-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RLdgn9PUgI49P2MhhSoMADYufzPEjKF+z4oASoRiZ6znjwtMNcgnnE4bqjjpc+QK u2HrYvYV/u8XN3oUH5BVEg== 0000912057-00-014986.txt : 20000331 0000912057-00-014986.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-014986 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILSHIRE FINANCIAL SERVICES GROUP INC CENTRAL INDEX KEY: 0001024321 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 931223879 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-21845 FILM NUMBER: 587173 BUSINESS ADDRESS: STREET 1: 1776 SW MADISON STREET CITY: PORTLAND STATE: OR ZIP: 97205 BUSINESS PHONE: 5032235600 MAIL ADDRESS: STREET 1: 776 SW MADISON ST CITY: PROTLAND STATE: OR ZIP: 97205 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 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 incorporation or organization) Identification 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:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock. None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes /X/ No / / 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. Yes /X/ The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing sales price on March 6, 2000, was $9,072,288. As of March 6, 2000, 20,033,600 shares of Wilshire Financial Services Group Inc.'s common stock, par value $.01 per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE None. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WILSHIRE FINANCIAL SERVICES GROUP INC. FORM 10-K INDEX
ITEM PAGE - ---- -------- PART I.................................................................... 4 1. Business.................................................... 4 2. Properties.................................................. 18 3. Legal Proceedings........................................... 18 4. Submission of Matters to a Vote of Security Holders......... 19 PART II................................................................... 19 5. Market for the Registrant's Common Equity and Related 19 Stockholder Matters......................................... 6. Selected Financial Data and Operating Statistics............ 20 7. Management's Discussion and Analysis of Financial Condition 25 and Results of Operations................................... 7A. Quantitative and Qualitative Disclosures About Market 48 Risk........................................................ 8. Financial Statements and Supplementary Data................. 48 9. Changes in and Disagreements with Accountants on Accounting 48 and Financial Disclosure.................................... PART III.................................................................. 49 10. Directors and Executive Officers of the Registrant.......... 49 11. Executive Compensation...................................... 51 12. Security Ownership of Certain Beneficial Owners and 57 Management.................................................. 13. Certain Relationships and Related Transactions.............. 58 PART IV................................................................... 58 14. Exhibits, Financial Statement Schedules, and Reports on Form 58 8-K.........................................................
2 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, interest rates, the cease and desist order and other regulatory matters, the availability of pools of loans at acceptable prices, the availability of financing for existing assets, loan pool acquisitions and servicing portfolio expansion, and the sale of European assets and operations. Accordingly, there can be no assurance that the forward-looking statements contained in this Annual Report on Form 10-K will be realized or that actual results will not be significantly higher or lower. The forward-looking statements have not been audited by, examined by or subjected to agreed-upon procedures by independent accountants, and no third-party has independently verified or reviewed such statements. Readers of this Annual Report on Form 10-K should consider these facts in evaluating the information contained herein. The inclusion of the forward-looking statements contained in this Annual Report on Form 10-K should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Annual Report on Form 10-K will be achieved. In light of the foregoing, readers of this Annual Report on Form 10-K are cautioned not to place undue reliance on the forward-looking statements contained herein. 3 PART I. ITEM 1. BUSINESS GENERAL THE COMPANY Wilshire Financial Services Group Inc. and subsidiaries ("WFSG" or the "Company") is a diversified financial services company. We conduct a mortgage loan portfolio acquisition, servicing and banking business in the U.S. and to a limited extent in Western Europe. We offer wholesale banking through our subsidiary, First Bank of Beverly Hills, F.S.B. ("First Bank"). First Bank is a federally chartered savings institution regulated by the Office of Thrift Supervision ("OTS") with one branch, a wholly-owned commercial mortgage brokerage subsidiary, a merchant bankcard-processing center and a lending center in Southern California. We service loans through our majority-owned subsidiary, Wilshire Credit Corporation ("WCC"). As of December 31, 1999, we had 332 employees. Our administrative headquarters and loan servicing operations are located at 1776 S.W. Madison, Portland, Oregon 97205. Our telephone number is (503) 223-5600. RESTRUCTURING OF THE COMPANY As more fully described below under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview and Restructuring of WFSG," in response to adverse market conditions in the second half of 1998 and the resulting effect on our operations, we focused our efforts during 1999 on stabilizing the assets remaining at our non-banking subsidiaries and restructuring WFSG through a voluntary prepackaged Chapter 11 bankruptcy filing. First Bank remained focused on the execution of its primary business plan as it was relatively unaffected by the severe market conditions which dramatically affected the Company's non-banking subsidiaries during the second half of 1998. In connection with the plan of reorganization (the "Plan"), we filed a voluntary petition for relief under the Chapter 11 Bankruptcy Code in the Federal Bankruptcy Court in Wilmington, Delaware on March 3, 1999. On April 12, 1999, the Plan was approved by the bankruptcy court. On June 10, 1999, the Plan became effective, we emerged from bankruptcy and a new Board of Directors was seated. The restructuring was the Company's necessary response to significant negative market factors arising in the third and fourth quarters of 1998. These factors resulted in a dramatic reduction in market valuations for certain of our mortgage-backed securities and other assets, as well as a reduction in the availability of borrowings for securities and certain of our loan assets, thereby reducing our liquidity. Turmoil in the Russian financial markets, following a prolonged period of uncertainty in the Asian financial markets, caused investors to reassess their risk tolerance. This resulted in a dramatic movement of liquidity toward less risky assets (e.g., U.S. Treasury instruments) and away from higher risk assets, including most non-investment grade assets and commercial and other mortgage and asset-backed securities. This movement toward higher quality investments dramatically reduced available liquidity to non-investment grade assets. Without available funding sources, many investors in these assets, including several well-known hedge funds, were forced to liquidate holdings at reduced prices. With greater sales pressure and supply outpacing demand, prices continued to fall as more lenders made collateral calls, demanding additional collateral for their loan positions. Many companies were rapidly depleting available cash reserves. In order to address these liquidity concerns and to improve the Company's financial condition, the Company and an unofficial committee of holders of a majority of the Company's $184.2 million in outstanding publicly issued notes agreed, in November 1998, to a restructuring of the Company whereby (i) the noteholders would exchange their notes for new common stock in the Company; (ii) the Company's 4 existing common stock and options would be canceled; and (iii) noteholders would reallocate up to 0.6% of the new common stock to the then existing stockholders of the Company. Pursuant to the Plan, the holders of the Company's $184.2 million in outstanding publicly issued notes received approximately 96.16 shares of new common stock for every $1,000 of notes, including accrued interest through March 2, 1999. An additional portion of the new common stock was issued to Wilshire Real Estate Investment Inc. ("WREI," formerly Wilshire Real Estate Investment Trust Inc.) in exchange for other debt owed to it. A portion of the new common stock was reallocated by the noteholders so that holders of the old common stock received approximately 0.6% of the outstanding shares of new common stock. The principal stockholders, Andrew A. Wiederhorn and Lawrence A. Mendelsohn, received 1 share of new common stock for every 136.07 shares of old common stock held by them. The registered holders other than the principal stockholders received approximately 1 share of new common stock for every 77.28 shares of old common stock. WREI Inc. received 2,874,791 shares of new common stock, representing a 14.4% ownership interest in the Company. As part of the Plan, the servicing of the Company's assets currently is conducted by Wilshire Credit Corporation ("WCC" (formerly WCC Inc.)), a newly formed, majority-owned subsidiary of the Company. Prior to the reorganization, the Company's assets were serviced by the company formerly named Wilshire Credit Corporation (now known as Capital Wilshire Holdings Inc. ("CWH")), a company previously owned by Andrew A. Wiederhorn and Lawrence A. Mendelsohn. As part of the Plan, the Company entered into concurrent negotiations with the owners of CWH and the principal creditor of CWH, Capital Consultants Inc. ("CCI"), to incorporate the servicing operations of CWH into WFSG. CWH was in default on a loan from its principal creditor, CCI. A portion of that loan had been guaranteed by the Company. CCI took control of CWH and in exchange for releases from such debt, CWH contributed its assets to WCC and, in exchange for such assets and CCI's release of the Company's loan guaranty to CCI, WFSG transferred 49.99% of the equity of WCC to CWH. As a result, the Company currently owns 100% of the Class A voting common stock (representing 50.01% of the economic value) of WCC, and CWH owns 100% of the Class B non-voting common stock and the remaining 49.99% economic interest of WCC. Class B non-voting common stock is convertible into voting common stock on a share-for-share basis and, under certain circumstances, convertible into WFSG common stock. Class B non-voting common stock also has a liquidation preference of approximately $19.3 million. In January 1999, WREI agreed to provide the Company debtor-in-possession financing of up to $10.0 million (the "DIP Facility") as part of a compromise and settlement of a $17.0 million obligation payable from the Company to WREI. The DIP Facility bears interest at 12% and is secured by the stock of First Bank. WREI funded $5.0 million of the DIP Facility on March 3, 1999, but did not provide the remaining balance. Accordingly, 50%, or approximately $8.5 million, of the Company's obligation payable to WREI was converted into 6% pay-in-kind ("PIK") Notes due 2006, and the remaining $8.5 million of the Company's obligation was treated PARI PASSU with WFSG's noteholders and converted to newly issued common stock of WFSG on the effective date of the Plan. Following the completion of WFSG's reorganization, the DIP Facility became an ordinary secured lending facility with no special priority accorded by bankruptcy law. TERMINATION OF CHIEF EXECUTIVE OFFICER AND PRESIDENT On August 19, 1999, the Board of Directors of the Company notified each of Messrs. Wiederhorn and Mendelsohn of the Company's intention to terminate his employment for "cause" pursuant to his employment agreement with the Company. The Company suspended each of Messrs. Wiederhorn and Mendelsohn that same day. On September 2, 1999, the Company terminated the employment of each of them for cause. Messrs. Wiederhorn and Mendelsohn have brought suit against the Company, alleging wrongful termination. See "Item 3--Legal Proceedings." 5 PARTIAL SETTLEMENT WITH WREI On December 13, 1999, the Company entered into an agreement with WREI. The principal terms of the agreement include, but are not limited to, the following: WFSG surrendered to WREI all of its interest in WREI's common stock, including 992,587 shares of WREI common stock, and rights to previously declared dividends on such shares, and options to purchase an additional 1,112,500 shares; WFSG released WREI from the management fee otherwise payable by WREI under the Management Agreement between WFSG and WREI for the quarterly period ended September 30, 1999; WREI cancelled WFSG's obligations under the 6% pay-in-kind (PIK) notes previously issued by WFSG to WREI; and WFSG issued to WREI an unsecured promissory note in the amount of $275,000, bearing interest at 9%. Various other matters remain the subject of litigation between WFSG and WREI, and are discussed further in "Item 3--Legal Proceedings." BUSINESS STRATEGY As more fully described below (see Results of Operations--Seven Months Ended December 31, 1999), the Company changed its business strategy significantly in September 1999. The Company believes that its success depends on its ability to (i) properly evaluate and manage credit risk; (ii) efficiently service pools of loans, including pools of loans requiring special competence in loss mitigation and client-customized investor reporting; (iii) fund acquisitions on a cost effective basis; and (iv) manage interest rate risk and liquidity. The Company's objective is to expand in markets where it can capitalize on its core strengths in these areas through a strategy consisting of the following key elements: - Expansion of loan servicing, loss mitigation and special investor reporting operations. - Growth of loan pool acquisitions in the U.S for the Company's own account and through co-investment with institutional investors. - Growth of the Company's banking operations, including its commercial lending, mortgage origination and merchant bankcard processing operations. ACQUISITIONS OF POOLS OF LOANS We primarily acquire pools of performing and sub-performing residential, multi-family and commercial mortgage loans, and, to a lesser degree, mortgage-backed securities and loan servicing rights. We also originate multi-family and nonresidential mortgage loans at First Bank and broker nonresidential loans to various third party contractors at First Bank's commercial mortgage brokerage subsidiary, George Elkins Mortgage Banking ("GEMB"). At December 31, 1999, we had total assets of approximately $654.5 million, including approximately $483.2 million of loans, approximately $59.7 million of mortgage-backed and U.S. government securities, and approximately $11.6 million of real estate owned, net. We acquire pools of loans that, at the time of acquisition, consist primarily of either (a) performing sub-prime and sub-performing loans that are available for purchase at prices that more closely approximate their unpaid principal balances ("Non-Discounted Loans") or (b) non-performing loans that, because of their delinquent status, are available for purchase at prices that reflect a significant discount from their unpaid principal balances ("Discounted Loans"). At December 31, 1999, we held approximately $460.7 million of Non-Discounted Loans and approximately $22.5 million of Discounted Loans. The following table sets forth the composition of our portfolio of Non-Discounted Loans and Discounted Loans by type of loan at the dates indicated. 6 COMPOSITION OF THE NON-DISCOUNTED LOANS AND DISCOUNTED LOANS (1)
DECEMBER 31, ----------------------------------------- 1999 1998 1997 1996 -------- -------- -------- -------- (DOLLARS IN THOUSANDS) NON-DISCOUNTED LOANS: Single-family residential......................... $184,692 $458,452 $306,601 $ 74,895 Multi-family residential.......................... 98,538 67,079 68,301 69,044 Commercial real estate............................ 175,489 155,298 95,133 63,374 Consumer and other................................ 26,568 86,341 49,443 22,817 -------- -------- -------- -------- Non-Discounted Loan portfolio....................... 485,287 767,170 519,478 230,130 Premium (unaccreted discount) and deferred fees..... 3,228 7,850 (23,830) (6,232) Valuation allowance(2)(5)........................... (27,859) (34,787) (31,046) (31,936) -------- -------- -------- -------- Total Non-Discounted Loans, net (6)............... $460,656 $740,233 $464,602 $191,962 ======== ======== ======== ======== DISCOUNTED LOANS: Single-family residential......................... $ 29,597 $ 93,133 $507,206 $276,759 Multi-family residential.......................... 4,261 2,188 16,300 317 Commercial real estate............................ 14,816 21,901 79,370 4,919 Consumer and other(3)............................. 214,401 227,844 238,152 1,342 -------- -------- -------- -------- Discounted Loan portfolio........................... 263,075 345,066 841,028 283,337 Unaccreted discount and deferred fees(3)............ (3,918) (8,596) (290,444) (58,088) Valuation allowance(2)(5)........................... (236,639) (284,481) (87,229) (5,619) -------- -------- -------- -------- Total Discounted Loans, net (4)................... $ 22,518 $ 51,989 $463,355 $219,630 ======== ======== ======== ========
- ------------------------ (1) Non-Discounted Loans and Discounted Loans include both loans held for sale as well as loans intended to be held to maturity. (2) For discussion of the valuation allowance allocation for purchase discount, see "Asset Quality--Allowances for Loan Losses." (3) In the first quarter of 1997, we acquired approximately $174.2 million of consumer loans for less than 1.1% of their face amount. Accordingly, the amounts shown for "Consumer and other" and "Unaccreted discount and deferred fees" increased substantially. (4) The substantial decline in Discounted Loans reflects substantial asset sales to meet collateral calls by lenders in the third and fourth quarter of 1998. (5) Included in the valuation allowance at December 31, 1998 is $30.4 million classified as market valuation losses and impairments in the audited financial statements. The balance represents other than temporary impairment recognized to reduce the carrying value of certain Discounted and Non-Discounted Loans at December 31, 1998. (6) The substantial decline in Non-Discounted Loans in 1999 reflects sales of loans to increase liquidity and reduce outstanding debt. The real properties which secure our Non-Discounted Loans are located throughout the United States. At December 31, 1999, the five states with the greatest concentration of properties securing our Non-Discounted Loans were California, Florida, Texas, Washington and New York, which had $275.2 million, $51.0 million, $48.9 million, $40.5 million and $29.7 million principal amount of loans, respectively. The real properties which secure our Discounted Loans are located throughout the United States. At December 31, 1999, the five states with the greatest concentration of properties securing our Discounted 7 Loans were New York, New Jersey, California, Connecticut, and Massachusetts, which had $3.8 million, $2.5 million, $1.8 million, $1.7 million and $1.0 million principal amount of loans, respectively. The following table sets forth certain information at December 31, 1999 regarding the dollar amount for Non-Discounted Loans based on their contractual terms to maturity and includes scheduled payments but not potential prepayments, as well as the dollar amount of those loans which have fixed or adjustable interest rates. No information is shown with respect to Discounted Loans because those loans, by definition, are in default and unlikely to mature in accordance with their stated amortization schedules. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances have not been adjusted for unamoritized discounts or premiums, deferred loan fees and the allowance for loan losses. MATURITY OF NON-DISCOUNTED LOANS
MATURING IN --------------------------------------------------- AFTER ONE AFTER FIVE ONE YEAR YEAR THROUGH YEARS THROUGH AFTER TEN OR LESS FIVE YEARS TEN YEARS YEARS -------- ------------ ------------- --------- (DOLLARS IN THOUSANDS) Single-family residential....................... $ 258 $1,718 $ 3,953 $178,763 Multi-family residential........................ 1,434 6,574 43,612 46,918 Commercial and other mortgage loans............. 24,180 40,310 77,186 33,813 Consumer and other loans........................ 6,987 3,234 4,318 12,029 Interest rate terms on amounts due after one year: Fixed......................................... -- 30,866 106,529 203,230 Adjustable.................................... -- 20,970 22,540 68,293
Scheduled contractual principal repayments do not reflect the actual maturities of Non-Discounted Loans because of prepayments and, in the case of conventional mortgage loans, due-on-sale clauses. The average life of mortgage loans, particularly fixed-rate loans, tends to increase when current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgages are substantially higher than prevailing mortgage loan rates. 8 INTERNATIONAL ASSETS AND OPERATIONS Beginning in 1996, we engaged in loan acquisition activities in the United Kingdom and France. We established offices in London, Paris and Dublin, and established loan servicing operations in the United Kingdom and France. In 1999, management decided to discontinue our European loan acquisition and servicing operations. As discussed further in Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations, we are currently in the process of winding down such operations and are in negotiations to sell our European assets and operations to outside parties. We expect substantially to complete the wind-down during the second quarter of 2000. ACQUISITION OF SECURITIES Prior to 1999, we acquired mortgage-backed securities, consisting primarily of subordinate interests in private-label securities backed by loans that were originated by and are being serviced by unaffiliated third parties. We also retained or, in certain cases, acquired in the secondary market subordinate and other classes of mortgage-backed securities backed by loans that were previously held in the portfolio of the Company or one of our affiliates and for which the Company is continuing to act as servicer. During 1999, we sold all subordinate mortgage-backed securities originated or serviced by unaffiliated third parties and currently intend to purchase or hold only such securities where we act as servicer. First Bank has acquired government agency securities (or quasi-government agency securities) to earn net interest spread. The following table sets forth our holdings of mortgage-backed and other securities at the dates indicated: MORTGAGE-BACKED SECURITIES AND OTHER SECURITIES
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998(1) 1997 -------- -------- -------- (DOLLARS IN THOUSANDS) Available for sale: Mortgage-backed securities................... $10,362 $ 66,829 $223,185 Agency mortgage-backed securities............ 33,221 47,634 75,779 Trading account securities: Mortgage-backed securities................... -- -- 38,969 Held to maturity: U.S. Government and other securities......... 5,979 5,962 5,946 Mortgage-backed securities................... 10,166 13,580 18,468 ------- -------- -------- Total...................................... 16,145 19,542 24,414 ------- -------- -------- Total investment securities................ $59,728 $134,005 $362,347 ======= ======== ========
- ------------------------ (1) The substantial decline in the value of subordinate mortgage-backed securities in the third and fourth quarters of 1998 forced the Company to sell significant amounts of subordinate mortgage-backed securities in order to meet collateral calls by lenders. SERVICING U.S. SERVICING. Beginning in June 1999, the servicing of the Company's assets is conducted by Wilshire Credit Corporation ("WCC" (formerly WCC Inc.)), a newly formed, majority-owned subsidiary of the Company. Prior to the reorganization, the Company's assets were serviced by Wilshire Credit Corporation (now known as Capital Wilshire Holdings Inc. ("CWH")), a company previously owned by Andrew A. Wiederhorn and Lawrence A. Mendelsohn, formerly the Company's principal stockholders. 9 WCC provides loan portfolio management services, including billing, portfolio administration and collection services for pools of loans. WCC has developed specialized procedures and proprietary software designed to effectively service performing, non-performing and sub-performing loans and foreclosed real estate. As part of its loan pool acquisition or servicing analysis, WCC designs a servicing plan for each underlying loan and property in a pool that is intended to maximize cash flow from that loan or property. Discounted Loans are generally resolved within one to two years through foreclosure, compromise, a discounted payoff or reinstatement. Non-Discounted Loans are actively serviced to facilitate timely and accurate payments over their remaining lives. The following table sets forth the composition of our portfolio of loans serviced by type of loan at the dates indicated. COMPOSITION OF LOANS SERVICED
DECEMBER 31, ------------------------------------ 1999 1998 1997 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Single-family residential................ $1,516,536 $2,273,862 $1,993,762 Multi-family residential................. 104,307 83,731 79,295 Commercial real estate................... 221,605 166,638 172,109 Consumer and other....................... 271,515 361,609 371,121 ---------- ---------- ---------- Total.................................. $2,113,963 $2,885,840 $2,616,287 ========== ========== ==========
EUROPEAN SERVICING. In 1996, we established loan servicing operations in the United Kingdom and France to service loans for ourselves and third parties. As stated above, the Company is in the process of winding down and selling its European operations. MORTGAGE LOAN ORIGINATIONS We previously operated a mortgage loan origination program through correspondents for the origination of residential mortgage loans and the origination of commercial mortgage loans. In the fourth quarter of 1998, due to difficult market conditions the Company ceased origination activity through its residential mortgage origination channel. In October 1998, First Bank purchased George Elkins Mortgage Banking Company, LP, a four branch commercial mortgage loan broker headquartered in Southern California, for $3.7 million in cash and an additional $1.5 million, which is contingent on certain operating performances through the Year 2000. For the year ended December 31, 1999, George Elkins Mortgage Banking Company, LP, brokered approximately $467.5 million of commercial mortgage loans and accounted for approximately $9.5 million of commercial mortgage loan originations for First Bank. MERCHANT BANKCARD PROCESSING OPERATIONS The Bank is continuing to develop its merchant bankcard processing operations, which generate revenues through merchant discounts and processing fees for Visa-Registered Trademark- and MasterCard-Registered Trademark- transactions. The Bank has refocused its Bankcard business lines away from high-risk merchants toward more traditional merchants while positioning itself to take advantage of the ever-increasing demand for credit card processing in the rapidly growing e-commerce market. This shift is anticipated to increase the current percentage of retail merchant business from 22% in December 1999 to 26% in December 2000 while also raising the percentage of internet merchant business from 30% in December 1999 to 43% in December 2000. A significant portion of this business involves processing Visa-Registered Trademark- and MasterCard-Registered Trademark- transactions for e-commerce business on the internet. 10 The financial results of the Bank's merchant bankcard processing operations for the years ended December 31, 1999, 1998 and 1997 have been as follows:
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (DOLLARS IN THOUSANDS) Bankcard revenues................................. $17,059 $13,801 $6,289 Bankcard processing expense....................... (12,918) (8,893) (4,294) ------- ------- ------ Income before other expenses...................... 4,141 4,908 1,995 Other expenses.................................... (3,104) (2,521) (1,784) ------- ------- ------ Net............................................... $ 1,037 $ 2,387 $ 211 ======= ======= ======
In addition to focusing on continued internal growth, the Bank is evaluating strategic alternatives for the bankcard operations which may include developing a debit card processing program and acquisitions of similar or complimentary businesses. 11 FUNDING SOURCES GENERAL. In order to maximize the return on our investment in acquired loans, we fund acquisitions with third party debt financing so that our invested capital is a small percentage of the purchase price for the asset acquired. The four principal sources for such funding are (1) deposits at First Bank, (2) Federal Home Loan Bank ("FHLB") of San Francisco advances, (3) repurchase agreements and other short-term borrowings with major investment and commercial banks, and (4) the securitization of loans. We closely monitor rates and terms of competing sources of funds on a regular basis and generally utilize the source which is the most cost effective. Due to the recent market volatility, some of these funding sources may not be fully available as described under "Management's Discussion and Analysis of Financial Condition and Results of Operations." First Bank's funding strategy has been to fund growth through a mixture of FHLB advances, repurchase borrowings and deposit growth. First Bank generally accumulated deposits by participating in deposit rate surveys which list First Bank among the higher rate paying insured institutions, and periodically advertising in various local market newspapers and other media. However, because First Bank competes for deposits primarily on the basis of rates, First Bank could experience difficulties in attracting deposits if it could not continue to offer deposit rates at levels above those of other banks and savings institutions. The following table sets forth information relating to our borrowings and other interest-bearing obligations at the dates indicated. BORROWINGS AND INTEREST-BEARING OBLIGATIONS
DECEMBER 31, ---------------------------------- 1999 1998 1997 -------- ---------- ---------- (DOLLARS IN THOUSANDS) Deposits................................... $419,285 $ 510,430 $ 362,598 FHLB Advances.............................. 80,000 -- -- Repurchase Agreements and other short-term borrowings............................... 31,927 420,816 966,500 Notes Payable (1).......................... -- 184,245 184,245 -------- ---------- ---------- Total.................................. $531,212 $1,115,491 $1,513,343 ======== ========== ==========
- ------------------------ (1) The Company's unsecured notes were cancelled and converted into equity as part of the Company's restructuring. See "Business--Restructuring of the Company." DEPOSITS. The following table sets forth information relating to First Bank's deposits at the dates indicated.
DECEMBER 31, --------------------------------------------------------------- 1999 1998 1997 ------------------- ------------------- ------------------- AVG. AVG. AVG. AMOUNT RATE AMOUNT RATE AMOUNT RATE -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Non-interest bearing checking accounts...... $ 11,321 0.00% $ 10,934 0.00% $ 5,959 0.00% NOW and money market checking accounts...... 4,383 4.46 2,060 2.45 1,563 1.47 Savings accounts............................ 399 2.01 293 2.00 329 2.02 Certificates of deposit..................... 403,182 5.49 497,143 5.70 354,747 6.02 -------- ---- -------- ---- -------- ---- Total deposits.......................... $419,285 5.33% $510,430 5.56% $362,598 5.83% ======== ==== ======== ==== ======== ====
12 The primary source of deposits for First Bank currently is "wholesale" certificates of deposit. To a lesser extent First Bank obtains brokered certificates of deposit from national investment banking firms which, pursuant to agreements with First Bank, solicit funds from their customers for deposit with First Bank. At December 31, 1999, $124.1 million or 30.8% of First Bank's certificates of deposit were brokered and $279.1 million or 69.2% were wholesale deposits. Wholesale deposits generally are obtained on more economically attractive terms to First Bank than brokered deposits. The following table sets forth, by various interest rate categories, First Bank's certificates of deposit at December 31, 1999. INTEREST RATES FOR CERTIFICATES OF DEPOSIT
DECEMBER 31, 1999 ---------------------- (DOLLARS IN THOUSANDS) 3.50% or less............................................ $ 151 3.51-4.50%............................................... 286 4.51-5.50%............................................... 134,852 5.51-6.50%............................................... 267,893 -------- Total................................................ $403,182 ========
The following table sets forth the amount and maturities of First Bank's certificates of deposit at December 31, 1999. MATURITIES OF CERTIFICATES OF DEPOSIT
ORIGINAL MATURITY IN MONTHS ------------------------------------- 12 OR LESS OVER 12 TO 36 OVER 36 ---------- ------------- -------- (DOLLARS IN THOUSANDS) Balances Maturing in 3 Months or Less....................... $16,516 $ 44,974 $ 99 Weighted Average Rate..................................... 5.61% 5.57% 6.31% Balances Maturing in over 3 Months to 12 Months............. $40,122 $256,806 $ 332 Weighted Average Rate..................................... 6.21% 5.87% 6.34% Balances Maturing in over 12 Months to 36 Months............ -- $ 35,650 $7,930 Weighted Average Rate..................................... -- 5.88% 5.88% Balances Maturing in over 36 Months......................... -- -- $ 753 Weighted Average Rate..................................... -- -- 5.97%
At December 31, 1999, First Bank had outstanding an aggregate of approximately $157.1 million of certificates of deposit in face amounts equal to or greater than $100,000 maturing as follows: approximately $21.6 million within three months; approximately $62.6 million over three months through six months; approximately $57.5 million over six months through 12 months; and approximately $15.4 million thereafter. FHLB ADVANCES. First Bank obtains advances from the FHLB of San Francisco upon the security of certain of its assets, provided certain standards related to the creditworthiness of First Bank have been met. FHLB advances are available to member financial institutions such as First Bank for investment and lending activities and other general business purposes. FHLB advances are made pursuant to several different credit programs (each of which has its own interest rate, which may be fixed or adjustable). During 1999, the Federal Home Loan Bank of San Francisco agreed to provide a credit facility to First Bank equal to 20% of total assets measured at each quarter-end and for terms up to 10 years. 13 The following table sets forth First Bank's FHLB Advances at and for the years ended December 31, 1999, 1998, and 1997:
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (DOLLARS IN THOUSANDS) FHLB advances: Average amount outstanding during the period.............. $33,115 $ -- $ 479 Maximum month-end balance outstanding during the period... 87,500 -- 8,000 Weighted average rate: During the period....................................... 5.84% -- 5.67% At end of period........................................ 6.33% -- --
No short-term FHLB Advances were outstanding at December 31, 1999, 1998, or 1997. As of December 31, 1999, First Bank had $13.0 million of FHLB advances maturing within two years, $25.5 million maturing within three years, $15.0 million maturing within four years, and $26.5 million maturing within five years. REPURCHASE AGREEMENTS AND OTHER SHORT-TERM BORROWINGS. In the fourth quarter of 1999, we secured a committed repurchase financing facility with Credit Suisse First Boston to finance WFC's then-outstanding mortgage-backed securities and whole loan investments for a one-year period. We also have outstanding repurchase agreements, with other lenders, that mature monthly and roll into new 30-day repurchase agreements. Such lenders are not obligated to continue to roll the repurchase agreements. We had a secured warehouse financing facility of up to $150 million for the origination or purchase of residential first and second lien mortgage loans which matured on March 31, 1999 and for which the Company had no outstanding borrowings at December 31, 1999. First Bank is party to a $225 million Master Repurchase Agreement with Bear Stearns Mortgage Capital Corporation ("BSMCC"). This agreement enables First Bank to purchase pools of loans with immediate financing from BSMCC which can then be repaid as other funding sources are utilized. First Bank also obtains funding from repurchase borrowings on mortgage backed securities with major investment brokerage houses. The following table sets forth certain information related to our short-term borrowings having average balances during the period of greater than 30% of stockholders' equity at the end of the period. During each reported period, repurchase agreements are the only categories for borrowings meeting this criteria. Averages are determined by utilizing month-end balances.
AT OR FOR THE YEAR ENDED DECEMBER 31, -------------------------------------- 1999 1998 1997 ---------- ------------ ---------- (DOLLARS IN THOUSANDS) Repurchase Agreements and Other Short-Term Borrowings: Average amount outstanding during the period.............. $161,209 $ 972,376 $586,370 Maximum month-end balance outstanding during the period... 420,816 1,248,797 966,500 Weighted average rate: During the period....................................... 7.07% 7.65% 7.45% At end of period........................................ 8.08% 6.78% 7.32%
SECURITIZATIONS. At December 31, 1998, the Company and its affiliates had securitized $1.5 billion of assets through 10 publicly offered and three privately placed securitizations, including non-performing and sub-performing mortgage loans, manufactured housing loans, consumer loans, non-conforming mortgage loans and foreclosed real estate. Securitizations have allowed the Company to increase our loan acquisition and origination volume, reduce the risks associated with interest rate fluctuations and provide access to longer term funding sources. However, we believe our opportunities to securitize assets may be limited for the foreseeable future. 14 ASSET QUALITY We are exposed to certain credit risks related to the value of the collateral that secures our loans and the ability of borrowers to repay their loans. We closely monitor our pools of loans and foreclosed real estate for potential problems on a periodic basis. NON-PERFORMING LOANS. It is our policy to establish an allowance for uncollectible interest on loans that are over 90 days past due or sooner when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. Upon such a determination, those loans are placed on non-accrual status and deemed to be non-performing. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed by a charge to interest income. FORECLOSED REAL ESTATE. We carry our holdings of foreclosed real estate at the lower of (1) cost or (2) fair value less estimated costs to sell. Holding and maintenance costs related to properties are recorded as expenses in the period incurred. Declines in values of foreclosed real estate subsequent to acquisition are charged to income and recognized as a valuation allowance. Subsequent increases in the valuation of real estate owned are reflected as a reduction in the valuation allowance, but not below zero, and credited to income. The following table sets forth the aggregate carrying value of the Company's holdings of foreclosed real estate (by source of acquisition) at the dates indicated. FORECLOSED REAL ESTATE BY LOAN TYPE
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (DOLLARS IN THOUSANDS) Discounted Loans(1): Single-family residential..................... $ 213 $26,834 $111,316 Multi-family residential...................... 523 2,859 2,270 Commercial and other mortgage loans........... -- 4,812 10,248 ------- ------- -------- Total....................................... 736 34,505 123,834 Non-Discounted Loans: Single-family residential..................... 2,954 1,990 6,110 Multi-family residential...................... 199 22 3,082 Commercial and other mortgage loans........... 2,916 2,666 950 ------- ------- -------- Total....................................... 6,069 4,678 10,142 Foreclosed real estate purchased directly: Single-family residential..................... 4,724 22,689 40,706 Commercial and other mortgage loans........... 2,077 2,011 -- Valuation allowance for losses................ (2,035) (1,715) (5,070) ------- ------- -------- Foreclosed real estate owned, net........... $11,571 $62,168 $169,612 ======= ======= ========
- ------------------------ (1) The decreases in foreclosed real estate in 1998 and 1999 are due to sale of the properties to third parties. ALLOWANCE FOR LOAN LOSSES. We maintain an allowance for loan losses at a level believed adequate by management to absorb estimated incurred losses in the loan portfolios. The allowance is increased by provisions for loan losses charged against operations, recoveries of previously charged off loans, and allocations of discounts on purchased loans, and is decreased by loan charge-offs. Loans are charged off when they are deemed to be uncollectable, or in the case of automobile and other consumer loans, when payments are delinquent by more than 120 days. 15 First Bank uses its internal asset review system to evaluate all loans individually and to classify loans as pass, special mention, substandard, doubtful or loss. These terms correspond to varying degrees of risk that the loans will not be collected in part or in full. The frequency at which a specific loan is subjected to internal asset review depends on the type and size of the loan and the presence or absence of other risk factors, such as delinquency and changes in collateral values. The allowance for loan losses comprises specific valuation allowances established for impaired loans and for certain other classified loans, and general valuation allowances. Specific valuation allowances are based on the estimated fair value of the collateral for impaired or troubled collateral dependent loans, in most cases. General valuation allowances for First Bank are based on management's periodic analysis of the composition of the loan portfolio, delinquencies, loan classifications, historical loss experience, peer group data, OTS guidelines, economic factors and other relevant information. When the Company increases the allowance for loan losses related to loans other than Discounted Loans, it records a corresponding increase to the provision for loan losses in the statement of operations. For Discounted Loans, increases to the allowance for loan losses are recorded shortly after each acquisition of a pool by allocating a portion of the purchase discount deemed to be associated with measurable credit risk. The allocation is based on the analyses of specific and general valuation allowances discussed above. Amounts allocated to the allowance for loan losses from purchase discounts do not increase the provision for loan losses recorded in the statement of operations; rather they decrease the amounts of the purchase discounts that are accreted into the interest income over the lives of the loans. If, after the initial allocation of the purchase discount to the allowance for loan losses, management subsequently identifies the need for additional allowances against Discounted Loans, the additional allowances are established through charges to the provision for loan losses. In addition, the OTS, as part of its examination process, periodically reviews First Bank's allowances for losses and the carrying values of its assets. There can be no assurance that the OTS will not require additional reserves following future examinations. The following table sets forth information with respect to the Company's allowance for loan losses by category of loan. ALLOWANCE FOR LOAN LOSSES BY LOAN CATEGORY
DECEMBER 31, -------------------------------------------------------------------------------------------- 1999 % OF TOTAL 1998 % OF TOTAL 1997 % OF TOTAL 1996 %OF TOTAL -------- ---------- -------- ---------- -------- ---------- -------- --------- (DOLLARS IN THOUSANDS) Loan category: Real estate...................... $ 19,448 7.4% $ 16,334 5.7% $ 27,534 23.3% $24,051 64.0% Non-real estate.................. 8,411 3.2 10,508 3.6 3,512 3.0 7,885 21.0 Discounted loans................. 236,639 89.5 262,026 90.7 87,229 73.7 5,619 15.0 -------- ----- -------- ----- -------- ----- ------- ----- Total allowance for loan losses......................... $264,498 100.0% $288,868 100.0% $118,275 100.0% $37,555 100.0% ======== ===== ======== ===== ======== ===== ======= =====
The following table sets forth the activity in the allowance for loan losses during the periods indicated. 16 ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
YEAR ENDED DECEMBER 31 ----------------------------------------- 1999 1998 1997 1996 -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Balance, beginning of period......... $288,868 $118,275 $ 37,555 $25,651 Allocation of purchased loan discount: at acquisition..................... 4,878 372,136 174,920 10,752 at disposition..................... (27,989) (210,224) (70,222) -- Addition due to discontinuation of European Operations................ 1,739 -- -- -- Net reduction pursuant to fresh-start reporting.......................... (626) -- -- -- Charge-offs.......................... (2,468) (8,924) (27,175) (17,219) Recoveries........................... 458 2,818 1,206 1,822 Provision for loan losses............ 3,722 13,338 1,991 16,549 Currency translation adjustment...... (4,084) 1,449 -- -- -------- -------- -------- ------- $264,498 $288,868 $118,275 $37,555 ======== ======== ======== =======
17 The table below sets forth the delinquency status of the Company's Non-Discounted Loans at the dates indicated. DELINQUENCY EXPERIENCE FOR NON-DISCOUNTED LOANS
DECEMBER 31, --------------------------------------------------------------------------------------------- 1999 1998 1997 1996 --------------------- --------------------- --------------------- --------------------- PERCENT OF PERCENT OF PERCENT OF PERCENT OF BALANCE PORTFOLIO BALANCE PORTFOLIO BALANCE PORTFOLIO BALANCE PORTFOLIO -------- ---------- -------- ---------- -------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) Period of Delinquency: 31-60 days...................... $ 3,583 0.7% $ 6,253 0.8% $ 56,751 10.9% $ 7,613 3.3% 61-90 days...................... 1,224 0.3 1,091 0.1 36,294 7.0 7,204 3.1 91 days or more(1)(2)........... 14,294 2.9 25,098 3.3 66,643 12.8 54,524 23.7 ------- ---- ------- ---- -------- ---- ------- ---- Total loans delinquent........ $19,101 3.9% $32,442 4.2% $159,688 30.7% $69,341 30.1% ======= ==== ======= ==== ======== ==== ======= ====
- ------------------------------ (1) All loans delinquent over 90 days were on nonaccrual status. (2) The Company classifies loans as discounted or non-discounted on a pool basis. Each pool is designated as discounted or non-discounted based on whether the pool consists primarily of Discounted or Non-Discounted Loans at the time of acquisition. For example, a pool of Non-Discounted Loans may contain non-performing loans at the time of acquisition as long as the non-performing loans were not the primary component of the pool at the time. As a result, the Company does not believe that the information is a meaningful indicator of the delinquency experience on its non-discounted loans. ITEM 2. PROPERTIES The Company's corporate headquarters and loan servicing operations are located in Portland, Oregon, where the Company leases approximately 43,000 square feet of office space from Watumull Properties Corp. pursuant to lease agreements expiring December 31, 2001 and September 29, 2002. The Company also leases office space in London, England, Dublin, Ireland and Paris, France (although, as discussed earlier, the Company expects to substantially complete the wind-down of its European operations by the second quarter of 2000). First Bank leases its branch office in Beverly Hills, California, office space for its wholesale lending unit in Woodland Hills, California, and office space for its merchant bankcard operations in Calabasas, California pursuant to leases expiring February 29, 2000, February 1, 2004, and August 31, 2004, respectively. In addition, GEMB has commercial brokerage offices in San Diego, Santa Barbara and Newport Beach and its administrative office in Los Angeles, California. The Company believes its facilities are suitable and adequate for its current business purposes and for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS The Company and its directors are currently defendants to a lawsuit brought on behalf of each of Andrew A. Wiederhorn, the Company's former Chief Executive Officer, and Lawrence A. Mendelsohn, the Company's former President. On August 19, 1999, the Board of Directors of the Company notified each of Messrs. Wiederhorn and Mendelsohn of the Company's intention to terminate his employment for "cause" pursuant to his employment agreement with the Company. The Company suspended the employment of each of Messrs. Wiederhorn and Mendelsohn that same day. On September 2, 1999, the Company terminated the employment of each of them for cause. Mr. Wiederhorn and Mr. Mendelsohn have brought suit alleging, inter alia, that they were wrongfully terminated and defamed by the Company's and the directors' actions. The Company has filed its response denying the allegations and has filed counterclaims against Messrs. Wiederhorn and Mendelsohn. The Company is also currently a party to a lawsuit with WREI. In August 1999, WREI filed suit against the Company alleging that the aforementioned suspensions of Mr. Wiederhorn and 18 Mr. Mendelsohn caused a facilities sharing agreement between the Company and WREI to come into effect, thereby suspending WREI's obligations under a management agreement between WREI and Wilshire Realty Services Corporation ("WRSC"), a subsidiary of the Company (Messrs. Wiederhorn and Mendelsohn were simultaneously serving as the senior executive officers of WREI). WREI's motion for preliminary injunctive relief to prevent the Company from ousting Messrs. Wiederhorn and Mendelsohn from the Company's headquarters facilities and for other relief was denied in a written ruling. WREI thereafter amended its complaint to assert that, as a result of the termination of Messrs. Wiederhorn and Mendelsohn, (i) the Company had breached the management agreement with WREI (which permitted WREI to terminate that agreement) and (ii) the facilities sharing agreement between the Company and WREI had been triggered, requiring WREI to pay the Company only for the cost of the management provided by the Company's employees (and no further fees would be payable under the management agreement). The Company has counterclaimed, alleging that (i) WREI has failed to pay management fees owed to the Company under the management agreement, (ii) WREI is not entitled to terminate the management agreement until April 6, 2000 (because WRSC had not breached the agreement) and any purported termination of that agreement by WREI entitles the Company to a termination fee in excess of $3 million, and (iii) the facilities sharing agreement is inapplicable and/or invalid. The Company will continue to vigorously contest the claims made by Messrs. Wiederhorn and Mendelsohn and WREI and assert its counterclaims against the same. Management, after consulting legal counsel, believes that the Company will likely substantially prevail on its claims and its defenses. As described above in Item 1, the Company filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. On April 12, 1999, the Plan was approved by the bankruptcy court. On June 10, 1999, the Plan became effective, the Company emerged from bankruptcy and a new Board of Directors was seated. The Company is involved in various other 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 On December 2, 1999, at the annual stockholders' meeting, the Company's shareholders elected the following seven (7) persons to the Board of Directors of the Company: Larry B. Faigin, Elizabeth F. Aaroe, Robert M. Deutschman, Peter S. Fishman, Stephen P. Glennon, Daniel A. Markee, and, subject to obtaining approval from the Office of Thrift Supervision ("OTS"), Edmund M. Kaufman. The shareholders also voted 11,309,599 to 3,737,225, with 10,608 abstentions, to approve the Company's 1999 Equity Participation Plan. PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Beginning July 7, 1999, the Company's new Common Stock, par value $.01 per share (the "Common Stock") was trading over-the-counter under the symbol "WFSG." Prior to July 7, 1999, there was no market for the Company's new Common Stock. The approximate number of record holders of the Company's Common Stock at March 6, 2000 was 1,412. The following table sets forth the range of high and low sales for common stock for the periods indicated:
PERIOD HIGH LOW - ------ -------- -------- Year ended December 31, 1999: Third Quarter............................................. $3.50 $1.20 Fourth Quarter............................................ $1.81 $1.00
19 The Company has not paid any cash dividends on its Common Stock. It is the current intention of the Company's Board of Directors to retain earnings to finance the growth of the Company's business rather than to pay dividends. The Company's old common stock, par value $.01 per share was quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") under the symbol "WFSG." On February 3, 1999 NASDAQ halted trading in the Company's common stock and subsequently delisted the Company's common stock due to the Company's filing the Plan of Reorganization. The following table sets forth the range of high and low sales for the old common stock for the periods indicated. However, the results for 1998 are not comparable with those for 1999 due to the cancellation of the old common stock and subsequent issuance of the new Common Stock.
PERIOD HIGH LOW - ------ -------- -------- Year ended December 31, 1998: First Quarter............................................. $27.00 $20.00 Second Quarter............................................ $25.25 $19.81 Third Quarter............................................. $24.00 $ 6.25 Fourth Quarter............................................ $ 6.00 $ 0.53
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, 1999, 1998, 1997, and 1996 have been derived from the audited consolidated financial statements of the Company. The 1999 income statement and operating data includes the five-month period ended May 31, 1999 prior to reorganization ("Predecessor Company") and the seven-month period ended December 31, 1999 following reorganization ("Reorganized Company"). WFSG was incorporated in 1996 to be the holding company for Wilshire Acquisitions Corporation ("WAC"). WFSG formed certain nonbank subsidiaries, including WFC, and completed an initial public offering of common stock and Notes in the fourth quarter of 1996. The consolidated financial statements for 1996 include the accounts of WAC and First Bank for periods prior to the formation of WFSG. 20
YEAR ENDED DECEMBER 31 -------------------------------------------------- 1999 1998 1997 1996 ---------- ----------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Total interest income............................... $ 65,737 $ 140,516 $110,057 $48,422 Total interest expense.............................. 44,395 125,458 86,836 29,277 -------- --------- -------- ------- Net interest income............................... 21,342 15,058 23,221 19,145 Provision for loan losses(1)........................ 3,722 13,338 1,991 16,549 -------- --------- -------- ------- Net interest income after provision for estimated loan losses..................................... 17,620 1,720 21,230 2,596 Other Income (loss): Market valuation losses and impairments........... (10,837) (113,711) -- -- Write-down of mortgage servicing rights........... -- (13,704) -- -- Gain on sale of loans............................. 1,494 19,240 39,049 11,538 Gain on sale of securities........................ 423 4,024 3,742 -- Trading account gain, net......................... -- 1,630 2,330 1,833 Servicing revenue................................. 8,105 6,497 5,580 -- Loan fees and charges............................. 6,192 4,210 825 1,747 Real estate owned, net............................ 3,814 5,508 6,309 556 Bankcard income, net.............................. 4,141 4,908 1,995 1,666 Discontinuation of European operations............ (2,365) -- -- -- Other income (loss), net.......................... 5,366 (12,755) 1,473 602 -------- --------- -------- ------- Total other income (loss)..................... 16,333 (94,153) 61,303 17,942 -------- --------- -------- ------- Other Expenses: Compensation and employee benefits................ 29,298 36,787 14,404 4,464 Loan service fees and expenses.................... 9,365 39,277 28,126 5,176 Professional services............................. 6,413 9,306 3,171 700 Occupancy......................................... 2,682 2,461 1,125 339 FDIC insurance premiums........................... 812 896 1,049 2,381 Corporate travel and development.................. 2,622 6,851 3,439 519 Depreciation and amortization..................... 2,551 3,995 495 164 Other general and administrative expenses......... 9,223 13,709 4,923 1,703 -------- --------- -------- ------- Total other expenses.......................... 62,966 113,282 56,732 15,446 -------- --------- -------- ------- (Loss) income before reorganization items, income tax provision (benefit) and extraordinary item.... (29,013) (205,715) 25,801 5,092 Reorganization items................................ (52,034) -- -- -- -------- --------- -------- ------- (Loss) income before income tax provision (benefit) and extraordinary item............................ (81,047) (205,715) 25,801 5,092 Income tax provision (benefit)...................... 1,312 (4,056) 10,637 125 -------- --------- -------- ------- (Loss) income before extraordinary item............. (82,359) (201,659) 15,164 4,967 Extraordinary item, net of tax...................... 225,606 -- -- -- -------- --------- -------- ------- Net income (loss)................................... $143,247 $(201,659) $ 15,164 $ 4,967 ======== ========= ======== ======= Basic (loss) income per share(2).................... N/A $ (18.93) $ 1.79 $ 1.07
21
DECEMBER 31, -------------------------------------------- 1999 1998 1997 1996 -------- --------- ---------- -------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents......................... $ 54,168 $ 23,468 $ 66,115 $152,298 Portfolio Assets:(3) Discounted Loans, net........................... 22,518 51,989 463,355 219,630 Non-Discounted Loans, net....................... 460,656 740,233 464,602 191,962 Mortgage-backed and other securities............ 59,728 134,005 362,347 84,964 Foreclosed real estate, net..................... 11,571 62,168 169,612 78,200 -------- --------- ---------- -------- Total portfolio assets...................... $554,473 $ 988,395 $1,459,916 $574,756 Total assets...................................... 654,518 1,084,253 1,629,027 753,849 Deposits.......................................... 419,285 510,430 362,598 501,614 FHLB advances..................................... 80,000 -- -- -- Short-term debt................................... 31,927 420,816 966,500 97,624 Notes payable..................................... -- 184,245 184,245 75,000 Stockholders' equity (deficit) (4)................ 78,333 (92,795) 99,122 61,022
YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 1996 -------- -------- -------- -------- FINANCIAL RATIOS AND OTHER DATA: Return on average assets(12)............................... 17.86% (11.85)% 1.22% 0.95% Return on average equity(13)............................... 1,172.46% (273.93)% 19.48% 13.68% Average interest yield on total loans(15).................. 5.97% 7.91% 9.68% 9.41% Net interest spread(5)(6).................................. 0.38% 2.03% 3.07% 0.17% Net interest margin(6)(7).................................. 2.07% 0.86% 2.03% 3.63% Ratio of earnings to fixed charges(8): Including interest on deposits........................... 0.35 -- 1.30 1.17 Excluding interest on deposits........................... -- -- 1.42 2.19 Long-term debt to total capitalization(9).................. 0.52 2.01 0.65 0.55 Total financial liabilities to equity...................... 7.36 N/A 15.43 11.35 Average equity to average assets(14)....................... 1.52% 4.33% 6.25% 6.90% Non-performing loans to loans at end of period(10)(11)..... 2.95% 3.27% 12.83% 23.69% Allowance for loan losses to total loans at end of period................................................... 5.74% 4.53% 5.98% 13.88%
YEAR ENDED DECEMBER 31, -------------------------------------------- 1999 1998 1997 1996 -------- ---------- --------- -------- (DOLLARS IN THOUSANDS) OPERATING DATA: Investments and originations: Discounted Loans and foreclosed real estate...... $ 808 $ 179,105 $ 584,014 $324,159 Non-Discounted Loans(10)......................... 167,045 907,328 673,234 254,517 Mortgage originations............................ 32,317 811,769 77,918 2,280 Mortgage-backed and other securities............. 792 133,092 310,220 67,604 -------- ---------- --------- -------- Total........................................ 200,962 2,031,294 1,645,386 648,560 Repayments......................................... (163,666) (327,785) (196,646) (66,160) Loan sales and securitizations..................... (354,634) (1,535,501) (486,109) (301,411) Net change in portfolio assets..................... (433,922) (471,521) 885,160 250,349
22 - ------------------------ (1) Approximately $4.8 million of the 1996 provision related to the loans inherited by the Company upon the acquisition of the Savings Banks. (2) Earnings per share amounts are based on weighted average number of shares outstanding of WFSG during the applicable periods. For the period prior to the formation of WFSG, WAC shares outstanding were converted to their WFSG equivalent. For 1999, earnings per share for the full year is not applicable, as the company had a different issuance of common stock for the five-month period ended May 31, 1999 (prior to the reorganization) than for the seven-month period ended December 31, 1999 (subsequent to the reorganization). See Item 14(a)--Financial Statements for earnings per share amounts for the Predecessor Company for the five months ended May 31, 1999 and for the Reorganized Company for the seven months ended December 31, 1999. (3) During 1998 the Company sold to WREI (i) $44.1 million of loans, (ii) MBS Investments for approximately $127.2 million, and (iii) International Investments in the United Kingdom for approximately $3.3 million. (4) Effective January 1, 1996, $11.0 million of Common Stock was issued in exchange for subordinated debt. Prior to the Company's initial public offering, an additional $17.8 million of common stock was issued for cash. In December 1996, the Company completed its initial public offering, which resulted in $20.9 million of new capital. Effective July 31, 1997, the Company issued to the former Wilshire private companies (CWH) 27,500 shares of PIK Preferred Stock having an aggregate liquidation value of $27.5 million in exchange for the cancellation of certain accounts payable to these Wilshire private companies aggregating approximately $27.1 million and cash in the amount of approximately $400,000, resulting in an increase in stockholders' equity of approximately $27.5 million. During 1998, the Company sold 3,500,000 shares of common stock for net proceeds of approximately $61.8 million. A portion of the proceeds was used to redeem the 27,500 outstanding shares of preferred stock. (5) Net interest spread represents average yield on interest-earning assets minus average rate paid on interest-bearing liabilities. (6) The reduction in net interest margin and net interest spread in the year ended December 31, 1997 primarily reflects the significant increase in the Company's holdings of Discounted Loans. The acquisition of a pool of Discounted Loans tends to reduce net interest margin and net interest spread, because the interest cost of the debt used to fund the acquisition is not offset by a corresponding increase in interest income. Relatively little cash flow from a pool of Discounted Loans is generally received during the six to nine months following the acquisition of a pool of Discounted Loans and the Company only recognizes interest and discount on Discounted Loans when those loans result in the receipt of cash. In addition, a significant portion of the income associated with Discounted Loans generally results from gains on sales of foreclosed real estate, which are not reflected in interest income. The reduction also reflected a full year of interest expense on the $84.2 million of Notes and part of the third quarter and all of the fourth quarter of interest expense on approximately $100.0 million of Series A Notes, the proceeds of which were held for part of such periods in a lower-yielding liquid investment prior to their use by the Company to fund acquisitions. (7) Net interest margin represents net interest income divided by total average interest-earning assets. The increase in interest margin in 1999 was primarily due to the cancellation of the Company's $184.2 million, 13% Notes payable as part of its restructuring. As a result, the Company's interest expense on the Notes decreased by approximately $21.3 million during 1999, significantly increasing net interest income as a percentage of interest-earning assets. (8) The ratios of earnings to fixed charges were computed by dividing (x) income from continuing operations before income taxes, extraordinary gains and cumulative effect of a change in accounting principle plus fixed charges by (y) fixed charges. Fixed charges represent total interest expense, 23 including and excluding interest on deposits, as applicable, as well as the interest component of rental expense. During 1999 and 1998, earnings were inadequate to cover fixed charges by $14.5 million and $80.3 million, respectively. (9) Total capitalization equals long-term debt plus equity. (10) Non-performing loans include all non-discounted loans that have been placed on non-accrual status by the Company. Non-discounted loans are placed on non-accrual status when they became past due more than 90 days or sooner when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. (11) Discounted loans are not included in non-performing loans. (12) Excluding the extraordinary gain on extinguishment of debt and non-recurring costs incurred in connection with the reorganization, the Company's return on average assets for 1999 was (3.78)%. (13) The results for 1999 reflect the Company's deficit balance in its equity for the first five months of 1999, which significantly reduced the average equity (denominator) for the year. For the seven-month period subsequent to the reorganization, the Company's annualized return on average equity was (27.85)%. (14) Average equity to average assets decreased substantially in 1999, as the Company had a deficit balance in its equity for the first five months of 1999, significantly reducing the average equity (numerator) for the year. For the seven-month period subsequent to the reorganization, the Company's average equity to average assets was 11.58%. (15) The decrease in yield for 1999 was due to the large proportion of Discounted Loans in the Company's portfolio. The average balance of Discounted Loans represents the gross unpaid principal balance before adjusting for allowances for loan losses, but interest on such loans is recognized only when cash is received. As a result, these loans have an adverse effect on the overall loan yield. 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF WILSHIRE FINANCIAL SERVICES GROUP INC. AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS FILING. REFERENCES IN THIS FILING TO "WILSHIRE FINANCIAL SERVICES GROUP INC.," "WFSG," THE "COMPANY," "WE," "OUR," AND "US" REFER TO WILSHIRE FINANCIAL SERVICES GROUP INC., OUR WHOLLY OWNED SUBSIDIARIES, AND WILSHIRE CREDIT CORPORATION ("WCC"), OUR MAJORITY-OWNED SUBSIDIARY, UNLESS THE CONTEXT INDICATES OTHERWISE. Wilshire Financial Services Group Inc. is a diversified financial services company. We conduct business in the U.S. and Europe, specializing in loan portfolio acquisition and servicing. We offer wholesale banking through our subsidiary, First Bank of Beverly Hills, F.S.B. ("First Bank"). First Bank is a federally chartered savings institution regulated by the Office of Thrift Supervision ("OTS") with one branch, a merchant bankcard processing center, and a lending center in Southern California. Administrative headquarters of WFSG are located in Portland, Oregon. OVERVIEW AND RESTRUCTURING OF WFSG In response to adverse market conditions in the second half of 1998 and the resulting effect on our operations, we focused our efforts during 1999 on stabilizing the assets remaining at our non-banking subsidiaries and restructuring WFSG through a voluntary prepackaged Chapter 11 bankruptcy filing. First Bank remained focused on the execution of its primary business plan as it was relatively unaffected by the severe market conditions which dramatically affected the Company's non-banking subsidiaries during the second half of 1998. In connection with the plan of reorganization (the "Plan"), we filed a voluntary petition for relief under Chapter 11 Bankruptcy Code in the Federal Bankruptcy Court in Wilmington, Delaware on March 3, 1999. On April 12, 1999, the Plan was approved by the bankruptcy court. On June 10, 1999, the Plan became effective, we emerged from bankruptcy and a new Board of Directors was seated. Upon the Plan becoming effective, we adopted fresh start reporting (as described in Note 2 to the consolidated financial statements), which had the effect of revaluing our assets and liabilities to fair value and eliminating the stockholders' deficit as of May 31, 1999. Wilshire Credit Corporation, now known as Capital Wilshire Holdings ("CWH"), a former affiliate of the Company, provided loan servicing to us prior to the reorganization. As part of the Plan, the loan servicing operations of CWH, and the assets and stock of a wholly-owned subsidiary of the Company, Wilshire Servicing Corporation, were transferred to WCC Inc. (renamed Wilshire Credit Corporation ("WCC")), a newly formed, majority-owned subsidiary. This transfer allows us to service our own assets and provide third-party servicing. We own 50.01% of WCC with the remaining 49.99% owned by an unaffiliated third party. In January 1999, the OTS issued a cease and desist order to WFSG, CWH and WAC that prohibits these entities from entering into a transaction, directly or indirectly, that would cause First Bank to violate or be in violation of transactions with affiliate regulations. The orders also require 30-day advance notification before adding, replacing, or terminating any member of First Bank's Board of Directors or senior executives. On June 3, 1999, the OTS issued a directive that indicates that it considers First Bank to be in "troubled condition." This directive places restrictions on First Bank's ability to engage in certain activities without first obtaining OTS approval, including, but not limited to: increasing asset size; making new loans, investments or capital expenditures; paying dividends or making other capital distributions; and hiring senior executive officers, directors or consultants. On September 2, 1999, the OTS completed a safety and soundness examination of First Bank. As a result of this examination, the OTS directive letter will remain in force until First Bank corrects items noted in the examination report, including developing and implementing an interest rate risk reduction plan; developing a more detailed business plan under various 25 interest rate scenarios; and improving controls in the Bankcard division. First Bank is cooperating with the OTS to have the "troubled institution" designation lifted and is working with the OTS to satisfy certain of its concerns, including addressing First Bank's asset and liability management process and current interest rate sensitivity position. During the year ended December 31, 1999, and continuing to the present, we remain committed to reducing corporate overhead where deemed appropriate by management. During the latter part of 1999, as discussed more fully below, we took steps which will reduce corporate overhead in our non-bank U.S. operations in excess of $9 million annually. We have made reductions in overhead related to our operations in Europe, and are in the process of selling and winding down the remaining assets and operations there. In addition, the Company has sold and is pursuing the additional sale of certain non-bank loans, mortgage-backed securities and other assets, with a view to reducing or eliminating related debt. During the fourth quarter of 1999 we reduced short-term repurchase agreement borrowings by $41.2 million through sales of loans, mortgage-backed securities and other assets. On October 11, 1999, pursuant to an agreement between the Company and WREI, six employees of the Company terminated their employment and entered into the employment of WREI. Those employees included several of the most highly compensated officers of the Company to whom the Company has no other financial obligations and from whom the Company has received releases. In addition, WREI has assumed all obligations with respect to a Connecticut facility utilized by one of its employees. The Company intends to focus on business growth opportunities at First Bank and WCC and utilize the holding company to supplement or further such efforts, where possible, as more fully discussed above (see Item 1-Business--Business Strategy). INTEREST INCOME A significant portion of our earnings comes from net interest income, which is the difference between the interest income received (plus accreted purchase discount) on its financial assets and the interest expense paid on its outstanding interest-bearing liabilities. Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities, the degree of mismatch in the maturity and repricing characteristics of its interest-earning assets and interest-bearing liabilities, the percentage of discounted loans included in the portfolio and the timing of receipt or accretion of purchase discount. In addition, net interest income reflects the full interest cost of funding the acquisition of discounted loans and foreclosed real estate but does not reflect any accretion of purchase discount on those assets until cash is collected (which generally occurs later in the life of a pool of discounted loans) and does not reflect any gain on sales of foreclosed real estate. The following table sets forth, for the periods indicated, information regarding the total amount of income from interest-earning assets and the resultant average yields, the interest expense associated with interest-bearing liabilities, expressed in dollars and rates, and the net interest spread and net interest margin. Information is based on monthly balances during the indicated periods. For 1999, the interest income and expense amounts represent the sum of those for the five months ended May 31, 1999 ("Predecessor Company") and for the seven months ended December 31, 1999 ("Reorganized Company"). 26 INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------- 1999 1998 ---------------------------------- ------------------------------------ AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE ---------- -------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) AVERAGE ASSETS: Mortgage-backed securities............... $ 98,007 $10,794 11.01% $ 256,298 $ 25,676 10.02% Loan portfolio net of unaccreted discounts/ unamortized premium(1)... 872,387 52,099 5.97 1,408,187 111,444 7.91 Investment securities and other.................... 58,760 2,844 4.84 80,062 3,396 4.24 ---------- ------- --------- ---------- ---------- ------ Total interest-earning assets............. 1,029,154 65,737 6.39 1,744,547 140,516 8.05 Non-interest earning cash..................... 8,487 -- -- 217 -- -- Allowance for loan losses................... (279,645) -- -- (291,060) -- -- Other assets............... 54,271 -- -- 247,599 -- -- ---------- ------- --------- ---------- ---------- ------ Total assets......... $ 812,267 $65,737 $1,701,303 $ 140,516 ========== ======= ========== ========== AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing deposits................. 466,187 $25,913 5.56% $ 434,572 $ 25,566 5.88% FHLB advances.............. 33,115 1,935 5.84 -- -- 479 Short-term borrowings...... 161,209 11,403 7.07 972,376 74,374 7.65 Other borrowings........... 77,840 5,144 6.61 184,245 25,518 13.85 ---------- ------- --------- ---------- ---------- ------ Total interest-bearing liabilities........ 738,351 44,395 6.01 1,591,193 125,458 7.88 Non-interest bearing deposits................. 12,108 -- -- 9,350 -- -- Other liabilities.......... 49,590 -- -- 27,144 -- -- ---------- ------- --------- ---------- ---------- ------ Total liabilities.... 800,049 44,395 1,627,687 125,458 1,168,047 86,836 Stockholders' equity....... 12,218 -- 73,616 -- ---------- ------- ---------- ---------- Total liabilities and stockholders' equity..... $ 812,267 $44,395 $1,701,303 $ 125,458 ========== ======= ========== ========== Net interest income........ $21,342 $ 15,058 Net interest spread(2)(3)............. 0.38% 0.17% Net interest margin(3)..... 2.07% 0.86% Ratio of average interest- earning assets to average interest-bearing liabilities.............. 139.39% 109.64% YEAR ENDED DECEMBER 31, ------------------------------------ 1997 ------------------------------------ AVERAGE AVERAGE BALANCE INTEREST YIELD/RATE ---------- ---------- ---------- (DOLLARS IN THOUSANDS) AVERAGE ASSETS: Mortgage-backed securities............... $ 196,218 $ 20,785 10.59% Loan portfolio net of unaccreted discounts/ unamortized premium(1)... 878,846 85,090 9.68 Investment securities and other.................... 67,804 4,182 6.17 ---------- ---------- ----- Total interest-earning assets............. 1,142,868 110,057 9.63 Non-interest earning cash..................... 2,416 -- -- Allowance for loan losses................... (75,939) -- -- Other assets............... 176,533 -- -- ---------- ---------- ----- Total assets......... $1,245,878 $ 110,057 ========== ========== AVERAGE LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing deposits................. $ 429,289 $ 25,687 5.98% FHLB advances.............. 27 5.67 Short-term borrowings...... 586,370 43,682 7.45 Other borrowings........... 125,912 17,440 13.85 ---------- ---------- ----- Total interest-bearing liabilities........ 1,142,050 86,836 7.60 Non-interest bearing deposits................. 6,004 -- -- Other liabilities.......... 19,993 -- -- ---------- ---------- ----- Total liabilities.... -- Stockholders' equity....... 77,831 -- -- ---------- ---------- Total liabilities and stockholders' equity..... $1,245,878 $ 86,836 ========== ========== Net interest income........ $ 23,221 Net interest spread(2)(3)............. 2.03% Net interest margin(3)..... 2.03% Ratio of average interest- earning assets to average interest-bearing liabilities.............. 100.1%
- ---------------------------------- (1) The average balances of the loan portfolio include Discounted Loans and non-performing loans, on which interest is recognized on a cash basis. (2) Net interest spread represents average yield on interest-earning assets minus average rate paid on interest-bearing liabilities. (3) Net interest margin represents net interest income divided by total average interest-earning assets. The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior rate), (ii) changes in rate (change in rate multiplied by prior volume) and (iii) total change in rate and volume. Changes attributable to both volume and rate have been allocated proportionately to the change due to volume and the change due to rate. 27 CHANGES IN NET INTEREST INCOME
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1999 V. 1998 1998 V. 1997 -------------------------------- -------------------------------- (DECREASE) INCREASE DUE TO (DECREASE) INCREASE DUE TO RATE VOLUME TOTAL RATE VOLUME TOTAL ---------- -------- -------- ---------- -------- -------- Interest-Earning Assets: Mortgage-backed securities.......... $ 2,853 $(17,735) $(14,882) $ (1,053) $ 5,944 $ 4,891 Loan portfolio...................... (23,267) (36,078) (59,345) (11,466) 37,820 26,354 Investment securities and other..... 623 (1,175) (552) (1,867) 1,081 (786) -------- -------- -------- -------- ------- ------- Total interest-earning assets... (19,791) (54,988) (74,779) (14,386) 44,845 30,459 Interest-Bearing Liabilities: Interest-bearing deposits........... (1,088) 1,435 347 (452) 331 (121) FHLB advances....................... -- 1,935 1,935 -- (27) (27) Short-term borrowings and other interest-bearing obligations...... (5,208) (57,763) (62,971) 1,198 29,494 30,692 Long-term debt...................... (9,681) (10,693) (20,374) -- 8,078 8,078 -------- -------- -------- -------- ------- ------- Total interest-bearing liabilities................... (15,977) (65,086) (81,063) 746 37,876 38,622 -------- -------- -------- -------- ------- ------- (Decrease) increase in net interest income.............................. $ (3,814) $10,098 $ 6,284 $(15,132) $ 6,969 $(8,163) ======== ======== ======== ======== ======= ======= YEAR ENDED DECEMBER 31, -------------------------------- 1997 V. 1996 -------------------------------- (DECREASE) INCREASE DUE TO RATE VOLUME TOTAL ---------- -------- -------- Interest-Earning Assets: Mortgage-backed securities.......... $2,136 $16,852 $18,988 Loan portfolio...................... 1,310 39,486 40,796 Investment securities and other..... (423) 2,274 1,851 ------ ------- ------- Total interest-earning assets... 3,023 58,612 61,635 Interest-Bearing Liabilities: Interest-bearing deposits........... 41 376 417 FHLB advances....................... (19) (113) (132) Short-term borrowings and other interest-bearing obligations...... 316 39,835 40,151 Long-term debt...................... -- 17,123 17,123 ------ ------- ------- Total interest-bearing liabilities................... 338 57,221 57,559 ------ ------- ------- (Decrease) increase in net interest income.............................. $2,685 $ 1,391 $ 4,076 ====== ======= =======
28 RESULTS OF OPERATIONS--SEVEN MONTHS ENDED DECEMBER 31, 1999 For financial reporting purposes, we accounted for the consummation of our restructuring effective May 31, 1999 (though the restructuring was completed on June 10, 1999). The following discussion relates to the operating results of the "Reorganized Company" for the seven-month period subsequent to our restructuring. See "Results of Operations-1999 Compared to 1998" below for discussion and comparison of full year results of operations. During the seven months following reorganization, we focused on: - addressing regulatory concerns and restrictions at FBBH; - reducing liquidity and other risks of the non-bank's assets and related short-term debt; - reviewing alternatives for European operations; and, - reducing corporate overhead. As discussed in Item 1--Business--Business Strategy, in September 1999 the Company instituted a new business strategy emphasizing its core strengths in its loan pool acquisition, loan pool servicing and banking operations. As discussed further elsewhere in this Form 10-K, First Bank has hired a new chief executive officer and other management, has addressed interest rate risk management, submitted its Year 2000 Business Plan for regulatory approval, and addressed certain other matters raised by the OTS. We believe significant progress has been made in this regard. Since restructuring, we have reduced our subordinated mortgage-backed securities portfolio from $60.0 million at May 31, 1999 to $10.4 million at December 31, 1999, and related short-term borrowings have been reduced from $62.5 million to $9.1 million for the same period. In addition, we have sold certain loans and other non-bank assets and reduced related short-term debt from $123.8 million at May 31, 1999 to $32.2 million at December 31, 1999. By reducing these short-term borrowings, we have significantly reduced the risk of future margin calls resulting from potential market volatility of these types of assets. After considering various strategic alternatives, we decided to discontinue our European operations, which have negatively impacted results of operations. In the fourth quarter, we provided $2.4 million to cover expected losses from separate sales of our French operations and remaining UK assets, both of which are expected to be completed in the second quarter of 2000. We have taken steps to significantly reduce expenses, including reductions in executive management and staff, elimination of the corporate jet and company automobiles, and various other costs totaling in excess of $9 million annually. We continue to pursue further reductions. Additional discussion and analysis of the various major components of operations for the seven months ended December 31, 1999 following restructuring appears below. NET LOSS Our net loss for the seven months ended December 31, 1999 was approximately $14.1 million, or $0.70 per share. The net loss is primarily attributable to other operating expenses of $31.6 million, partially offset by net interest income after provision for loan losses of $15.6 million and other income of $2.6 million. As discussed below, other income was reduced by market valuation losses and impairments of $10.8 million and provisions for the discontinuation of European operations of $2.4 million. NET INTEREST INCOME Our net interest income for the seven months ended December 31, 1999 was approximately $16.6 million, which consisted of interest income of $37.9 million, offset by interest expense of $21.3 million. Approximately $30.4 million, or 80%, of our interest income was derived from our portfolio of loans and 29 discounted loans, with $5.3 million, or 14%, from mortgage-backed and other securities. Our interest expense consisted of $14.7 million of interest on deposits at First Bank and $6.6 million of interest on short-term debt facilities. We no longer incur interest expense on our 13% Notes and 13% Series B Notes (the "Notes") payable, as the Notes were cancelled and converted to equity as part of our restructuring. PROVISIONS FOR LOSSES ON LOANS During the seven months ended December 31, 1999, we recognized approximately $2.3 million of provisions on discounted loans in our non-banking operations. This provision was partially offset by the reversal of approximately $1.2 million of provisions for loan losses previously taken at First Bank as reserves were deemed to be excessive based on current analysis, resulting from improved credit quality due to continued seasoning and performance of the portfolio. OTHER INCOME Our other income was approximately $2.6 million for the seven months ended December 31, 1999, consisting primarily of servicing revenue of $4.8 million, loan fees and charges of $4.5 million, income from real estate owned of $2.3 million, bankcard income, net, of $1.8 million, and other, net, of $3.6 million, partially offset by market valuation losses and impairments of $10.8 million and estimated losses on the discontinuation of our European operations of $2.4 million. The servicing revenue was derived from the loan servicing operations of WCC, a newly formed, majority-owned subsidiary. These operations were previously conducted by a former affiliate, CWH, but were transferred to WCC as part of our restructuring (see Note 1 to the consolidated financial statements). Loan fees and charges represent loan origination and late fees at First Bank, and ancillary charges and late fee income on loans serviced by WCC. During the seven months ended December 31, 1999, gross bankcard processing revenue was $10.7 million, of which $4.5 million was attributable to internet commerce, $5.1 million was from mail order transaction processing, and $1.1 million resulted from audiotext transactions. These bankcard revenues were offset by bankcard processing expenses of $8.9 million, which include a provision for bankcard losses of $1.2 million. Real estate owned, net, consisted primarily of gains on sales of property acquired in foreclosure or deed-in-lieu thereof. Other, net, includes primarily $1.1 million of management fees earned from WREI and other miscellaneous income. WREI notified the Company of its purported termination and non-renewal of the management agreement in September 1999, as discussed further in Note 16 to the consolidated financial statements. Total market valuation losses and impairments recorded in net loss for the year ended December 31, 1999 was approximately $10.8 million. Of this amount, $5.1 million relates to sales of mortgage-backed securities, $1.5 million relates to other than temporary impairment of mortgage-backed securities remaining in the portfolio, $0.4 million relates to real estate owned which was sold subsequent to year-end, $1.6 million relates to our investment in WREI which was sold in December 1999, $0.9 million relates to sales of other assets, and $1.3 million relates to equipment and other assets remaining at December 31, 1999. As discussed earlier, we have segregated, for financial statement reporting purposes, those costs expected to be incurred in connection with the discontinuation of our European operations. These costs include approximately $0.9 million of compensation and benefits, $0.7 million of loan loss provisions, and $0.8 million of various other costs. 30 OTHER EXPENSES Our other expenses totaled approximately $31.6 million for the seven months ended December 31, 1999. These expenses consisted primarily of compensation and employee benefits expenses of $17.5 million, other general and administrative expenses of approximately $4.7 million (consisting primarily of insurance, taxes and general corporate overhead), professional services of $3.7 million, corporate travel and development of $1.8 million and depreciation and amortization of $1.4 million. In the latter part of 1999, we implemented changes that will further reduce overhead at the corporate level, including a reduction in workforce, the termination of our corporate jet lease agreement, and the termination of several highly compensated executives. We anticipate that these cost-saving measures will result in savings in excess of $9 million annually. RESULTS OF OPERATIONS--1999 COMPARED TO 1998 In the following discussion, the amounts for the year ended December 31, 1999 represent the sum of the Predecessor Company's operations for the five months ended May 31, 1999 and the Reorganized Company's operations for the seven months ended December 31, 1999, as reported in the accompanying consolidated statements of operations. NET INCOME (LOSS) Our net income for the year ended December 31, 1999 was approximately $143.2 million, which included an extraordinary gain on the extinguishment of debt of $225.6 million (see Note 3--Extraordinary Item). Excluding the extraordinary gain, our net loss for the year ended December 31, 1999 was approximately $82.4 million, compared with a net loss of approximately $201.7 million for the year ended December 31, 1998. The smaller operating loss for the 1999 period is primarily attributable to an increase in other income of $110.5 million, a decrease in other expenses of $50.3 million, a decrease in provision for estimated losses on loans of $9.6 million, and an increase in net interest income of $6.3 million, partially offset by $52.0 million of costs related to our restructuring. NET INTEREST INCOME Our net interest income was approximately $21.3 million for the year ended December 31, 1999, compared with approximately $15.1 million for the year ended December 31, 1998. This increase was due to a decline in interest expense of $81.1 million, partially offset by a decline in interest income of $74.8 million, reflecting our reduction in the levels of loans and other interest-earning assets and paydown of the related short-term borrowing facilities and the reduction of interest expense on the Notes, as discussed further below. INTEREST INCOME. Our interest income was approximately $65.7 million for the year ended December 31, 1999, compared with approximately $140.5 million for the year ended December 31, 1998, a decrease of $74.8 million. Average interest-earning assets decreased from $1.7 billion for the year ended December 31, 1998 to $1.0 billion for the year ended December 31, 1999, resulting from the sale of certain loans and other assets to provide liquidity and repay certain short-term borrowing facilities. INTEREST EXPENSE. Our interest expense was approximately $44.4 million for the year ended December 31, 1999, compared with approximately $125.5 million for the year ended December 31, 1998, a decrease of $81.1 million. Average interest-bearing liabilities decreased from $1.6 billion for the year ended December 31, 1998 to $738 million for the year ended December 31, 1999, resulting primarily from the repayments of short-term borrowing facilities with proceeds from the asset sales described above. In addition, during the year ended December 31, 1999, we recognized interest on the Notes only through March 3, 1999, the date on which we filed our voluntary Chapter 11 petition. As a result, the amount of interest expense recognized on the Notes for the year ended December 31, 1999 was approximately 31 $4.2 million, compared with approximately $25.5 million for the year ended December 31, 1998. Upon the completion of our restructuring, the Notes were cancelled and converted to equity of WFSG. PROVISIONS FOR LOSSES ON LOANS Provision for losses on loans for the year ended December 31, 1999 was approximately $3.7 million, compared with approximately $13.3 million for the year ended December 31, 1998. The decrease results primarily from a reduction in provision taken on discounted loans in our non-banking operations. In addition, we reversed $1.25 million of provisions previously taken at First Bank, as reserves were deemed to be excessive based on current analysis, resulting from improved credit quality due to continued seasoning and performance of the portfolio. The higher provision for 1998 was due to the requirement for higher loan loss reserves resulting from the effects of increasing spreads and reduced market values. OTHER INCOME (LOSS) Our other income increased to approximately $16.3 million for the year ended December 31, 1999, compared with a loss of approximately $94.2 million for the year ended December 31, 1998. The components of our other income (loss) are reflected in the following table:
YEAR ENDED DECEMBER 31, ---------------------- 1999 1998 --------- ---------- (DOLLARS IN THOUSANDS) Other income (loss): Market valuation losses and impairments.............. $(10,837) $(113,711) Write-down of mortgage servicing rights.............. -- (13,704) Gain on sale of loans................................ 1,494 19,240 Gain on sale of securities........................... 423 4,024 Trading account gain, net............................ -- 1,630 Servicing revenue.................................... 8,105 6,497 Loan fees and charges................................ 6,192 4,210 Real estate owned, net............................... 3,814 5,508 Bankcard income, net................................. 4,141 4,908 Discontinuation of European Operations............... (2,365) -- Other income (loss), net............................. 5,366 (12,755) -------- --------- Total other income (loss)........................ $ 16,333 $ (94,153) ======== =========
The net increase in other income was primarily attributable to a $102.9 million decline in market valuation losses and impairments and the absence of write-downs of mortgage servicing rights in 1999, compared with such write-downs of $13.7 million for 1998. In addition, the increase resulted from an $18.1 million increase in other, net and a $2.0 million increase in loan fees and charges, partially offset by a $17.7 million decrease in gain on sale of loans and a $3.6 million decrease in gain on sale of securities. The components of other income are further described below. MARKET VALUATION LOSSES AND IMPAIRMENTS. Total market valuation losses and impairments recorded in net loss for the year ended December 31, 1999 was approximately $10.8 million. Of this amount, $5.1 million relates to sales of mortgage-backed securities, $1.5 million relates to other than temporary impairment of mortgage-backed securities remaining in the portfolio, $0.4 million relates to real estate owned which was sold subsequent to year-end, $1.6 million relates to our investment in WREI which was sold in December 1999, $0.9 million relates to sales of other assets, and $1.3 million relates to equipment and other assets remaining at December 31, 1999. The Company believes that the decline in the value of its mortgage-backed securities and other assets is other than temporary. 32 Total market valuation losses and impairments for the year ended December 31, 1998 was $113.7 million. Of this amount, $22.2 million related to sales of mortgage-backed securities, $9.2 million related to other than temporary impairment of unsold mortgage-backed securities, $36.6 million related to sales of loans held for sale, $30.4 million related to sales of loans held for sale and discounted loans and $15.3 million related to hedge losses previously deferred and classified in other assets in the statement of financial condition. WRITE-DOWN OF MORTGAGE SERVICING RIGHTS. During the year ended December 31, 1998, we wrote-down capitalized servicing rights by approximately $13.7 million. The write-down was the result of faster than expected prepayments on loans being serviced and revised estimates of future prepayments. No such write-downs were recorded in 1999. GAIN ON SALE OF LOANS. Gain on sale of loans decreased by approximately $17.7 million from the year ended December 31, 1998 to the year ended December 31, 1999. During the year ended December 31, 1998, we completed three securitizations of approximately $507.7 million aggregate unpaid principal balance and one whole loan sale of approximately $72.3 million unpaid principal balance. These sale transactions resulted in gains on sale of approximately $29.2 million. These gains were offset by net losses of approximately $10.0 million, primarily resulting from sale of loans originated through our retail and wholesale mortgage origination channels and recognition of the related hedge losses previously deferred in our consolidated statement of financial condition. There was substantially reduced sales activity in 1999, resulting in net gains of approximately $1.5 million. GAIN ON SALE OF SECURITIES. The gain on sale of securities of $0.4 million for the year ended December 31, 1999 resulted from sales of approximately $42.1 million in carrying value of securities for proceeds of approximately $42.5 million. During the year ended December 31, 1998, we sold primarily subordinate mortgage-backed securities with carrying values of approximately $95.0 million to WREI in conjunction with its initial public offering of common stock in April 1998, resulting in gains of approximately $0.7 million. Additionally, we sold, to unrelated parties, securities with carrying values of approximately $104.4 million, resulting in net gains of approximately $3.3 million. A substantial amount of these sales were made by us in the fourth quarter of 1998 to meet collateral calls and increase liquidity. SERVICING REVENUE. Servicing revenue for the year ended December 31, 1999 was $8.1 million, compared with $6.5 million for the year ended December 31, 1998, an increase of $1.6 million. The increase reflects the servicing activity of WCC, a newly formed, majority-owned subsidiary. Such operations were previously performed by a former affiliate, Capital Wilshire Holdings Inc. (CWH), which was formerly known as Wilshire Credit Corporation. Certain assets and liabilities of Wilshire Credit Corporation (including its name) were transferred to WCC effective June 10, 1999 as part of our reorganization (see Note 1 to the consolidated financial statements). LOAN FEES AND CHARGES. Loan fees and charges increased from approximately $4.2 million for the year ended December 31, 1998 to approximately $6.2 million for the year ended December 31, 1999. The increase primarily reflects ancillary charges and late fee income on loans serviced by WCC. Such operations were previously performed by CWH, but were transferred to WCC effective June 10, 1999 as part of our reorganization (see Note 1 to the consolidated financial statements). REAL ESTATE OWNED, NET. Real estate owned, net, decreased approximately $1.7 million from the year ended December 31, 1998 to the year ended December 31, 1999, primarily due to a decrease in gains on the sale of properties acquired through foreclosure or deed-in-lieu thereof, reflecting our decision to focus more on non-discounted loans. BANKCARD INCOME, NET. Bankcard income, net, was approximately $4.1 million for the year ended December 31, 1999, compared with $4.9 million for the year ended December 31, 1998. This decrease is primarily a result of providing for $1.8 million in loss reserves during 1999, with no such provisions in 1998. 33 During the year ended December 31, 1999, gross bankcard processing revenue was $17.1 million, of which $8.3 million was attributable to internet commerce and $2.2 million was attributable to audio text transactions. The remainder of approximately $6.6 million is primarily attributable to mail order transaction processing. The financial results of First Bank's bankcard processing operations for the years ended December 31, 1999 and 1998 were as follows:
YEAR ENDED DECEMBER 31, ------------------- 1999 1998 -------- -------- (DOLLARS IN THOUSANDS) Bankcard revenues......................................... $17,059 $13,801 Bankcard processing expenses.............................. (11,140) (8,893) Provision for losses...................................... (1,778) -- ------- ------- Income before other expenses.............................. 4,141 4,908 Other expenses............................................ (3,104) (2,521) ------- ------- Net....................................................... $ 1,037 $ 2,387 ======= =======
DISCONTINUATION OF EUROPEAN OPERATIONS. In 1999, management decided to discontinue our European loan acquisition and servicing operations, and has entered into negotiations to dispose of our European assets and liabilities. We have segregated, for financial statement reporting purposes, all costs expected to be incurred in connection with such disposal. These costs include approximately $0.9 million of compensation and benefits, $0.7 million of loan loss provisions, and $0.8 million of various other costs. After write downs, total assets of the European operations were $14.7 million at December 31, 1999, and are expected to be sold in the first half of 2000 at their approximate net carrying values. OTHER, NET. Other, net, increased by approximately $18.1 million from the year ended December 31, 1998 to the year December 31, 1999. The increase is primarily attributable to a loss of $12.4 million in 1998 related to a write-off of costs capitalized in connection with proposed acquisition activities (with no such write-off in 1999) and a $5.0 million increase in the income from our investment in WREI (income of $0.2 million for 1999 compared with a loss of $4.8 million for 1998), partially offset by a $0.6 million decrease in management fee income from WREI). As discussed in Notes 16 and 17 to the consolidated financial statements, in December 1999 we sold our investment in WREI stock. 34 OTHER EXPENSES Our other expenses totaled approximately $63.0 million for the year ended December 31, 1999, compared with approximately $113.3 million for the year ended December 31, 1998, a decrease of $50.3 million. This decrease was primarily due to decreases in loan service fees and expenses of $29.9 million, compensation and employee benefits of $7.5 million, other general and administrative expenses of $4.5 million, corporate travel and development of $4.2 million, and professional services of $2.9 million. LOAN SERVICE FEES AND EXPENSES. Loan service fees and expenses decreased from approximately $39.3 million for the year ended December 31, 1998 to approximately $9.4 million for the year ended December 31, 1999. The decrease is primarily due to the inclusion of WCC's operating results with WFSG in 1999 resulting from the restructuring (see Note 1 to the consolidated financial statements). This decrease was also due to a decline in the balance of loans from $792 million at December 31, 1998 to $483 million at December 31, 1999, as we sold a large portion of our loan portfolio to increase liquidity and reduce outstanding debt. COMPENSATION AND EMPLOYEE BENEFITS. Compensation and employee benefits totaled approximately $29.3 million for the year ended December 31, 1999, compared with approximately $36.8 million for the year ended December 31, 1998. The decrease was primarily due to the reduction of our workforce in the fourth quarter of 1998, the effects of which were realized during 1999. In addition, due to additional reductions in our workforce in the fourth quarter of 1999, we anticipate that compensation and employee benefits expenses will decline further in future periods. Our total employee head count declined from 403 at December 31, 1998 to 332 at December 31, 1999. OTHER GENERAL AND ADMINISTRATIVE EXPENSES. Other general and administrative expenses decreased from approximately $13.7 million for the year ended December 31, 1998 to approximately $9.2 million for the year ended December 31, 1999. The decrease was primarily due to a $1.2 million decrease in due diligence expense which reflected the decline in acquisition activity, a $0.8 million decrease in advertising, a $0.4 million decrease in taxes, and decreases in other miscellaneous expenses, reflecting our efforts to reduce corporate overhead. CORPORATE TRAVEL AND DEVELOPMENT. Corporate travel and development decreased from approximately $6.9 million for the year ended December 31, 1998 to approximately $2.6 million for the year ended December 31, 1999, primarily due to substantially reduced travel activity in 1999 as acquisition activity declined. Corporate travel and development expenses are expected to decline further in future periods due to the termination of the lease of our corporate jet, which had a minimum monthly charge of approximately $0.1 million. PROFESSIONAL SERVICES. Professional services decreased from approximately $9.3 million for the year ended December 31, 1998 to approximately $6.4 million for the year ended December 31, 1999. The decrease was primarily due to higher legal, accounting and consulting fees incurred in 1998 in connection with our plan of reorganization. In addition, approximately $0.6 million of professional service expenses for 1999 have been reclassed and are reflected as Reorganization Items in the consolidated statement of operations for the five months ended May 31, 1999. REORGANIZATION ITEMS During the year ended December 31, 1999, we incurred approximately $52.0 million of expenses related to the WFSG restructuring (see Note 1 to the consolidated financial statements). These expenses primarily consisted of net write-downs of the reported amounts of assets and liabilities of approximately $37.6 million, the write-off of unamortized debt issuance costs of $11.3 million, professional services of $0.6 million and costs related to the restructuring of our European operations of $2.5 million. There were no such reorganization items for the year ended December 31, 1998. The $52.0 million of reorganization 35 expenses, as well as $4.2 million of interest expense recognized during the period related to the Notes, will be non-recurring due to WFSG's reorganization. We recognized interest expense on the Notes only through March 3, 1999, the date WFSG filed its petition under Chapter 11 of the Bankruptcy Code. RESULTS OF OPERATIONS--1998 COMPARED TO 1997 NET LOSS Our net loss was approximately $201.7 million for 1998 compared with net income of approximately $15.2 million for 1997. The net loss for 1998 is primarily attributable to the substantial declines in the value of assets in which we invest and the forced sale of such assets due to collateral calls. The net loss for 1998 includes $113.7 million of market valuation losses and impairments recognized by us, write-down of mortgage servicing rights of $13.7 million and provision for estimated losses on loans of $13.3 million, as further explained below. NET INTEREST Our net interest income was approximately $15.1 million for 1998 compared with approximately $23.2 million for 1997, a decrease of 35.2%. Average interest-earning assets increased from $1.1 billion during the year ended December 31, 1997 to $1.7 billion during the year ended December 31, 1998. The increase in interest-earning assets is primarily attributable to acquisitions of loans and mortgage-backed securities which in part were funded from the Company's issuance of $100.0 million of 13% Series B Notes in August 1997 and its offering of 3,500,000 shares of common stock in February 1998. Interest-earning assets declined substantially in the fourth quarter due to asset sales. INTEREST INCOME. Our interest income was approximately $140.5 million for 1998 compared with approximately $110.1 million for 1997, an increase of 27.7%. The increase in our interest income was due primarily to an increase in our average interest earning assets from approximately $1.1 billion during the year ended December 31, 1997 to approximately $1.7 billion during the year ended December 31, 1998, partially offset by a decline in the average earnings rate from 9.63% in 1997 to 8.05% in 1998. This decline in the average rate resulted from proportionately higher investments in non-discounted loans and a lower overall interest rate environment in the United States. INTEREST EXPENSE. Our interest expense was approximately $125.5 million for 1998 compared with approximately $86.8 million for 1997, an increase of 44.5%. The increase in interest expense resulted from an increase in our average interest-bearing liabilities to approximately $1.6 billion during the year ended December 31, 1998 from approximately $1.1 billion during the year ended December 31, 1997 and includes the issuance of $100.0 million of our 13% Series B Notes in the third quarter of 1997. PROVISIONS FOR LOSSES ON LOANS Provision for losses on loans for 1998 was approximately $13.3 million. A provision of approximately $21.4 million was taken on Discounted Loans at our non-banking subsidiaries in the second half of 1998 as a result of increasing market yields on loans, which have decreased market values on many pools of loans (primarily Discounted Loans) in our portfolio. The provision for losses on loans for 1998 also includes additional reserves to the extent market values for pools of loans have been reduced below book value, offset by a negative provision at the Bank because the general valuation allowance exceeded an adequate level. This compares with a net provision for losses on loans for 1997 of approximately $2.0 million resulting from additional provision of approximately $4.5 million, which was partially offset by the reversal of $2.5 million of excess reserves on loans previously sold. 36 OTHER (LOSS) INCOME Our other loss was approximately $94.2 million for 1998 compared with income of approximately $61.3 million for 1997. The components of our other (loss) income are reflected in the following table:
YEAR ENDED DECEMBER 31, ---------------------- 1998 1997 ---------- --------- (DOLLARS IN THOUSANDS) Other (loss) income: Market valuation losses and impairments............. $(113,711) $ -- Write-down of mortgage servicing rights............. (13,704) -- Gain on sale of loans............................... 19,240 39,049 Gain on sale of securities.......................... 4,024 3,742 Trading account gain, net........................... 1,630 2,330 Servicing revenue................................... 6,497 5,580 Loan fees and charges............................... 4,210 825 Real estate owned, net.............................. 5,508 6,309 Bankcard income, net................................ 4,908 1,995 Other (loss) income, net............................ (12,755) 1,473 --------- ------- Total other (loss) income....................... $ (94,153) $61,303 ========= =======
The decrease in other income between the comparable periods was due primarily to market valuation losses and impairments of $113.7 million, a write-down of mortgage servicing rights of $13.7 million, a $19.8 million reduction in gain on sale of loans, and a $14.2 million decrease in other (loss) income, net. MARKET VALUATION LOSSES AND IMPAIRMENTS. The term "Market Valuation Losses and Impairments" as used herein refers to impairment losses recognized primarily on our subordinate mortgage-backed securities and loan portfolios, as a result of the international economic and financial marketplace turmoil during the third and early fourth quarters of 1998. As a result of these conditions and reductions in market values of these assets, lenders required additional collateral for their outstanding loans to us. In order to satisfy these requirements, we were forced to sell certain assets, resulting in significant losses. In addition, we also recognized write-downs in asset values, which have been deemed to be other than temporary in nature, related to mortgage-backed and other securities which, as of December 31, 1998, had not been sold. Total market valuation losses and impairments for the year ended December 31, 1998 were $113.7 million. Of this amount, $22.2 million relates to sales of non-agency subordinated mortgage-backed securities, $36.6 million relates to sales of loans, $9.2 million relates to other than temporary impairment of unsold mortgage-backed securities, $30.4 million relates to impairment of unsold loans held for sale and discounted loans and $15.3 million relates to hedge losses. The Company had hedged its asset portfolio's exposure to rising interest rates by short-selling U.S. Treasury securities. However, as spreads between U.S. Treasury Securities and the Company's portfolio assets widened, the hedge was largely ineffective. During the latter part of the fourth quarter of 1998, the marketplace for non-investment grade debt securities, including subordinated mortgage-backed securities stabilized. Yield spreads and prices for these securities appear to have slowed or stopped their deterioration in relation to investment grade investments. However, prices for such securities have not recovered to levels experienced prior to the financial market turmoil. This difference between our amortized cost of available-for-sale securities and current market values, which was $25.6 million at December 31, 1998, is included in "Accumulated Other Comprehensive Loss" in stockholders' equity. This amount, unlike "market valuation losses and impairments," represents a market value decline that management believes is temporary. 37 WRITE-DOWN OF MORTGAGE SERVICING RIGHTS. During the year ended December 31, 1998, we wrote-down capitalized servicing rights by approximately $13.7 million. The write-down is the result of faster than expected prepayments on loans being serviced and revised estimates of future prepayments and other factors. GAIN ON SALE OF LOANS. Gain on sale of loans decreased $19.8 million during the year ended December 31, 1998 as a result of lower than expected securitization activity by us during the year. As described under "General Market Conditions," beginning in August 1998, turmoil in the financial markets resulted in reduced demand for asset-backed securities and therefore, we were unable to complete all planned securitization transactions, resulting in lower than anticipated gain on sale of loans. During the year ended December 31, 1998, we completed three securitizations of approximately $507.7 million aggregate unpaid principal balance and one whole loan sale of approximately $72.3 million unpaid principal balance. These sale transactions resulted in gains on sale of approximately $29.2 million. These gains were offset by net losses of approximately $10.0 million, primarily resulting from sales of loans originated through our retail and wholesale mortgage origination channels and recognition of the related hedge losses previously deferred in our consolidated statement of financial condition. GAIN ON SALE OF SECURITIES. During the year ended December 31, 1998, we sold primarily subordinate mortgage-backed securities with carrying values of approximately $95.0 million to WREI in conjunction with their initial public offering of common stock in April 1998, resulting in gains of approximately $0.7 million. Additionally, we sold, to unrelated parties, securities with carrying values of approximately $104.4 million, resulting in net gains of approximately $3.3 million. A substantial amount of these sales were made by us in the fourth quarter of 1998 to meet collateral calls and increase liquidity. A portion of these securities were written-down through our recognition of permanent impairment, which is included in market valuation losses and impairments in our consolidated statement of operations. SERVICING REVENUE. Servicing revenue increased $0.9 million or 16.4% during 1998, primarily as a result of contracting for the servicing rights on loan portfolios owned by unaffiliated third parties (including securitizations) and arranging for such loans to be sub-serviced by a former affiliate, Wilshire Credit Corporation (now CWH), at a rate which is lower than the rate received by us. REAL ESTATE OWNED, NET. Income from real estate owned, net is primarily due to gains on the disposition of real estate acquired through foreclosure or deed in lieu thereof from our portfolio of Discounted Loans, including European assets. OTHER, NET. Other, net decreased $14.2 million during 1998. The net decrease is primarily attributable to a loss of approximately $12.4 million related to a write-off of costs capitalized in connection with proposed acquisition activities and a loss of $4.8 million resulting from our ownership of WREI, offset by $3.2 million of management fee income associated with our management of WREI. The Company accounted for its investment in WREI under the equity method of accounting. As stockholders' equity at WREI changed, the Company's investment in WREI changed in line with its proportionate ownership. OTHER EXPENSE Our other expense totaled approximately $113.3 million for 1998 compared to approximately $56.7 million for 1997, primarily attributable to an increase in loan service fees and expenses paid to affiliates which results from increases in our total loan portfolio and third party servicing (which was sub-serviced by CWH) and increased compensation and employee benefits and other general and administrative expenses resulting from the expansion of business operations and infrastructure necessary to accommodate growth. LOAN SERVICE FEES AND EXPENSES PAID TO AFFILIATE. The largest component of other expense in 1998 was loan service fees and expenses, which includes servicing fees paid to CWH and collection-related expenses 38 incurred directly by CWH and reimbursed by us. Loan service fees and expenses paid to affiliates were approximately $39.3 million (of which approximately $25.5 million represents collection related loan expenses) for 1998 compared to approximately $28.1 million for 1997, an increase of approximately $11.2 million, or 39.6%. The $11.2 million increase is primarily attributable to growth in the average balance of total loans during 1998 and collection related expenses incurred in the resolution of Discounted Loans. Discounted Loans tend to reduce, in the first months after acquisition, net interest margin and net interest spread, because the interest cost of debt (which is higher than for Non-Discounted Loans) is not offset by a corresponding increase in interest income. Relatively little cash flow from a pool of Discounted Loans is generally received in the first six to nine months following acquisition and we only recognize interest and discount on Discounted Loans in income when those loans result in the receipt of cash. We also experience a much higher level of collection related expenses associated with Discounted Loans, requiring a higher level of cash investment prior to resolution. Due to the capital-intensive nature of these investments and the related unpredictable earnings stream, we believe that a reduced investment in Discounted Loans will improve cash flow and provide more predictable earnings. COMPENSATION AND EMPLOYEE BENEFITS. Compensation and employee benefits were approximately $36.8 million for 1998, compared with approximately $14.4 million for 1997, an increase of 155.4%. The increase was primarily due to an increase in the average number of full-time equivalent employees during 1998, reflecting the expansion of business activities, particularly loan acquisition and origination activities, and European operations. In the fourth quarter of 1998, the Company reduced its workforce by approximately 33%, primarily resulting from the Company's elimination of its retail residential and manufactured housing origination activities and other general decreases in the Company's infrastructure in response to decreased acquisition and securitization activities during the fourth quarter at the non-banking subsidiaries. OTHER GENERAL AND ADMINISTRATIVE EXPENSES. Other general and administrative expenses increased from approximately $4.9 million for 1997 to approximately $13.7 million for 1998, an increase of 178.5%, due primarily to general corporate costs resulting from the expansion of business activities at the non-bank subsidiaries, particularly loan acquisition activities such as due diligence costs, European operations and origination activities. CHANGES IN FINANCIAL CONDITION The following discussion compares the balances of certain asset, liability and stockholders' equity (deficit) amounts of the Reorganized Company as of December 31, 1999 with those of the Predecessor Company as of December 31, 1998 as reported in the accompanying consolidated statements of financial condition. MORTGAGE-BACKED AND OTHER SECURITIES. For accounting purposes, our mortgage-backed and other securities are classified as available for sale or held to maturity. Our holdings of mortgage-backed securities available for sale decreased approximately $70.9 million during the year ended December 31, 1999. This decrease was primarily due to sales of approximately $42.1 million in carrying value of securities, reflecting the sale of all subordinate mortgage-backed securities where we are not also the servicer of the underlying assets, and reducing liquidity risk from potential margin calls on the related debt, as well as principal repayments of $15.4 million and write-downs to fair value of $8.4 million. Our holdings of mortgage-backed securities held to maturity decreased approximately $3.4 million during the year ended 39 December 31, 1999 primarily due to principal repayments. The following table sets forth our holdings of mortgage-backed and other securities as of December 31, 1999 and December 31, 1998:
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ (DOLLARS IN THOUSANDS) Available for sale: Mortgage-backed securities........................ $10,362 $ 66,829 Agency mortgage-backed securities................. 33,221 47,634 Held to maturity: U.S. Government and other securities.............. 5,979 5,962 Mortgage-backed securities........................ 10,166 13,580 ------- -------- Total investment securities................... $59,728 $134,005 ======= ========
LOANS, NET. Our portfolio of loans, net of discounts and allowances, decreased by approximately $18.0 million during the year ended December 31, 1999. This decrease is primarily attributable to sales of loans in the fourth quarter of 1999 at First Bank for proceeds of approximately $93.0 million, partially offset by First Bank's acquisition and origination activity during the year. The decrease in loans, net was net of a $3.5 million decrease in the allowance for loan losses, from $18.2 million at December 31, 1998 to $14.7 million at December 31, 1999. This decrease in the allowance for loan losses was primarily due to net charge-offs of approximately $2.0 million and the reversal of $1.25 million of excess reserves at First Bank, reflecting improved credit quality due to continued seasoning and performance of the portfolio. DISCOUNTED LOANS, NET. Our portfolio of Discounted Loans decreased by approximately $40.6 million during the year ended December 31, 1999. The decrease is primarily attributable to our sale of Discounted Loans to repay certain short-term borrowing facilities and provide liquidity. Discounted Loans require significant capital resources prior to resolution, which is generally six to nine months following acquisition. In September 1999, we reclassified an additional $9.7 million of discounted loans to loans held for sale. LOANS AND DISCOUNTED LOANS HELD FOR SALE, NET, AT LOWER OF COST OR MARKET. Loans held for sale, net, at lower of cost or market decreased by approximately $250.5 million during the year ended December 31, 1999 primarily as a result of the sale of loans to increase liquidity and reduce outstanding borrowings. These decreases were partially offset by the reclassification of $9.7 million of discounted loans to loans held for sale in September 1999. REAL ESTATE OWNED, NET. Real estate owned, net decreased by approximately $50.6 million during the year ended December 31, 1999. The decrease was primarily due to sales of properties for proceeds of approximately $55.1 million, partially offset by acquisitions of real estate through foreclosure or deed-in-lieu thereof from our portfolio of discounted loans. INVESTMENT IN WILSHIRE REAL ESTATE INVESTMENT INC. In December 1999, WFSG and WREI reached an agreement and exchanged certain assets whereby WFSG sold its interest in WREI stock to WREI (see Notes 15 and 16 to the consolidated financial statements). As a result, WFSG no longer had an investment in WREI as of December 31, 1999. SERVICER ADVANCES. Servicer advances increased by approximately $20.1 million during the year ended December 31, 1999. The increase was primarily due to the transfer of CWH's assets to WFSG as part of our restructuring (see Note 1 to the consolidated financial statements), as CWH had made reimbursable advances on loans owned by third parties. MORTGAGE SERVICING RIGHTS, NET. Mortgage servicing rights, net decreased by $1.8 million during the year ended December 31, 1999, primarily due to the write-off of previously capitalized or purchased 40 servicing rights due to faster than expected prepayments on loans being serviced and revised future estimates of prepayments. DEPOSITS. First Bank's deposits decreased by approximately $91.1 million during the year ended December 31, 1999. This decrease is a result of First Bank utilizing FHLB advances and short term repurchase agreements to fund loan acquisitions and provide liquidity. SHORT-TERM BORROWINGS. Short-term borrowings decreased by approximately $388.9 million during the year ended December 31, 1999, resulting primarily from our sales of loans held for sale and mortgage-backed securities and subsequent paydowns of the related debt facilities. NOTES PAYABLE. The Notes payable of $184.2 million at December 31, 1998 were cancelled in June 1999. Pursuant to our prepackaged Chapter 11 bankruptcy filing, these Notes were converted into equity of WFSG, as described more fully in Note 1 to the consolidated financial statements. ACCOUNTS PAYABLE AND OTHER LIABILITIES. WREI has prepaid certain servicing fees to WCC. These amounts are included in accounts payable and other liabilities as deferred revenue. The initial amount of the prepaid fees is in dispute between WREI and WCC with WCC contending that the initial amount is as low as $2.3 million and WREI contending the amount is $3.2 million. Without admission, the Company initially recorded the amount at $3.2 million and is carrying the prepaid fee at $3.0 million at December 31, 1999. CORPORATE RISK PROFILE Managing risk is an essential part of successfully operating a financial services company. The most prominent risk exposures are credit quality, interest rate sensitivity, and liquidity. Credit quality risk is the risk of not collecting interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of net interest income as the result of changes in interest rates. Rate movements can affect the repricing of assets and liabilities differently, as well as their market value. Liquidity risk is the possible inability to fund obligations to depositors, investors and borrowers. ASSET AND LIABILITY MANAGEMENT Asset and liability management analyzes the timing and magnitude of the repricing of assets and liabilities. It is our objective to attempt to control risks associated with interest rate movements. In general, management's strategy is to limit our exposure to earnings variations and variations in the value of assets and liabilities as interest rates change over time. Our asset and liability management strategy is formulated and monitored by the asset and liability committees for the Company and First Bank (the "Asset and Liability Committee") which meets regularly to review, among other things, the sensitivity of our assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, including those attributable to hedging transactions, purchase and securitization activity, and maturities of investments and borrowings. First Bank's Asset and Liability Committee coordinates with the Bank's Board of Directors and the Company's investment committees with respect to overall asset and liability composition. The Asset and Liability Committee is authorized to utilize a wide variety of off-balance sheet financial techniques to assist them in the management of interest rate risk. These techniques include interest rate swap agreements, pursuant to which the parties exchange the difference between fixed-rate and floating-rate interest payments on a specified principal amount (referred to as the "notional amount") for a specified period without the exchange of the underlying principal amount. Interest rate swap agreements are utilized to reduce our exposure caused by the narrowing of the interest spread between fixed rate loans held for investment and associated liabilities funding those loans caused by changes in market interest rates. First Bank had approximately $30.5 million notional principal amount in an interest rate swap agreement outstanding at December 31, 1999, which was designated as a hedge of certain fixed rate loans 41 in order to convert variable rate liabilities to fixed rate. This swap had the effect of decreasing our net interest income by approximately $0.3 million during the year ended December 31, 1999. At times, we have also hedged the interest rate exposure of fixed-rate or lagging-index loans or securities that are either held or available for sale. The Company creates a hedge which matches the principal amortization of such assets against the maturity of our liabilities generally by entering into short sales or forward sales of U.S. Treasury securities, Government securities, interest rate futures contracts or interest rate swap agreements. This results in market gains or losses on hedging instruments, in response to interest rate increases or decreases, respectively, which approximate the amount of corresponding market losses or gains, respectively, on assets being hedged. We evaluate the interest rate sensitivity of each pool of loans or securities in conjunction with the current interest rate environment and decide whether to hedge the interest rate exposure of a particular pool. We generally do not hedge the interest rate risk associated with holding non-lagging index adjustable-rate mortgages pending their sale or securitization due to the decreased significance of such risk. In general, when a pool of loans or securities are acquired, we will determine whether or not to hedge and, with respect to any sale or financing of any pool of loans through securitization, will determine whether or not to discontinue its duration-matched hedging activities with respect to the relevant loans. In addition, as required by OTS regulations, First Bank's Asset and Liability Committee also regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and the Net Portfolio Value ("NPV"), 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 NPV that is authorized by the board of directors of First Bank. The following table quantifies the potential changes in our net portfolio value at December 31, 1999, should interest rates go up or down (shocked) by 100 to 300 basis points, assuming the yield curves of the rate shocks will be parallel to each other. INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
NET PORTFOLIO VALUE ------------------------------ CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE - ------------------------------------------------------------ -------- -------- -------- (DOLLARS IN THOUSANDS) +300bp...................................................... $32,075 $(38,001) (54)% +200bp...................................................... 45,922 (24,154) (34) +100bp...................................................... 58,529 (11,547) (16) 0bp..................................................... 70,076 -- 0 - --100bp..................................................... 79,400 9,324 13 - --200bp..................................................... 85,243 15,167 22 - --300bp..................................................... 87,406 17,330 25
Management also believes that the assumptions (including prepayment assumptions) used by it to evaluate the vulnerability of our operations to changes in interest rates approximate actual experience and considers them reasonable; however, the interest rate sensitivity of our assets and liabilities and the estimated effects of changes in interest rates on our net interest income and NPV could vary substantially if different assumptions were used or actual experience differs from the historical experience on which they are based. First Bank sold approximately $95 million of fixed-rate residential loans in December, 1999 at a loss of approximately $2.3 million. The effects of this sale improved (reduced) First Bank's interest rate sensitivity and are included in the table above. First Bank expects to further reduce interest rate risk in 2000. The effect on First Bank's results of operations cannot be estimated at this time. 42 LIQUIDITY AND CAPITAL RESOURCES Liquidity is the measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund investments, purchase pools of loans, and for general business purposes. Our sources of cash flow include certificates of deposit, whole loan and mortgage-backed securities sales, net interest income and borrowings under warehouse and repurchase financing facilities (if available), lines of credit from commercial banks, and currently to a lesser extent, from securitizations, institutional investors and other lenders and public and private debt offerings. We also have borrowed from WREI. In addition, First Bank has available funding through FHLB advances. Our liquidity is actively managed on a daily basis and is reviewed periodically by our Board of Directors. This process is intended to ensure the maintenance of sufficient funds to meet the needs of the Company. The dramatic events in the financial markets in late 1998, which included a significant reduction in valuations of and liquidity for mortgage-backed securities, had a significant adverse impact on our liquidity and financial condition. Many of our lenders determined that the value of these assets had decreased and demanded cash or securities to continue lending, which reduced our cash position and eventually prompted asset sales at depressed prices to meet these demands and provide liquidity. While these asset sales have improved our liquidity position, the market for mortgage-backed securities, particularly subordinate mortgage-backed securities, remains depressed and the financial markets generally continue to be volatile. Further, certain of our lenders have expressed concern about continued lending to this industry given market conditions and to us given recent operating losses. It is not clear to what extent we can rely on short-term warehouse or repurchase agreements as a source of liquidity. At December 31, 1999, our cash balances totaled approximately $54.2 million; however, $48.4 million of the balance was held at First Bank and is not available for use by any Wilshire entity other than First Bank. Our restructuring, which was effective on June 10, 1999 and is described in Note 1 to the consolidated financial statements, significantly improved our financial position by reducing indebtedness, eliminating the ongoing interest cost associated with that indebtedness, and significantly increasing our equity account. Based on our current and expected asset size, capital levels, and organizational infrastructure, we believe there will be sufficient available cash to meet our needs. We intend aggressively to seek new capital and financing to permit us to more fully and more efficiently utilize our banking and loan servicing platforms. There can be no assurance, however, that we will be able to obtain new capital or will have sufficient cash flows. In addition, given current market conditions, we likely will not securitize loans as a source of liquidity. Sources of liquidity for First Bank include wholesale and brokered certificates of deposit, FHLB advances, and mortgage-backed securities repurchase borrowings. At December 31, 1999, First Bank had approximately $403.2 million of certificates of deposit. At December 31, 1999, scheduled maturities of certificates of deposit during the 12 months ending December 31, 2000 and thereafter amounted to approximately $358.8 million and approximately $44.4 million, respectively. Brokered and other wholesale deposits generally are more responsive to changes in interest rates than core deposits and, thus, are more likely to be withdrawn by the investor upon maturity as changes in interest rates and other factors are perceived by investors to make other investments more attractive. However, management of First Bank believes it can adjust the rates paid on certificates of deposit to retain deposits in changing interest rate environments and that brokered and other wholesale deposits can be both a relatively cost-effective and stable source of funds. In addition, First Bank management is currently increasing the amount of its FHLB advance borrowings as a percentage of its total borrowings and deposits and is exploring new ways to reduce its exposure to changes in interest rates, including efforts to develop core deposits and sales of fixed-rate loans with simultaneous purchase and origination of variable-rate loans. In November 1999 one of the Company's primary lenders provided a one-year committed repurchase agreement financing facility for all loans and mortgage-backed securities then outstanding under previous agreements with such lender, totaling $9.9 million and $8.8 million, respectively, at December 31, 1999. In 43 connection with completing this financing, the Company paid approximately $1.7 million of outstanding margin calls. Mortgage-backed securities which are subject to repurchase agreements, as well as loans and real estate which secure other indebtedness, periodically are revalued by the lender, and a decline in the value that is recognized by the lender (whether or not the lender recognized the full fair value of the security) may result in the lender requiring us to provide additional collateral to secure the indebtedness. Primarily as a result of asset sales, we have had adequate cash and cash equivalents to meet calls for additional collateral to repay a portion of the related indebtedness or to meet our other operating and financing requirements. In most instances, lenders under repurchase agreements secured by mortgage-backed securities have withheld principal and/or interest payments on such securities in order to reduce outstanding, unpaid margin calls. At December 31, 1999, there were no outstanding collateral calls, as determined by our lenders, net of withheld principal and interest payments. If we are unable to fund additional collateral requirements or to repay, renew or replace maturing indebtedness on terms reasonably satisfactory to us, we may be required to sell (on short notice) a portion of our assets, and could incur losses as a result. Furthermore, since, from time to time, there is extremely limited liquidity in the market for subordinate and residual interests in mortgage-related securities, there can be no assurance that we will be able to dispose of such securities promptly for fair value in such situations. In the first quarter of 2000, we have negotiated with a major commercial bank to obtain an $8 million line of credit, collateralized by servicer advance receivables and servicing rights. We expect this facility to be finalized in the second quarter of 2000, although there can be no assurance that we will finalize the facility. We are party to various off-balance sheet financial instruments in the normal course of business to manage our interest rate risk. We conduct business with a variety of financial institutions and other companies in the normal course of business, including counterparties to our off-balance sheet financial instruments. We are subject to potential financial loss if the counterparty is unable to complete an agreed upon transaction. We seek to limit counterparty risk through financial analysis and other monitoring procedures. Adequate credit facilities and other sources of funding are essential to the continuation of the Company's ability to purchase pools of loans and servicing rights. During the third and fourth quarters of 1998, financial markets were severely and negatively impacted by various factors which have resulted in reduced availability of liquidity and capital to specialty finance companies and other holders of non-investment grade assets and certain types of loans. This includes the ability to raise new equity capital and long-term debt, as well as the ability to securitize or finance certain types of loans. The Company's growth strategy is dependent on its ability to raise additional debt and/or equity financing and growth at First Bank and to find equity partners for purchases of loan pools and servicing rights by our servicing operation. To the extent that the current market environment persists, such growth will depend largely on the Company's ability to find and use equity partners for growth of our servicing operation portfolios and on growth at First Bank. Otherwise, such growth may be significantly curtailed or delayed. 44 First Bank is required under applicable federal regulations to maintain specified levels of "liquid" investments in qualifying types of U.S. Government, federal agency and other investments having maturities of five years or less. Current OTS regulations require that a savings association maintain liquid assets of not less than 4% of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less, of which short-term liquid assets must consist of not less that 1%. Monetary penalties may be imposed for failure to meet applicable liquidity requirements. First Bank has complied with these requirements. REGULATORY CAPITAL REQUIREMENTS Federally insured savings associations such as First Bank are required to maintain minimum levels of regulatory capital. Those standards generally are as stringent as the comparable capital requirements imposed on national banks. The OTS also is authorized to impose capital requirements in excess of these standards on a case-by-case basis. In connection with the 1998 examination, the OTS indicated that the capital level of First Bank exceeds the minimum requirement for "well capitalized" status under provisions of the Prompt Corrective Action Regulation. On June 3, 1999, the OTS issued a directive letter that indicates that it considers First Bank to be in "troubled condition." This directive places restrictions on First Bank's ability to engage in certain activities, including, but not limited to: increasing asset size; making new loans, investments or capital expenditures; paying dividends or making other capital distributions; and hiring senior executive officers, directors or consultants. On September 2, 1999, the OTS completed a safety and soundness examination of First Bank. As a result of this examination, the OTS directive letter will remain in force until First Bank corrects items noted in the examination report, including developing and implementing an interest rate risk reduction plan; developing a more detailed business plan under various interest rate scenarios; and improving controls in the Bankcard division. First Bank is cooperating with the OTS to have the "troubled institution" designation lifted. The following table sets forth the regulatory capital ratios of First Bank at December 31, 1999. REGULATORY CAPITAL RATIOS
TO BE CATEGORIZED AS "WELL AMOUNT REQUIRED CAPITALIZED" UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ------------------- ------------------- ------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Total Capital to Risk-Weighted Assets (Risk- Based Capital)............................ $58,746 15.3% $30,644 38.0% $38,305 310.0% Tier 1 Capital to Risk-Weighted Assets...... 54,766 14.3 Not Applicable 22,983 36.0% Core Capital to Tangible Assets............. 54,766 9.7 22,474 34.0% 28,092 35.0% Tangible Capital to Tangible Assets......... 54,766 9.7 8,428 31.5% Not Applicable
The distribution of First Bank's retained earnings is subject to regulatory approval and other restrictions. REGULATION On February 8, 1999, the OTS rescinded the Order under which the Bank had previously been operating. The Order had prohibited the Bank from: increasing total assets in excess of $750 million; purchasing any loans or real estate, without the approval of the OTS, until certain management, acquisition and servicing deficiencies identified by the OTS had been corrected; and purchasing any non-performing assets or foreclosed real estate until such time as the Bank was rate a composite "3" rating 45 according to the Uniform Financial Institutions Rating System. Management believes that the Bank was in material compliance with the various provisions of the Order for each period that it was in place. In January 1999, the OTS issued a cease and desist order to WFSG, CWH and WAC that prohibits these entities from entering into a transaction, directly or indirectly, that would cause First Bank to violate or be in violation of transactions with affiliate regulations. The orders also require 30-day advance notification before adding, replacing, or terminating any member of First Bank's Board of Directors or senior executives. On June 3, 1999, the OTS issued a directive letter that indicates that it considers First Bank to be in "troubled condition." This directive places restrictions on First Bank's ability to engage in certain activities, including, but not limited to: increasing asset size; making new loans, investments or capital expenditures; paying dividends or making other capital distributions; and hiring senior executive officers, directors or consultants. On September 2, 1999, the OTS completed a safety and soundness examination of First Bank. As a result of this examination, the OTS directive letter will remain in force until First Bank corrects items noted in the examination report, including developing and implementing an interest rate risk reduction plan; developing a more detailed business plan under various interest rate scenarios; and improving controls in the Bankcard division. First Bank is cooperating with the OTS to have the "troubled institution" designation lifted. OTHER-YEAR 2000 COMPLIANCE Many existing computer software programs and other technologically dependent systems use two digits to indicate the year in date fields and, as such, could fail or create erroneous results by or during the year 2000. We utilize a number of technologically dependent systems to operate, service mortgage loans and manage mortgage assets. WFSG, together with WCC (a subsidiary controlled by WFSG) and Wilshire Servicing Company U.K. Limited (a wholly-owned subsidiary of WFSG), who are our two Servicers, formed a committee to address Year 2000 issues ("the Committee") that reports directly to WFSG's Executive Committee. The Committee is headed by WFSG's Chief Information Officer and includes representatives from across departments within WFSG and our Servicers as well as our management. The Committee established and completed a project plan with respect to Year 2000 readiness. In the first phase of the project, the Committee conducted an inventory of all systems for WFSG and our Servicers, classifying each as either "critical" or "non-critical." For systems deemed "critical," the Committee developed detailed test plans and created separate Year 2000 test environments. After the testing phase, in which Year 2000 issues were identified, phases of resolution, re-testing, implementation and certification were completed. Wilshire began testing of all critical systems in 1997 and completed all necessary testing of such systems, including both systems supplied by outside vendors and internally developed systems, by the end of February 1999. In each case, issues which were identified were resolved. Changes which resulted from testing were coded, retested and implemented and moved into production. Following these phases, each department's executive management certified that their staff had tested critical code and deemed it adequate. In addition, for all critical systems supplied by outside vendors, the Committee obtained a written certification from the vendors that the applicable package is "Year 2000 compliant." With respect to non-critical systems supplied by outside vendors, the Committee consulted substantially all of the vendors' Internet sites and obtained copies of Year 2000 compliance certifications from those sites. All phases of the Committee's Year 2000 readiness project were completed by the end of April 1999. As a result, WFSG's management believes that the Company is Year 2000 compliant in all material respects. In addition to the information technology systems ("IT systems"), various "environmental systems" ("non-IT systems") used for the Company's business, including the telephone, elevator and security systems, incorporate technology that could be impaired by the year 2000 date change. The Committee has received written certification that each significant non-IT system is Year 2000 compliant. 46 The financial impact of becoming Year 2000 compliant has not been material to our financial condition or results of operations. Aside from limited hardware costs, our primary expense related to Year 2000 compliance is allocation of existing staff. The Committee estimates the total cost related to Year 2000 compliance to be approximately $0.5 million, substantially all of which had been incurred by December 31, 1998. In the opinion of management, these costs did not result in the postponement of other IT projects or other capital expenditures, nor did they affect our other spending or revenue patterns to any material extent. Our most likely worst case Year 2000 scenario would be one in which we are unable to perform necessary loan servicing activities. To the extent the loan servicing system is not Year 2000 compliant, the ability to service loans would be in jeopardy. This, in turn, would limit the collections of payments on mortgage loans, which would, further, hinder the Company's ability to meet its own debt service and other cash requirements. Although we did not consider it reasonably likely that the Year 2000 date change will cause such a scenario to occur, the Committee developed a contingency plan with procedures for manual loan servicing, for up to a week, should the loan servicing system cease to be operational. The loan servicing system was developed internally, and we believe that, in the event of an unexpected Year 2000 issue, the source of the issue could be isolated, and the issue could be rapidly corrected by our existing staff without significant cost. Accordingly, we do not believe that such a failure of the loan servicing system would result in any material loss of revenue or have any other material impact on the Company. As we transitioned into the year 2000, we did not experience any significant systems or other Year 2000-related problems. In addition, no Year 2000 problems have occurred subsequent to January 2000, and we do not believe that it is reasonably likely that any potential such problems will arise in the future. Furthermore, we are not aware of any third party relationships that may be adversely affected by any Year 2000 problems. Based on the results of the Committee's Year 2000 readiness project, and the absence of any Year 2000 problems to date or in the foreseeable future, we are confident that we have appropriately addressed the Year 2000 issues. Critical IT systems supplied by outside vendors have undergone testing not only by us, but by other customers of the vendors as well. Our loan servicing system is an internally developed system, and therefore, our information technology personnel are very familiar with the system and believe their efforts will have favorable results. ACCOUNTING MATTERS We classify loans as discounted or non-discounted on a pool basis. Each pool is designated as discounted or non-discounted based on whether that pool consists primarily of Discounted or Non-Discounted Loans at the time of acquisition. For example, a pool of Non-Discounted Loans may contain non-performing loans at the time of acquisition as long as the non-performing loans were not the primary component of the pool at that time. As used herein, the term "performing loan" means a loan as to which payments have been and are being made substantially in accordance with its contractual terms, the term "sub-performing loan" means a loan as to which payments are delinquent for 90 days or less or has a history of delinquencies, and the term "non-performing loan" means a loan as to which payments are generally 91 or more days delinquent. Discounted Loans are presented in the Consolidated Financial Statements net of unamortized discount and an allowance for loan losses established for those loans. For each pool of loans acquired by us, purchased discounts are allocated into (a) valuation allowances for estimated losses against face value on specific loans ("specific valuation allowances") and (b) portions of the discounts available for accretion to interest as yield adjustments. In addition, for Discounted Loans purchased by First Bank, the initial discounts are further segregated into a valuation allowance for the inherent risk of losses in the loan portfolio that have yet to be specifically identified ("general valuation allowance") as required by OTS 47 regulations. The allocated specific and general valuation allowances are included in the allowance for loan losses. Where appropriate, discounts are accreted into interest income generally on a cash basis. The acquisition of a pool of Discounted Loans tends to reduce net interest margin and net interest spread, because the interest cost of the debt used to fund the acquisition is not offset by a corresponding increase in interest income. Relatively little cash flow from a pool of Discounted Loans is generally received during the first six to nine months following an acquisition of a pool of Discounted Loans and the Company only recognizes interest and discount on Discounted Loans in income when those loans result in the receipt of cash. Non-Discounted Loans are presented in the Consolidated Financial Statements in substantially the same manner as Discounted Loans, except that interest income is recognized on an accrual basis. Gains or losses on loans sold through securitization transactions are based on the difference between the cash proceeds received from the sale of the senior classes of mortgage-backed securities to outside investors and our cost basis allocated to the senior classes of mortgage-backed securities. Our cost basis in loans sold is allocated between the senior classes of mortgage-backed securities and the subordinate classes of mortgage-backed securities retained by us based on the relative fair values of the two types of securities. The cost basis of the loans securitized is determined by their acquisition cost, adjusted for any discount accretion (for purchased loans) or net carrying value (for originated loans). We carry subordinate classes of mortgage-backed securities at fair value. As such, the carrying value of these securities is impacted by changes in market interest rates and prepayment and loss experiences of these and similar securities. In cases where we have financed the holding of subordinate classes with a lender under a repurchase agreement, the fair value used by us is based on the lender's determination of market value for purposes of potential margin calls in determining fair value. In other cases, we determine the fair value of the subordinate classes of mortgage-backed securities utilizing prepayment and credit loss assumptions it deems appropriate for each particular securitization. The range of values attributable to the factors used in determining fair value is broad. Accordingly, our estimate of fair value is subjective. For accounting purposes, our mortgage-backed and other securities are classified as "held to maturity" and "available for sale securities." Securities are classified as held to maturity when management believes we have the ability and the positive intent to hold the securities to maturity. Securities classified as held to maturity are carried on an historical cost basis, adjusted for the amortization of premiums and accretion of discounts using a method that approximates the interest method. Securities are classified as available for sale when we intend to hold the securities for an indefinite period of time, but not necessarily to maturity. Securities classified as available for sale are reported at their fair values. Unrealized holding gains and losses on securities available for sale are reported, net of tax, as a separate component of stockholders' equity. Realized gains and losses from the sales of available for sale securities are reported separately in the consolidated statements of operations and are calculated using the specific identification method. Real estate acquired in settlement of loans is originally recorded at fair value less estimated costs to sell. Loan balances in excess of the fair value of real estate acquired are charged against the allowance for loan losses at the date of acquisition. Allowances are recorded to provide for estimated declines in the fair value subsequent to the date of acquisition. Any subsequent operating expenses or income, as well as gains or losses on disposition of such properties, are charged to current operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK See Item 7--Asset and Liability Management--of Part II of this Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14 of Part IV of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 48 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth information about the executive officers and directors of the Company as of February 28, 2000. The business address of each executive officer and director is the address of the Company, 1776 SW Madison Street, Portland, OR 97205, and each executive officer and director is a United States Citizen, unless otherwise noted. DIRECTORS LARRY B. FAIGIN, age 56, was appointed to the Board of Directors in June 1999 and was elected Chairman in September 1999. In December 1999, Mr. Faigin was elected to a one-year term. Mr. Faigin is President and Chief Executive Officer of GreenPark Group, LLC, a company that specializes in acquiring environmentally-impacted land and remediating and improving the property for further development. Prior to joining that company, he was Chief Executive Officer of Home Capital Corporation, a subsidiary of HomeFed Bank. He also has served as a consultant to Chevron Corporation, and Chief Executive Officer and Director of Wood Bros. Homes, Inc. ELIZABETH F. AAROE, age 42, was appointed to the Board in June 1999 and, in December 1999, was elected to a one-year term. Ms. Aaroe is Principal of Fisher Consulting, LLC (FICO), a provider of specialized real estate advisory, management and disposition services. Ms. Aaroe and a consortium of advisors oversaw the management and dissolution of the real estate portfolio of Kentucky Central Life Insurance Company, one of the nation's largest life insurance company liquidations. Prior to 1993, Ms. Aaroe served in a variety of management positions, including Group Head at ABN-AMRO N.V.'s "bad bank" subsidiary. Ms Aaroe spent her early career in corporate, project and real estate finance with Citicorp. ROBERT M. DEUTSCHMAN, age 42, was appointed to the Board in June 1999 and, in December 1999, was elected to a one-year term. Mr. Deutschman is a Managing Director of Cappello Capital Corp., a financial service and advisory company which engages in merchant banking, venture capital and investment banking. Prior to joining Cappello, Mr. Deutschman was a managing Director of Saybrook Capital Corp. From 1991 until 1994, Mr. Deutschman was a Senior Vice President and Director of Principal Investments in the Public Finance Group of Houlihan Lokey Howard & Zukin. PETER S. FISHMAN, age 52, was appointed to the Board in September 1999, and in December 1999, was elected to a one-year term. Mr. Fishman has been a Vice President at Houlihan Lokey, Howard & Zukan, an investment banking firm, since January 2000. Previously, Mr. Fishman was a Director of Helix Capital services, a private merchant bank engaged in investing in and providing merger and acquisition advisory services to its clients. Prior to joining Helix, Mr. Fishman was a partner in law firms in Los Angeles and San Francisco, specializing in financial reorganizations and restructurings. Mr. Fishman's practice focused on the representation of underperforming and troubled companies, both public and private, and the representation of financial institutions and other lenders in structuring new financings and the workout of troubled credits. DANIEL A. MARKEE, age 42, was appointed to the Board in June 1999 and, in December 1999, was elected to a one-year term. Mr. Markee is a principal of LendSource, Inc., a firm specializing in the origination of first mortgage, home equity and consumer installment debt. From 1993 until 1997, Mr. Markee was involved in the real estate investment business as President of Ferterra, Inc., and as a principal of Euro-American Partners, Inc. EDMUND M. KAUFMAN, age 69, was appointed as Director in September 1999 and, in December 1999, was elected to a one-year term (Mr. Kaufman's formal service as a director will commmence upon the receipt of OTS approval). Mr. Kaufman has been a partner with the law firm of Irell & Manella LLP for the last thirty-six (36) years, specializing in mergers and acquisitions and corporate finance. Mr. Kaufman 49 has served as a director of United PanAm Financial Corp. since October 1997, a director of Structural Research & Analysis Corp. since 1990, and a director of the Los Angeles Opera since 1986. EXECUTIVE OFFICERS STEPHEN P. GLENNON, age 55, has been the Company's Chief Executive Officer since September 1999 and, in December 1999, was elected to a one-year term on the Board of Directors. From 1994 until joining the Company, Mr. Glennon served as Chief Executive Officer of Glennon Associates, a firm of private investment bankers specializing in financial restructuring and turnaround management of financial sector companies. Mr. Glennon previously served as an investment banker with Lehman Brothers, N.Y. and Lepercq de Neuflize & Co., N.Y. Mr. Glennon currently serves as a director of New Water Street Corporation, N.Y. and Point Clear Holdings, N.Y. RICHARD S. CUPP, age 59, has been Chief Executive Officer and President of First Bank since November 1999. From July 1997 to July 1999, Mr. Cupp was President and Chief Executive Officer of HF Bancorp, the parent of Hemet Federal Bank. From July 1993 to March 1997, Mr. Cupp was President and Chief Executive Officer of Ventura County National Bancorp. GLENN J. OHL, age 45, is Chief Financial Officer of the Company, and has served in various senior financial positions with the Company and its affiliates since October 1996. From August 1995 until October 1996, Mr. Ohl was the Senior Vice President and Corporate Treasurer of CWM Mortgage Holdings, Inc. (now known as IndyMac), an affiliate of Countrywide Credit Industries, Inc., a residential financing company. From September 1992 until August 1995, Mr. Ohl was the Executive Vice President and Chief Financial Officer of ARCS Mortgage, Inc., a financing company. MARK H. PETERMAN, age 52, has been Executive Vice President, Legal Counsel and Secretary of the Company since July 1998. Mr. Peterman was a partner in the law firm of Stoel Rives LLP between 1975 and July 1998. JENNIFER G. COOPERMAN, age 39, has been Senior Vice President, Corporate Finance since November 1999. Previously, Ms. Cooperman was Deputy Superintendent and Chief Operating Officer of the New York State Insurance Department from June 1997 until July 1999. From May 1996 to June 1997, Ms. Cooperman was the Director of Policy of the New York State Banking Department. From June 1993 to January 1995, Ms. Cooperman was Vice President, Mortgage Finance of Goldman Sachs & Co., a leading global investment banking and securities firm. GEOFFREY B. DAVIS, age 58, has been Senior Vice President, Administration since November 1999. From October 1997 to November 1999, Mr. Davis was Chief Information Officer of the Company. From 1970 to 1997, Mr. Davis held various senior management positions in information systems with Bank of America in Venezuela, Panama, Spain, Canada, Mexico and Brazil. OTHER OFFICERS BRADLEY B. NEWMAN, age 38, has been Vice President, Capital Markets/Securitization of Wilshire Funding Corporation since August 1998. From 1989 to 1998, Mr. Newman held various positions in the mortgage-backed securities area of Citicorp Securities, Inc., including Vice President/Senior ARMS Trader and Vice President/MBS Product Manager for Europe and the Middle East. JAY MEMMOTT, age 38, has been President of Wilshire Credit Corporation since November 1999, and has held other management positions with the Company since August 1997. From April 1990 to August 1997, Mr. Memmot was Vice President and Manager of Major Loan Administration at Coast Federal Bank. BRUCE WEINSTEIN, age 37, has been Senior Vice President and Chief Financial Officer of Wilshire Credit Corporation since November 1999. From March 1997 to November 1999, Mr. Weinstein was Vice 50 President, Finance of the Company. Previously, Mr. Weinstein held various financial positions in closely-held family businesses. RUSSELL T. CAMPBELL, age 36, has been Senior Vice President, Portfolio Manager of Wilshire Credit Corporation since April 1997. From 1992 to March 1997, Mr. Campbell was Chief Financial Officer at Oregon Business Media. LAURIE MAGEE, age 36, has been Senior Vice President, Default Management at Wilshire Credit Corporation since November 1999, and has served in other management positions at WCC since October 1996. From February 1995 to October 1996, Ms. Magee worked in Servicer Oversight at Credit Suisse First Boston/FGB Realty Advisors and Ontra, Inc. From 1993 to 1995, Ms. Magee was Manager of Residential REO at the J.E. Robert Company of New England. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires a company's directors and executive officers, and beneficial owners of more than 10% of the common stock of such company to file with the Securities and Exchange Commission initial reports of ownership and periodic reports of changes in ownership of the company's securities. To the knowledge of the Company, no director, officer, or beneficial owner of more than 10% of the Company's Common Stock has failed to timely furnish reports required of such person by Section 16(a) on Forms 3, 4 and 5. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS During 1999, as a result of the Company's restructuring, including emergence from bankruptcy and additional time requirements, each member of the Board of Directors who was not an officer or employee of the Company was paid in 1999 a monthly stipend of $4,167, a per-meeting fee of $1,000 for each Board of Directors' meeting attended in person and $500 for each meeting attended telephonically, and a $500 per-meeting fee for each committee meeting attended on days other than when Board of Directors' meetings were held. In addition, directors who served as chairs of a committee or of the Board received an additional yearly stipend of $5,000. Upon joining the Board, each non-employee director was also granted an initial option to purchase 30,000 shares of common stock at a price per share equal to the fair market value of the shares of common stock on the grant date. These options vest in thirds on each anniversary of the grant date. The directors also received options to purchase an additional 10,000 shares of common stock at a price per share equal to $1.0625, which options vest in thirds on each anniversary of December 2, 1999. Officers and employees of the Company who also serve as directors do not receive any retainer or additional fees for serving as a director. Director Elizabeth F. Aaroe was paid $15,000 in additional director fees during 1999 for additional Board-related duties. In 1999, Directors of the Company who also served as Directors of First Bank received from the Bank a monthly stipend of $1,250 and a per-meeting fee of $1,000 ($1,500 for the Chairman of First Bank) for each Board of Directors' meeting attended. In addition, the director who served as chair of the Loan Committee received a monthly stipend of $750, and other Loan Committee members received monthly stipends of $500. The chairmen of the ALCO, IAR and Audit Committees received monthly stipends of $250, and Committee members received per-meeting fees ranging from $300 to $500 for each meeting attended. Prior to the Company's restructuring, each member of the Board of Directors who was not an officer or employee of the Company was paid a per-meeting fee of $1,000 for each Board of Directors' meeting and a fee of $100 per hour for each committee meeting attended which was not held on a regularly scheduled meeting date. In addition, the chairmen of the various board committees received $10,000 per 51 month to sit as chairmen. Officers and employees of the Company who also serve as directors do not receive any retainer or additional fees for serving as a director. For the year 2000, directors' fees have been reduced. Effective March 1, 2000, each member of the Board of Directors who is not an officer or employee of the Company is paid a monthly stipend of $2,083, a per-meeting fee of $1,000 for each Board of Directors' meeting attended in person and $500 for each meeting attended telephonically, and a $500 per-meeting fee for each committee meeting attended on days other than when Board of Directors' meetings are held. In addition, directors who serve as chair of the Audit Committee or of the Board receive an additional yearly stipend of $10,000, and the chairman of the Compensation Committee receives an additional yearly stipend of $5,000. Other members of the Audit Committee and Compensation Committee receive yearly stipends of $5,000 and $2,500, respectively. The Chairman of the Board of First Bank receives a yearly stipend of $10,000. Directors of WFSG who also serve as Directors of First Bank receive no additional yearly stipend. SUMMARY COMPENSATION TABLE The following table sets forth the total compensation paid or accrued by the Company for services rendered during the year ended December 31, 1999 to (i) the two persons who served as Chief Executive Officer of the Company during the year, (ii) each of the four other most highly compensated executive officers of the Company who were serving as executive officers at December 31, 1999, and (iii) an additional individual who would have been included in (ii) but for the fact that he was not serving as an executive officer at December 31, 1999.
ANNUAL COMPENSATION -------------------------------------------------------- OTHER ANNUAL NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) - --------------------------- -------- ---------- ---------- ---------------- Stephen P. Glennon............................. 1999 $ 89,349(1) $ -- -- Chief Executive Officer Andrew A. Wiederhorn........................... 1999 $163,781(2) $ -- $115,772(9) Chairman, Chief Executive Officer, Secretary 1998 $292,184 $1,546,027 -- and Treasurer 1997 $300,000 $ -- -- Mark H. Peterman............................... 1999 $253,242 $ 250,000 -- Executive Vice President, Legal Counsel and 1998 $ 98,495(3) $ 125,000 -- Secretary Phillip D. Vincent(4).......................... 1999 $226,731 $ 250,000 -- President and Chief Operating Officer 1998 $200,639 $ 100,000 -- 1997 $237,036 $ 20,833 -- Peter B. O'Kane(5)............................. 1999 $217,356 $ 100,000 -- Senior Vice President, Loan Acquisitions 1998 $150,945 $ 75,000 -- 1997 $150,000 $ 50,000 -- Scott McElroy(6)............................... 1999 $213,788 $ 100,000 -- Vice President and Risk Manager 1998 $150,405(7) $ 100,000 -- Lawrence A. Mendelsohn......................... 1999 $199,395(8) $ -- $100,862(10) President 1998 $295,967 $ 867,720 -- 1997 $300,000 $ -- --
- ------------------------ (1) Mr. Glennon was hired in September 1999. (2) Mr. Wiederhorn's employment was terminated in September 1999. 52 (3) Mr. Peterman was hired in July 1998. (4) Mr. Vincent resigned in January 2000. (5) Mr. O'Kane resigned in March 2000. (6) Mr. McElroy resigned in January 2000. (7) Mr. McElroy was hired in March 1998. (8) Mr. Mendelsohn's employment was terminated in September 1999. (9) Includes $76,496 for personal usage of the corporate jet. (10) Includes $72,021 for personal usage of the corporate jet. 53 OPTION/SAR GRANTS IN LAST FISCAL YEAR The following table provides information concerning stock options granted by the Company during the year ended December 31, 1999 to each of the Named Executive Officers.
% OF TOTAL POTENTIAL REALIZABLE OPTIONS/SARS VALUE AT ASSUMED NUMBER OF GRANTED TO ANNUAL RATES OF STOCK SECURITIES EMPLOYEES IN EXERCISE PRICE APPRECIATION FOR UNDERLYING YEAR ENDED OR BASE OPTION TERM(1) OPTIONS/SARS DECEMBER 31, PRICE EXPIRATION ----------------------- NAME GRANTED(#) 1999 ($/SH) DATE 5% 10% - ---- ------------ ------------ -------- ---------- ---------- ---------- Richard S. Cupp................ 200,000 -- $1.00 2009 $125,779 $318,748
- ------------------------ (1) These amounts represent hypothetical gains that could be achieved for the options if they are exercised at the end of their terms. The assumed 5% and 10% rates of stock price appreciation are mandated by rules of the Securities and Exchange Commission. They do not represent the Company's estimate or projection of future prices of the Common Stock. EMPLOYMENT AND OTHER ARRANGEMENTS The Company entered into substantially similar employment agreements, effective June 10, 1999, with Andrew A. Wiederhorn (as Chief Executive Officer) and Lawrence A. Mendelsohn (as President) (each individually, an "Executive" and collectively, the "Executives"). Each agreement provides for an initial one-year term. The 1999 agreements provide for an annual base salary of $33,333 for Mr. Wiederhorn and $166,667 for Mr. Mendelsohn, an annual minimum bonus of $150,000 each, a capital bonus based on equity capital obtained for the Company, an earnings bonus equal to 3% of after-tax earnings of the Company, and a discretionary bonus to be determined by the Board of Directors. The agreements also provide that upon certain dates Mr. Wiederhorn would receive stock options equal to 2% of the common stock of the Company and Mr. Mendelsohn would receive stock options equal to 1% of the common stock of the Company. The agreement also provides that during the employment term and thereafter, the Company will indemnify the Executive to the fullest extent permitted by law, in connection with any claim against the Executive as a result of the Executive serving as an officer or director of the Company or in any capacity at the request of the Company in or with regard to any other entity, employee benefit plan or enterprise. Following the Executive's termination of employment, the Company will continue to cover the Executive even if the Executive has ceased to serve in such capacity. The agreement may be terminated at any time by the Executive or the Company for Cause or for any other reason (as each capitalized term is defined in the agreement). If the agreement is terminated other than for Cause, all unvested stock options automatically vest. If the agreement is terminated due to a Triggering Termination or if the agreement is not renewed, the Company has agreed to pay Capital Consultants, Inc. in the case of termination of Mr. Wiederhorn, two-thirds of the then outstanding balance of a non-interest-bearing note in the amount of $2.2 million, payable over a five-year period commencing on June 8, 1999 (the "WFSG Promissory Note"), and in the case of Mr. Mendelsohn, one-third of the then outstanding balance of the WFSG Promissory Note. A Triggering Termination means termination without cause, termination due to death or disability, or termination by the Executive due to certain specified causes. Each agreement provides that the Executive will maintain the confidentiality of Proprietary Information. Each agreement provides that during the term of the agreement and for six months thereafter each executive will not solicit employees of the company for employment elsewhere. 54 On September 3, 1999 the employment of Messrs. Wiederhorn and Mendelsohn was terminated for Cause and is subject to litigation. See "Item 3--Legal Proceedings". On September 3, 1999 the Company hired Stephen Glennon to act as the Chief Executive Officer. Until April 1, 2000, Mr. Glennon's salary is $25,000 per month and in January 2000, Mr. Glennon was granted 400,000 stock options at a price of $1.0625 per share. One-third of the options vested on January 1, 2000, one-third of the options will vest on June 30, 2001 and one-third will vest on June 30, 2002. Commencing April 1, 2000 Mr. Glennon will receive a salary of $1 per year for two years, and will be reimbursed for certain rental and car expenses. Mr. Glennon also was granted 575,000 stock options (subject to shareholder approval) at a price of $1.1875 per share. Approximately 23,958 of the options vest each month of employment completed by Mr. Glennon. The options have acceleration provisions (subject to OTS approval) whereby, in the event of a change in control of the Company, the options would vest automatically and immediately become exercisable. On November 15, 1999 First Bank hired Richard S. Cupp as Chief Executive Officer and President for a two-year term. A signing bonus of $40,000 was paid to Mr. Cupp on January 3, 2000. Mr. Cupp's annual salary is $250,000 and Mr. Cupp was granted 200,000 stock options at a price of $1.00 per share. One-third of the options vested on January 1, 2000, one-third of the options will vest on June 30, 2001, and one-third will vest on June 30, 2002. The options have acceleration provisions (subject to OTS approval) whereby, in the event of a change in control of the Company, the options would vest automatically and immediately become exercisable. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee report below shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended (the "Securities Act") or under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), except to the extent the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under the Securities Act or Exchange Act. The Compensation Committee of the Board of Directors of the Company (the "Committee") is made up exclusively of non-employee directors. New members of the Committee were appointed on July 22, 1999. The Committee administers the executive compensation programs of the Company. All actions of the Committee pertaining to executive compensation are submitted to the Board of Directors for approval. The Company's executive compensation program is designed to attract, retain, and motivate high caliber executives and to focus the interests of the executives on objectives that enhance stockholder value. These goals are attained by emphasizing "pay for performance" by having a portion of the executive's compensation dependent upon business results and by providing equity interests in the Company. The principal elements of the Company's executive compensation program are base salary and stock options. In addition, the Company anticipates that it will recognize individual contributions as well as overall business results, using a discretionary bonus program. The Company has engaged an executive compensation consulting firm to assist it in designing an overall executive compensation and incentive bonus plan. BASE SALARY Base salaries for the Company's executives are intended to reflect the scope of each executives' responsibilities, the success of the Company, and contributions of each executive to that success. Executive salaries are adjusted gradually over time and only as necessary to meet this objective. Increases in base salary may be moderated by other considerations, such as geographic or market data, industry trends or internal fairness within the Company. BONUSES Annual discretionary bonuses were paid by the Company and the Savings Bank in 1999. The amount of the annual discretionary bonuses paid to executives by the Company was in most cases established by 55 retention letters that had been provided to the executives in May 1999 by prior management. Annual bonuses paid to other employees was based on salary levels for the employees. INCENTIVE STOCK OPTION PLAN At its annual shareholder meeting on December 2, 1999, the Company adopted a new Equity Participation Plan (the "Equity Participation Plan"). The purpose of the Equity Participation Plan is to enable the Company to attract, retain and motivate key employees, directors and, on occasion, consultants, by providing them with equity participation in the Company. Accordingly, the Equity Participation Plan permits the Company to grant incentive stock options ("ISOs"), non-statutory stock options ("NSOs"), restricted stock and stock appreciation rights (collectively "Awards") to employees, directors and consultants of the Company and subsidiaries of the Company. The Board of Directors has delegated administration of the Equity Participation Plan to the Committee. Under the Stock Plan, the Committee may grant ISOs and NSOs. The option exercise price of both ISOs and NSOs may not be less than the fair market value of the shares covered by the option on the date the option is granted. The Committee may also grant Awards of restricted shares of Common Stock. Each restricted stock Award would specify the number of shares of Common Stock to be issued to the recipient, the date of issuance, any consideration for such shares and the restrictions imposed on the shares (including the conditions of release or lapse of such restrictions). The Committee may also grant Awards of stock appreciation rights. A stock appreciation right entitles the holder to receive from the Company, in cash or Common Stock, at the time of exercise, the excess of the fair market value at the date of exercise of a share of Common Stock over a specified price fixed by the Committee in the Award, multiplied by the number of shares as to which the right is being exercised. The specified price fixed by the Committee will not be less than the fair market value of shares of Common Stock at the date the stock appreciation right was granted. In 1999, the Committee granted options for a total of 200,000 shares of Common Stock to an executive officer. In January 2000 the Committee granted options for 1,625,000 shares of Common Stock to other executive officers, and in February 2000, options for an additional 575,000 shares were granted to the Company's Chief Executive Officer in consideration of Mr. Glennon's agreement to a salary of $1 per year commencing April 1, 2000. COMPENSATION COMMITTEE Daniel A. Markee Robert M. Deutschman Elizabeth F. Aaroe Edmund M. Kaufman CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Edmund M. Kaufman, who has been appointed as a Director of the Company pending OTS approval, is a partner with the law firm of Irell & Manella LLP, one of the Company's counsel. In 1999, the Company paid approximately $484,000 in legal fees to Irell & Manella. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION On July 22, 1999, Andrew A. Wiederhorn, Lawrence A. Mendelsohn, Elizabeth F. Aaroe, Robert M. Deutschman and Daniel A. Markee were appointed to the Compensation Committee. Messrs. Wiederhorn and Mendelsohn were then serving as the Company's Chief Executive Officer and President, respectively. As previously discussed, Messrs. Wiederhorn and Mendelsohn were terminated from their positions as executive officers in September 1999, and subsequently resigned as directors of the Company and its subsidiaries. Edmund M. Kaufman was appointed to the Compensation Committee, subject to OTS approval, on September 30, 1999 to fill one of the resulting vacancies. 56 PERFORMANCE GRAPH The Performance Graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act or under the Exchange Act, except to the extent the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under the Securities Act or the Exchange Act. The following Performance Graph covers the period beginning July 7, 1999 when the Company's new Common Stock was first traded, through December 31, 1999. The graph compares the performance of the Company's Common Stock to the S&P 500 and a Financial Services Index ("FSI"). [Graph to come] 1999 MEASUREMENT PERIOD(1)(2)
JULY 7, DECEMBER 31, 1999 1999 -------- ------------ Company................................................ $100.00 $ 39.29 FSI(3)................................................. $100.00 $ 70.29 S&P 500................................................ $100.00 $105.26
- ------------------------ (1) Assumes all distributions to stockholders are reinvested on the payment dates. (2) Assumes $100 invested on July 7, 1999 in the Company's Common Stock, the S&P 500 Index and the FSI. (3) The companies included in the FSI through December 31, 1999 are Advanta Corporation, Amresco Inc., Countrywide Credit Industries Inc., Imperial Thrift and Loan Capital and Ocwen Financial Corporation. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows, as of March 6, 2000, the beneficial ownership of Common Stock with respect to (i) each person who was known by the Company to own beneficially more than 5% of the 57 outstanding shares of Common Stock, (ii) each director, (iii) each Named Executive Officer, and (iv) all directors and executive officers as a group.
NAME AND ADDRESS OF AMOUNT AND NATURE OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP (2) PERCENT OF CLASS - ------------------- ------------------------ ---------------- American Express Financial Advisors....................... 4,169,000 20.8 Wilshire Real Estate Investment Inc....................... 2,874,791 14.4 Capital Research and Management--Income Fund.............. 2,150,517 10.7 Capital Research and Management--Bond Fund................ 1,601,967 8.0 Lutheran Brotherhood Research Corp........................ 1,457,358 7.3 Stephen P. Glennon........................................ 157,291(3) * Richard S. Cupp........................................... 66,667(4) * Robert M. Deutschman...................................... 55,000 * Larry B. Faigin........................................... 50,000 * Edmund M. Kaufman......................................... 50,000(5) * Elizabeth F. Aaroe........................................ 10,000 * Glenn J. Ohl.............................................. 37 * Peter S. Fishman.......................................... -- -- Daniel A. Markee.......................................... -- -- Mark H. Peterman.......................................... -- -- Jennifer G. Cooperman..................................... -- -- Geoffrey B. Davis......................................... -- -- All directors and executive officers as a group (12 persons)................................................ 388,995(6) 1.9
- ------------------------ (1) The address for each stockholder is c/o Wilshire Financial Services Group Inc., 1776 S.W. Madison Street, Portland, OR 97205. (2) Amounts include stock options vesting within 60 days of March 6, 2000. (3) Includes 157,291 shares of Common Stock which may be acquired upon the exercise of options. (4) Includes 66,667 shares of Common Stock which may be acquired upon the exercise of options. (5) Mr. Kaufman was appointed as a Director but is awaiting seating pending OTS approval. (6) Includes 223,958 shares of Common Stock which may be acquired upon the exercise of options. *Less than 1%. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Item 12. Executive Compensation--Compensation Committee Interlocks and Insider Participation PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements See Index to Financial Statements immediately following Exhibit Index. (b) Reports on Form 8-K (i) Current report on Form 8-K, dated November 16, 1999 and (ii) Current report on Form 8-K, dated December 28, 1999. (c) Exhibits See Exhibit Index immediately following the signature page. 58 INDEX TO FINANCIAL STATEMENTS
PAGE -------- WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES Report of Independent Public Accountants.................... F-2 Consolidated Financial Statements: Consolidated Statements of Financial Condition December 31, 1999, May 31, 1999 (unaudited) and December 31, 1998.................................................... F-3 Consolidated Statements of Operations Seven months ended December 31, 1999, five months ended May 31, 1999, and years ended December 31, 1998 and 1997.................. F-4 Consolidated Statements of Cash Flows Seven months ended December 31, 1999, five months ended May 31, 1999, and years ended December 31, 1998 and 1997.................. F-5 Consolidated Statements of Stockholders' Equity (Deficit) Seven months ended December 31, 1999, five months ended May 31, 1999, and years ended December 31, 1998 and 1997.................................................... F-7 Notes to Consolidated Financial Statements................ F-8
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Wilshire Financial Services Group Inc. and Subsidiaries: We have audited the accompanying consolidated statements of financial condition of Wilshire Financial Services Group Inc. and Subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the seven months ended December 31, 1999 and the five months ended May 31, 1999, and for the years ended December 31, 1998 and 1997. 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. As discussed in the Note 1, effective June 10, 1999, the Company was reorganized under a plan confirmed by the United States Bankruptcy Court in Wilmington, Delaware. At May 31, 1999, the Company adopted a new basis of accounting whereby all remaining assets and liabilities were adjusted to their estimated fair values. Accordingly, the consolidated financial statements for periods subsequent to the reorganization are not comparable to the consolidated financial statements presented for prior periods. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Wilshire Financial Services Group Inc. and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the seven months ended December 31, 1999 and the five months ended May 31, 1999, and for the years ended December 31, 1998 and 1997 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Arthur Andersen LLP Portland, Oregon March 17, 2000 F-2 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
PREDECESSOR REORGANIZED COMPANY COMPANY -------------------------- ------------ MAY 31, DECEMBER 31, 1999 DECEMBER 31, 1999 (UNAUDITED) 1998 ------------ ----------- ------------ ASSETS Cash and cash equivalents................................. $ 54,168 $ 26,552 $ 23,468 Mortgage-backed securities available for sale, at fair value................................................... 43,583 99,647 114,463 Mortgage-backed securities held to maturity, at amortized cost.................................................... 10,166 11,993 13,580 Securities held to maturity, at amortized cost............ 5,979 5,969 5,962 Loans, net................................................ 437,600 491,576 455,561 Discounted loans, net..................................... 11,424 29,058 51,989 Loans and discounted loans held for sale, net, at lower of cost or market.......................................... 34,150 45,757 284,672 Stock in Federal Home Loan Bank of San Francisco, at cost.................................................... 5,575 4,655 5,332 Real estate owned, net.................................... 11,571 35,374 62,168 Leasehold improvements and equipment, net................. 4,425 6,156 8,185 Accrued interest receivable............................... 3,939 5,138 5,468 Servicer advances, net.................................... 25,074 7,552 5,007 Income tax receivable..................................... -- -- 9,865 Prepaid expenses and other assets......................... 6,864 17,860 38,533 -------- -------- ---------- TOTAL............................................... $654,518 $787,287 $1,084,253 ======== ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) LIABILITIES: Deposits................................................ $419,285 $497,424 $ 510,430 FHLB advances........................................... 80,000 21,000 -- Short-term borrowings................................... 31,927 143,854 420,816 Notes payable........................................... -- -- 184,245 Notes payable to Wilshire Real Estate Investment Inc.... 5,275 10,748 16,973 Accounts payable and other liabilities.................. 28,586 27,442 44,584 Minority interest in Wilshire Credit Corporation........ 11,112 -- -- -------- -------- ---------- Total liabilities................................... 576,185 700,468 1,177,048 -------- -------- ---------- COMMITMENTS AND CONTINGENCIES (NOTE 14) STOCKHOLDERS' EQUITY (DEFICIT): New Common Stock $.01 par value, 20,033,600 shares authorized and outstanding............................ 92,542 86,819 -- Old Common stock $.01 par value, 50,000,000 shares authorized, 11,070,000 shares outstanding............. -- -- 117,708 Treasury stock, 185,000 shares, at cost................. -- -- (2,852) Retained deficit........................................ (14,091) -- (183,294) Accumulated other comprehensive loss, net............... (118) -- (24,357) -------- -------- ---------- Total stockholders' equity (deficit)................ 78,333 86,819 (92,795) -------- -------- ---------- TOTAL............................................... $654,518 $787,287 $1,084,253 ======== ======== ==========
See notes to consolidated financial statements. F-3 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
REORGANIZED COMPANY PREDECESSOR COMPANY ------------- ----------------------------------------- SEVEN MONTHS FIVE MONTHS ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER 31, MAY 31, DECEMBER 31, DECEMBER 31, 1999 1999 1998 1997 ------------- ----------- ------------ ------------ INTEREST INCOME: Loans................................................ $ 30,389 $ 21,710 $ 111,444 $85,090 Mortgage-backed securities........................... 5,313 5,481 25,676 20,785 Securities and federal funds sold.................... 2,170 674 3,396 4,182 -------- -------- --------- ------- Total interest income.............................. 37,872 27,865 140,516 110,057 INTEREST EXPENSE: Deposits............................................. 14,707 11,206 25,566 25,687 Borrowings........................................... 6,559 11,923 99,892 61,149 -------- -------- --------- ------- Total interest expense............................. 21,266 23,129 125,458 86,836 -------- -------- --------- ------- NET INTEREST INCOME.................................... 16,606 4,736 15,058 23,221 PROVISION FOR ESTIMATED LOSSES ON LOANS................ 1,025 2,697 13,338 1,991 -------- -------- --------- ------- NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOSSES ON LOANS...................................... 15,581 2,039 1,720 21,230 -------- -------- --------- ------- OTHER INCOME (LOSS): Market valuation losses and impairments.............. (10,837) -- (113,711) -- Write-down of mortgage servicing rights.............. -- -- (13,704) -- (Loss) gain on sales of loans........................ (1,671) 3,165 19,240 39,049 Gain on sale of securities........................... 423 -- 4,024 3,742 Trading account gain, net............................ -- -- 1,630 2,330 Servicing revenue.................................... 4,796 3,309 6,497 5,580 Loan fees and charges................................ 4,496 1,696 4,210 825 Real estate owned, net............................... 2,348 1,466 5,508 6,309 Bankcard income, net................................. 1,806 2,335 4,908 1,995 Discontinuation of European Operations............... (2,365) -- -- -- Other income (loss), net............................. 3,578 1,788 (12,755) 1,473 -------- -------- --------- ------- Total other income (loss).......................... 2,574 13,759 (94,153) 61,303 -------- -------- --------- ------- OTHER EXPENSES: Compensation and employee benefits................... 17,502 11,796 36,787 14,404 Loan service fees and expenses....................... 842 8,523 39,277 28,126 Professional services................................ 3,661 2,752 9,306 3,171 Occupancy............................................ 1,297 1,385 2,461 1,125 FDIC insurance premiums.............................. 311 501 896 1,049 Corporate travel and development..................... 1,847 775 6,851 3,439 Depreciation and amortization........................ 1,390 1,161 3,995 495 Other general and administrative expense............. 4,742 4,481 13,709 4,923 -------- -------- --------- ------- Total other expenses............................... 31,592 31,374 113,282 56,732 (LOSS) INCOME BEFORE REORGANIZATION ITEMS, INCOME TAX PROVISION (BENEFIT) AND EXTRAORDINARY ITEM........... (13,437) (15,576) (205,715) 25,801 REORGANIZATION ITEMS (See Note 1)...................... -- (52,034) -- -- -------- -------- --------- ------- (LOSS) INCOME BEFORE INCOME TAX PROVISION (BENEFIT) AND EXTRAORDINARY ITEM................................... (13,437) (67,610) (205,715) 25,801 INCOME TAX PROVISION (BENEFIT)......................... 654 658 (4,056) 10,637 -------- -------- --------- ------- (LOSS) INCOME BEFORE EXTRAORDINARY ITEM................ (14,091) (68,268) (201,659) 15,164 EXTRAORDINARY ITEM (See Note 3)........................ -- 225,606 -- -- -------- -------- --------- ------- NET (LOSS) INCOME...................................... $(14,091) $157,338 $(201,659) $15,164 ======== ======== ========= ======= (LOSS) EARNINGS PER SHARE: Basic: (Loss) income before extraordinary item............ $ (0.70) $ (6.27) $ (18.93) $ 1.79 Net (loss) income.................................. (0.70) 14.45 (18.93) 1.79 Diluted: (Loss) income before extraordinary item............ $ (0.70) $ (6.27) $ (18.93) $ 1.69 Net (loss) income.................................. (0.70) 14.45 (18.93) 1.69
See notes to consolidated financial statements F-4 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
REORGANIZED COMPANY PREDECESSOR COMPANY ------------- ----------------------------------------- SEVEN MONTHS FIVE MONTHS ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER 31, MAY 31, DECEMBER 31, DECEMBER 31, 1999 1999 1998 1997 ------------- ----------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income.................................... $(14,091) $157,338 $ (201,659) $ 15,164 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Market valuation losses and impairments............ 10,837 -- 113,711 -- Provision for estimated losses on loans............ 1,025 2,697 13,338 1,991 Provision for losses on real estate owned.......... 638 -- 6,225 1,944 Write-downs from discontinuation of European operations....................................... 1,740 -- -- -- Write-down of mortgage servicing rights............ -- -- 13,704 -- Asset valuation adjustments........................ 158 647 -- -- Depreciation and amortization...................... 1,390 1,161 3,995 491 Provision (benefit) for deferred income taxes...... -- -- 4,437 (524) Gain on sale of real estate owned.................. (1,748) (2,192) (14,586) (8,574) Loss on disposal of equipment...................... -- 62 -- -- Origination of loans held for sale................. (367) (169) (745,940) (77,918) Purchase of loans held for sale.................... (1,493) (1,629) (507,046) (673,234) Proceeds from sale of loans held for sale.......... 5,844 255,845 361,548 476,890 Loss (gain) on sale of loans....................... 1,671 (3,165) (19,425) (39,049) Gain on sale of securities......................... (423) -- (4,024) (3,742) Gain on trading securities......................... -- -- (1,630) (2,330) Amortization (accretion) of discounts and deferred fees............................................. 30 869 (19,031) (28,952) Income on equity investments....................... (128) (291) (301) (241) Receipt of income tax refund....................... -- 12,219 -- -- Other.............................................. (370) -- 5,920 -- Reorganization items: Write-off of unamortized debt issuance costs..... -- 11,319 -- -- European reorganization costs.................... -- 2,492 -- -- Adjustments to carrying amounts of assets and liabilities pursuant to fresh-start reporting...................................... -- 37,601 -- -- Gain on extinguishment of debt..................... -- (225,606) -- -- Change in: Trading account securities....................... -- -- 23,730 (12,098) Servicer advances................................ (4,248) (2,545) -- -- Accrued interest receivable...................... 1,199 330 1,173 (3,124) Prepaid expenses and other assets................ 2,181 (3,180) (31,833) (29,030) Due from affiliate, net.......................... -- -- 64,643 (11,224) Accounts payable and other liabilities........... 2,135 12,893 28,829 (2,027) Minority interest in WCC......................... 5,440 -- -- -- -------- -------- ----------- --------- Net cash provided by (used in) operating activities................................... 11,420 256,696 (904,222) (395,587) -------- -------- ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of loans and discounted loans............... (76,035) (87,988) (561,032) (519,451) Loan repayments...................................... 74,512 70,412 284,376 175,297 Loan originations.................................... (20,035) (11,746) (65,829) -- Proceeds from sale of loans.......................... 94,439 -- 1,193,378 31,150 Purchase of mortgage-backed securities available for sale............................................... -- -- (133,092) (308,387) Repayments of mortgage-backed securities available for sale........................................... 6,388 9,010 38,602 16,680 Proceeds from sale of mortgage backed securities available for sale................................. 42,476 -- 249,272 24,556 Proceeds from maturity of securities held to maturity........................................... -- -- -- 1,500 Repayments of mortgage-backed securities held to maturity........................................... 1,800 1,544 4,807 3,169 Proceeds from FHLB stock dividend.................... -- 750 -- -- Purchases of FHLB stock.............................. (792) -- -- (1,833) Purchases of real estate owned....................... -- (708) (18,355) (47,445) Proceeds from sale of real estate owned.............. 26,755 28,359 254,216 97,868 Purchases of leasehold improvements and equipment.... (750) (768) (5,803) (2,681) Purchase of equity securities........................ -- -- (14,731) -- -------- -------- ----------- --------- Net cash provided by (used in) investing activities................................... 148,758 $ 8,865 $ 1,225,809 $(529,577) -------- -------- ----------- ---------
See notes to consolidated financial statements F-5 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLARS IN THOUSANDS)
REORGANIZED COMPANY PREDECESSOR COMPANY ------------- ----------------------------------------- SEVEN MONTHS FIVE MONTHS ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER 31, MAY 31, DECEMBER 31, DECEMBER 31, 1999 1999 1998 1997 ------------- ----------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in deposits.................. $(78,139) $(13,256) $ 147,832 $(139,016) Net proceeds from issuance of common stock........... -- -- 61,811 -- Repurchase of common stock........................... -- -- (2,728) (124) Proceeds from FHLB advances.......................... 66,500 21,000 -- -- Repayments of FHLB advances.......................... (7,500) -- -- -- Proceeds from short-term borrowings.................. 151,792 78,579 1,814,937 1,618,113 Repayments of short-term borrowings.................. (262,788) (353,800) (2,356,565) (749,237) Repayment of note payable to WREI.................... (2,427) -- -- -- Proceeds from debtor-in-possession financing......... -- 5,000 -- -- Proceeds from notes payable.......................... -- -- -- 109,245 Redemption of preferred stock........................ -- -- (29,521) -- -------- -------- ---------- --------- Net cash (used in) provided by financing activities....................................... (132,562) (262,477) (364,234) 838,981 -------- -------- ---------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... 27,616 3,084 (42,647) (86,183) CASH AND CASH EQUIVALENTS: Beginning of period.................................. 26,552 23,468 66,115 152,298 -------- -------- ---------- --------- End of period........................................ $ 54,168 $ 26,552 $ 23,468 $ 66,115 ======== ======== ========== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--Cash paid during the period for: Interest............................................. $ 18,653 $ 17,083 $ 52,655 $ 77,994 Income taxes, net.................................... 240 1,327 1,708 9,420 NONCASH INVESTING ACTIVITIES: Additions to real estate owned acquired in settlement of loans........................................... 1,830 3,547 122,704 135,205 Transfer of securities previously classified as trading to available for sale...................... -- -- 16,869 -- Transfer of loans classified as discounted to available for sale................................. 9,743 -- -- -- NONCASH FINANCING ACTIVITIES: Pay in kind preferred stock dividend................. -- -- -- 1,604 Preferred stock issued in exchange for cancellation of accounts payable................................ -- -- -- 27,500 NONCASH REORGANIZATION ITEMS: Cancellation of old common stock..................... -- 114,856 -- -- Issuance of new common stock in exchange for notes payable and accrued interest thereon............... -- 86,819 -- -- Contribution of net assets of WCC.................... 5,723 -- -- --
See notes to consolidated financial statements F-6 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK TREASURY STOCK RETAINED ------------------- ----------------------- ------------------- EARNINGS SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT (DEFICIT) -------- -------- ----------- --------- -------- -------- ---------- BALANCE, DECEMBER 31, 1996.... -- $ -- 7,570,000 $ 55,897 -- $ -- $ 5,222 Comprehensive income: Net income................ $ 15,164 Unrealized loss on available-for- sale securities............ Reclassification adjustment for losses on securities included in net income......... Total comprehensive income.................... Treasury stock acquired..... 5,000 (124) Issuance of preferred stock..................... 27,500 27,500 Preferred stock dividend.... (1,604) ------- -------- ----------- --------- -------- ------- --------- BALANCE, DECEMBER 31, 1997.... 27,500 27,500 7,570,000 55,897 5,000 (124) 18,782 Comprehensive loss: Net loss.................. (201,659) Unrealized loss on available for sale securities.............. Foreign currency translation........... Reclassification adjustment for losses on securities included in net income......... Total comprehensive loss.... Treasury stock acquired..... 180,000 (2,728) Preferred stock dividend.... (417) Preferred stock redemption................ (27,500) (27,500) Common stock issuance, net of offering costs of $8,189.................... 3,500,000 61,811 ------- -------- ----------- --------- -------- ------- --------- BALANCE, DECEMBER 31, 1998.... -- -- 11,070,000 117,708 185,000 (2,852) (183,294) Comprehensive income: Net income................ 157,338 Unrealized holding losses on available for sale securities--net of tax..................... Unrealized loss on foreign currency translation.... Total comprehensive income.................... Impact of reorganization: Elimination of former equity in connection with bankruptcy plan.... (11,070,000) (117,708) (185,000) 2,852 25,956 Issuance of new equity in connection with bankruptcy plan......... 20,033,600 86,819 ------- -------- ----------- --------- -------- ------- --------- BALANCE, MAY 31, 1999 (Fresh-start reporting date)..................... -- -- 20,033,600 86,819 -- -- -- Comprehensive loss: Net loss.................. (14,091) Unrealized holding losses on available for sale securities--net of tax..................... Unrealized gain on foreign currency translation.... Total comprehensive loss.... Impact of reorganization: Contribution of equity of CWH..................... 5,723 ------- -------- ----------- --------- -------- ------- --------- BALANCE, DECEMBER 31, 1999.... -- $ -- 20,033,600 $ 92,542 -- $ -- $ (14,091) ======= ======== =========== ========= ======== ======= ========= ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) TOTAL -------------------- --------- BALANCE, DECEMBER 31, 1996.... $ (97) $ 61,022 Comprehensive income: Net income................ 15,164 Unrealized loss on available-for- sale securities............ (8,908) (8,908) Reclassification adjustment for losses on securities included in net income......... 6,072 6,072 --------- Total comprehensive income.................... 12,328 Treasury stock acquired..... (124) Issuance of preferred stock..................... 27,500 Preferred stock dividend.... (1,604) ------- --------- BALANCE, DECEMBER 31, 1997.... (2,933) 99,122 Comprehensive loss: Net loss.................. (201,659) Unrealized loss on available for sale securities.............. (48,434) (48,434) Foreign currency translation........... 1,287 1,287 Reclassification adjustment for losses on securities included in net income......... 25,723 25,723 --------- Total comprehensive loss.... (223,083) Treasury stock acquired..... (2,728) Preferred stock dividend.... (417) Preferred stock redemption................ (27,500) Common stock issuance, net of offering costs of $8,189.................... 61,811 ------- --------- BALANCE, DECEMBER 31, 1998.... (24,357) (92,795) Comprehensive income: Net income................ 157,338 Unrealized holding losses on available for sale securities--net of tax..................... (720) (720) Unrealized loss on foreign currency translation.... (1,662) (1,662) --------- Total comprehensive income.................... 154,956 Impact of reorganization: Elimination of former equity in connection with bankruptcy plan.... 26,739 (62,161) Issuance of new equity in connection with bankruptcy plan......... 86,819 ------- --------- BALANCE, MAY 31, 1999 (Fresh-start reporting date)..................... -- 86,819 Comprehensive loss: Net loss.................. (14,091) Unrealized holding losses on available for sale securities--net of tax..................... (29) (29) Unrealized gain on foreign currency translation.... (89) (89) --------- Total comprehensive loss.... (14,209) Impact of reorganization: Contribution of equity of CWH..................... 5,723 ------- --------- BALANCE, DECEMBER 31, 1999.... $ (118) $ 78,333 ======= =========
F-7 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. RESTRUCTURING OF THE COMPANY In order to address liquidity concerns and to improve Wilshire Financial Services Group Inc.'s ("WFSG" or the "Company") financial condition, the Company and an unofficial committee of holders of a majority of the Company's $184.2 million in outstanding publicly issued notes agreed, in November 1998, to a restructuring of the Company whereby (i) the noteholders would exchange their notes for new common stock in the Company; (ii) the Company's existing common stock and options would be canceled; and (iii) noteholders would reallocate up to 0.6% of the new common stock to the then existing stockholders of the Company. In connection with the plan of reorganization (the "Plan"), the Company filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the Federal Bankruptcy Court in Wilmington, Delaware on March 3, 1999. On April 12, 1999, the Plan was approved by the bankruptcy court. On June 10, 1999, the Plan became effective, the Company emerged from bankruptcy and a new Board of Directors was seated. Pursuant to the Plan, the holders of the Company's $184.2 million in outstanding publicly issued notes received approximately 96.16 shares of new common stock for every $1,000 of notes, including accrued interest through March 2, 1999 (see Note 3--Extraordinary Item). An additional portion of the new common stock was issued to Wilshire Real Estate Investment Inc. ("WREI", formerly known as Wilshire Real Estate Trust Inc.) in exchange for other debt owed to it. A portion of the new common stock was reallocated by the noteholders so that holders of the old common stock received approximately 0.6% of the outstanding shares of new common stock. The principal stockholders, Andrew A. Wiederhorn and Lawrence A. Mendelsohn, received 1 share of new common stock for every 136.07 shares of old common stock held by them. The registered holders other than the principal stockholders received approximately 1 share of new common stock for every 77.28 shares of old common stock. WREI received 2,874,791 shares of new common stock, representing a 14.4% ownership interest in the Company (see Note 17--Investment in WREI). As part of the Plan, the servicing of the Company's assets currently is conducted by Wilshire Credit Corporation ("WCC" (formerly WCC Inc.)), a newly formed, majority-owned subsidiary of the Company. Prior to the reorganization, the Company's assets were serviced by the company formerly named Wilshire Credit Corporation (now known as Capital Wilshire Holdings Inc. ("CWH")), a company previously owned by Andrew A. Wiederhorn and Lawrence A. Mendelsohn. As part of the Plan, the Company entered into concurrent negotiations with the owners of CWH and the principal creditor of CWH, Capital Consultants Inc. ("CCI"), to incorporate the servicing operations of CWH into WFSG. CWH was in default on a loan from its principal creditor, CCI. A portion of that loan had been guaranteed by the Company. CCI took control of CWH and in exchange for releases from such debt, CWH contributed its assets and certain liabilities to WCC and, in exchange for such assets and liabilities and CCI's release of the Company's loan guaranty to CCI, WFSG transferred 49.99% of the equity of WCC to CWH. As a result, the Company currently owns 100% of the Class A voting common stock (representing 50.01% of the economic value) of WCC, and CWH owns 100% of the Class B non-voting common stock and the remaining 49.99% economic interest of WCC. Class B non-voting common stock is convertible into voting common stock on a share-for-share basis and, under certain circumstances, convertible into WFSG Common stock. Class B non-voting common stock also has a liquidation preference of approximately $19.3 million. The Company accounted for the acquisition of the assets and certain liabilities of CWH under Accounting Principles Board Opinion No. 16, BUSINESS COMBINATIONS. WFSG contributed the stock of WSC to WCC at its book value. F-8 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1. RESTRUCTURING OF THE COMPANY (CONTINUED) In January 1999, WREI agreed to provide the Company debtor-in-possession financing of up to $10.0 million (the "DIP Facility") as part of a compromise and settlement of a $17.0 million obligation payable from the Company to WREI. The DIP Facility bears interest at 12% and is secured by the stock of First Bank of Beverly Hills, FSB ("First Bank"), WFSG's savings bank subsidiary. WREI funded $5.0 million of the DIP Facility on March 3, 1999, but did not provide the remaining balance. Accordingly, 50% or approximately $8.5 million, of the Company's obligation payable to WREI was converted into 6% pay-in-kind ("PIK") Notes due 2006, and the remaining $8.5 million of the Company's obligation was treated PARI PASSU with WFSG's noteholders and converted to newly issued common stock of WFSG on the effective date of the Plan. Following the completion of WFSG's reorganization, the DIP Facility became an ordinary secured lending facility with no special priority accorded by bankruptcy law. Revenues and expenses resulting from the reorganization of the Company while it was in Chapter 11 have been segregated and recorded as Reorganization Items in the consolidated statements of operations and include the following for the five months ended May 31, 1999:
FIVE MONTHS ENDED MAY 31, 1999 ---------------------- (DOLLARS IN THOUSANDS) Write-off of unamortized debt issuance costs............. $11,319 Professional services.................................... 609 European restructuring costs............................. 2,492 Fresh-start reporting adjustments to assets and liabilities............................................ 37,601 Other general and administrative expenses................ 13 ------- $52,034 =======
Costs incurred to issue the $184.2 million notes were previously capitalized and were being amortized over the life of the notes. The remaining unamortized balance of such costs associated with the notes have been written-off. Professional services included in Reorganization Items represent services provided in connection with the Plan after the March 3, 1999 Chapter 11 filing date. In March 1999, WFSG developed and communicated a plan to restructure its European operations and reduce its workforce. Costs included in Reorganization Items as of May 31, 1999 consist primarily of severance related compensation, the write-off of certain leasehold improvements and other office closure related costs. The effects of the fresh-start reporting adjustments are detailed in Note 2 below in reconciling the predecessor Company's balance sheet to the successor Company's balance sheet as of May 31, 1999. Due to the reorganization of the Company, management of the Company does not believe that the results of operations of the predecessor company for the five months ended May 31, 1999 are indicative of the performance of the reorganized company following the effective date of the Plan. 2. FRESH-START REPORTING The Company's Plan was accounted for in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE ("SOP 90-7"). The accounting of SOP 90-7 resulted in the creation of a new entity for F-9 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. FRESH-START REPORTING (CONTINUED) financial reporting purposes. The Company adopted fresh-start reporting because holders of the Company's existing common stock immediately before filing and confirmation of the Plan received less than 50% of the new common stock of the emerging entity and the Company's reorganized value is less than its postpetition liabilities and allowed claims. The reorganization value of the Company was determined by estimating the fair value of its net assets as of the fresh-start reporting date. For financial reporting purposes, the Company accounted for the consummation of the reorganization effective May 31, 1999. The periods prior to this date have been designated "Predecessor Company" and the period subsequent to this date has been designated "Reorganized Company." As a result of the adoption of the fresh-start reporting, the Reorganized Company's consolidated financial statements are not comparable to the Predecessor Company's consolidated financial statements. F-10 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2. FRESH-START REPORTING (CONTINUED) The effect of the plan of reorganization and the implementation of fresh-start reporting on the Company's balance sheet as of May 31, 1999 is as follows (unaudited):
ADJUSTMENTS TO RECORD CONFIRMATION OF PLAN PREDECESSOR ------------------------------------------------------- REORGANIZED COMPANY'S FORGIVENESS FRESH-START CANCELLATION ISSUANCE OF COMPANY'S BALANCE SHEET OF DEBT ADJUSTMENTS OF OLD STOCK NEW STOCK BALANCE SHEET ------------- ----------- ------------ ------------ ----------- ------------- (DOLLARS IN THOUSANDS) ASSETS Cash and cash equivalents............. $ 26,552 $ -- $ -- $ -- $ -- $ 26,552 Mortgage-backed securities available for sale............................ 99,124 523 99,647 Mortgage-backed securities held to maturity............................ 11,993 11,993 Securities held to maturity........... 5,969 5,969 Loans, net............................ 490,498 1,078 491,576 Discounted loans, net................. 29,058 29,058 Loans held for sale, net, at lower of cost or market...................... 45,757 45,757 Stock in Federal Home Loan Bank of San Francisco, at cost.................. 4,655 4,655 Real estate owned, net................ 33,966 1,408 35,374 Leasehold improvements and equipment, net................................. 6,474 (318) 6,156 Accrued interest receivable........... 5,138 5,138 Servicer advances..................... 7,552 7,552 Mortgage servicing rights, net........ 2,192 (2,192) -- Prepaid expenses and other assets..... 23,508 -- (5,648) -- -- 17,860 --------- --------- -------- ------- -------- -------- TOTAL ASSETS.......................... $ 792,436 $ -- $ (5,149) $ -- $ -- $787,287 ========= ========= ======== ======= ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY Liabilities: Liabilities not subject to compromise: Deposits.......................... $ 497,174 $ -- $ 250 $ -- $ -- $497,424 Short-term borrowings............. 163,064 1,790 164,854 Notes payable to Wilshire Real Estate Investment Inc........... 13,486 (2,738) 10,748 Accounts payable and other liabilities..................... 26,165 1,277 27,442 Liabilities subject to compromise... 225,606 (225,606) -- -- -- -- --------- --------- -------- ------- -------- -------- Total liabilities............... 925,495 (225,606) 579 -- -- 700,468 --------- --------- -------- ------- -------- -------- Stockholders' Equity: Common stock...................... 117,708 (117,708) 86,819 86,819 Treasury stock.................... (2,852) 2,852 -- Retained deficit.................. (216,042) 225,606 (37,601) 114,856 (86,819) -- Accumulated other comprehensive loss, net....................... (31,873) -- 31,873 -- -- -- --------- --------- -------- ------- -------- -------- Total stockholders' (deficit) equity........................ (133,059) 225,606 (5,728) -- -- 86,819 --------- --------- -------- ------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 792,436 $ -- $ (5,149) $ -- $ -- $787,287 ========= ========= ======== ======= ======== ========
F-11 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 3. EXTRAORDINARY ITEM--GAIN ON EXTINGUISHMENT OF DEBT In connection with its restructuring, the Company exchanged its notes payable and certain other outstanding claims for new common stock in the Company. This gain on extinguishment of debt is reported in the consolidated statements of operations for the five-month period ended May 31, 1999 as an extraordinary item in the amount of $225.6 million, and is comprised of the following liabilities:
(DOLLARS IN THOUSANDS) Notes payable............................................ $184,245 Accrued interest on notes payable........................ 14,536 Payable to Captial Wilshire Holdings, Inc. (formerly known as Wilshire Credit Corporation).................. 18,338 Payable to Wilshire Real Estate Investment Inc........... 8,487 -------- $225,606 ========
The above debt was cancelled as part of the Plan, and the Notes payable, accrued interest thereon and payable to Wilshire Real Estate Investment Inc. were converted into equity of the Reorganized Company. No funds were expended in the extinguishment of such debt. The gain on extinguishment of debt will cause a reduction of tax attributes, such as net operating losses, capital losses and the tax basis of assets (see Note 13). 4. MARKET VALUATION LOSSES AND IMPAIRMENTS The Company evaluates, on an ongoing basis, the carrying value of its securities portfolio. To the extent differences between the book bases of the securities accounted for as available-for-sale and their current market values are deemed to be temporary in nature, such unrealized gains or losses are reflected directly in stockholders' equity, as "accumulated other comprehensive income or (loss)." Impairments that are deemed to be other than temporary are charged to income, as "market valuation losses and impairments." In evaluating impairments as other than temporary, the Company considers the magnitude and trend in the decline of the market value of securities, the Company's ability to collect all amounts due according to the contractual terms and the Company's expectations at the time of purchase. Total market valuation losses and impairments recorded in net loss for the seven months ended December 31, 1999 was approximately $10.8 million. Of this amount, $5.1 million relates to sales of mortgage-backed securities. $1.5 million relates to other than temporary impairment of mortgage-backed securities remaining in the portfolio, $0.4 million relates to real estate owned which was sold subsequent to year-end, $1.6 million relates to our investment in WREI which, was sold in December 1999, $0.9 million relates to sales of other assets, and $1.3 million relates to equipment and other assets remaining at December 31, 1999. The Company believes that the decline in the value of these assets is other than temporary. There were no recorded market valuation losses and impairments for the five months ended May 31, 1999. Total market valuation losses and impairments recorded in net loss for the year ended December 31, 1998 was approximately $113.7 million. Of this amount, $22.2 million relates to sales of mortgage-backed securities, $9.2 million relates to other than temporary impairment of mortgage-backed securities remaining in the portfolio, $36.6 million relates to sales of loans held for sale, discounted loans and real estate owned, $15.3 million relates to hedge losses previously deferred in the Company's Consolidated Statement of Financial Condition (see Note 14, Commitments, Contingencies and Off-Balance Sheet Risk), and F-12 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 4. MARKET VALUATION LOSSES AND IMPAIRMENTS (CONTINUED) $30.4 million relates to valuation allowances provided by management relating to loans held for sale and discounted loans held by the Company as of December 31, 1998. 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS--The operations of the Company are conducted primarily through nonbank subsidiaries, Wilshire Funding Corporation ("WFC") and Wilshire Credit Corporation ("WCC"), and through a second-tier subsidiary savings bank, First Bank of Beverly Hills F.S.B., ("FBBH" or the "Bank"). See Note 1 regarding the pledge of the stock of FBBH to secure the DIP facility in 1999. The Company is primarily engaged in the acquisition and servicing of pools of performing, sub-performing and non-performing residential and commercial mortgage loans, as well as foreclosed real estate and mortgage-backed securities. The Company also acquires newly originated residential mortgage loans through correspondents and operates a merchant bankcard processing business. The Company's primary sources of revenue are from interest income from real estate and consumer loans acquired in purchase transactions, mortgage-backed securities, income from loan sale and securitization transactions, and, to a lesser extent, revenues from merchant bankcard operations. Administrative headquarters of the Company, WFC and WCC are located in Portland, Oregon. The Bank is a federally chartered savings institution regulated by the Office of Thrift Supervision ("OTS"). The Bank conducts its operations through a branch and a merchant bankcard center in Southern California. The Company began operations in France and the United Kingdom and Ireland (the "European Operations") in 1996. The total assets of these operations as of December 31, 1999 and 1998 were $13,929 and $48,226, respectively, consisting primarily of real estate and real estate secured loans. The Company is in the process of selling and winding down its European operations. BANK MERGER--On December 31, 1997, FBBH was merged into its affiliate, Girard Savings Bank F.S.B. ("GSB") and the surviving entity was renamed First Bank of Beverly Hills, F.S.B. The merger of the two affiliates was accomplished in an all stock transaction and, due to their common ownership, has been accounted for as a reorganization of affiliates under common control in a manner similar to the pooling-of-interests method. The assets, liabilities, equity and results of operations for all prior periods presented have been restated to reflect FBBH and GSB as if they had been combined from the beginning of the earliest period presented. There were no material intercompany eliminations or adjustments that were required in the accompanying financial statements. PRINCIPLES OF CONSOLIDATION--WFSG was incorporated in 1996 to be the holding company for Wilshire Acquisitions Corporation ("WAC"), which is the holding company for the Bank. WFSG formed certain nonbank subsidiaries, including WFC, and completed an initial public offering of common stock and a public debt offering in the fourth quarter of 1996. The accompanying consolidated financial statements include the accounts of WAC and the Bank for periods prior to the formation of WFSG. Intercompany accounts have been eliminated in consolidation. For purposes of presenting information about WFSG's common stock, weighted average number of shares outstanding and earnings per share, outstanding shares of common stock of WAC prior to its combination with WFSG have been retroactively restated to their WFSG equivalents based on the conversion ratio at the time of the combination discussed above. F-13 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Effective May 31, 1999, as part of its restructuring, the Company formed a majority-owned (50.01%) subsidiary, WCC, to perform asset servicing operations (see Note 1). The accompanying consolidated financial statements include the accounts of WCC for periods subsequent to May 31, 1999. The remaining 49.99% interest in WCC held by CWH is reflected as "Minority Interest in WCC" in the accompanying consolidated financial statements. USE OF ESTIMATES IN THE PREPARATION OF THE CONSOLIDATED FINANCIAL STATEMENTS--The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Significant estimates include valuation allowances for loans, real estate owned and net deferred tax assets, merchant bankcard charge-back reserves, the determination of fair values of certain financial instruments for which there is not an active market, the allocation of basis between assets sold and retained, the evaluation of other than temporary impairment and the selection of yields utilized to recognize interest income on certain mortgage-backed securities. Estimates and assumptions also effect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS--For purposes of reporting financial condition and cash flows, cash and cash equivalents include cash and due from banks, federal funds sold, and securities with original maturities less than 90 days. SECURITIES AND MORTGAGE-BACKED SECURITIES--The Company's securities portfolios consist of mortgage-backed and other debt securities that are classified as held to maturity and available for sale. Securities are classified as held to maturity when management has the ability and the positive intent to hold the securities to maturity. Securities classified as held to maturity are carried at their historical cost basis, adjusted for the amortization of premiums and accretion of discounts using a method that approximates the interest method. Securities are classified as available for sale when the Company intends to hold the securities for an indefinite period of time, but not necessarily to maturity. Securities classified as available for sale are reported at their fair market values with unrealized holding gains and losses on securities reported, net of tax, when applicable, as a separate component of comprehensive income in stockholders' equity (deficit). Holding gains and losses on securities classified as available for sale that are determined by management to be other than temporary in nature are reclassified from the unrealized holding losses included in accumulated other comprehensive (loss) income to current operations. Realized gains and losses from the sales of available for sale securities are reported separately in the Consolidated Statements of Operations and are calculated using the specific identification method. LOANS, DISCOUNTED LOANS, LOANS AND DISCOUNTED LOANS HELD FOR SALE AND ALLOWANCE FOR LOAN LOSSES--The Company's principal business involves acquiring performing, sub-performing and non-performing loan portfolios, for prices generally at or below face value (i.e., unpaid principal balances plus accrued interest). Nonperforming loans are generally acquired at deep discounts to face value and are classified as discounted loans in the Consolidated Statements of Financial Condition. Loans that have been identified as likely to be sold are classified as loans and discounted loans held for sale in the Consolidated Statements of Financial Condition. Loans other than discounted loans and loans and discounted loans held for sale are classified simply as loans. F-14 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Discounted loans are presented in the Consolidated Statements of Financial Condition net of unaccreted discount and allowance for loan losses established for those loans. Unaccreted discounts represent the portion of the difference between the purchase price and the principal face amount on specific loans that is available for accretion to interest income. The allowance for loan losses includes valuation allowances for estimated losses against the cost of the loans that are established at acquisition and for subsequent valuation adjustments that are provided for through current period earnings and are based on discounted future cash flows or the fair value of the underlying real estate collateral for collateral dependent loans. If total cash received on a pool of loans exceeds original estimates, excess specific valuation allowances are recorded as additional discount accretion on the cost-recovery method. The allocated specific valuation allowances are included in the allowance for loan losses. Where appropriate, discounts are accreted into interest income on a cash basis. In addition, for loans purchased by the Bank, the initial discounts are further segregated into a valuation allowance for inherent losses in the loan portfolio that have yet to be specifically identified ("general valuation allowance") as required by the OTS regulations. The allocated specific and general valuation allowances are included in the allowance for loan losses. Loans other than discounted loans are presented in the Consolidated Statements of Financial Condition in substantially the same manner as discounted loans. Interest income is recognized on an accrual basis. Originated loans are carried net of unamortized deferred origination fees and costs. Deferred fees and costs are recognized in interest income over the terms of the loans using a method that approximates the interest method. Certain loans and discounted loans are designated as loans and discounted loans held for sale (including loans originated by the Company) and are presented at the lower of cost or fair value. Cost is determined as described above. If fair value is less than cost, a valuation allowance is recorded through a charge to earnings to reduce the carrying value to fair value. Gains or losses on loans sold through securitization or other transactions are based on the difference between the cash proceeds received on the sales or certificates sold to outside investors and the Company's cost basis allocated to such interests in the loans. The percentage allocation of the loans' cost basis between the portions sold and the subordinated interests and servicing rights retained, if any, is based on their relative fair values. The Company evaluates commercial and multi-family real estate loans (whether purchased or originated and whether classified as loans or discounted loans) for impairment. Commercial and multi-family real estate loans are considered to be impaired, for financial reporting purposes, when it is probable that the Company will be unable to collect all principal or interest when due. Specific valuation allowances are established, either at acquisition or through provisions for losses, as described above, for impaired loans based on the fair value of the underlying real estate collateral. The Company evaluates single-family real estate, consumer and other smaller balance, homogeneous loans for impairment on a collective basis. Management evaluates these loans for impairment by comparing management's estimate of net realizable value to the net carrying value of the portfolios. All specific and general valuation allowances established for pools of loans and discounted loans are recorded in the allowance for loan losses. The allowance for each pool is decreased by the amount of loans charged off and is increased by the provision for estimated losses on loans and recoveries of previously charged-off loans. The allowance for each pool is maintained at a level believed adequate by management F-15 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) to absorb probable losses. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, previous loan loss experience, current economic conditions, volume, growth and composition of the portfolio and other relevant factors. Actual losses may differ from management's estimates. It is the Company's policy to establish an allowance for uncollectable interest on loans that are past due more than 90 days or sooner when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. Upon such a determination, those loans are placed on non-accrual status and deemed to be non-performing. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed by a charge to interest income. MORTGAGE SERVICING RIGHTS--The Company capitalizes mortgage servicing rights retained when the mortgage loans are either sold or securitized, based upon the allocation of loan basis between the loans sold or securitized and the servicing rights retained based on their relative fair market values. Servicing assets and liabilities are subsequently amortized in proportion to and over the period of estimated net servicing income. Impairment of mortgage servicing rights is evaluated by comparing the carrying amounts to the estimated fair values. The Company wrote-down mortgage servicing rights by $13,704 during the year ended December 31, 1998, and wrote down $2,192 pursuant to Fresh Start Reporting (see Note 2). These write-downs were a result of faster than expected prepayments and management's revised estimates of future prepayments and other factors. The Company estimates the relative fair market values of mortgage servicing rights retained in a whole loan sale or securitization by applying a market multiple for similar servicing rights traded in the public market to the servicing fee and the unpaid principal balance of the loans to be serviced. The market multiples used during 1998 ranged from 4.0 to 6.0. The fair market values of subordinated interests is determined by management based on market assumptions for similar securitization transactions. INTEREST-RATE SWAPS--Interest-rate swap agreements used to manage interest-rate risk are treated, where appropriate, as hedges of specified assets or liabilities for accounting and tax purposes and are accounted for on a settlement basis. That is, the periodic net settlement with the counterparties to the swap agreements of the interest paid/received is recorded as an adjustment to interest income or expense derived from the hedged assets or liabilities. Any gain or loss generated by the early termination or sale of an interest rate swap agreement is deferred and recorded in the cost basis of the hedged item. FUTURES--Interest rate futures contracts are used as hedges against future fluctuations in the market value of loans held for sale and available for sale securities resulting from changes in interest rates. Contracts are designated as a hedge of specific loans or a portfolio of homogeneous loans and exhibit a high degree of correlation with the assets being hedged. Changes in the market value of these instruments are deferred as adjustments to the cost basis of the hedged loans and securities and thus are amortized as an adjustment to the yield using a method approximating the interest method or are recognized in connection with the ultimate sale of such loans. Foreign exchange currency futures contracts are used as hedges against fluctuations in prevailing currency exchange rates for certain foreign assets. Changes in the market value of these instruments are deferred as adjustments to the cost basis of the hedged assets. FOREIGN CURRENCY TRANSLATION--All assets and liabilities relating to the Company's foreign activities are translated at current exchange rates. The results of the Company's foreign operations are translated at the average exchange rate for each reporting period. Translation adjustments, related hedging results and applicable income taxes are included, when material, in the accumulated translation adjustments as a F-16 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) separate component of comprehensive (loss) income within stockholders' equity (deficit). The Company had unrealized gains from foreign currency translation adjustments of $89 and $1,287 included in accumulated other comprehensive (loss) income, net, as of December 31, 1999 and 1998, respectively. REAL ESTATE OWNED--Real estate acquired in settlement of loans or purchased directly is originally recorded at the lower of fair value less estimated costs to sell, or purchase price, respectively. Any excess of net loan cost basis over the fair value less estimated selling costs of real estate acquired through foreclosure is charged to the allowance for loan losses. Any subsequent operating expenses or income, reductions in estimated fair values, as well as gains or losses on disposition of such properties, are recorded in current operations. LEASEHOLD IMPROVEMENTS AND EQUIPMENT--Office leasehold improvements and equipment are stated at cost, less accumulated depreciation and amortization, computed on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter. SERVICER ADVANCES--In the normal course of performing loan servicing activities, WCC makes servicer advances to various unrelated third parties which represent (1) impound payments on securitizations and other servicing arrangements, (2) scheduled remittances of principal and interest on certain securitizations, and (3) loan collection costs on securitizations and other servicing arrangements. These advances are netted for purposes of the accompanying combined financial statements by collections from mortgagors which are used to fund these advances. INCOME TAXES--The provision (benefit) for income taxes is based on income (loss) recognized for financial statement purposes. The Company and its eligible subsidiaries file a consolidated U.S. federal income tax return. Certain foreign subsidiaries and WCC which are consolidated for financial reporting are not eligible to be included in the consolidated U.S. federal income tax return and separate provisions for income taxes have been determined for these entities. Deferred income taxes result from temporary differences between financial statement income and that recognized for tax return purposes, carryforwards of losses and income tax credits. A valuation allowance is recorded if it is more likely than not that a deferred tax asset will not be realized. The Company and its U.S. subsidiaries have entered into a tax sharing agreement where the tax liability is to be allocated pro rata among entities that would have paid tax if they had filed separate income tax returns. In addition, those entities reimburse loss entities pro rata for the reduction in tax liability as a result of their losses. BANKCARD OPERATIONS--Bankcard income, net, includes merchant discounts and transaction fees for processing Visa-Registered Trademark- and Mastercard-Registered Trademark- transactions and is offset by bankcard expense consisting primarily of fees paid to the Company's third-party processors and interchange fees paid to card-issuing banks. Other direct and indirect costs of Bankcard operations are included in various other categories of expenses and are not specifically allocated separately from other operating expenses of the Company. (LOSS) INCOME PER SHARE--Basic (loss) income per share ("EPS") excludes dilution and is computed by dividing (loss) income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the (loss) earnings of the Company. F-17 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS--SFAS No. 130, "Reporting Comprehensive Income," requires companies to report all changes in equity during a period, except those relating to investment by owners and distributions to owners, in a financial statement for the period in which they are recognized. The Company has adopted this statement retroactively and chosen to disclose comprehensive (loss) income for the seven months ended December 31, 1999, the five months ended May 31, 1999, and for the years ended December 31, 1998 and 1997 which encompasses net (loss) income, unrealized holding losses on available for sale securities and currency translation adjustments, on the face of the accompanying Consolidated Statements of Stockholders' Equity (Deficit). In 1998, the Company adopted SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information," which establishes standards for the way that public entities report selected information about operating segments in annual financial statements and requires that those entities report selected information about operating segments in interim financial reports issued to shareholders. The segment information required by this pronouncement is disclosed in the notes to the Company's consolidated financial statements (See Note 21). In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the consolidated statement of financial condition as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Accounting for qualifying hedges allows a derivative's gain or loss to be offset with the related results on the hedged item in the consolidated statement of operations, or in certain circumstances can be deferred in other comprehensive income and later offset with the results of the hedged item in the Consolidated Statement of Operations. A company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Management expects that the Company will adopt SFAS No. 133 effective the year beginning January 1, 2001. Management has not yet quantified the impact of adopting SFAS No. 133 on its financial statements and has not determined the method of its adoption of SFAS No. 133. However, the Statement could increase volatility in earnings and other comprehensive income. In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise", an amendment of SFAS No. 65. This Statement is effective for the first fiscal quarter beginning after December 15, 1998. This Statement standardizes how mortgage banking firms account for certain securities and other interests they retain after securitizing mortgage loans that were held for sale. Adoption of this pronouncement is not expected to have a material impact on the Company's consolidated financial condition or results of operations. RECLASSIFICATIONS--Certain items in the consolidated financial statements for 1998 and 1997 were reclassified to conform to the 1999 presentation, none of which affect previously reported net income. F-18 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 6. 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, 1999 and 1998 are shown below. Fair market value estimates were obtained from independent parties.
ESTIMATED GROSS GROSS FAIR AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUES --------- ---------- ---------- --------- DECEMBER 31, 1999 Available-for-sale mortgage-backed securities....... $ 43,634 $ 127 $ 178 $ 43,583 ======== ====== ======= ======== Held-to-maturity: U.S. Treasury notes............................... $ 5,979 $ 6 $ -- $ 5,985 Mortgage-backed securities........................ 10,166 -- 236 9,930 -------- ------ ------- -------- Total held-to-maturity.......................... $ 16,145 $ 6 $ 236 $ 15,915 ======== ====== ======= ======== DECEMBER 31, 1998 Available-for-sale mortgage-backed securities....... $140,107 $2,317 $27,961 $114,463 ======== ====== ======= ======== Held-to-maturity: U.S. Treasury notes............................... $ 5,962 $ 250 $ -- $ 6,212 Mortgage-backed securities........................ 13,580 -- 69 13,511 -------- ------ ------- -------- Total held-to-maturity.......................... $ 19,542 $ 250 $ 69 $ 19,723 ======== ====== ======= ========
The amortized cost of the securities reflects the impairment adjustments deemed to be other than temporary as discussed in Note 4, above. The total amount of impairment write downs were $6.6 million and $31.4 million for the seven months ended December 31, 1999 and the year ended December 31, 1998, and have been reflected as market valuation losses and impairments in the accompanying consolidated statement of operations. There were no impairment write-downs recognized during the five months ended May 31, 1999 or the year ended December 31, 1997. At December 31, 1999, the net unrealized loss on available-for-sale mortgage-backed securities totaled approximately $51. In the opinion of management, these losses represent temporary declines in the fair market values of such securities and do not represent other than temporary declines in such market values. Should the nature and duration of these market value declines for such securities change in the future, such changes in management's estimates will be reflected as losses in the Company's Consolidated Statements of Operations at that time. During the year ended December 31, 1998, the Company reclassified securities with carrying value of $16,869 from trading account to available for sale. The Company expects to receive payments on all mortgage-backed securities over periods that are considerably shorter than the contractual maturities of the securities, which range from 6 to 30 years. Securities held to maturity other than mortgage-backed securities at December 31, 1999 and 1998 had contractual maturities of one to five years. F-19 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 6. SECURITIES (CONTINUED) At December 31, 1999 and 1998, securities with carrying values of $55,999 and $123,546, respectively, and market values of approximately $55,810 and $123,736, respectively, were pledged to secure merchant bankcard transactions, short-term borrowings and lines of credit (see Note 12). Of the total securities pledged, securities with fair values of approximately $55,810 and $133,961 were held by a third-party custodian as of December 31, 1999 and 1998, respectively. Gains and losses from the sale of securities available for sale were $571 and $148, respectively, during the seven months ended December 31, 1999 and $10,062 and $6,038, respectively, during the year ended December 31, 1998. Gains from the sale of securities available for sale were $3,742 during the year ended December 31, 1997, and there were no losses during that period. There were no gains or losses from such sales during the five months ended May 31, 1999. 7. 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, ------------------- 1999 1998 -------- -------- LOANS Real estate loans: One to four units......................................... $176,006 $259,150 Over four units........................................... 96,611 65,482 Commercial................................................ 162,975 125,809 Land...................................................... -- 457 -------- -------- Total loans secured by real estate........................ 435,592 450,898 Other loans................................................. 12,144 16,122 -------- -------- 447,736 467,020 Less: Allowance for loan losses................................. (14,656) (18,163) Premium on purchased loans and deferred fees.............. 4,520 6,704 -------- -------- $437,600 $455,561 ======== ========
F-20 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 7. LOANS, DISCOUNTED LOANS AND LOANS HELD FOR SALE (CONTINUED)
DECEMBER 31, ------------------- 1999 1998 -------- -------- DISCOUNTED LOANS Real estate loans: One to four units......................................... $14,369 $ 93,133 Over four units........................................... -- 2,188 Commercial................................................ 444 17,964 Land...................................................... -- 3,937 ------- -------- Total loans secured by real estate........................ 14,813 117,222 Other loans................................................. 431 227,844 ------- -------- 15,244 345,066 Less: Market valuation losses and impairments................... -- (22,455) Allowance for loan losses................................. (3,318) (262,026) Discount on purchased loans............................... (502) (8,596) ------- -------- $11,424 $ 51,989 ======= ========
DECEMBER 31, ------------------- 1999 1998 -------- -------- LOANS AND DISCOUNTED LOANS HELD FOR SALE Real estate loans: One to four units......................................... $ 23,913 $199,302 Over four units........................................... 6,189 1,597 Commercial................................................ 26,885 25,598 Land...................................................... -- 3,434 -------- -------- Total loans secured by real estate........................ 56,987 229,931 Other loans................................................. 228,395 70,219 -------- -------- 285,382 300,150 Less: Market valuation losses and impairments................... -- (7,945) Allowance for loan losses, deferred fees, and discounts and premium on purchased loans.......................... (251,232) (7,533) -------- -------- $ 34,150 $284,672 ======== ========
As of December 31, 1999 and 1998 loans with adjustable rates of interest were $137,184 and $383,264, respectively, and loans with fixed rates of interest were $611,178 and $728,972, respectively. Adjustable-rate loans are generally indexed to U.S. Treasury Bills, the FHLB's Eleventh District Cost of Funds Index, LIBOR or Prime and are subject to limitations on the timing and extent of adjustment. Most loans adjust within six months of changes in the index. F-21 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 7. LOANS, DISCOUNTED LOANS AND LOANS HELD FOR SALE (CONTINUED) At December 31, 1999 and 1998, loans with unpaid principal balances of approximately $195,200 and $380,393, respectively, were pledged to secure credit line borrowings and repurchase agreements included in short-term borrowings (see Note 12). Activity in the allowance for loan losses is summarized as follows:
REORGANIZED COMPANY PREDECESSOR COMPANY ------------ ----------------------------------------- SEVEN MONTHS FIVE MONTHS ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER 31, MAY 31, DECEMBER 31, DECEMBER 31, 1999 1999 1998 1997 ------------ ----------- ------------ ------------ (DOLLARS IN THOUSANDS) Balance, beginning of period................ $275,402 $288,868 $118,275 $ 37,555 Allocations of purchased reserves: at acquisition............................ 2,145 2,733 372,136 174,920 at disposition............................ (12,027) (15,962) (210,224) (70,222) Addition due to discontinuation of European Operations................................ 1,739 -- -- -- Net change pursuant to fresh-start reporting................................. 452 (1,078) -- -- Charge-offs................................. (1,400) (1,068) (8,924) (27,175) Recoveries.................................. 272 186 2,818 1,206 Provision for estimated losses on loans..... 1,025 2,697 13,338 1,991 Currency translation adjustment............. (3,110) (974) 1,449 -- -------- -------- -------- -------- Balance, end of period...................... $264,498 $275,402 $288,868 $118,275 ======== ======== ======== ========
At December 31, 1999 and 1998, the Bank had impaired loans (other than discounted loans) totaling $707 and $5,194, respectively, and had recorded specific valuation allowances to measure the impairments of those loans totaling $158 and $869, respectively. At December 31, 1999 and 1998, the Bank had impaired loans totaling $800 and $6,963, respectively, with no recorded specific valuation allowances. At December 31, 1999 and 1998, the nonbank subsidiaries had impaired loans (other than discounted loans) with unpaid principal balances of $27,968 and $10,445, respectively, and a carrying value, net of purchase discount, of $3,159 and $7,890, respectively, which is below fair value. The average unpaid principal balances of impaired loans during the years ended December 31, 1999 and 1998 were $26,663 and $102,399, respectively. Interest income recognized on impaired loans during 1999, 1998 and 1997 was $203, $95 and $3,245, respectively, based on cash payments. These amounts exclude consideration of single-family residential and other loan pools evaluated for impairment on a pooled basis. The above amounts do not include impaired discounted loans. Management has determined that generally all discounted loans meet the criteria for impairment and collectively evaluates these loans for impairment. The Company has a geographic concentration of mortgage loans in Southern California and in the northeastern United States. F-22 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 7. LOANS, DISCOUNTED LOANS AND LOANS HELD FOR SALE (CONTINUED) Management's estimates are utilized to determine the adequacy of the allowance for loan losses. Estimates are also involved in determining the ultimate recoverability of purchased loans and, consequently, the pricing of purchased loans. These estimates are inherently uncertain and depend on the outcome of future events. Although management believes the levels of the allowance as of December 31, 1999 and 1998 are adequate to absorb inherent losses in the loan portfolio, rising interest rates, various other economic factors and regulatory requirements may result in increasing levels of losses. Those losses will be recognized if and when these events occur. 8. REAL ESTATE OWNED Real estate owned consists of property that was obtained through foreclosure or was purchased directly. Activity in the valuation allowance on real estate owned is as follows:
REORGANIZED COMPANY PREDECESSOR COMPANY ------------ ----------------------------------------- SEVEN MONTHS FIVE MONTHS ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER 31, MAY 31, DECEMBER 31, DECEMBER 31, 1999 1999 1998 1997 ------------ ----------- ------------ ------------ (DOLLARS IN THOUSANDS) Valuation allowance for losses on real estate owned, beginning of period......... $ 5,857 $1,679 $ 5,070 $ -- Valuation allowance on real estate sold..... (4,547) (833) (4,548) (3,662) Allocation of purchase discount............. -- 4,879 (979) 6,788 Provision for losses........................ 455 132 2,136 1,944 Addition due to discontinuation of European Operations................................ 270 -- -- -- ------- ------ ------- ------- Valuation allowance for losses on real estate owned, end of period............... $ 2,035 $5,857 $ 1,679 $ 5,070 ======= ====== ======= =======
Real estate owned with a net carrying value of $3,364 and $31,414 at December 31, 1999 and 1998, respectively, collateralizes credit line borrowings (see Note 12). 9. LEASEHOLD IMPROVEMENTS AND EQUIPMENT Leasehold improvements and equipment consist of:
DECEMBER 31, ------------------- 1999 1998 -------- -------- Leasehold improvements.................................... $ 286 $ 762 Furniture and equipment................................... 11,006 9,930 ------- ------- Total cost................................................ 11,292 10,692 Accumulated depreciation and amortization................. (6,867) (2,507) ------- ------- $ 4,425 $ 8,185 ======= =======
F-23 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 10. SERVICER ADVANCES, NET At December 31, 1999, gross servicer advances totaled $38,918, which were netted for purposes of the accompanying combined financial statements by $13,844 of collections from mortgagors which were used to fund these advances. The net amount totals $25,074 and is included in the accompanying combined Statement of Financial Condition as Servicer Advances, net as of December 31, 1999. As part of these servicing activities, the Company held customer cash in custodial accounts totaling $36,575 at December 31, 1999 which, for purposes of these combined financial statements, is offset against a liability representing amounts due to investors at that date. These amounts are not included in the accompanying combined statement of financial condition. 11. DEPOSITS Deposits consist of:
DECEMBER 31, ------------------- 1999 1998 -------- -------- Passbook accounts....................................... $ 399 $ 293 Money market accounts................................... 4,383 2,060 NOW/checking............................................ 11,321 10,934 Time deposits: Less than $100........................................ 246,098 353,736 $100 or more.......................................... 157,084 143,407 -------- -------- Total deposits.......................................... $419,285 $510,430 ======== ========
A summary of time deposits as of December 31, 1999, by maturity, is as follows: 2000.................................................... $358,849 2001.................................................... 41,573 2002.................................................... 2,007 2003.................................................... 753 -------- $403,182 ========
The interest rate characteristics of certain deposits have been changed utilizing interest rate swaps. See Note 13 for the specific terms and rates on instruments outstanding. 12. NOTES PAYABLE AND SHORT-TERM BORROWINGS At December 31, 1998, we had $184.2 million of unsecured, 13% Notes outstanding, which were to mature in 2004. In June 1999, pursuant to our prepackaged Chapter 11 bankruptcy filing, these Notes were converted into equity of WFSG, as described more fully in Note 1 to the consolidated financial statements. F-24 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 12. NOTES PAYABLE AND SHORT-TERM BORROWINGS (CONTINUED) Short-term borrowings at December 31, 1999 and 1998 include repurchase agreements and line of credit borrowings. Proceeds from the various credit facilities are used primarily for the acquisition of loan pools. Following is information about short-term borrowings:
REORGANIZED COMPANY PREDECESSOR COMPANY ------------ -------------------------- SEVEN MONTHS FIVE MONTHS ENDED ENDED YEAR ENDED DECEMBER 31, MAY 31, DECEMBER 31, 1999 1999 1998 ------------ ----------- ------------ Average balance during the period....... $ 95,521 $245,900 $ 972,376 Highest amount outstanding during the period................................ 150,339 $420,816 $1,248,797 Average interest rate-during the period................................ 7.1% 7.3% 7.6% Average interest rate-end of period..... 8.1% 6.1% 6.8%
The Company has repurchase agreements outstanding that mature monthly and roll into new 30-day repurchase agreements. In addition, the Company has discussed additional lending arrangements with investment banks who may provide financing on a transaction by transaction basis. There can be no assurance that lenders will not change material terms, including, but not limited to, advance rates and interest rates, or whether any such additional financing will materialize. 13. INCOME TAXES The domestic and foreign components of income (loss) before domestic and foreign income and other taxes were as follows:
REORGANIZED COMPANY PREDECESSOR COMPANY ------------ ----------------------------------------- SEVEN MONTHS FIVE MONTHS ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER 31, MAY 31, DECEMBER 31, DECEMBER 31, 1999 1999 1998 1997 ------------ ----------- ------------ ------------ (DOLLARS IN THOUSANDS) Domestic.................................... $(10,009) $(62,165) $(184,332) $29,689 Foreign..................................... (3,428) (5,445) (21,383) (3,888) -------- -------- --------- ------- Total................................. $(13,437) $(67,610) $(205,715) $25,801 ======== ======== ========= =======
F-25 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 13. INCOME TAXES (CONTINUED) The components of income tax (benefit) provision were as follows:
REORGANIZED COMPANY PREDECESSOR COMPANY ------------ ----------------------------------------- SEVEN MONTHS FIVE MONTHS ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER 31, MAY 31, DECEMBER 31, DECEMBER 31, 1999 1999 1998 1997 ------------ ----------- ------------ ------------ (DOLLARS IN THOUSANDS) Current tax provision (benefit): Federal................................... $467 $470 $(7,963) $ 9,019 State..................................... 187 188 (530) 2,083 Foreign................................... -- -- -- 59 ---- ---- ------- ------- Total current tax provision (benefit)........................... $654 $658 (8,493) 11,161 ---- ---- ------- ------- Deferred tax provision (benefit): Federal................................... -- -- 3,390 (493) State..................................... -- -- 847 169 Foreign................................... -- -- 200 (200) ---- ---- ------- ------- Total deferred tax provision (benefit)........................... -- -- 4,437 (524) ---- ---- ------- ------- Total income tax provision (benefit)........................... $654 $658 $(4,056) $10,637 ==== ==== ======= =======
The current tax provision for the seven-month and five-month periods ended December 31, 1999 and May 31, 1999, respectively, results from excess inclusion income earned on certain residual interests in REMICs which cannot be offset by tax losses. The 1998 current tax benefit results from a carryback of the 1998 net operating loss, net of taxes paid on REMIC excess inclusion income. F-26 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 13. INCOME TAXES (CONTINUED) The difference between the effective tax rate in the consolidated financial statements and the statutory federal income tax rate can be attributed to the following:
REORGANIZED COMPANY PREDECESSOR COMPANY ------------ ----------------------------------------- SEVEN MONTHS FIVE MONTHS ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER 31, MAY 31, DECEMBER 31, DECEMBER 31, 1999 1999 1998 1997 ------------ ----------- ------------ ------------ (DOLLARS IN THOUSANDS) Federal income tax (benefit) provision at statutory rate............................ (34.0)% (34.0)% (35.0)% 35.0% State taxes, net of federal tax effect...... (6.8) (6.8) (9.4) 5.7 Federal credit for foreign taxes............ -- -- -- (0.2) Foreign losses with no federal tax benefit................................... 8.7 2.2 0.8 (2.5) Subpart F income............................ 3.4 0.5 0.3 -- Stock issuance costs........................ -- 6.4 -- -- Valuation allowance for deferred tax asset, net....................................... 34.9 36.5 42.0 1.9 Other....................................... (1.5) (3.8) (0.7) 1.3 ----- ----- ----- ---- Effective income tax rate................... 4.7% 1.0% (2.0)% 41.2% ===== ===== ===== ====
F-27 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 13. INCOME TAXES (CONTINUED) Deferred income taxes are provided for temporary differences between income tax and financial statement recognition of revenue and expenses. Deferred income tax assets and liabilities are summarized as follows:
DECEMBER 31, ------------------- 1999 1998 -------- -------- Deferred tax assets: Loans-purchase discounts, allowance for loan losses and market valuation adjustments............................ $ 7,415 $ 8,875 Capitalized mortgage servicing rights..................... 2,023 1,935 Purchase accounting....................................... 27 -- Depreciation and amortization............................. 672 164 Unrealized loss on available for sale securities.......... -- 9,901 Unrealized loss on investment in WREIT.................... -- 1,367 Pass-through income....................................... 3,374 -- Net operating loss carryforward, net of COD income........ 31,809 80,198 State taxes............................................... -- 263 Accrued expenses.......................................... 3,752 3,415 Capitalized costs......................................... 283 1,264 Goodwill.................................................. 515 390 Capital loss carryforward................................. 14,889 6,203 Other..................................................... 8,171 207 -------- -------- Gross deferred tax assets............................. 72,930 114,182 -------- -------- Deferred tax liabilities: Market adjustment on mortgage-backed securities and hedge instruments............................................. (242) (15,388) Deferred loan fees........................................ (105) (138) FHLB stock dividends...................................... (820) (73) State taxes............................................... (367) -- Unrealized loss on available-for-sale securities.......... (133) -- Other..................................................... -- (587) -------- -------- Gross deferred tax liabilities........................ (1,667) (16,186) -------- -------- Total deferred tax asset, net............................. 71,263 97,996 Valuation allowance....................................... (71,263) (97,996) -------- -------- Net deferred tax asset................................ $ -- $ -- ======== ========
SFAS Statement No. 109, "Accounting for Income Taxes," requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Management believes sufficient uncertainty exists regarding the realizability of the U.S. and foreign items that a valuation allowance is required. As pre-reorganization tax benefits are realized and the valuation allowance is reduced, the tax effect will be recorded as an increase to stockholders' equity in accordance with SOP 90-7 and not as a benefit on the statement of operations. At May 31, 1999 the valuation allowance was $66.4 million, a decrease of $31.6 million, partially attributable to the extraordinary gain which is not reflected in the tax provision. During the remainder of 1999 the valuation allowance increased $26.7 million. During 1998, the net increase in the valuation allowance was $97.5 million, $11.0 million of this relates to unrealized losses recorded in consolidated stockholders' equity. F-28 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 13. INCOME TAXES (CONTINUED) The Company has U.S. net operating loss carryforwards at December 31, 1999 of approximately $49 million that may be available, subject to limitations, to offset regular taxable U.S. income during the carryforward period (through 2019). The Company also has state net operating loss carryforwards and $32.1 million of capital loss carryforwards for U.S. income tax purposes that expire in 2002 through 2004. Cancellation of indebtedness income in the amount of $136.1 million has been excluded from taxable income due to an exception for bankruptcy related debt forgiveness. The amount of cancellation of indebtedness income that is excluded from taxable income will be applied to reduce tax attributes, such as net operating loss and capital loss carryforwards as of January 1, 2000. Accordingly, operating losses are presented net of this amount. In addition, the Company has undergone an ownership change due to the restructuring which results in a limitation on the amount of pre-reorganization losses that may be utilized annually to offset taxable income. The annual limitation on future use of pre-reorganization net operating loss and capital loss carryforwards is approximately $4.3 million. The Company has foreign tax net operating loss carryforwards of $4.4 million in the U.K., $9.1 million in Ireland and $11.8 million in France (expiring in 2002 through 2004). As of December 31, 1999, the Company also has a capital loss carryforward of $3.1 million in France expiring in 2007. As noted above, a valuation allowance has been established to offset all U.S., state and foreign net operating loss and capital loss carryforwards. In accordance with SOP 90-7, the tax benefit realized from utilizing the pre-reorganization net operating loss carryforwards will be recorded as an increase to stockholders' equity. The Company has not provided for U.S. deferred income taxes on undistributed earnings of foreign subsidiaries as cumulative losses have been generated in each foreign jurisdiction since inception. The Company is in the process of winding down its foreign operations; however, it is anticipated that no additional U.S. tax will result from this wind-down. During 1999 the Internal Revenue Service ("IRS") concluded a field audit of First Bank's (formerly known as Girard Savings Bank) income tax return for the year ended December 31, 1995. First Bank agreed to two temporary adjustments that resulted in a $300 thousand payment prior to year-end. First Bank had accrued for this payment as of December 31, 1999. 14. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK LEASE COMMITMENTS--The following is a schedule of future minimum rental payments under operating leases for the period ended December 31, 1999: 2000........................................................ $2,522 2001........................................................ 1,790 2002........................................................ 1,088 2003........................................................ 656 2004........................................................ 483 Thereafter.................................................. -- ------ Total................................................... $6,539 ======
FINANCIAL INSTRUMENTS INVOLVING OFF-BALANCE SHEET RISK--In hedging the interest rate exposure of a fixed-rate or lagging-index asset, the Company may create a hedge which matches the principal amortization of such an asset against the maturity of the Company's liabilities generally by entering into short sales F-29 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 14. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK (CONTINUED) or forward sales of U.S. Treasury securities, Government Securities or interest rate futures contracts. This results in market gains or losses on hedging instruments, in response to interest rate increases or decreases, respectively, which approximate the amount of the corresponding market losses or gains, respectively, on loans being hedged. The unusually volatile market conditions affecting the value of hedged assets caused a breakdown of the historical interest rate relationships with the related hedging instruments. The correlation between hedged assets and hedging instruments was insufficient to support continuation of this particular hedging strategy at that time. As a result, all hedging instruments related to fixed-rate or lagging-index assets held or available for sale were closed out in 1998. $19.2 million of previously deferred hedging losses were considered ineffective and charged to net loss during the year (see Note 4). At December 31, 1999 and 1998 the Bank had approximately $30.5 million and $51.7 million respectively, notional principal amount of interest rate swap agreements outstanding. These interest rate swaps were designated as hedges to convert fixed rate income streams on loans to variable rate. These swaps had the effect of decreasing the Company's net interest income by approximately $0.1 million for the seven-month period ended December 31, 1999, $0.2 million for the five-month period ended May 31, 1999, and $0.1 million for the year ended December 31, 1998. The market value of these swaps currently deferred was $0.1 million at December 31, 1999. The weighted average fixed payments and floating-rate receipts of interest were 6.25% (1999) and 6.20% (1998) over USD LIBOR, respectively. PURCHASE COMMITMENTS--From time to time, the Company enters into various commitments and letters of intent relating to purchases of loans, foreclosed real estate portfolios and discrete operating companies. There can be no assurance that any of such transactions will ultimately be consummated. It is the Company's policy to generally record such transactions in the financial statements in the period in which such transactions are closed. LITIGATION--The Company and its directors are currently defendants to a lawsuit brought on behalf of each of Andrew A. Wiederhorn, the Company's former Chief Executive Officer, and Lawrence A. Mendelsohn, the Company's former President. On August 19, 1999, the Board of Directors of the Company notified each of Messrs. Wiederhorn and Mendelsohn of the Company's intention to terminate his employment for "cause" pursuant to his employment agreement with the Company. The Company suspended the employment of each of Messrs. Wiederhorn and Mendelsohn that same day. On September 2, 1999, the Company terminated the employment of each of them for cause. Mr. Wiederhorn and Mr. Mendelsohn have brought suit alleging, inter alia, that they were wrongfully terminated and defamed by the Company's and the directors' actions. The Company has filed its response denying the allegations and has filed counterclaims against Messrs. Wiederhorn and Mendelsohn. The Company is also currently a party to a lawsuit with WREI. In August 1999, WREI filed suit against the Company alleging that the aforementioned suspensions of Mr. Wiederhorn and Mr. Mendelsohn caused a facilities sharing agreement between the Company and WREI to come into effect, thereby suspending WREI's obligations under a management agreement between WREI and Wilshire Realty Services Corporation ("WRSC"), a subsidiary of the Company (Messrs. Wiederhorn and Mendelsohn were simultaneously serving as the senior executive officers of WREI). WREI's motion for preliminary injunctive relief to prevent the Company from removing Messrs. Wiederhorn and Mendelsohn from the Company's headquarters facilities and for other relief was denied in a written ruling. WREI thereafter amended its complaint to assert that, as a result of the termination of Messrs. Wiederhorn and F-30 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 14. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK (CONTINUED) Mendelsohn, (i) the Company had breached the management agreement with WREI (which permitted WREI to terminate that agreement) and (ii) a facilities sharing agreement between the Company and WREI had been triggered, requiring WREI to pay the Company only for the cost of the management provided by the Company's employees (and no further fees would be payable under the management agreement). The Company has counterclaimed, alleging that (i) WREI has failed to pay management fees owed to the Company under the management agreement, (ii) WREI is not entitled to terminate the management agreement until April 6, 2000 (because WRSC had not breached the agreement) and any purported termination of that agreement by WREI entitles the Company to a termination fee in excess of $3 million, and (iii) the facilities sharing agreement is inapplicable and/or invalid. The Company will continue to vigorously contest the claims made by Messrs. Wiederhorn and Mendelsohn and WREI and assert its counterclaims against the same. Management, after consulting legal counsel, believes that the Company will likely substantially prevail on its claims and its defenses. The Company is a potential defendant to a lawsuit likely to be filed by a former officer of the Company. In December 1999, the Company terminated the employment of this officer for cause. The former officer's attorney claimed in a letter to the Company that he was wrongfully terminated and that he is thereby entitled to damages. The Company has attempted to settle, but offers of settlement have been rejected by this officer. The Company is a defendant in other legal actions arising from transactions conducted in the ordinary course of business. Management, after consultation with legal counsel, believes the ultimate liability, if any, arising from such actions will not materially affect the Company's consolidated results of operations or financial position. OTHER--As part of the restructuring the Company issued a Liquidation Bond to CCI which is a non-interest bearing obligation to pay CCI, upon any liquidation or dissolution of WCC, $19.3 million less any distributions that CCI receives from its 49.99% ownership interest in WCC. WCC is obligated to keep the bond collateralized with assets of WCC or WFSG having a fair market value equal to the bond and, to the extent that it does not do so, WFSG may be responsible for the deficiency. 15. REGULATORY MATTERS REGULATORY AGREEMENTS--FIRST BANK OF BEVERLY HILLS--On February 8, 1999, the OTS rescinded the Cease and Desist Order (the "Order") under which the Bank had previously been operating. The Order had prohibited the Bank from: increasing total assets in excess of $750 million; purchasing any loans or real estate, without the approval of the OTS, until certain acquisition and servicing deficiencies identified by the OTS had been corrected; and purchasing any non-performing assets or foreclosed real estate until such time as the Bank was rated a composite "3" rating according to the Uniform Financial Institutions Rating System. Management believes that the Bank was in material compliance with the various provisions of the Order for each period that it was in place. On June 3, 1999, the OTS issued a directive letter that indicates that it considers First Bank to be in "troubled condition." This directive places restrictions on First Bank's ability to engage in certain activities, including, but not limited to: increasing asset size; making new loans, investments or capital expenditures; paying dividends or making other capital distributions; and hiring senior executive officers, directors or F-31 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 15. REGULATORY MATTERS (CONTINUED) consultants. On September 2, 1999, the OTS completed a safety and soundness examination of First Bank. As a result of this examination, the OTS directive letter will remain in force until First Bank corrects items noted in the examination report, including developing and implementing an interest rate risk reduction plan; developing a more detailed business plan under various interest rate scenarios; and improving controls in the Bankcard division. First Bank is cooperating with the OTS to have the "troubled institution" designation lifted. REGULATORY AGREEMENT--WFSG AND WAC--On January 7, 1999, WFSG and WAC stipulated to Cease and Desist Orders by the OTS. WCC is subject to a similar stipulated order. The orders prohibit these entities from entering into a transaction, directly or indirectly, that would cause the Bank to violate or be in violation of transactions with affiliates regulations. These Orders also require 30-day advance notification before adding, replacing, or terminating any member of the Bank's Board of Directors or any senior executive of the Bank. CAPITAL REQUIREMENTS--Federally insured savings associations such as the Bank are required to maintain minimum levels of regulatory capital. Those standards generally are as stringent as the comparable capital requirements imposed on national banks. The OTS also is authorized to impose capital requirements in excess of these standards on a case-by-case basis. While the Order was in place, the Bank was required to maintain minimum capital ratios required of institutions to be deemed "well capitalized." In connection with the 1998 examination, the OTS indicated that the capital level of the Bank exceeds the minimum requirement for "well capitalized" under the provisions of the Prompt Corrective Action Regulation. As of December 31, 1999 and 1998, the total core capital and total risk-based capital amounts of the Bank, compared to the OTS minimum requirements, are as follows:
TO BE CATEGORIZED AS AMOUNT REQUIRED "WELL CAPITALIZED" FOR CAPITAL UNDER PROMPT ADEQUACY CORRECTIVE ACTION ACTUAL PURPOSES REGULATIONS ------------------- ------------------- --------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- -------- -------- -------- --------- --------- DECEMBER 31, 1999 Total Capital to Risk-Weighted Assets (Risk-Based Capital)..................... $58,746 15.3% $30,644 >8.0% $38,305 >10.0% Tier 1 Capital to Risk-Weighted Assets..... 54,766 14.3% Not Applicable 22,983 > 6.0% Core Capital to Tangible Assets............ 54,766 9.7% 22,474 >4.0% 28,092 > 5.0% Tangible Capital to Tangible Assets........ 54,766 9.7% 8,428 >1.5% Not Applicable DECEMBER 31, 1998 Total Capital to Risk-Weighted Assets (Risk-Based Capital)..................... $55,286 14.8% $29,894 >8.0% $37,368 >10.0% Tier 1 Capital to Risk-Weighted Assets..... 51,364 13.8% Not Applicable 22,421 > 6.0% Core Capital to Tangible Assets............ 51,364 8.8% 23,478 >4.0% 29,348 > 5.0% Tangible Capital to Tangible Assets........ 51,364 8.8% 8,804 >1.5% Not Applicable
As of December 31, 1999 and 1998, the Bank's capital ratios were sufficient for it to be categorized as "well capitalized." If notified or otherwise deemed to be categorized as less than "well capitalized," the F-32 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 15. REGULATORY MATTERS (CONTINUED) Bank could be subject to certain restrictions, including restrictions on the use of brokered deposits as a funding source. 16. RELATED PARTY TRANSACTIONS At December 31, 1999, the Company had a $5.0 million note payable to WREI bearing interest at 12%, which was funded under the DIP Facility (see Note 1). WREI owned 14.4% of the Company's outstanding common stock at December 31, 1999. From WREI's inception until September 1999, WRSC was the manager of WREI and earned a management fee based on the level of WREI's investment assets. The Company, through WRSC, earned management fee income of $1.1 million for the seven months ended December 31, 1999, $1.3 million for the five months ended May 31, 1999, and $3.2 million for the year ended December 31, 1998. On September 2, 1999, the Company terminated the employment of Andrew A. Wiederhorn, its former Chief Executive Officer, and Lawrence A. Mendelsohn, its former President, for "cause" pursuant to their employment agreements with the Company. Messrs. Wiederhorn and Mendelsohn have served as senior management of WREI since the formation of that company and continue to do so. Subsequent to the Company's termination of Messrs. Wiederhorn and Mendelsohn, WREI notified the Company (i) that WREI was terminating the management agreement between WREI and WRSC as a result of WRSC's breach of that agreement, and (ii) in the event that WREI had no right to terminate the management agreement, WREI would not renew the agreement when it expires by its terms in April 2000. In October 1999, WFSG sold mortgage-backed securities with a book value of $20.9 million and transferred related debt of $18.5 million to WREI for net proceeds of approximately $2.4 million. Such amount was applied to the $5.8 million discounted present value (book value) of a 6%, unsecured pay-in-kind ("PIK") Note payable to WREI. No gain or loss was recorded on this sale, as the mortgage-backed securities had previously been written down to the sales price in the accompanying consolidated financial statements. In December 1999, the Company entered into an agreement with WREI. The principal terms of the agreement include, but are not limited to, the following: WFSG sold to WREI all of its interest in WREI's common stock, including 992,587 shares of WREI common stock, and rights to previously declared dividend on such shares, and options to purchase an additional 1,112,500 shares; WFSG released WREI from the management fee otherwise payable by WREI under a management agreement between WFSG and WREI for the quarterly period ended September 30, 1999; WREI cancelled WFSG's obligations under the PIK notes previously issued by WFSG to WREI; and WFSG issued to WREI an unsecured promissory note in the amount of $275,000, bearing interest at 9%. At December 31, 1999, the Company had two loans outstanding to a partner of CCI (the 49.99% minority owner of WCC), totaling approximately $3.1 million and bearing interest at 15.5%. F-33 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 17. INVESTMENT IN WREI In April 1998, the Company sponsored the initial public offering of WREI, whereby WREI received approximately $167.0 million of proceeds. The Company purchased approximately 990,000 shares of WREI common stock in connection with the initial public offering. Through September 1999 this investment was accounted for by the equity method of accounting and was not adjusted for changes in the market price of the underlying shares but rather, for increases and decreases based on the stockholders' equity of WREI. In September 1999, as discussed above in Note 16, the Company terminated Messrs. Wiederhorn and Mendelsohn from their executive positions with WFSG (although they remain executives of WREI), and subsequently, WREI notified the Company that it was purporting to terminate or otherwise decline to renew its management agreement with WRSC. As a result, the Company discontinued accounting for its investment in WREI on the equity method, and subsequently accounted for the investment as a security available-for-sale, which requires that the investment be reported at its current fair value. At September 30, 1999 the Company's investment in WREI was written down to approximately $2.6 million, based on management's evaluation of other than temporary impairment for this security. A charge of approximately $1.6 million was recorded as a market valuation loss and impairment as a result of this write-down to fair value. In December 1999, the Company reached a settlement agreement with WREI whereby the Company sold to WREI all of its interest in WREI common stock. As a result, the Company no longer had an investment in WREI as of December 31, 1999. 18. NET (LOSS) INCOME PER SHARE For the seven-month period subsequent to the Company's restructuring, the Company had outstanding stock options on its new common stock which were considered common stock equivalents. However, the Company experienced a loss for this period, which resulted in common stock equivalents having an anti-dilutive effect on loss per share. Therefore, loss per share is calculated by dividing net loss by the 20,033,600 outstanding shares of the Company's new common stock.
PER SHARE NET LOSS SHARES AMOUNT -------- ---------- --------- SEVEN MONTHS ENDED DECEMBER 31, 1999 Net loss.................................................... $(14,091) 20,033,600 $(0.70) Dilution from common stock equivalents...................... -- -- -- -------- ---------- ------ Diluted loss per share...................................... $(14,091) 20,033,600 $(0.70) ======== ========== ======
For the five months ended May 31, 1999, the Company had outstanding stock options on its old common stock which were considered common stock equivalents in the calculation of (loss) earnings per share. However, because the exercise price of the options then outstanding on the Company's old common stock exceeded the average market price of the common stock during the period, exercise of the options would have been anti-dilutive. As a result, the weighted average shares outstanding is the same for basic F-34 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 18. NET (LOSS) INCOME PER SHARE (CONTINUED) and diluted (loss) earnings per share, which is calculated by dividing (loss) income by the 10,885,000 outstanding shares of old common stock, as follows:
PER SHARE (LOSS) INCOME SHARES AMOUNT ------------- ---------- --------- FIVE MONTHS ENDED MAY 31, 1999 Net loss before extraordinary item......................... $(68,268) 10,885,000 $(6.27) Extraordinary item, net of tax............................. 225,606 10,885,000 20.72 -------- ---------- ------ Net income................................................. $157,338 10,885,000 $14.45 Dilution from common stock equivalents..................... -- -- -- -------- ---------- ------ Diluted income per share................................... $157,338 10,885,000 $14.45 ======== ========== ======
During the year ended December 31, 1998, the Company experienced a net loss, which resulted in common stock equivalents having an anti-dilutive effect on loss per share. Weighted average shares outstanding is therefore equivalent for basic and diluted loss per share for the year ended December 31, 1998. The following is a reconciliation of net loss available to common shareholders and weighted average shares outstanding as used to calculate basic and diluted loss per share for the year ended December 31, 1998.
PER SHARE NET LOSS SHARES AMOUNT --------- ---------- --------- YEAR ENDED DECEMBER 31, 1998 Net loss.................................................... $(201,659) Preferred stock dividend.................................... (417) --------- Net loss available to common shareholders................... $(202,076) ========= Basic loss per share........................................ $(202,076) 10,676,685 $(18.93) Dilution from common stock equivalents...................... -- -- -- --------- ---------- ------- Diluted loss per share...................................... $(202,076) 10,676,685 $(18.93) ========= ========== =======
19. EMPLOYEE BENEFITS AND AGREEMENTS PROFIT SHARING PLAN--The Company's employees participate in a defined contribution profit sharing and 401(k) plan sponsored by companies included in the Company's "control group." At the discretion of the Company's Board of Directors, the Company may elect to contribute to the plan based on profits of the Company or based on matching participants' contributions. For the seven-month period ended December 31, 1999 and for the years ended December 31, 1998 and 1997, the Company contributed $395, $172 and $119, respectively, to the plan. There was no such contribution for the five-month period ended May 31, 1999. EMPLOYMENT AGREEMENTS--The Company entered into substantially similar employment agreements, effective June 10, 1999, with Andrew A. Wiederhorn (as Chief Executive Officer) and Lawrence A. Mendelsohn (as President) (each individually, an "Executive" and collectively, the "Executives"). Each agreement provides for an initial one-year term. F-35 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 19. EMPLOYEE BENEFITS AND AGREEMENTS (CONTINUED) The 1999 agreements provide for an annual base salary of $33,333 for Mr. Wiederhorn and $166,667 for Mr. Mendelsohn, an annual minimum bonus of $150,000 each, a capital bonus based on equity capital obtained for the Company, an earnings bonus equal to 3% of after-tax earnings of the Company, and a discretionary bonus to be determined by the Board of Directors. The agreements also provide that upon certain dates Mr. Wiederhorn would receive stock options equal to 2% of the common stock of the Company and Mr. Mendelsohn would receive stock options equal to 1% of the common stock of the Company. The agreement also provides that during the employment term and thereafter, the Company will indemnify the Executive to the fullest extent permitted by law, in connection with any claim against the Executive as a result of the Executive serving as an officer or director of the Company or in any capacity at the request of the Company in or with regard to any other entity, employee benefit plan or enterprise. Following the Executive's termination of employment, the Company will continue to cover the Executive even if the Executive has ceased to serve in such capacity. The agreement may be terminated at any time by the Executive or the Company for cause or for any other reason (as each capitalized term is defined in the agreement). If the agreement is terminated other than for cause, all unvested stock options automatically vest. If the agreement is terminated due to a Triggering Termination (defined below) or if the agreement is not renewed, the Company has agreed to pay Capital Consultants, Inc. in the case of termination of Mr. Wiederhorn, two-thirds of the then outstanding balance of a non-interest-bearing note in the amount of $2.2 million, payable over a five-year period commencing on June 8, 1999 (the "WFSG Promissory Note"), and in the case of Mr. Mendelsohn, one-third of the then outstanding balance of the WFSG Promissory Note. A Triggering Termination means termination without cause, termination due to death or disability, or termination by the Executive due to certain specified causes. Each agreement provides that the Executive will maintain the confidentiality of proprietary information. Each agreement provides that during the term of the agreement and for six months thereafter each executive will not solicit employees of the company for employment elsewhere. On September 2, 1999 the employment of Messrs. Wiederhorn and Mendelsohn was terminated for cause and is subject to litigation. See Note 14. On September 3, 1999 the Company hired Stephen Glennon to act as the Chief Executive Officer. Until April 1, 2000, Mr. Glennon's salary is $25,000 per month and in January 2000, Mr. Glennon was granted 400,000 stock options at a price of $1.0625 per share. One-third of the options vested on January 1, 2000, one-third of the options will vest on June 30, 2001 and one-third will vest on June 30, 2002. Commencing April 1, 2000 Mr. Glennon will receive a salary of $1 per year for two years, and will be reimbursed for certain rental and car expenses. Mr. Glennon also was granted 575,000 stock options at a price of $1.00 per share. Approximately 23,958 of the options vest each month of employment completed by Mr. Glennon. The options have acceleration provisions (subject to OTS approval) whereby, in the event of a change in control of the Company, the options would vest automatically and immediately become exercisable. On November 15, 1999 First Bank hired Richard S. Cupp as Chief Executive Officer and President for a two-year term. A signing bonus of $40,000 was paid to Mr. Cupp on January 3, 2000. Mr. Cupp's annual F-36 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 19. EMPLOYEE BENEFITS AND AGREEMENTS (CONTINUED) salary is $250,000 and Mr. Cupp was granted 200,000 stock options at a price of $1.00 per share. One-third of the options vested on January 1, 2000, one-third of the options will vest on June 30, 2001, and one-third will vest on June 30, 2002. The options have acceleration provisions (subject to OTS approval) whereby, in the event of a change in control of the Company, the options would vest automatically and immediately become exercisable. STOCK OPTIONS--The Company adopted a new Stock Plan, the 1999 Equity Participation Plan, on December 2, 1999. The Equity Participation Plan permits the Company to grant incentive stock options ("ISOs"), non-statutory stock options ("NSOs"), restricted stock and stock appreciation rights (collectively "Awards") to employees, directors and consultants of the Company and subsidiaries of the Company. The Board of Directors has delegated administration of the Equity Participation Plan to the Compensation Committee (the "Committee"). Under the Stock Plan, the Committee may grant ISOs and NSOs. The option exercise price of both ISOs and NSOs may not be less than the fair market value of the shares covered by the option on the date the option is granted. The Committee may also grant Awards of restricted shares of Common Stock. Each restricted stock Award would specify the number of shares of Common Stock to be issued to the recipient, the date of issuance, any consideration for such shares and the restrictions imposed on the shares (including the conditions of release or lapse of such restrictions). The Committee may also grant Awards of stock appreciation rights. A stock appreciation right entitles the holder to receive from the Company, in cash or Common Stock, at the time of exercise, the excess of the fair market value at the date of exercise of a share of Common Stock over a specified price fixed by the Committee in the Award, multiplied by the number of shares as to which the right is being exercised. The specified price fixed by the Committee will not be less than the fair market value of shares of Common Stock at the date the stock appreciation right was granted. In 1999, the Company authorized the issuance of options for a total of 500,000 shares of Common Stock to executive officers and options for a total of 170,000 shares of Common Stock to directors, and in December 1999, option for 170,000 share were granted to directors. In January 2000 the Company authorized the issuance of options for an additional 1,625,000 shares of Common Stock to Executive officers and options for an additional 50,000 shares of common stock to directors. F-37 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 19. EMPLOYEE BENEFITS AND AGREEMENTS (CONTINUED) A summary of the Company's stock options as of December 31, 1999 and 1998, and changes during the periods then ended is presented below:
REORGANIZED COMPANY ------------------- PREDECESSOR COMPANY SEVEN MONTHS --------------------------------------------- ENDED FIVE MONTHS ENDED YEAR ENDED DECEMBER 31, 1999 MAY 31, 1999 DECEMBER 31, 1998 ------------------- ---------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE -------- -------- ----------- -------- --------- -------- Outstanding at beginning of period....... -- -- 1,809,776 $15.62 1,387,326 $13.58 Cancelled................................ -- -- (1,809,776) -- ---- Granted.................................. 370,000 $1.10 -- -- 422,450 22.34 Forfeited................................ -- -- -- -- -- -- ------- ----- ----------- ------ --------- ------ Outstanding at end of period............. 370,000 $1.10 $ -- $ -- 1,809,776 $15.62 ======= ===== =========== ====== ========= ======
Additional information regarding options outstanding as of December 31, 1999 is as follows:
WEIGHTED- WEIGHTED- AVERAGE AVERAGE RANGE OF REMAINING EXERCISE EXERCISE PRICES SHARES LIFE PRICE - --------------- -------- --------- --------- $1.00........................................... 200,000 9.87 $1.00 $1.22........................................... 170,000 10.00 $1.22
The Company applies Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related Interpretations in accounting for its Stock Plan. Accordingly, no compensation expense has been recognized for grants under the Stock Plan. There has been no pro-forma adjustment to record compensation expense under SFAS No. 123 for the seven months ended December 31, 1999 as the options were granted near year-end. Had compensation expense for the Company's Stock Plan been determined based on the fair value at the grant date consistent with the methods of SFAS No. 123, the F-38 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 19. EMPLOYEE BENEFITS AND AGREEMENTS (CONTINUED) Company's net income and earnings per share for the year ended December 31, 1998 would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, 1998 ------------ Net loss to common shareholders: As reported............................................... $(201,659) Pro forma................................................. $(202,816) Net loss per common and common share equivalent: Basic loss per share: As reported............................................. $ (18.93) Pro forma............................................... $ (19.04) Diluted loss per share: As reported............................................. $ (18.93) Pro forma............................................... $ (19.04)
There were no options granted in 1998 with exercise prices below the market value of the stock at the grant date. The weighted average fair value at date of grant of options granted during 1998 was $11.21 for options with exercise prices exceeding the market price of the stock at the grant date. Fair values were estimated using the Black-Scholes option-pricing model with the following weighted average assumptions used: no dividend yield, expected volatility of 25%, risk-free interest rate of 6.6% and expected lives of three to five years. F-39 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 20. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
DECEMBER 31, 1999 --------------------- CARRYING ESTIMATED AMOUNT FAIR VALUE -------- ---------- Assets: Cash and cash equivalents................................. $ 54,168 $ 54,168 Mortgage-backed securities available for sale............. 43,583 43,583 Mortgage-backed securities held to maturity............... 10,166 9,930 Securities held to maturity............................... 5,979 5,985 Loans, discounted loans, and loans held for sale, net..... 483,174 487,232 Federal Home Loan Bank stock.............................. 5,575 5,575 Servicer advances, net.................................... 25,074 17,719 Liabilities: Deposits.................................................. 419,285 416,822 FHLB advances............................................. 80,000 78,926 Short-term borrowings..................................... 31,927 31,927 Notes payable............................................. 5,275 5,275 Off-balance-sheet instruments: Interest-rate swaps....................................... -- 131
DECEMBER 31, 1998 --------------------- CARRYING ESTIMATED AMOUNT FAIR VALUE -------- ---------- Assets: Cash and cash equivalents................................. $ 23,468 $ 23,468 Mortgage-backed securities available for sale............. 114,463 114,463 Mortgage-backed securities held to maturity............... 13,580 13,511 Securities held to maturity............................... 5,962 6,212 Loans, discounted loans, and loans held for sale, net..... 792,222 800,535 Federal Home Loan Bank stock.............................. 5,332 5,332 Liabilities: Deposits.................................................. 510,430 510,220 Short-term borrowings..................................... 420,816 420,816 Notes payable............................................. 184,245 91,502 Off-balance-sheet instruments: Interest-rate swaps....................................... -- (663)
F-40 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 20. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The methods and assumptions used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value are explained below: CASH AND CASH EQUIVALENTS--The carrying amounts approximate fair values due to the short-term nature of these instruments. SECURITIES AND MORTGAGE-BACKED SECURITIES--The fair values of securities are generally obtained from market bids for similar or identical securities, or are obtained from independent security brokers or dealers. LOANS, DISCOUNTED LOANS AND LOANS HELD FOR SALE--The fair value of discounted loans, which are predominately non-performing loans, is more difficult to estimate due to uncertainties as to the nature, timing and extent to which the loans will be either collected according to original terms, restructured, or foreclosed upon. Discounted loans' fair values were estimated using the Company's best judgement for these factors in determining the estimated present value of future net cash flows discounted at a risk-adjusted market rate of return. For other loans, fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, such as fixed- and adjustable-rate interest terms. The fair values of fixed-rate mortgage loans are based on discounted cash flows utilizing applicable risk-adjusted spreads relative to the current pricing of similar fixed-rate loans as well as anticipated prepayment schedules. The fair values of adjustable-rate mortgage loans are based on discounted cash flows utilizing discount rates that approximate the pricing of available mortgage-backed securities having similar rate and repricing characteristics, as well as anticipated prepayment schedules. No value adjustments have been made for changes in credit within the loan portfolio. It is management's opinion that the allowance for estimated loan losses pertaining to loans results in a fair value adjustment of the credit risk of such loans. FEDERAL HOME LOAN BANK STOCK--The carrying amounts approximate fair values because the stock may be sold back to the Federal Home Loan Bank at carrying value. SERVICER ADVANCES--The fair value calculation for servicer advances is separately performed for the following categories of advances: 1) Advances related to scheduled remittances on certain securitizations for borrowers who are current 2) Advances related to scheduled remittances on certain securitizations for borrowers who are delinquent 3) Impound payments and loan collection costs on securitizations and other servicing arrangements Advances on scheduled remittances on certain securitizations approximate their book value for borrowers who are current, as the funds expended are generally repaid by the mortgagors in a matter of days. For advances on scheduled remittances on certain securitizations where the borrowers are delinquent, the expected repayments are anticipated to occur generally within twelve months, and have been discounted utilizing the Company's cost of funds rate. Impound payments and loan collection costs on securitizations and other servicing arrangements are also generally recovered within twelve months, and have been discounted utilizing the Company's cost of funds rate. F-41 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 20. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) DEPOSITS--The fair values of deposits are estimated based on the type of deposit products. Demand accounts, which include passbook and transaction accounts, are presumed to have equal book and fair values, since the interest rates paid on these accounts are based on prevailing market rates. The estimated fair values of time deposits are determined by discounting the cash flows of settlements of deposits having similar maturities and rates, utilizing a yield curve that approximated the prevailing rates offered to depositors as of the reporting date. SHORT-TERM BORROWINGS--The carrying amounts of short-term borrowings approximate fair value due to the short-term nature of these instruments. NOTES PAYABLE--The fair value of notes payable is obtained from market bids from independent securities dealers. OFF-BALANCE-SHEET LIABILITIES--The fair values of interest-rate swaps are estimated at the net present value of the future payable, based on the current spread, discounted at a current rate. The fair values of interest rate and foreign currency futures are generally obtained from market bids for similar or identical instruments. Fair values of off-balance-sheet commitments to lend are estimated based on deferred fees associated with such commitments, which are immaterial as of the reporting date. The fair value estimates presented herein are based on pertinent information available to management as of each reporting date. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented herein. 21. OPERATING SEGMENTS In June 1997, SFAS No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION," was issued effective for fiscal years beginning after December 15, 1998. The Company opted not to adopt this statement prior to that date. The Company's reportable operating segments, as defined by the Company's management, are thrift banking and non-banking (primarily asset servicing) operations. The operating segments vary in terms of regulatory environment, funding sources and asset acquisition focus. A description of the Company's operating segments is as follows: THRIFT BANKING--The Company's thrift banking operations are conducted through the Bank. The Bank is engaged in the acquisitions of mortgage loans, origination of mortgage loans, and merchant bankcard processing. The primary source of financing for the Bank acquisitions and originations is wholesale and brokered certificates of deposit, and to a lesser extent, committed short-term line of credit facilities and FHLB advances. The Bank is a federally chartered savings bank and is regulated by the Office of Thrift Supervision. NON-BANKING--The Company's non-banking operations are conducted primarily through WCC, WFC, and to a lesser extent, Wilshire Financial Services Group Europe Inc. In addition to loan servicing operations, the non-banking operating segment also performs mortgage loan acquisitions and loan sales. Historically, the primary funding sources utilized for non-banking operations were line of credit and repurchase agreement facilities with nationally recognized investment banking firms. F-42 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 21. OPERATING SEGMENTS (CONTINUED) Segment data for the seven months ended December 31, 1999, the five months ended May 31, 1999, and the years ended December 31, 1998 and 1997 is as follows:
THRIFT NON- SEVEN MONTHS ENDED DECEMBER 31, 1999 SEGMENT DATA BANKING BANKING TOTAL - ------------------------------------------------- -------- -------- -------- Interest income............................................. $ 28,349 $ 9,523 $ 37,872 Interest expense............................................ 17,447 3,819 21,266 -------- -------- -------- Net interest income......................................... 10,902 5,704 16,606 Provision for loan losses................................... (1,250) 2,275 1,025 -------- -------- -------- Net interest income after provision for loan losses......... 12,152 3,429 15,581 Other income................................................ 2,403 171 2,574 Other expense............................................... 10,822 20,770 31,592 -------- -------- -------- Income (loss) before taxes.................................. 3,733 (17,170) (13,437) Income tax provision (benefit).............................. 1,605 (951) 654 -------- -------- -------- Net income (loss)........................................... $ 2,128 $(16,219) $(14,091) ======== ======== ======== Total assets................................................ $564,014 $ 90,504 $654,518 ======== ======== ========
THRIFT NON- FIVE MONTHS ENDED MAY 31, 1999 SEGMENT DATA BANKING BANKING TOTAL - ------------------------------------------- -------- -------- -------- Interest income............................................. $ 17,771 $ 10,094 $ 27,865 Interest expense............................................ 11,680 11,449 23,129 -------- -------- -------- Net interest income (loss).................................. 6,091 (1,355) 4,736 Provision for loan losses................................... -- 2,697 2,697 -------- -------- -------- Net interest income (loss) after provision for loan losses.................................................... 6,091 (4,052) 2,039 Other income................................................ 4,278 9,481 13,759 Other expense............................................... 7,678 23,696 31,374 -------- -------- -------- Income (loss) before reorganization items, taxes and extraordinary item........................................ 2,691 (18,267) (15,576) Reorganization items........................................ -- (52,034) (52,034) -------- -------- -------- Income (loss) before taxes and extraordinary item........... 2,691 (70,301) (67,610) Income tax provision (benefit).............................. 1,357 (699) 658 -------- -------- -------- Income (loss) before extraordinary item..................... 1,334 (69,602) (68,268) Extraordinary item.......................................... -- 225,606 225,606 -------- -------- -------- Net income.................................................. $ 1,334 $156,004 $157,338 ======== ======== ======== Total assets................................................ $606,954 $180,333 $787,287 ======== ======== ========
F-43 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 21. OPERATING SEGMENTS (CONTINUED)
THRIFT NON- 1998 SEGMENT DATA BANKING BANKING TOTAL - ----------------- -------- --------- ---------- Interest income............................................. $ 41,813 $ 98,703 $ 140,516 Interest expense............................................ 29,775 95,683 125,458 -------- --------- ---------- Net interest income......................................... 12,038 3,020 15,058 Provision for loan losses................................... (5,100) 18,438 13,338 -------- --------- ---------- Net interest income (loss) after provision for loan losses.................................................... 17,138 (15,418) 1,720 Other income (loss)......................................... 6,528 (100,681) (94,153) Other expense............................................... 12,878 100,404 113,282 -------- --------- ---------- Income (loss) before taxes.................................. 10,788 (216,503) (205,715) Income tax provision (benefit).............................. 4,639 (8,695) (4,056) -------- --------- ---------- Net income (loss)........................................... $ 6,149 $(207,808) $ (201,659) -------- --------- ---------- Total assets................................................ $594,259 $ 489,994 $1,084,253 ======== ========= ==========
THRIFT NON- 1997 SEGMENT DATA BANKING BANKING TOTAL - ----------------- -------- ---------- ---------- Interest income............................................ $ 34,647 $ 75,410 $ 110,057 Interest expense........................................... 26,377 60,459 86,836 -------- ---------- ---------- Net interest income........................................ 8,270 14,951 23,221 Provision for loan losses.................................. (550) 2,541 1,991 -------- ---------- ---------- Net interest income after provision for loan losses........ 8,820 12,410 21,230 Other income............................................... 12,723 48,580 61,303 Other expense.............................................. 16,729 40,003 56,732 -------- ---------- ---------- Income before taxes........................................ 4,814 20,987 25,801 Income tax provision....................................... 2,070 8,567 10,637 -------- ---------- ---------- Net income................................................. $ 2,744 $ 12,420 $ 15,164 ======== ========== ========== Total assets............................................... $466,199 $1,162,828 $1,629,027 ======== ========== ==========
F-44 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
QUARTERS ENDED ------------------------ DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 1999 1999 1999 1999 ------------ ------------- -------- --------- Interest income................................. $ 15,318 $ 16,673 $ 16,543 $ 17,203 Interest expense................................ 8,895 9,419 9,454 16,627 Provision for loan losses....................... 1,685 (741) 2,708 70 -------- --------- -------- -------- Net interest income after provision for loan losses........................................ 4,738 7,995 4,381 506 Non-interest (loss) income...................... (38) 101 6,806 9,464 Non-interest expense............................ 10,628 14,928 16,295 21,115 -------- --------- -------- -------- Loss before reorganization items, taxes and extraordinary item............................ (5,928) (6,832) (5,108) (11,145) Reorganization items............................ -- -- (37,601) (14,433) -------- --------- -------- -------- Loss before taxes and extraordinary item........ (5,928) (6,832) (42,709) (25,578) Income tax provision............................ 225 304 408 375 -------- --------- -------- -------- Loss before extraordinary item.................. (6,153) (7,136) (43,117) (25,953) Extraordinary item.............................. -- -- 225,606 -- -------- --------- -------- -------- Net (loss) income............................... $ (6,153) $ (7,136) $182,489 $(25,953) ======== ========= ======== ======== Basic and diluted loss per share................ $ (0.31) $ (0.36) N/A $ (2.38)
QUARTERS ENDED ------------------------ DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 1998 1998 1998 1998 ------------ ------------- -------- --------- Interest income................................. $ 23,358 $ 41,017 $ 41,323 $ 34,818 Interest expense................................ 26,151 35,054 33,793 30,460 Provision for loan losses....................... 1,147 15,191 (1,500) (1,500) -------- --------- -------- -------- Net interest (loss) income after provision for loan losses................................... (3,940) (9,228) 9,030 5,858 Non-interest (loss) income...................... (54,158) (87,103) 40,970 6,138 Non-interest expense............................ 27,620 36,663 29,202 19,797 -------- --------- -------- -------- (Loss) income before income taxes............... (85,718) (132,994) 20,798 (7,801) Income tax provision (benefit).................. 4,136 (14,028) 8,972 (3,136) -------- --------- -------- -------- Net (loss) income............................... $(89,854) (118,966) $ 11,826 $ (4,665) ======== ========= ======== ======== (Loss) earnings per share: Basic......................................... $ (8.25) $ (10.82) $ 1.07 $ (0.52) Diluted....................................... $ (8.25) $ (10.82) $ 1.07 $ (0.52)
F-45 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
QUARTERS ENDED ------------------------ DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 1997 1997 1997 1997 ------------ ------------- -------- --------- Interest income................................. $ 34,601 $ 29,947 $ 27,892 $ 17,617 Interest expense................................ 27,800 24,345 20,717 13,974 Provision for loan losses....................... 1,065 2,350 445 (1,869) -------- --------- -------- -------- Net interest income after provision for loan losses........................................ 5,736 3,252 6,730 5,512 Non-interest income............................. 14,586 28,631 15,585 2,501 Non-interest expense............................ 15,744 19,578 13,502 7,908 -------- --------- -------- -------- Income before income taxes...................... 4,578 12,305 8,813 105 Income tax provision............................ 1,656 5,237 3,702 42 -------- --------- -------- -------- Net income...................................... $ 2,922 $ 7,068 $ 5,111 $ 63 ======== ========= ======== ======== Earnings per share: Basic......................................... $ 0.26 $ 0.85 $ 0.68 $ 0.01 Diluted....................................... $ 0.24 $ 0.80 $ 0.66 $ 0.01
F-46 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 23. PARENT COMPANY INFORMATION (UNAUDITED) CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, ------------------- 1999 1998 -------- -------- ASSETS Cash and cash equivalents................................. $ 790 $ 1,674 Mortgage-backed securities available for sale, at fair value................................................... -- 13,395 Due from affiliate, net................................... 30,732 68,908 Investment in subsidiaries................................ 54,130 7,135 Prepaid expenses and other assets......................... 1,237 29,270 ------- -------- $86,889 $120,382 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and other liabilities.................... $ 6,171 $ 15,187 Short-term borrowings..................................... 2,385 13,745 Notes payable............................................. -- 184,245 ------- -------- Total liabilities....................................... 8,556 213,177 Contributed and retained equity (deficit)................. 78,333 (92,795) ------- -------- $86,889 $120,382 ======= ========
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 -------- --------- -------- Interest income........................................ $ 1,144 $ 6,152 $ 6,187 Interest expense....................................... 18,197 29,419 18,337 -------- --------- -------- Net interest expense................................... (17,053) (23,267) (12,150) Non-interest loss...................................... (2,441) (14,056) (344) Non-interest expense................................... 13,934 3,944 1,667 -------- --------- -------- Loss before income tax (benefit) provision, equity in earnings (losses) of subsidiaries, and extraordinary item................................................. (33,428) (41,267) (14,161) Income tax (benefit) provision......................... (968) 1,217 (5,947) Equity in earnings (losses) of subsidiaries............ 25,536 (159,175) 23,378 Extraordinary item..................................... 150,171 -- -- -------- --------- -------- Net income (loss)...................................... $143,247 $(201,659) $ 15,164 ======== ========= ========
F-47 WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 23. PARENT COMPANY INFORMATION (UNAUDITED) (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
YEAR ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 -------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $143,247 $(201,659) $ 15,164 Adjustments to reconcile net income (loss) to net cash used in operating activities: Market valuation losses and impairments................. 2,770 12,443 -- Amortization and accretion of discounts................. 88 5,417 -- Loss (gain) on sale of mortgage backed securities available for sale.................................... 110 (1,247) -- Equity in earnings of subsidiaries...................... (25,536) 161,609 (23,378) Reorganization items: Write-off of unamortized debt issuance costs.......... 11,319 -- -- Gain on extinguishment of debt........................ (150,171) -- -- Other................................................... (414) -- -- Change in: Prepaid expenses and other assets..................... 16,824 1,806 (8,823) Accounts payable and other liabilities................ 5,621 10,366 (10,939) Due from affiliate, net............................... (4,680) (46,656) (92,240) -------- --------- -------- Net cash used in operating activities............... (822) (57,921) (120,216) -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of mortgage-backed securities available for sale.................................................. -- (36,357) (82,949) Principal repayment of mortgage-backed securities available for sale.................................... 228 12,056 12,452 Proceeds from sale of mortgage-backed securities, available for sale.................................... 11,298 77,532 -- Dividend received from subsidiary....................... 385 -- -- Net investment in subsidiaries.......................... (250) (20,558) -- -------- --------- -------- Net cash provided by (used in) investing activities........................................ 11,661 32,673 (70,497) -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemption of preferred stock........................... -- (29,521) -- Issuance of notes payable............................... -- -- 109,245 Proceeds from short term borrowings..................... 2,241 27,311 59,920 Repayments of short term borrowings..................... (13,964) (68,473) (5,013) Issuance of capital stock............................... -- 61,811 -- Purchase of treasury stock.............................. -- (2,728) (124) -------- --------- -------- Net cash (used in) provided by financing activities..... (11,723) (11,600) 164,028 -------- --------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS................... (884) (36,848) (26,685) CASH: Beginning of year....................................... 1,674 38,522 65,207 -------- --------- -------- End of year............................................. $ 790 $ 1,674 $ 38,522 ======== ========= ======== NONCASH FINANCING ACTIVITIES: Conversion of affiliate receivable to investment in subsidiary............................................ -- $ 120,000 -- Issuance of preferred stock in exchange for cancellation of certain payables due to affiliate.................. -- -- $ 27,500 Pay-in-kind preferred stock dividend.................... -- -- 1,604 NONCASH REORGANIZATION ITEMS: Cancellation of old common stock........................ $114,856 -- -- Issuance of new common stock in exchange for notes payable and accrued interest thereon.................. 86,819 -- --
F-48 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 30, 2000 by the undersigned, thereunto duly authorized. WILSHIRE FINANCIAL SERVICES GROUP INC. By: /s/ STEPHEN P. GLENNON ----------------------------------------- Stephen P. Glennon CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 30, 2000 by the following persons on behalf of the Registrant and in the capacities indicated.
NAME TITLE ---- ----- /s/ LARRY B. FAIGIN ------------------------------------------- Chairman of the Board Larry B. Faigin /s/ STEPHEN P. GLENNON ------------------------------------------- Chief Executive Officer and Director Stephen P. Glennon /s/ GLENN J. OHL ------------------------------------------- Chief Financial Officer Glenn J. Ohl /s/ ELIZABETH F. AAROE ------------------------------------------- Director Elizabeth F. Aaroe /s/ ROBERT M. DEUTSCHMAN ------------------------------------------- Director Robert M. Deutschman /s/ PETER S. FISHMAN ------------------------------------------- Director Peter S. Fishman /s/ DANIEL A. MARKEE ------------------------------------------- Director Daniel A. Markee
EXHIBIT INDEX The following exhibits are filed as part of this report. 2.1 Solicitation and Disclosure Statement dated February 1, 1999, (incorporated by reference to the Company's current report on Form 8-K dated February 8, 1999). 2.2 Form of Plan of Reorganization (incorporated by reference to the Company's current report on form 8-K dated February 8, 1999). ++3.1 Certificate of Incorporation ++3.2 By-laws +10.5 Master Repurchase Agreement between First Bank of Beverly Hills, F.S.B. and Bear Stearns Mortgage Capital Corporation dated as of May 22, 1996 +10.6 Supplemental Terms and Conditions dated as of May 22, 1996 between First Bank of Beverly Hills, F.S.B. and Bear Stearns Mortgage Capital Corporation +10.7 Master Repurchase Agreement between Girard Savings Bank FSB and Bear Stearns Mortgage Capital Corporation dated as of December 22, 1995 10.12 Cease and Desist Order (Wilshire Financial Services Group Inc. and Wilshire Acquisition Corporation)(incorporated by reference to the Company's report on Form 10-K dated April 2, 1999) 10.13 Purchase and Sale Agreement dated October 14, 1998 between Salomon Brothers Realty Corp. and WMFC 1997-4 Inc. (Incorporated by reference to the Company's report on Form 8-K dated October 14, 1998). 10.14 Mortgage Loan Purchase Agreement dated October 30, 1998 between Wilshire Funding Corporation and Bear Stearns Mortgage Capital Corporation (Incorporated by reference to the Company's current report on Form 8-K dated October 30, 1998). *10.15 1999 Equity Participation Plan *10.16 Master Repurchase Agreement dated November 26, 1999 between CS First Boston Mortgage Capital LLC and Wilshire Funding Corp. *10.17 Master Repurchase Agreement dated December 15, 1999 between CS First Boston (Europe) Limited and Wilshire Funding Corp. *10.18 Post-Restructuring Agreement dated June 8, 1999 among WCC, Capital Consultants, Inc. and Wilshire Financial Services Group Inc. *10.19 DIP Loan Agreement dated March 3, 1999 between Wilshire Real Estate Partnership L.P. and Wilshire Financial Services Group Inc. #10.20 Settlement Agreement dated December 10, 1999 between Wilshire Real Estate Investment Inc. and Wilshire Financial Services Group Inc. *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
* Filed herewith + Incorporated by reference to the Company's Registration Statement on Form S-1 dated December 19, 1996 (Registration No. 333-15263) ++ Incorporated by reference to the Company's report on Form 8-K dated June 15, 1999. # Incorporated by reference to the Company's report on Form 8-K dated December 29, 1999. EX-10.15 2 EXHIBIT 10.15 EXHIBIT 10.15 THE 1999 EQUITY PARTICIPATION PLAN OF WILSHIRE FINANCIAL SERVICES GROUP INC. Wilshire Financial Services Group Inc., a Delaware corporation, has adopted The 1999 Equity Participation Plan of Wilshire Financial Services Group Inc. (the "Plan"), effective September 30, 1999, for the benefit of its eligible employees and directors. The purposes of the Plan are as follows: (1) To provide an additional incentive for directors and key Employees (as such terms are defined below) to further the growth, development and financial success of the Company by personally benefiting through the ownership of Company stock and/or rights which recognize such growth, development and financial success. (2) To enable the Company to obtain and retain the services of directors and key Employees considered essential to the long range success of the Company by offering them an opportunity to own stock in the Company and/or rights which will reflect the growth, development and financial success of the Company. ARTICLE I. DEFINITIONS 1.1. GENERAL. Wherever the following terms are used in the Plan they shall have the meanings specified below, unless the context clearly indicates otherwise. 1.2. ADMINISTRATOR. "Administrator" shall mean the entity that conducts the general administration of the Plan as provided herein. With reference to the administration of the Plan with respect to Options granted to Independent Directors, the term "Administrator" shall refer to the Board. With reference to the administration of the Plan with respect to any other Award, the term "Administrator" shall refer to the Committee unless the Board has assumed the authority for administration of the Plan generally as provided in Section 10.1. 1.3. AWARD. "Award" shall mean an Option, a Restricted Stock award, a Performance Award or a Stock Payment award which may be awarded or granted under the Plan (collectively, "Awards"). 1.4. AWARD AGREEMENT. "Award Agreement" shall mean a written agreement executed by an authorized officer of the Company and the Holder which shall contain such terms and conditions with respect to an Award as the Administrator shall determine, consistent with the Plan. 2 1.5. AWARD LIMIT. "Award Limit" shall mean 400,000 shares of Common Stock, as adjusted pursuant to Section 10.3 of the Plan. 1.6. BOARD. "Board" shall mean the Board of Directors of the Company. 1.7. CHANGE IN CONTROL. shall mean a change in ownership or control of the Company effected through any of the following transactions: (a) any person or related group of persons (other than the Company or a person that, prior to such transaction, directly or indirectly controls, is controlled by, or is under common control with, the Company) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities possessing more than ninety percent (90%) of the total combined voting power of the Company's outstanding securities pursuant to a tender or exchange offer made directly to the Company's stockholders which the Board does not recommend such stockholders to accept; or (b) there is a change in the composition of the Board over a period of thirty-six (36) consecutive months (or less) such that a majority of the Board members (rounded up to the nearest whole number) ceases, by reason of one or more proxy contests for the election of Board members, to be comprised of individuals who either (i) have been Board members continuously since the beginning of such period or (ii) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by the Board; or (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation (or other entity), other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 66-2/3% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 25% of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control; or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 3 1.8. CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.9. COMMITTEE. "Committee" shall mean the Compensation Committee of the Board, or another committee or subcommittee of the Board, appointed as provided in Section 9.1. 1.10. COMMON STOCK. "Common Stock" shall mean the common stock of the Company, par value $0.01 per share, and any equity security of the Company issued or authorized to be issued in the future, but excluding any preferred stock and any warrants, options or other rights to purchase Common Stock. 1.11. COMPANY. "Company" shall mean Wilshire Financial Services Group Inc., a Delaware corporation. 1.12. DIRECTOR. "Director" shall mean a member of the Board or an FBBH Director, as the context may require. 1.13. DRO. "DRO" shall mean a domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. 1.14. EMPLOYEE. "Employee" shall mean any officer or other employee (as defined in accordance with Section 3401(c) of the Code) of the Company, or of any corporation which is a Subsidiary. 1.15. EXCHANGE ACT. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 1.16. FAIR MARKET VALUE. "Fair Market Value" of a share of Common Stock as of a given date shall be (a) the price of a share of Common Stock on the principal exchange on which shares of Common Stock are then trading, if any (or as reported on any composite index which includes such principal exchange) (calculated using the trailing average of the listed high and low trading price for the preceding trading days), or (b) if Common Stock is not traded on an exchange but is 4 quoted on NASDAQ or a successor quotation system, the mean between the closing representative bid and asked prices for the Common Stock on the trading day previous to such date as reported by NASDAQ or such successor quotation system; or (c) if Common Stock is not publicly traded on an exchange and not quoted on NASDAQ or a successor quotation system, the Fair Market Value of a share of Common Stock as established by the Administrator acting in good faith. 1.17. FBBH. "FBBH" shall mean First Bank of Beverly Hills, N.A., a Subsidiary of the Company. 1.18. FBBH DIRECTOR. "FBBH Director" shall mean a member of the board of directors of FBBH. 1.19. HOLDER. "Holder" shall mean a person who has been granted or awarded an Award. 1.20. INCENTIVE STOCK OPTION. "Incentive Stock Option" shall mean an option which conforms to the applicable provisions of Section 422 of the Code and which is designated as an Incentive Stock Option by the Administrator. 1.21. INDEPENDENT COMPANY DIRECTOR. "Independent Company Director" shall mean a member of the Board who is not an Employee of the Company. 1.22. INDEPENDENT DIRECTOR. "Independent Director" shall mean an Independent Company Director or an Independent FBBH Director, as the context may require. 1.23. INDEPENDENT FBBH DIRECTOR. "Independent FBBH Director" shall mean a member of the board of directors of FBBH who is neither an Employee nor an Independent Company Director. 1.24. NON-QUALIFIED STOCK OPTION. "Non-Qualified Stock Option" shall mean an Option which is not designated as an Incentive Stock Option by the Administrator. 1.25. OPTION. "Option" shall mean a stock option granted under Article IV of the Plan. An Option granted under the Plan shall, as determined by the Administrator, be either a Non-Qualified Stock Option or an Incentive Stock Option; PROVIDED, HOWEVER, that Options granted to Independent Directors shall be Non-Qualified Stock Options. 5 1.26. PERFORMANCE AWARD. "Performance Award" shall mean a stock bonus or other performance or incentive award that is paid in Common Stock or a combination of cash and Common Stock, awarded under Article VIII of the Plan. 1.27. PERFORMANCE CRITERIA. "Performance Criteria" shall mean the following business criteria with respect to the Company, any Subsidiary or any division or operating unit: (a) net income, (b) pre-tax income, (c) operating income, (d) cash flow, (e) earnings per share, (f) return on equity, (g) return on invested capital or assets, (h) cost reductions or savings, (i) funds from operations, (j) appreciation in the fair market value of Common Stock and (k) earnings before any one or more of the following items: interest, taxes, depreciation or amortization. 1.28. PLAN. "Plan" shall mean The 1999 Equity Participation Plan of Wilshire Financial Services Group Inc. 1.29. REORGANIZATION. "Reorganization" shall mean the prepackaged plan of reorganization filed with the Bankruptcy Court for the State of Delaware on March 3, 1999. 1.30. RESTRICTED STOCK. "Restricted Stock" shall mean Common Stock awarded under Article VII of the Plan. 1.31. RULE 16B-3. "Rule 16b-3" shall mean that certain Rule 16b-3 under the Exchange Act, as such Rule may be amended from time to time. 1.32. SECTION 162(m) PARTICIPANT. "Section 162(m) Participant" shall mean any key Employee designated by the Administrator as a key Employee whose compensation for the fiscal year in which the key Employee is so designated or a future fiscal year may be subject to the limit on deductible compensation imposed by Section 162(m) of the Code. 1.33. SECURITIES ACT. "Securities Act" shall mean the Securities Act of 1933, as amended. 1.34. STOCK PAYMENT. 6 "Stock Payment" shall mean (a) a payment in the form of shares of Common Stock, or (b) an option or other right to purchase shares of Common Stock, as part of a deferred compensation arrangement, made in lieu of all or any portion of the compensation, including without limitation, salary, bonuses and commissions, that would otherwise become payable to a key Employee in cash, awarded under Article VIII of the Plan. 1.35. SUBSIDIARY. "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 1.36. SUBSTITUTE AWARD. "Substitute Award" shall mean an Option granted under this Plan upon the assumption of, or in substitution for, outstanding equity awards previously granted by a company or other entity in connection with a corporate transaction, such as a merger, combination, consolidation or acquisition of property or stock; PROVIDED, HOWEVER, that in no event shall the term "Substitute Award" be construed to refer to an award made in connection with the cancellation and repricing of an Option. 1.37. TERMINATION OF DIRECTORSHIP. "Termination of Directorship" shall mean the time when a Holder who is an Independent Director ceases to be a Director for any reason, including, but not by way of limitation, a termination by resignation, failure to be elected, death or retirement. The Board, in its sole and absolute discretion, shall determine the effect of all matters and questions relating to Termination of Directorship with respect to Independent Directors. 1.38. TERMINATION OF EMPLOYMENT. "Termination of Employment" shall mean the time when the employee-employer relationship between a Holder and the Company or any Subsidiary is terminated for any reason, with or without cause, including, but not by way of limitation, a termination by resignation, discharge, death, disability or retirement; but excluding (a) terminations where there is a simultaneous reemployment or continuing employment of a Holder by the Company or any Subsidiary, (b) at the discretion of the Administrator, terminations which result in a temporary severance of the employee-employer relationship, and (c) at the discretion of the Administrator, terminations which are followed by the simultaneous establishment of a consulting relationship by the Company or a Subsidiary with the former employee. The Administrator, in its absolute discretion, shall determine the effect of all matters and questions relating to Termination of Employment, including, but not by way of limitation, the question of whether a Termination of Employment resulted from a discharge for good cause, and all questions of whether a particular leave of absence constitutes a Termination of Employment; PROVIDED, HOWEVER, that, with respect 7 to Incentive Stock Options, unless otherwise determined by the Administrator in its discretion, a leave of absence, change in status from an employee to an independent contractor or other change in the employee-employer relationship shall constitute a Termination of Employment if, and to the extent that, such leave of absence, change in status or other change interrupts employment for the purposes of Section 422(a)(2) of the Code and the then applicable regulations and revenue rulings under said Section. ARTICLE II. SHARES SUBJECT TO PLAN 2.1. SHARES SUBJECT TO PLAN. (a) The shares of stock subject to Awards shall initially be shares of the Company's Common Stock, par value $0.01 per share. The aggregate number of such shares which may be issued upon exercise of such Options or rights or upon any such awards under the Plan shall not exceed Two Million Eight Hundred Thousand (2,800,000) of which no more than Five Hundred Thousand (500,000) shares may be issued as Restricted Stock or Performance Awards. The shares of Common Stock issuable upon exercise of such Options or rights or upon any such awards may be either previously authorized but unissued shares or treasury shares. (b) The maximum number of shares which may be subject to Awards, granted under the Plan to any individual in any fiscal year shall not exceed the Award Limit. To the extent required by Section 162(m) of the Code, shares subject to Options which are canceled continue to be counted against the Award Limit. 2.2. ADD-BACK OF OPTIONS AND OTHER RIGHTS. If any Option, or other right to acquire shares of Common Stock under any other Award under the Plan, expires or is canceled without having been fully exercised, or is exercised in whole or in part for cash as permitted by the Plan, the number of shares subject to such Option or other right but as to which such Option or other right was not exercised prior to its expiration, cancellation or exercise may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Furthermore, any shares subject to Awards which are adjusted pursuant to Section 10.3 and become exercisable with respect to shares of stock of another corporation shall be considered canceled and may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Shares of Common Stock which are delivered by the Holder or withheld by the Company upon the exercise of any Award under the Plan, in payment of the exercise price thereof or tax withholding thereon, may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. If any shares of Restricted Stock are surrendered by the Holder or repurchased by the Company pursuant to Section 7.4 or 7.5 hereof, such shares may again be optioned, granted or awarded hereunder, subject to the limitations of Section 2.1. Notwithstanding the provisions of this Section 2.2, no shares of Common Stock may again be optioned, granted or awarded if such action would cause 8 an Incentive Stock Option to fail to qualify as an incentive stock option under Section 422 of the Code. ARTICLE III. GRANTING OF AWARDS 3.1. AWARD AGREEMENT. Each Award shall be evidenced by an Award Agreement. Award Agreements evidencing Awards intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. Award Agreements evidencing Incentive Stock Options shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 422 of the Code. 3.2. PROVISIONS APPLICABLE TO SECTION 162(M) PARTICIPANTS. (a) The Committee, in its discretion, may determine whether an Award is to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code. (b) Notwithstanding anything in the Plan to the contrary, the Committee may grant any Award to a Section 162(m) Participant, including Restricted Stock the restrictions with respect to which lapse upon the attainment of performance goals which are related to one or more of the Performance Criteria and any performance or incentive award described in Article VIII that vests or becomes exercisable or payable upon the attainment of performance goals which are related to one or more of the Performance Criteria. (c) To the extent necessary to comply with the performance-based compensation requirements of Section 162(m)(4)(C) of the Code, with respect to any Award granted under Articles VII and VIII which may be granted to one or more Section 162(m) Participants, no later than ninety (90) days following the commencement of any fiscal year in question or any other designated fiscal period or period of service (or such other time as may be required or permitted by Section 162(m) of the Code), the Committee shall, in writing, (i) designate one or more Section 162(m) Participants, (ii) select the Performance Criteria applicable to the fiscal year or other designated fiscal period or period of service, (iii) establish the various performance targets, in terms of an objective formula or standard, and amounts of such Awards, as applicable, which may be earned for such fiscal year or other designated fiscal period or period of service and (iv) specify the relationship between Performance Criteria and the performance targets and the amounts of such Awards, as applicable, to be earned by each Section 162(m) Participant for such fiscal year or other designated fiscal period or period of service. Following the completion of each fiscal year or other designated fiscal period or period of service, the Committee shall certify in writing whether the applicable performance targets have been achieved for such fiscal year or other designated fiscal period or period of 9 service. In determining the amount earned by a Section 162(m) Participant, the Committee shall have the right to reduce (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the fiscal year or other designated fiscal period or period of service. (d) Furthermore, notwithstanding any other provision of the Plan or any Award which is granted to a Section 162(m) Participant and is intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall be subject to any additional limitations set forth in Section 162(m) of the Code (including any amendment to Section 162(m) of the Code) or any regulations or rulings issued thereunder that are requirements for qualification as performance-based compensation as described in Section 162(m)(4)(C) of the Code, and the Plan shall be deemed amended to the extent necessary to conform to such requirements. 3.3. LIMITATIONS APPLICABLE TO SECTION 16 PERSONS. Notwithstanding any other provision of the Plan, the Plan, and any Award granted or awarded to any individual who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by applicable law, the Plan and Awards granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule. 3.4. CONSIDERATION. In consideration of the granting of an Award under the Plan, the Holder shall agree, in the Award Agreement, to remain in the employ of (or to consult for or to serve as an Independent Director of, as applicable) the Company or any Subsidiary for a period of at least one year (or such shorter period as may be fixed in the Award Agreement or by action of the Administrator following grant of the Award) after the Award is granted (or, in the case of an Independent Director, until the next annual meeting of stockholders of the Company). 3.5. AT-WILL EMPLOYMENT. Nothing in the Plan or in any Award Agreement hereunder shall confer upon any Holder any right to continue in the employ of the Company or any Subsidiary, or as a director of the Company, or shall interfere with or restrict in any way the rights of the Company and any Subsidiary, which are hereby expressly reserved, to discharge any Holder at any time for any reason whatsoever, with or without cause, except to the extent expressly provided otherwise in a written employment agreement between the Holder and the Company and any Subsidiary. 10 ARTICLE IV. GRANTING OF OPTIONS TO EMPLOYEES AND INDEPENDENT DIRECTORS 4.1. ELIGIBILITY. Any Employee selected by the Committee pursuant to Section 4.4(a)(i) shall be eligible to be granted an Option. Each Independent Director of the Company shall be eligible to be granted Options at the times and in the manner set forth in Section 4.5. 4.2. DISQUALIFICATION FOR STOCK OWNERSHIP. No person may be granted an Incentive Stock Option under the Plan if such person, at the time the Incentive Stock Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any then existing Subsidiary or parent corporation (within the meaning of Section 422 of the Code) unless such Incentive Stock Option conforms to the applicable provisions of Section 422 of the Code. 4.3. QUALIFICATION OF INCENTIVE STOCK OPTIONS. No Incentive Stock Option shall be granted to any person who is not an Employee. 4.3. GRANTING OF OPTIONS TO EMPLOYEES. (a) The Committee shall from time to time, in its absolute discretion, and subject to applicable limitations of the Plan: (i) Determine which Employees are key Employees and select from among the key Employees (including Employees who have previously received Awards under the Plan) such of them as in its opinion should be granted Options; (ii) Subject to the Award Limit, determine the number of shares to be subject to such Options granted to the selected key Employees; (iii) Subject to Section 4.3, determine whether such Options are to be Incentive Stock Options or Non-Qualified Stock Options and whether such Options are to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code; and (iv) Determine the terms and conditions of such Options, consistent with the Plan; PROVIDED, HOWEVER, that the terms and 11 conditions of Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code shall include, but not be limited to, such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. (b) Upon the selection of a key Employee to be granted an Option, the Committee shall instruct the Secretary of the Company to issue the Option and may impose such conditions on the grant of the Option as it deems appropriate. (c) Any Incentive Stock Option granted under the Plan may be modified by the Committee, with the consent of the Holder, to disqualify such Option from treatment as an "incentive stock option" under Section 422 of the Code. 4.5. GRANTING OF OPTIONS TO INDEPENDENT DIRECTORS. (a) Each person who is an Independent Company Director as of or following the date of the confirmation of the Reorganization automatically shall be granted (i) an Option to purchase thirty thousand (30,000) shares of Common Stock (subject to adjustment as provided in Section 10.3) on the date of the commencement of such directorship and (ii) an Option to purchase ten thousand (10,000) shares of Common Stock (subject to adjustment as provided in Section 10.3) on the date of each annual meeting of stockholders at which the Independent Company Director is reelected to the Board. Members of the Board who are employees of the Company who subsequently retire from the Company and remain on the Board will not receive an initial Option grant pursuant to clause (i) of the preceding sentence, but to the extent that they are otherwise eligible, will receive, after retirement from employment with the Company, Options as described in clause (ii) of the preceding sentence. (b) Each person who is an Independent FBBH Director as of or following the date of the confirmation of the Reorganization automatically shall be granted (i) an Option to purchase ten thousand (10,000) shares of Common Stock (subject to adjustment as provided in Section 10.3) on the date of the commencement of such directorship and (ii) an Option to purchase five thousand (5,000) shares of Common Stock (subject to adjustment as provided in Section 10.3) on the date of each annual meeting of the Company's stockholders. Members of the FBBH Board who are Employees who subsequently retire from the Company and remain on the FBBH Board will not receive an initial Option grant pursuant to clause (i) of the preceding sentence, but to the extent that they are otherwise eligible, will receive, after retirement from employment with the Company or any Subsidiary, Options as described in clause (ii) of the preceding sentence. (c) All the foregoing Option grants authorized by this Section 4.5 are subject to stockholder approval of the Plan. 12 4.6. OPTIONS IN LIEU OF CASH COMPENSATION. Options may be granted under the Plan to Employees in lieu of cash bonuses which would otherwise be payable to such Employees and to Independent Directors in lieu of directors' fees which would otherwise be payable to such Independent Directors, pursuant to such policies which may be adopted by the Administrator from time to time. ARTICLE V. TERMS OF OPTIONS 5.1. OPTION PRICE. The price per share of the shares subject to each Option granted to Employees shall be set by the Committee; PROVIDED, HOWEVER, that such price shall be no less than the par value of a share of Common Stock, unless otherwise permitted by applicable state law and: (a) in the case of Options intended to qualify as performance-based compensation as described in Section 162(m)(4)(C) of the Code, such price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted; (b) in the case of Incentive Stock Options such price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted (or the date the Option is modified, extended or renewed for purposes of Section 424(h) of the Code); (c) in the case of Incentive Stock Options granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation thereof (within the meaning of Section 422 of the Code), such price shall not be less than 110% of the Fair Market Value of a share of Common Stock on the date the Option is granted (or the date the Option is modified, extended or renewed for purposes of Section 424(h) of the Code). 5.2. OPTION TERM. The term of an Option granted to an Employee shall be set by the Committee in its discretion; PROVIDED, HOWEVER, that, in the case of Incentive Stock Options, the term shall not be more than ten (10) years from the date the Incentive Stock Option is granted, or five (5) years from the date the Incentive Stock Option is granted if the Incentive Stock Option is granted to an individual then owning (within the meaning of Section 424(d) of the Code) more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary or parent corporation thereof (within the meaning of Section 422 of the Code). Except as limited by requirements of Section 422 of the Code and regulations and rulings thereunder applicable to Incentive Stock Options, the Committee may extend the term of any outstanding Option in 13 connection with any Termination of Employment of the Holder, or amend any other term or condition of such Option relating to such a termination. 5.3. OPTION VESTING (a) The period during which the right to exercise, in whole or in part, an Option granted to an Employee vests in the Holder shall be set by the Committee and the Committee may determine that an Option may not be exercised in whole or in part for a specified period after it is granted; PROVIDED, HOWEVER, that, unless the Committee otherwise provides in the terms of the Award Agreement or otherwise, no Option shall be exercisable by any Holder who is then subject to Section 16 of the Exchange Act within the period ending six months and one day after the date the Option is granted. At any time after grant of an Option, the Committee may, in its sole and absolute discretion and subject to whatever terms and conditions it selects, accelerate the period during which an Option granted to an Employee vests. (b) No portion of an Option granted to an Employee which is unexercisable at Termination of Employment shall thereafter become exercisable, except as may be otherwise provided by the Committee either in the Award Agreement or by action of the Committee following the grant of the Option. (c) To the extent that the aggregate Fair Market Value of stock with respect to which "incentive stock options" (within the meaning of Section 422 of the Code, but without regard to Section 422(d) of the Code) are exercisable for the first time by a Holder during any calendar year (under the Plan and all other incentive stock option plans of the Company and any parent or subsidiary corporation, within the meaning of Section 422 of the Code) of the Company, exceeds $100,000, such Options shall be treated as Non-Qualified Options to the extent required by Section 422 of the Code. The rule set forth in the preceding sentence shall be applied by taking Options into account in the order in which they were granted. For purposes of this Section 5.3(c), the Fair Market Value of stock shall be determined as of the time the Option with respect to such stock is granted. (d) Notwithstanding any other provision of this Plan, in the event of a Change in Control as defined in Section 1.7(c) that is or is to be accounted for as a "pooling of interests", each outstanding Option shall, immediately prior to the effective date of the Change in Control, automatically become fully exercisable for all of the shares of Common Stock at the time subject to such rights and may be exercised for any or all of those shares as fully-vested shares of Common Stock. 5.4. TERMS OF OPTIONS GRANTED TO INDEPENDENT DIRECTORS. (a) The price per share of the shares subject to each Option granted to an Independent Director shall equal 100% of the Fair Market Value of a share of Common Stock on the date the Option is granted; PROVIDED, HOWEVER, that the price of each share subject to each 14 Option granted to Independent Directors on the date of the confirmation of the Reorganization shall equal the price per share of Common Stock calculated using the trailing average of the listed high and low trading price for the following twenty trading days. Options granted to Independent Directors shall become exercisable in cumulative annual installments of 33.3% on each of the first, second and third anniversaries of the date of Option grant and, subject to Section 6.6, the term of each Option granted to an Independent Director shall be ten (10) years from the date the Option is granted, except that any Option granted to an Independent Director may by its terms become immediately exercisable in full upon the retirement of the Independent Director in accordance with the Company's retirement policy applicable to directors. No portion of an Option which is unexercisable at Termination of Directorship shall thereafter become exercisable. (b) Notwithstanding any other provision of this Plan, in the event of a Change in Control, each outstanding Award to an Independent Director shall, immediately prior to the effective date of the Change in Control, automatically become fully exercisable for all of the shares of Common Stock at the time subject to such rights and may be exercised for any or all of those shares as fully-vested shares of Common Stock. 5.5. SUBSTITUTE AWARDS. Notwithstanding the foregoing provisions of this Article V to the contrary, in the case of an Option that is a Substitute Award, the price per share of the shares subject to such Option may be less than the Fair Market Value per share on the date of grant, PROVIDED, that the excess of: (a) the aggregate Fair Market Value (as of the date such Substitute Award is granted) of the shares subject to the Substitute Award; over (b) the aggregate exercise price thereof; does not exceed the excess of; (c) the aggregate fair market value (as of the time immediately preceding the transaction giving rise to the Substitute Award, such fair market value to be determined by the Committee) of the shares of the predecessor entity that were subject to the grant assumed or substituted for by the Company; over (d) the aggregate exercise price of such shares. ARTICLE VI. EXERCISE OF OPTIONS 6.1. PARTIAL EXERCISE. An exercisable Option may be exercised in whole or in part. However, an Option shall not be exercisable with respect to fractional shares and the Administrator may require that, by the terms of the Option, a partial exercise be with respect to a minimum number of shares. 15 6.2. MANNER OF EXERCISE. All or a portion of an exercisable Option shall be deemed exercised upon delivery of all of the following to the Secretary of the Company or his office: (a) A written notice complying with the applicable rules established by the Administrator stating that the Option, or a portion thereof, is exercised. The notice shall be signed by the Holder or other person then entitled to exercise the Option or such portion of the Option; (b) Such representations and documents as the Administrator, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act and any other federal or state securities laws or regulations. The Administrator may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer notices to agents and registrars; (c) In the event that the Option shall be exercised pursuant to Section 10.1 by any person or persons other than the Holder, appropriate proof of the right of such person or persons to exercise the Option; and (d) Full cash payment to the Secretary of the Company for the shares with respect to which the Option, or portion thereof, is exercised. However, the Administrator, may in its discretion (i) allow a delay in payment up to thirty (30) days from the date the Option, or portion thereof, is exercised; (ii) allow payment, in whole or in part, through the delivery of shares of Common Stock which have been owned by the Holder for at least six months, duly endorsed for transfer to the Company with a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof; (iii) allow payment, in whole or in part, through the surrender of shares of Common Stock then issuable upon exercise of the Option having a Fair Market Value on the date of Option exercise equal to the aggregate exercise price of the Option or exercised portion thereof; (iv) allow payment, in whole or in part, through the delivery of property of any kind which constitutes good and valuable consideration; (v) allow payment, in whole or in part, through the delivery of a full recourse promissory note bearing interest (at no less than such rate as shall then preclude the imputation of interest under the Code) and payable upon such terms as may be prescribed by the Administrator; (vi) allow payment, in whole or in part, through the delivery of a notice that the Holder has placed a market sell order with a broker with respect to shares of Common Stock then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the Option exercise price, PROVIDED that payment of such proceeds is then made to the Company upon settlement of such sale; or (vii) allow payment through any combination of the consideration provided in the foregoing subparagraphs (ii), (iii), (iv), (v) and (vi). In the case of a promissory note, the Administrator may also prescribe the 16 form of such note and the security to be given for such note. The Option may not be exercised, however, by delivery of a promissory note or by a loan from the Company when or where such loan or other extension of credit is prohibited by law. 6.3. CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; (b) The completion of any registration or other qualification of such shares under any state or federal law, or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body which the Administrator shall, in its absolute discretion, deem necessary or advisable; (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Administrator shall, in its absolute discretion, determine to be necessary or advisable; (d) The lapse of such reasonable period of time following the exercise of the Option as the Administrator may establish from time to time for reasons of administrative convenience; and (e) The receipt by the Company of full payment for such shares, including payment of any applicable withholding tax, which in the discretion of the Administrator may be in the form of consideration used by the Holder to pay for such shares under Section 6.2(d). 6.4. RIGHTS AS STOCKHOLDERS. Holders shall not be, nor have any of the rights or privileges of, stockholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until certificates representing such shares have been issued by the Company to such Holders. 6.5. OWNERSHIP AND TRANSFER RESTRICTIONS. The Administrator, in its absolute discretion, may impose such restrictions on the ownership and transferability of the shares purchasable upon the exercise of an Option as it deems appropriate. Any such restriction shall be set forth in the respective Award Agreement and may be referred to on the certificates evidencing such shares. The Holder shall give the Company prompt notice of any disposition of shares of Common Stock acquired by exercise of an Incentive Stock Option within (a) two years from the date of granting (including the date the 17 Option is modified, extended or renewed for purposes of Section 424(h) of the Code) such Option to such Holder or (b) one year after the transfer of such shares to such Holder. 6.6. LIMITATIONS ON EXERCISE OF OPTIONS GRANTED TO INDEPENDENT DIRECTORS. No Option granted to an Independent Director may be exercised to any extent by anyone after the first to occur of the following events: (a) The expiration of twelve (12) months from the date of the Holder's death; (b) the expiration of twelve (12) months from the date of the Holder's Termination of Directorship by reason of his permanent and total disability (within the meaning of Section 22(e)(3) of the Code); (c) the expiration of three (3) months from the date of the Holder's Termination of Directorship for any reason other than such Holder's death or his permanent and total disability, unless the Holder dies within said three-month period; or (d) The expiration of ten (10) years from the date the Option was granted. 6.7. ADDITIONAL LIMITATIONS ON EXERCISE OF OPTIONS. Holders may be required to comply with any timing or other restrictions with respect to the settlement or exercise of an Option, including a window-period limitation, as may be imposed in the discretion of the Administrator. ARTICLE VII. AWARD OF RESTRICTED STOCK 7.1. ELIGIBILITY. Subject to the Award Limit, Restricted Stock may be awarded to any Employee who the Committee determines is a key Employee. 7.2. AWARD OF RESTRICTED STOCK (a) The Committee may from time to time, in its absolute discretion: (i) Determine which Employees are key Employees and select from among the key Employees (including Employees who have previously received other awards under the Plan) such of them as in its opinion should be awarded Restricted Stock; and (ii) Determine the purchase price, if any, and other 18 terms and conditions applicable to such Restricted Stock, consistent with the Plan. (b) The Committee shall establish the purchase price, if any, and form of payment for Restricted Stock; PROVIDED, HOWEVER, that such purchase price shall be no less than the par value of the Common Stock to be purchased, unless otherwise permitted by applicable state law. In all cases, legal consideration shall be required for each issuance of Restricted Stock. (c) Upon the selection of a key Employee to be awarded Restricted Stock, the Committee shall instruct the Secretary of the Company to issue such Restricted Stock and may impose such conditions on the issuance of such Restricted Stock as it deems appropriate. 7.3. RIGHTS AS STOCKHOLDERS. Subject to Section 7.4, upon delivery of the shares of Restricted Stock to the escrow holder pursuant to Section 7.6, the Holder shall have, unless otherwise provided by the Committee, all the rights of a stockholder with respect to said shares, subject to the restrictions in his Award Agreement, including the right to receive all dividends and other distributions paid or made with respect to the shares; PROVIDED, HOWEVER, that in the discretion of the Committee, any extraordinary distributions with respect to the Common Stock shall be subject to the restrictions set forth in Section 7.4. 7.4. RESTRICTION. All shares of Restricted Stock issued under the Plan (including any shares received by holders thereof with respect to shares of Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization) shall, in the terms of each individual Award Agreement, be subject to such restrictions as the Committee shall provide, which restrictions may include, without limitation, restrictions concerning voting rights and transferability and restrictions based on duration of employment with the Company, Company performance and individual performance; PROVIDED, HOWEVER, that, unless the Committee otherwise provides in the terms of the Award Agreement or otherwise, no share of Restricted Stock granted to a person subject to Section 16 of the Exchange Act shall be sold, assigned or otherwise transferred until at least six months and one day have elapsed from the date on which the Restricted Stock was issued, and PROVIDED, further, that, except with respect to shares of Restricted Stock granted to Section 162(m) Participants, by action taken after the Restricted Stock is issued, the Committee may, on such terms and conditions as it may determine to be appropriate, remove any or all of the restrictions imposed by the terms of the Award Agreement. Restricted Stock may not be sold or encumbered until all restrictions are terminated or expire. If no consideration was paid by the Holder upon issuance, a Holder's rights in unvested Restricted Stock shall lapse, and such Restricted Stock shall be surrendered to the Company without consideration, upon Termination of Employment with the Company; PROVIDED, HOWEVER, that except with respect to shares of Restricted Stock granted to Section 162(m) Participants, the Committee in its sole and absolute 19 discretion may provide that no such lapse or surrender shall occur in the event of a Termination of Employment without cause or following any Change in Control of the Company or because of the Holder's retirement, death, disability or otherwise. Notwithstanding anything to the contrary in this Section 7.4, in the event of and immediately prior to a Change in Control as defined in Section 1.7(c) that is to be accounted for as a "pooling of interests", all unvested shares of Restricted Stock shall immediately vest such that no such lapse or surrender shall occur following such Change in Control. 7.5. REPURCHASE OF RESTRICTED STOCK. The Committee shall provide in the terms of each individual Award Agreement that the Company shall have the right to repurchase from the Holder the Restricted Stock then subject to restrictions under the Award Agreement immediately upon a Termination of Employment between the Holder and the Company, at a cash price per share equal to the price paid by the Holder for such Restricted Stock; PROVIDED, HOWEVER, that, except with respect to shares of Restricted Stock granted to Section 162(m) Participants, the Committee in its sole and absolute discretion may provide that no such right of repurchase shall exist in the event of a Termination of Employment without cause or following any Change in Control of the Company or because of the Holder's retirement, death, disability or otherwise. Notwithstanding anything to the contrary in this Section 7.5, in the event of and immediately prior to a Change in Control as defined in Section 1.7(c) that is to be accounted for as a "pooling of interests", any such repurchase rights shall expire. 7.6. ESCROW. The Secretary of the Company or such other escrow holder as the Committee may appoint shall retain physical custody of each certificate representing Restricted Stock until all of the restrictions imposed under the Award Agreement with respect to the shares evidenced by such certificate expire or shall have been removed. 7.7. LEGEND. In order to enforce the restrictions imposed upon shares of Restricted Stock hereunder, the Committee shall cause a legend or legends to be placed on certificates representing all shares of Restricted Stock that are still subject to restrictions under Award Agreements, which legend or legends shall make appropriate reference to the conditions imposed thereby. 7.8. SECTION 83(b) ELECTION. If a Holder makes an election under Section 83(b) of the Code, or any successor section thereto, to be taxed with respect to the Restricted Stock as of the date of transfer of the Restricted Stock rather than as of the date or dates upon which the Holder would otherwise be taxable under Section 83(a) of the Code, the Holder shall deliver a copy of such election to the Company immediately after filing such election with the Internal Revenue Service. 20 ARTICLE VIII. PERFORMANCE AWARDS AND STOCK PAYMENTS 8.1. ELIGIBILITY. Subject to the Award Limit, one or more Performance Awards and/or Stock Payments may be granted to any Employee whom the Committee determines is a key Employee. 8.2. PERFORMANCE AWARDS. Any key Employee selected by the Committee may be granted one or more Performance Awards. The value of such Performance Awards may be linked to any one or more of the Performance Criteria or other specific performance criteria determined appropriate by the Committee, in each case on a specified date or dates or over any period or periods determined by the Committee. In making such determinations, the Committee shall consider (among such other factors as it deems relevant in light of the specific type of award) the contributions, responsibilities and other compensation of the particular key Employee. 8.3. STOCK PAYMENTS. Any key Employee selected by the Committee may receive Stock Payments in the manner determined from time to time by the Committee. The number of shares shall be determined by the Committee and may be based upon the Performance Criteria or other specific performance criteria determined appropriate by the Committee, determined on the date such Stock Payment is made or on any date thereafter. 8.4. TERM. The term of a Performance Award and/or Stock Payment shall be set by the Committee in its discretion. 8.5. EXERCISE OR PURCHASE PRICE. The Committee may establish the exercise or purchase price of a Performance Award or shares received as a Stock Payment; PROVIDED, HOWEVER, that such price shall not be less than the par value for a share of Common Stock, unless otherwise permitted by applicable state law. 8.6. EXERCISE UPON TERMINATION OF EMPLOYMENT. A Performance Award, and/or Stock Payment is exercisable or payable only while the Holder is an Employee; PROVIDED, HOWEVER, that except with respect to Performance Awards granted to Section 162(m) Participants, the Administrator in its sole and absolute discretion may provide that Performance Awards may be exercised or paid following a Termination of Employment without cause, or following a Change in Control of the Company, or because of the Holder's 21 retirement, death or disability, or otherwise. Notwithstanding anything to the contrary in this Article 8, in the event of a Change in Control as defined in Section 1.7(c) that is or is to be accounted for as a "pooling of interests", all outstanding Performance Awards and Stock Payments shall be immediately exercisable or payable following such Change in Control. 8.7. FORM OF PAYMENT. Payment of the amount determined under Section 8.2 or 8.3 above shall be in cash, in Common Stock or a combination of both, as determined by the Committee. To the extent any payment under this Article VIII is effected in Common Stock, it shall be made subject to satisfaction of all provisions of Section 6.3. ARTICLE X. ADMINISTRATION 9.1. COMPENSATION COMMITTEE. The Compensation Committee (or another committee or a subcommittee of the Board assuming the functions of the Committee under the Plan) shall consist solely of two or more Independent Company Directors appointed by and holding office at the pleasure of the Board, each of whom is both a "non-employee director" as defined by Rule 16b-3 and an "outside director" for purposes of Section 162(m) of the Code. Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee may be filled by the Board. 9.2. DUTIES AND POWERS OF COMMITTEE. It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its provisions. The Committee shall have the power to interpret the Plan and the Award Agreements, and to adopt such rules for the administration, interpretation, and application of the Plan as are consistent therewith, to interpret, amend or revoke any such rules and to amend any Award Agreement provided that the rights or obligations of the Holder of the Award that is the subject of any such Award Agreement are not affected adversely. Any such grant or award under the Plan need not be the same with respect to each Holder. Any such interpretations and rules with respect to Incentive Stock Options shall be consistent with the provisions of Section 422 of the Code. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan except with respect to matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations or rules issued thereunder, are required to be determined in the sole discretion of the Committee. Notwithstanding the foregoing, the full Board, acting by a majority of its members in office, shall conduct the general administration of the Plan with respect to Options granted to Independent Directors. 22 9.3. MAJORITY RULE; UNANIMOUS WRITTEN CONSENT. The Committee shall act by a majority of its members in attendance at a meeting at which a quorum is present or by a memorandum or other written instrument signed by all members of the Committee. 9.4. COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS. Members of the Committee shall receive such compensation, if any, for their services as members as may be determined by the Board. All expenses and liabilities which members of the Committee incur in connection with the administration of the Plan shall be borne by the Company. The Committee may, with the approval of the Board, employ attorneys, consultants, accountants, appraisers, brokers, or other persons. The Committee, the Company and the Company's officers and Directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee or the Board in good faith shall be final and binding upon all Holders, the Company and all other interested persons. No members of the Committee or Board shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or Awards, and all members of the Committee and the Board shall be fully protected by the Company in respect of any such action, determination or interpretation. 9.5. DELEGATION OF AUTHORITY TO GRANT AWARDS. The Committee may, but need not, delegate from time to time some or all of its authority to grant Awards under the Plan to a committee consisting of one or more members of the Committee or of one or more officers of the Company; provided, however, that the Committee may not delegate its authority to grant Awards to individuals (i) who are subject on the date of the grant to the reporting rules under Section 16(a) of the Exchange Act, (ii) who are Section 162(m) Participants or (iii) who are officers of the Company who are delegated authority by the Committee hereunder. Any delegation hereunder shall be subject to the restrictions and limits that the Committee specifies at the time of such delegation of authority and may be rescinded at any time by the Committee. At all times, any committee appointed under this Section 9.5 shall serve in such capacity at the pleasure of the Committee. ARTICLE XI. MISCELLANEOUS PROVISIONS 10.1. NOT TRANSFERABLE. No Award under the Plan may be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution or, subject to the consent of the Administrator, pursuant to a DRO, unless and until such Award has been exercised, or the shares underlying such Award have been issued, and all restrictions applicable to such shares have lapsed. No Award or interest or right therein shall be liable for the debts, contracts or 23 engagements of the Holder or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted disposition thereof shall be null and void and of no effect, except to the extent that such disposition is permitted by the preceding sentence. During the lifetime of the Holder, only he may exercise an Option or other Award (or any portion thereof) granted to him under the Plan, unless it has been disposed of with the consent of the Administrator pursuant to a DRO. After the death of the Holder, any exercisable portion of an Option or other Award may, prior to the time when such portion becomes unexercisable under the Plan or the applicable Award Agreement, be exercised by his personal representative or by any person empowered to do so under the deceased Holder's will or under the then applicable laws of descent and distribution. Notwithstanding the foregoing provisions of this Section 10.1, the Administrator, in its sole discretion, may determine to grant to any Holder an Award which, by its terms as set forth in the applicable Award Agreement, may be transferred by the Holder, in writing and with prior written notice to the Administrator, by gift, without the receipt of any consideration, to a member of the Holder's immediate family, as defined in Rule 16a-1 under the Exchange Act, or to a trust for the exclusive benefit of, or any other entity owned solely by, such members, provided, that an Award that has been so transferred shall continue to be subject to all of the terms and conditions of the Award as applicable to the original Holder, and the transferee shall execute any and all such documents requested by the Administrator in connection with the transfer, including without limitation to evidence the transfer and to satisfy any requirements for an exemption for the transfer under applicable federal and state securities laws. 10.2. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN. Except as otherwise provided in this Section 10.2, the Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Administrator. However, without approval of the Company's stockholders given within twelve months before or after the action by the Administrator, no action of the Administrator may, except as provided in Section 10.3, increase the limits imposed in Section 10.3 on the maximum number of shares which may be issued under the Plan. No amendment, suspension or termination of the Plan shall, without the consent of the Holder alter or impair any rights or obligations under any Award theretofore granted or awarded, unless the Award itself otherwise expressly so provides. No Awards may be granted or awarded during any period of suspension or after termination of the Plan, and in no event may any Incentive Stock Option be granted under the Plan after the first to occur of the following events: (a) The expiration of ten years from the date the Plan is adopted by the Board; or (b) The expiration of ten years from the date the Plan is approved by the Company's stockholders under Section 10.4. 24 10.3. CHANGES IN COMMON STOCK OR ASSETS OF THE COMPANY, ACQUISITION OR LIQUIDATION OF THE COMPANY AND OTHER CORPORATE EVENTS. (a) Subject to Section 10.3 (d), in the event that the Administrator determines that any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), recapitalization, reclassification, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, liquidation, dissolution, or sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company, or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate transaction or event, in the Administrator's sole discretion, affects the Common Stock such that an adjustment is determined by the Administrator to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to an Award, then the Administrator shall, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of shares of Common Stock (or other securities or property) with respect to which Awards may be granted or awarded (including, but not limited to, adjustments of the limitations in Section 2.1 on the maximum number and kind of shares which may be issued and adjustments of the Award Limit), (ii) the number and kind of shares of Common Stock (or other securities or property) subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Award. (b) Subject to Sections 5.3(d), 5.4(b) and 10.3(d), in the event of any transaction or event described in Section 10.3(a) or any unusual or nonrecurring transactions or events affecting the Company, any affiliate of the Company, or the financial statements of the Company or any affiliate, or of changes in applicable laws, regulations, or accounting principles, the Administrator, in its sole and absolute discretion, and on such terms and conditions as it deems appropriate, either by the terms of the Award or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Holder's request, is hereby authorized to take any one or more of the following actions whenever the Administrator determines that such action is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any Award under the Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles: (i) To provide for either the purchase of any such Award for an amount of cash equal to the amount that could have been 25 attained upon the exercise of such Award or realization of the Holder's rights had such Award been currently exercisable or payable or fully vested or the replacement of such Award with other rights or property selected by the Administrator in its sole discretion; (ii) To provide that the Award cannot vest, be exercised or become payable after such event; (iii) To provide that such Award shall be exercisable as to all shares covered thereby, notwithstanding anything to the contrary in the provisions of such Award; (iv) To provide that such Award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; (v) To make adjustments in the number and type of shares of Common Stock (or other securities or property) subject to outstanding Awards, and in the number and kind of outstanding Restricted Stock and/or in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding options, rights and awards and options, rights and awards which may be granted in the future; (vi) To provide that, for a specified period of time prior to such event, the restrictions imposed under an Award Agreement upon some or all shares of Restricted Stock may be terminated, and, in the case of Restricted Stock, some or all shares of such Restricted Stock may cease to be subject to repurchase under Section 7.5 or forfeiture under Section 7.4 after such event (vii) To provide that, in the event of a Change in Control, each outstanding Award shall, immediately prior to the effective date of the Change in Control, automatically become fully exercisable for all of the shares of Common Stock at the time subject to such rights and may be exercised for any or all of those shares as fully-vested shares of Common Stock; and (viii) To provide that, in the event of any transaction described in Section 10.3(a), each outstanding Award shall, immediately prior to the effective date of such transaction, automatically become fully exercisable for all of the shares of Common Stock at the time subject to such rights or fully vested, as applicable, and may be exercised for any or 26 all of those shares as fully-vested shares of Common Stock. However, an outstanding right shall not so accelerate if and to the extent: (i) such right is, in connection with such transaction, either to be assumed by the successor or survivor corporation (or parent thereof) or to be replaced with a comparable right with respect to shares of the capital stock of the successor or survivor corporation (or parent thereof) or (ii) the acceleration of exercisability of such right is subject to other limitations imposed by the Administrator at the time of grant. The determination of comparability of rights under clause (i) above shall be made by the Administrator, and its determination shall be final, binding and conclusive (c) Subject to Sections 3.2, 3.3, 5.3(d), 5.4(b), 7.4, 7.5, 8.6 and 10.3(d), the Administrator may, in its discretion, include such further provisions and limitations in any Award, agreement or certificate, as it may deem equitable and in the best interests of the Company. (d) With respect to Awards which are granted to Section 162(m) Participants and are intended to qualify as performance-based compensation under Section 162(m)(4)(C), no adjustment or action described in this Section 10.3 or in any other provision of the Plan shall be authorized to the extent that such adjustment or action would cause such Award to fail to so qualify under Section 162(m)(4)(C), or any successor provisions thereto. No adjustment or action described in this Section 10.3 or in any other provision of the Plan shall be authorized to the extent that such adjustment or action would cause the Plan to violate Section 422(b)(1) of the Code. Furthermore, no such adjustment or action shall be authorized to the extent such adjustment or action would result in short-swing profits liability under Section 16 or violate the exemptive conditions of Rule 16b-3 unless the Administrator determines that the Award is not to comply with such exemptive conditions. The number of shares of Common Stock subject to any Award shall always be rounded to the next whole number. (e) Notwithstanding the foregoing, in the event that the Company becomes a party to a transaction that is intended to qualify for "pooling of interests" accounting treatment and, but for one or more of the provisions of this Plan or any Award Agreement would so qualify, then this Plan and any Award Agreement shall be interpreted so as to preserve such accounting treatment, and to the extent that any provision of the Plan or any Award Agreement would disqualify the transaction from pooling of interests accounting treatment (including, if applicable, an entire Award Agreement), then such provision shall be null and void. All determinations to be made in connection with the preceding sentence shall be made by the independent accounting firm whose opinion with respect to "pooling of interests" treatment is required as a condition to the Company's consummation of such transaction. (f) The existence of the Plan, the Award Agreement and the Awards granted hereunder shall not affect or restrict in any way the right or power of the Company or the shareholders of the Company to make or authorize any adjustment, 27 recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 10.4. APPROVAL OF PLAN BY STOCKHOLDERS. The Plan will be submitted for the approval of the Company's stockholders within twelve months after the date of the Board's initial adoption of the Plan. Awards may be granted or awarded prior to such stockholder approval, provided that such Awards shall not be exercisable nor shall such Awards vest prior to the time when the Plan is approved by the stockholders, and provided further that if such approval has not been obtained at the end of said twelve-month period, all Awards previously granted or awarded under the Plan shall thereupon be canceled and become null and void. In addition, if the Board determines that Awards other than Options which may be granted to Section 162(m) Participants should continue to be eligible to qualify as performance-based compensation under Section 162(m)(4)(C) of the Code, the Performance Criteria must be disclosed to and approved by the Company's stockholders no later than the first stockholder meeting that occurs in the fifth year following the year in which the Company's stockholders previously approved the Performance Criteria. 10.5. TAX WITHHOLDING. The Company shall be entitled to require payment in cash or deduction from other compensation payable to each Holder of any sums required by federal, state or local tax law to be withheld with respect to the issuance, vesting, exercise or payment of any Award. The Administrator may in its discretion and in satisfaction of the foregoing requirement allow such Holder to elect to have the Company withhold shares of Common Stock otherwise issuable under such Award (or allow the return of shares of Common Stock) having a Fair Market Value equal to the sums required to be withheld. 10.6. LOANS. The Committee may, in its discretion, extend one or more loans to key Employees in connection with the exercise or receipt of an Award granted or awarded under the Plan, or the issuance of Restricted Stock awarded under the Plan. The terms and conditions of any such loan shall be set by the Committee. 10.7. FORFEITURE PROVISIONS. Pursuant to its general authority to determine the terms and conditions applicable to Awards under the Plan, the Administrator shall have the right to provide, in the terms of 28 Awards made under the Plan, or to require a Holder to agree by separate written instrument, that (a) (i) any proceeds, gains or other economic benefit actually or constructively received by the Holder upon any receipt or exercise of the Award, or upon the receipt or resale of any Common Stock underlying the Award, must be paid to the Company, and (ii) the Award shall terminate and any unexercised portion of the Award (whether or not vested) shall be forfeited, if (b)(i) a Termination of Employment or Termination of Directorship occurs prior to a specified date, or within a specified time period following receipt or exercise of the Award, or (ii) the Holder at any time, or during a specified time period, engages in any activity in competition with the Company, or which is inimical, contrary or harmful to the interests of the Company, as further defined by the Administrator or (iii) the Holder incurs a Termination of Employment or Termination of Directorship for cause. 10.8. EFFECT OF PLAN UPON OPTIONS AND COMPENSATION PLANS. The adoption of the Plan shall not affect any other compensation or incentive plans in effect for the Company or any Subsidiary. Nothing in the Plan shall be construed to limit the right of the Company (a) to establish any other forms of incentives or compensation for Employees or Directors of the Company or any Subsidiary or (b) to grant or assume options or other rights or awards otherwise than under the Plan in connection with any proper corporate purpose including but not by way of limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, partnership, limited liability company, firm or association. 10.9. COMPLIANCE WITH LAWS. The Plan, the granting and vesting of Awards under the Plan and the issuance and delivery of shares of Common Stock and the payment of money under the Plan or under Awards granted or awarded hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under the Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements. To the extent permitted by applicable law, the Plan and Awards granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such laws, rules and regulations. 10.10. TITLES. Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. 10.11. GOVERNING LAW. 29 The Plan and any agreements hereunder shall be administered, interpreted and enforced under the internal laws of the State of Oregon without regard to conflicts of laws thereof. * * * I hereby certify that the foregoing Plan was duly adopted by the Board of Directors of Wilshire Financial Services Group Inc. on September 30, 1999. Executed on this 30th day of September 1999. ------------------------------ Secretary 30 EX-10.16 3 EXHIBIT 10.16 Exhibit 10.16 Dated as of November 26, 1999 Between: CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC ("Buyer") - --------------------------------------------------------- and WILSHIRE FUNDING CORPORATION ("Seller") - --------------------------------------- 1. APPLICABILITY From time to time the parties hereto may enter into transactions in which one party ("Seller") agrees to transfer to the other ("Buyer") securities or other assets ("Securities") against the transfer of funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such Securities at a date certain or on demand, against the transfer of funds by Seller. Each such transaction shall be referred to herein as a "Transaction" and, unless otherwise agreed in writing, shall be governed by this Agreement, including any supplemental terms or conditions contained in Annex I hereto and in any other annexes identified herein or therein as applicable hereunder. 2. DEFINITIONS (a) "Act of Insolvency", with respect to any party, (i) the commencement by such party as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, moratorium, dissolution, delinquency or similar law, or such party seeking the appointment or election of a receiver, conservator, trustee, custodian or similar official for such party or any substantial part of its property, or the convening of any meeting of creditors for purposes of commencing any such case or proceeding or seeking such an appointment or election, (ii) the commencement of any such case or proceeding against such party, or another seeking such an appointment or election, or the filing against a party of an application for a protective decree under the provisions of the Securities Investors Protection Act of 1970, which (A) is consented to or not timely contested by such party, (B) results in the entry of an order for relief, such an appointment or election, the issuance of such a protective decree or the entry of an order having a similar effect, or (C) is not dismissed within 15 days, (iii) the making by such party of a general assignment for the benefit of creditors, or (iv) the admission in writing by such party of such party's inability to pay such party's debts as they become due; (b) "Additional Purchased Securities", Securities provided by Seller to Buyer pursuant to Paragraph 4(a) hereof; (c) "Buyer's Margin Amount", with respect to any Transaction as of any date, the amount obtained by application of the Buyer's Margin Percentage to the Repurchase Price for such Transaction as of such date; (d) "Buyer's Margin Percentage", with respect to any Transaction as of any date, a percentage (which may be equal to the Seller's Margin Percentage) agreed to by Buyer and Seller or, in the absence of any such agreement, the percentage obtained by dividing the Market Value of the Purchased Securities on the Purchase Date by the Purchase Price on the Purchase Date for such Transaction; (e) "Confirmation", the meaning specified in Paragraph 3(b) hereof; (f) "Income", with respect to any Security at any time, any principal thereof and all interest, dividends or other distributions thereon; (g) "Margin Deficit", the meaning specified in Paragraph 4(a) hereof; (h) "Margin Excess", the meaning specified in Paragraph 4(b) hereof; (i) "Margin Notice Deadline", the time agreed to by the parties in the relevant Confirmation, Annex I hereto or otherwise as the deadline for giving notice requiring same-day satisfaction of margin maintenance obligations as provided in Paragraph 4 hereof (or, in the absence of any such agreement, the deadline for such purposes established in accordance with market practice); (j) "Market Value", with respect to any Securities as of any date, the price for such Securities on such date obtained from a generally recognized source agreed to by the parties or the most recent closing bid quotation from such a source, plus accrued income to the extent not included therein (other than any Income credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to market practice for such Securities); (k) "Price Differential", with respect to any Transaction as of any date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the Purchase Price for such Transaction on a 360-day-per-year basis for the actual number of days during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the date of determination (reduced by any amount of such Price Differential previously paid by Seller to Buyer with respect to such Transaction); (l) "Pricing Rate", the per annum percentage rate for determination of the Price Differential; (m) "Prime Rate", the prime rate of U.S. commercial banks as published in THE WALL STREET JOURNAL (or, if more than one such rate is published, the average of such rates); (n) "Purchase Date", the date on which Purchased Securities are to be transferred by Seller to Buyer; (o) "Purchase Price", (i) on the Purchase Date, the price at which Purchased Securities are transferred by Seller to Buyer, and (ii) thereafter, except where Buyer and Seller agree otherwise, such price increased by the amount of any cash transferred by Buyer to Seller pursuant to Paragraph 4(b) hereof and decreased by the amount of any cash transferred by Seller to Buyer pursuant to Paragraph 4(a) hereof or applied to reduce Seller's obligations under clause (ii) of Paragraph 5 hereof; (p) "Purchased Securities", the Securities transferred by Seller to Buyer in a Transaction hereunder, and any Securities substituted therefor in accordance with Paragraph 9 hereof. The term "Purchased Securities" with respect to any Transaction at any time also shall include Additional Purchased Securities delivered pursuant to Paragraph 4(a) hereof and shall exclude Securities returned pursuant to Paragraph 4(b) hereof; (q) "Repurchase Date", the date on which Seller is to repurchase the Purchased Securities from Buyer, including any date determined by application of the provisions of Paragraph 3(c) or 11 hereof; (r) "Repurchase Price", the price at which Purchased Securities are to be transferred from Buyer to Seller upon termination of a Transaction, which will be determined in each case (including Transactions terminable upon demand) as the sum of the Purchase Price and the Price Differential as of the date of such determination; 2 (s) "Seller's Margin Amount", with respect to any Transaction as of any date, the amount obtained by application of the Seller's Margin Percentage to the Repurchase Price for such Transaction as of such date; (t) "Seller's Margin Percentage", with respect to any Transaction as of any date, a percentage (which may be equal to the Buyer's Margin Percentage) agreed to by Buyer and Seller or, in the absence of any such agreement, the percentage obtained by dividing the Market Value of the Purchased Securities on the Purchase Date by the Purchase Price on the Purchase Date for such Transaction; 3. INITIATION; CONFIRMATION; TERMINATION (a) An agreement to enter into a Transaction may be made orally or in writing at the initiation of either Buyer or Seller. On the Purchase Date for the Transaction, the Purchased Securities shall be transferred to Buyer or its agent against the transfer of the Purchase Price to an account of Seller. (b) Upon agreeing to enter into a Transaction hereunder, Buyer or Seller (or both), as shall be agreed, shall promptly deliver to the other party a written confirmation of each Transaction (a "Confirmation"). The Confirmation shall describe the Purchased Securities (including CUSIP number, if any), identify Buyer or Seller and set forth (i) the Purchase Date, (ii) the Purchase Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on demand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction, and (v) any additional terms or conditions of the Transaction not inconsistent with this Agreement. The Confirmation, together with this Agreement, shall constitute conclusive evidence of the terms agreed between Buyer and Seller with respect to the Transaction to which the Confirmation relates, unless with respect to the Confirmation specific objection is made promptly after receipt thereof. In the event of any conflict between the terms of such Confirmation and this Agreement, this Agreement shall prevail. (c) In the case of Transactions terminable upon demand, such demand shall be made by Buyer or Seller, no later than such time as is customary in accordance with market practice, by telephone or otherwise on or prior to the business day on which such termination will be effective. On the date specified in such demand, or on the date fixed for termination in the case of Transactions having a fixed term, termination of the Transaction will be effected by transfer to Seller or its agent of the Purchased Securities and any Income in respect thereof received by Buyer (and not previously credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) against transfer of the Repurchase Price to an account of Buyer. 4. MARGIN MAINTENANCE (a) If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Buyer is less than the aggregate Buyer's Margin Amount for all such Transactions (a "Margin Deficit"), then Buyer may by notice to Seller require Seller in such Transactions, at Seller's option, to transfer to Buyer cash or additional Securities reasonably acceptable to Buyer ("Additional Purchased Securities"), so that the cash and aggregate Market Value of the Purchased Securities, including any such Additional Purchased Securities, will thereupon equal or exceed such aggregate Buyer's Margin Amount (decreased by the amount of any Margin Deficit as of such date arising from any Transactions in which such Buyer is acting as Seller). (b) If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Seller exceeds the aggregate Seller's Margin Amount for all such Transactions at such time (a "Margin Excess"), then Seller may by notice to Buyer require Buyer in such Transactions, at Buyer's option, to transfer cash or Purchased Securities to Seller, so that the aggregate Market Value of the Purchased Securities, after deduction of any such 3 cash or any Purchased Securities so transferred, will thereupon not exceed such aggregate Seller's Margin Amount (increased by the amount of any Margin Excess as of such date arising from any Transactions in which such Seller is acting as Buyer). (c) If any notice is given by Buyer or Seller under subparagraph (a) or (b) of this Paragraph at or before the Margin Notice Deadline on any business day, the party receiving such notice shall transfer cash or Additional Purchased Securities as provided in such subparagraph no later than the close of business in the relevant market on such day. If any such notice is given after the Margin Notice Deadline, the party receiving such notice shall transfer such cash or Securities no later than the close of business in the relevant market on the next business day following such notice. (d) Any cash transferred pursuant to this Paragraph shall be attributed to such Transactions as shall be agreed upon by the Buyer and Seller. (e) Seller and buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer or Seller (or both) under subparagraphs (a) or (b) of this Paragraph may be exercised only where a Margin Deficit or a Margin Excess, as the case may be, exceeds a specified dollar amount or a specified percentage of the Repurchase Prices for such Transactions (which amount or percentage shall be agreed to by Buyer and Seller prior to entering into any such Transactions). (f) Seller and Buyer may agree with respect to any or all Transactions hereunder, that the respective rights of Buyer and Seller under subparagraphs (a) or (b) of this Paragraph to require the elimination of a Margin Deficit or a Margin Excess, as the case may be, may be exercised whenever such a Margin Deficit or a Margin Excess exists with respect to any single Transaction hereunder (calculated without regard to any other Transaction outstanding under this Agreement). 5. INCOME PAYMENTS Seller shall be entitled to receive an amount equal to all income paid or distributed on or in respect of the Securities that is not otherwise received by Seller, to the full extent it would so be entitled if the Securities had not been sold to Buyer. Buyer shall, as the parties may agree with respect to any Transaction (or, in the absence of any such agreement, as Buyer shall reasonably determine in its discretion), on the date such Income is paid or distributed either (i) transfer to or credit to the account of Seller such Income with respect to any Purchased Securities subject to such Transaction or (ii) with respect to Income paid in cash, apply the Income payment or payments to reduce the amount, if any, to be transferred to Buyer by Seller upon termination of such Transaction. Buyer shall not be obligated to take any action pursuant to the preceding sentence (A) to the extent that such action would result in the creation of a Margin Deficit, unless prior thereto or simultaneously therewith Seller transfers to Buyer cash or Additional Purchased Securities sufficient to eliminate such Margin Deficit, or (B) if an Event of Default with respect to Seller has occurred and is then continuing at the time such Income is paid or distributed. 6. SECURITY INTEREST Although the parties intend that all Transactions hereunder be sales and purchases and not loans, in the event any such Transactions are deemed to be loans, Seller shall be deemed to have pledged to Buyer as security for the performance by Seller of its obligations under each such Transaction, and shall be deemed to have granted to Buyer a security interest in, all of the Purchased Securities with respect to all Transactions hereunder and all income thereon and other proceeds thereof. 7. PAYMENT AND TRANSFER Unless otherwise mutually agreed, all transfers of funds hereunder shall be in immediately available funds. All Securities transferred by one party hereto to the other party (i) shall be in suitable form for transfer or shall be accompanied by duly executed instruments of transfer or assignment in blank and 4 such other documentation as the party receiving possession may reasonably request, (ii) shall be transferred on the book-entry system of the Federal Reserve Bank, or (iii) shall be transferred by any other method mutually acceptable to Seller and Buyer. 8. SEGREGATION OF PURCHASED SECURITIES To the extent required by applicable law, all Purchased Securities in the possession of Seller shall be segregated from other securities in its possession and shall be identified as subject to this Agreement. Segregation may be accomplished by appropriate identification on the books and records of the holder, including a financial or securities intermediary or a clearing corporation. All of Seller's interest in the Purchased Securities shall pass to Buyer on the Purchase Date and, unless otherwise agreed by Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging in repurchase transactions with the Purchased Securities or otherwise selling, transferring, pledging or hypothecating the Purchased Securities to Seller pursuant to Paragraph 3, 4 or 11 hereof, or of Buyer's obligation to credit or pay Income to, or apply Income to the obligations of, Seller pursuant to Paragraph 5 hereof. REQUIRED DISCLOSURE FOR TRANSACTIONS IN WHICH THE SELLER RETAINS CUSTODY OF THE PURCHASED SECURITIES Seller is not permitted to substitute other securities for those subject to this Agreement and therefore must keep Buyer's securities segregated at all times, unless in this Agreement Buyer grants Seller the right to substitute other securities. If the Buyer grants the right to substitute, this means that Buyer's securities will likely be commingled with Seller's own securities during the trading day. Buyer is advised that, during any trading day that Buyer's securities are commingled with Seller's securities, they [will]* [may]** be subject to liens granted by Seller to [its clearing bank]* [third parties]** and may be used by Seller for deliveries on other securities transactions. Whenever the securities are commingled, Seller's ability to resegregate substitute securities for Buyer will be subject to Seller's ability to satisfy [the clearing]* [any]** lien or to obtain substitute securities. *Language to be used under 17 C.F.R. SECTION 403.4(e) if Seller is a government securities broker or dealer other than a financial institution. **Language to be used under 17 C.F.R. SECTION 403.5(d) if Seller is a financial institution. 9. SUBSTITUTION (a) Seller may, subject to agreement with and acceptance by Buyer, substitute other Securities for any Purchased Securities. Such substitution shall be made by transfer to Buyer of such other Securities and transfer to Seller of such Purchased Securities. After substitution, the substituted Securities shall be deemed to be Purchased Securities. (b) In transactions in which Seller retains custody of Purchased Securities, the parties expressly agree that Buyer shall be deemed, for purposes of subparagraph (a) of this Paragraph, to have agreed to and accepted in this Agreement substitution by Seller of other Securities for Purchased Securities; PROVIDED, HOWEVER, that such other Securities shall have a Market Value at least equal to the Market Value of the Purchased Securities for which they are substituted. 10. REPRESENTATIONS Each of Buyer and Seller represents and warrants to the other that (i) it is duly authorized to execute and deliver this Agreement, to enter into Transactions contemplated hereunder and to perform its obligation hereunder and has taken all necessary action to authorize such execution, delivery and performance, 5 (ii) it will engage in such Transactions as principal (or, if agreed in writing, in the form of an annex hereto or otherwise, in advance of any Transaction by the other party hereto, as agent for the disclosed principal), (iii) the person signing this Agreement on its behalf is duly authorized to do so on its behalf (or on behalf of any such disclosed principal), (iv) it has obtained all authorizations of any governmental body required in connection with this Agreement and the Transactions hereunder and such authorizations are in full force and effect and (v) the execution, delivery and performance of this Agreement and the Transactions hereunder will not violate any law, ordinance, charter, by-law or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected. On the Purchase Date for any Transaction Buyer and Seller shall each be deemed to repeat all the foregoing representations made by it. 11. EVENTS OF DEFAULT In the event that (i) Seller fails to transfer or Buyer fails to purchase Purchased Securities upon the applicable Purchase Date, (ii) Seller fails to repurchase or Buyer fails to transfer Purchased Securities upon the applicable Repurchase Date, (iii) Seller or Buyer fails to comply with Paragraph 4 hereof, (iv) Buyer fails, after one business day's notice, to comply with Paragraph 5 hereof, (v) an Act of Insolvency occurs with respect to Seller or Buyer, (vi) any representation made by Seller or Buyer shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated, or (vii) Seller or Buyer shall admit to the other its inability to, or its intention not to, perform any of its obligations hereunder (each an "Event of Default"): (a) The nondefaulting party may, at its option (which option shall be deemed to have been exercised immediately upon the occurrence of an Act of Insolvency), declare an Event of Default to have occurred hereunder and, upon the exercise or deemed exercise of such option, the Repurchase Date for each Transaction hereunder shall, if it has not already occurred, be deemed immediately to occur (except that, in the event that the Purchase Date for any Transaction has not yet occurred as of the date of such exercise or deemed exercise, such Transaction shall be deemed immediately canceled). The nondefaulting party shall (except upon the occurrence of an Act of Involvency) give notice to the defaulting party of the exercise of such option as promptly as practicable. (b) In all Transactions in which the defaulting party is acting as Seller, if the nondefaulting party exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, (i) the defaulting party's obligations in such Transactions to repurchase all Purchased Securities, at the Repurchased Price therefor on the Repurchase Date determined in accordance with subparagraph (a) of this Paragraph, shall thereupon become immediately due and payable, (ii) all Income paid after such exercise or deemed exercise shall be retained by the nondefaulting party and applied to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder, and (iii) the defaulting party shall immediately deliver to the nondefaulting party any Purchased Securities subject to such Transactions then in the defaulting party's possession or control. (c) In all Transactions in which the defaulting party is acting as Buyer, upon tender by the nondefaulting party of payment of the aggregate Repurchase Prices for all such Transactions, all right, title and interest in and entitlement to all Purchased Securities subject to such Transactions shall be deemed transferred to the nondefaulting party, and the defaulting party shall deliver all such Purchased Securities to the nondefaulting party. 6 (d) If the nondefaulting party exercises or is deemed to have exercised the option referred to in sub-paragraph (a) of this Paragraph, the nondefaulting party, without prior notice to the defaulting party, may: (i) as to Transactions in which the defaulting party is acting as Seller, (A) immediately sell, in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the nondefaulting party may reasonably deem satisfactory, any or all Purchased Securities subject to such Transactions and apply the proceeds thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Securities, to give the defaulting party credit for such Purchased Securities in an amount equal to the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source, against the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder; and (ii) as to Transactions in which the defaulting party is acting as Buyer, (A) immediately purchase, in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the nondefaulting party may reasonably deem satisfactory, securities ("Replacement Securities") of the same class and amount as any Purchased Securities that are not delivered by the defaulting party to the nondefaulting party as required hereunder or (B) in its sole discretion elect, in lieu of purchasing Replacement Securities, to be deemed to have purchased Replacement Securities at the price therefor on such date, obtained from a generally recognized source or the most recent closing offer quotation from such a source. Unless otherwise provided in Annex I, the parties acknowledge and agree that (1) the Securities subject to any Transaction hereunder are instruments traded in a recognized market, (2) in the absence of a generally recognized source for prices or bid or offer quotations for any Security, the nondefaulting party may establish the source therefor in its sole discretion and (3) all prices, bids and offers shall be determined together with accrued Income (except to the extent contrary to market practice with respect to the relevant Securities). (e) As to Transactions in which the defaulting party is acting as Buyer, the defaulting party shall be liable to the nondefaulting party for any excess of the price paid (or deemed paid) by the nondefaulting party for Replacement Securities over the Repurchase Price for the Purchased Securities replaced thereby and for any amounts payable by the defaulting party under Paragraph 5 hereof or otherwise hereunder. (f) For purposes of this Paragraph 11, the Repurchase Price for each Transaction hereunder in respect of which the defaulting party is acting as Buyer shall not increase above the amount of such Repurchase Price for such Transaction determined as of the date of the exercise or deemed exercise by the nondefaulting party of the option referred to in subparagraph (a) of this Paragraph. (g) The defaulting party shall be liable to the nondefaulting party for (i) the amount of all reasonable legal or other expenses incurred by the nondefaulting party in connection with or as a result of an Event of Default, (ii) damages in an amount equal to the cost (including all fees, expenses and commissions) of entering into replacement transactions and entering into or terminating hedge transactions in connection with or as a result of an Event of Default, and (iii) any other loss, damage, cost or expense directly arising or resulting from the occurrence of an Event of Default in respect of a Transaction. (h) To the extent permitted by applicable law, the defaulting party shall be liable to the nondefaulting party for interest on any amounts owing by the defaulting party hereunder, from the date the defaulting party becomes liable for such amounts hereunder until such amounts are (i) paid in full 7 by the defaulting party or (ii) satisfied in full by the exercise of the nondefaulting party's rights hereunder. Interest on any sum payable by the defaulting party to the nondefaulting party under this Paragraph 11(h) shall be at a rate equal to the greater of the Pricing Rate for the relevant Transaction or the Prime Rate. (i) The nondefaulting party shall have, in addition to its rights hereunder, any rights otherwise available to it under any other agreement or applicable law. 12. SINGLE AGREEMENT Buyer and Seller acknowledge that, and have entered hereinto and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder constitute a single business and contractual relationship and have been made in consideration of each other. Accordingly, each of Buyer and Seller agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transactions hereunder and (iii) that payments, deliveries and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder, and the obligations to make any such payments, deliveries and other transfers may be applied against each other and netted. 13. NOTICES AND OTHER COMMUNICATIONS Any and all notices, statements, demands or other communications hereunder may be given by a party to the other by mail, facsimile, telegraph, messenger or otherwise to the address specified in Annex II hereto, or so sent to such party at any other place specified in a notice of change of address hereafter received by the other. All notices, demands and requests hereunder may be made orally, to be confirmed promptly in writing, or by other communication as specified in the preceding sentence. 14. ENTIRE AGREEMENT; SEVERABILITY This Agreement shall supersede any existing agreements between the parties containing general terms and conditions for repurchase transactions. Each provision and agreement herein shall be treated as separate and independent from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement. 15. NON-ASSIGNABILITY; TERMINATION (a) The rights and obligations of the parties under this Agreement and under any Transaction shall not be assigned by either party without the prior written consent of the other party, and any such assignment without the prior written consent of the other party shall be null and void. Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. This Agreement may be terminated by either party upon giving written notice to the other, except that this Agreement shall, notwithstanding such notice, remain applicable to any Transactions then outstanding. (b) Subparagraph (a) of this Paragraph 15 shall not preclude a party from assigning, charging or otherwise dealing with all or any part of its interest in any sum payable to it under Paragraph 11 hereof. 16. GOVERNING LAW This Agreement shall be governed by the laws of the State of New York without giving effect to the conflict of law principles thereof. 8 17. NO WAIVERS, ETC. No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless and until such shall be in writing and duly executed by both of the parties hereto. Without limitation on any of the foregoing, the failure to give a notice pursuant to Paragraph 4(a) or 4(b) hereof will not constitute a waiver of any right to do so at a later date. 18. USE OF EMPLOYEE PLAN ASSETS (a) If assets of an employee benefit plan subject to any provision of the Employee Retirement Income Security Act of 1974 ("ERISA") are intended to be used by either party hereto (the "Plan Party") in a Transaction, the Plan Party shall so notify the other party prior to the Transaction. The Plan Party shall represent in writing to the other party that the Transaction does not constitute a prohibited transaction under ERISA or is otherwise exempt therefrom, and the other party may proceed in reliance thereon but shall not be required so to proceed. (b) Subject to the last sentence of subparagraph (a) of this Paragraph, any such Transaction shall proceed only if Seller furnishes or has furnished to Buyer its most recent available audited statement of its financial condition and its most recent subsequent unaudited statement of its financial condition. (c) By entering into a Transaction pursuant to this Paragraph, Seller shall be deemed (i) to represent to Buyer that since the date of Seller's latest such financial statements, there has been no material adverse change in Seller's financial condition which Seller has not disclosed to Buyer, and (ii) to agree to provide Buyer with future audited and unaudited statements of its financial condition as they are issued, so long as it is a Seller in any outstanding Transaction involving a Plan Party. 19. INTENT (a) The parties recognize that each Transaction is a "repurchase agreement" as that term is defined in Section 101 of Title 11 of the United States Code, as amended (except insofar as the type of Securities subject to such Transaction or the term of such Transaction would render such definition inapplicable), and a "securities contract" as that term is defined in Section 741 of Title 11 of the United States Code, as amended (except insofar as the type of assets subject to such Transaction would render such definition inapplicable). (b) It is understood that either party's right to liquidate Securities delivered to it in connection with Transactions hereunder or to exercise any other remedies pursuant to Paragraph 11 hereof is a contractual right to liquidate such Transaction as described in Sections 555 and 559 of Title 11 of the United States Code, as amended. (c) The parties agree and acknowledge that if a party hereto is an "insured depository institution," as such term is defined in the Federal Deposit Insurance Act, as amended ("FDIA"), then each Transaction hereunder is a "qualified financial contract," as that term is defined in FDIA and any rules, orders or policy statements thereunder (except insofar as the type of assets subject to such Transaction would render such definition inapplicable). (d) It is understood that this Agreement constitutes a "netting contract" as defined in and subject to Title IV of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and each payment entitlement and payment obligation under any Transaction hereunder shall constitute a "covered contractual payment entitlement" or "covered contractual payment obligation", 9 respectively, as defined in and subject to FDICIA (except insofar as one or both of the parties is not a "financial institution" as that term is defined in FDICIA). 20. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS The parties acknowledge that they have been advised that: (a) in the case of Transactions in which one of the parties is a broker or dealer registered with the Securities and Exchange Commission ("SEC") under Section 15 of the Securities Exchange Act of 1934 ("1934 Act"), the Securities Investor Protection Corporation has taken the position that the provisions of the Securities Investor Protection Act of 1970 ("SIPA") do not protect the other party with respect to any Transaction hereunder; (b) in the case of Transactions in which one of the parties is a government securities broker or a government securities dealer registered with the SEC under Section 15C of the 1934 Act, SIPA will not provide protection to the other party with respect to any Transaction hereunder; and (c) in the case of Transactions in which one of the parties is a financial institution, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, as applicable. CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC WILSHIRE FUNDING CORPORATION [Name of Party] [Name of Party] By: [illegible] By: [illegible] -------------------------- --------------------------- Title: Managing Director Title: CFO ----------------------- -------------------------- Date: 11/16/99 Date: November 12, 1999 ------------------------- --------------------------- ANNEX I SUPPLEMENTAL TERMS AND CONDITIONS (MORTGAGE CAPITAL/WFC) Pursuant to the terms of the Master Repurchase Agreement (the printed text only, the "Master Repurchase Agreement" and together with this Annex and any other Annexes and Exhibits thereto, the "Agreement") dated as of November 26, 1999 (the "Restatement Date"). Buyer and Seller agree to be governed by the Supplemental Terms and Condition stated herein. The Agreement amends, restates and consolidates in their entirety (a) the Master Repurchase Agreement (Commercial) dated as of June 16, 1997 between Wilshire Financial Corporation ("WFC or Seller") and Credit Suisse First Boston Mortgage Capital LLC ("Buyer") relating to commercial mortgage loans and commercial real property (the "Original Commercial Agreement") and (b) the Master Repurchase Agreement dated June 16, 1997, between WFC and Buyer relating to residential mortgage loans, residential real property and manufactured home installment contracts (the "Original Residential Agreement" and, together with the Original Commercial Agreement, the "Original Agreements"). The Transactions under the Original Agreements (the "Original Transactions") shall, as of the Restatement Date, be replaced by the New Transactions referred to below. The New Transactions and the Rollover Transactions referred to below shall be governed by the Agreement. All capitalized terms used in these Supplemental Terms and Conditions that are defined in the Master Repurchase Agreement are used herein as defined therein, except to the extent such terms are amended or supplemented herein. Reference is made to Section 6 hereof for the meaning of additional defined terms used herein. To the extent that any provisions in these Supplemental Terms and Conditions are in conflict with provisions contained in the Master Repurchase Agreement, the provisions of these Supplemental Terms and Conditions shall prevail. 1. SPECIFIC TRANSACTIONS ONLY. (a) Unless otherwise agreed by Buyer and Seller, the only Transactions under the Agreement shall be (i) new Transactions (the "New Transactions") entered into as of the Restatement Date covering the Purchased Securities that were then subject to Original Transactions and (ii) the Rollover Transactions described below. Each New Transaction shall have a term of approximately one month, and shall have a Purchase Price equal to the Repurchase Price (determined as of the Restatement Date without any Breakage Costs) applicable to the Original Transaction for the corresponding Purchased Security (subject to adjustment to give effect to the payments and fee described in Section 2 below). Unless (x) an Event of Default shall have occurred, (y) Seller directs Buyer not to do so, or (z) Seller shall have paid the applicable Repurchase Price for the relevant Transaction, Buyer shall with respect to each Transaction enter into successive additional monthly Transactions (the "Rollover Transactions") for the Purchased Securities covered by such Transaction; PROVIDED, HOWEVER, that Buyer shall have no obligation to enter into any Transaction with a Repurchase Date later than the first anniversary of the Restatement Date. Neither Buyer nor Seller shall have any obligation to enter into any Transaction under the Agreement other than the Transactions described above in this Section 1(a). The Pricing Rate for all Transactions, unless otherwise agreed in connection with a specific Transaction, shall be a per annum rate equal to LIBOR plus the following respective per annum rate for Transactions covering the following types of Purchased Securities (all of which are Contracts):
TYPE OF PURCHASED SECURITIES PER ANNUM RATE Commercial Performing 2.25% Commercial Non-Performing 3.00% Residential First Loan Contract 1.50% Residential Junior Loan Contract 1.90% Residential Non-Performing 2.50% Residential Manufactured 1.90%
2. PAYMENTS AND FEES. (a) On November 16, 1999, Seller wired immediately available funds to Buyer in the amount of $1,693,043.53, which payment was applied to the outstanding Margin Deficits (as such term is defined in the Original Agreements) under the Original Agreements as of the Restatement Date. (b) On the Restatement Date, Buyer shall be entitled to a facility fee in the amount of 0.5% of the New Transaction Purchase Prices (determined after giving effect to the payments described in Section 2(a) above and before giving effect to such fee), which shall be added to and be part of the respective Purchase Prices under the New Transactions. 3. MARKET VALUE. (a) The text of Paragraph 2(j) of the Master Repurchase Agreement is replaced in its entirety with the following: "`Market Value', with respect to any Securities as of any date, the price of such Securities as determined by Buyer in its good faith judgment;" (b) Buyer shall provide to Seller, at Seller's request and for information purposes only, the assumptions used by Buyer to determine the Market Value of the Purchased Securities for each new determination of Market Value. 4. MARGIN MAINTENANCE. (a) The Margin Notice Deadline shall be 10 AM, New York City time. The Buyer's Margin Percentage with respect to each Transaction under the Agreement shall be equal to the Buyer's Margin Percentage with respect to the final Original Transaction for the corresponding Purchased Security as specified in the relevant Confirmation. (b) Paragraph 4 of the Master Repurchase Agreement is amended by deleting subparagraphs (d), (e) and (f) of such Paragraph. Neither party shall be required to comply with the provisions of subparagraph (b) of Paragraph 4, which subparagraph is preserved solely for the purpose of providing a definition of the term "Margin Excess." (C) Notwithstanding anything to the contrary contained in the Agreement, Seller shall not be required to eliminate any Margin Deficit pursuant to Paragraph 4(a) except to the extent, if any, that the amount of such Margin Deficit exceeds the amount of any Margin Excess (as such term is defined in the MBS Agreement) existing at such time under the MBS Agreement. 2 (d) The Custodial Agreement shall set forth further terms and provisions relating to Buyer's and Seller's rights and obligations under Paragraph 4 of the Master Repurchase Agreement. 5. INCOME PAYMENTS. The text of Paragraph 5 of the Master Repurchase Agreement is replaced in its entirety with the following: "Buyer shall be entitled to receive and retain an amount equal to all Income and other proceeds (including sale and refinancing proceeds) paid, distributed, received or otherwise realized from, on or in respect of the Securities (after deduction for any required tax or other third-party payments), and shall apply all such amounts in the following order: first to pay any unpaid accrued Price Differentials; second, to pay any amounts due from Seller as a result of principal paydowns, or changes in the Market Value, of Purchased Securities; and then, to pay any other amounts owing by Seller under the Agreement or in respect of any Transaction (in such order as Buyer shall determine in its sole discretion)." 6. ADDITIONAL DEFINITIONS. "AFFILIATE" With respect to any specified Person, any other Person controlling or controlled by or under common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities (including, without limitation, partnership interests), by contract or otherwise and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "BREAKAGE COSTS" shall have the meaning assigned thereto in Section 29 hereof. "BREAKAGE PERIOD" shall have the meaning assigned thereto in Section 29 hereof. "BREAKAGE RATE" shall have the meaning assigned thereto in Section 29 hereof. "BUSINESS DAY" shall mean any day other than (i) a Saturday or a Sunday or (ii) another day on which banking institutions in the cities of Portland, Oregon or New York, New York are authorized or obligated by law, executive order, or governmental decree to be closed. "COLLATERALIZATION AGREEMENT" shall mean the Collateralization Agreement dated as of the Restatement Date between Seller and Credit Suisse First Boston Corporation, an Affiliate of CSFB. "COMMERCIAL CONTRACT" shall mean a Contract that was a Purchased Security under the Original Commercial Agreement, and any Contract that constitutes proceeds of such a Purchased Security. 3 "COMMERCIAL EXHIBIT A" shall mean Exhibit A to the Original Commercial Agreement (with all defined terms used therein having the meanings ascribed thereto in the Original Commercial Agreement). "COMMERCIAL EXHIBIT B" shall mean Exhibit B to the Original Commercial Agreement (with all defined used therein have the meanings ascribed thereto in the Original Commercial Agreement). "CONTRACTS" shall mean (i) mortgage loans secured by a first or junior mortgage on real property and related personal property, (ii) certain real property and related personal property and (iii) manufactured housing retail installment contracts and installment loan agreements, all to the extent such loans, property or contracts constituted Purchased Securities under an Original Agreement. Each such Contract includes, without limitation, all Records relating to such Contract and all related security interests, Related Assets, and any and all rights to receive payments thereunder and all proceeds thereof (including, without limitation, any recourse rights against third persons) from and after the related Purchase Date. "CSFB" shall mean Credit Suisse First Boston Mortgage Capital LLC. "CUSTODIAL AGREEMENT" shall refer to the Second Amended and Restated Custodial and Servicing Agreement dated as of June 16, 1997, as amended as of the Restatement Date, by and among Buyer, Seller and Custodian, providing for the custody and the servicing of the Contracts. "CUSTODIAN" shall refer to Bankers Trust Company of California, N.A., in its capacity as custodian under the Custodial Agreement, or any successor or any permitted assigns. "GUARANTOR" shall mean WFSG, or any successor thereto. "GUARANTY AGREEMENT" shall mean the Guaranty dated as of the Restatement Date issued by WFSG for the benefit of the Buyer. "LIBOR" shall mean the offered rate for United States dollars with a maturity of one month which appears on Telerate as of 9 AM, New York City time, as determined by Buyer (absent manifest error) on the Purchase Date for the relevant Transaction; PROVIDED, HOWEVER, that if such rate does not appear on the Dow Jones Telerate Service page 3750 (or such other page as may replace that page on that service) or if such service is no longer offered, the rate for United States dollars with a maturity of one month quoted by such other comparable service as may be selected by Buyer. "MBS AGREEMENT" shall mean the Global Master Repurchase Agreement dated as of November 13, 1996 between Seller and Credit Suisse First Boston (Hong Kong) Limited, as amended, modified, restated or supplemented from time to time, relating to mortgage-backed securities; PROVIDED, HOWEVER that if such Global Master Repurchase Agreement is replaced by a Master Repurchase Agreement between Seller and Credit Suisse First Boston (Europe) Limited, such Master Repurchase Agreement, as amended, modified, restated or supplemented from time to time shall be the MBS Agreement. 4 "NON-PERFORMING" (i) with respect to a Commercial Contract, has the meaning ascribed to such term in the Original Commercial Agreement and (ii) with respect to a Residential Contract, has the meaning ascribed to such term in the Original Residential Agreement. "OBLIGOR" shall mean each Person who is indebted under a Contract. "PERFORMING" shall mean any Contract that is not Non-Performing as of the date of determination. "PERSON" shall mean any legal person, including any individual, corporation, partnership, association, joint-stock company, trust, limited liability company, unincorporated organization, governmental entity or other entity of similar nature "RECORDS" shall mean, with respect to any Contract, all documents, books, records and other information (including, without limitation, computer programs, tapes, discs, punch cards and related property and rights) relating to such Contract. "RELATED ASSETS" shall mean, with respect to any Contract, (i) Seller's security interest in the related real and personal property (including all improvements, fixtures, equipment and articles of personal property located on such real property and all rents, issues, profits and income derived from the operation of such real property, and in the case of a Contract relating to a manufactured home, such manufactured home) and rights, remedies, powers and privileges under the related mortgage or other security instrument, (ii) Seller's rights, remedies, powers and privileges under such Contract, including any personal guaranty thereof, (iii) Seller's rights, remedies, powers and privileges under the Agreement and the Custodial Agreement and any servicing agreement, (iv) Seller's rights, remedies, powers and privileges under the Insurance Policies (as defined in the Custodial Agreement), and (v) all proceeds of the foregoing. "REO SUBSIDIARY PLEDGE AGREEMENT" shall mean the REO Subsidiary Pledge Agreement dated June 16, 1997, as amended as of the Restatement Date, between Buyer and Seller. "RESIDENTIAL CONTRACT" shall mean a Contract that was a Purchased Security under the Original Residential Agreement, and any Contract that constitutes proceeds of such a Purchased Security. "RESIDENTIAL EXHIBIT A" shall mean Exhibit A to the Original Residential Agreement (with all defined terms used therein having the meanings ascribed thereto in the Original Residential Agreement). "RESIDENTIAL EXHIBIT B" shall mean Exhibit B to the Original Residential Agreement (with all defined used therein have the meanings ascribed thereto in the Original Residential Agreement). "SECURITIES" shall mean, notwithstanding the definition set forth in Paragraph 1 of the Repurchase Agreement, Contracts purchased pursuant to this Agreement. "SERVICER" shall refer to WSC, WCC or WFC, or their respective successors. 5 "SERVICING LETTER AGREEMENT" means the letter agreement dated as of June 16, 1997, as amended as of the Restatement Date, among Buyer and each Servicer, relating to the servicing of the Contracts and other real property. "TRANSACTION DOCUMENTS" means this Agreement, the Custodial Agreement, the Servicing Letter Agreement and any related agreements. "WCC" shall mean Wilshire Credit Corporation. "WFSG" shall mean Wilshire Financial Services Group Inc. "WREI" shall mean, collectively, Wilshire Real Estate Investment Inc. and its subsidiaries. "WSC" shall mean Wilshire Servicing Corporation. 7. BACKUP SECURITY INTEREST. (a) In the event that, for any reason, any Transaction is construed by any court as a secured loan rather than a purchase and sale, the parties intend that Seller shall have granted to Buyer a security interest in all of the Purchased Securities, which security interest is not subject to any prior security interests created under the Uniform Commercial Code in the appropriate jurisdiction. (b) Seller shall pay all fees and expense associated with perfecting and maintaining such security interest including, without limitation, the cost of filing financing statements and continuation statements under the Uniform Commercial Code and the recording of any assignment of Mortgage in the appropriate jurisdiction as and when required thereunder or specified by Buyer. (c) In the event that Buyer elects to engage in repurchase transactions with the Purchased Securities or otherwise elects to pledge or hypothecate the Purchased Securities, Seller shall, at the request of Buyer and at the expense of Seller, do and perform such acts and things necessary to enable the Custodian to do and perform such further acts and things and to execute and deliver to Buyer and its counterparty such additional documents, acknowledgments, powers and instruments as are reasonably required by Buyer in connection with such transaction and such counterparty, it being understood and agreed that Seller will retain all servicing rights in respect of any Purchased Securities so transferred. 8. REPRESENTATIONS; COVENANTS. (a) Each party represents and warrants, and shall on and as of the Purchase Date for any Transaction and on and as of each date thereafter through the related Repurchase Date be deemed to represent and warrant, as follows: (i) The execution, delivery and performance of the Agreement and the performance of each Transaction do not and will not result in or require the creation of any lien, security interest or other charge or en- 6 cumbrance (other than pursuant hereto) upon or with respect to any of its properties in favor of any Person other than Buyer; and (ii) The Agreement is, and each Transaction when entered into under the Agreement will be, a legal, valid and binding obligation of it enforceable against it in accordance with the terms of the Agreement. (b) Seller hereby makes, and on and as of the Purchase Date of any Transaction and on and as of each date thereafter through the related Repurchase Date shall be deemed to have made, the representations and warranties to Buyer set forth in (i) as to Transactions for Purchased Securities which are Commercial Contracts, Commercial Exhibit A and Commercial Exhibit B and (ii) as to Transactions for Purchased Securities which are Residential Contracts, Residential Exhibit A and Residential Exhibit B. The representations and warranties set forth herein shall survive transfer of the Purchased Securities to the Buyer and shall continue for so long as the Purchased Securities are subject to this Agreement. In the event Buyer engages in a repurchase transaction with any of the Purchased Securities or otherwise pledges or hypothecates any of the Purchased Securities, Buyer shall have the right to assign to Buyer's counterparty any representations or warranties in Commercial Exhibit B or Residential Exhibit B, as the case may be, as they relate to the Purchased Securities that are subject to such repurchase transaction; PROVIDED, HOWEVER, that Buyer hereby represents and warrants that so long as this Agreement is in effect, any repurchase transaction entered into between Buyer and a counterparty with respect to Contracts which are the subject of a Transaction hereunder shall not permit such counterparty to assert a breach of an assigned representation or warranty made by Seller with respect to such Contracts (as set forth in Commercial Exhibit B or Residential Exhibit B, as the case may be) against Seller unless Buyer is in default of its obligations under such repurchase transaction. (c) Buyer represents and warrants that (i) it is a separate and independent corporate entity from the custodian named in the Custodial Agreement; (ii) it does not own a controlling interest in such custodian either directly or through Affiliates; (iii) and no director or officer of Buyer is also a director or officer of such custodian. (d) Seller represents and warrants that (i) it is a separate and independent corporate entity from the custodian named in the Custodial Agreement; (ii) it does not own a controlling interest in such custodian either directly or through Affiliates; (iii) and no director or officer of Seller is also a director or officer of such custodian. 9. REPURCHASE OF CONTRACTS. Upon discovery by Seller of a breach of any of the representations and warranties set forth in Commercial Exhibit B or Residential Exhibit B, as the case may be, Seller shall give prompt written notice thereof to Buyer. If Seller does not correct or cure such breach on or before the 15th day following the earlier of discovery of such breach by Seller or receipt of notice of such breach, then Seller shall repurchase such Contract on the Repurchase Date next succeeding such 15th day following receipt of such notice (or, if such 15th day following receipt of such notice occurs on a Repurchase Date, on such Repurchase Date). The provisions of this Section shall not be deemed to limit, or affect the time periods provided for in, any other provision of this Agreement respecting margin maintenance or otherwise. 7 10. REHYPOTHECATION. (a) Paragraph 8 of the Master Repurchase Agreement is amended by deleting "or pay Income" in the ninth line thereof and deleting the comma in the tenth line thereof. (b) Buyer may at its sole election engage in repurchase transactions with the Purchased Securities or otherwise pledge, hypothecate, assign, transfer or otherwise convey the Purchased Securities with a counterparty of Buyer's choice; PROVIDED, HOWEVER, that no such transaction by Buyer shall relieve Buyer of its obligations to WFC in connection with the repurchase by WFC of any Purchased Securities in accordance with the terms of this Agreement and the relevant Confirmation. 11. EVENTS OF DEFAULT. (a) In addition to the Events of Default described in the Master Repurchase Agreement, the occurrence of any of the following shall constitute an Event of Default: (i) Seller shall fail to perform or comply with, or shall admit its inability to or intention not to perform or comply with, any covenant or agreement contained in these Supplemental Terms and Conditions. (ii) Seller shall (x) default or breach its obligations under any repurchase agreement, reverse repurchase agreement or other agreement with Buyer or any Affiliate of Buyer or (y) default or breach any of its obligations under any material agreement with any other person (except WREI). (iii) A material adverse change (a "Material Adverse Change") shall have occurred with respect to the financial condition, business, litigation or operations of Seller or Guarantor. (iv) Any report by independent accountants of Seller's or Guarantor's financial condition issued after the Restatement Date shall contain any "going concern" qualification or limitation. (v) A Change in Control shall have occurred. For this purpose, a Change in Control shall have occurred if (x) any person or group (within the meaning of Rule 13d-5 of the Securities Exchange Act of 1934 as in effect on the Restatement Date) shall own directly or indirectly, beneficially or of record, shares or other equity interests representing more than 35% of the aggregate voting power represented by the issued and outstanding partnership or other equity interests of Seller or Guarantor; (y) a majority of the seats (other than vacant seats) on the board of directors (or equivalent body) of Seller or Guarantor shall at any time be occupied by persons who were neither (A) nominated by the board of directors (or such body) of Seller or Guarantor nor (B) appointed by directors (or equivalent persons) so nominated; (z) any change in control (or similar event, however denominated) with respect to Seller or Guarantor shall occur under and as defined in 8 any indenture, agreement or guaranty in respect of indebtedness to which Seller or Guarantor is a party or guarantor. (vi) The Agreement shall for any reason cease to create in favor or Buyer a valid ownership or first priority security interest in any of the Purchased Securities purported to be covered thereby, and such failure is not cured, or the affected Contracts repurchased, by Seller, within 2 Business Days of the earlier of Seller's discovery of, or notice to Seller of, such failure. (vii) A final judgment by any competent court in the United States of America for the payment of money in an amount of at least $1,000,000 is rendered against Seller or Guarantor and the same remains undischarged for a period of 30 days during which execution of such judgment is not effectively stayed. (viii) WFC or Servicer shall fail to observe or perform any of the covenants or agreements under any Transaction Document, which failure, in the reasonable judgment of Buyer, materially and adversely affects Buyer. (ix) WFC shall fail to promptly notify Buyer of (i) the acceleration of any material debt obligation of WFC or Guarantor; (ii) the amount of any revolving or funded credit facility of WFC or Guarantor of $100 million or more entered into after the date hereof with any one new lender; (iii) any material adverse developments with respect to pending or future litigation involving WFC or Guarantor (other than foreclosures conducted by or on behalf of WFC or Guarantor and other like ordinary-course-of-business proceedings); and (iv) any other developments which materially and adversely affect the financial condition of WFC. Notwithstanding any other provision of this Section 11(a) of the Supplemental Terms and Conditions, any repurchase period or cure period provided herein in respect of any action to be taken by Seller may be shortened to two (2) Business Days by Buyer if, in Buyer's sole good faith discretion, it is unreasonable to permit such cure period or repurchase period under the circumstances, taking into consideration, among other things, the volatility of the market for the Contracts involved, the extent and nature of any Event of Default (or events which with the given of such passage of time would constitute an Event of Default) and the risks inherent in deferring the exercise of remedies for the otherwise applicable repurchase period or cure period. (b) In addition to the rights of the Buyer pursuant to Paragraph 11 of the Master Repurchase Agreement, upon the occurrence of an Event of Default by Seller: 9 (i) All rights of Seller and Servicers to receive payments on, or otherwise service or possess Records with respect to, the Contracts shall cease, and all such rights shall thereupon become vested in Buyer, which shall thereupon have the sole right to receive such payments and apply them to the aggregate unpaid Repurchase Prices owed by Seller (subject to the rights of Obligors in respect of Escrow Payments, as defined in the Custodial Agreement) and to pay any excess either (x) to the Seller if in the Buyer's reasonable judgment the Seller is legally entitled thereto, (y) to such other party or Person as is in the Buyer's reasonable judgment is legally entitled thereto, or (z) if the Buyer cannot determine in its reasonable judgment the Person or party entitled thereto, as directed by a court of competent jurisdiction; (ii) All payments which are received by Seller and Servicers contrary to the provisions of the preceding clause (i) shall be received in trust for the benefit of Buyer and shall as soon as practicable, but no more than three (3) Business Days after receipt, be segregated from other funds of Seller; and (iii) The Pricing Rate for each day from and after the date of such Event of Default shall be a per annum rate equal to the sum of (x) the Pricing Rate otherwise applicable and (y) 2.00%. (c) Each event specified in Section 11(a) of these Supplemental Terms and Conditions may, at the option of Buyer, cause an acceleration of the Repurchase Date for a Transaction and shall be in addition to any other rights of Buyer to cause such an acceleration under the Agreement. 12. REPURCHASE DATE AND REPURCHASE PRICE. Seller shall pay to Buyer on each Repurchase Date, to the extent not theretofore paid pursuant to Paragraph 5 of the Master Repurchase Agreement, (a) the accrued Price Differential with respect to each Transaction terminating on such Repurchase Date and (b) the portion of the amount by which the Repurchase Price of each such Transaction exceeds the Purchase Price of the next corresponding Rollover Transaction that is attributable to principal paydowns on, and reductions in the Market Value of, the relevant Purchased Securities during the term of such Transaction. Payment of amounts shall be made by wire transfer in immediately available funds in accordance with the intended recipient's written instructions. With respect to any Contract, notwithstanding the occurrence of a repossession, foreclosure, deed-in-lieu of foreclosure or other realization on the underlying property, such Contract shall be deemed outstanding for purposes of the calculation of the Repurchase Price and the servicing fee, and the repurchase obligation of Seller under the terms and conditions of the Agreement, and the payment of the Repurchase Price for such Contract by Seller shall entitle Seller to receive the non-cash property obtained through such realization (subject to the other provisions of the Agreement). The obligation of Seller to pay the Repurchase Price for any Transaction on a Repurchase Date shall not be lessened or otherwise affected in any way by the fact that Contracts subject to such Transaction may have ceased to exist by reason of such realization, and the payment of such Repurchase Price shall with respect to such Contracts, constitute 10 a repurchase by Seller of all related rights, proceeds and underlying property, as applicable, in respect of such realization. 13. REPORTING REQUIREMENTS. Seller shall furnish to Buyer: (a) within 90 days after the end of each fiscal year of Guarantor, Guarantor's consolidated balance sheet as at the end of such fiscal year and the related statements of income and cash flows for such fiscal year, audited by independent certified public accountants of recognized national standing, together with (i) management's discussion and analysis of yearly results compared to the prior year and (ii) an opinion of such accountants (which shall not be qualified in any material respect) to the effect that such financial statements fairly present the financial condition and results of operations of Guarantor on a consolidated basis in accordance with generally accepted accounting principles consistently applied; (b) within 45 days after the close of each quarterly accounting period in each fiscal year of Guarantor (other than the last fiscal quarter of any fiscal year), the consolidated balance sheet of Guarantor as at the end of such quarterly accounting period and the related consolidated statements of income and cash flows for such quarterly accounting period, together with management's discussion and analysis of quarterly results and year-to-date results compared to the same periods in the prior year, all of which shall be certified by the chief financial officer of Guarantor, subject to normal year-end adjustments; (c) within 45 days after the end of each month (other than the last month of any quarterly accounting period), the consolidated balance sheet of Guarantor as at the end of such month and the related consolidated statement of income for such month, all of which shall be certified by the chief financial officer of Guarantor, subject to normal year-end adjustments; (d) within 30 days after the end of each month, loan level performance data as of the end of such month for any Securities subject to Transactions hereunder with respect to which Seller, Guarantor, any Servicer or any successor or Affiliate of any of them is the servicer or master servicer (collectively, "Wilshire-Serviced Securities"), including delinquency reports, pool analytic reports and static pool reports (including delinquency, foreclosure and net charge-off reports), all to the extent obtainable without unreasonable cost by Seller from the relevant trustee or servicer (it being recognized by the parties that the reports currently received by Seller or Buyer, as registered holder of the relevant Securities, do not include all such information); (e) promptly following the occurrence thereof, written notice of any Event of Default, or any event, condition or circumstance which with the giving of notice and/or passage of time may constitute an Event of Default, in each case specifying the nature and extent thereof and the corrective action, if any, taken or proposed to be taken with respect thereto; (f) promptly following the occurrence thereof, written notice of the filing or commencement of, or any threat or notice of intention of any person to file or commence, any action, suit or proceeding, whether at law or in equity or by or before any governmental authority, against Seller or Guarantor that might result in a Material Adverse Change; 11 (g) promptly following the occurrence thereof, written notice of any event, condition or circumstance that has resulted in, or may reasonably be expected to result in, a Material Adverse Change; (h) promptly following the occurrence thereof, written notice of the receipt of any New Capital by any Prepayment Party (as such terms are defined in Section 16 below); and (i) promptly, from time to time, such other information and reports regarding the operations, business affairs and financial condition of Seller or Guarantor, or compliance with the terms of the Agreement, as Buyer may reasonably request. 14. ACCESS TO INFORMATION. At any reasonable time, Seller shall permit Buyer, its agents or attorneys, to inspect and copy any and all documents and data in their possession pertaining to each Contract that is the subject of a Transaction. Such inspection shall occur upon the request of Buyer at a mutually agreeable location during regular business hours and on a date not more than two (2) Business Days after the date of such request. 15. SELLER'S COVENANT. During any Restricted Period (as defined below) occurring prior to the date on which Seller shall have paid in full all of its obligations hereunder, Seller shall not, without the prior written consent of Buyer, (x) pay any indebtedness outstanding on the Restatement Date to, or repurchase price under a repurchase agreement outstanding on the Restatement Date with, a party (other than Buyer) earlier than the scheduled due or repurchase date thereof or (y) provide security, margin, additional purchased securities, collateral or other credit support for any such indebtedness or repurchase price; PROVIDED, HOWEVER that this covenant shall not prohibit (i) the refinancing or replacement of currently existing indebtedness or repurchase agreement obligations, or of indebtedness or repurchase agreement obligations incurred in accordance with immediately following clause (ii), in each case on terms which are, taken as a whole, at least as favorable to Seller as those applicable to the indebtedness or repurchase agreement being refinanced or replaced, but this covenant will apply to the refinancing or replacement repurchase agreement as if it were outstanding on the Restatement Date, (ii) the incurrence by Seller of new indebtedness or of obligations under repurchase agreements, in each case on customary terms, in connection with the acquisition by Seller of the securities or instruments securing or subject to such indebtedness or repurchase agreements, (iii) compliance by Seller with mark to market provisions (including providing security, margin, additional purchased securities, collateral or other credit support as a result of a change in the value of securities or otherwise) in effect under agreements outstanding on the Restatement Date or entered into thereafter in accordance with immediately preceding clauses (i) and (ii), and (iv) repayment by Seller of indebtedness or of obligations under repurchase agreements to the extent required in connection with the sale of any securities or instruments securing or subject to such indebtedness or repurchase agreements. A Restricted Period exists whenever (a) an Event of Default exists as a result of the failure of Seller to pay a Repurchase Price or eliminate a Margin Deficit when required under the Agreement or any other repurchase agreement between Seller and Buyer or an Affiliate of Buyer or (b) any other Event of Default exists of which Buyer has given notice to Seller, in each case regardless of whether Buyer has exercised or intends to exercise any remedies with respect thereto. 12 16. MANDATORY PREPAYMENT OF REPURCHASE PRICE. In the event that, at any time from the Restatement Date through the date on which Seller shall have paid in full all of its obligations hereunder, any one or more of Seller, Guarantor or any of their respective subsidiaries (a "Prepayment Party") receive net proceeds ("New Capital") in an aggregate amount exceeding $50 million from the issuance or other disposition of indebtedness for money borrowed (excluding indebtedness of the kind described in clauses (i) and (ii) of the proviso in Section 15 hereof) or equity of any Prepayment Party, in one or more transactions, Seller shall cause 25% of such excess to be applied substantially simultaneously with the receipt thereof to pay outstanding repurchase prices on reverse repurchase agreements (including, without limitation, the Repurchase Prices under the Transactions) between Seller and Buyer or Affiliates of Buyer, all in such proportions as may be specified by Buyer and such Affiliates in their sole discretion. Seller's obligation under this Section 16 is the same as, and not in addition to, its identical obligation under any MBS Agreement of the kind referred to in the proviso to the definition of "MBS Agreement" in Section 6 hereof. 17. MUTUAL RELEASES. (a) As of the Restatement Date, each of Seller and Guarantor (on its own behalf and on behalf of WCC and WSC) hereby releases Buyer and all of their former and current officers, directors, employees, shareholders, agents, representatives, advisors, attorneys, accountants, parents, subsidiaries, Affiliates and any predecessors and successors of any of the foregoing (collectively, the "Buyer Releasees") from any and all claims, actions, cause of action, demands and charges of whatever nature, known or unknown, including actual, consequential, punitive and other damages, that either of them has or may have against any of the Buyer Releasees relating to or arising from the Agreement, the Original Agreements, any Transaction, any Original Transaction, any Security subject to any Transaction or Original Transaction, any other repurchase agreement to which Seller is a party with Buyer or any other Buyer Releasee, and all related documents and transactions. (b) As of the Restatement Date, Buyer hereby releases Seller, Guarantor and all of their former and current officers, directors, employees, shareholders, agents, representatives, advisors, attorneys, accountants, parents, subsidiaries, Affiliates and any predecessors and successors of any of the foregoing (collectively, the "Seller Releasees") from any and all claims, actions, cause of action, demands and charges of whatever nature, known or unknown, including actual, consequential, punitive and other damages, that it has or may have against any of the Seller Releasees relating to or arising from the Agreement, the Original Agreement, any Transaction, any Original Transaction, any Security subject to any Transaction or Original Transaction, any other repurchase agreement to which Buyer is a party with Seller or any other Seller Releasee, and all related documents and transactions (collectively, the "Buyer Claims"); PROVIDED, HOWEVER, that this Section 17(b) shall not be deemed to release WREI or any of its officers, directors, employees, shareholders, agents, representatives, advisors, attorneys, accountants, parents, subsidiaries, Affiliates and any predecessors and successors of any of the foregoing, in each case in their respective capacities as such, from any Buyer Claims. 18. NOTICES. The text of Paragraph 13 of the Master Repurchase Agreement is replaced in ------- its entirety with the following: "Any notice or communication in respect of this Agreement will be sufficiently given to a party if in writing and delivered in person, sent by certified 13 or registered mail, return receipt requested, or by overnight courier or given by facsimile transfer at the following address or facsimile number: If to Buyer: 11 Madison Avenue, 4th Floor New York, New York 10010 Attention: Kari A. Skilbred Facsimile No.: (212) 325-8107 with a copy to: 11 Madison Avenue New York, New York 10010 Attention: Lawrence Brandman, Esq. Facsimile No.: (212) 325-8219 If to Seller: 1776 S.W. Madison Street Portland, Oregon 97205 Attention: Brad Newman Facsimile No.: (503) 223-8799 with a copy to: Stoel Rives LLP 900 S.W. Fifth Avenue Portland, Oregon 97204-1268 Attention: Gary Barnum Facsimile No.: (503) 220-2480 A notice or communication will be effective: (i) if delivered by hand or sent by overnight courier, on the day and time it is delivered; (ii) if sent by facsimile transfer on a machine providing for confirmation of receipt, on the day and time it is sent; or (iii) if sent by certified or registered mail, return receipt requested, three days after dispatch. Either party may by like notice to the other change the address or facsimile number at which notices or communications are to be given to it." 14 19. BINDING ON SUCCESSORS. All of the covenants, stipulations, promises and agreements in this Annex I shall bind the successors and assigns of the parties hereto, whether expressed or not. 20 COUNTERPARTS. This Annex I may be executed in any number of counterparts, each of which shall be an original but such counterparts shall together constitute but one and the same instrument. 21. FURTHER ASSURANCES. Seller and Buyer shall promptly provide such further assurances or agreements as Buyer or Seller, as the case may be, may reasonably request in order to effect the purposes of the Agreement. 22. NON-RELIANCE. Buyer and Seller each represents to the other that it is entering into this Agreement and will enter into each Transaction in reliance upon such tax, accounting, regulatory, legal and financial advice as it deems necessary and not upon any view expressed by the other. 23. EXPENSES. Seller shall promptly pay, or reimburse Buyer for the payment of, all reasonable legal, due diligence and other out-of-pocket costs and expenses incurred by Buyer in connection with the negotiation, preparation, establishment, enforcement and administration of the Agreement and the Transactions. 24. RETURN OF PURCHASED SECURITIES. Notwithstanding anything to the contrary contained in the Collateralization Agreement or Paragraph 12 of the Master Repurchase Agreement, if (i) no Event of Default shall have occurred under the Agreement, (ii) no "Event of Default" within the meaning of the Collateralization Agreement shall have occurred, (iii) the Seller shall have paid in full all of the Repurchase Prices of all of the Transactions, (iv) no Margin Deficit (within the meaning of the MBS Agreement) then exists under the MBS Agreement without regard to any Margin Excess existing under the Agreement, and (v) no other amounts remain owing by Seller under the Agreement, Buyer shall return to Seller any Purchased Securities then held by Buyer. 25. SINGLE AGREEMENT. The text of Paragraph 12 of the Master Repurchase Agreement is replaced in its entirety with the following: Buyer and Seller hereby acknowledge that they consider all transactions and agreements between them to constitute a single business and contractual relationship and to have been made in consideration of each other and this Agreement. Therefore, (a) each party hereby agrees to perform all of its obligations to the other party with respect to all transactions or agreements between them, that a default in the performance of any such obligations ("Obligations") shall constitute an Event of Default hereunder, and that any Event of Default hereunder shall constitute a default in all such other transactions and agreements between them, (b) each party shall have a right of setoff against the other party for amounts owing hereunder and any other amounts or obligations owing in respect of any other agreement or transaction whatsoever, and (c) payments, deliveries and other transfers made by either party 15 hereunder shall be considered to have been made in consideration of payments, deliveries and other transfers made by the other party with respect to all other agreements or transactions between them, and the Obligations to make any such payments, deliveries, and other transfers may be applied against each other and netted. As security for the performance by each party of all of its Obligations, each party hereby grants to the other a security interest in all securities, instruments, money, and other property (and all distributions thereon, proceeds thereof and security entitlements with respect thereto) transferred by such party to the other pursuant to this Agreement or otherwise. With respect to defaulted Obligations which did not arise under this Agreement, such security interest may be enforced in accordance with the provisions of applicable law or Paragraph 11(d)(i) hereof (applying such Paragraph as if such defaulted Obligations were owed hereunder in respect of a Transaction in which the defaulting party is acting as Seller). Buyer will advise Seller promptly following the application of any payments or the exercise of setoff rights under this Paragraph 12. 26. CONSENT TO ASSIGNMENT. In accordance with Paragraph 15(a) of the Master Repurchase Agreement, Seller hereby consents to the assignment by CSFB ("Assignor") to Credit Suisse First Boston, Cayman Branch ("Assignee") of all of Buyer's rights and obligations under the Agreement and under all Transactions; PROVIDED, HOWEVER, that the foregoing consent shall not be effective if such assignment would impose new or additional tax liability on Seller. Upon any such assignment, Assignor shall be relieved of all of its obligations under the Agreement and such Transactions. Following any such assignment, (a) any notice or report required to be delivered to Buyer under the Agreement shall be delivered to Assignor, as agent for Assignee, at the same address set forth herein, (b) Assignor shall act solely as agent for Assignee, and Assignor shall have no responsibility or personal liability to Seller or Assignee arising from any failure of Seller or Assignee to pay or perform any obligation under the Agreement and (c) each of Seller and Assignee shall proceed against the other to collect or recover any assets or monies owing to it in connection with or as a result of any Transaction or otherwise under the Agreement. 27. JURISDICTION; NO JURY TRIAL. WFC agrees to submit to personal jurisdiction in the State of New York in any action or proceeding arising out of the Agreement. Buyer and WFC each hereby waive the right of trial by jury in any litigation arising hereunder. 28. INDEMNIFICATION; FEES AND DISBURSEMENTS. Seller hereby agrees to indemnify and hold harmless Buyer from any and all losses, damages, claims, judgments, costs (including attorney fees and costs) and other expenses arising from or relating to third party claims or third party claims Buyer reasonably believes may be asserted relating to (a) any Event of Default and (b) any error, or inaccuracy or untruthfulness in any representation or warranty contained in this Agreement (including each Exhibit) and without regard to any qualification thereof by "best of knowledge", "Seller's knowledge", "material" or other words of like import; provided, however, that with respect to representations or warranties qualified by words of such import, the Seller shall not be liable for breach of contract damages, nor for damages for any cause of action in tort, nor for any punitive or consequential damages, unless (in each case) either (i) 16 such damages are actually incurred by Buyer, or (ii) such representation or warranty, as modified by such words of limitation, has been breached. In the event that either party commences a lawsuit or proceeding against the other in connection with the Agreement, any and all reasonable attorneys' fees and costs incurred in connection with the lawsuit or proceeding shall be paid by the non-prevailing party after all appeals have been exhausted or not pursued. 29. PREPAYMENT. (a) Seller shall have the right to accelerate any Repurchase Date for any Transaction at any time and prepay any Transaction prior to the Repurchase Date and thereby terminate the Transaction, without penalty or premium, subject, however, to payment of Breakage Costs by Seller to Buyer as provided in subsection (b) below. (b) Breakage Costs shall be paid by Seller to Buyer at the time of prepayment and shall be calculated as follows ("Breakage Costs"): the product of (x) the aggregate Repurchase Price (excluding Price Differential) and (y) the product of (i) the Breakage Rate and (ii) a fraction, the numerator of which is the Breakage Period and the denomination of which is 360. "Breakage Rate" shall mean the applicable Pricing Rate minus the prevailing LIBOR. "Breakage Period" shall mean the number of days from the date of prepayment to and including the scheduled Repurchase Date. Notwithstanding anything herein to the contrary, in the event that the Contracts that are the subject of a prepaid Transaction are transferred or deposited to a depositor or sponsor of a securitization underwritten or placed by Buyer, then Seller shall not be obligated to pay Breakage Costs with respect to such Contracts. 30. EFFECTIVENESS. This Agreement shall become effective, as of the Restatement Date, upon the satisfaction of all of the following conditions: (a) execution and delivery of the Agreement by all of the parties thereto; (b) payment by Seller of the amount described in Section 2(a) hereof; (c) execution and delivery of (x) the Collateralization Agreement, in form and substance satisfactory to Buyer, by all of the parties thereto and (y) any UCC-1 financing statements required by the Collateralization Agreement, in form and substance satisfactory to Buyer, by Seller; (d) execution and delivery of the Guaranty Agreement, in form and substance satisfactory to Buyer, by Guarantor; and 17 (e) execution and delivery of amendments to the Custodial Agreement, the REO Subsidiary Pledge Agreement and the Servicing Letter Agreement, all as of the Restatement Date and in form and substance satisfactory to Buyer, by all of the parties thereto. WILSHIRE FUNDING CORPORATION CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC By:____________________________ By:__________________________ Name: Name: Title: Title: AGREED AS TO SECTIONS 17(a) AND 24 ONLY: WILSHIRE FINANCIAL SERVICES GROUP INC. By:_____________________________ Name: Title: 18 EX-10.17 4 EXHIBIT 10.17 Exhibit 10.17 Dated as of December 15, 1999 Between: CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED ("Buyer") - --------------------------------------------------------- and WILSHIRE FUNDING CORPORATION ("Seller") - --------------------------------------- 1. APPLICABILITY From time to time the parties hereto may enter into transactions in which one party ("Seller") agrees to transfer to the other ("Buyer") securities or other assets ("Securities") against the transfer of funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such Securities at a date certain or on demand, against the transfer of funds by Seller. Each such transaction shall be referred to herein as a "Transaction" and, unless otherwise agreed in writing, shall be governed by this Agreement, including any supplemental terms or conditions contained in Annex I hereto and in any other annexes identified herein or therein as applicable hereunder. 2. DEFINITIONS (a) "Act of Insolvency", with respect to any party, (i) the commencement by such party as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, moratorium, dissolution, delinquency or similar law, or such party seeking the appointment or election of a receiver, conservator, trustee, custodian or similar official for such party or any substantial part of its property, or the convening of any meeting of creditors for purposes of commencing any such case or proceeding or seeking such an appointment or election, (ii) the commencement of any such case or proceeding against such party, or another seeking such an appointment or election, or the filing against a party of an application for a protective decree under the provisions of the Securities Investors Protection Act of 1970, which (A) is consented to or not timely contested by such party, (B) results in the entry of an order for relief, such an appointment or election, the issuance of such a protective decree or the entry of an order having a similar effect, or (C) is not dismissed within 15 days, (iii) the making by such party of a general assignment for the benefit of creditors, or (iv) the admission in writing by such party of such party's inability to pay such party's debts as they become due; (b) "Additional Purchased Securities", Securities provided by Seller to Buyer pursuant to Paragraph 4(a) hereof; (c) "Buyer's Margin Amount", with respect to any Transaction as of any date, the amount obtained by application of the Buyer's Margin Percentage to the Repurchase Price for such Transaction as of such date; (d) "Buyer's Margin Percentage", with respect to any Transaction as of any date, a percentage (which may be equal to the Seller's Margin Percentage) agreed to by Buyer and Seller or, in the absence of any such agreement, the percentage obtained by dividing the Market Value of the Purchased Securities on the Purchase Date by the Purchase Price on the Purchase Date for such Transaction; (e) "Confirmation", the meaning specified in Paragraph 3(b) hereof; (f) "Income", with respect to any Security at any time, any principal thereof and all interest, dividends or other distributions thereon; (g) "Margin Deficit", the meaning specified in Paragraph 4(a) hereof; (h) "Margin Excess", the meaning specified in Paragraph 4(b) hereof; (i) "Margin Notice Deadline", the time agreed to by the parties in the relevant Confirmation, Annex I hereto or otherwise as the deadline for giving notice requiring same-day satisfaction of margin maintenance obligations as provided in Paragraph 4 hereof (or, in the absence of any such agreement, the deadline for such purposes established in accordance with market practice); (j) "Market Value", with respect to any Securities as of any date, the price for such Securities on such date obtained from a generally recognized source agreed to by the parties or the most recent closing bid quotation from such a source, plus accrued income to the extent not included therein (other than any Income credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to market practice for such Securities); (k) "Price Differential", with respect to any Transaction as of any date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the Purchase Price for such Transaction on a 360-day-per-year basis for the actual number of days during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the date of determination (reduced by any amount of such Price Differential previously paid by Seller to Buyer with respect to such Transaction); (l) "Pricing Rate", the per annum percentage rate for determination of the Price Differential; (m) "Prime Rate", the prime rate of U.S. commercial banks as published in THE WALL STREET JOURNAL (or, if more than one such rate is published, the average of such rates); (n) "Purchase Date", the date on which Purchased Securities are to be transferred by Seller to Buyer; (o) "Purchase Price", (i) on the Purchase Date, the price at which Purchased Securities are transferred by Seller to Buyer, and (ii) thereafter, except where Buyer and Seller agree otherwise, such price increased by the amount of any cash transferred by Buyer to Seller pursuant to Paragraph 4(b) hereof and decreased by the amount of any cash transferred by Seller to Buyer pursuant to Paragraph 4(a) hereof or applied to reduce Seller's obligations under clause (ii) of Paragraph 5 hereof; (p) "Purchased Securities", the Securities transferred by Seller to Buyer in a Transaction hereunder, and any Securities substituted therefor in accordance with Paragraph 9 hereof. The term "Purchased Securities" with respect to any Transaction at any time also shall include Additional Purchased Securities delivered pursuant to Paragraph 4(a) hereof and shall exclude Securities returned pursuant to Paragraph 4(b) hereof; (q) "Repurchase Date", the date on which Seller is to repurchase the Purchased Securities from Buyer, including any date determined by application of the provisions of Paragraph 3(c) or 11 hereof; (r) "Repurchase Price", the price at which Purchased Securities are to be transferred from Buyer to Seller upon termination of a Transaction, which will be determined in each case (including Transactions terminable upon demand) as the sum of the Purchase Price and the Price Differential as of the date of such determination; 2 (s) "Seller's Margin Amount", with respect to any Transaction as of any date, the amount obtained by application of the Seller's Margin Percentage to the Repurchase Price for such Transaction as of such date; (t) "Seller's Margin Percentage", with respect to any Transaction as of any date, a percentage (which may be equal to the Buyer's Margin Percentage) agreed to by Buyer and Seller or, in the absence of any such agreement, the percentage obtained by dividing the Market Value of the Purchased Securities on the Purchase Date by the Purchase Price on the Purchase Date for such Transaction; 3. INITIATION; CONFIRMATION; TERMINATION (a) An agreement to enter into a Transaction may be made orally or in writing at the initiation of either Buyer or Seller. On the Purchase Date for the Transaction, the Purchased Securities shall be transferred to Buyer or its agent against the transfer of the Purchase Price to an account of Seller. (b) Upon agreeing to enter into a Transaction hereunder, Buyer or Seller (or both), as shall be agreed, shall promptly deliver to the other party a written confirmation of each Transaction (a "Confirmation"). The Confirmation shall describe the Purchased Securities (including CUSIP number, if any), identify Buyer or Seller and set forth (i) the Purchase Date, (ii) the Purchase Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on demand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction, and (v) any additional terms or conditions of the Transaction not inconsistent with this Agreement. The Confirmation, together with this Agreement, shall constitute conclusive evidence of the terms agreed between Buyer and Seller with respect to the Transaction to which the Confirmation relates, unless with respect to the Confirmation specific objection is made promptly after receipt thereof. In the event of any conflict between the terms of such Confirmation and this Agreement, this Agreement shall prevail. (c) In the case of Transactions terminable upon demand, such demand shall be made by Buyer or Seller, no later than such time as is customary in accordance with market practice, by telephone or otherwise on or prior to the business day on which such termination will be effective. On the date specified in such demand, or on the date fixed for termination in the case of Transactions having a fixed term, termination of the Transaction will be effected by transfer to Seller or its agent of the Purchased Securities and any Income in respect thereof received by Buyer (and not previously credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) against transfer of the Repurchase Price to an account of Buyer. 4. MARGIN MAINTENANCE (a) If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Buyer is less than the aggregate Buyer's Margin Amount for all such Transactions (a "Margin Deficit"), then Buyer may by notice to Seller require Seller in such Transactions, at Seller's option, to transfer to Buyer cash or additional Securities reasonably acceptable to Buyer ("Additional Purchased Securities"), so that the cash and aggregate Market Value of the Purchased Securities, including any such Additional Purchased Securities, will thereupon equal or exceed such aggregate Buyer's Margin Amount (decreased by the amount of any Margin Deficit as of such date arising from any Transactions in which such Buyer is acting as Seller). (b) If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Seller exceeds the aggregate Seller's Margin Amount for all such Transactions at such time (a "Margin Excess"), then Seller may by notice to Buyer require Buyer in such Transactions, at Buyer's option, to transfer cash or Purchased Securities to Seller, so that the aggregate Market Value of the Purchased Securities, after deduction of any such 3 cash or any Purchased Securities so transferred, will thereupon not exceed such aggregate Seller's Margin Amount (increased by the amount of any Margin Excess as of such date arising from any Transactions in which such Seller is acting as Buyer). (c) If any notice is given by Buyer or Seller under subparagraph (a) or (b) of this Paragraph at or before the Margin Notice Deadline on any business day, the party receiving such notice shall transfer cash or Additional Purchased Securities as provided in such subparagraph no later than the close of business in the relevant market on such day. If any such notice is given after the Margin Notice Deadline, the party receiving such notice shall transfer such cash or Securities no later than the close of business in the relevant market on the next business day following such notice. (d) Any cash transferred pursuant to this Paragraph shall be attributed to such Transactions as shall be agreed upon by the Buyer and Seller. (e) Seller and buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer or Seller (or both) under subparagraphs (a) or (b) of this Paragraph may be exercised only where a Margin Deficit or a Margin Excess, as the case may be, exceeds a specified dollar amount or a specified percentage of the Repurchase Prices for such Transactions (which amount or percentage shall be agreed to by Buyer and Seller prior to entering into any such Transactions). (f) Seller and Buyer may agree with respect to any or all Transactions hereunder, that the respective rights of Buyer and Seller under subparagraphs (a) or (b) of this Paragraph to require the elimination of a Margin Deficit or a Margin Excess, as the case may be, may be exercised whenever such a Margin Deficit or a Margin Excess exists with respect to any single Transaction hereunder (calculated without regard to any other Transaction outstanding under this Agreement). 5. INCOME PAYMENTS Seller shall be entitled to receive an amount equal to all income paid or distributed on or in respect of the Securities that is not otherwise received by Seller, to the full extent it would so be entitled if the Securities had not been sold to Buyer. Buyer shall, as the parties may agree with respect to any Transaction (or, in the absence of any such agreement, as Buyer shall reasonably determine in its discretion), on the date such Income is paid or distributed either (i) transfer to or credit to the account of Seller such Income with respect to any Purchased Securities subject to such Transaction or (ii) with respect to Income paid in cash, apply the Income payment or payments to reduce the amount, if any, to be transferred to Buyer by Seller upon termination of such Transaction. Buyer shall not be obligated to take any action pursuant to the preceding sentence (A) to the extent that such action would result in the creation of a Margin Deficit, unless prior thereto or simultaneously therewith Seller transfers to Buyer cash or Additional Purchased Securities sufficient to eliminate such Margin Deficit, or (B) if an Event of Default with respect to Seller has occurred and is then continuing at the time such Income is paid or distributed. 6. SECURITY INTEREST Although the parties intend that all Transactions hereunder be sales and purchases and not loans, in the event any such Transactions are deemed to be loans, Seller shall be deemed to have pledged to Buyer as security for the performance by Seller of its obligations under each such Transaction, and shall be deemed to have granted to Buyer a security interest in, all of the Purchased Securities with respect to all Transactions hereunder and all income thereon and other proceeds thereof. 7. PAYMENT AND TRANSFER Unless otherwise mutually agreed, all transfers of funds hereunder shall be in immediately available funds. All Securities transferred by one party hereto to the other party (i) shall be in suitable form for transfer or shall be accompanied by duly executed instruments of transfer or assignment in blank and 4 such other documentation as the party receiving possession may reasonably request, (ii) shall be transferred on the book-entry system of the Federal Reserve Bank, or (iii) shall be transferred by any other method mutually acceptable to Seller and Buyer. 8. SEGREGATION OF PURCHASED SECURITIES To the extent required by applicable law, all Purchased Securities in the possession of Seller shall be segregated from other securities in its possession and shall be identified as subject to this Agreement. Segregation may be accomplished by appropriate identification on the books and records of the holder, including a financial or securities intermediary or a clearing corporation. All of Seller's interest in the Purchased Securities shall pass to Buyer on the Purchase Date and, unless otherwise agreed by Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging in repurchase transactions with the Purchased Securities or otherwise selling, transferring, pledging or hypothecating the Purchased Securities to Seller pursuant to Paragraph 3, 4 or 11 hereof, or of Buyer's obligation to credit or pay Income to, or apply Income to the obligations of, Seller pursuant to Paragraph 5 hereof. REQUIRED DISCLOSURE FOR TRANSACTIONS IN WHICH THE SELLER RETAINS CUSTODY OF THE PURCHASED SECURITIES Seller is not permitted to substitute other securities for those subject to this Agreement and therefore must keep Buyer's securities segregated at all times, unless in this Agreement Buyer grants Seller the right to substitute other securities. If the Buyer grants the right to substitute, this means that Buyer's securities will likely be commingled with Seller's own securities during the trading day. Buyer is advised that, during any trading day that Buyer's securities are commingled with Seller's securities, they [will]* [may]** be subject to liens granted by Seller to [its clearing bank]* [third parties]** and may be used by Seller for deliveries on other securities transactions. Whenever the securities are commingled, Seller's ability to resegregate substitute securities for Buyer will be subject to Seller's ability to satisfy [the clearing]* [any]** lien or to obtain substitute securities. *Language to be used under 17 C.F.R. SECTION 403.4(e) if Seller is a government securities broker or dealer other than a financial institution. **Language to be used under 17 C.F.R. SECTION 403.5(d) if Seller is a financial institution. 9. SUBSTITUTION (a) Seller may, subject to agreement with and acceptance by Buyer, substitute other Securities for any Purchased Securities. Such substitution shall be made by transfer to Buyer of such other Securities and transfer to Seller of such Purchased Securities. After substitution, the substituted Securities shall be deemed to be Purchased Securities. (b) In transactions in which Seller retains custody of Purchased Securities, the parties expressly agree that Buyer shall be deemed, for purposes of subparagraph (a) of this Paragraph, to have agreed to and accepted in this Agreement substitution by Seller of other Securities for Purchased Securities; PROVIDED, HOWEVER, that such other Securities shall have a Market Value at least equal to the Market Value of the Purchased Securities for which they are substituted. 10. REPRESENTATIONS Each of Buyer and Seller represents and warrants to the other that (i) it is duly authorized to execute and deliver this Agreement, to enter into Transactions contemplated hereunder and to perform its obligation hereunder and has taken all necessary action to authorize such execution, delivery and performance, 5 (ii) it will engage in such Transactions as principal (or, if agreed in writing, in the form of an annex hereto or otherwise, in advance of any Transaction by the other party hereto, as agent for the disclosed principal), (iii) the person signing this Agreement on its behalf is duly authorized to do so on its behalf (or on behalf of any such disclosed principal), (iv) it has obtained all authorizations of any governmental body required in connection with this Agreement and the Transactions hereunder and such authorizations are in full force and effect and (v) the execution, delivery and performance of this Agreement and the Transactions hereunder will not violate any law, ordinance, charter, by-law or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected. On the Purchase Date for any Transaction Buyer and Seller shall each be deemed to repeat all the foregoing representations made by it. 11. EVENTS OF DEFAULT In the event that (i) Seller fails to transfer or Buyer fails to purchase Purchased Securities upon the applicable Purchase Date, (ii) Seller fails to repurchase or Buyer fails to transfer Purchased Securities upon the applicable Repurchase Date, (iii) Seller or Buyer fails to comply with Paragraph 4 hereof, (iv) Buyer fails, after one business day's notice, to comply with Paragraph 5 hereof, (v) an Act of Insolvency occurs with respect to Seller or Buyer, (vi) any representation made by Seller or Buyer shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated, or (vii) Seller or Buyer shall admit to the other its inability to, or its intention not to, perform any of its obligations hereunder (each an "Event of Default"): (a) The nondefaulting party may, at its option (which option shall be deemed to have been exercised immediately upon the occurrence of an Act of Insolvency), declare an Event of Default to have occurred hereunder and, upon the exercise or deemed exercise of such option, the Repurchase Date for each Transaction hereunder shall, if it has not already occurred, be deemed immediately to occur (except that, in the event that the Purchase Date for any Transaction has not yet occurred as of the date of such exercise or deemed exercise, such Transaction shall be deemed immediately canceled). The nondefaulting party shall (except upon the occurrence of an Act of Involvency) give notice to the defaulting party of the exercise of such option as promptly as practicable. (b) In all Transactions in which the defaulting party is acting as Seller, if the nondefaulting party exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, (i) the defaulting party's obligations in such Transactions to repurchase all Purchased Securities, at the Repurchased Price therefor on the Repurchase Date determined in accordance with subparagraph (a) of this Paragraph, shall thereupon become immediately due and payable, (ii) all Income paid after such exercise or deemed exercise shall be retained by the nondefaulting party and applied to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder, and (iii) the defaulting party shall immediately deliver to the nondefaulting party any Purchased Securities subject to such Transactions then in the defaulting party's possession or control. (c) In all Transactions in which the defaulting party is acting as Buyer, upon tender by the nondefaulting party of payment of the aggregate Repurchase Prices for all such Transactions, all right, title and interest in and entitlement to all Purchased Securities subject to such Transactions shall be deemed transferred to the nondefaulting party, and the defaulting party shall deliver all such Purchased Securities to the nondefaulting party. 6 (d) If the nondefaulting party exercises or is deemed to have exercised the option referred to in sub-paragraph (a) of this Paragraph, the nondefaulting party, without prior notice to the defaulting party, may: (i) as to Transactions in which the defaulting party is acting as Seller, (A) immediately sell, in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the nondefaulting party may reasonably deem satisfactory, any or all Purchased Securities subject to such Transactions and apply the proceeds thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Securities, to give the defaulting party credit for such Purchased Securities in an amount equal to the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source, against the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder; and (ii) as to Transactions in which the defaulting party is acting as Buyer, (A) immediately purchase, in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as the nondefaulting party may reasonably deem satisfactory, securities ("Replacement Securities") of the same class and amount as any Purchased Securities that are not delivered by the defaulting party to the nondefaulting party as required hereunder or (B) in its sole discretion elect, in lieu of purchasing Replacement Securities, to be deemed to have purchased Replacement Securities at the price therefor on such date, obtained from a generally recognized source or the most recent closing offer quotation from such a source. Unless otherwise provided in Annex I, the parties acknowledge and agree that (1) the Securities subject to any Transaction hereunder are instruments traded in a recognized market, (2) in the absence of a generally recognized source for prices or bid or offer quotations for any Security, the nondefaulting party may establish the source therefor in its sole discretion and (3) all prices, bids and offers shall be determined together with accrued Income (except to the extent contrary to market practice with respect to the relevant Securities). (e) As to Transactions in which the defaulting party is acting as Buyer, the defaulting party shall be liable to the nondefaulting party for any excess of the price paid (or deemed paid) by the nondefaulting party for Replacement Securities over the Repurchase Price for the Purchased Securities replaced thereby and for any amounts payable by the defaulting party under Paragraph 5 hereof or otherwise hereunder. (f) For purposes of this Paragraph 11, the Repurchase Price for each Transaction hereunder in respect of which the defaulting party is acting as Buyer shall not increase above the amount of such Repurchase Price for such Transaction determined as of the date of the exercise or deemed exercise by the nondefaulting party of the option referred to in subparagraph (a) of this Paragraph. (g) The defaulting party shall be liable to the nondefaulting party for (i) the amount of all reasonable legal or other expenses incurred by the nondefaulting party in connection with or as a result of an Event of Default, (ii) damages in an amount equal to the cost (including all fees, expenses and commissions) of entering into replacement transactions and entering into or terminating hedge transactions in connection with or as a result of an Event of Default, and (iii) any other loss, damage, cost or expense directly arising or resulting from the occurrence of an Event of Default in respect of a Transaction. (h) To the extent permitted by applicable law, the defaulting party shall be liable to the nondefaulting party for interest on any amounts owing by the defaulting party hereunder, from the date the defaulting party becomes liable for such amounts hereunder until such amounts are (i) paid in full 7 by the defaulting party or (ii) satisfied in full by the exercise of the nondefaulting party's rights hereunder. Interest on any sum payable by the defaulting party to the nondefaulting party under this Paragraph 11(h) shall be at a rate equal to the greater of the Pricing Rate for the relevant Transaction or the Prime Rate. (i) The nondefaulting party shall have, in addition to its rights hereunder, any rights otherwise available to it under any other agreement or applicable law. 12. SINGLE AGREEMENT Buyer and Seller acknowledge that, and have entered hereinto and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder constitute a single business and contractual relationship and have been made in consideration of each other. Accordingly, each of Buyer and Seller agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transactions hereunder and (iii) that payments, deliveries and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder, and the obligations to make any such payments, deliveries and other transfers may be applied against each other and netted. 13. NOTICES AND OTHER COMMUNICATIONS Any and all notices, statements, demands or other communications hereunder may be given by a party to the other by mail, facsimile, telegraph, messenger or otherwise to the address specified in Annex II hereto, or so sent to such party at any other place specified in a notice of change of address hereafter received by the other. All notices, demands and requests hereunder may be made orally, to be confirmed promptly in writing, or by other communication as specified in the preceding sentence. 14. ENTIRE AGREEMENT; SEVERABILITY This Agreement shall supersede any existing agreements between the parties containing general terms and conditions for repurchase transactions. Each provision and agreement herein shall be treated as separate and independent from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement. 15. NON-ASSIGNABILITY; TERMINATION (a) The rights and obligations of the parties under this Agreement and under any Transaction shall not be assigned by either party without the prior written consent of the other party, and any such assignment without the prior written consent of the other party shall be null and void. Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. This Agreement may be terminated by either party upon giving written notice to the other, except that this Agreement shall, notwithstanding such notice, remain applicable to any Transactions then outstanding. (b) Subparagraph (a) of this Paragraph 15 shall not preclude a party from assigning, charging or otherwise dealing with all or any part of its interest in any sum payable to it under Paragraph 11 hereof. 16. GOVERNING LAW This Agreement shall be governed by the laws of the State of New York without giving effect to the conflict of law principles thereof. 8 17. NO WAIVERS, ETC. No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless and until such shall be in writing and duly executed by both of the parties hereto. Without limitation on any of the foregoing, the failure to give a notice pursuant to Paragraph 4(a) or 4(b) hereof will not constitute a waiver of any right to do so at a later date. 18. USE OF EMPLOYEE PLAN ASSETS (a) If assets of an employee benefit plan subject to any provision of the Employee Retirement Income Security Act of 1974 ("ERISA") are intended to be used by either party hereto (the "Plan Party") in a Transaction, the Plan Party shall so notify the other party prior to the Transaction. The Plan Party shall represent in writing to the other party that the Transaction does not constitute a prohibited transaction under ERISA or is otherwise exempt therefrom, and the other party may proceed in reliance thereon but shall not be required so to proceed. (b) Subject to the last sentence of subparagraph (a) of this Paragraph, any such Transaction shall proceed only if Seller furnishes or has furnished to Buyer its most recent available audited statement of its financial condition and its most recent subsequent unaudited statement of its financial condition. (c) By entering into a Transaction pursuant to this Paragraph, Seller shall be deemed (i) to represent to Buyer that since the date of Seller's latest such financial statements, there has been no material adverse change in Seller's financial condition which Seller has not disclosed to Buyer, and (ii) to agree to provide Buyer with future audited and unaudited statements of its financial condition as they are issued, so long as it is a Seller in any outstanding Transaction involving a Plan Party. 19. INTENT (a) The parties recognize that each Transaction is a "repurchase agreement" as that term is defined in Section 101 of Title 11 of the United States Code, as amended (except insofar as the type of Securities subject to such Transaction or the term of such Transaction would render such definition inapplicable), and a "securities contract" as that term is defined in Section 741 of Title 11 of the United States Code, as amended (except insofar as the type of assets subject to such Transaction would render such definition inapplicable). (b) It is understood that either party's right to liquidate Securities delivered to it in connection with Transactions hereunder or to exercise any other remedies pursuant to Paragraph 11 hereof is a contractual right to liquidate such Transaction as described in Sections 555 and 559 of Title 11 of the United States Code, as amended. (c) The parties agree and acknowledge that if a party hereto is an "insured depository institution," as such term is defined in the Federal Deposit Insurance Act, as amended ("FDIA"), then each Transaction hereunder is a "qualified financial contract," as that term is defined in FDIA and any rules, orders or policy statements thereunder (except insofar as the type of assets subject to such Transaction would render such definition inapplicable). (d) It is understood that this Agreement constitutes a "netting contract" as defined in and subject to Title IV of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and each payment entitlement and payment obligation under any Transaction hereunder shall constitute a "covered contractual payment entitlement" or "covered contractual payment obligation", 9 respectively, as defined in and subject to FDICIA (except insofar as one or both of the parties is not a "financial institution" as that term is defined in FDICIA). 20. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS The parties acknowledge that they have been advised that: (a) in the case of Transactions in which one of the parties is a broker or dealer registered with the Securities and Exchange Commission ("SEC") under Section 15 of the Securities Exchange Act of 1934 ("1934 Act"), the Securities Investor Protection Corporation has taken the position that the provisions of the Securities Investor Protection Act of 1970 ("SIPA") do not protect the other party with respect to any Transaction hereunder; (b) in the case of Transactions in which one of the parties is a government securities broker or a government securities dealer registered with the SEC under Section 15C of the 1934 Act, SIPA will not provide protection to the other party with respect to any Transaction hereunder; and (c) in the case of Transactions in which one of the parties is a financial institution, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, as applicable. CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC WILSHIRE FUNDING CORPORATION [Name of Party] [Name of Party] By: [illegible] By: [illegible] -------------------------- --------------------------- Title: Managing Director Title: CFO ----------------------- -------------------------- Date: 11/16/99 Date: November 12, 1999 ------------------------- --------------------------- ANNEX I SUPPLEMENTAL TERMS AND CONDITIONS (EUROPE LIMITED/WFC) Pursuant to the terms of the Master Repurchase Agreement (the printed text only, the "Master Repurchase Agreement," and together with this Annex and the other Annexes and Exhibits thereto, the "Agreement") dated as of December 15, 1999 (the "Effective Date"), Buyer and Seller agree to be governed by the Supplemental Terms and Conditions stated herein. Prior to the Effective Date, Seller had entered into reverse repurchase transactions with Credit Suisse First Boston (Hong Kong) Limited ("CSFB Hong Kong") pursuant to a Global Master Repurchase Agreement dated as of November 13, 1996 (together with the Annexes and Exhibits thereto, the "HK Agreement") between CSFB Hong Kong and Seller. The transactions under the HK Agreement (the "HK Transactions") that are outstanding on the Effective Date shall be settled on the Effective Date, and Buyer and Seller shall contemporaneously enter into the New Transactions referred to below. The New Transactions and the Rollover Transactions referred to below shall be governed by the Agreement. All capitalized terms used in these Supplemental Terms and Conditions that are defined in the Master Repurchase Agreement are used herein as defined therein, except to the extent such terms are amended or supplemented herein. To the extent that any provisions in these Supplemental Terms and Conditions are in conflict with provisions contained in the Master Repurchase Agreement, the provisions of these Supplemental Terms and Conditions shall prevail. 1. SPECIFIC TRANSACTIONS ONLY. (a) Unless otherwise agreed by Buyer and Seller, the only Transactions under the Agreement shall be (i) new Transactions (the "New Transactions") entered into as of the Effective Date covering the Purchased Securities that were then subject to HK Transactions and (ii) the Rollover Transactions described below. Each New Transaction shall have a term of approximately one month, and shall have a Purchase Price equal to the Repurchase Price (determined as of the Effective Date without any breakage costs or similar charges) applicable to the HK Transaction for the corresponding Purchased Security (subject to adjustment to give effect to the payments and fee described in Section 2 below). Unless (x) an Event of Default shall have occurred, (y) Seller directs Buyer not to do so, or (z) Seller shall have paid the applicable Repurchase Price for the relevant Transaction, Buyer shall with respect to each Transaction enter into successive additional monthly Transactions (the "Rollover Transactions") for the Purchased Securities covered by such Transaction; PROVIDED, HOWEVER, that Buyer shall have no obligation to enter into any Transaction with a Repurchase Date later than the first anniversary of the Effective Date. Neither Buyer nor Seller shall have any obligation to enter into any Transaction under the Agreement other than the Transactions described above in this Section 1(a). (b) The Pricing Rate for all Transactions, subject to adjustment as set forth in Section 9 below and unless otherwise agreed in connection with a specific Transaction, shall be a per annum rate equal to LIBOR (as defined below) plus the following respective per annum rate for Transactions covering the following types of Purchased Securities:
TYPE OF PURCHASED SECURITIES PER ANNUM RATE Mortgage-backed Securities Rated "BB" 1.50% Mortgage-backed Securities Rated "B" 2.00% Mortgage-backed Securities which are not Rated 2.50%
"Rated" means, with respect to any Purchased Securities, the lowest rating given to such Purchased Securities by any one of more of Moody's Investors Service, Inc., Standard & Poor's Corporation, Duff & Phelps Credit Rating Co., Fitch IBCA, Inc. or any successor to any of such rating agencies. "LIBOR" means the offered rate for United States dollars with a maturity of one month which appears on Telerate as of 9 AM, New York City time, as determined by Buyer (absent manifest error) on the Purchase Date for the relevant Transaction; PROVIDED, HOWEVER, that if such rate does not appear on the Dow Jones Telerate Service page 3750 (or such other page as may replace that page on that service) or if such service is no longer offered, the rate for United States dollars with a maturity of one month quoted by such other comparable service as may be selected by Buyer. 2. PAYMENTS AND FEES. (a) On November 29, 1999, Seller wired immediately available funds to Buyer in the amount of $2,000,000, which payment was applied to the outstanding Repurchase Prices under the HK Agreement. (b) On the Effective Date, Buyer shall be entitled to a facility fee in the amount of 0.5% of the New Transaction Purchase Prices (determined after giving effect to the payments described in Section 2(a) above and before giving effect to such fee), which shall be added to and be part of the respective Purchase Prices under the New Transactions. (c) Buyer has agreed to accept deferred payment of the $1,645,225.33 Margin Deficit (the "Deferred Amount") outstanding on the Effective Date, and the Deferred Amount shall be included in the Purchase Price for the New Transactions as of the Effective Date. Seller shall use all proceeds (net of any related Repurchase Prices) received after the Effective Date by Seller or Guarantor from sales of loans and securities subject to the Agreement and the Whole Loan Agreement (as defined below) and from Guarantor's European operations to pay the Deferred Amount and, in any event, shall pay at least $175,000 of the Deferred Amount no later than December 31, 1999, at least $800,000 (inclusive of all prior payments) of the Deferred Amount no later than January 31, 2000, at least $1,070,000 (inclusive of all prior payments) of the Deferred Amount no later than February 29, 2000, at least $1,270,000 (inclusive of all prior payments) of the Deferred Amount no later than March 31, 2000, and the entire Deferred Amount no later than April 28, 2000. All payments shall be effected by wiring immediately available funds to Buyer (unless Buyer has received the proceeds of the related sale directly). Except as set forth in this Section 2(c) or Paragraph 11 of the Master Repurchase Agreement, but notwithstanding the provisions of Paragraph 4(a) of the Master Repurchase Agreement, Buyer shall not require transfers by Seller to eliminate any Margin Deficit to the extent that such Margin Deficit is attributable to the Deferred Amount. Buyer shall release, and shall cause Credit Suisse First Boston Mortgage Capital LLC to release, any proceeds (net of any related Repurchase Prices) of loans and securities subject to the Agreement or the Whole Loan Agreement, as -2- the case may be, for payment of the Deferred Amount in accordance with this Section 2(c); PROVIDED, HOWEVER that no such proceeds shall be released if and to the extent such release would result in, or such proceeds are required to eliminate, a Margin Deficit (unrelated to the Deferred Amount) under the Agreement or the Whole Loan Agreement, as the case may be. 3. MARKET VALUE. (a) The text of Paragraph 2(j) of the Master Repurchase Agreement is replaced in its entirety with the following: "`Market Value', with respect to any Securities as of any date, the price of such Securities as determined by Buyer in its good faith judgment;" (b) Buyer shall provide to Seller, at Seller's request and for information purposes only, the assumptions used by Buyer to determine the Market Value of the Purchased Securities for each new determination of Market Value. 4. MARGIN MAINTENANCE. (a) The Margin Notice Deadline shall be 10 AM, New York City time. The Buyer's Margin Percentage with respect to each Transaction under the Agreement shall be equal to the Buyer's Margin Percentage with respect to the final HK Transaction for the corresponding Purchased Security as specified in the relevant Confirmation. (b) Paragraph 4 of the Master Repurchase Agreement is amended by deleting subparagraphs (d), (e) and (f) of such Paragraph. Neither party shall be required to comply with the provisions of subparagraph (b) of Paragraph 4, which subparagraph is preserved solely for the purpose of providing a definition of the term "Margin Excess." (c) Notwithstanding anything to the contrary contained in the Agreement (except that this Section 4(c) shall not affect the obligations of Seller set forth in Section 2(c) hereof), Seller shall not be required to eliminate any Margin Deficit pursuant to Paragraph 4(a) except to the extent, if any, that the amount of such Margin Deficit exceeds the amount of any Margin Excess (as such term is defined in the amended and restated Master Repurchase Agreement dated as of November 26, 1999 between Seller and Credit Suisse First Boston Mortgage Capital LLC (as amended, modified, restated or supplemented from time to time, the "Whole Loan Agreement")) existing at such time under the Whole Loan Agreement. 5. INCOME PAYMENTS. The text of Paragraph 5 of the Master Repurchase Agreement is replaced in its entirety with the following: "(a) Buyer shall be entitled to receive and retain an amount equal to all Income and other proceeds (including sale and refinancing proceeds) paid, distributed, received or otherwise realized from, on or in respect of the Securities (after deduction for any required tax or other third-party payments), and shall apply all such amounts in the following order: first to pay any unpaid accrued Price Differentials; second, to pay any amounts due from Seller as a result of principal paydowns, or changes in the Market Value, of Purchased Securities; and then, to pay any other amounts owing by Seller under the Agreement or in respect of any Transaction (in such order as Buyer shall determine in its sole discretion). -3- (b) Each party agrees to be liable to the relevant taxing authority for the full amount of any Taxes required by governing law to be deducted or withheld from payments or distributions of income that the party receives from the issuer of the Securities ("Income Payments"). All payments made by one party to the other party in respect of any Transaction pursuant to this Agreement, including any Income Payments payable by Buyer to Seller, shall be made free and clear of, and without any, withholding or deduction for or on account of any Taxes, unless such withholding or deduction is required by any applicable law, as modified by the practice of any relevant governmental revenue authority. If such withholding or deduction is so required, then the payor shall (i) promptly notify the payee of such requirement, (ii) pay to the relevant authorities the full amount required to be deducted or withheld promptly upon learning that such deduction or withholding is required, (iii) promptly forward to the payee an official receipt (or certified copy), or other such documentation, evidencing such payment to such authorities, and (iv) pay to the payee such additional amounts as are necessary to yield and remit to the payee an amount which, after deduction of all Taxes (including any Taxes imposed on the additional amounts) so withheld or deducted, equals the full amount that the payee would have received had no such withholding or deduction been required; provided, however, that in no event will Seller be entitled to receive any amount in respect of any Income Payment greater than Seller would have received had it not entered into the relevant Transaction. If (i) the payor fails to timely remit the appropriate amount to the relevant governmental revenue authority in respect of any amount that the payor is required to withhold or deduct from any payment to the payee, and (ii) a liability for such amount is assessed directly against the payee, then payor shall, in addition to its liability to pay additional amounts to the payee pursuant to the preceding sentence, be liable to the payee for any interest or penalties that are thereby imposed upon the payee by reason of such failure by the payor. (c) Each party agrees to complete (accurately and in a manner reasonably satisfactory to the other party), execute, arrange for any required certification of, and deliver to the other party or such government or taxing authority as the other party directs, any form or document that may be required or reasonably requested in order to assist or enable the other party to secure the benefit of any available exemption or relief from any deduction or withholding on account of any Tax or, if there is no available exemption or relief as aforesaid, to secure the benefit of any reduced rate of deduction or withholding, in respect of any payment under this Agreement, promptly upon the earlier of: (i) reasonable demand by the other party, and (ii) learning that the form or document is so required. Failure to comply with or perform any tax covenant provided for hereunder will terminate payor's obligation to pay any additional amount to the extent such additional amount would not be required to be paid but for such failure. (d)(1) In the event a Tax Event occurs with respect to a party to this Agreement, at the option of such party (exercised by written notice to the other -4- party, such notice being treated as a demand pursuant to paragraph 3(c) of this Agreement), the Repurchase Date for the Transaction with respect to which the Tax Event occurred shall be immediately deemed to occur and such Repurchase Date shall be treated as the date of determination for purposes of calculating the Repurchase Price. (d)(2) The occurrence with respect to either party of any of the following events will constitute a Tax Event for purposes of this subparagraph: (A) the party shall be required on the next succeeding payment date to pay to the other party an additional amount under subparagraph 5(b) as a result of a Change in Tax Law; (B) there is a substantial likelihood that the party will be required on the next succeeding payment date to pay to the other party an additional amount under subparagraph 5(b) and such substantial likelihood results from an action taken by a taxing authority or court of competent jurisdiction, on or after the date on which such Transaction was entered into (regardless of whether such action was taken or brought with respect to a party to this Agreement); or (C) the party will be required on the next succeeding payment date to pay to the other party an additional amount under subparagraph 5(b) as a result of a consolidation, amalgamation, merger or transfer of substantially all of the assets of such other party by such other party. (e) Each party agrees that it will pay any Stamp Tax levied or imposed upon it or in respect of its execution or performance of this Agreement by a jurisdiction in which it is incorporated, organized, managed and controlled, or is considered to have its seat, or in which a branch or office through which it is acting for the purpose of this Agreement is located (a "Stamp Tax Jurisdiction") and will indemnify the other party against any Stamp Tax levied or imposed upon the other party or in respect of the other party's execution or performance of this Agreement by any such Stamp Tax Jurisdiction which is not also a Stamp Tax Jurisdiction with respect to the party. Notwithstanding the foregoing, if a party becomes a Defaulting Party under this Agreement, then such party agrees to indemnify the other party for any Stamp Taxes imposed upon such other party by reason of such other party's enforcement and protection, as a result of such other default, of its rights under this Agreement or any related credit support document. (f) For purposes of this Paragraph 5: (1) "Change in Tax Law" means the enactment, promulgation, execution or ratification of, or any change in or amendment to, any law (or in the application or official interpretation of any law) that occurs on or after the date on which the relevant Transaction is entered into. -5- (2) "Law" includes any treaty, law, rule or regulation (as modified, in the case of tax matters, by the practice of any relevant governmental revenue authority either generally or with respect to a party to this Agreement) and "Change in Tax Law" shall be construed accordingly. (3) "Stamp Tax" means any stamp, registration, documentation or similar tax. (4) "Tax" means any present or future tax, levy, impost, duty, charge, assessment or fee of any nature that is imposed by any government or other taxing authority in respect of any payment under this Agreement." 6. REHYPOTHECATION. Paragraph 8 of the Master Repurchase Agreement is amended by deleting "or pay Income" in the ninth line thereof and deleting the comma in the tenth line thereof. 7. EVENTS OF DEFAULT. (a) In addition to the Events of Default described in the Master Repurchase Agreement, the occurrence of any of the following shall constitute an Event of Default: (i) Seller shall fail to perform or comply with, or shall admit its inability to or intention not to perform or comply with, any covenant or agreement contained in these Supplemental Terms and Conditions. (ii) Seller shall (x) default or breach its obligations under any repurchase agreement, reverse repurchase agreement or other agreement with Buyer or any affiliate of Buyer or (y) default or breach any of its obligations under any material agreement with any other person (except Wilshire Real Estate Investment Inc. or any of its subsidiaries (collectively, "WREI")). (iii) A material adverse change (a "Material Adverse Change") shall have occurred with respect to the financial condition, business, litigation or operations of Seller or Wilshire Financial Services Group Inc. ("Guarantor"). (iv) Any report by independent accountants of Seller's or Guarantor's financial condition issued after the Effective Date shall contain any "going concern" qualification or limitation. (v) A Change in Control shall have occurred. For this purpose, a Change in Control shall have occurred if (x) any person or group (within the meaning of Rule 13d-5 of the Securities Exchange Act of 1934 as in effect on the Effective Date) shall own directly or indirectly, beneficially or of record, shares or other equity interests representing more than 35% of the aggregate voting power represented by the issued and outstanding partnership or other equity interests of Seller or Guarantor; (y) a majority of the seats (other than vacant seats) on the board of directors (or equivalent body) of Seller or Guarantor shall at any time be occupied by persons who were neither (A) nominated by the board of directors (or such body) of -6- Seller or Guarantor nor (B) appointed by directors (or equivalent persons) so nominated; (z) any change in control (or similar event, however denominated) with respect to Seller or Guarantor shall occur under and as defined in any indenture, agreement or guaranty in respect of indebtedness to which Seller or Guarantor is a party or guarantor. (b) The parties agree that a nondefaulting party that exercises or is deemed to exercise its rights to declare an Event of Default under Paragraph 11(a) of the Master Repurchase Agreement may elect, in lieu of application of subparagraphs (b) through (e) of Paragraph 11, to exercise its remedies through application of the following provisions (regardless of any such election, the provisions of subparagraphs (a) and (f) through (i) of Paragraph 11 shall remain applicable): "(b) Upon the nondefaulting party's exercise or deemed exercise of the option referred to in subparagraph (a) of this Paragraph (and the deemed occurrence of the Repurchase Date as provided therein), the performance of the respective obligations of the parties with respect to Transactions shall be effected only in accordance with the provisions of subparagraphs (c) through (i) of this Paragraph. (c) The value of the Purchased Securities to be transferred and the aggregate Repurchase Prices to be paid by each party, and any other amounts owed or owing in connection with Transactions under this Agreement, shall be established by the nondefaulting party for all outstanding Transactions as at the Repurchase Date determined in accordance with subparagraph (a) of this Paragraph (and for this purpose, the value of Purchased Securities transferable by the nondefaulting party shall be the price therefor obtained from a generally recognized source or the most recent closing bid from such source, and the value of Purchased Securities transferable by the defaulting party shall be the price therefor, obtained from a generally recognized source or the most recent closing offer quotation from such source, in each case as determined by the nondefaulting party). (d) On the basis of the values and other amounts established in accordance with subparagraph (c) of this Paragraph, an account shall be taken (as at the Repurchase Date determined in accordance with subparagraph (a) of this Paragraph) of the amounts owing by each party to the other under this Agreement (which amounts shall be equal, in the case of each party's claims against the other in respect of transfers of Securities, to the value of such Securities established in accordance with subparagraph (c) of this Paragraph) and the amounts owing by one party shall be set off and applied against the amounts owing by the other, and only the balance of the account shall become immediately due and payable (by the party owing the greater amount pursuant to the foregoing). (e) Unless otherwise provided in Annex I, the parties acknowledge and agree that (1) the Securities subject to any Transaction hereunder are instruments -7- traded in a recognized market, (2) in the absence of a generally recognized source for prices or bid or offer quotations for any Security, the nondefaulting party may in good faith establish the source therefor in its sole discretion and (3) all parties, bids and offers shall be determined together with accrued Income (except to the extent contrary to market practice with respect to the relevant Securities)." 8. REPORTING REQUIREMENTS. Seller shall furnish to Buyer: (a) within 90 days after the end of each fiscal year of Guarantor, Guarantor's consolidated balance sheet as at the end of such fiscal year and the related statements of income and cash flows for such fiscal year, audited by independent certified public accountants of recognized national standing, together with (i) management's discussion and analysis of yearly results compared to the prior year and (ii) an opinion of such accountants (which shall not be qualified in any material respect) to the effect that such financial statements fairly present the financial condition and results of operations of Guarantor on a consolidated basis in accordance with generally accepted accounting principles consistently applied; (b) within 45 days after the close of each quarterly accounting period in each fiscal year of Guarantor (other than the last fiscal quarter of any fiscal year), the consolidated balance sheet of Guarantor as at the end of such quarterly accounting period and the related consolidated statements of income and cash flows for such quarterly accounting period, together with management's discussion and analysis of quarterly results and year-to-date results compared to the same periods in the prior year, all of which shall be certified by the chief financial officer of Guarantor, subject to normal year-end adjustments; (c) within 45 days after the end of each month (other than the last month of any quarterly accounting period), the consolidated balance sheet of Guarantor as at the end of such month and the related consolidated statement of income for such month, all of which shall be certified by the chief financial officer of Guarantor, subject to normal year-end adjustments; (d) within 30 days after the end of each month, loan level performance data as of the end of such month for any Securities subject to Transactions hereunder with respect to which Seller, Guarantor, Wilshire Credit Corporation or any successor or affiliate of either of them is the servicer or master servicer (collectively, "Wilshire-Serviced Securities"), including delinquency reports, pool analytic reports and static pool reports (including delinquency, foreclosure and net charge-off reports), all to the extent obtainable without unreasonable cost by Seller from the relevant trustee or servicer (it being recognized by the parties that the reports currently received by Seller or Buyer, as registered holder of the relevant Securities, do not include all such information); (e) stratification reports for the Wilshire-Serviced Securities, reflecting the loan level information described in immediately preceding clause (d) in an aggregate format, stratified by delinquency, charge-off status and other matters covered by the customary reports of such information, all to the extent obtainable without unreasonable cost by Seller from the relevant trustee or servicer (it being recognized by the parties that the reports currently received by -8- Seller or Buyer, as registered holder of the relevant Securities, do not include all such information); (f) promptly following the occurrence thereof, written notice of any Event of Default, or any event, condition or circumstance which with the giving of notice and/or passage of time may constitute an Event of Default, in each case specifying the nature and extent thereof and the corrective action, if any, taken or proposed to be taken with respect thereto; (g) promptly following the occurrence thereof, written notice of the filing or commencement of, or any threat or notice of intention of any person to file or commence, any action, suit or proceeding, whether at law or in equity or by or before any governmental authority, against Seller or Guarantor that might result in a Material Adverse Change; (h) promptly following the occurrence thereof, written notice of any event, condition or circumstance that has resulted in, or may reasonably be expected to result in, a Material Adverse Change; (i) promptly following the occurrence thereof, written notice of the receipt of any New Capital by any Prepayment Party (as such terms are defined in Section 10 below); and (j) promptly, from time to time, such other information and reports regarding the operations, business affairs and financial condition of Seller or Guarantor, or compliance with the terms of the Agreement, as Buyer may reasonably request. 9. SELLER'S COVENANTS. (a) During any Restricted Period (as defined below) occurring prior to the date on which Seller shall have paid in full all of its obligations hereunder, Seller shall not, without the prior written consent of Buyer, (x) pay any indebtedness outstanding on the Effective Date to, or repurchase price under a repurchase agreement outstanding on the Effective Date with, a party (other than Buyer) earlier than the scheduled due or repurchase date thereof or (y) provide security, margin, additional purchased securities, collateral or other credit support for any such indebtedness or repurchase price; PROVIDED, HOWEVER that this covenant shall not prohibit (i) the refinancing or replacement of currently existing indebtedness or repurchase agreement obligations, or of indebtedness or repurchase agreement obligations incurred in accordance with immediately following clause (ii), in each case on terms which are, taken as a whole, at least as favorable to Seller as those applicable to the indebtedness or repurchase agreement being refinanced or replaced, but this covenant will apply to the refinancing or replacement repurchase agreement as if it were outstanding on the Effective Date, (ii) the incurrence by Seller of new indebtedness or of obligations under repurchase agreements, in each case on customary terms, in connection with the acquisition by Seller of the securities or instruments securing or subject to such indebtedness or repurchase agreements, (iii) compliance by Seller with mark to market provisions (including providing security, margin, additional purchased securities, collateral or other credit support as a result of a change in the value of securities or otherwise) in effect under agreements outstanding on the Effective Date or entered into thereafter in accordance with immediately preceding clauses (i) and (ii), and (iv) repayment by Seller of indebtedness or of obligations under repurchase agreements to the extent required in connection with the sale of any securities or instruments securing or subject to such indebtedness or repurchase agreements. A Restricted Period exists whenever (a) an Event of Default exists as a result -9- of the failure of Seller to pay a Repurchase Price or eliminate a Margin Deficit when required under the Agreement or any other repurchase agreement between Seller and Buyer or an affiliate of Buyer or (b) any other Event of Default exists of which Buyer has given notice to Seller, in each case regardless of whether Buyer has exercised or intends to exercise any remedies with respect thereto. (b) Seller shall use its best efforts to arrange for the resecuritization, third-party financing, alternative repurchase agreement placement or other disposition or financing of all Purchased Securities which are not Wilshire-Serviced Securities as soon as possible. In the event that any Transactions for such non-Wilshire-Serviced Securities remain outstanding on the Effective Date, the Pricing Rate applicable to such Transactions shall be automatically increased by 1.50% per annum commencing on the Effective Date. (c) Seller shall use its best efforts to arrange for the resecuritization, third-party financing, alternative repurchase agreement placement or other disposition or financing of all Purchased Securities which are Wilshire-Serviced Securities by no later than April 30, 2000 (or as soon thereafter as possible). In the event that any Transactions for such Securities remain outstanding (i) after April 30, 2000, the Pricing Rate applicable to such Transactions shall be automatically increased by 0.50% per annum commencing on May 1, 2000 and (ii) after June 30, 2000, the Pricing Rate applicable to such Transactions shall be automatically increased by an additional 0.50% per annum (an aggregate of 1.00% per annum over the original Pricing Rate specified in Section 1(b) above) commencing on July 1, 2000. 10. MANDATORY PREPAYMENT OF REPURCHASE PRICE. In the event that, at any time from the Effective Date through the date on which Seller shall have paid in full all of its obligations hereunder, any one or more of Seller, Guarantor or any of their respective subsidiaries (a "Prepayment Party") receive net proceeds ("New Capital") in an aggregate amount exceeding $50 million from the issuance or other disposition of indebtedness for money borrowed (excluding indebtedness of the kind described in clauses (i) and (ii) of the proviso in Section 9(a) hereof) or equity of any Prepayment Party, in one or more transactions, Seller shall cause 25% of such excess to be applied substantially simultaneously with the receipt thereof to pay outstanding repurchase prices on reverse repurchase agreements (including, without limitation, the Repurchase Prices under the Transactions) between Seller and Buyer or affiliates of Buyer, all in such proportions as may be specified by Buyer and such affiliates in their sole discretion. Seller's obligation under this Section 10 is the same as, and not in addition to, its identical obligation under Section 16 of Annex I to the Whole Loan Agreement. 11. MUTUAL RELEASES. (a) As of the Effective Date, each of Seller and Guarantor hereby releases Buyer, CSFB Hong Kong and all of their former and current officers, directors, employees, shareholders, agents, representatives, advisors, attorneys, accountants, parents, subsidiaries, affiliates and any predecessors and successors of any of the foregoing (collectively, the "Buyer Releasees") from any and all claims, actions, cause of action, demands and charges of whatever nature, known or unknown, including actual, consequential, punitive and other damages, that either of them has or may have against any of the Buyer Releasees relating to or arising from the Agreement, the HK Agreement, any Transaction, any HK Transaction, any Security subject to any Transaction or HK Transaction, any other repurchase agreement to -10- which Seller is a party with Buyer or any other Buyer Releasee, and all related documents and transactions. (b) As of the Effective Date, Buyer hereby releases Seller, Guarantor and all of their former and current officers, directors, employees, shareholders, agents, representatives, advisors, attorneys, accountants, parents, subsidiaries, affiliates and any predecessors and successors of any of the foregoing (collectively, the "Seller Releasees") from any and all claims, actions, cause of action, demands and charges of whatever nature, known or unknown, including actual, consequential, punitive and other damages, that it has or may have against any of the Seller Releasees relating to or arising from the Agreement, the HK Agreement, any Transaction, any HK Transaction, any Security subject to any Transaction or HK Transaction, any other repurchase agreement to which Buyer is a party with Seller or any other Seller Releasee, and all related documents and transactions (collectively, the "Buyer Claims"); PROVIDED, HOWEVER, that this Section 11(b) shall not be deemed to release WREI or any of its officers, directors, employees, shareholders, agents, representatives, advisors, attorneys, accountants, parents, subsidiaries, affiliates and any predecessors and successors of any of the foregoing, in each case in their respective capacities as such, from any Buyer Claims. 12. NOTICES. The text of Paragraph 13 of the Master Repurchase Agreement is replaced in its entirety with the following: "Any notice or communication in respect of this Agreement will be sufficiently given to a party if in writing and delivered in person, sent by certified or registered mail, return receipt requested, or by overnight courier or given by facsimile transfer at the following address or facsimile number: If to Buyer: 11 Madison Avenue, 4th Floor New York, New York 10010 Attention: Kari A. Skilbred Facsimile No.: (212) 325-8107 with a copy to: 11 Madison Avenue New York, New York 10010 Attention: Lawrence Brandman, Esq. Facsimile No.: (212) 325-8219 If to Seller: 1776 S.W. Madison Street Portland, Oregon 97205 Attention: Brad Newman Facsimile No.: (503) 223-8799 -11- with a copy to: Stoel Rives LLP 900 S.W. Fifth Avenue Portland, Oregon 97204-1268 Attention: Gary Barnum Facsimile No.: (503) 220-2480 A notice or communication will be effective: (i) if delivered by hand or sent by overnight courier, on the day and time it is delivered; (ii) if sent by facsimile transfer on a machine providing for confirmation of receipt, on the day and time it is sent; or (iii) if sent by certified or registered mail, return receipt requested, three days after dispatch. Either party may by like notice to the other change the address or facsimile number at which notices or communications are to be given to it." 13. BINDING ON SUCCESSORS. All of the covenants, stipulations, promises and agreements in this Annex I shall bind the successors and assigns of the parties hereto, whether expressed or not. 14. COUNTERPARTS. This Annex I may be executed in any number of counterparts, each of which shall be an original but such counterparts shall together constitute but one and the same instrument. 15. FURTHER ASSURANCES. Seller and Buyer shall promptly provide such further assurances or agreements as Buyer or Seller, as the case may be, may reasonably request in order to effect the purposes of the Agreement. 16. NON-RELIANCE. Buyer and Seller each represents to the other that it is entering into this Agreement and will enter into each Transaction in reliance upon such tax, accounting, regulatory, legal and financial advice as it deems necessary and not upon any view expressed by the other. 17. EXPENSES. Seller shall promptly pay, or reimburse Buyer for the payment of, all reasonable legal, due diligence and other out-of-pocket costs and expenses incurred by Buyer in connection with the negotiation, preparation, establishment, enforcement and administration of the Agreement and the Transactions. 18. RETURN OF REPURCHASED SECURITIES. Notwithstanding anything to the contrary contained in the Collateralization Agreement (as defined below) or Paragraph 12 of the Master Repurchase Agreement, if (i) no Event of Default shall have occurred under the Agreement, (ii) no "Event of Default" within the meaning of the Collateralization Agreement shall -12- have occurred, (iii) the Seller shall have paid in full all of the Repurchase Prices of all of the Transactions, (iv) no Margin Deficit (within the meaning of the Whole Loan Agreement) then exists under the Whole Loan Agreement without regard to any Margin Excess existing under the Agreement, and (v) no other amounts remain owing by Seller under the Agreement, Buyer shall return to Seller any Purchased Securities then held by Buyer. The "Collateralization Agreement" is the letter agreement dated as of the Restatement Date between Seller and Credit Suisse First Boston Corporation regarding collateral and remedies. 19. STOCKBROKER. The parties acknowledge and agree that Buyer is a "stockbroker" as defined in Section 101 of the Bankruptcy Code of 1978, as amended. 20. CREDIT SUISSE FIRST BOSTON CORPORATION, AS AGENT. In the event that Seller is a U.S. person or entity not registered as a broker-dealer in the U.S.: (a) Each Transaction made under the Agreement shall be confirmed by CREDIT SUISSE FIRST BOSTON CORPORATION as Agent for Buyer and Seller on Purchase Date by confirmation, in accordance with Paragraph 3(b) of the Agreement (b) Notwithstanding anything to the contrary contained in the Agreement, any Confirmation or any other agreements or instruments delivered in connection with any Transaction hereunder: (i) CREDIT SUISSE FIRST BOSTON CORPORATION, as a broker-dealer registered with the U.S. Securities and Exchange Commission ("SEC"), will arrange as Agent for each of Buyer and Seller, each Transaction to be entered into pursuant to this Agreement in accordance with Rule 15a-6 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"). As Agent, CREDIT SUISSE FIRST BOSTON CORPORATION will be responsible for (i) effecting and settling all such Transactions in compliance with said Rule 15a-6, (ii) issuing all required confirmations and statements to Buyer and Seller in compliance with Rule 15c3-1 under the Exchange Act, (iii) maintaining books and records relating to such Transactions as required by Rule 17a-3 and 17a-4 under the Exchange Act, and (iv) if requested by Buyer or Seller, receiving, delivering and safeguarding such party's funds and securities in connection with such Transactions in compliance with Rule 15c3-3 under the Exchange Act. (ii) CREDIT SUISSE FIRST BOSTON CORPORATION is participating in each Transaction solely as Agent for Buyer and Seller. CREDIT SUISSE FIRST BOSTON CORPORATION shall have no responsibility or personal liability to Buyer and Seller arising from any failure of Buyer or Seller to pay or perform any obligation hereunder, including, without limitation, any obligation to maintain margin. Each of Buyer and Seller agrees to proceed solely against the other to collect or recover any securities or monies owing to it in connection with or as a result of any Transac- -13- tion or otherwise hereunder. CREDIT SUISSE FIRST BOSTON CORPORATION shall otherwise have no liability in respect of this Agreement or any Transaction, except that CREDIT SUISSE FIRST BOSTON CORPORATION shall be liable for its gross negligence or willful misconduct, or its failure to comply with applicable U.S. securities laws and regulations, in performing its duties as Agent hereunder. 21. SINGLE AGREEMENT. The text of Paragraph 12 of the Master Repurchase Agreement is replaced in its entirety with the following: Buyer and Seller hereby acknowledge that they consider all transactions and agreements between them to constitute a single business and contractual relationship and to have been made in consideration of each other and this Agreement. Therefore, (a) each party hereby agrees to perform all of its obligations to the other party with respect to all transactions or agreements between them, that a default in the performance of any such obligations ("Obligations") shall constitute an Event of Default hereunder, and that any Event of Default hereunder shall constitute a default in all such other transactions and agreements between them, (b) each party shall have a right of setoff against the other party for amounts owing hereunder and any other amounts or obligations owing in respect of any other agreement or transaction whatsoever, and (c) payments, deliveries and other transfers made by either party hereunder shall be considered to have been made in consideration of payments, deliveries and other transfers made by the other party with respect to all other agreements or transactions between them, and the Obligations to make any such payments, deliveries, and other transfers may be applied against each other and netted. As security for the performance by each party of all of its Obligations, each party hereby grants to the other a security interest in all securities, instruments, money, and other property (and all distributions thereon, proceeds thereof and security entitlements with respect thereto) transferred by such party to the other pursuant to this Agreement or otherwise. With respect to defaulted Obligations which did not arise under this Agreement, such security interest may be enforced in accordance with the provisions of applicable law or Paragraph 11(d)(i) hereof (applying such Paragraph as if such defaulted Obligations were owed hereunder in respect of a Transaction in which the defaulting party is acting as Seller). Buyer will advise Seller promptly following the application of any payments or the exercise of setoff rights under this Paragraph 12. 22. CONSENT TO ASSIGNMENT. In accordance with Paragraph 15(a) of the Master Repurchase Agreement, Seller hereby consents to the assignment by Buyer to any affiliate of Buyer of Buyer's rights and obligations under the Agreement and under any or all Transactions; PROVIDED, HOWEVER, that Seller shall not be deemed to have hereby consented to any assignment to an affiliate that would result in Seller incurring payment obligations under Paragraphs 5(b) through (e) of the Master Repurchase Agreement greater in amount than those to which it was subject immediately prior to the assignment, all determined in accordance with the Law (as defined in Paragraph 5(f) of the Master Purchase Agreement) in effect as of the proposed effective -14- date of such assignment. Upon consummation of any such assignment, Buyer shall be relieved of all of its obligations under the Agreement and such Transactions. 23. SUBSTITUTION. Paragraph 9 of the Master Repurchase Agreement is amended by adding the following new subparagraphs (c) and (d): "(c) In the case of any Transaction for which the Repurchase Date is other than the business day immediately following the Purchase Date and with respect to which Seller does not have any existing right to substitute substantially the same Securities for the Purchased Securities, Seller shall have the right, subject to the proviso to this sentence, upon notice to Buyer, which notice shall be given at or prior to 10 AM New York City time on such business day, to substitute substantially the same Securities for any Purchased Securities; PROVIDED, HOWEVER, that Buyer may elect, by the close of business on the business day notice is received, or by the close of the next business day if notice is given after 10 AM New York City time on such day, not to accept such substitution. In the event such substitution is accepted by Buyer, such substitution shall be made by Seller's transfer to Buyer of such other Securities and Buyer's transfer to Seller of such Purchased Securities, and after substitution, the substituted Securities shall be deemed to be Purchased Securities. In the event Buyer elects not to accept such substitution, Buyer shall offer Seller the right to terminate the Transaction. (d) In the event Seller exercises its right to substitute or terminate under subparagraph (c), Seller shall be obligated to pay to Buyer, by the close of the business day of such substitution or termination, as the case may be, an amount equal to (A) Buyer's actual cost (including all fees, expenses and commissions) of (i) entering into replacement transactions; (ii) entering into or terminating hedge transactions; and/or (iii) terminating transactions or substituting Securities in like transactions with third parties in connection with or as a result of such substitution or termination, AND (B) to the extent Buyer determines not to --- enter into replacement transactions, the loss incurred by Buyer directly arising or resulting from such substitution or termination. The foregoing amounts shall be solely determined and calculated by Buyer in good faith." 24. EFFECTIVENESS. This Agreement shall become effective, as of the Effective Date, upon the satisfaction of all of the following conditions: -15- (a) execution and delivery of the Agreement by all of the parties thereto; and (b) execution and delivery of a guaranty of the payment and performance of Seller's obligations under the Agreement, in form and substance satisfactory to Buyer, by Guarantor. CREDIT SUISSE FIRST BOSTON WILSHIRE FUNDING CORPORATION (EUROPE) LIMITED By:____________________________ By:_______________________________ Name: Name: Title: Title: ACCEPTED AND AGREED TO SOLELY AGREED AS TO SECTION 11(a) ONLY: IN ITS CAPACITY AS AGENT: CREDIT SUISSE FIRST BOSTON WILSHIRE FINANCIAL SERVICES CORPORATION GROUP INC. By:_____________________________ By:_______________________________ Name: Name: Title: Title: -16- EX-10.18 5 EXHIBIT 10.18 EXHIBIT 10.18 POST-RESTRUCTURING AGREEMENT This POST-RESTRUCTURING AGREEMENT ("Agreement") is entered into this 8th day of June, 1999 by and among WCC Inc., a Nevada Corporation ("New Servicer"), Capital Consultants, Inc., an Oregon corporation, for itself and as agent for any investors it represents ("CCI") or its successors or assigns, Wilshire Financial Services Group Inc., a Delaware corporation ("WFSG"), and Wilshire Credit Corporation, a Nevada corporation, which shall change its name to Capital Wilshire Holdings, Inc. ("CWH"). RECITALS A. WFSG, CWH, Wilshire Servicing Corporation ("WSC"), Portland Servicing Corporation ("PSC"), Andrew Wiederhorn, Lawrence Mendelsohn and CCI have entered into that certain Amended and Restated Restructuring Agreement dated January 19, 1999 (the "Restructuring Agreement"). B. The Restructuring Agreement contemplates the restructuring of WFSG, CWH and WSC and the creation of New Servicer, which will be the sole provider of real estate and loan management services for WFSG and its subsidiaries. C. Pursuant to Section 8(C) of the Restructuring Agreement, CCI formed a corporation which in turn formed a wholly-owned corporate subsidiary ("CWH Mergeco Sub Corp."). CWH will merge with CWH Mergeco Sub Corp. CWH shall be the surviving corporation and upon termination of that certain Transition Servicing Agreement among New Servicer dated even herewith (the "Transition Servicing Agreement") shall change its name from Wilshire Credit Corporation to Capital Wilshire Holdings, Inc. D. Pursuant to the Restructuring Agreement, CWH will assign to New Servicer all of its right, title and interests in all of its assets (including, without limitation, the right to the name Wilshire Credit Corporation and all rights to and under all insurance policies) in exchange for the Class B Common Stock of the New Servicer ("Class B Stock") and the assumption by New Servicer of all of the liabilities of CWH (other than obligations under the WCC Loan Agreement and Claims (as each term is defined in the Restructuring Agreement) against CWH or PSC). E. Pursuant to the Restructuring Agreement, WFSG will contribute all of the outstanding common stock of WSC to New Servicer for all of the outstanding Class A common stock of New Servicer ("Class A Stock"). F. New Servicer will receive material benefits, both direct and indirect, from the consummation of the transactions contemplated by the Restructuring Agreement. 1 G. The parties hereto desire to document the respective obligations of each party upon the consummation of the Restructuring. AGREEMENT For good and valuable consideration, the parties hereto agree as follows: 1. DEFINITIONS. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Restructuring Agreement. 2. INDEBTEDNESS. New Servicer agrees solely for the benefit of the holder of the New Servicer Class B Common Stock that neither it nor any subsidiary performing loan servicing shall incur debt for borrowed money other than debt incurred for working capital to finance the operations of New Servicer or such subsidiary as a loan servicer (including, without limitation, the financing of advances made by New Servicer or such subsidiary, as servicer, with respect to loans, REO properties and servicing expenses in the ordinary course of business) and to finance the acquisition of servicing rights; provided that such operations and acquisitions shall be on a good faith, arms-length basis, at fair market value in connection with the business of New Servicer or such subsidiary as a servicing company. 3. SERVICING. New Servicer and its subsidiaries shall be the sole servicer for WFSG and its subsidiaries for servicing performed in the United States and any such servicing agreements which are held or acquired by WFSG or any such subsidiary other than New Servicer shall be transferred to New Servicer (unless, in relation to those servicing agreements for which Wilshire Servicing Corporation ("WSC") is master servicer, the consent of a third party would be required for such transfer, in which case such agreements will be subserviced to New Servicer); provided, however, if the Office of Thrift Supervision (or other similar governing body) requires or recommends (and officers of the bank determines that it is prudent to follow such recommendation) that the servicing for First Bank of Beverly Hills, FSB and its subsidiaries (the "Bank") be effected by a third party, this provision shall not apply to the servicing for the Bank; provided, that, in such event, for purposes of the calculation contemplated with respect to the exchange rights of the Class B Common Stock of New Servicer contained in that certain Exchange Rights Agreement between WFSG and CCI of this same date ("Exchange Agreement"), the parties shall impute to the total earnings of New Servicer an amount equal to the earnings which would have been earned had New Servicer continued to be the servicer for the Bank during the applicable calculation period. New Servicer shall not transfer the stock of WSC without the prior written consent of CWH, except that WSC and New Servicer may merge without the consent of CWH. 4. WFSG DIVIDENDS. Dividends declared by WFSG during the twenty-four month period in which New Servicer Class B Common Stock may not be exchanged for WFSG common 2 stock pursuant to the Exchange Agreement shall be shared pro rata (determined at the time of declaration as though the New Servicer Class B Common Stock had been converted to WFSG common stock pursuant to the Exchange Agreement) pursuant to the Exchange Agreement with the holder of the New Servicer Class B Common Stock; provided, that such dividends (including stock rights or similar rights) may be held in escrow pending the conversion of the New Servicer Class B Common Stock into WFSG common stock; provided, however, that such dividends shall not be so shared with the holder of the New Servicer Class B Common Stock to the extent such dividends represent a pass-through of dividends declared and distributed by New Servicer and shared with the holder of the New Servicer Class B Common Stock pursuant to Article III, Section 1 of New Servicer's Amended and Restated Articles of Incorporation. 5. NOTICE OF LIQUIDATION. In the event WFSG determines that it is necessary or prudent to liquidate its assets, WFSG shall use its best efforts (subject to the fiduciary and other legal obligations imposed upon its board of directors, including obligations concerning confidentiality and restrictions under applicable securities law) to: A. Provide commercially reasonable prior notice (taking into account the specific facts and circumstances) to CCI or CCI's assignee if such assignee is Sterling Capital, LLC (together, "CCI/Sterling") of any such action undertaken by WFSG; A. Provide CCI/Sterling with the same information as is provided the board of directors concerning the proposed liquidation and to provide representatives of CCI/Sterling the opportunity to attend meetings of the board of directors relating to the proposed liquidation; A. Provide CCI/Sterling a commercially reasonable time (taking into account the specific facts and circumstances) in which CCI/Sterling may offer to purchase the assets of WFSG and obtain financing therefor or entertain offers from other potential buyers. 6. INFORMATION TO SHAREHOLDERS. So long as the New Servicer Class B Common Stock is pledged to or owned by CCI/Sterling, WFSG shall provide to CCI/Sterling promptly upon the filing or sending thereof, a copy of any annual, periodic or special report or registration statement (inclusive of exhibits thereto) filed by WFSG with the SEC or any securities exchange and of each communication from WFSG to shareholders generally. In addition, WFSG shall provide, on or before April 30 of each year, a certificate of its chief financial officer that the expenses of New Servicer for the immediately preceding fiscal year have been allocated on a commercially reasonable basis in accordance with GAAP between New Servicer and WFSG. In addition, WFSG shall use its best efforts (subject to the fiduciary obligations imposed upon its board of directors, including obligations concerning confidentiality and 3 restrictions under applicable securities law) to promptly notify CCI/Sterling of any offers for the sale of WFSG which are under serious consideration, including the price and material terms. Further, New Servicer shall provide to CCI/Sterling, upon the written request of CCI/Sterling, New Servicer's quarterly income statement and balance sheet prepared in conjunction with the preparation of financial statements by WFSG (it being acknowledged by all parties that such income statement and balance sheet may not be prepared in accordance with GAAP). 7. POST-CLOSING CONTRIBUTIONS. A. Section 1 of Article III of New Servicer's Amended and Restated Articles of Incorporation (the "Articles") provides as follows: If at any time after the date hereof the holders of shares of either the Class A Stock or the Class B Stock makes a capital contribution to New Servicer that is not matched by the holders of the Class A Stock or the Class B Stock, as the case may be, pro rata according to their respective dividend rights set forth in Section 1 of Article III of the Articles (a "Post-Closing Contribution"), New Servicer may declare and distribute a special dividend solely to the shareholders making the Post-Closing Contribution as follows: (i) if the Post-Closing Contribution consists of cash, an amount equal to such contribution or (ii) if the Post-Closing Contribution consists of an asset, the asset so contributed (or the proceeds thereof); PROVIDED that no additional contribution by the holders of Class B Stock made in connection with that certain Transition Servicing Agreement shall be deemed a Post-Closing Contribution. B. If either WFSG or CCI elects to make a Post-Closing Contribution (as defined in and contemplated by Section 1 of Article III of New Servicer's Amended and Restated Articles of Incorporation), such party shall use reasonable efforts to provide notice to the other party of such contribution, including the nature and value of such contribution. C. If New Servicer elects to make a distribution of the Post-Closing Contribution to the shareholder having made such contribution, it shall give the shareholder not making such contribution notice within 30 days after such distribution. D. In the case of a distribution relating to a Post-Closing Contribution consisting of an asset, if the shareholder receiving the notice referred to in Section 7(B) reasonably believes that the value of such distribution exceeds the value of the 4 Post-Closing Contribution to which the distribution relates, such shareholder shall have the right to demand an independent appraisal of the value of such distribution and the Post-Closing Contribution to which the distribution relates. If the appraised value of the Post-Closing Contribution is less than 90 percent of the value of the distribution, the shareholder receiving the distribution shall be responsible for the costs of the appraisal. If the appraised value of the Post-Closing Contribution is 90 percent or more of the value of the distribution, the shareholder demanding the appraisal shall be responsible for the costs of the appraisal. 8. VOTING AGREEMENT. In the event that CWH elects to convert its shares of Class B Stock into Class A Stock, as a condition precedent to such conversion CWH and New Servicer shall enter into a voting agreement substantially in the form attached as EXHIBIT A. 9. INTERPRETATION. (a) AMBIGUITIES. The parties acknowledge that each party and its counsel has materially participated in the drafting of this Agreement; consequently, the rule of contract interpretation, that ambiguities, if any, in a writing be construed against the drafter, shall not apply. (b) HEADINGS. The section headings in this Agreement are included for convenience only; they do not give full notice of the terms of any portion of this Agreement and are not relevant to the interpretation of any provision of this Agreement. (c) GOVERNING LAW. The parties intend that this Agreement shall be governed by and construed in accordance with the laws of the state of Oregon applicable to contracts made and wholly performed within Oregon by persons domiciled in Oregon, without regard to choice of law rules. (d) SEVERABILITY. Any provision of this Agreement that is deemed invalid or unenforceable shall be ineffective to the extent of such invalidity or unenforceability, without rendering invalid or unenforceable the remaining provisions of this Agreement. Furthermore, in lieu of each such invalid or unenforceable provision, there shall be added automatically as a part of this Agreement, a provision as similar in terms to such invalid or unenforceable provision as may be possible and be valid and enforceable. 5 10. ACCOUNTS. As of January 19, 1999, CCI, in addition to that certain account in the name of Wilshire Credit Corporation existing at Bear Stearns (Account No. 277-04722-1-1), was entitled to all funds contained in that certain account in the name of Wilshire Credit Corporation existing at First American Title Company (Money Market Account No. 98-160944A) and in that certain account in the name of Portland Servicing Corporation existing at Bear Stearns (Account No. 277-05050-1-0), and Wilshire Credit Corporation and Portland Servicing Corporation each released their respective interests in such accounts as of January 19, 1999. 11. DISSOLUTION OF CWH. CWH shall not dissolve within two years of the date of this Agreement. 12. TERMINATION. The respective rights and obligations of the parties contained in this Agreement shall terminate upon the exchange of the New Servicer Class B Common Stock for WFSG Common Stock pursuant to the Exchange Agreement or the liquidation of New Servicer. The respective rights and obligations of the parties contained in Sections 2, 3, 5 and 6 shall terminate upon the earlier of the conversion of the New Servicer Class B Common Stock into shares of New Servicer Class A Common Stock. 12. INTEGRATION; AMENDMENT. This Agreement constitutes the entire agreement of the parties relating to the subject matter hereof. There are no promises, terms, conditions, obligations, or warranties other than those contained in such document and such document supersedes all prior communications, representations, or agreements, verbal or written, among the parties relating to the subject matter hereof. This Agreement may not be amended except in writing executed by all of the parties hereto. 13. WAIVER. No provision of this Agreement shall be deemed to have been waived unless such waiver is in writing signed by the waiving party. No failure by any party to insist upon the strict performance of any provision of this Agreement or to exercise any right or remedy consequent upon a breach thereof, shall constitute a waiver of any such breach, of such provision or of any other provision. No waiver of any provision of this Agreement shall be deemed a waiver of any other provision of this Agreement or a waiver of such provision with respect to any subsequent breach, unless expressly provided in writing. 14. NOTICE. All notices required or permitted to be given under this Agreement shall be in writing. Notices may be served by certified or registered mail, postage paid with return receipt requested; by private courier, prepaid; by telex, facsimile, or other telecommunication device capable of transmitting or creating a written record; or personally. Mailed notices shall be deemed delivered five days after mailing, properly addressed. Couriered notices shall be deemed delivered when delivered as addressed, or if the addressee refuses delivery, when presented for delivery notwithstanding such refusal. Telex or telecommunicated notices shall be deemed delivered when receipt is either confirmed by confirming transmission equipment 6 or acknowledged by the addressee or its office. Personal delivery shall be effective when accomplished. Unless a party changes its address by giving notice to the other party as provided herein, notices shall be delivered to the parties at the following addresses: If to WFSG: 1776 S.W. Madison Portland, OR 97207-8517 Attn: Andrew A. Wiederhorn Lawrence A. Mendelsohn Facsimile No. (503) 223-8799 With copies to: Stoel Rives LLP 900 SW Fifth Avenue Portland, Oregon 97204 Attn: Gary R. Barnum Facsimile No. (503) 220-2480 If to New Servicer: 1705 SW Taylor Street Portland, OR 97207 Attn: Phillip Vincent Facsimile No. (503) 952-7476 With copies to: Stoel Rives LLP 900 SW Fifth Avenue Portland, Oregon 97204 Attn: Gary R. Barnum Facsimile No. (503) 220-2480 If to CCI or CWH: Capital Consultants, Inc. 2300 S.W. First Ave. Portland, Oregon 97201 Attn: Linda Lucas Facsimile No. (503) 224-4355 With copies to: Lane Powell Spears Lubersky LLP 520 S.W. Yamhill Street, Suite 800 Portland, Oregon 97204 Attn: Robert E. Maloney, Jr. Facsimile No. (503) 224-0388 15. DISPUTE RESOLUTION. Other than claims for specific performance, injunctive or other equitable relief, which shall be resolved by appropriate court action, and claims arising from or related to a bankruptcy petition filed by or against any person, which shall be resolved in 7 bankruptcy court, any dispute between any of the parties to this Agreement, whether or not arising out of this Agreement, will be resolved by binding arbitration in Portland, Oregon, conducted in accordance with the provisions of ORS 36.300 ET SEQ., including any amendments thereto. The arbitration shall take place in Portland, Oregon, and the parties shall have full and complete rights to all discovery provided in accordance with the Oregon Rules of Civil Procedure, including but not limited to depositions, requests for production of documents, requests for admissions, and as otherwise provided in said Rules of Civil Procedure. The parties shall mutually agree to selection of the arbitrator, and agree that disputes under five (5) million dollars shall be decided by a single arbitrator. Any dispute in excess of that amount shall be determined by three arbitrators. In the event the parties are unable to agree, such arbitrator or arbitrators shall be selected by the presiding circuit court judge for Multnomah County, District No. 4. Any requests or pendency of the arbitration shall not be a bar or in any way a defense to either party seeking appropriate specific performance or equitable relief from any court of competent jurisdiction or from a bankruptcy court consistent with the terms of this Agreement. The award of arbitration shall be final and judgment shall be entered upon it in accordance with applicable law in any court having jurisdiction thereof. 16. ATTORNEY FEES. If any suit or action arising out of or related to this Agreement is brought by any party hereto, the prevailing party or parties shall be entitled to recover the costs and fees (including without limitation reasonable attorney fees, the fees and costs of experts and consultants, copying, courier and telecommunication costs, and deposition costs and all other costs of discovery) incurred by such party or parties in such suit or action, including without limitation at arbitration, trial, any post-trial or appellate proceeding, or in any bankruptcy proceeding. 17. SURVIVAL; ASSIGNMENT; BINDING EFFECT. The representations, warranties and covenants contained in this Agreement shall survive the closing of the transactions contemplated herein. This Agreement shall bind and inure to the benefit of, and be enforceable by, the parties hereto and their respective successors, heirs, and assigns. 18. COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement binding on all the parties, notwithstanding that all parties are not signatories to the same counterpart. 8 IN WITNESS WHEREOF, the parties hereto execute this Services Agreement as of the date first written above. WCC INC., a Nevada corporation By:____________________________________ Name: Phillip Vincent Title: President WILSHIRE FINANCIAL SERVICES GROUP INC., a Delaware corporation By:____________________________________ Name: Title: WILSHIRE CREDIT CORPORATION, a Nevada corporation By:____________________________________ Name: Jeffrey L. Grayson Title: President CAPITAL CONSULTANTS, INC., an Oregon corporation, for itself and as agent for its Investors By:____________________________________ Name: Jeffrey L. Grayson Title: President 9 EXHIBIT A VOTING AGREEMENT This VOTING AGREEMENT (the "Agreement") dated as of _________, 1999, is among WCC Inc., a Nevada corporation (the "Company") and ________ as holders of Class B Common Stock of the Company (the "Holders"). RECITALS A. WHEREAS, the Holders propose to convert their shares of the Company's Class B Common Stock (the "Class B Stock") for shares of the Company's Class A Common Stock (the "Class A Stock") pursuant to the Company's Amended and Restated Articles of Incorporation (the "Converted Stock"); and B. WHEREAS, the parties hereto desire to provide for the Holders to vote their shares of Converted Stock in a certain manner with respect to all business of the Company. AGREEMENT NOW, THEREFORE, in reliance on the foregoing Recitals and in consideration of the mutual covenants contained herein, the parties agree as follows: 1. No Transfer of Voting Stock in Violation of this Agreement. Until this Agreement is terminated, as provided herein, no party to this Agreement will transfer any voting stock in the Company to any person not a party to this Agreement immediately prior to such transfer, unless such transferee, as a condition of such transfer, becomes a party to this Agreement by executing a signature page hereto and by delivering a copy thereof to the Company. Each certificate representing voting stock of the Company issued in the name of a party to this Agreement shall contain substantially the following legend: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A VOTING AGREEMENT AMONG CERTAIN STOCKHOLDERS, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE COMPANY OR MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY. The Company shall not permit the transfer of any such shares of voting stock on its books or issue a new certificate upon transfer of any such voting stock unless the person to whom such voting stock is to be transferred shall have become a party to this Agreement. 1 2. Voting of Shares. Each Holder of Class B Stock executing this Agreement, upon conversion of such Class B Stock pursuant to its terms into Class A Stock shall, in voting on any matter, vote all shares of voting stock of the Company as to which such party has voting discretion, consistent with the voting on a pro rata basis of the Class A Stock outstanding prior to the conversion of any shares of Class B Stock. 3. Grant of Proxy. Should the provisions of this Agreement be construed to constitute the granting of proxies, such proxies shall be deemed coupled with an interest and are irrevocable for the term of this Agreement. 4. Manner of Voting. The voting of shares pursuant to this Agreement may be effected in person, by proxy, by written consent or in any other manner permitted by applicable law. 5. Term and Termination. This Agreement shall become effective upon the conversion of the Class B Stock into Class A Stock and shall continue in full force and effect through the earliest of the following dates, on which it shall terminate in its entirety: 5.1 The consummation of the Company's sale of its common stock in a bona fide, firm commitment, underwritten public offering pursuant to an effective registration statement on Form S-1 (or its successor form) under the Securities Act of 1933, as amended. 5.2 A merger or consolidation of the Company into or with another corporation after which the shareholders of the Company immediately before such transaction shall own less than 50% of the voting equity securities of the surviving corporation or its parent; or 5.3 The sale, lease, transfer, or other disposition of all or substantially all of the Company's assets. 6. Miscellaneous. 6.1 Specific Performance. The parties hereto hereby declare that it is impossible to measure in money the damages which will accrue to a party hereto or to their heirs, personal representatives or assigns by reason of a failure to perform any of the obligations under this Agreement and agree that the terms of this Agreement shall be specifically enforceable, and appropriate injunctive relief may be applied for and granted in connection therewith. In any action or proceeding to specifically enforce the provisions hereof, any person against whom such action or proceeding is brought hereby waives the claim of defense therein that such party has an adequate remedy at law, and such person shall not offer in any such action or proceeding the claim or defense that such remedy at law exists. Such equitable remedies shall, however, be cumulative and not exclusive and shall be in 2 addition to any other remedies that any party may have under this Agreement or otherwise. 6.2 Other Voting Agreements. The Holders represent and agree that they are not and will not become parties to any voting trust, agreement for voting control, or other like agreement involving any of the voting equity securities of the Company owned by them during the term of this Agreement, which trust or agreement is in conflict with the terms of this Agreement. 6.3 Governing Law. This Agreement, and the rights of the parties hereto, shall be governed by and construed in accordance with the laws of the state of Oregon, exclusive of choice of law rules. 6.4 Amendment. Any term or provision of this Agreement may be amended only by a writing signed by the Company, the parties and a majority of the holders of Class A Stock. 6.5 Severability. If any provision of this Agreement is held to be invalid or unenforceable, the validity and enforceability of the remaining provisions of this Agreement shall not be affected thereby. 6.6 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed an original but all of which together shall constitute one and the same agreement. 6.7 Absence of Third-Party Beneficiary Rights. No provisions of this Agreement are intended nor shall be interpreted to provide or create any third-party beneficiary rights or any other rights of any kind in any client, customer, affiliate, shareholder or partner of any party hereto, or any other person, unless specifically provided otherwise herein and, except as so provided, all provisions hereof shall be personal solely between the parties to this Agreement. 6.8 Entire Agreement. This Agreement, the documents referenced herein and the exhibits thereto constitute the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect to such subject matters. [SIGNATURE PAGE FOLLOWS] 3 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. THE COMPANY: WCC INC. By:______________________________ Name: Title: HOLDERS: [HOLDER] By:______________________________ Name: Title: [HOLDER] By:______________________________ Name: Title: 4 EX-10.19 6 EXHIBIT 10.19 EXHIBIT 10.19 DIP LOAN AGREEMENT This DIP Loan Agreement ("Agreement") is entered into as of March 3, 1999, by and between WILSHIRE REAL ESTATE PARTNERSHIP L.P., a Delaware limited partnership ("WREP") and WILSHIRE FINANCIAL SERVICES GROUP INC., a Delaware corporation ("WFSG"). RECITALS A. WREP and WAC entered into the WAC Interim Loan Agreement, whereby WREP agreed to make the WAC Interim Loan pursuant to the terms thereof. B. Contemporaneous with the making of the WAC Interim Loan, WAC and WFSG entered into the WFSG Interim Loan Agreement, whereby WAC agreed to use the proceeds of the WAC Interim Loan to make the WFSG Interim Loan pursuant to the terms thereof. C. WREP has agreed to make the DIP Loan to WFSG, for the purpose of repaying the WFSG Interim Loan and for other purposes. The parties wish to set forth the terms and conditions upon which the DIP Loan will be made and repaid. D. On March 3, 1999 (the "Petition Date"), WFSG filed a petition under Chapter 11 of the Bankruptcy Code and currently is operating its business as Chapter 11 Debtor-in-Possession ("DIP"). E. WFSG currently is unable to obtain the funds it requires to operate after the Petition Date other than by borrowing from WREP on the terms set forth in this Agreement. WREP is unwilling to lend to WFSG, except on the terms of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and promises of the parties contained herein, WREP and WFSG hereby agree as follows: ARTICLE I. DEFINITIONS A. DEFINED TERMS "AFFILIATE" of any person shall mean any other person which, directly or indirectly, controls or is controlled by or is under common control with such person . 1 "AGREEMENT" means this Loan Agreement as amended, modified or supplemented from time to time. "BANKRUPTCY CODE" means the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time, including (unless the context otherwise requires) any rules or regulations promulgated thereunder. "BOARD" shall mean the Board of Governors of the Federal Reserve System of the United States. "BOARD REGULATION" shall mean any of Regulation D, T, U or X of the Board, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "BUSINESS DAY" means any day other than a Saturday, Sunday or other days on which commercial banks are authorized or required to be closed in Portland, Oregon. "CLOSE" OR "CLOSING" means the funding of the DIP Loan. "CLOSING DATE" means the day which is one Business Day after the satisfaction or waiver of all the conditions set forth in Section III.C hereof. "CAPITAL RESEARCH LOAN" means the loan from Capital Research and Management Company to WREP evidenced by an Amended and Restated Promissory Note dated as of November 12, 1998. The principal balance of the Capital Research Loan as of the date of this Agreement is approximately $18,129,000. "COLLATERAL" means the WAC Stock and the First Bank Stock. "DEFAULT" means an Event of Default or an event or condition, which with the giving of notice or the passage of time, or both, would constitute an Event of Default. "DIP LOAN" means the loan of up to $10,000,000 by WREP to WFSG pursuant to the terms of this Agreement. "EVENT OF DEFAULT" has the meaning set forth in Section VII.A hereof. "FIRST BANK" means the First Bank of Beverly Hills, FSB. "FIRST BANK STOCK" means all of the issued and outstanding capital stock of First Bank. "FISCAL YEAR" shall mean the fiscal year of the WFSG for accounting purposes which ends on December 31 of each year. 2 "GAAP" means generally accepted accounting principles as in effect in the United States from time to time, consistently applied. "GOVERNMENTAL AUTHORITY" means any domestic or foreign national, state or local government, any political subdivision thereof, any department agency, authority or bureau of any of the foregoing, or any other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Comptroller of the Currency, any central bank or any comparable authority. "GOVERNMENT RULE" means any applicable law, rule, regulation, ordinance, order, code interpretation, judgment, decree, directive, guidelines, policy or similar form of decision of any Government Authority. "INDEBTEDNESS" shall mean, with respect to any person, (a) all obligations of such person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such person evidenced by bonds, debentures, notes or other similar instruments or upon which interest charges are customarily paid, (c) all obligations of such person for the deferred purchase price of property or services, except current accounts payable arising in the ordinary course of business and not overdue beyond such periods as is commercially reasonable for such person's business, (d) all obligations of such person under conditional sale or other title retention agreements relating to property purchased by such person and all capitalized lease obligations, (e) all payment obligations of such person with respect to interest rate or current protection agreements, (f) all obligations of such person as an account party under any letter of credit or in respect of bankers' acceptances, (g) all obligations of any third party secured by property or assets of such person (regardless of whether or not such person is liable for repayment of such obligations), and (h) all guarantees of such person. "IRWINDALE PROPERTY" shall mean that certain parcel of real property described in EXHIBIT B attached hereto. "LETTER AGREEMENT" means that certain amended and restated agreement dated as of January 19, 1999, by and among WREP, WFSG, WAC and WREIT. "LIEN" shall mean, with respect to any asset, (i) any mortgage, lien, pledge encumbrance, charge or security interest in or on such asset, (ii) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset, (iii) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities or (iv) any other right of or arrangement with any creditor to have such creditor's claim satisfied out of such assets, or the proceeds therefrom, prior to the general creditors of the owner thereof. "LOAN DOCUMENTS" means this Agreement, the Note, the Security Agreement, and other agreements, documents and instruments now or at any time hereafter executed and/or delivered 3 by the WFSG in connection with this Agreement, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. "MARGIN STOCK" shall have the meaning assigned to such term in Regulation U. "MATERIAL ADVERSE EFFECT" means a material adverse effect occurring after the Closing Date on (a) the condition, business, performance, prospects, operations or properties of WFSG or WAC, (b) WFSG's ability to pay or perform the Obligations, (c) the rights and remedies of or benefits available to WREP under the Loan Documents, or (d) WREP's Lien on the Collateral. "NEW LENDER" shall have the meaning defined in Section VI.A.2 of this Agreement. "NEW LOAN" is defined in Section VI.A.2 of this Agreement. "NEW LOAN DOCUMENTS" " means any agreements, documents and instruments executed and/or delivered by WREP, WFSG and/or WAC (as the case may be), in connection with the New Loan, as the same may be amended, modified, supplemented, extended, renewed, restated or replaced. "NOTE" means a promissory note executed by WFSG in favor of WREP evidencing the DIP Loan, substantially in the form attached as EXHIBIT A hereto. "NOTICE OF NEW LOAN" shall have the meaning defined in Section VI.A.2 of this Agreement. "OBLIGATIONS" means all of obligations of the WFSG to WREP, under the Loan Documents, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereby arising. "PREPACKAGED PLAN" or "PLAN" means the prepackaged plan of reorganization filed by WFSG on March 3, 1999, "SECURITY AGREEMENT" means the Security Agreement of even date from WFSG to WREP with respect to the WAC Stock, substantially in the form of EXHIBIT E attached hereto, and/or, where the context requires, a similar security agreement from WAC to WREP with respect to the First Bank Stock. "SENIOR NOTES" means the corporate debenture issued by WFSG which pay interest at the rate of 13% per annum with a maturity date of 2004, and the Series B Notes issued by WFSG which pay interest at the rate of 13% per annum with a maturity date of 2004. "SENIOR NOTEHOLDERS" means the holders of the Senior Notes. "VALENCIA PROPERTY" means that certain parcel of real property described in EXHIBIT C attached hereto. 4 "WAC" means Wilshire Acquisitions Corporation, a Nevada corporation. "WAC INTERIM LOAN" means the loan in the amount of up to $5,000,000 by WREP to WAC pursuant to the WAC Interim Loan Agreement. "WAC INTERIM LOAN AGREEMENT" means that certain loan agreement dated as of February 1, 1999, by and between WREP and WAC. "WAC OUTSTANDING BALANCE" means the outstanding principal balance and all accrued interest on the WAC Interim Loan as of the Closing Date. "WAC STOCK" means all of the issued and outstanding capital stock of WAC. "WFSG INTERIM LOAN" means the loan in the amount of up to $5,000,000 by WAC to WFSG pursuant to the WFSG Interim Loan Agreement. "WFSG INTERIM LOAN AGREEMENT" means that certain loan agreement dated as of February 1, 1999, by and between WAC and WFSG. "WFSG OUTSTANDING BALANCE" means the outstanding principal balance and all accrued interest on the WFSG Interim Loan as of the Closing Date. "WREIT" means Wilshire Real Estate Investment Trust Inc., a Maryland corporation. "WREIT/WREP CLAIM" means the claims of WREIT and WREP against WFSG as of January 14, 1999, which claim was compromised and settled pursuant to Paragraph A of the Letter Agreement. "WREIT/WREP CLAIM NOTE" means a promissory note in the amount of $18,400,000 by WFSG to the order of WREP and/or WREIT substantially in the form attached as EXHIBIT D hereto. "WREIT/WREP CLASS" means the class of creditors in the WFSG reorganization which consists of WREIT and WREP. ARTICLE II. HEADINGS Headings in the Loan Documents are for convenience of reference only and are not part of the substance hereof or thereof. 5 ARTICLE III. THE CREDIT A. THE DIP LOAN On the terms and subject to the conditions, and relying on the representations and warranties, contained in this Agreement, WREP agrees to make the DIP Loan to WFSG. 1. The DIP Loan shall be evidenced by the Note and secured by a pledge from WAC and WFSG of the Collateral. 2. WREP is hereby granted a security interest in and lien on the Collateral to secure all of the Obligations. Such postpetition security interest shall be valid and enforceable as of the Petition Date and shall have priority over all other security interests and liens. Except as allowed under Article VI below, WFSG shall not create or grant an interest or lien senior to WREP's interest in any of the Collateral without WREP's consent or Bankruptcy Court order. 3. Subject to the provisions of Section B.5 below, the DIP Loan shall be disbursed to WFSG, by wire transfer of immediately available funds, on the Closing Date. B. REPAYMENT The DIP Loan shall be repaid as follows: 1. From the Closing Date to February 29, 2000, WFSG shall make monthly payments, on the last day of each month, of accrued interest only on the outstanding balance of the DIP Loan, at the rate of twelve percent (12%) per annum, in arrears. Interest shall be calculated based on the actual number of days elapsed in a year of 360 days. 2. Commencing on February 29, 2000 and on the last day of each month thereafter, WFSG shall make equal monthly payments of principal and accrued interest in an amount that will fully amortize the outstanding principal balance of the DIP Loan in 48 monthly payments. 3. All outstanding principal of the DIP Loan and accrued interest thereon shall be paid in full on February 29, 2004. 4. Without limiting any of WREP's other remedies, on and after the occurrence and during the continuance of any Default or Event of Default, WFSG shall on demand from time to time pay interest, to the extent permitted by law, on all Obligations outstanding up to the date of cure or waiver of such Default or Event of Default at a rate per annum equal to fourteen percent (14%) per annum in lieu of the 12% interest rate. WFSG shall make each payment hereunder and under any instrument delivered hereunder not later than 5:00 p.m. (Oregon time) on the day 6 when due in lawful money of the United States (in freely transferable dollars) to WREP, in immediately available funds, or as otherwise directed. 5. WFSG shall apply the proceeds of the DIP Loan to pay the WFSG Outstanding Balance in full, and shall direct WAC to apply such proceeds to the WAC Outstanding Balance. The parties agree that on the Closing Date, (a) WREP may withhold from disbursement of the DIP Loan an amount equal to the WFSG Outstanding Balance and such amount shall be deemed to be applied to the WFSG Outstanding Balance, and (b) if the WFSG Outstanding Balance is less than the WAC Outstanding Balance, WFSG may withhold the difference from disbursement of the DIP Loan. 6. Payments under this Section B shall be applied first to accrued interest through the date of payment, then to principal. If the date specified for a payment is not a Business Day, then payment shall be due on the next Business Day. WFSG may prepay the DIP Loan, in whole or in part, at any time without penalty or prepayment premium. C. CONDITIONS OF DIP LOAN The obligation of WREP to disburse the DIP Loan is subject to the satisfaction of all of the following conditions on or prior to the Closing Date. WREP shall have the sole discretion to waive, in whole or in part, satisfaction of any of the conditions: 1. CONDITIONS PRECEDENT. (a) CAPITAL RESEARCH RESTRUCTURING. WREP has restructured the Capital Research Loan to provide for terms no less favorable to WREP than the following: (i) interest at 16% per annum, payable monthly, (ii) principal due two years from restructuring, (iii) secured by a lien in WREP's equity in any of WREP's real property other than the Irwindale Property and the Valencia Property, and (iv) prepayable at any time in whole or in part without any penalty, and such other commercially reasonable terms for a loan of its type. (b) MOTION. WFSG has filed a motion for authorization to incur postpetition debt pursuant to this Agreement, with terms and in a form acceptable to WREP, (the "Motion") and given proper notice of the Motion in accordance with Federal Rule of Bankruptcy Procedure 40001(d). 7 (i) PROPOSAL OF PREPACKAGED PLAN. WFSG has not materially revised the Prepackaged Plan. (c) COURT ORDER. After Final Hearing of the Motion , the Bankruptcy Court having jurisdiction over WFSG's Chapter 11 case has entered a final order: (i) authorizing and approving the DIP Loan on the terms of this Agreement and the other Loan Documents; (ii) granting super-priority and administrative claim status to WREP's claims under the DIP Loan pursuant to 11 USC Section 507(b) and 503(b); (iii) authorizing and approving, pursuant to 11 USC Section 364(c)(2), WFSG's grant to WREP of a first-priority security interest in the Collateral in accordance with the Security Agreement and Article III. A. (2) hereof, which security interest shall be deemed perfected without filing or any other act to effect perfection; and (ii) finding that in making the DIP loan, WREP is acting in good faith within the meaning of 11 USC Section 364(e); which Order has not been stayed pending appeal (the "Final Order"). (d) ABSENCE OF MATERIAL CHANGES. From the date of the execution of the loan documents relating to the WFSG Interim Loan, there has been no change that has caused a Material Adverse Effect in the business, assets or results of operations of: (i) WFSG and its subsidiaries taken as a whole, (ii) WAC, or (iii) First Bank. (e) FINANCING. WREP has arranged for financing, on terms satisfactory to WREP, to obtain funds sufficient to allow WREP to make the DIP Loan. (f) WREIT/WREP CLAIM NOTE. The WREIT/WREP Claim Note has been executed and delivered. 8 2. DOCUMENTATION. WREP has received each of the following duly executed: a) This Agreement. b) The Note. c) The Security Agreement from WFSG and the Security Agreement from WAC pledging the Collateral to secure the Obligations. d) A good standing certificate for WFSG. e) Certificate of incumbency from WFSG. f) A good standing certificate for WAC. g) Certificate of incumbency from WAC. h) The WREIT/WREP Claim Note. 3. COLLATERAL. a) WFSG has delivered to WREP (as collateral under the Security Agreement) original certificates for the WAC Stock, together with stock powers executed in blank by WFSG. b) WAC has delivered to WREP (as collateral under the Security Agreement) original certificates for the First Bank Stock, together with stock powers executed in blank by WAC. 4. REPRESENTATIONS AND WARRANTIES. All representations and warranties by WFSG and WAC are true and correct in all material respects, and no Default or Event of Default has occurred and is continuing. ARTICLE IV. REPRESENTATIONS AND WARRANTIES A. REPRESENTATIONS AND WARRANTIES OF WFSG WFSG hereby makes the following representations and warranties to WREP, which representations and warranties shall survive the Closing and shall survive the full and final payment and satisfaction and discharge of all Obligations. 9 1. LEGAL STATUS WFSG is a corporation, duly organized and existing and in good standing under the laws of the State of Delaware, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a Material Adverse Effect. 2. AUTHORIZATION AND VALIDITY Upon authorization by the Bankruptcy Court, WFSG has full power and legal capacity to execute, deliver, and perform the terms and provisions of this Agreement and all of the documents and instruments that it is required to execute, deliver, and perform by the terms of this Agreement. The Loan Documents have been authorized by WFSG's signature thereto and the performance by it of its obligations under the Loan Documents constitutes a proper corporate purpose under all applicable law. Upon their execution and delivery in accordance with the provisions hereof, the Loan Documents will constitute legal, valid and binding agreements and obligations of WFSG enforceable against it in accordance with their respective terms. 3. NO VIOLATION The execution, delivery and performance by WFSG of each of the Loan Documents do not violate or contravene any provision of its Articles of Incorporation or By-Laws, do not violate any Government Rule or result in a breach of or constitute a default under any contract, obligation, indenture or other instrument to which it or any subsidiary of it is a party or by which it may be bound, and do not result in the creation or imposition of any Lien upon any property or assets of the WFSG. 4. ACCURACY OF REPRESENTATIONS IN SECURITY AGREEMENT All representations and warranties of WFSG contained in the Security Agreement are true and correct in all material respects. 5. FEDERAL RESERVE REGULATIONS WFSG is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. No part of the proceeds of the DIP Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, to purchase or carry Margin Stock or to extend credit to others for the purpose of purchasing or carrying Margin Stock (except payment on margin calls for currently held mortgage-backed securities) or to refund Indebtedness originally incurred for such purpose, or for any purpose which entails a violation of, or which is inconsistent with, the provisions of the Regulations of the Board, including, without limitation, Regulation T, U or X thereof. 10 6. USE OF PROCEEDS The first proceeds of the DIP Loan shall be used by WFSG to pay off in full the WFSG Outstanding Balance. The balance of the proceeds of the DIP Loan shall be used by WFSG in the ordinary course of business or for such purposes outside the ordinary course of business as are consented to by WREP and approved by the order of the Bankruptcy Court. 7. NO MATERIAL MISSTATEMENTS No information, report, financial statement, exhibit or schedule prepared or furnished by or on behalf of WFSG to WREP in connection with any Loan Document or the transactions contemplated thereby or included therein, if any, contained or contains any material misstatement of fact or omitted or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 8. SECURITY INTEREST WFSG is the record and beneficial owner and holder of the WAC Stock, free and clear of all encumbrances. The stock certificates of the WAC Stock are free of any legends or other reference to any purported encumbrance or restrictions, and they represent all of the outstanding shares issued by WAC. The Security Agreement creates and grants to the WREP a valid and perfected first priority security interest in the collateral identified therein. Such collateral or property is not subject to any other Liens. 9. TAXES WFSG has filed or caused to be filed all federal, state, local and foreign tax returns which are required to be filed by it, on or prior to the Closing Date, other than tax returns in respect of taxes that (x) are not franchise, capital or income taxes, (y) in the aggregate are not material and (z) would not, if unpaid, result in the imposition of any material Lien on any property or assets of the WFSG. WFSG has paid or caused to be paid all taxes shown to be due and payable on such filed returns or on any assessments received by them, other than any taxes or assessments the validity of which WFSG is contesting in good faith by appropriate proceedings, and with respect to which WFSG shall, to the extent required by GAAP have set aside on its books adequate reserves, and taxes other than income, capital or franchise taxes that in the aggregate are not material and which would not, if unpaid, result in the imposition of any material Lien on any property or assets of WFSG. B. REPRESENTATIONS AND WARRANTIES OF WAC WAC hereby makes the following representations and warranties to WREP, which representations and warranties shall survive the Closing and shall survive the full and final payment and satisfaction and discharge of all Obligations. 11 1. LEGAL STATUS WAC is a corporation, duly organized and existing and in good standing under the laws of the State of Nevada, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a Material Adverse Effect. 2. CAPITALIZATION The authorized equity securities of WAC consist of (a) fifty million shares of common stock, par value one cent per share, of which 23,595.4649 shares are issued and outstanding, and (b) two hundred million shares of preferred stock, par value one cent per share (of which one hundred million shares are designated Series A Preferred), none of which are issued or outstanding. All such equity securities shall together constitute the WAC Stock. 3. AUTHORIZATION AND VALIDITY The Loan Documents to which WAC is a party, upon their execution and delivery in accordance with the provisions hereof, will constitute legal, valid and binding agreements and obligations of WAC, enforceable against it in accordance with their respective terms, subject to bankruptcy, insolvency and other similar laws affecting the enforcement of creditors' rights and general principles of equity. 4. NO VIOLATION The execution, delivery and performance by WAC of each of the Loan Documents to which it is a party do not violate or contravene any provision of its Articles of Incorporation or By-Laws, do not violate any Government Rule or result in a breach of or constitute a default under any contract, obligation, indenture or other instrument to which it or any subsidiary of it is a party or by which it may be bound, and do not result in the creation or imposition of any Lien upon any property or assets of WAC. 5. USE OF PROCEEDS On the Closing Date, WAC shall use the funds it receives from WFSG in payment for the WFSG Outstanding Balance, and other funds if necessary, to pay in full the WAC Outstanding Balance. 12 6. SECURITY INTEREST WAC is the record and beneficial owner and holder of the First Bank Stock, free and clear of all encumbrances. The stock certificates of the First Bank Stock are free of any legends or other reference to any purported encumbrance or restrictions, and they represent all of the outstanding shares issued by First Bank. The Security Agreement creates and grants to WREP a valid and perfected first priority security interest in the First Bank Stock. The First Bank Stock is not subject to any other Liens. All representations and warranties of WAC contained in the Security Agreement are true and correct in all material respects. ARTICLE V. AFFIRMATIVE COVENANTS WFSG covenants that for so long as any Obligations remain outstanding, and until payment in full, in cash, of all Obligations, WFSG shall, unless WREP otherwise consents in writing and subject to the order by the Bankruptcy Court: A. PUNCTUAL PAYMENTS AND PERFORMANCE Punctually pay and perform all Obligations including, without limitation, all principal, interest and other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein, and perform and comply with all covenants. B. ACCOUNTING RECORDS Keep accurate books and records of its financial affairs sufficient to permit the preparation of consolidated financial statements therefrom in accordance with GAAP. C. FURTHER ASSURANCES At the request of WREP at any time and from time to time, duly execute and deliver, or cause to be duly executed and delivered, such further agreements, documents and instruments, and do or cause to be done such further acts as may be necessary or proper to evidence, perfect, maintain and enforce the security interests and the priority thereof in the Collateral and to otherwise effectuate the provisions or purposes of this Agreement or any of the other Loan Documents, at WFSG's expense. 13 D. LEGAL EXISTENCE Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence. E. BUSINESS AND PROPERTIES At all times do or cause to be done all things necessary to preserve, renew and keep in full force and effect the rights, licenses, permits, franchises, patents, copyrights, trademarks and trade names material to the conduct of its businesses; and comply in all material respects with all laws, rules, regulations and governmental orders (whether federal, state or local) applicable to the operation of its businesses. F. TAXES Pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise, which, if unpaid, might give rise to Liens upon such properties or any part thereof. G. BANKRUPTCY COURT ORDER Comply with all orders of the Bankruptcy Court. H. INSPECTION Allow WREP or its agents, representatives, or workers to enter WFSG's places of business at any reasonable time after prior written notice to WFSG for the purpose of inspecting and copying any of WFSG's books and records, and for the purpose of performing any of the acts it is authorized to perform under the terms of this Agreement or any of the other Loan Documents. Any such inspection shall take place during ordinary business hours and shall not unduly interfere with the operation of WFSG's business. WREP shall give WFSG reasonable notice before conducting such an inspection, provided that 24 hours' notice shall conclusively be deemed reasonable. WREP's inspection rights hereunder shall he in addition to all of WREP's rights to inspect its collateral under its security agreements with WFSG and otherwise. I. REPORTS Deliver to WREP copies of all reports filed by WFSG with any governmental agency. 14 J. INFORMATION With reasonable promptness, provide such other information respecting the business, operations, and financial condition of WFSG or its affiliates as WREP may from time to time reasonably request. K. LICENSES Maintain all material licenses, permits, and all related or other agreements, necessary for WFSG to operate its business, as the same may now exist or be modified or expanded. L. COMPLIANCE At all times comply with any and all material regulations, rules, or requirements of any federal agency or department and of any state, local, or municipal government agency or department that may at any time have jurisdiction or power to regulate, license, or grant permits in respect of the facilities or activities of WFSG, whether such regulations, rules, or requirements presently exist or are modified, promulgated, or implemented after the date hereof. M. POST-PETITION CLAIMS Duly pay and discharge all lawful claims arising after the Petition Date whether for labor, materials, rentals, or anything else, that might or could, if unpaid, become a lien or charge upon WFSG's property including, but not limited to, a lien or charge under Bankruptcy Code Section 506(c), unless and to the extent only that the validity thereof, after written notice thereof having been given to WREP, is being contested in good faith and by appropriate proceedings. In the event any charge is being contested by WFSG as allowed above, WFSG shall establish adequate reserves against possible liability in respect thereto. N. NOTICE OF ACTION OR DISPUTE Promptly give written notice to WREP of any of the following with respect to WFSG: (i) Any (a) refusal or failure by any governmental agency or instrumentality to renew or extend any material license, certificate of compliance, or permit (b) revocation, termination, or modification thereof, or (c) denial or threatened denial or revocation or modification by any governmental agency or instrumentality of any material authorization required by law. (ii) Any nonrenewal or modification of, any material lease for real or personal property to which WFSG is a party. (iii) Any postpetition actions, proceedings, or claims of which it may have notice, that may be commenced or asserted against it in which the amount involved 15 is $1,000,000 or more, and that is not fully covered by insurance or that, if not solely a claim for monetary damages, could, if adversely determined, have a material adverse effect on it. O. NOTICE OF DEFAULT Promptly notify WREP in the event that WFSG becomes aware of a Default or Event of Default hereunder. P. NOTICE OF OFFERS Notify WREP of any written offers to purchase WFSG's assets out of the ordinary course of business. Q. COPIES Provide WREP with copies of all pleadings filed in this case, except proofs of claim or notices of appearance, that do not evidence service on WREP or its counsel. R. STATUS MEETINGS Meet with WREP on reasonable notice, at reasonable times, and at reasonable intervals to inform WREP of the status of the bankruptcy case. ARTICLE VI. NEGATIVE COVENANTS WFSG and WAC covenant that so long as any Obligations remain outstanding, and until payment in full, in cash of all Obligations, WFSG and WAC will not, unless otherwise permitted by the Bankruptcy Court, without the prior written consent of WREP: A. LIENS 1. Except as otherwise provided in Article VI.A.2 below, incur, create, assume or permit to exist any Lien on any of the Collateral, whether owned at the Closing Date or thereafter acquired, or assign or convey any rights to or security interests in any of the Collateral, except for liens which are expressly subordinate to WREP's liens in the Collateral. 16 2. If WFSG or WAC desires to borrow from a new lender ("New Lender") secured by a lien on the WAC Stock or the Bank Stock (as the case may be) prior to WREP's lien on the WAC Stock or the Bank Stock (as the case may be), then prior to accepting a commitment for a loan ("New Loan") from the New Lender, WFSG or WAC (as the case may be) shall give written notice to WREP ("Notice of New Loan") and give WREP the opportunity to make a loan to WFSG and/or WAC (as the case may be) under the same terms as the New Loan. If WREP declines to make such loan, or WREP fails to respond within 5 days of receipt of the Notice of New Loan, WFSG or WAC (as the case may be) shall have the right to complete the New Loan and WREP shall agree to subordinate the priority of its lien in the WAC Stock or the First Bank Stock and the right to repayment of the DIP Loan to the New Loan pursuant to a reasonable subordination agreement, provided that (a) immediately after the closing of the New Loan, the ratio of all debts of WFSG or WAC (as the case may be) secured by the WAC Stock or First Bank Stock (as the case may be) to the tangible equity of WAC or First Bank (as the case may be) does not exceed 1:2; (b) the term of the New Loan is for not less than two years; (c) if the interest rate of the New Loan is greater than the interest rate of the DIP Loan, WREP shall have the right to increase the interest rate of the DIP Loan (up to the principal amount of the New Loan) to the same interest rate as the New Loan; and (d) the loan documents of the New Loan shall contain (i) a provision that in the event of a default by WFSG or WAC (as the case may be) under the New Loan, the New Lender would give WFSG or WAC (as the case may be) and WREP written notice of such default and an opportunity to cure within 30 days of such notice; (ii) in the event an action for foreclosure is instituted against WFSG or WAC (as the case may be) by the New Lender, WFSG or WAC (as the case may be) or WREP shall have the right to redeem the WAC Stock or the First Bank Stock (as the case may be) from the foreclosure up to the completion of the foreclosure proceedings but in no event less than 90 days from the notice of default; and (iii) such other commercially reasonable terms for a loan of its type. B. DIVIDENDS, DISTRIBUTIONS AND PAYMENTS Declare or pay, directly and indirectly, any dividends, whether in cash or otherwise, with respect to (whether by reduction of capital or otherwise) any shares of its capital stock, provided however WAC may pay dividends on preferred stock as required thereby. C. INVESTMENTS Make any investments, except in the ordinary course of business in accordance with its historical practices. D. MODIFICATION OF CHARTER DOCUMENTS Modify, amend or alter, or permit the modification, amendment or alteration, of its certificate or articles of incorporation in any manner materially adverse to the interests of the WREP as the lender hereunder. 17 E. SEPARATE COVENANTS WITH RESPECT TO WFSG. WFSG shall not: 1. sell its assets outside of the ordinary course of business; except in accordance with the Prepackaged Plan; 2. commingle its assets with those of any other entity. ARTICLE VII. EVENTS OF DEFAULT A. EVENTS OF DEFAULT The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: 1. Failure to have properly noticed and completed the Final Hearing on the Motion within 45 days of the Petition Date unless WREP approves in writing of additional time. 2. A notice of lien, levy, or assessment is filed of record with respect to all or a part of the Collateral and the same is not released within 30 days. 3. Custody or control of any substantial part of WFSG's property is assumed by any governmental agency or authority or any court of competent jurisdiction at the insistence of any governmental agency or authority, or any governmental regulatory agency or authority takes any final action that would have a material adverse effect on the Collateral. 4. There shall occur any refusal or failure by any governmental agency or instrumentality to issue, renew, or extend any lease, license, contract, certificate of compliance, or permit with respect to the operation of the business of WFSG, or any denial, forfeiture or revocation by any governmental agency or instrumentality of any license, permit, or authorization required by law, which refusal, failure, denial, forfeiture or revocation could have a material adverse effect on WFSG and the Collateral. 5. Any event occurs that specifically affects WFSG and that has a material adverse effect upon the business or financial condition of WFSG, and that materially increases WREP's risk or materially impairs the Collateral. 6. WFSG's authority to borrow from WREP terminates or expires. 7. The Bankruptcy Court announces from the bench or enters any order or judgment holding any material provision of this Agreement invalid or unenforceable and such order or judgment materially and adversely affects WREP. 18 8. The Bankruptcy Court announces from the bench or enters any order dismissing WFSG's bankruptcy case, converting that case to a chapter 7 case, or appointing a trustee, or WFSG files a motion to convert that case to a chapter 7 case or a motion to have a trustee appointed. 9. WFSG fails to pay when due any amount payable under any of the Loan Documents, or WFSG otherwise defaults in the performance of or compliance with any other obligation, agreement or other provision contained in any Loan Document and such failure continues for at least 10 days; 10. Any representation or warranty made by WFSG under, or in connection with, any of the Loan Documents, was false or misleading in any material respect when furnished or made; 11. Any representation or warranty made by WAC under, or in connection with, any of the Loan Documents, was false or misleading in any material respect when furnished or made; 12. An "event of default" occurs under the Security Agreement; or 13. This Agreement, or any other Loan Documents, for any reason cease to be, or are asserted by WFSG or WAC not to be, legal, valid and binding obligations, enforceable in accordance with their terms, or the security interest created by the Security Agreement for any reason ceases to be a valid, first priority perfected security interest in the Collateral. B. REMEDIES Upon the occurrence or existence of (a) an Event of Default which relates to WFSG's obligation to make payments hereunder, or (b) an Event of Default which relates to WFSG's or WAC's non-monetary obligation hereunder which remains uncured for a period of 20 days after written notice from WREP, and at any time thereafter during the continuance of such Event of Default, by written notice to WFSG or WAC, as the case may be, WREP may declare all or any part of the Obligations to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by WFSG or WAC (as the case may be) and may, subject to the approval, if any, of any Governmental Authority, including the Office of Thrift Supervision, exercise its remedies under the Security Agreement and/or any of the other Loan Documents. 19 ARTICLE VIII. MISCELLANEOUS A. CONTINUING OBLIGATIONS Termination of this Agreement or the other Loan Documents shall not relieve or discharge WFSG of its duties, obligations and covenants under the Loan Documents until all Obligations have been fully and finally discharged and paid in cash. B. NOTICES All notices, requests and demands that a party is required or may desire to give to the other party under any provision of this Agreement must be in writing delivered to the other party at the following address: WFSG: WILSHIRE FINANCIAL SERVICES GROUP INC. 1776 SW Madison Street Portland, Oregon 9720 Attention: Andrew Wiederhorn Telecopy: (503) 223-8799 with a copy to: Gary R. Barnum Stoel Rives LLP Suite 2300 900 SW Fifth Avenue Portland, OR 97204 Telecopy: (503) 220-2480 Latham & Watkins 633 West Fifth Street, Suite 4000 Los Angeles, California 90071-2007 Attention: Benjamin J. Murphy Telecopy: (213) 891-8763 WAC: WILSHIRE ACQUISITIONS CORPORATION 1776 SW Madison Street Portland, Oregon 97205 Attention: Lawrence Mendelsohn Telecopy: (503) 223-8799 with copies to: 20 WILSHIRE ACQUISITIONS CORPORATION 1776 SW Madison Street Portland, Oregon 97205 Attention: Mark Peterman Telecopy: (503) 223-8799 Latham & Watkins 633 West Fifth Street, Suite 4000 Los Angeles, California 90071-2007 Attention: Bennett J. Murphy Telecopy: (213) 891-8763 and Stoel Rives LLP 900 SW Fifth Avenue, Suite 2600 Portland, Oregon 97204-1268 Attention: Mark A. Norby Telecopy: (503) 220-2480 WREP: WILSHIRE REAL ESTATE PARTNERSHIP L.P. 1776 SW Madison Street Portland, Oregon 97205 Attention: Andrew Wiederhorn Telecopy: (503) 223-8799 with a copy to: Davis Wright Tremaine LLP 1300 SW Fifth Avenue, Suite 2300 Portland, OR 97034 Attention: James C. Waggoner Telecopy: (503) 778-5299 or to such other address as a party may designate by written notice to the other party. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt and the sender will endeavor to send a hard copy of such telecopied notice to the recipient by mail. 21 C. SUCCESSORS; ASSIGNMENT This Agreement shall be binding upon and insure to the benefit of the successors and assigns of the parties; provided, however, that WFSG may not assign or transfer its interest hereunder. D. ENTIRE AGREEMENT; AMENDMENT The Loan Documents constitute the entire agreement between WFSG and WREP with respect to the DIP Loan and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof, PROVIDED that the terms of the Letter Agreement with respect to the subject matters contained herein shall be incorporated by this reference. This Agreement may be amended or modified only by a written instrument executed by each party hereto. E. THIRD PARTY BENEFICIARIES This Agreement is made and entered into the for sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other Person shall be a third party beneficiary or, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party. F. TIME Time is of the essence of each and every provision of the Loan Documents. G. SEVERABILITY OF PROVISIONS If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. H. COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement. I. EXPENSES; ATTORNEY FEES; INDEMNITY 1. In the event any suit, action or arbitration is instituted to enforce or interpret any of the terms, or if any proceeding is commenced which arises out of, or which relates to this Agreement, including any action or participation in or in connection with a case proceeding under any Chapter of the Bankruptcy Code or any successor statute, the prevailing party shall be 22 entitled to such sum as the court or arbitrator may adjudge reasonable as attorney fees and costs in such suit, action or arbitration or upon any appeal from any judgment, order, decree or award entered therein, and whether or not such fees and costs are prescribed by statute. Whether or not any court action or arbitration is involved, after the occurrence of an Event of Default, WFSG agrees to pay all reasonable attorney fees and costs incurred by WREP to protect its interests or enforce its rights hereunder. 2. WFSG agrees to indemnify WREP and Wilshire Real Estate Investment Trust Inc. and their directors, officers, employees and agents against, and agrees to hold WREP and Wilshire Real Estate Investment Trust Inc. and each such person harmless from, any and all losses, claims, damages, liabilities, fines, penalties and related expenses, including reasonable counsel fees and expenses, incurred by or asserted against them, or any of them, arising out of, in any way connected with, or as a result of: a) breach of any representation or warranty, b) a violation of, or failure to comply with, any environmental law, rule or regulation, or c) any claim, litigation, investigation or proceedings related to any of the foregoing, whether or not WREP or any such person is a party thereto; provided, however, that such indemnity shall not apply to any such losses, claims, damages, liabilities or related expenses to the extent that they result from the negligence or misconduct of WREP. J. WAIVER OF JURY TRIAL 1. Except as prohibited by law, each party hereto hereby waives any right it may have to a trial by jury in respect of any litigation directly or indirectly arising out of, under on in connection with this Agreement, the Note, any of the other Loan Documents or the transactions contemplated hereby. 2. Except as prohibited by law, each party hereto hereby waives any right it may have to claim or recover in any litigation referred to in paragraph (a) of this Section J any special, exemplary, punitive or consequential damages or any damages other than, or in addition to, actual damages. 3. Each party hereto certifies that no representative, agent or attorney of the other party has represented, expressly or otherwise, that other party would not, in the event of litigation, seek to enforce the foregoing waivers and acknowledges that it has been induced to enter into this Agreement, the Note or the other Loan Documents, as applicable, by, among other things, the mutual waivers and certifications herein. 23 WAIVER AND ESTOPPEL. WREP may at any time and from time to time waive in writing any one or more of the terms and/or conditions contained in this Agreement, but any such waiver shall be deemed to be made pursuant to this Agreement and not in modification thereof, and any such waiver in any instance shall not be construed a waiver of such condition in any other circumstance or in any subsequent Default or Event of Default. The failure of WREP to promptly exercise its rights or remedies shall not be deemed to be a waiver or grounds for the claim of estoppel. K. GOVERNING LAW This Agreement shall be government by and construed in accordance with the laws of the State of Oregon. L. OREGON STATUTORY NOTICE UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY WREP AFTER OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY WFSG'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY WREP TO BE ENFORCEABLE. IN WITNESS WHEREOF, THE PARTIES HERETO HAVE CAUSED THIS AGREEMENT TO BE EXECUTED AS OF THE DAY AND YEAR FIRST WRITTEN ABOVE. WILSHIRE REAL ESTATE PARTNERSHIP L.P. A DELAWARE LIMITED PARTNERSHIP By: WILSHIRE REAL ESTATE INVESTMENT TRUST INC., a Maryland corporation, its General Partner By: ____________________________ Title: ____________________________ WILSHIRE FINANCIAL SERVICES GROUP INC., A DELAWARE CORPORATION By: _______________________ Its: _______________________ With respect to Sections III.B.5 (Repayment), III.C.3 (Collateral), IV.B. (Representations and Warranties) and VI.A.2 (New Loan) of this Agreement only. 24 WILSHIRE ACQUISITIONS CORPORATION, A NEVADA CORPORATION By: _________________________ Title: _________________________ 25 EX-11 7 EXHIBIT 11 EXHIBIT 11 COMPUTATION OF (LOSS) EARNINGS PER COMMON SHARE
Reorganized Company Predecessor Company ------------ ------------------------------------- Seven Months Five Months Ended Ended Year Ended Year Ended December 31, May 31, December 31, December 31, 1999 1999 1998 1997 ------------ ----------- ------------ ------------ (Unaudited) (Dollars in Thousands) Net (Loss) Income Available to Common Shareholders: Net (Loss) Income ......................................... $ (14,091) $ 157,338 $ (201,659) $ 15,164 Redeemable Preferred Stock Dividends ...................... -- -- (417) (1,604) $ (14,091) $ 157,338 $ (202,076) $ 13,560 ----------- ----------- ------------ ------------ Weighted Average Number of Shares: Average common shares outstanding ......................... 20,033,600 10,885,000 10,676,685 7,569,808 Common share equivalents resulting from assumed exercise of stock options .......................................... -- -- -- 449,491 ----------- ----------- ------------ ------------ Total average shares ...................................... 20,033,600 10,885,000 10,676,685 8,019,299 ----------- ----------- ------------ ------------ (Loss) Earnings per common share ............................... $ (0.70) $ 14.45 $ (18.93) $ 1.69 =========== =========== =========== ============
EX-12 8 EXHIBIT 12 EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED)
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------ ------------ ------------ (Dollars in thousands) Earnings: Pre-tax (loss) income before reorganization items and extraordinary item .......................................... $ (29,013) $(205,715) $ 25,801 Add: Interest and fixed charges .................................... 44,395 125,458 86,836 Portion of rent under long-term operating leases representative of an interest factor ...................................... 0 0 0 --------- --------- --------- Total earnings available for fixed charges ......................... 15,382 (80,257) 112,637 --------- --------- --------- Fixed charges: Interest and fixed charges .................................... 44,395 125,458 86,836 Portion of rent under long-term leases representative of an interest factor ......................................... 0 0 0 --------- --------- --------- Total fixed charges ................................................ 44,395 125,458 86,836 --------- --------- --------- Deficiency in earnings to cover fixed charges ...................... 29,013 80,257 -- Ratio of earnings to fixed charges ................................. 0.35 -- 1.30
EX-21.1 9 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES Wilshire Funding Corporation WMFC 1997-1 Inc. WMFC 1997-2 Inc. WMFC 1997-3 Inc. WMFC 1997-3 Properties Inc. WMFC 1997-4 Inc. WMFC 1997-3 Development Inc. Wilshire Mortgage Funding IV Inc. Wilshire Mortgage Funding Company V Inc. Wilshire Mortgage Funding Company VII Inc. Wilshire Servicing Corporation Wilshire Servicing fbo SBRC Corp. Wilshire Financial Services Group, Europe, Inc. Wilshire Acquisition Company Ireland Limited Wilshire Funding Company Ireland Limited Wilshire Management Leasing Corporation Wilshire Ventures Corporation Wilshire Ventures PFE Inc. Wilshire Mortgage Acquisition Corporation Wilshire Real Estate Investment Corporation Wilshire Realty Services Corporation Wilshire Insurance and Risk Management Corporation Wilshire Credit Corporation Wilshire Securities Corporation Wilshire Acquisitions Corporation First Bank of Beverly Hills, F.S.B. Wilshire Trust Deed Corporation Wilshire Financing Company, LLC GT MOHO Sales, Inc. Life Capital, Inc. WREP 1998-1 Member Inc. Girard Financial Corporation George Elkins L.P. Wilshire Mortgage Funding Company LLC Wilshire Financial Services Group UK Limited WFSG Ireland Limited EX-27 10 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S BALANCE SHEET AS OF DECEMBER 31, 1999 AND STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 54,168 0 0 0 43,583 16,145 15,915 483,174 264,498 654,518 419,285 31,297 124,973 0 0 0 92,542 (14,209) 654,518 52,099 10,794 2,844 65,737 25,913 44,395 21,342 3,722 423 62,966 (29,013) (82,359) 225,606 0 143,247 0 0 0 0 0 0 0 288,868 2,468 458 264,498 0 0 0
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