<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO
(MARK ONE)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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)
<TABLE>
<CAPTION>
DELAWARE 93-1223879
<S> <C>
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
<CAPTION>
1776 SW MADISON STREET, PORTLAND,
OR 97205
<S> <C>
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES) (ZIP CODE)
</TABLE>
(503) 223-5600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT MAY 1, 1997
<S> <C>
Common Stock, par value $.01 per
share 7,570,000 Shares
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
This report on Form 10-Q/A constitutes Amendment No. 1 to the Registrant's
Form 10-Q for the quarter ended March 31, 1997. This report is intended to
amend certain information contained in Part I, Items 1 and 2, and Part II, Item
6. See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Accounting Matters" for a discussion of the basis for such
amendments.
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.................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 15
Item 2. Changes in Securities....................................... 15
Item 3. Defaults Upon Senior Securities............................. 15
Item 4. Submission of Matters to a Vote of Security-Holders......... 15
Item 5. Other Information........................................... 15
Item 6. Exhibits and Reports on Form 8-K............................ 15
</TABLE>
2
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(AS
RESTATED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents........................... $ 58,774 $152,298
Mortgage backed securities available for sale, at
fair value......................................... 124,191 31,270
Mortgage backed securities held to maturity, at am-
ortized cost....................................... 20,975 21,724
Securities held to maturity, at amortized cost...... 7,433 7,429
Trading account securities.......................... 17,758 24,541
Loans, net.......................................... 204,975 176,026
Discounted loans, net............................... 353,275 206,740
Loans held for sale, net, at lower cost or market... 192,794 28,826
Stock in Federal Home Loan Bank of San Francisco, at
cost............................................... 3,005 2,958
Real estate owned, net.............................. 86,078 78,200
Leasehold improvements and equipment, net........... 748 317
Due from affiliate, net............................. -- 5,051
Accrued interest receivable......................... 8,568 3,517
Prepaid expenses and other assets................... 10,804 10,769
Deferred tax asset, net............................. 5,663 4,183
---------- --------
TOTAL........................................... $1,095,041 $753,849
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits............................................ $ 462,989 $501,614
Short-term borrowings............................... 430,173 97,624
Notes payable....................................... 84,245 75,000
Accounts payable and other liabilities.............. 28,366 17,872
Deferred credits.................................... 621 717
Due to affiliate, net............................... 27,488 --
---------- --------
Total liabilities................................. 1,033,882 692,827
---------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock..................................... -- --
Common stock........................................ 55,897 55,897
Retained earnings................................... 5,285 5,222
Unrealized loss on available-for-sale securities,
net................................................ (23) (97)
---------- --------
Total stockholders' equity........................ 61,159 61,022
---------- --------
TOTAL........................................... $1,095,041 $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 QUARTER ENDED
MARCH 31, MARCH 31,
1997 1996
------------- -------------
(AS RESTATED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
INTEREST INCOME:
Loans............................................ $ 16,261 $ 8,909
Mortgage-backed securities....................... 416 322
Securities and federal funds sold................ 940 313
--------- ---------
Total interest income.......................... 17,617 9,544
INTEREST EXPENSE:
Deposits......................................... 7,007 4,897
Borrowings....................................... 6,967 77
--------- ---------
Total interest expense......................... 13,974 4,974
--------- ---------
NET INTEREST INCOME................................ 3,643 4,570
PROVISION FOR ESTIMATED LOSSES ON LOANS............ (1,869) 5,385
--------- ---------
NET INTEREST INCOME (LOSS) AFTER PROVISION FOR
ESTIMATED LOSSES ON LOANS....................... 5,512 (815)
OTHER INCOME (LOSS):
Bankcard income.................................. 1,643 1,584
Bankcard processing expense...................... (1,178) (1,265)
Gain on sale of loans............................ -- 1,983
Loan fees and charges............................ 232 199
Trading account-unrealized gain.................. 14 1,601
Real estate owned, net........................... 1,182 (40)
Servicing revenue................................ 161 --
Other, net....................................... 447 127
--------- ---------
Total other income............................. 2,501 4,189
--------- ---------
OTHER EXPENSES:
Compensation and employee benefits............... 3,041 786
FDIC insurance premiums.......................... 230 166
Occupancy........................................ 161 71
Professional services............................ 313 254
Data processing and equipment rentals............ 63 55
Loan service fees and expenses paid to affiliate. 2,946 1,191
Other general and administrative expenses........ 1,154 328
--------- ---------
Total other expenses........................... 7,908 2,851
--------- ---------
INCOME BEFORE INCOME TAX PROVISION................. 105 523
INCOME TAX PROVISION (BENEFIT)..................... 42 (474)
--------- ---------
NET INCOME......................................... $ 63 $ 997
========= =========
EARNINGS PER SHARE:
Basic............................................ $ 0.01 $ 0.34
Diluted.......................................... $ 0.01 $ 0.34
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic............................................ 7,570,000 2,954,429
Diluted.......................................... 7,915,294 2,954,429
</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 QUARTER ENDED
MARCH 31, MARCH 31,
1997 1996
------------- -------------
(AS RESTATED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 63 $ 997
Reconciliation of net income to net cash (used
in) provided by
operating activities:
Provision for estimated loan losses............ (1,869) 5,385
Depreciation and amortization.................. 111 32
Gain on sale of real estate owned.............. (1,273) (13)
Purchase of loans held for sale................ (187,487) --
Gain on sale of loans.......................... -- (1,983)
Amortization of discounts and deferred fees.... (7,089) (1,453)
Amortization of deferred credits............... (96) (115)
FHLB stock dividend............................ (47) (18)
Change in:
Trading account securities..................... 6,783 (7,063)
Accrued interest receivable.................... (5,051) (720)
Prepaid expenses and other assets.............. 35 1,339
Due from affiliate, net........................ 5,051 (19,371)
Due to affiliate, net.......................... 27,488 --
Deferred tax asset, net........................ (1,480) (928)
Accounts payable and other liabilities......... 10,001 1,051
Minority interest.............................. -- 300
--------- ---------
Net cash used in operating activities........ (154,860) (22,560)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans................................ (184,397) (138,201)
Loan repayments, net of originations............. 22,419 4,572
Proceeds from sale of loans...................... -- 23,568
Purchase of mortgage-backed securities available
for sale........................................ (93,715) --
Repayments of mortgage-backed securities
available for sale.............................. 240 413
Proceeds from maturity of investment securities
held to maturity................................ -- 5,000
Purchase of mortgage-backed securities held to
maturity........................................ -- (9,400)
Repayments of mortgage-backed securities held to
maturity........................................ 715 356
Change in unrealized (gain) loss on mortgage-
backed securities
available for sale.............................. (57) (27)
Purchase of securities and FHLB stock............ -- (1,403)
Proceeds from sale of real estate owned.......... 13,007 4,343
Purchases of leasehold improvements and
equipment....................................... (45) (68)
--------- ---------
Net cash used in investing activities (241,833) (110,847)
--------- ---------
</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 QUARTER ENDED
MARCH 31, MARCH 31,
1997 1996
------------- -------------
(AS RESTATED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits.............. (38,625) 61,974
Issuance of common stock......................... -- 9,750
Proceeds from short-term borrowings.............. 360,146 110,850
Repayments of short-term borrowings.............. (27,597) (26,850)
Proceeds from notes payable...................... 9,245 --
-------- --------
Net cash provided by financing activities.... 303,169 155,724
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... (93,524) 22,317
CASH AND CASH EQUIVALENTS:
Beginning of quarter............................. 152,298 4,482
-------- --------
End of quarter................................... $ 58,774 $ 26,799
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--
Cash paid during the quarter for:
Interest......................................... $ 10,696 $ 4,886
Income taxes..................................... 3,500 --
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned acquired in
settlement of loans............................. 19,612 2,612
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). 63 63
Unrealized gain on
available-for-sale
securities--net of tax
(unaudited)........... 74 74
---------- ------ --------- ------- ------ ----- -------
BALANCE, March 31, 1997
(as restated)
(unaudited)............ -- $ -- 7,570,000 $55,897 $5,285 $ (23) $61,159
========== ====== ========= ======= ====== ===== =======
</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 quarter ended
March 31, 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. ACCOUNTING MATTERS
The Company is amending its results for the quarter ended March 31, 1997.
This restatement is due to the reversal of servicing fee revenue of $5.6
million and deferral of its recognition over the life of the related loan
portfolios. The recognition of the revenue in the previously filed Form 10-Q
was based upon a contractual arrangement with an unrelated third party, cash
received in connection with that arrangement and professional accounting
advice received by the Company. The transaction was recently reviewed by the
Company's independent accountants, Arthur Andersen LLP, who recommended that
the servicing fee revenue received be deferred and amortized over the life of
the related loan portfolios. This classification change defers revenue
recognition but does not impact the economics of the transaction.
3. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK
FINANCIAL INSTRUMENTS INVOLVING OFF-BALANCE SHEET RISK--The Company is a
party to interest-rate swap transactions in managing interest-rate exposure as
part of asset/liability management. Interest-rate swap transactions generally
involve the exchange of fixed and floating-rate interest-payment obligations
without the exchange of the underlying principal amounts. The swap agreements
involve credit risk to the extent of the counterparties' obligation to settle
under the terms of the agreements. Settlements occur monthly. The Company
controls credit risk by entering into agreements with financially sound and
reputable counterparties.
During 1996, the Company entered into swap agreements to pay fixed-rate
interest payments in exchange for receiving floating-rate interest payments.
The notional amounts of the interest-rate swaps were $233,049 at March 31,
1997; these notional amounts amortize downward in each successive month until
they mature in 1999-2001. The amortization is designed to mirror the projected
decrease in the principal balances of the loans the swaps are matched against.
The weighted average fixed-payment rates on the swaps were 6.06% at March 31,
1997. The floating-rate payments are based on a weighted average of 0.29% over
USD LIBOR. The effect of these agreements is to convert loans to floating-rate
assets to maintain a more predictable spread between the income of such assets
and the interest rate expense on deposits and other borrowings which reprice
frequently.
PURCHASE COMMITMENTS--At March 31, 1997, the Company had outstanding
commitments to purchase loans at a cost of $30,746. Included in the purchase
commitment is a commitment to purchase from a third party at a cost of
$28,500, its interest in loans that are serviced by Wilshire Credit
Corporation ("WCC"), which is affiliated with the Company by common ownership.
During 1996, WCC transferred its rights to servicing fees earned on this
portfolio, which include a profit participation element, to Wilshire Servicing
Corporation, a subsidiary of the Company. The servicing rights were
transferred at WCC's historical cost basis of $0.
8
<PAGE>
Subsequent to March 31, 1997, the Company has acquired or committed to
acquire additional earning assets of approximately $375 million, including $40
million in Europe.
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.
9
<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. and Girard Savings Bank,
F.S.B. (the "Banks").
ACCOUNTING MATTERS
On July 16, 1997, the Company restated its previously released consolidated
financial statements for the quarter ended March 31, 1997 to reflect the
reversal of servicing fee revenue of approximately $5.6 million and to defer
its recognition over the life of the related loan portfolios (expected to be
approximately 18 months). The Company originally recognized this servicing fee
revenue based on (i) such servicing fee being payable pursuant to a
contractual arrangement with an unrelated third party, (ii) the receipt of
approximately $5.6 million as a servicing fee pursuant to such contractual
arrangement during the quarter ended March 31, 1997 and (iii) professional
accounting advice received by the Company.
On further review of this contractual arrangement, Arthur Andersen LLP, the
Company's independent accountants, recommended that the revenue received be
deferred and amortized over the life of the related portfolios. Under this
contractual arrangement, an unrelated third party was obligated to pay to
Wilshire Credit Corporation, an affiliate of the Company, a servicing fee
equal to a specified percentage of the cash flow on the related portfolios. In
the fourth quarter of 1996, the right to receive this servicing fee was
assigned by Wilshire Credit Corporation to the Company. During the quarter
ended March 31, 1997, the Company purchased the unrelated third party's
interest in the related portfolios, which resulted in the unaffiliated third
party becoming obligated under the contractual arrangement to pay a specified
percentage of the cash received in such purchase as a servicing fee. The
Company, based on the advice of Arthur Andersen LLP, further considered the
accounting on the transaction and reduced the Company's cost basis in the
related portfolios and should recognize such amount over the life of the
related portfolios.
This restatement defers revenue recognition but does not impact the
economics of the transaction or affect the receipt of the amount. As a result
of the reversal of servicing fee revenue and the reduction of the Company's
cost basis in the related portfolios, such amount will be recognized over the
life of the related portfolios (which is currently expected to be
approximately 18 months) in the form of increased interest income.
Accordingly, interest income for the quarter ended March 31, 1997 has been
restated to reflect an increase in interest income in the first quarter
resulting from this lower cost basis. Similarly, the amount of loans and
securities carried on the Company's consolidated financial statements has been
reduced to reflect the Company's lower cost basis in the related portfolios.
The reversal of this amount did not reduce the amount of cash held by the
Company as shown on its Consolidated Statements of Cash Flows.
RESULTS OF OPERATIONS MARCH 31, 1997 COMPARED TO MARCH 31, 1996
NET INTEREST INCOME
The Company's net interest income was approximately $3.6 million for the
quarter ended March 31, 1997 compared to approximately $4.6 million for the
quarter ended March 31, 1996, a decrease of 20.3%. The
10
<PAGE>
reduction in net interest margin and net interest spread in the quarter ended
March 31, 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 $17.6
million for quarter ended March 31, 1997, compared to approximately $9.5
million for the quarter ended March 31, 1996, an increase of 84.6%. The
increase in the Company's interest income was due primarily to an increase in
interest on loans, from $8.9 million for the quarter ended March 31, 1996 to
$16.3 million for the quarter ended March 31, 1997, reflecting an increase in
the balance of the Company's loans from $396.0 million to $751.0 million at
March 31, 1996 and 1997, respectively.
Interest Expense. The Company's interest expense was approximately $14.0
million for the quarter ended March 31, 1997, compared with approximately $5.0
million for the quarter ended March 31, 1996, an increase of 180.9%. The
increase in interest expense resulted from an increase in interest-bearing
liabilities from March 31, 1996 to March 31, 1997 of $515.4 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 6.04% at
March 31, 1996 to 7.17% at March 31, 1997.
PROVISION FOR ESTIMATED LOSSES ON LOANS
Provision for estimated losses on loans for the first quarter of 1997 was a
net recovery of $1.9 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 $0.6 million. This compares with a provision for
estimated losses on loans of $5.4 million in the first quarter of 1996 from
reserves established primarily for the sub-prime auto loans and inherited
loans.
OTHER INCOME
The Company's other income was approximately $2.5 million for the quarter
ended March 31, 1997 compared with approximately $4.2 million for the quarter
ended March 31, 1996, a decrease of 40.3%. The components of the Company's
non-interest income are reflected in the following table:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------- ---
1997 1996
--------------- -----------
(AS RESTATED)
(DOLLARS IN THOUSANDS) ---
Other income: ---
<S> <C> <C> <C>
Bankcard income....................... $ 1,643 $ 1,584
Bankcard processing expense........... (1,178) (1,265)
Gain on sale of loans................. -- 1,983
Loan fees and charges................. 232 199
Trading account-unrealized gain....... 14 1,601
Real estate owned, net................ 1,182 (40)
Servicing revenue..................... 161 --
Other, net............................ 447 127
----------- -----------
Total other income.................. $ 2,501 $ 4,189
=========== =========== ===
</TABLE>
11
<PAGE>
The decrease was primarily attributed to a decrease of $2.0 million in gains
on sales of loans and a decrease of $1.6 million from unrealized gains on
trading securities, which was partially offset by 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.
OTHER EXPENSE
The Company's other expenses totaled approximately $7.9 million for the
quarter ended March 31, 1997 compared with approximately $2.9 million for
quarter ended March 31, 1996, an increase of 177.4%.
Compensation and Employee Benefits. The largest component of other expenses
was compensation and employee benefits which increased approximately 286.9%
from approximately $0.8 million for the quarter ended March 31, 1996 to
approximately $3.0 million for the quarter ended March 31, 1997. The increase
was primarily due to an increase in the average number of full-time equivalent
employees from 48 for the quarter ended March 31, 1996 to 138 for the quarter
ended March 31, 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 $2.9 million
for the quarter ended March 31, 1997 compared to approximately $1.2 million
for the quarter ended March 31, 1996, an increase of approximately 147.4%. The
increase in loan servicing fees and expenses paid to affiliate was primarily
the result of the increase in the unpaid principal balance of loans being
serviced by WCC on behalf of the Company to approximately $1.1 billion at
March 31, 1997 from approximately $437.8 million at March 31, 1996.
Other general and administrative expenses increased from approximately $0.3
million for the quarter ended March 31, 1996 to approximately $1.2 million for
the quarter ended March 31, 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 $0.04 million
during the quarter ended March 31, 1997 compared with a benefit of
approximately $0.5 million during the quarter ended March 31, 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 $85.4 million during the quarter
ended March 31, 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 $339.5 million during the quarter
ended March 31, 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 $371.9 million for the quarter ended March 31,
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 $7.9 million during the quarter ended March 31, 1997 primarily
as a result of the foreclosure of certain discounted loans acquired in the
fourth quarter of 1996. The Company actively manages its real estate owned.
Due to/from Affiliate. Due from affiliate of $5.1 million at December 31,
1996 was attributable to payments received in the normal course of servicing
operations by WCC, which had not been remitted to the
12
<PAGE>
Company. At March 31, 1997, the Company had a net balance due to affiliate of
$27.5 million primarily attributable to the acquisition of certain loans and
securities from the affiliate.
Deposits. Deposits decreased by approximately $38.6 million or 7.7% during
the quarter ended March 31, 1997. Pursuant to the Cease and Desist Orders
imposed upon First Bank of Beverly Hills, F.S.B. and Girard Savings Bank,
F.S.B, 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 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
$332.5 million during the quarter ended March 31, 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 March 31, 1997, the Banks had
approximately $454.2 million of certificates of deposit. As of March 31, 1997,
scheduled maturities of certificates of deposit during the twelve months
ending March 31, 1998 and thereafter amounted to approximately $431.2 million
and approximately $23.0 million, respectively. Brokered and other wholesale
deposits generally are more responsive to changes in interest rates than core
deposits and, thus, are more likely to be withdrawn by the investor upon
maturity as changes in interest rates and other factors are perceived by
investors to make other investments more attractive. However, management of
the Banks believe that it can adjust the rates paid on certificates of deposit
to retain deposits in changing interest rate environments and that brokered
and other wholesale deposits can be both a relatively cost-effective and
stable source of funds.
As of March 31, 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 $250 million under a
repurchase agreement with CS First Boston Mortgage Capital Corporation.
Sources of borrowings also include FHLB advances, which are required to be
secured by single-family and/or multi-family residential loans or other
acceptable collateral, and reverse repurchase agreements. As of March 31,
1997, the Banks had no FHLB advances outstanding, and were eligible to borrow
up to an aggregate of $13.3 million from the FHLB of San Francisco and had
$1.9 million of single-family residential loans, approximately $16.4 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 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 is expected to utilize secured borrowings and be
highly leveraged. The actual dollar amount of secured borrowings incurred by
the Company will vary depending on a number of factors, including the
breakdown between performing and non-performing loans acquired by the Company,
the amount of leverage lenders are willing to make available at the time a
loan portfolio is acquired (which will be effected by market conditions), and
management's determination as to the appropriate amount of leverage at the
time a portfolio is acquired. With respect to loan portfolios of
13
<PAGE>
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 quarter ended March 31,
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 Banks are required under applicable
federal regulations to maintain specified levels of "liquid" investments in
qualifying types of U.S. Government, federal agency and other investments
having maturities of five years or less. Current OTS regulations require that
a savings association maintain liquid assets of not less than 5% of its
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less, of which short-term liquid assets must consist of
not less than 1%. Monetary penalties may be imposed for failure to meet
applicable liquidity requirements. The Company and the 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.
14
<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.
A report on Form 8-K was filed on April 14, 1997, as amended with respect to
a change in accountants.
15
<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: July 15, 1997 By: /s/ Lawrence A. Mendelsohn
---------------------------------
LAWRENCE A. MENDELSOHN
PRESIDENT
By: /s/ Chris Tassos
---------------------------------
CHRIS TASSOS
CHIEF FINANCIAL OFFICER
16
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Diluted net income per share:
Net income............................................. $ 63,000 $ 997,000
Average number of shares outstanding................... 7,570,000 2,954,429
Net effect of dilutive stock options-based on treasury
stock method using average market price............... 345,294 0
---------- ----------
Total average shares................................. 7,915,294 2,954,429
Diluted net income per share......................... $ 0.01 $ 0.34
========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's Balance Sheet as of March 31, 1997 and Statement of Earnings for the
three months ended March 31, 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> MAR-31-1997
<CASH> 58774
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 17758
<INVESTMENTS-HELD-FOR-SALE> 124191
<INVESTMENTS-CARRYING> 28408
<INVESTMENTS-MARKET> 28408
<LOANS> 751044
<ALLOWANCE> 67364
<TOTAL-ASSETS> 1095041
<DEPOSITS> 462989
<SHORT-TERM> 430173
<LIABILITIES-OTHER> 56475
<LONG-TERM> 84245
0
0
<COMMON> 55897
<OTHER-SE> 5262
<TOTAL-LIABILITIES-AND-EQUITY> 1095041
<INTEREST-LOAN> 16261
<INTEREST-INVEST> 0
<INTEREST-OTHER> 1356
<INTEREST-TOTAL> 17617
<INTEREST-DEPOSIT> 7007
<INTEREST-EXPENSE> 6967
<INTEREST-INCOME-NET> 3643
<LOAN-LOSSES> (1869)
<SECURITIES-GAINS> 14
<EXPENSE-OTHER> 7908
<INCOME-PRETAX> 105
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 37555
<CHARGE-OFFS> 8029
<RECOVERIES> 100
<ALLOWANCE-CLOSE> 67364
<ALLOWANCE-DOMESTIC> 67364
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
