<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
or
[_] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-17292
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 OFFICES) (ZIP CODE)
(503) 223-5600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JULY 31, 1997
Common Stock, par value $.01 per share 7,570,000 Shares
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<C> <S> <C>
Item 1. Financial Statements.
Consolidated Statements of Financial Condition.............. 3
Consolidated Statements of Operations....................... 4
Consolidated Statements of Cash Flows....................... 5
Consolidated Statements of Stockholders' Equity............. 7
Notes to Interim Financial Statements....................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 14
Item 2. Changes in Securities....................................... 14
Item 3. Defaults Upon Senior Securities............................. 14
Item 4. Submission of Matters to a Vote of Security-Holders......... 14
Item 5. Other Information........................................... 14
Item 6. Exhibits and Reports on Form 8-K............................ 14
</TABLE>
2
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents........................... $ 39,712 $152,298
Mortgage backed securities available for sale, at
fair value......................................... 144,253 31,270
Mortgage backed securities held to maturity, at am-
ortized cost....................................... 20,190 21,724
Securities held to maturity, at amortized cost...... 7,437 7,429
Trading account securities.......................... 17,778 24,541
Loans, net.......................................... 196,472 176,026
Discounted loans, net............................... 395,829 206,740
Loans held for sale, net, at lower cost or market... 195,686 28,826
Stock in Federal Home Loan Bank of San Francisco, at
cost............................................... 4,881 2,958
Real estate owned, net.............................. 135,984 78,200
Leasehold improvements and equipment, net........... 1,130 317
Due from affiliate, net............................. 7,502 5,051
Accrued interest receivable......................... 7,247 3,517
Prepaid expenses and other assets................... 18,561 10,769
Deferred tax asset, net............................. 3,430 4,183
---------- --------
TOTAL........................................... $1,196,092 $753,849
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits............................................ $ 445,333 $501,614
Short-term borrowings............................... 583,468 97,624
Notes payable....................................... 84,245 75,000
Accounts payable and other liabilities.............. 13,614 17,872
Deferred credits.................................... 505 717
---------- --------
Total liabilities................................. 1,127,165 692,827
---------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock..................................... -- --
Common stock........................................ 55,897 55,897
Retained earnings................................... 10,396 5,222
Unrealized gain (loss) on available-for-sale securi-
ties, net.......................................... 2,634 (97)
---------- --------
Total stockholders' equity........................ 68,927 61,022
---------- --------
TOTAL........................................... $1,196,092 $753,849
========== ========
</TABLE>
See notes to interim financial statements.
3
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans............................ $ 20,655 $ 11,527 $ 34,574 $ 20,436
Mortgage-backed securities....... 4,275 576 7,034 898
Securities and federal funds
sold............................ 1,244 304 2,184 617
--------- --------- --------- ---------
Total interest income.......... 26,174 12,407 43,792 21,951
--------- --------- --------- ---------
INTEREST EXPENSE:
Deposits......................... 6,647 5,736 13,654 10,633
Borrowings....................... 14,070 1,310 21,037 1,387
--------- --------- --------- ---------
Total interest expense......... 20,717 7,046 34,691 12,020
--------- --------- --------- ---------
NET INTEREST INCOME................ 5,457 5,361 9,101 9,931
PROVISION FOR ESTIMATED LOSSES ON
LOANS............................. 445 5,483 (1,424) 10,868
--------- --------- --------- ---------
NET INTEREST INCOME (LOSS) AFTER
PROVISION FOR ESTIMATED LOSSES
ON LOANS........................ 5,012 (122) 10,525 (937)
--------- --------- --------- ---------
OTHER INCOME (LOSS):
Bankcard income.................. 1,747 1,691 3,391 3,275
Bankcard processing expense...... (1,152) (1,351) (2,330) (2,616)
Gain on sale of loans............ 11,216 -- 11,216 1,983
Loan fees and charges............ 219 433 451 632
Trading account-unrealized gain.. -- -- 14 1,601
Real estate owned, net........... 1,557 (75) 2,739 (115)
Servicing revenue................ 1,784 -- 1,944 --
Other, net....................... 215 119 661 246
--------- --------- --------- ---------
Total other income............. 15,586 817 18,086 5,006
--------- --------- --------- ---------
OTHER EXPENSES:
Compensation and employee
benefits........................ 3,609 752 6,651 1,538
FDIC insurance premiums.......... 293 221 523 387
Occupancy........................ 254 71 415 142
Professional services............ 649 43 962 297
Data processing and equipment
rentals......................... 90 69 153 124
Loan service fees and expenses
paid to affiliate............... 5,049 931 7,995 2,122
Other general and administrative
expenses........................ 1,841 438 2,994 766
--------- --------- --------- ---------
Total other expenses........... 11,785 2,525 19,693 5,376
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION......................... 8,813 (1,830) 8,918 (1,307)
INCOME TAX PROVISION (BENEFIT)..... 3,701 (805) 3,744 (1,279)
--------- --------- --------- ---------
NET INCOME (LOSS).................. $ 5,112 $ (1,025) $ 5,174 $ (28)
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE:
Primary.......................... $ 0.68 $ (0.23) $ 0.68 $ (0.01)
Fully diluted.................... $ 0.66 $ -- $ 0.66 $ --
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Primary.......................... 7,570,000 4,370,081 7,570,000 3,623,132
Fully diluted.................... 7,775,729 -- 7,852,328 --
</TABLE>
See notes to interim financial statements.
4
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
1997 1996 1997 1996
--------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 5,112 $ (1,025) $ 5,174 $ (28)
Reconciliation of net income to net
cash (used in) provided by
operating activities:
Provision for estimated loan
losses.......................... 445 5,483 (1,424) 10,868
Depreciation and amortization.... 92 46 203 78
Gain on sale of real estate
owned........................... (1,838) (30) (3,111) (43)
Purchase of loans held for sale.. (162,032) -- (349,519) --
Proceeds from sale of loans held
for sale........................ 191,351 -- 191,351 --
Gain on sale of loans............ (11,216) -- (11,216) (1,983)
Amortization of discounts and
deferred fees................... (3,628) (764) (10,703) (2,244)
Amortization of deferred credits. (116) (115) (212) (230)
FHLB stock dividend.............. (44) (26) (91) (44)
Change in:
Trading account securities....... (20) (29) 6,763 (7,092)
Accrued interest receivable...... 1,321 (784) (3,730) (1,504)
Prepaid expenses and other
assets.......................... (7,757) (864) (7,792) 475
Due from affiliate, net.......... (7,502) 16,555 (2,451) (2,816)
Due to affiliate, net............ (27,488) -- -- --
Deferred tax asset, net.......... 326 145 (1,154) (783)
Accounts payable and other
liabilities..................... (14,751) (1,989) (4,750) (938)
Minority interest................ -- (900) -- (600)
--------- -------- --------- ---------
Net cash provided by (used in)
operating activities.......... (37,745) 15,703 (192,662) (6,884)
--------- -------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans.................. (129,508) (84,072) (313,905) (222,273)
Loan repayments, net of
originations...................... 14,202 16,271 36,621 20,843
Proceeds from sale of loans........ -- -- -- 23,568
Purchase of mortgage-backed
securities available for sale..... (13,939) -- (107,654) --
Repayments of mortgage-backed
securities available for sale..... 190 1,301 430 1,714
Proceeds from maturity of
investment securities held to
maturity.......................... -- -- -- 5,000
Purchase of mortgage-backed
securities held to maturity....... -- (1,846) -- (11,246)
Repayments of mortgage-backed
securities held to maturity....... 769 477 1,484 833
Purchase of securities and FHLB
stock............................. (1,833) (5,918) (1,833) (7,321)
Proceeds from sale of real estate
owned............................. 13,563 941 26,570 5,284
Purchases of leasehold improvements
and equipment..................... (400) (49) (445) (117)
--------- -------- --------- ---------
Net cash used in investing
activities (116,956) (72,895) (358,732) (183,715)
--------- -------- --------- ---------
</TABLE>
See notes to interim financial statements.
(Continued)
5
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net increase (decrease) in
deposits........................ (17,656) 67,564 (56,281) 129,538
Issuance of common stock......... -- 8,000 -- 17,750
Proceeds from short-term
borrowings...................... 338,903 84,295 699,049 195,145
Repayments of short-term
borrowings...................... (185,608) (115,005) (213,205) (141,855)
Proceeds from notes payable...... -- -- 9,245 --
--------- --------- --------- ---------
Net cash provided by
financing activities........ 135,639 44,854 438,808 200,578
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................. (19,062) (12,338) (112,586) 9,979
CASH AND CASH EQUIVALENTS:
Beginning of quarter............. 58,774 26,799 152,298 4,482
--------- --------- --------- ---------
End of quarter................... $ 39,712 $ 14,461 $ 39,712 $ 14,461
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION--
Cash paid during the quarter for:
Interest......................... $ 16,855 5,730 $ 27,551 10,616
Income taxes..................... 650 -- 4,150 --
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned
acquired in settlement of loans. 61,631 1,192 81,243 3,804
Equipment acquired through
capital lease................... -- -- 493 --
Transfer of securities from
available for sale to trading... -- -- -- 636
NONCASH FINANCING ACTIVITIES:
Exchange of subordinated debt for
common stock.................... -- -- -- 11,000
</TABLE>
See notes to interim financial statements.
6
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON
RETAINED AVAILABLE-
PREFERRED STOCK COMMON STOCK EARNINGS FOR-SALE
------------------ ----------------- (ACCUMULATED SECURITIES
SHARES AMOUNT SHARES AMOUNT DEFICIT) NET OF TAX TOTAL
---------- ------ --------- ------- ------------ ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1,
1994................... -- $ -- 366,288 $ 3,050 $ 915 $ (159) $ 3,806
Net loss............... (1,252) (1,252)
Unrealized loss on
available-for-sale
securities--net of
tax................... (511) (511)
Issuance of stock...... 1,000,000 1,000 934,575 3,750 4,750
---------- ------ --------- ------- ------- ------ -------
BALANCE, December 31,
1994................... 1,000,000 1,000 1,300,863 6,800 (337) (670) 6,793
Net income............. 592 592
Unrealized gain on
available-for-sale
securities--net of
tax................... 654 654
Exchange of preferred
stock for
subordinated debt..... (1,000,000) (1,000) (1,000)
---------- ------ --------- ------- ------- ------ -------
BALANCE, December 31,
1995................... -- -- 1,300,863 6,800 255 (16) 7,039
Net income............. 4,967 4,967
Unrealized loss on
available-for-sale
securities--net of
tax................... (81) (81)
Exchange of
subordinated debt for
common stock.......... 1,606,618 11,000 11,000
Issuance of common
stock................. 4,662,519 38,097 38,097
---------- ------ --------- ------- ------- ------ -------
BALANCE, December 31,
1996................... -- -- 7,570,000 55,897 5,222 (97) 61,022
Net income (unaudited). 5,174 5,174
Unrealized gain on
available-for-sale
securities--net of tax
(unaudited)........... 2,731 2,731
---------- ------ --------- ------- ------- ------ -------
BALANCE, June 30, 1997
(unaudited)............ -- $ -- 7,570,000 $55,897 $10,396 $2,634 $68,927
========== ====== ========= ======= ======= ====== =======
</TABLE>
See notes to interim financial statements.
7
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The consolidated financial statements of Wilshire Financial Services Group
Inc. and Subsidiaries (the "Company") are unaudited and should be read in
conjunction with the 1996 Annual Report on Form 10-K. A summary of the
Company's significant accounting policies is set forth in Note 1 to the
Consolidated Financial Statements in the 1996 Annual Report on Form 10-K.
In the opinion of management, all adjustments generally comprised of normal
recurring accruals necessary for fair presentations of the interim financial
statements have been included and all intercompany accounts and transactions
have been eliminated in consolidation. Operating results for the six months
ended June 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
Certain reclassifications of 1996 amounts were made in order to conform to
the 1997 presentation, none of which affect previously reported net income.
2. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK
FINANCIAL INSTRUMENTS INVOLVING OFF-BALANCE SHEET RISK--In hedging the
interest rate exposure of a fixed-rate or lagging-index asset, the Company may
create a hedge which matches the principal amortization of such an asset
against the maturity of the Company's liabilities generally by entering into
short sales or forward sales of U.S. Treasury securities, Government
Securities, interest rate futures contracts or interest rate swap agreements.
This results in market gains or losses on hedging instruments, in response to
interest rate increases or decreases, respectively, which approximate the
amount of the corresponding market losses or gains, respectively, on loans
being hedged. At June 30, 1997, the notional amounts of interest rate swaps
were $229,285. The weighted average fixed and floating-rate interest payments
were 6.06% and 0.29% over USD LIBOR, respectively. At June 30, 1997, the
Company also had open short positions on 530 10-year U.S. Treasury Note and
260 5-year U.S. Treasury Note interest rate futures contracts.
PURCHASE COMMITMENTS--At June 30, 1997, the Company had outstanding
commitments to purchase loans at a cost of $0.5 million.
4. EARNINGS PER SHARE
The Company will adopt SFAS No. 128, "Earnings per Share," effective
December 15, 1997. Adoption of this accounting standard will not affect
previously reported earnings per share data for fiscal years ending prior to
January 1, 1997.
5. SIGNIFICANT TRANSACTIONS
During the quarter ended June 30, 1997, the Company completed a sale of
approximately $175 million of loans, resulting in a gain of approximately
$11.2 million. At the sale date, the Company allocated $3.5 million and $1.8
million of original cost to retained servicing rights and other participation
interests retained in the loans, respectively, and such amounts are included
in other assets.
8
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and notes thereto.
Wilshire Financial Services Group Inc. is a diversified financial services
company. The Company conducts business in the U.S., U.S. Territories and
Europe, specializing in loan portfolio acquisition and securitization,
correspondent lending and servicing. It offers wholesale banking through two
subsidiaries, First Bank of Beverly Hills, F.S.B. ("First Bank") and Girard
Savings Bank, F.S.B. ("Girard," and collectively, the "Savings Banks").
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 1997 VERSUS SIX MONTHS ENDED
JUNE 30, 1996
NET INTEREST INCOME
The Company's net interest income was approximately $9.1 million for the six
months ended June 30, 1997 compared to approximately $9.9 million for the six
months ended June 30, 1996, a decrease of 8.4%. The reduction in net interest
margin and net interest spread in the six months ended June 30, 1997 primarily
reflects the increased interest cost of short-term debt incurred in the last
quarter of 1996 and the first quarter of 1997 to fund the purchase of
approximately $141.3 million of pools of Discounted Loans, which was not
offset by a corresponding increase in interest income since relatively little
cash from Discounted Loans is generally received during the first two quarters
following an acquisition of a pool of Discounted Loans and the Company only
recognizes interest and discount on Discounted Loans when collected in cash.
The components of the Company's net interest income for these fiscal years are
discussed below.
Interest Income. The Company's interest income was approximately $43.8
million for the six months ended June 30, 1997, compared to approximately
$22.0 million for the six months ended June 30, 1996, an increase of 99.5%.
The increase in the Company's interest income was due primarily to an increase
in interest on loans, from $20.4 million for the six months ended June 30,
1996 to $34.6 million for the six months ended June 30, 1997, reflecting an
increase in the balance of the Company's loans from $459.3 million to $788.0
million at June 30, 1996 and 1997, respectively.
Interest Expense. The Company's interest expense was approximately $34.7
million for the six months ended June 30, 1997, compared with approximately
$12.0 million for the six months ended June 30, 1996, an increase of 188.6%.
The increase in interest expense resulted from an increase in interest-bearing
liabilities from June 30, 1996 to June 30, 1997 of $612.5 million, including
the issuance in the fourth quarter of 1996 and early 1997 of $84.2 million of
its 13% notes due in 2004, and an increase in the cost of funds from 5.76% at
June 30, 1996 to 7.44% at June 30, 1997.
PROVISION FOR ESTIMATED LOSSES ON LOANS
Provision for estimated losses on loans for the first six months of 1997 was
a net recovery of $1.4 million from the reversal of $2.5 million of excess
reserves on loans previously sold, which was partially offset by an additional
provision of approximately $1.1 million. This compares with a provision for
estimated losses on loans of $10.9 million for the first six months of 1996
from reserves established primarily for certain sub-prime auto loans and
inherited loans from the acquisition of the Savings Banks.
9
<PAGE>
OTHER INCOME
The Company's other income was approximately $18.1 million for the six
months ended June 30, 1997 compared with approximately $5.0 million for the
six months ended June 30, 1996, an increase of 261.3%. The components of the
Company's non-interest income are reflected in the following table:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------ ---
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS) ---
Other income: ---
<S> <C> <C> <C>
Bankcard income........................... $ 3,391 $ 3,275
Bankcard processing expense............... (2,330) (2,616)
Gain on sale of loans..................... 11,216 1,983
Loan fees and charges..................... 451 632
Trading account-unrealized gain........... 14 1,601
Real estate owned, net.................... 2,739 (115)
Servicing revenue......................... 1,944 --
Other, net................................ 661 246
----------- -----------
Total other income...................... $ 18,086 $ 5,006
=========== =========== ===
</TABLE>
The increase in other income is primarily attributable to the sale of loans,
which resulted in a gain of approximately $11.2 million, an increase in income
from real estate owned, net, resulting from the ongoing disposition of assets
from a $72.3 million pool of properties acquired in the fourth quarter of 1996
and an increase in servicing fees collected from others. This increase was
partially offset by a decrease of approximately $1.6 million from unrealized
gains on trading securities.
The gain on sale of loans is the result of the sale of approximately $175
million of loans as to which the Company retained the servicing rights and
other participation interests in the portfolio. At the sale date, the Company
allocated $3.5 million and $1.8 million of original cost to retained servicing
rights and other participation interests retained in the loans, respectively,
and such amounts are included in other assets.
OTHER EXPENSE
The Company's other expenses totaled approximately $19.7 million for the six
months ended June 30, 1997 compared with approximately $5.4 million for the
six months ended June 30, 1996, an increase of 266.3%.
Compensation and Employee Benefits. The largest component of other expenses
was compensation and employee benefits which increased approximately 332.4%
from approximately $1.5 million for the six months ended June 30, 1996 to
approximately $6.7 million for the six months ended June 30, 1997. The
increase was primarily due to an increase in the average number of full-time
equivalent employees from 50 for the six months ended June 30, 1996 to 166 for
the six months ended June 30, 1997, reflecting the expansion of business
activities, particularly loan acquisition activities and the growth of
activities at the non-bank subsidiaries.
Loan Service Fees and Expenses Paid to Affiliate. Loan service fees and
expenses are paid to WCC and include (a) servicing fees and (b) collection-
related expenses incurred directly by WCC and reimbursed by the Company. Loan
service fees and expenses paid to affiliate were approximately $8.0 million
for the six months ended June 30, 1997 compared to approximately $2.1 million
for the six months ended June 30, 1996, an increase of approximately 276.8%.
The increase in loan servicing fees and expenses paid to affiliate was
primarily the result of the increase in the unpaid principal balance of loans
being serviced by WCC on behalf of the Company to approximately $1.3 billion
at June 30, 1997 from approximately $408 million at June 30, 1996 and an
increase in subservicing fees of approximately $1.4 million. Also, collection-
related expenses increased from the six months ended June 30, 1996 to the
comparable period in 1997 due to the substantial increase in Discounted
10
<PAGE>
Loans, most of which were acquired at the end of 1996 and the first six months
of 1997. Discounted Loan portfolios generally require higher expenditures
during the first two quarters after acquisition.
Other general and administrative expenses increased from approximately $0.8
million for the six months ended June 30, 1996 to approximately $3.0 million
for the six months ended June 30, 1997 due primarily to the expansion of
business activities at the non-bank subsidiaries, particularly loan acquisition
activities such as due diligence.
INCOME TAX PROVISION (BENEFIT)
Income tax provision amounted to an expense of approximately $3.7 million
during the six months ended June 30, 1997 compared with a benefit of
approximately $1.3 million during the six months ended June 30, 1996. The
change was primarily due to the utilization of net operating loss deductions in
1996 and a normalized tax provision in 1997.
CHANGES IN FINANCIAL CONDITION
Mortgage-Backed and Other Securities. The Company's mortgage-backed and other
securities increased approximately $104.7 million during the six months ended
June 30, 1997, primarily as a result of purchasing certain subordinated
securities.
Loans Receivable, Net. The Company's total loan portfolio, net of discounts
and allowances, increased by approximately $376.4 million during the six months
ended June 30, 1997, primarily as a result of the Company's business strategy
of aggressively acquiring loan portfolios of discounted loans and other
mortgage loans, which totaled $663.4 million for the six months ended June 30,
1997.
Real Estate Owned, Net. Real estate owned, net consists of properties
acquired by foreclosure or deed-in-lieu thereof on loans in the Company's total
loan portfolio or purchased directly. Real estate owned increased by
approximately $57.8 million during the six months ended June 30, 1997 primarily
as a result of the foreclosure of certain discounted loans acquired in the
fourth quarter of 1996 and the first six months of 1997. The Company actively
manages its real estate owned.
Due from Affiliate, net. Due from affiliate, net of $7.5 million at June 30,
1997 was primarily attributable to payments received in the normal course of
servicing operations by WCC, which had not been remitted to the Company.
Deposits. Deposits decreased by approximately $56.3 million or 11.2% during
the six months ended June 30, 1997. Pursuant to the Cease and Desist Orders
imposed upon First Bank and Girard, effective October 31, 1996, First Bank and
Girard are prohibited from increasing their total assets, as measured at the
end of each calendar quarter above $145 million and $408 million, respectively,
unless such increase is an amount that represents the total net interest
credited on deposit liabilities earned during that quarter plus any increase
permitted by the Cease and Desist Orders in prior quarters. The Savings Banks
have complied with these requirements.
Notes Payable. In the fourth quarter of 1996 and early 1997, the Company
issued $84.2 million of 13% notes due in 2004.
Short-Term Borrowings. Short-term borrowings increased by approximately
$485.8 million during the six months ended June 30, 1997, resulting from
increased use of repurchase agreements and warehouse financing to fund the
purchases of loans and securities, instead of deposits.
LIQUIDITY AND CAPITAL RESOURCES
Sources of liquidity include wholesale and brokered certificates of deposit
and certain credit facilities. As of June 30, 1997, the Savings Banks had
approximately $437.0 million of certificates of deposit. As of June 30,
11
<PAGE>
1997, scheduled maturities of certificates of deposit during the twelve months
ending June 30, 1998 and thereafter amounted to approximately $415.4 million
and approximately $21.6 million, respectively. Brokered and other wholesale
deposits generally are more responsive to changes in interest rates than core
deposits and, thus, are more likely to be withdrawn by the investor upon
maturity as changes in interest rates and other factors are perceived by
investors to make other investments more attractive. However, management of
the Savings Banks believe that it can adjust the rates paid on certificates of
deposit to retain deposits in changing interest rate environments and that
brokered and other wholesale deposits can be both a relatively cost-effective
and stable source of funds.
As of June 30, 1997, the Company's sources of borrowing included (i) Master
Repurchase Agreements with Bear Stearns Mortgage Capital Corporation as to
which the parties have orally agreed that approximately $210 million in
aggregate would be available for the purchase of loans, (ii) a $100 million
warehouse lending agreement with Prudential Securities Credit Corporation, and
(iii) certain repurchase arrangements including $350 million under a
repurchase agreement with Credit Suisse First Boston Mortgage Capital LLC.
Sources of borrowings also include FHLB advances, which are required to be
secured by single-family and/or multi-family residential loans or other
acceptable collateral, and reverse repurchase agreements. As of June 30, 1997,
the Savings Banks had no FHLB advances outstanding, and were eligible to
borrow up to an aggregate of $9.6 million from the FHLB of San Francisco and
had approximately $12.8 million of multi-family residential loans and
$2.6 million of commercial loans which were available as security for such
advances. At the same date, the Savings Banks had a contractual relationship
with the FHLB of San Francisco pursuant to which it could obtain funds from
reverse repurchase agreements and had $5.5 million of unencumbered investment
securities and mortgage-backed and related securities which could be used to
secure such borrowings.
The Company's uses of cash include the funding of loan purchases and
origination, payment of interest expenses, repayment of loans, operating and
administrative expenses, income taxes and capital expenditures. The Company
draws on a number of sources to obtain such funds including certificates of
deposit and repurchase arrangements with Wall Street investment banks. The
Company's purchases of loans are expected to utilize secured borrowings and be
highly leveraged. The actual dollar amount of secured borrowings incurred by
the Company will vary depending on a number of factors, including the
breakdown between performing and non-performing loans acquired by the Company,
the amount of leverage lenders are willing to make available at the time a
loan portfolio is acquired (which will be effected by market conditions), and
management's determination as to the appropriate amount of leverage at the
time a portfolio is acquired. With respect to loan portfolios of discounted
loans and performing loans, the Company generally seeks to fund 90% and 95%,
respectively, of the market value of such loan portfolios with borrowed money.
Management expects to repay any secured indebtedness incurred in connection
with loan acquisitions from the proceeds of the loan portfolios acquired.
Capital expenditures were immaterial for the six months ended June 30, 1997.
In addition to commitments to extend credit, the Company is party to various
off-balance sheet financial instruments in the normal course of business to
manage its interest rate risk.
Adequate credit facilities and other sources of funding, including the
ability of the Company to securitize loans, are essential to the continuation
of the Company's ability to purchase and originate loans, and acquire
subordinate securities.
After utilizing available working capital and any securitization proceeds,
the Company borrows money to fund its loan purchases and originations. The
Company's business plan generally calls for using a high degree of leverage in
acquiring loan portfolios.
The Company believes that cash flow from operations, the proceeds of
certificates of deposit, the availability under the warehouse financing
facility and other borrowings, and the net proceeds from securitizations will
be sufficient to fund operating needs, commitments and capital expenditures.
The Company is required to maintain one year of interest on the notes due in
2004 in liquid assets. In addition, the Savings Banks are required under
applicable federal regulations to maintain specified levels of
12
<PAGE>
"liquid" investments in qualifying types of U.S. Government, federal agency
and other investments having maturities of five years or less. Current OTS
regulations require that a savings association maintain liquid assets of not
less than 5% of its average daily balance of net withdrawable deposit accounts
and borrowings payable in one year or less, of which short-term liquid assets
must consist of not less than 1%. Monetary penalties may be imposed for
failure to meet applicable liquidity requirements. The Company and the Savings
Banks have complied with these requirements.
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. All of the
statements contained in this Quarterly Report on Form 10-Q which are not
identified as historical should be considered forward-looking. In connection
with certain forward-looking statements contained in this Quarterly Report on
Form 10-Q and those that may be made in the future by or on behalf of the
Company which are identified as forward-looking, the Company notes that there
are various factors that could cause actual results to differ materially from
those set forth in any such forward-looking statements. Such factors include
but are not limited to, the real estate market, the cease and desist orders,
the availability of loan portfolios at acceptable prices, the availability of
financing for loan portfolio acquisitions, interest rates and expansion
outside the U.S. Accordingly, there can be no assurance that the forward-
looking statements contained in this Quarterly Report on Form 10-Q will be
realized or that actual results will not be significantly higher or lower. The
forward-looking statements have not been audited by, examined by or subjected
to agreed-upon procedures by independent accountants, and no third-party has
independently verified or reviewed such statements. Readers of this Quarterly
Report on Form 10-Q should consider these facts in evaluating the information
contained herein. The inclusion of the forward-looking statements contained in
this Quarterly Report on Form 10-Q should not be regarded as a representation
by the Company or any other person that the forward-looking statements
contained in this Quarterly Report on Form 10-Q will be achieved. In light of
the foregoing, readers of this Quarterly Report on Form 10-Q are cautioned not
to place undue reliance on the forward-looking statements contained herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
13
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES.
There have been no changes in the Company's securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Company is not in material default with respect to any indebtedness
exceeding 5% of the total assets of the Company and its consolidated
subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the period
covered by this report.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 11--Statement re Computation of Per Share Earnings
Exhibit 27--Financial Data Schedule
(b) Reports on Form 8-K.
None.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WILSHIRE FINANCIAL SERVICES GROUP
INC.
Date: August 14, 1997
By: /s/ Lawrence A. Mendelsohn
---------------------------------
LAWRENCE A. MENDELSOHN
PRESIDENT
By: /s/ Chris Tassos
---------------------------------
CHRIS TASSOS
CHIEF FINANCIAL OFFICER
15
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Diluted net income per share:
Net income............................................ $5,174,000 $ (28,000)
Average number of shares outstanding.................. 7,570,000 3,623,132
Net effect of dilutive stock options-based on treasury
stock method using average market price.............. 282,328 0
---------- ----------
Total average shares................................ 7,852,328 3,623,132
Diluted net income per share........................ $ 0.66 $ (0.01)
========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's Balance Sheet as of June 30, 1997 and Statement of Earnings for the
three months ended June 30, 1997 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 39712
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 17758
<INVESTMENTS-HELD-FOR-SALE> 144253
<INVESTMENTS-CARRYING> 27627
<INVESTMENTS-MARKET> 27627
<LOANS> 787987
<ALLOWANCE> 69693
<TOTAL-ASSETS> 1196092
<DEPOSITS> 445333
<SHORT-TERM> 583468
<LIABILITIES-OTHER> 14119
<LONG-TERM> 84245
0
0
<COMMON> 55897
<OTHER-SE> 13030
<TOTAL-LIABILITIES-AND-EQUITY> 1196092
<INTEREST-LOAN> 20655
<INTEREST-INVEST> 4275
<INTEREST-OTHER> 1244
<INTEREST-TOTAL> 26174
<INTEREST-DEPOSIT> 6647
<INTEREST-EXPENSE> 14070
<INTEREST-INCOME-NET> 5457
<LOAN-LOSSES> 445
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11785
<INCOME-PRETAX> 8813
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5112
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.66
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 67364
<CHARGE-OFFS> 6304
<RECOVERIES> 188
<ALLOWANCE-CLOSE> 69693
<ALLOWANCE-DOMESTIC> 69693
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
