gap
and more on ensuring that individual loan portfolios are properly hedged. In
hedging the interest rate exposure of a fixed-rate or lagging-index asset that
is held for sale, the Company creates a hedge which matches the principal
amortization of such asset against the maturity of the Company's liabilities
generally by entering into short sales or forward sales of U.S. Treasury
securities, U.S. agency mortgage-backed 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 the corresponding
market losses or gains, respectively, on loans being hedged. The Company
evaluates the interest rate sensitivity of each loan portfolio and decides
whether to hedge the interest rate exposure of a particular portfolio. In
general, the Company tends to hedge its fixed-rate loan portfolios. The
Company generally does not hedge the interest rate risk associated with
holding non-lagging index adjustable-rate mortgages pending their sale or
securitization due to the decreased significance of such risk. Though the
Company's loan portfolio
29
changes relatively frequently as a result of loan portfolio acquisitions and
the sale of loan portfolios through securitization, the Company to date has
not experienced any significant costs or problems in hedging its portfolio. In
general, as a new loan portfolio is acquired, the Company will determine
whether or not to hedge and, with respect to any sale or financing of loan
portfolios through securitization, the Company will determine whether or not
to discontinue its duration-matched hedging activities with respect to the
relevant loans.
The Asset and Liability Committees are authorized to utilize a wide variety
of off-balance sheet financial techniques to assist them in the management of
interest rate risk. These techniques include interest rate swap agreements,
pursuant to which the parties exchange the difference between fixed-rate and
floating-rate interest payments on a specified principal amount (referred to
as the "notional amount") for a specified period without the exchange of the
underlying principal amount. Interest rate swap agreements are utilized by the
Company to protect against the narrowing of the interest spread between fixed
rate loans and associated liabilities funding those loans. The Company had
approximately $234.3 million notional principal amount of interest rate swap
agreements outstanding at December 31, 1996, which had the effect of
decreasing the Company's net interest income by approximately $0.2 million
during the year ended December 31, 1996. There was no significant hedging
activity in 1995.
In addition, as required by OTS regulations, the Asset and Liability
Committees also regularly review interest rate risk by forecasting the impact
of alternative interest rate environments on net interest income and market
value of portfolio equity ("MVPE"), which is defined as the net present value
of an institution's existing assets, liabilities and off-balance sheet
instruments, and evaluating such impacts against the maximum potential changes
in net interest income and MVPE that is authorized by the Boards of Directors
of the Banks. In addition, at December 31, 1996, management estimates based
upon the MVPE analysis prepared by the OTS that the estimated percentage
change in the Company's MVPE over the ensuing four-quarter period as a result
of a 200 basis point increase or decrease in interest rates would be an
approximate 10% increase or 14% decrease, respectively. The following table
highlights the interest rate sensitivity of the OTS's models of MVPE of a
change in rates from 0 to 400 basis points ("bp").
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
NET PORTFOLIO VALUE
---------------------------
CHANGE
IN
RATES AMOUNT $ CHANGE % CHANGE
------ -------- -------- --------
(DOLLARS IN THOUSANDS)
+400bp $ 65,237 $ 9,655 17%
+300bp 63,506 7,924 14%
+200bp 61,391 5,809 10%
+100bp 58,764 3,182 6%
0bp 55,582 --
-100bp 51,879 (3,703) -7%
-200bp 47,660 (7,922) -14%
-300bp 42,946 (12,636) -23%
-400bp 38,219 (17,363) -31%
Management of the Banks believes that the assumptions (including pre-payment
assumptions) used by it to evaluate the vulnerability of the Banks' operations
to changes in interest rates approximate actual experience and considers them
reasonable; however, the interest rate sensitivity of the Banks' assets and
liabilities and the estimated effects of changes in interest rates on the
Banks' net interest income and MVPE could vary substantially if different
assumptions were used or actual experience differs from the historical
experience on which they are based. Additionally, the OTS's model does not
incorporate all of the terms and features of the hedging instruments.
30
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the measurement of the Company's ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, purchase loans, purchase Discounted Loans, fund lending
activities and for general business purposes. The Company's sources of cash
flow include certificates of deposit, securitizations, net interest income and
borrowings under its warehouse and repurchase financing facilities and from
institutional investors and other lenders. In addition, the Banks obtain
funding through FHLB advances.
The Company's liquidity is actively managed on a daily basis and reviewed
periodically by the Board of Directors. This process is intended to ensure the
maintenance of sufficient funds to meet the needs of the Company, including
adequate cash flows for off-balance sheet instruments.
Sources of liquidity for the Banks include wholesale and brokered
certificates of deposit. As of December 31, 1996, the Banks had approximately
$493.5 million of certificates of deposit. As of December 31, 1996, scheduled
maturities of certificates of deposit during the 12 months ending December 31,
1997 and thereafter amounted to approximately $389.5 million and approximately
$104.0 million, respectively. Brokered and other wholesale deposits generally
are more responsive to changes in interest rates than core deposits and, thus,
are more likely to be withdrawn by the investor upon maturity as changes in
interest rates and other factors are perceived by investors to make other
investments more attractive. However, management of the Banks believe that 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.
As of December 31, 1996, the Company's sources of borrowing included (i)
Master Repurchase Agreements between each of the Banks and Bear Stearns
Mortgage Capital Corporation as to which the parties have orally agreed that
approximately $210 million in aggregate would be available for the purchase of
loans, (ii) a $100 million warehouse lending agreement with Prudential
Securities Realty Funding Corp., and (iii) certain repurchase arrangements
including $250 million under a repurchase agreement with First Boston Mortgage
Capital Corporation.
Sources of borrowings also include FHLB advances, which are required to be
secured by single-family and/or multi-family residential loans or other
acceptable collateral, and reverse repurchase agreements. As of December 31,
1996, the Banks had no FHLB advances outstanding, and were eligible to borrow
up to an aggregate of $11.9 million from the FHLB of San Francisco and had
$1.9 million of single-family residential loans, approximately $16.5 million
of multi-family residential loans and $2.6 million of commercial loans which
were pledged as security for such advances. At the same date, the Banks had a
contractual relationship with the FHLB of San Francisco pursuant to which it
could obtain funds from reverse repurchase agreements and had $7.4 million of
unencumbered investment securities and mortgage-backed and related securities
which could be used to secure such borrowings.
The Company's uses of cash include the funding of loan purchases and
origination, payment of interest expenses, repayment of loans, funding of
initial over-collateralization requirements for securitizations, operating and
administrative expenses, income taxes and capital expenditures. The Company's
purchases of loans is expected to utilize secured borrowings and be highly
leveraged. The actual dollar amount of secured borrowings incurred by the
Company will vary depending on a number of factors, including the breakdown
between performing and non-performing loans acquired by the Company, the
amount of leverage lenders are willing to make available at the time a Loan
Portfolio is acquired (which will be effected by market conditions), and
management's determination as to the appropriate amount of leverage at the
time a portfolio is acquired. Management expects to repay any secured
indebtedness incurred in connection with loan acquisitions from the proceeds
of the loan portfolios acquired. Capital expenditures were immaterial for the
years ended December 31, 1996, 1995, and 1994. In addition to commitments to
extend credit, the Company is party to various off-balance sheet financial
instruments in the normal course of business to manage its interest rate risk.
31
The Company conducts business with a variety of financial institutions and
other companies in the normal course of business, including counterparties to
its off-balance sheet financial instruments. The Company is subject to
potential financial loss if the counterparty is unable to complete an agreed
upon transaction. The Company seeks to limit counterparty risk through
financial analysis and other monitoring procedures.
Adequate credit facilities and other sources of funding, including the
ability of the Company to securitize loans, are essential to the continuation
of the Company's ability to purchase and originate loans, and acquire
subordinate securities. During the fiscal years 1996, 1995 and 1994, the
Company used cash in the approximate amounts of $511.3 million, $186.9
million, and $41.6 million, respectively, for new loan purchases. During the
fiscal year 1996 and fiscal year 1995, the Company received cash from the
securitization and sales of loans of approximately, $312.9 million and $16.7
million, respectively.
After utilizing available working capital, deposits and any securitization
proceeds, the Company borrows money to fund its loan purchases and
originations. During fiscal years 1996, 1995 and 1994, the Company used
borrowings under various repurchase arrangements and FHLB advances in the
approximate amounts of $618.7 million, $77.4 million and $41.7 million,
respectively, for new loan purchases and origination, purchases of real estate
owned, and subordinated securities. The Company's business plan generally
calls for using a high degree of leverage in acquiring loan portfolios. With
respect to loan portfolios of discounted loans and performing loans, the
Company generally seeks to fund 90% and 95%, respectively, of the market value
of such loan portfolios with borrowed money. The Company draws on a number of
sources to obtain such funds including certificates of deposit and repurchase
arrangements with Wall Street investment banks.
The Company believes that cash flow from operations, the net proceeds of the
Company's common stock offering and the Company's notes offering, the proceeds
of certificates of deposit, the availability under the warehouse financing
facility and other borrowings, and the net proceeds from securitizations will
be sufficient to fund operating needs, commitments and capital expenditures.
The Banks are 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 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity
requirements. FBBH's liquidity, as measured for regulatory purposes, amounted
to 7.7% as of December 31, 1996 and averaged 9.1%, 9.1%, and 8.0% during the
years ended December 31, 1996, 1995 and 1994, respectively. GSB's liquidity,
as measured for regulatory purposes, amounted to 5.7% as of December 31, 1996
and averaged 11.2%, 11.2%, and 8.5% during the year ended December 31, 1996,
1995, and the quarter ended December 31, 1994, respectively.
REGULATORY CAPITAL REQUIREMENTS
Federally-insured savings associations such as the Banks are required to
maintain minimum levels of regulatory capital. These standards generally are
as stringent as the comparable capital requirements imposed on national banks.
The OTS also is authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis. Under the
Orders, the Banks are required to be "well-capitalized" as of December 31,
1996.
32
The following table sets forth the regulatory capital ratios of the Banks at
December 31, 1996.
REGULATORY CAPITAL RATIOS
TO BE
CATEGORIZED AS
"WELL CAPITALIZED"
OTS MINIMUM UNDER OTS
ACTUAL REQUIREMENTS EXCESS REGULATIONS EXCESS
------------- ------------ ------------- ------------------ ------------
AMOUNT RATIO RATIO AMOUNT RATIO RATIO AMOUNT RATIO
------- ----- ------------ ------- ----- ------------------ ------ -----
(DOLLARS IN THOUSANDS)
Tangible Capital:
FBBH................... $11,436 8.0% 1.5% $ 9,280 6.5% N/A N/A N/A
GSB.................... 32,136 7.9% 1.5% 26,035 6.4% N/A N/A N/A
Tier 1 Capital to Aver-
age Assets:
FBBH................... 11,436 8.0% 3.0% 7,147 5.0% 5.0% 4,284 3.0%
GSB.................... 32,136 8.3% 3.0% 20,520 5.3% 5.0% 12,689 3.3%
Tier 1 Capital to Risk-
Weighted
Assets:
FBBH................... 11,436 10.6% N/A N/A N/A 6.0% 4,954 4.6%
GSB.................... 32,136 8.8% N/A N/A N/A 6.0% 10,326 2.8%
Total Risk-Based Capital
to Risk-Weighted As-
sets:
FBBH................... 12,835 11.9% 8.0% 4,192 3.9% 10.0% 2,031 1.9%
GSB.................... 36,726 10.1% 8.0% 7,645 2.1% 10.0% 375 0.1%
In August 1993, the OTS promulgated regulations which incorporate an
interest rate risk component into the OTS' risk-based capital requirements,
and in August 1995 the OTS postponed the effectiveness of this regulation
after having previously deferred the effective date several times. Because
only institutions whose measured interest rate risk exceeds certain parameters
will be subject to the interest rate risk capital requirement, management of
the Company does not believe that this regulation will increase the Banks'
risk-based regulatory capital requirement if it becomes effective in its
current form.
REGULATION
Recent Regulatory Examinations. Following examinations of the Banks and WAC
by the OTS in 1994, 1995 and 1996, the OTS issued Reports of Examination that
were critical of the Banks and WAC in a number of respects. These regulatory
concerns initially resulted in the OTS requiring FBBH to enter into a
Supervisory Agreement on June 8, 1995. The Supervisory Agreement required FBBH
to (a) develop plans and procedures concerning (i) reduction of non-performing
assets, (ii) internal asset review, (iii) asset monitoring, (iv) appraisals,
(v) loan underwriting, (vi) loan purchases; (b) enhance recordkeeping; (c)
develop requirements to ensure that the servicing of loans by WCC is
satisfactory; and (d) maintain its separate corporate existence. In addition,
the Supervisory Agreement required FBBH to maintain certain minimum capital
ratios and prohibited FBBH from increasing total assets beyond specified
levels and acquiring non-performing assets without the prior written consent
of the Assistant Regional Director of the OTS--West Region.
Imposition of Cease-and-Desist Orders. In July 1996, the OTS advised FBBH
that it had not fully complied with the terms of the Supervisory Agreement and
that both Banks had failed in a number of respects to address regulatory
concerns raised in the 1994 and 1995 examination reports. The OTS also
expressed continuing concerns regarding the adequacy of management of FBBH in
light of its business activities. As a result of these issues, the OTS
replaced the Supervisory Agreement with a Cease and Desist Order, effective
October 31, 1996. Given the similar nature of GSB's business activities, the
OTS has also issued a Cease and Desist Order to GSB similar to the Order
issued to FBBH, also effective October 31, 1996. The issuance of a cease and
desist order is generally evidence of an increased level of regulatory concern
regarding the subject institution.
The Orders require that both Banks not engage in unsafe and unsound
practices and that they maintain minimum capital ratios as of December 31,
1996 required of institutions to be deemed "well-capitalized" under OTS
regulations. The Orders further require that the Banks appropriately risk-
weight their assets and off-balance sheet items pursuant to OTS regulations
and establish and thereafter maintain internal controls sufficient to
33
ensure the accuracy and integrity of the calculation of their regulatory
capital ratios. The Orders also require the Banks to: (a) revise policies and
procedures concerning (i) internal asset reviews, (ii) the allowances for loan
and lease losses, (iii) loan purchases, (iv) internal audits and (v) hedging
transactions; (b) develop plans to augment the depth and expertise of the
management teams; (c) revise business plans; (d) modify certain policies
concerning the accounting for loan discounts; (e) improve monitoring of (i)
interest rate risk, (ii) asset classifications (e.g., as held for sale versus
held to maturity) and (iii) compliance with laws and regulations concerning
transactions with affiliates; (f) ensure compliance with the proper servicing
of adjustable-rate mortgages and escrow accounts; (g) ensure servicer
correction of OTS-identified deficiencies in information systems; and (h)
enhance recordkeeping. In addition, FBBH is required to correct OTS-identified
deficiencies in its merchant bankcard processing operations. These
requirements are accompanied by related requirements that the Banks submit to
the OTS, by certain specified dates, various policies, plans and reports on
other actions to comply with the Orders. In some cases, OTS approval of such
information is required.
Specifically, among other things, the Orders require that the Banks revise
and submit to the OTS their internal asset review policies and procedures (the
"IAR Policies") to provide guidance on identifying and classifying troubled,
collateral dependent loans under OTS regulatory guidance and, for purposes of
ensuring the independence of the internal asset review process, to require
that loan underwriting, servicing and purchasing functions be generally
segregated from the credit review function. The Banks delivered copies of
their revised IAR Policies to the OTS prior to October 31, 1996. In addition,
the Orders require the Banks to develop, implement and maintain an effective
internal asset review system that provides for adequate internal controls to
ensure that management timely reviews and classifies assets under the IAR
Policies.
The Orders also require the Banks to revise and submit to the OTS their
policies and procedures for allowances for loan and lease losses (the "ALLL
Policies") regarding the factors considered in setting loan loss allowances
and to provide adequate internal controls to ensure that management and the
Banks comply with the revised ALLL Policies. Under the Orders, when the Banks
report quarterly to the OTS on their progress in implementing the ALLL
Policies, the Banks must also submit their reserve analyses for the preceding
calendar quarter.
The Orders also require that the Banks revise and submit to the OTS their
loan purchase policies and procedures (the "Loan Purchase Policies") to
provide specific guidance on due diligence scope and sampling, assign
personnel to oversee due diligence activities and require such personnel to
ensure that all diligence is completed in accordance with the Loan Purchase
Policies and to provide specific guidance regarding the use and reliance on
broker price opinions. Under the Orders, the Banks are directed to establish
and maintain sufficient internal controls to confirm that loan data for all
purchased loans meet certain minimum standards set by the Banks and to
identify loan documentation deficiencies prior to purchase.
The Orders require that the Banks submit to the OTS an amended accounting
policy that requires management to establish and adhere to appropriate
guidance and procedures for the amortization of discounts on Discounted Loans,
to establish appropriate reserves on Discounted Loans prior to recognizing the
yield adjustment on such loans into income and to demonstrate the accuracy of
the yield adjustment component of the discount.
In connection with the requirements of the Orders regarding asset liability
management, the Banks are required to submit to the OTS a hedging policy that
fully complies with relevant accounting guidance and that establishes written
guidelines to ensure the Banks document their hedging strategy. In addition,
the Banks are required to submit to the OTS a plan to develop or obtain
internal expertise and resources necessary to measure, monitor and model the
Banks' interest rate risk.
The Orders provide that the Banks must submit a plan detailing how WCC will
complete a comprehensive audit of certain of its servicing activities for the
Banks and take such action to ensure that WCC fully implements
34
the results of such audit. Further, the Orders require that the Banks take
corrective actions specified, and adhere to the controls developed, in the
audit.
Management believes that the Banks are complying with those requirements of
the Orders that took effect immediately upon the imposition of the Orders. In
addition, the Banks have implemented several actions to address the other
requirements of the Orders, including (i) hiring a new chief executive officer
and chief credit review officer for the Banks, (ii) engaging Arthur Andersen
LLP to review management's implementation of corrective actions required by
the OTS, (iii) increasing the size of the internal asset review department,
and (iv) revising the internal asset review policy.
The Orders are enforceable by the OTS as written agreements under the
Federal Deposit Insurance Act. Therefore, failure to comply with the
requirements of the Orders could subject the Banks and their directors and
officers to further enforcement actions, including termination of FDIC
insurance or civil money penalties. There can be no assurances that the OTS
will approve the required submissions by the Banks without further
modification or will not impose further restrictions on the Banks.
OTS Growth Restrictions. Since June 30, 1995, FBBH has had limited ability
to increase deposits due to the provisions of an OTS Supervisory Agreement
which prohibited FBBH from increasing assets above specified levels.
Accordingly, the Company's asset growth has principally been financed through
the raising of deposits at GSB. However, due to the issuance of the Orders,
the Company will not be able to utilize the Banks as vehicles for growth until
and unless the Orders are lifted or modified. The Orders prohibit FBBH and GSB
from increasing their total assets, as measured at the end of each calendar
quarter, above $145 million and $408 million, respectively, unless such
increase is an amount that represents the total net interest credited on
deposit liabilities earned during that quarter plus any increase permitted
under the Orders in prior quarters.
Brokered Deposits. As of December 31, 1996, the Banks' capital ratios were
sufficient for them to be categorized as "well capitalized," and at December
31, 1995, FBBH's ratios were sufficient for them to be deemed "adequately
capitalized" and GSB's were sufficient for them to be deemed "well
capitalized," based solely on quantitative measures. The Banks have not been
notified by the OTS as to their capital category. If notified or otherwise
deemed to be categorized at less than "well capitalized," the Banks could be
subject to restrictions in addition to these specified in the Orders,
including restrictions on holding brokered deposits. As of December 31, 1996,
FBBH had no brokered deposits and GSB had brokered deposits of $172,427. In
the event that GSB is categorized as less than "well capitalized," it can
potentially retain brokered deposits with the permission of the Federal
Deposit Insurance Corporation. Alternatively, liquidity can be maintained with
borrowings on lines of credit (see Note 7). Because the Banks are currently
near the total asset maximums permitted under the Orders, the Banks do no
expect to add brokered deposits until and unless the growth restrictions are
removed.
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. All of the
statements contained in this Annual Report on Form 10-K which are not
identified as historical should be considered forward-looking. In connection
with certain forward-looking statements contained in this Annual Report on
Form 10-K and those that may be made in the future by or on behalf of the
Company which are identified as forward-looking, the Company notes that there
are various factors that could cause actual results to differ materially from
those set forth in any such forward-looking statements. Such factors include
but are not limited to, the real estate market, the cease and desist orders,
the availability of Loan Portfolios at acceptable prices, the availability of
financing for Loan Portfolio acquisitions, interest rates and European
expansion. Accordingly, there can be no assurance that the forward-looking
statements contained in this Annual Report on Form 10-K will be realized or
that actual results will not be significantly higher or
35
lower. The forward-looking statements have not been audited by, examined by or
subjected to agreed-upon procedures by independent accountants, and no third-
party has independently verified or reviewed such statements. Readers of this
Annual Report on Form 10-K should consider these facts in evaluating the
information contained herein. The inclusion of the forward-looking statements
contained in this Annual Report on Form 10-K should not be regarded as a
representation by the Company or any other person that the forward-looking
statements contained in this Annual Report on Form 10-K will be achieved. In
light of the foregoing, readers of this Annual Report on Form 10-K are
cautioned not to place undue reliance on the forward-looking statements
contained herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 of Part IV of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A definitive proxy statement of Wilshire Financial Services Group Inc. will
be filed not later than 120 days after the end of the fiscal year with the
Securities and Exchange Commission. The information regarding directors will
be included in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders and is incorporated herein by reference. The information with
respect to the executive officers of the Company required by this item is set
forth in Item 1 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in the Company's
Proxy Statement for the 1997 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in the Company's
Proxy Statement for the 1997 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the Company's
Proxy Statement for the 1997 Annual Meeting of Stockholders and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
See Index to Financial Statements immediately following Exhibit Index.
(b) Reports on Form 8-K
Current report on Form 8-K, dated December 24, 1996.
(c) Exhibits
See Exhibit Index immediately following signature pages.
37
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITORS' REPORT............................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition--
December 31, 1996 and 1995............................................... F-3
Consolidated Statements of Operations--
Years Ended December 31, 1996, 1995 and 1994............................. F-4
Consolidated Statements of Cash Flows--
Years Ended December 31, 1996, 1995 and 1994............................. F-5
Consolidated Statements of Stockholders' Equity--
Years Ended December 31, 1996, 1995 and 1994............................. F-8
Notes to Consolidated Financial Statements............................... F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Wilshire Financial Services Group, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial
condition of Wilshire Financial Services Group Inc. and Subsidiaries (the
"Company") as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1996, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of Wilshire Financial Services Group
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for the years ended December 31, 1996,
1995 and 1994, in conformity with generally accepted accounting principles.
As discussed in Note 10 to the consolidated financial statements, the
Company's subsidiaries, First Bank of Beverly Hills F.S.B. and Girard Savings
Bank F.S.B., are operating under regulatory agreements with the Office of
Thrift Supervision that require them to meet certain prescribed requirements.
Deloitte & Touche, LLP
March 14, 1997
Los Angeles, California
F-2
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
ASSETS
Cash and cash equivalents.................................. $152,298 $ 3,382
Federal funds sold......................................... 1,100
-------- --------
Total cash and cash equivalents........................ 152,298 4,482
Mortgage-backed securities available for sale, at fair
value
(amortized cost: December 31, 1996, $31,367; December 31,
1995, $9,099)............................................. 31,270 9,083
Mortgage-backed securities held to maturity, at amortized
cost
(fair values: December 31, 1996, $21,252; December 31,
1995, $12,873)............................................ 21,724 13,119
Securities held to maturity, at amortized cost (fair val-
ues: December 31, 1996, $7,518; December 31, 1995,
$6,488)................................................... 7,429 6,470
Trading account securities................................. 24,541
Loans, net................................................. 176,026 258,827
Discounted loans, net...................................... 206,740 13,347
Loans held for sale, net, at lower of cost or market....... 28,826 18,597
Stock in Federal Home Loan Bank of San Francisco, at cost.. 2,958 1,421
Real estate owned, net..................................... 78,200 4,964
Leasehold improvements and equipment, net.................. 317 275
Due from affiliate......................................... 5,051 3,755
Accrued interest receivable................................ 3,517 3,042
Prepaid expenses and other assets.......................... 10,769 3,143
Deferred tax asset, net.................................... 4,183 170
-------- --------
TOTAL.................................................. $753,849 $340,695
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits................................................. $501,614 $303,524
Short-term borrowings.................................... 97,624 13,000
Notes payable............................................ 75,000
Accounts payable and other liabilities................... 17,872 4,398
Subordinated debt........................................ 11,000
Deferred credits......................................... 717 1,134
Minority interest in subsidiaries........................ 600
-------- --------
Total liabilities...................................... 692,827 333,656
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock--$.01 par value, 50,000,000 shares autho-
rized, 7,570,000 (1996) and 1,300,863 (1995) outstand-
ing..................................................... 55,897 6,800
Preferred stock--$.01 par value, 10,000,000 authorized,
none outstanding
Retained earnings........................................ 5,222 255
Unrealized loss on available for sale securities, net.... (97) (16)
-------- --------
Total stockholders' equity............................. 61,022 7,039
-------- --------
TOTAL.................................................. $753,849 $340,695
======== ========
See notes to consolidated financial statements.
F-3
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
--------- --------- -------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
INFORMATION)
INTEREST INCOME:
Loans......................................... $ 44,294 $ 21,821 $ 7,923
Mortgage-backed securities.................... 1,797 1,359 1,361
Securities and federal funds sold............. 2,331 1,201 285
--------- --------- -------
Total interest income....................... 48,422 24,381 9,569
--------- --------- -------
INTEREST EXPENSE:
Deposits...................................... 25,002 13,944 5,017
Borrowings.................................... 4,275 537 440
--------- --------- -------
Total interest expense...................... 29,277 14,481 5,457
--------- --------- -------
NET INTEREST INCOME............................. 19,145 9,900 4,112
PROVISION FOR ESTIMATED LOSSES ON LOANS......... 16,549 4,266 2,173
--------- --------- -------
NET INTEREST INCOME AFTER PROVISION FOR
ESTIMATED LOSSES ON LOANS...................... 2,596 5,634 1,939
--------- --------- -------
OTHER INCOME (LOSS):
Bankcard income............................... 6,790 4,694 635
Bankcard processing expense................... (5,124) (3,462) (274)
Gain on sale of loans......................... 11,538 642
Loan fees and charges......................... 1,747 610 43
Trading account--unrealized gain.............. 1,833
Amortization of deferred credits.............. 461 460 388
Real estate owned, net........................ 556 (170) (241)
Other, net.................................... 141 163 435
--------- --------- -------
Total other income.......................... 17,942 2,937 986
--------- --------- -------
OTHER EXPENSES:
Compensation and employee benefits............ 4,464 2,516 1,922
FDIC insurance premiums....................... 2,381 721 261
Occupancy..................................... 339 385 319
Professional services......................... 700 1,028 507
Data processing and equipment rentals......... 229 232 162
Loan service fees and expenses paid to
affiliates.................................... 5,176 1,958 242
Other general and administrative expenses..... 2,157 1,092 1,290
--------- --------- -------
Total other expenses........................ 15,446 7,932 4,703
--------- --------- -------
INCOME (LOSS) BEFORE INCOME TAX PROVISION....... 5,092 639 (1,778)
INCOME TAX PROVISION (BENEFIT).................. 125 47 (526)
--------- --------- -------
NET INCOME (LOSS)............................... $ 4,967 $ 592 $(1,252)
========= ========= =======
EARNINGS (LOSS) PER SHARE....................... $ 1.07 $ 0.46 $ (2.52)
========= ========= =======
WEIGHTED AVERAGE SHARES......................... 4,647,068 1,300,863 496,873
========= ========= =======
See notes to consolidated financial statements.
F-4
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER
31,
------------------------
1996 1995 1994
------- ------ -------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ 4,967 $ 592 $(1,252)
Reconciliation of net income (loss) to net cash
(used in) provided by operating activities:
Provision for estimated loan losses............... 16,549 4,266 2,173
Provision for real estate owned losses............ 598 100
Depreciation and amortization..................... 165 241 121
(Gain) loss on sale of real estate owned.......... (623) (97) 406
Purchase of loans held for sale................... (28,826)
Gain on sale of loans............................. (11,538) (642)
Amortization of discounts and deferred fees....... (3,324) (1,246) (600)
Amortization of deferred credits.................. (461) (460) (388)
FHLB stock dividend............................... (111) (40) (39)
Change in:
Trading account................................... (24,541) 489
Accrued interest receivable....................... (475) (1,443) (238)
Prepaid expenses and other assets................. (7,626) (1,094) 1,074
Due from affiliates............................... (1,296) (345) (3,043)
Deferred income taxes............................. (4,013) (419) 111
Accounts payable and other liabilities............ 13,474 1,846 (474)
Minority interest................................. (600) 26
Other............................................. (194) (54)
------- ------ -------
Net cash (used in) provided by operating (48,279) 1,589 (1,614)
activities..................................... ------- ------ -------
See notes to consolidated financial statements.
(Continued)
F-5
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
--------- --------- --------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans........................ $(482,506) $(186,895) $(41,561)
Loan repayments, net of originations..... 54,180 49,035 16,836
Proceeds from sale of loans.............. 312,949 16,673
Purchase of mortgage-backed securities
available for sale...................... (24,537) (10,655)
Repayments of mortgage-backed securities
available for sale...................... 2,226 1,528
Proceeds from sale of mortgage-backed
securities available
for sale................................ 2,150 3,452
Proceeds from maturity of investment
securities held to maturity............. 5,654 1,000
Purchase of mortgage-backed securities
held to maturity........................ (16,079) (4,198)
Repayments of mortgage-backed securities
held to maturity........................ 1,820 824 643
Change in unrealized (gain) loss on
mortgage-backed securities available for
sale.................................... 81 (654) 511
Purchases of securities and FHLB stock... (2,447) (2,965) (105)
Proceeds from sale of FHLB stock......... 231
Purchases of real estate owned........... (67,344)
Proceeds from sale of real estate owned.. 16,482 5,254 569
Purchase of subsidiary net of cash and
cash equivalents........................ (346)
Purchases of leasehold improvements and
equipment............................... (195) (349) (184)
--------- --------- --------
Net cash used in investing activities.. (199,716) (114,168) (35,038)
--------- --------- -------- ---
See notes to consolidated financial statements.
(Continued)
F-6
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- -------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits....................... $198,090 $107,731 $26,181
Issuance of common stock....................... 38,097 3,750
Issuance of subordinated debt.................. 9,000
Proceeds from short-term borrowings............ 618,733 77,419 41,677
Repayments of short-term borrowings............ (534,109) (85,919) (30,285)
Proceeds from notes payable.................... 75,000
Issuance of preferred stock.................... 1,000
-------- -------- -------
Net cash provided by financing activities.... 395,811 108,231 42,323
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 147,816 (4,348) 5,671
CASH AND CASH EQUIVALENTS:
Beginning of year.............................. 4,482 8,830 3,159
-------- -------- -------
End of year.................................... $152,298 $ 4,482 $ 8,830
======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION--Cash paid during the year for:
Interest....................................... $ 21,746 $ 13,833 $ 5,479
Income taxes................................... 216 365 110
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned acquired in
settlement of loans........................... 21,751 9,878 3,122
Loans to facilitate the sale of real estate
owned......................................... 367 2,352
NONCASH FINANCING ACTIVITIES:
Exchange of subordinated debt for common stock. 11,000
Exchange of preferred stock for subordinated
debt.......................................... 1,000
See notes to consolidated financial statements.
(Concluded)
F-7
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
UNREALIZED
GAIN (LOSS)
ON
RETAINED AVAILABLE-
PREFERRED STOCK COMMON STOCK EARNINGS FOR-SALE
------------------ ----------------- (ACCUMULATED SECURITIES
SHARES AMOUNT SHARES AMOUNT DEFICIT) NET OF TAX TOTAL
---------- ------ --------- ------- ------------ ----------- -------
(DOLLARS IN THOUSANDS)
BALANCE, January 1,
1994................... -- $ -- 366,288 $ 3,050 $ 915 $(159) $ 3,806
Net loss............... (1,252) (1,252)
Unrealized loss on
available-for-sale
securities--net of
tax................... (511) (511)
Issuance of stock...... 1,000,000 1,000 934,575 3,750 4,750
---------- ------ --------- ------- ------ ----- -------
BALANCE, December 31,
1994................... 1,000,000 1,000 1,300,863 6,800 (337) (670) 6,793
Net income............. 592 592
Unrealized gain on
available-for-sale
securities--net of
tax................... 654 654
Exchange of preferred
stock for subordinated (1,000,000) (1,000) (1,000)
debt.................. ---------- ------ --------- ------- ------ ----- -------
BALANCE, December 31,
1995................... 1,300,863 6,800 255 (16) 7,039
Net income............. 4,967 4,967
Unrealized loss on
available-for-sale
securities--net of
tax................... (81) (81)
Exchange of
subordinated debt for
common stock.......... 1,606,618 11,000 11,000
Issuance of common 4,662,519 38,097 38,097
stock................. ---------- ------ --------- ------- ------ ----- -------
BALANCE, December 31, -- $ -- 7,570,000 $55,897 $5,222 $ (97) $61,022
1996................... ========== ====== ========= ======= ====== ===== =======
See notes to consolidated financial statements.
F-8
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS--The principal operations of Wilshire Financial
Services Group Inc. ("WFSG") and subsidiaries (collectively, the "Company")
are conducted through two second-tier subsidiary savings banks, Girard Savings
Bank F.S.B. ("GSB") and First Bank of Beverly Hills F.S.B. ("FBBH")
(collectively, the "Banks"), and a nonbank subsidiary, Wilshire Funding
Corporation ("WFC"). The Banks are federally chartered savings institutions
regulated by the Office of Thrift Supervision ("OTS") with two branches and a
merchant bankcard center in Southern California. Administrative headquarters
of the Company, the Banks and WFC are located in Portland, Oregon. The
Company's primary sources of revenue are real estate and consumer loans
acquired in purchase transactions, mortgage-backed securities, loan
securitization transactions, and merchant bankcard operations.
PRINCIPLES OF CONSOLIDATION--WFSG was incorporated in 1996 to be the holding
company for Wilshire Acquisitions Corporation ("WAC"), which is the holding
company for the Banks. WFSG formed certain nonbank subsidiaries, including
WFC, and completed an initial public offering of common stock and notes
payable in the fourth quarter of 1996. The accompanying consolidated financial
statements include the accounts of WAC and the Banks for periods prior to the
formation of WFSG. Intercompany accounts have been eliminated in
consolidation.
For purposes of presenting information about WFSG's common stock, weighted
average number of shares outstanding and earnings or loss per share,
outstanding shares of common stock of WAC prior to its combination with WFSG
have been retroactively restated to their WFSG equivalents based on the
conversion ratio at the time of the combination discussed above.
USE OF ESTIMATES IN THE PREPARATION OF THE CONSOLIDATED FINANCIAL
STATEMENTS--The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amount of
income and expenses during the reporting period. Actual results could differ
from those estimates. Significant estimates include valuation allowances for
loans and real estate owned, merchant bankcard charge-back reserves and fair
values of certain financial instruments for which there is not an active
market.
CASH AND CASH EQUIVALENTS--For purposes of reporting cash flows, cash and
cash equivalents include cash and due from banks, federal funds sold, and
securities with original maturities less than 90 days.
SECURITIES AND MORTGAGE-BACKED SECURITIES--The Company's securities
portfolios consist of mortgage-backed and other securities that are classified
as held-to-maturity, trading account and available-for-sale securities.
Securities are classified as held-to-maturity when management believes the
Company has the ability and the positive intent to hold the securities to
maturity. Securities classified as held-to-maturity are carried on an
historical cost basis, adjusted for the amortization of premiums and accretion
of discounts using a method that approximates the interest method. Securities
classified as trading account securities are subordinated securities and
residual interests in loan securitization transactions initiated by the
Company. Trading account securities are carried at estimated fair value, and
unrealized gains and losses are recorded in current operations. Securities are
classified as available-for-sale when the Company intends to hold the
securities for an indefinite period of time, but not necessarily to maturity.
Securities classified as available-for-sale are reported at their fair values.
Unrealized holding gains and losses on securities available-for-sale are
reported, net of tax, as a separate component of stockholders' equity.
Realized gains and losses from the sales of available-for-sale securities are
reported separately in the consolidated statements of operations and are
calculated using the specific identification method.
F-9
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LOANS, DISCOUNTED LOANS, LOANS HELD FOR SALE AND ALLOWANCE FOR LOAN LOSSES--
The Company's principal business involves acquiring loans, including loans
that are nonperforming when acquired. Acquired loans are generally purchased
in pools, or portfolios, for prices at or below face value (i.e., unpaid
principal balances plus accrued interest). Nonperforming loans are generally
acquired at deep discounts to face value and are classified as discounted
loans in the consolidated statements of financial condition. Loans that have
been identified as likely to be sold are classified as held for sale in the
consolidated statements of financial condition. Loans other than discounted
loans and loans held for sale are classified simply as loans.
Discounted loans are presented in the consolidated statements of financial
condition net of unamortized discount and the portion of the allowance for
loan losses established for those loans. Discounts are segregated into (a)
valuation allowances for estimated losses on specific loans ("specific
valuation allowances") and (b) portions of the discounts regarded as yield
adjustments. In addition, for discounted loans purchased by the Banks, the
initial discounts are further segregated into a valuation allowance for the
inherent risk of losses in the loan portfolio that have yet to be specifically
identified ("general valuation allowance") as required by OTS regulations. The
allocated specific and general valuation allowances are included in the
allowance for loan losses. The allowance for loan losses is also increased by
additional provisions for losses that are recorded in current operations. The
portion of purchase discounts regarded as yield adjustment is accreted into
income using a method approximating the interest method. Accrued interest on
discounted loans is recognized in income only when collected in cash.
Loans other than discounted loans are presented in the consolidated
statements of financial condition in substantially the same manner as
discounted loans except that interest income is recognized on an accrual
basis. That portion of the total loan portfolio representing originated loans
is carried net of unamortized deferred origination fees. Deferred fees are
recognized in interest income over the terms of the loans using a method that
approximates the interest method.
Loans held for sale are presented at lower of cost or market value, and cost
is determined as described above depending on whether the loans held for sale
are discounted loans or other loans. If market value is less than cost, a
valuation allowance is recorded to reduce the carrying value. Gains or losses
on loans sold through securitization transactions are based on the difference
between the cash proceeds received on the certificates sold to outside
investors and the Company's cost basis allocated to such interests in the
loans. The percentage allocation of the loan pools' cost basis between the
portions sold and subordinated interests retained is based on the relative
fair values of those portions.
The Company evaluates commercial and multi-family real estate loans (whether
purchased or originated and whether classified as loans or discounted loans)
for impairment under Statement of Financial Accounting Standards ("SFAS") No.
114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No.
118, Accounting by Creditors for Impairment of a Loan--Income Recognition and
Disclosures. Commercial and multi-family real estate loans are considered to
be impaired, for financial reporting purposes, when it is probable that the
Company will be unable to collect all principal or interest when due. Specific
valuation allowances are established, either through allocations of purchase
discount or through provisions for losses, as described above, for impaired
loans with estimated fair values that are less than the face value of the
loans. Fair values of impaired loans are estimated based on the fair value of
the real estate collateral.
The Company evaluates single-family real estate, consumer and other loans
for impairment on a pooled basis. These loans are considered to be smaller
balance, homogeneous loans and are evaluated on a portfolio basis considering
the projected net realizable value of the portfolio compared to the net
carrying value of the portfolio.
F-10
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
All specific and general valuation allowances established for loans and
discounted loans are recorded in the allowance for loan losses. The allowance
is decreased by the amount of loans charged off and is increased by recoveries
of previously charged-off loans. The allowance is maintained at a level
believed adequate by management to absorb potential losses in the total loan
portfolio. Management's determination of the adequacy of the allowance is
based on an evaluation of the portfolio, previous loan loss experience,
current economic conditions, volume, growth and composition of the portfolio
and other relevant factors.
INTEREST-RATE SWAPS--Interest-rate swap agreements used to manage interest-
rate risk are treated as hedges of specified assets and are accounted for on a
settlement basis. That is, the periodic net settlement with the counterparties
to the swap agreements of the interest paid/received is recorded as an
adjustment to interest income derived from the hedged assets.
REAL ESTATE OWNED--Real estate acquired in settlement of loans or purchased
directly is originally recorded at fair value less estimated costs to sell, or
purchase price. Loan balances in excess of fair value of real estate acquired
through foreclosure are charged against the allowance for loan losses at the
date of foreclosure. Any subsequent operating expenses or income, reduction in
estimated values, as well as gains or losses on disposition of such
properties, are recorded in current operations.
LEASEHOLD IMPROVEMENTS AND EQUIPMENT--Office leasehold improvements and
equipment are stated at cost, less accumulated depreciation and amortization,
computed on the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever is shorter.
PURCHASE ACCOUNTING ADJUSTMENTS--The Banks were acquired in purchase
accounting transactions, and the purchase prices were less than the fair
values of the net assets acquired. As a result, the Company recorded deferred
credits, or negative goodwill, totaling $2,156. These credits are being
amortized over five years on a straight-line basis. The other material
purchase accounting adjustment relates to the carrying value of GSB loans; the
difference between the carrying value and the estimated fair value of the
loans at the date of acquisition is being amortized over the expected lives of
the related loans.
INCOME TAXES--The Company files consolidated federal income tax returns with
its subsidiaries. Deferred tax assets and liabilities represent the tax
effects, based on current tax law, of future deductible or taxable amounts
attributable to events that have been recognized in the financial statements.
A valuation allowance is recorded against deferred tax assets when there is
not presumptive evidence that it is more likely than not that the deferred tax
assets will be realized.
BANKCARD OPERATIONS--Bankcard income includes merchant discounts and
transaction fees for processing Visa and Mastercard transactions. Bankcard
expense consists primarily of fees paid to the Company's third-party
processors and interchange fees paid to card-issuing banks. Other direct and
indirect costs of Bankcard operations are included in various other categories
of expenses and are not specifically allocated separately from other operating
expenses of the Company.
EARNINGS PER SHARE--Earnings per share for all periods presented are
calculated based upon the weighted average number of shares of common stock
outstanding during the year, giving effect to the exercise of stock options
using the treasury stock method if such effect is not anti-dilutive. There is
not a significant difference between primary and fully diluted earnings per
share in any of the years reported herein.
RECENT ACCOUNTING STANDARDS--In 1996, the Company adopted SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed of, SFAS No. 122, Accounting for
F-11
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Mortgage Servicing Rights, and SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS Nos. 121 and 122 did not have a material effect on the
Company's financial statements.
As permitted by SFAS No. 123, the Company did not adopt the provisions of
that statement relating to the accounting method used for stock options. The
Company will continue to use the intrinsic value method of accounting for its
stock options rather than the fair value method and will make the disclosures
required by the statement (see Note 12).
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Financial Liabilities, is generally effective for relevant
transactions occurring after December 31, 1996 and must be applied
prospectively. Earlier application is not permitted. Based on the types of
transactions the Company has engaged in historically, the pronouncement is
expected to be relevant to similar future transactions and may affect both the
accounting for, and disclosures about, such transactions. Transactions
affected may include sales of loans, particularly sales effected through
securitization transactions, and repurchase agreements. The Company does not
believe that the pronouncement would have had a material effect on any
transactions reflected in the accompanying financial statements if its
provisions had been previously adopted.
RECLASSIFICATIONS--Certain items in the consolidated financial statements
for 1995 and 1994 were reclassified to conform to the 1996 presentation.
2. SECURITIES
The amortized cost, fair value and gross unrealized gains and losses on U.S.
Treasury notes and mortgage-backed securities as of December 31, 1996 and 1995
are shown below. Fair value estimates were obtained from an independent
pricing service.
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
1996 COST GAINS LOSSES VALUE
- ---- --------- ---------- ---------- -------
Available-for-sale mortgage-backed se-
curities.............................. $31,367 $ 23 $120 $31,270
======= ==== ==== =======
Held-to-maturity:
U.S. Treasury notes.................. $ 7,429 $ 89 $ 7,518
Mortgage-backed securities........... 21,724 29 $501 21,252
------- ---- ---- -------
Total held-to-maturity............. $29,153 $118 $501 $28,770
======= ==== ==== =======
1995
- ----
Available-for-sale mortgage-backed
securities............................. $ 9,099 $ -- $ 16 $ 9,083
======= ==== ==== =======
Held-to-maturity:
U.S. Treasury notes.................. $ 6,470 $ 22 $ 4 $ 6,488
Mortgage-backed securities........... 13,119 -- 246 12,873
------- ---- ---- -------
Total held-to-maturity............. $19,589 $ 22 $250 $19,361
======= ==== ==== =======
F-12
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The amortized cost and estimated fair value of securities held to maturity
other than mortgage-backed securities at December 31, 1996 and 1995, by
contractual maturity, are as follows:
AMORTIZED FAIR
1996 COST VALUE
---- --------- ------
Due in one to five years............................... $7,429 $7,518
====== ======
1995
----
Due in less than one year.............................. $4,970 $4,966
Due in one to five years............................... 1,500 1,522
------ ------
$6,470 $6,488
====== ======
The Company receives payments on all mortgage-backed securities over periods
that are considerably shorter than the contractual maturities of the
securities, which range from 6 to 30 years.
At December 31, 1996, securities, including trading account securities, with
carrying values of $67,073 and market values of approximately $66,909 were
pledged to secure merchant bankcard transactions, certain guarantees related
to a loan securitization transaction, short-term borrowings and lines of
credit (see Note 7), and interest-rate swaps. Of the total securities pledged,
securities with fair values of approximately $59,391 were delivered to, and
are held by, a third-party custodian.
There were no sales of securities during the year ended December 31, 1996.
Gross gains from the sale of securities available for sale were $14 and $54 in
the years ended December 31, 1995, and 1994, respectively, and there were no
gross losses in these years.
3. LOANS, DISCOUNTED LOANS AND LOANS HELD FOR SALE
The Company's loans are comprised of loans, discounted loans and loans held
for sale. Following is a summary of each loan category by type:
DECEMBER 31,
-------------------
LOANS 1996 1995
----- --------- --------
Real estate loans:
One to four units................................ $ 63,562 $138,547
Over four units.................................. 68,897 71,239
Commercial....................................... 54,013 50,749
Land............................................. 2,558 2,709
--------- --------
Total loans secured by real estate............... 189,030 263,244
Other loans...................................... 22,768 19,832
--------- --------
211,798 283,076
Less:
Allowance for loan losses........................ (31,936) (10,016)
Deferred loan fees............................... (173) (245)
Discount on purchased loans not included in
allowance for loan losses....................... (3,663) (13,988)
--------- --------
$ 176,026 $258,827
========= ========
F-13
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
------------------
DISCOUNTED LOANS 1996 1995
---------------- --------- -------
Real Estate loans:
One to four units................................. $ 260,672 $18,380
Commercial........................................ 935 863
Land.............................................. 46
--------- -------
Total loans secured by real estate................ 261,653 19,243
Other loans....................................... 946 967
--------- -------
262,599 20,210
Less:
Allowance for loan losses......................... (5,619) (3,855)
Discount on purchased loans not included in
allowance for loan losses........................ (50,240) (3,008)
--------- -------
$ 206,740 $13,347
========= =======
LOANS HELD FOR SALE
-------------------
Real estate loans:
One to four units................................. $ 27,420 $33,497
Over four units................................... 464
Commercial........................................ 9,061 466
Land.............................................. 1,680 194
--------- -------
Total loans secured by real estate................ 38,625 34,157
Other loans....................................... 445 12
--------- -------
39,070 34,169
Allowances, discounts and deferred fees........... (10,244) (15,572)
--------- -------
$ 28,826 $18,597
========= =======
Discounted loans include loans purchased in the fourth quarter of 1996 with
discounts of $48,802 at December 31, 1996; these loans are being evaluated in
order to allocate a portion of the discounts to the allowance for loan losses
during the first quarter of 1997.
As of December 31, 1996 and 1995, loans with adjustable rates of interest
were $230,983 and $265,702, respectively, and loans with fixed rates of
interest were $282,484 and $71,753, respectively. Adjustable-rate loans are
generally indexed to the FHLB's Eleventh District Cost of Funds Index, LIBOR
or Prime and are subject to limitations on the timing and extent of
adjustment. Most loans adjust within six months of changes in the index.
At December 31, 1996, loans with unpaid principal balances of $43,615 were
pledged to secure credit line borrowings and repurchase agreements included in
short-term borrowings (see Note 7).
Activity in the allowance for loan losses is summarized as follows:
YEAR ENDED DECEMBER
31,
------------------------
1996 1995 1994
------- ------- ------
Balance, beginning of year......................... $25,651 $ 7,701 $4,314
Loans charged off.................................. (17,218) (5,404) (1,666)
Recoveries......................................... 1,822 81 71
Provision for loan losses.......................... 16,549 4,266 2,173
Allocations from purchased loan discounts.......... 10,751 19,007 2,809
------- ------- ------
Balance, end of year............................... $37,555 $25,651 $7,701
======= ======= ======
F-14
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
At December 31, 1996 and 1995, the Banks had impaired loans totaling $12,553
and $14,241, respectively, and had recorded specific valuation allowances to
measure the impairments of those loans totaling $4,173 and $4,155,
respectively. At the same dates, the Banks had impaired loans totaling $13,711
and $9,593, respectively, with no recorded specific valuation allowances. At
December 31, 1996, the nonbank subsidiaries had impaired loans with unpaid
principal balances of $4,472 and a carrying value, net of purchase discount,
of $2,768, which is below fair value. The average unpaid principal balances of
impaired loans during the years ended December 31, 1996 and 1995 were $25,049
and $24,204, respectively. Interest income recognized on impaired loans during
the same periods was $1,746 and $1,631, respectively, based on cash payments.
These amounts exclude consideration of single-family residential and other
loan pools evaluated for impairment on a pooled basis. Other loans consist of
consumer loan pools, including portfolios of sub-prime automobile loans
purchased at par in 1995 and 1996. As of December 31, 1996, the Company had
charged off all sub-prime automobile loans that were more than 60 days
delinquent. The remaining portfolio consists of loans that have performed over
a period of approximately one year. Management considers the performing loans
to be unimpaired, and interest on them is recognized on an accrual basis.
Management estimates are required to determine the allowance for loan
losses. Estimation is also involved in determining the ultimate recoverability
of purchased loans and, consequently, the pricing of purchased loans and the
adequacy of purchased discounts to provide allowances for credit risk. These
estimates are inherently uncertain and depend on the outcome of future events.
Regulatory authorities have required substantial increases in the allowances
maintained by many banks in recognition of the inherent risk in the existing
economic environment. Although management believes the levels of the allowance
as of December 31, 1996 and 1995 are adequate to absorb losses inherent in the
loan portfolio, rising interest rates, various other economic factors and
regulatory requirements may result in increasing losses that cannot reasonably
be predicted at this date. Such losses may also result in unanticipated
erosion of the Banks' capital.
The Company has a geographic concentration of mortgage loans in Southern
California, which experienced declines in real estate values in recent years,
and in the northeastern United States. Substantially all loans originated or
acquired by FBBH and GSB prior to their acquisition by the Company were
collateralized by Southern California real estate. The geographic
diversification of the portfolio is generally widening through loan
acquisitions.
4. REAL ESTATE OWNED
Real estate owned consists of property obtained through foreclosure and
purchased directly. Activity in the allowance for estimated losses on real
estate owned is as follows:
YEAR ENDED
DECEMBER 31,
--------------------
1996 1995 1994
------ ------ ----
Allowance for losses on real estate owned, beginning
of year............................................. $1,193 $ 123 $ 55
Charge-offs.......................................... (3,322) (82) (32)
Allocation of purchase discount...................... 2,129 554
Provision for the year............................... 598 100
------ ------ ----
Allowance for losses on real estate owned, end of
year................................................. $ -- $1,193 $123
====== ====== ====
Real estate owned purchased directly by WFC with a net carrying value of
$59,729 at December 31, 1996 collateralizes credit line borrowings (see Note
7).
F-15
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
5. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consist of:
DECEMBER 31,
------------------
1996 1995
-------- --------
Leasehold improvements................................ $ 319 $ 299
Furniture and equipment............................... 837 718
-------- --------
Total cost............................................ 1,156 1,017
Accumulated depreciation and amortization............. (839) (742)
-------- --------
$ 317 $ 275
======== ========
6. DEPOSITS
Deposits consist of:
DECEMBER 31,
------------------
1996 1995
-------- --------
Passbook accounts..................................... $ 480 $ 304
Money market accounts................................. 2,023 1,267
NOW/checking.......................................... 5,625 5,111
Time deposits:
Less than $100........................................ 382,018 247,814
$100 or more.......................................... 111,468 49,028
-------- --------
Total deposits........................................ $501,614 $303,524
======== ========
A summary of time deposits by maturity at December 31, 1996 is as follows:
YEAR ENDED
DECEMBER 31,
------------
1997............................................................. $389,509
1998............................................................. 103,019
Thereafter....................................................... 958
--------
$493,486
========
7. NOTES PAYABLE, SHORT-TERM BORROWINGS AND SUBORDINATED DEBT
Notes payable at December 31, 1996 are unsecured, bear interest at 13% and
mature in 2004.
Short-term borrowings at December 31, 1996 include repurchase agreements
and line of credit borrowings. Short-term borrowings at December 31, 1995
are repurchase agreements.
Proceeds from the various credit facilities are used primarily for the
acquisition of loan pools.
F-16
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Following is information about borrowings under repurchase agreements:
YEAR ENDED
DECEMBER 31,
---------------
1996 1995
------- ------
Average balance during the year.......................... $51,316 $4,122
Highest amount outstanding during the year............... 190,000 14,950
Average interest rate during the year.................... 6.9% 5.6%
Average interest rate--end of year....................... 7.8% 6.7%
As of December 31, 1996, the Company has committed lines of credit,
including repurchase agreement lines, totaling $350,000, and uncommitted lines
of $360,000. $97,624 is drawn on these lines and included in short-term
borrowings at December 31, 1996.
WAC's capitalization prior to the formation of WFSG included subordinated
debt with majority stockholders in amounts up to $50,000. Subordinated debt
paid interest at 14% per annum, compounded quarterly, had no stated maturity,
and represented an unsecured general obligation of WAC. As of December 31,
1995, borrowings under the subordinated debt agreement were $11,000.
8. INCOME TAXES
The provisions for income tax (benefit) consist of the following:
YEAR ENDED
DECEMBER 31,
-------------------
1996 1995 1994
------ ---- -----
Current tax expense (benefit):
Federal................................................. $3,208 $434 $(656)
State................................................... 930 32 19
------ ---- -----
4,138 466 (637)
------ ---- -----
Deferred tax expense (benefit):
Federal................................................. (3,135) (250) 90
State................................................... (878) (169) 21
------ ---- -----
(4,013) (419) 111
------ ---- -----
Total income tax provision (benefit).................. $ 125 $ 47 $(526)
====== ==== =====
The difference between the effective tax rate implicit in the consolidated
financial statements and the statutory federal income tax rate can be
attributed to the following:
YEAR ENDED
DECEMBER 31,
-------------------
1996 1995 1994
----- ----- -----
Federal income tax provision at statutory rate......... 35.0% 35.0% (35.0)%
State taxes (benefit), net of federal tax effect....... 8.5 4.0
Valuation allowance.................................... (33.9) (25.1) 8.8
Change in prior year estimate.......................... (4.7) (7.8)
Other.................................................. (2.4) 1.3 (3.4)
----- ----- -----
Effective income tax rate.............................. 2.5% 7.4% (29.6)%
===== ===== =====
F-17
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Deferred income tax assets (liabilities) are summarized as follows:
DECEMBER 31,
--------------
1996 1995
------ ------
Deferred tax assets:
Purchase discounts......................................... $2,884 $1,349
Purchase accounting........................................ 483 629
Depreciation............................................... 73 65
Provision for loan loss.................................... 2,291 408
Net operating loss......................................... 170
Other...................................................... 10
------ ------
Gross deferred tax assets.................................. 5,731 2,631
------ ------
Deferred tax liabilities:
Partnership income......................................... (44)
Deferred loan fees......................................... (217) (351)
FHLB stock dividends....................................... (268) (242)
State taxes................................................ (42)
Unrealized gains on securities............................. (744)
Other...................................................... (277) (98)
------ ------
Gross deferred tax liabilities............................. (1,548) (735)
------ ------
Total deferred tax asset................................... 4,183 1,896
Valuation allowance........................................ -- (1,726)
------ ------
Net deferred tax asset..................................... $4,183 $ 170
====== ======
9. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK
PROFIT SHARING PLAN--The Company's employees participate in a defined
contribution profit sharing and 401(k) plan sponsored by companies included in
the Company's "control group." At the discretion of the Company's Board of
Directors, the Company may elect to contribute to the plan based on profits of
the Company or based on matching participants' contributions. For the years
ended December 31, 1996, 1995 and 1994, the Company contributed $43, $28 and
$0, respectively, to the plan.
LEASE COMMITMENTS--The following is a schedule by year of future minimum
rental payments under operating leases:
YEAR ENDED
DECEMBER 31,
------------
1997........................................... $ 498
1998........................................... 502
1999........................................... 453
2000........................................... 276
2001........................................... 276
------
Total......................................... $2,005
======
F-18
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Lease commitments include commitments to an affiliated company which require
annual lease payments of $276 through 2001.
FINANCIAL INSTRUMENTS INVOLVING OFF-BALANCE SHEET RISK--The Company is a
party to interest-rate swap transactions in managing interest-rate exposure as
part of asset/liability management. Interest-rate swap transactions generally
involve the exchange of fixed- and floating-rate interest-payment obligations
without the exchange of the underlying principal amounts. The swap agreements
involve credit risk to the extent of the counterparties' obligation to settle
under the terms of the agreements. Settlements occur monthly. The Company
controls credit risk by entering into agreements with financially sound and
reputable counterparties.
During 1996, the Company entered into swap agreements to pay fixed-rate
interest payments in exchange for receiving floating-rate interest payments.
The notional principal amounts of the interest-rate swaps were $234,338 at
December 31, 1996; these notional principal amounts amortize downward in each
successive month until they mature in 1999-2001. The amortization is designed
to mirror the projected decrease in the principal balances of the loans the
swaps are matched against. The weighted average fixed-payment rates on the
swaps were 6.07% at December 31, 1996. The floating-rate payments are based on
a weighted-average of .28% over USD LIBOR. The effect of these agreements is
to convert loans to floating-rate assets to maintain a more predictable spread
between the income on such assets and the interest expense on deposits and
other borrowings, which reprice frequently.
At December 31, 1996 and 1995, the Company had commitments to extend credit
of $499 and $793, respectively. These commitments expose the Company to credit
risk in excess of amounts reflected in the consolidated financial statements.
The Company receives collateral to support loans and commitments to extend
credit for which collateral is deemed necessary.
PURCHASE COMMITMENTS--At December 31, 1996, the Company had outstanding
commitments to purchase loans at a cost of $152,834. Included in the purchase
commitments were commitments to purchase from third parties, at a cost of
$115,100, loans that are serviced by Wilshire Credit Corporation ("WCC"),
which is affiliated with WFSG by common ownership. WCC transferred its rights
to servicing fees earned on this portfolio, which include a profit
participation element, to Wilshire Servicing Corporation, a subsidiary of
WFSG. The servicing rights were transferred at WCC's historical cost basis of
$0.
LITIGATION--The Company is a defendant in legal actions arising from
transactions conducted in the ordinary course of business. Management, after
consultation with legal counsel, believes the ultimate liability, if any,
arising from such actions will not materially affect the Company's financial
position.
SECURITIZATION CONTINGENCIES--A loan securitization in March 1996 involved
the sale of discounted nonperforming loans with carrying amounts of
approximately $18,600. The Company is contingently liable for losses, if any,
that could arise if the collectibility of any securitized loan is
unenforceable due to the absence of original notes or files. In addition, the
Company is contingently liable to pay the interest due on the senior
securities if the liquidation of the assets underlying the securities results
in a shortfall on any due date; any such shortfall paid by the Company would
be reimbursable if liquidation proceeds were ultimately sufficient to cover
the interest. Management believes that it is not probable that any losses will
be incurred for these or other reasons involving the securitization.
F-19
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. REGULATORY MATTERS
REGULATORY AGREEMENT--On October 31, 1996, FBBH and GSB consented to
separate but similar Orders to Cease and Desist (the "Orders") issued by the
OTS. The Order issued to FBBH superseded a previously existing Supervisory
Agreement between FBBH and the OTS issued June 8, 1995.
The Orders require of both Banks that they not engage in unsafe and unsound
practices and that they maintain minimum capital ratios required of
institutions to be deemed "well capitalized" (as that term is defined under
the regulatory framework for prompt corrective action). In addition, the
Orders require the Banks to (I) revise policies and procedures concerning (i)
internal asset reviews, (ii) the allowances for loan and lease losses, (iii)
loan purchases, (iv) internal audits, and (v) hedging transactions; (II)
develop plans to augment the depth and expertise of the management teams;
(III) revise business plans; (IV) modify certain policies concerning the
accounting for loan discounts; (V) improve monitoring of (i) interest rate
risk, (ii) balance sheet classifications of certain assets (e.g., as held for
sale versus held to maturity), and (iii) compliance with laws and regulations
concerning transactions with affiliates; (VI) ensure compliance with the
proper servicing of adjustable rate mortgages and escrow accounts; and (VII)
enhance recordkeeping. In addition, the Banks may not increase their total
assets beyond certain specified levels. Also, FBBH will be required to correct
OTS-identified deficiencies in merchant bankcard operations. These
requirements will be accompanied by related requirements that the Banks submit
to the OTS, by certain specified dates, various policies, plans and reports on
other actions to comply with the Orders. In some cases, OTS approval of such
information will be required. The Banks are currently in process of addressing
these requirements. Management believes that the Banks are complying with
those requirements that have taken effect.
The Orders are enforceable by the OTS as written agreements under the
Federal Deposit Insurance Act. Therefore, failure to comply with the
requirements of the Orders could subject the Banks and their directors and
officers to further enforcement actions, including termination of Federal
Deposit Insurance Corporation insurance or civil money penalties.
As of March 14, 1997, a routine annual examination of the Banks is being
conducted by the OTS. As of that date, the OTS has not informed management of
any matters that would have an effect on the accompanying financial
statements.
CAPITAL REQUIREMENTS--The Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by the regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Banks must meet specific capital guidelines that involve
quantitative measures of the Banks' assets, liabilities and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Banks' capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios of total tangible
capital, core capital and risk-based capital, as those terms are defined in
OTS regulation. Under the regulatory framework for prompt corrective action,
quantitative and qualitative measures are used by the OTS to determine whether
an institution is categorized as "well capitalized," "adequately capitalized,"
"undercapitalized," or "significantly undercapitalized." Certain regulatory
actions are mandated by law, depending on an institution's category.
Quantitative measures include total capital to risk-weighted assets, Tier 1
capital to risk-weighted assets, and Tier 1 capital to average assets, as
those terms are defined in OTS regulation.
F-20
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Banks' actual and required capital amounts and ratios were as follows:
TO BE
CATEGORIZED AS
"WELL
CAPITALIZED"
UNDER
PROMPT
CORRECTIVE
FOR CAPITAL ACTION
ACTUAL ADEQUACY PURPOSES (1) PROVISIONS
------------- ---------------------- --------------
DECEMBER 31, 1996 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------- ------- ----- ----------- ---------- ------- ------
Total Capital to Risk-
Weighted Assets:
FBBH................... $12,835 11.9% $ 8,643 ^ 8.0% $10,804 ^10.0%
GSB.................... 36,726 10.1% 29,081 ^ 8.0% 36,351 ^10.0%
Tier 1 Capital to Risk-
Weighted Assets:
FBBH................... 11,436 10.6% Not applicable 6,482 ^ 6.0%
GSB.................... 32,136 8.8% Not applicable 26,810 ^ 6.0%
Tier 1 Capital to Average
Assets (Core Capital):
FBBH................... 11,436 8.0% 4,292 ^ 3.0% 7,152 ^ 5.0%
GSB.................... 32,136 8.3% 11,669 ^ 3.0% 19,447 ^ 5.0%
Tangible Capital:
FBBH................... 11,436 8.0% 2,156 ^ 1.5% Not applicable
GSB.................... 32,136 7.9% 6,101 ^ 1.5% Not applicable
Total Capital to Risk-
Weighted Assets:
FBBH................... $ 9,820 9.8% $ 7,999 ^ 8.0% $ 9,998 ^10.0%
GSB.................... 15,523 10.4% 11,973 ^ 8.0% 14,967 ^10.0%
Tier 1 Capital to Risk-
Weighted Assets:
FBBH................... 8,549 8.6% Not applicable 5,999 ^ 6.0%
GSB.................... 13,852 9.3% Not applicable 8,980 ^ 6.0%
Tier 1 Capital to Average
Assets
(Core Capital):
FBBH................... 8,549 6.4% 3,995 ^ 3.0% 6,657 ^ 5.0%
GSB.................... 13,852 10.3% 4,049 ^ 3.0% 6,748 ^ 5.0%
Tangible Capital:
FBBH................... 8,549 6.8% 3,075 ^ 1.5% Not applicable
GSB.................... 13,852 6.2% 2,066 ^ 1.5% Not applicable
- --------
(1) These capital adequacy ratios represent the requirements for all savings
institutions. The Bank's minimum required ratios specified in their Orders
are those in the column containing the "well capitalized" requirements.
F-21
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
As of December 31, 1996, the Banks' capital ratios were sufficient for them
to be categorized as "well capitalized," and at December 31, 1995, FBBH's
ratios were sufficient for them to be deemed "adequately capitalized" and
GSB's were sufficient for them to be deemed "well capitalized," based solely
on quantitative measures. The Banks have not been notified by the OTS as to
their capital category. If notified or otherwise deemed to be categorized as
less than "well capitalized," the Banks could be subject to restrictions in
addition to those specified in the Orders, including restrictions on holding
brokered deposits. As of December 31, 1996, FBBH had no brokered deposits and
GSB had brokered deposits of $172,427. In the event that GSB is categorized as
less than "well capitalized," it can potentially retain brokered deposits with
the permission of the Federal Deposit Insurance Corporation. Alternatively,
liquidity can be maintained with borrowings on lines of credit (see Note 7).
Because the Banks are currently near the total asset maximums permitted under
the Orders, the Banks do not expect to add brokered deposits until and unless
the growth restrictions are removed.
Because the Banks have minimum regulatory capital requirements and the
additional requirements under the Orders discussed above, substantially all
retained earnings of the Banks are restricted as to distribution to WAC and,
ultimately, to WFSG.
SAIF ASSESSMENT--During the fourth quarter of 1996, the Company paid
approximately $1.4 million for a special SAIF deposit insurance fund
assessment resulting from legislation enacted to recapitalize the SAIF fund.
11. RELATED PARTY TRANSACTIONS
Substantially all loans are serviced by WCC. Management believes that the
terms of the servicing agreement are no less favorable to the Company than
terms offered by other servicers. Due from affiliate in the accompanying
consolidated statements of financial condition substantially represents the
amount of loan payments collected by WCC but not yet remitted to the Company
at that date. Loan servicing fees and expenses shown in the consolidated
statements of operations were paid to WCC and include reimbursements for
direct expenses borne by WCC on behalf of the Company.
Subsequent to the effective date of the initial public offering, WFSG
purchased from WCC loans with unpaid principal balances of $17,032, at their
fair values, which approximated their carrying value on the books of WCC.
Certain costs associated with the initial public offering in the amount of
$274, which were paid by WCC, were subsequently reimbursed by WFSG.
12. STOCK OPTIONS
In 1994 and 1995, the Banks issued stock options for the benefit of certain
directors, executives and consultants. FBBH and GSB granted 19,447 and 69,724
options in 1995, respectively. All grants were made with exercise prices at
least equal to the book value of the relevant Bank's shares on the grant
dates. In the fourth quarter of 1996, these options were converted into 31,225
options to purchase the stock of WFSG. The options are exercisable no earlier
than 60 days after the effective date of the initial public offering of WFSG
stock.
The Company adopted a new Stock Plan on November 1, 1996. Under the Stock
Plan, the Company may grant options and other awards not to exceed 1,500,000
shares of common stock over a ten-year term. The options may be either
incentive stock options or nonstatutory stock options granted at exercise
prices between 100% and 125% of the fair value of WFSG common stock at the
grant date. Restricted stock and stock appreciation rights may also be granted
under the Stock Plan. The initial awards under the new Stock Plan were granted
at the date of the initial public offering. Options for 1,095,000 shares were
granted to the Company's two largest stockholders. The Stock Plan also
provides that nonemployee Company directors will receive automatic
nonstatutory stock option grants. The number of shares granted to nonemployee
directors each quarter
F-22
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
will be determined under a formula ($6 divided by the fair market value per
share of WFSG common stock on each grant date). As of December 31, 1996, no
options had been granted to nonemployee directors under the new Stock Plan.
A summary of the Company's stock options as of December 31, 1996, 1995 and
1994 and changes during the years ended on those dates is presented below:
1996 1995 1994
------------------ --------------- ---------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- ------ -------- ------ --------
Outstanding at beginning
of year................ 31,225 $8.80 5,872 $14.90 --
Granted................. 1,095,000 11.46 25,353 7.39 5,872 $14.90
--------- ------ -----
Outstanding at end of 1,126,225 31,225 5,872
year.................... ========= 11.34 ====== 8.80 ===== 14.90
Additional information regarding options outstanding as of December 31, 1996
is as follows:
WEIGHTED- WEIGHTED-
RANGE OF AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE
PRICES SHARES PRICE PRICE
------------------------------------------- --------- --------- ---------
$5.58..................................... 18,359 3.50 years $ 5.58
$10.50-$11.55.............................. 730,000 9.74 10.55
$12.15-$13.13.............................. 371,994 9.88 13.11
$14.90.................................... 5,872 2.50 14.90
---------
1,126,225 9.65 11.34
=========
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations in accounting for
its Stock Plan. Accordingly, no compensation cost has been recognized for the
Stock Plan. Had compensation cost for the Company's Stock Plan been determined
based on the fair value at the grant date consistent with the methods of SFAS
No. 123, the Company's net income and earnings per share for the year ended
December 31, 1996 would have been reduced to the pro forma amounts indicated
below:
Net income to common shareholders:
As reported..................................................... $4,967
Pro forma....................................................... $2,775
Net income per common and common share equivalent:
As reported..................................................... $ 1.07
Pro forma....................................................... $ 0.60
The weighted-average grant-date fair value of options granted during 1996
was $3.79 for options with exercise prices equivalent to market price of the
stock at the grant date and $2.75 for options with exercise prices exceeding
the market price of the stock at the grant date. Fair values were estimated
using the Black-Scholes option-pricing model with the following weighted
average assumptions used: no dividend yield, expected volatility of 25%, risk-
free interest rate of 6.6% and expected lives of three to five years.
13. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair
value
F-23
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
amounts have been determined by the Company using available market information
and appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
DECEMBER 31, 1996
------------------
ESTIMATED
CARRYING FAIR
AMOUNT VALUE
-------- ---------
Assets:
Cash and due from banks................................... $152,298 $152,298
Mortgage-backed securities held to maturity............... 21,724 21,252
Mortgage-backed securities available for sale............. 31,270 31,270
Securities held to maturity............................... 7,429 7,518
Trading account securities................................ 24,541 24,541
Loans, discounted loans, and loans held for sale.......... 411,592 424,450
Federal Home Loan Bank stock.............................. 2,958 2,958
Liabilities:
Deposits.................................................. 501,614 504,629
Short-term borrowings..................................... 97,624 97,624
Notes payable............................................. 75,000 75,000
Off-balance-sheet liabilities--Interest-rate swaps........ (500)
DECEMBER 31, 1995
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
Assets:
Cash and due from banks................................... $ 3,382 $ 3,382
Federal funds sold........................................ 1,100 1,100
Mortgage-backed securities held to maturity............... 13,119 12,873
Mortgage-backed securities available for sale............. 9,083 9,083
Securities held to maturity............................... 6,470 6,488
Loans, discounted loans, and loans held for sale.......... 290,771 295,747
Federal Home Loan Bank stock.............................. 1,421 1,421
Liabilities:
Deposits.................................................. 304,020 307,177
Short-term borrowings..................................... 13,000 13,000
Subordinated debt......................................... 11,000 11,000
The methods and assumptions used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate that value are
explained below:
Cash and Due from Banks--The carrying amounts approximate fair values due
to the short-term nature of these instruments.
Securities and Mortgage-Backed Securities--The fair values of securities
are generally obtained from market bids for similar or identical
securities, or are obtained from independent security brokers or dealers.
Loans, Discounted Loans and Loans Held for Sale--It is not practicable to
estimate the fair value of discounted loans, which are predominately
nonperforming loans, due to uncertainties as to the nature, timing
F-24
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
and extent to which the loans will be either collected according to
original terms, restructured, or foreclosed upon. Discounted loans fair
values are therefore assumed to be equivalent to carrying values. For other
loans, fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type, such as fixed- and
adjustable-rate interest terms. The fair values of fixed-rate mortgage
loans are based on discounted cash flows utilizing applicable risk-adjusted
spreads relative to the current pricing of similar fixed-rate loans as well
as anticipated prepayment schedules. The fair values of adjustable-rate
mortgage loans are based on discounted cash flows utilizing discount rates
that approximate the pricing of available mortgage-backed securities having
similar rate and repricing characteristics, as well as anticipated
prepayment schedules. No value adjustments have been made for changes in
credit within the loan portfolio. It is management's opinion that the
allowance for estimated loan losses pertaining to loans results in a fair
value adjustment of the credit risk of such loans.
Federal Home Loan Bank Stock--The carrying amounts approximate fair
values because the stock may be sold back to the Federal Home Loan Bank at
carrying value.
Deposits--The fair values of deposits are estimated based on the type of
deposit products. Demand accounts, which include passbook and transaction
accounts, are presumed to have equal book and fair values, since the
interest rates paid on these accounts are based on prevailing market rates.
The estimated fair values of time deposits are determined by discounting
the cash flows of settlements of deposits having similar maturities and
rates, utilizing a yield curve that approximated the prevailing rates
offered to depositors as of the reporting date.
Short-Term Borrowings--The carrying amounts of short-term borrowings
approximate fair value due to the short-term nature of these instruments.
Notes Payable--The fair value is assumed to be the carrying value because
the notes were issued in a market transaction near December 31, 1996.
Subordinated Debt--The fair value of subordinated debt issued to
shareholders by WAC was assumed to be equal to carrying value because the
debt terms were negotiated with related parties and there is no market for
the debt at such terms with unrelated parties.
Off-Balance-Sheet Liabilities--The fair values of interest-rate swaps
(1996 only) are estimated at the net present value of the future payable,
based on the current spread, discounted at a current rate. Fair values of
off-balance-sheet commitments to lend are estimated based on deferred fees
associated with such commitments, which are immaterial as of the reporting
date.
The fair value estimates presented herein are based on pertinent
information available to management as of each reporting date. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and
therefore, current estimates of fair value may differ significantly from
the amounts presented herein.
F-25
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
QUARTERS ENDED
---------------------------------------------
JUNE
DECEMBER 31, SEPTEMBER 30, 30, MARCH 31,
1996 1996 1996 1996
------------ ------------- ------- ---------
Interest income.................. $14,285 $12,186 $12,407 $9,544
Interest expense................. 9,685 7,572 7,046 4,974
Provision for loan losses........ 798 4,883 5,483 5,385
------- ------- ------- ------
Net interest income (loss) after
provision for loan losses....... 3,802 (269) (122) (815)
Noninterest income............... 11,796 1,140 817 4,189
Noninterest expense.............. 4,772 5,298 2,525 2,851
------- ------- ------- ------
Income (loss) before income
taxes........................... 10,826 (4,427) (1,830) 523
Income tax provision (benefit)... 4,777 (3,373) (805) (474)
------- ------- ------- ------
Net income (loss)................ $ 6,049 $(1,054) $(1,025) $ 997
======= ======= ======= ======
QUARTERS ENDED
---------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995
------------ ------------- -------- ---------
Interest income.................. $7,329 $6,173 $5,776 $5,103
Interest expense................. 4,070 3,704 3,573 3,134
Provision for estimated losses on 1,045 1,020 1,028 1,173
loans........................... ------ ------ ------ ------
Net interest income (loss) after
provision for estimated losses
on loans........................ 2,214 1,449 1,175 796
Noninterest income............... 353 1,591 526 467
Noninterest expense.............. 2,795 2,052 1,629 1,456
------ ------ ------ ------
(Loss) income before income
taxes........................... (228) 988 72 (193)
Income tax provision (benefit)... (21) 78 4 (14)
------ ------ ------ ------
Net income (loss)................ $ (207) $ 910 $ 68 $ (179)
====== ====== ====== ======
F-26
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. PARENT COMPANY INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
----------------
1996 1995
-------- -------
ASSETS
Cash.......................................................... $ 65,207 $ 1
Intercompany receivable....................................... 22,095
Noninterest income............................................ 48,065 18,777
Prepaid expenses and other assets............................. 4,665 153
-------- -------
$140,032 $18,931
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities........................ $ 4,010 $ 317
Due to affiliates............................................. 575
Note payable.................................................. 75,000
Subordinated debt to majority stockholders.................... 11,000
-------- -------
Total liabilities......................................... 79,010 11,892
Contributed and retained equity............................... 61,022 7,039
-------- -------
$140,032 $18,931
======== =======
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER
31,
-----------------------
1996 1995 1994
------ ------ -------
Interest income....................................... $ 45 $ 9 $ 24
Interest expense...................................... 421 243 31
------ ------ -------
Net interest expense.................................. (376) (234) (7)
Noninterest income.................................... 563 1,155 611
Noninterest expense................................... 125 363 156
------ ------ -------
Income before equity in earnings of subsidiaries and
income tax benefit................................... 62 558 448
Income tax benefit.................................... 131
Equity in earnings (loss) of subsidiaries............. 4,774 34 (1,700)
------ ------ -------
Net income (loss)..................................... $4,967 $ 592 $(1,252)
====== ====== =======
F-27
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 4,967 $ 592 $(1,252)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities:
Amortization of purchase accounting
adjustments................................. (1,045) (1,045) (488)
Equity in loss (earnings) of subsidiaries... (4,774) (34) 1,700
Change in:
Prepaid expenses and other assets......... (4,512) 51 495
Accounts payable and other liabilities.... 4,657 90 (111)
Due from affiliates....................... (71) (29)
Due to affiliates......................... (575)
Intercompany receivables.................. (22,095)
Other..................................... 33
------- ------- -------
Net cash (used in) provided by operating
activities.............................. (23,377) (384) 315
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES--
Net investment in subsidiaries................ (24,514) (9,000) (4,746)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of notes payable..................... 75,000
Issuance of capital stock..................... 38,097 4,750
Issuance of subordinated debt................. 9,000
Dividends from subsidiary..................... 65
------- ------- -------
Net cash provided by financing
activities.............................. 113,097 9,065 4,750
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 65,206 (319) 319
CASH:
Beginning of year............................. 1 320 1
------- ------- -------
End of year................................... $65,207 $ 1 $ 320
======= ======= =======
NONCASH FINANCING ACTIVITIES:
Conversion of capital stock to subordinated
debt.......................................... $ 2,000
Exchange of subordinated debt for common
stock......................................... $11,000
F-28
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. PRO FORMA INFORMATION CONCERNING ACQUISITIONS
During 1994, WAC acquired GSB in a purchase accounting transaction. The
results of GSB's operations are included in the Company's consolidated
financial statements subsequent to the date of acquisition. The following pro
forma financial information shows the estimated results of the Company's
operations for the year ended December 31, 1994 as though the GSB purchase had
occurred as of the beginning of the year. The pro forma amounts are not
necessarily indicative of what would have actually occurred if the acquisition
had occurred as of the beginning of the year.
YEAR ENDED
DECEMBER 31,
1994
------------
Net interest income and noninterest revenue.................. $7,222
Net loss..................................................... (920)
F-29
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF ON MARCH 28, 1997 BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
WILSHIRE FINANCIAL SERVICES GROUP
INC.
/s/ Lawrence A. Mendelsohn
-------------------------------------
LAWRENCE A. MENDELSOHN
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE-SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW ON MARCH 28, 1997 BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
SIGNATURE TITLE
/s/ Andrew A. Wiederhorn Chairman of the
- ------------------------------------- Board, Chief
ANDREW A. WIEDERHORN Executive Officer,
Secretary and
Treasurer
/s/ Lawrence A. Mendelsohn President and
- ------------------------------------- Director
LAWRENCE A. MENDELSOHN
/s/ Chris Tassos Senior Vice
- ------------------------------------- President and Chief
CHRIS TASSOS Financial Officer
/s/ Don H. Coleman Director
- -------------------------------------
DON H. COLEMAN
/s/ Philip G. Forte Director
- -------------------------------------
PHILIP G. FORTE
/s/ David Dale-Johnson Director
- -------------------------------------
DAVID DALE-JOHNSON
EXHIBIT INDEX
The following exhibits are filed as part of this report.
+ 3.1 Certificate of Incorporation
+ 3.2 By-laws
+ 4.2 Form of Indenture
+10.1 Form of Employment Agreement dated November 15, 1996 among the
Company and Andrew A. Wiederhorn
+10.2 Form of Employment Agreement dated November 15, 1996 among the
Company and Lawrence A. Mendelsohn
10.3 Incentive Stock Plan
+10.11 Cease and Desist Order
+10.12 Servicing Agreement dated as of November 15, 1996 among Wilshire
Credit Corporation and Wilshire Financial Services Group
+10.13 Master Repurchase Agreement dated as of July 29, 1996 among
Wilshire Credit Corporation and CS First Boston Capital
Corporation
+10.14 Additional Supplemental Terms to Master Repurchase Agreement,
dated as of July 29, 1996 between CS First Boston Mortgage
Capital Corp. and Wilshire Credit Corporation
+10.15 Interim Warehouse & Security Agreement, dated as of December 1,
1995, between Wilshire Funding Company, L.L.C. and Prudential
Securities Realty Funding Corp.
+10.16 Amendment to Interim Warehouse and Security Agreement dated June
28, 1996 between Wilshire Funding Company, L.L.C. and
Prudential Securities Realty Funding Corp.
+10.17 Amendment No. 2 to Interim Warehouse and Security Agreement
dated September 27, 1996 between Wilshire Funding Company,
L.L.C. and Prudential Securities Realty Funding Corp.
+10.18 Master Repurchase Agreement between First Bank of Beverly Hills,
F.S.B. and Bear Stearns Mortgage Capital Corporation dated as
of May 22, 1996
+10.19 Supplemental Terms and Conditions dated as of May 22, 1996 among
First Bank of Beverly Hills, F.S.B. and Bear Stearns Mortgage
Capital Corporation
+10.20 Master Repurchase Agreement between Girard Savings Bank FSB and
Bear Stearns Mortgage Capital Corporation dated as of December
22, 1995
+10.21 Master Repurchase Agreement dated as of November 15, 1996
between CS First Boston Mortgage Capital Corp. and Wilshire
Funding Corp.
+10.22 Interim Warehouse and Security Agreement by and between
Prudential Securities Credit Corporation and WMFC 1997-2, Inc.
dated as of November 15, 1996
11 Statement regarding earnings per share
12 Statement regarding the computation of the ratio of earnings to
fixed charges
+21.1 Subsidiaries
27 Financial Data Schedule
- --------
+ Exhibit is incorporated by reference to the Company's Registration Statement
on Form S-1, Registration No. 333-15263, initially filed with the Securities
and Exchange Commission on October 31, 1996, as amended.