SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2000
or
[ ] Transitional Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-21845
Wilshire Financial Services Group Inc.
(Exact name of registrant as specified in its charter)
Delaware 93-1223879
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No ___
-----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 31, 2000
Common Stock, par value $.01 per share 20,035,458 Shares
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements (Unaudited):
Consolidated Statements of Financial Condition....................3
Consolidated Statements of Operations.............................4
Consolidated Statements of Cash Flows.............................6
Consolidated Statement of Stockholders' Equity....................8
Notes to Interim Consolidated Financial Statements................9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................27
Item 2. Changes in Securities............................................28
Item 3. Defaults Upon Senior Securities..................................28
Item 4. Submission of Matters to a Vote of Security Holders..............28
Item 5. Other Information................................................28
Item 6. Exhibits and Reports on Form 8-K.................................28
<PAGE>
<TABLE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
September 30, December 31,
2000 1999
-------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents.................................................. $ 24,865 $ 54,168
Mortgage-backed securities available for sale, at fair value............... 33,720 43,583
Mortgage-backed securities held to maturity, at amortized cost............. 7,364 10,166
Securities held to maturity, at amortized cost............................. 6,018 5,979
Loans, net................................................................. 575,120 437,600
Discounted loans, net...................................................... 1,289 11,424
Loans and discounted loans held for sale, net, at lower of cost or market.. 11,133 34,150
Stock in Federal Home Loan Bank of San Francisco, at cost.................. 6,507 5,575
Real estate owned, net..................................................... 2,975 11,571
Leasehold improvements and equipment, net.................................. 3,766 4,425
Accrued interest receivable................................................ 4,221 3,939
Servicer advance receivables, net.......................................... 18,306 25,074
Prepaid expenses and other assets.......................................... 16,614 6,864
---------- ------------
TOTAL...................................................................... $ 711,898 $ 654,518
========== ============
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
<S> <C> <C>
Deposits.............................................................. $ 448,872 $ 419,285
Short-term borrowings................................................. 21,479 31,927
FHLB advances......................................................... 127,000 80,000
Notes payable to Wilshire Real Estate Investment Inc.................. 0 5,275
Accounts payable and other liabilities................................ 18,991 28,586
Minority interest in Wilshire Credit Corporation...................... 9,902 11,112
---------- ------------
Total liabilities.................................................. 626,244 576,185
---------- ------------
Commitments and Contingencies (see Note 2)
Stockholders' Equity:
Common stock.......................................................... 95,616 92,542
Retained deficit...................................................... (9,895) (14,091)
Accumulated other comprehensive loss, net............................. (67) (118)
---------- ------------
Total stockholders' equity......................................... 85,654 78,333
---------- ------------
TOTAL...................................................................... $ 711,898 $ 654,518
========== ============
See notes to interim consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except share data)
Three Months Ended Three Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
INTEREST INCOME:
<S> <C> <C>
Loans............................................................ $ 12,967 $ 13,108
Mortgage-backed securities....................................... 936 2,833
Securities and federal funds sold................................ 759 732
------------- --------------
Total interest income............................................ 14,662 16,673
------------- --------------
INTEREST EXPENSE:
Deposits......................................................... 6,813 6,495
Borrowings....................................................... 2,637 2,924
------------- --------------
Total interest expense........................................... 9,450 9,419
------------- --------------
NET INTEREST INCOME....................................................... 5,212 7,254
PROVISION FOR ESTIMATED LOSSES ON LOANS................................... (1,131) (741)
------------- --------------
NET INTEREST INCOME AFTER PROVISION
FOR ESTIMATED LOSSES ON LOANS.......................................... 6,343 7,995
------------- --------------
OTHER INCOME:
Servicing revenue................................................ 1,913 1,922
Real estate owned, net........................................... 23 2,622
Bankcard income (loss), net...................................... 1,209 (139)
Gain on sale of loans............................................ 0 158
(Loss) gain on sale of securities................................ (452) 292
Loan fees and charges............................................ 1,536 2,023
Market valuation losses and impairments.......................... -- (8,615)
Other, net....................................................... 3,564 1,174
------------- --------------
Total other income (loss)........................................ 7,793 (563)
------------- --------------
OTHER EXPENSES:
Compensation and employee benefits............................... 6,091 8,696
Loan service fees and expenses................................... 235 139
Professional services............................................ 1,279 1,654
Occupancy........................................................ 565 568
FDIC insurance premiums.......................................... 240 105
Corporate travel and development................................. 191 1,025
Depreciation and amortization.................................... 1,848 415
Other general and administrative expenses........................ 1,449 2,096
Minority interest in WCC......................................... (614) (434)
------------- --------------
Total other expenses............................................. 11,284 14,264
------------- --------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE AND EXTRAORDINARY ITEM............ 2,852 (6,832)
INCOME TAX EXPENSE........................................................ 1,238 304
------------- --------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM................................... 1,614 (7,136)
EXTRAORDINARY ITEM, NET OF TAX (see Note 5)............................... 239 --
------------- --------------
NET INCOME (LOSS)......................................................... $ 1,853 $ (7,136)
============= ==============
EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item.............................. $ 0.08 $ (0.36)
Extraordinary item................................................... 0.01 --
Net income (loss).................................................... $ 0.09 $ (0.36)
Weighted average shares outstanding....................................... 20,035,458 20,033,600
See notes to interim consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except share data)
Predecessor
Reorganized Company Company
------------------------------- -------------
Nine Months Four Months
Ended Ended Five Months
September 30, September 30, Ended
2000 1999 May 31, 1999
-------------- ------------- -------------
INTEREST INCOME:
<S> <C> <C> <C>
Loans.............................................................. $ 36,299 $ 17,508 $ 21,710
Mortgage-backed securities......................................... 3,132 4,008 5,481
Securities and federal funds sold.................................. 2,614 1,038 674
-------------- ------------- -------------
Total interest income.............................................. 42,045 22,554 27,865
-------------- ------------- -------------
INTEREST EXPENSE:
Deposits........................................................... 18,640 8,640 11,206
Borrowings......................................................... 7,468 3,731 11,923
-------------- ------------- -------------
Total interest expense............................................. 26,108 12,371 23,129
-------------- ------------- -------------
NET INTEREST INCOME......................................................... 15,937 10,183 4,736
PROVISION FOR ESTIMATED LOSSES ON LOANS..................................... (4,227) (660) 2,697
-------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION
FOR ESTIMATED LOSSES ON LOANS.......................................... 20,164 10,843 2,039
-------------- ------------- -------------
OTHER INCOME:
Servicing revenue.................................................. 6,432 3,364 3,309
Real estate owned, net............................................. 202 2,775 1,466
Bankcard income, net............................................... 2,968 268 2,381
Gain on sale of loans.............................................. 1,244 170 3,165
(Loss) gain on sale of securities.................................. (452) 292 --
Loan fees and charges.............................................. 3,792 2,778 1,696
Market valuation losses and impairments............................ -- (8,615) --
Other, net......................................................... 4,588 1,616 1,788
-------------- ------------- -------------
Total other income................................................. 18,774 2,648 13,805
-------------- ------------- -------------
OTHER EXPENSES:
Compensation and employee benefits................................. 18,330 11,906 11,796
Loan service fees and expenses..................................... 174 1,342 8,523
Professional services.............................................. 3,732 2,257 2,752
Occupancy.......................................................... 1,883 772 1,385
FDIC insurance premiums............................................ 658 202 501
Corporate travel and development................................... 529 1,546 775
Depreciation and amortization...................................... 3,064 631 1,161
Other general and administrative expenses.......................... 4,678 2,938 4,527
Minority interest in WCC........................................... (1,210) (594) --
-------------- ------------- -------------
Total other expenses............................................... 31,838 21,000 31,420
-------------- ------------- -------------
INCOME (LOSS) BEFORE REORGANIZATION ITEMS, INCOME TAX EXPENSE, AND
EXTRAORDINARY ITEM..................................................... 7,100 (7,509) (15,576)
REORGANIZATION ITEMS........................................................ -- -- (52,034)
-------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE AND EXTRAORDINARY ITEM.............. 7,100 (7,509) (67,610)
INCOME TAX EXPENSE.......................................................... 3,143 429 658
-------------- ------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM..................................... 3,957 (7,938) (68,268)
EXTRAORDINARY ITEM, NET OF TAX (See Note 5)................................. 239 -- 225,606
-------------- ------------- -------------
NET INCOME (LOSS)........................................................... $ 4,196 $ (7,938) $ 157,338
============== ============= =============
EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item................................ $ 0.20 $ (0.40) $ (6.28)
Extraordinary item..................................................... 0.01 -- 20.73
Net income (loss)...................................................... $ 0.21 $ (0.40) $ 14.45
Weighted average shares outstanding......................................... 20,035,458 20,033,600 10,885,000
See notes to interim consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Predecessor
Reorganized Company Company
----------------------------- -------------
Nine Months Four Months
Ended Ended Five Months
September 30, September 30, Ended
2000 1999 May 31, 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss)...................................................... $ 4,196 $ (7,938) $ 157,338
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Market valuation losses and impairments...................... -- 8,615 --
Provision for estimated losses on loans........................... (4,227) (660) 2,697
Provision for losses on real estate owned......................... 68 132 --
Asset valuation adjustments....................................... -- -- 647
Depreciation and amortization..................................... 3,064 631 1,161
Gain on sale of real estate owned................................. (446) (1,783) (2,192)
Loss on disposal of equipment..................................... 6 -- 62
Origination of loans held for sale................................ -- (229) --
Purchase of loans held for sale................................... (5,158) -- (1,629)
Proceeds from sale of loans held for sale......................... 17,446 5,844 255,845
Gain on sale of loans............................................. (1,244) (170) (3,165)
Loss (gain) on sale of securities................................. 452 (292) --
Amortization of discounts and deferred fees....................... 1,256 (103) 869
Income on equity investments...................................... (282) (64) (291)
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:
Servicer advance receivables.................................... 6,768 (2,052) (2,545)
Accrued interest receivable..................................... (282) 823 330
Prepaid expenses and other assets............................... (7,086) 2,491 9,039
Accounts payable and other liabilities.......................... (9,566) 4,098 12,893
Minority interest............................................... (1,210) (594) --
------------- ------------- -------------
Net cash provided by operating activities.................... 3,755 8,749 256,865
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans................................................. (155,384) (46,637) (87,988)
Loan repayments................................................... 68,397 48,748 70,412
Loan originations................................................. (40,302) (8,211) (11,915)
Proceeds from sale of loans....................................... 12,872 815 --
Proceeds from sale of mortgage-backed securities available for sale 3,784 16,411 --
Purchase of mortgage-backed securities available for sale......... (9,919) -- --
Repayment of mortgage-backed securities available for sale........ 15,394 3,501 9,010
Repayments of mortgage-backed securities held to maturity......... 2,744 1,242 1,544
Proceeds from redemption of FHLB stock............................ 776 -- 750
Purchase of real estate owned..................................... (244) -- (708)
Proceeds from sale of real estate owned........................... 10,932 22,616 28,359
Purchase of FHLB stock............................................ (1,426) -- --
Purchases of leasehold improvements and equipment................. (1,742) (332) (768)
Proceeds from sale of leasehold improvements and equipment........ 172 -- --
------------- ------------- -------------
Net cash (used in) provided by investing activities............. (93,946) 38,153 8,696
------------- ------------- -------------
See notes to interim consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(Dollars in thousands)
Predecessor
Reorganized Company Company
----------------------------- -------------
Nine Months Four Months
Ended Ended Five Months
September 30, September 30, Ended
2000 1999 May 31, 1999
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Net increase (decrease) in deposits................................. $ 29,587 $ (37,716) $ (13,256)
Proceeds from FHLB advances......................................... 63,000 -- --
Repayments of FHLB advances......................................... (16,000) -- --
Proceeds from short-term borrowings................................. 81,800 144,428 99,579
Repayments of short-term borrowings................................. (92,224) (152,150) (353,800)
Repayment of note payable to WREI................................... (5,275) -- --
Proceeds from debtor-in-possession financing........................ -- -- 5,000
------------- ------------- -------------
Net cash provided by (used in) financing activities............ 60,888 (45,438) (262,477)
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........................ (29,303) 1,464 3,084
CASH AND CASH EQUIVALENTS:
Beginning of period................................................. 54,168 26,552 23,468
------------- ------------- -------------
End of period....................................................... $ 24,865 $ 28,016 $ 26,552
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--Cash paid for:
Interest............................................................ $ 25,277 $ 7,950 $ 17,083
Income taxes........................................................ 875 240 6,252
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned acquired in settlement of loans...... 1,954 742 3,547
Transfer of loans classified as discounted to available for sale.... -- 11,629 --
NONCASH REORGANIZATION ITEMS:
Cancellation of old common stock.................................... -- -- 114,856
Issuance of new common stock in exchange for notes payable
and accrued interest thereon................................... -- -- 88,900
See notes to interim consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands, except share data and where noted)
Accumulated
Common Stock Other
------------------------ Retained Comprehensive
Shares Amount Deficit Loss Total
----------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 2000 20,033,600 $ 92,542 $ (14,091) $ (118) $ 78,333
Comprehensive income:
Net income.......................... 4,196 4,196
Unrealized holding losses on
available for sale securities
- net of tax...................... (38) (38)
Unrealized gain on foreign
currency translation - net of tax 89 89
------------
Total comprehensive income........... 4,247
Tax benefit from utilization of
pre-reorganizational Net
Operating Losses (Note 3).......... 3,074 3,074
Allocation of additional shares
pursuant to reorganization......... 1,858
----------- ------------ ------------ -------------- ------------
BALANCE, September 30, 2000............ 20,035,458 $ 95,616 $ (9,895) $ (67) $ 85,654
=========== ============ ============ ============== ============
See notes to interim consolidated financial statements
</TABLE>
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollars in thousands, except share data and where noted)
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements of Wilshire
Financial Services Group Inc. and Subsidiaries (the "Company") are unaudited and
should be read in conjunction with the 1999 Annual Report on Form 10-K. A
summary of the Company's significant accounting policies is set forth in Note 5
to the Consolidated Financial Statements in the 1999 Annual Report on Form 10-K.
In the opinion of management, all adjustments, other than the adjustments
described below, generally comprised of normal recurring accruals necessary for
fair presentation of the interim consolidated financial statements, have been
included and all intercompany accounts and transactions have been eliminated in
consolidation. Operating results for the three and nine months ended September
30, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000.
On June 10, 1999, the Company completed its plan of reorganization (the
"Plan") under Chapter 11 of the United States Bankruptcy Code and emerged from
bankruptcy. The financial statements presented include consolidated statements
of financial condition of the reorganized company as of December 31, 1999 and
September 30, 2000; consolidated statements of operations of the predecessor
company for the five-month period ended May 31, 1999; and consolidated
statements of operations of the reorganized company for the three-month and
four-month periods ended September 30, 1999, and the three-month and nine-month
periods ended September 30, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications of 1999 amounts were made in order to conform to
the 2000 presentation, none of which affect previously reported net income.
2. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK
The Company's savings bank subsidiary, First Bank of Beverly Hills, FSB
("First Bank" or the "Bank"), had approximately $23.5 million notional principal
amount in an interest rate swap agreement outstanding at September 30, 2000,
which was designated as a hedge of certain fixed rate loans in order to convert
fixed rate income streams on loans to variable rate. This swap had the effect of
increasing the Company's net interest income by approximately $67 thousand and
$99 thousand, respectively, during the quarter and nine months ended September
30, 2000. The market value of this swap currently deferred was approximately
$0.1 million at September 30, 2000.
At September 30, 2000 the Company, through First Bank, had outstanding
commitments to fund $6.9 million of loans.
In connection with the transfer of the Company's minority ownership
interest in Wilshire Credit Corporation ("WCC") to Capital Consultants, LLC
("CCL") described in Note 7, the Company provided to CCL a contingent
Liquidation Bond in the form of a non-interest bearing obligation to pay CCL, in
the event (and only in the event) of any liquidation or dissolution of WCC,
$19.3 million less any distributions that CCL receives from its minority
ownership interest in WCC. WCC is obligated to keep the bond collateralized with
assets of WCC or the Company having a fair market value equal to such bond and,
to the extent that it does not do so, the Company may be responsible for the
deficiency.
3. INCOME TAXES
The Company files consolidated federal income tax returns with its eligible
domestic subsidiaries. WCC and certain foreign subsidiaries that are included in
the consolidated financial statements are not eligible to be included in the
consolidated federal income tax return. WCC is not eligible to be consolidated
as the company does not meet the required ownership threshold of 80% (the
Company's economic interest is 50.01%). WCC incurred a loss during the nine
months ended September 30, 2000. This loss cannot offset earnings of the Company
and its other subsidiaries for purposes of determining income tax liabilities,
thus affecting the overall effective tax rate of the Company. Due to the
uncertainty regarding future profitability of WCC, the Company has not recorded
a tax benefit for the WCC loss.
Although the Company has net operating losses and deductible temporary
differences available to offset income earned during the nine months ended
September 30, 2000, the Company recorded income tax expense of $3.3 million.
There are two components to the income tax provision: current taxes of $0.2
million and deferred taxes of $3.1 million. The current tax provision results
from excess inclusion income earned on certain residual interests in REMICs
which cannot be offset by tax losses. Deferred taxes are discussed below.
<PAGE>
Deferred tax assets and liabilities represent the tax effect of future
deductible or taxable amounts. They are attributable to carryforwards, such as
net operating losses, capital losses, and temporary differences between amounts
that have been recognized in the financial statements and amounts that have been
recognized in the income tax returns. The deferred tax provision results from a
reduction in the amount of the net deferred tax asset during the nine months
ended September 30, 2000.
The Company established a valuation allowance against the net deferred tax
asset at the restructuring date (June 1999) as there was not presumptive
evidence at that time that it was more likely than not that the deferred tax
asset would be realized. The Company is currently evaluating the valuation
allowance in light of current operating results. Deferred tax assets that
existed on June 10, 1999, the date of completion of the Plan, were also offset
by a full valuation allowance. As these pre-reorganization tax benefits are
realized from reductions in the valuation allowance, the tax effect is recorded
as an increase to stockholders' equity 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"), and not as
a tax benefit in the statement of operations. Approximately $7.5 million of
pre-reorganization tax benefits were realized in the nine months ended September
30, 2000. This results in a corresponding decrease in the valuation allowance
and the tax effect, approximately $3.1 million, has been recorded as an increase
to stockholders' equity. The maximum pre-reorganization tax benefit available to
the Company (partially subject to the annual limits discussed below) at
September 30, 2000 was $61.8 million.
The Company's net operating losses have been reduced by cancellation of
indebtedness income that was excluded from taxable income in 1999. All of the
Company's remaining net operating loss and capital loss carryforwards were
generated in the pre-reorganization period and therefore are subject to a
limitation on the amount that may be utilized annually to offset taxable income.
The annual limitation on the use of pre-reorganization net operating or capital
loss carryforwards is approximately $4.3 million. There is no limitation on the
Company's ability to utilize deductible temporary differences. For the nine
months ended September 30, 2000 the limitation on the Company's ability to
utilize pre-reorganization net operating losses is approximately $5.4 million
(75% of the current year limitation plus a carryover of unused limitation from
the prior year).
4. SIGNIFICANT TRANSACTIONS
During the quarter ended September 30, 2000 the Company's Specialty
Servicing and Finance operations, through WCC, acquired from two subsidiaries of
Transamerica Finance Corporation and from DLJ Mortgage Capital the servicing
rights and related servicer advance receivables to approximately 10,500
residential mortgage loans totaling approximately $370 million in aggregate
unpaid principal balances. In addition, WCC contracted with Wells Fargo as
Master Servicer, and MBIA as certificate insurer, to service approximately
27,000 residential mortgage loans totaling approximately $424 million in
aggregate unpaid principal balances. In connection with each of these three
transactions, the transfer of servicing is expected to be completed in the
fourth quarter, 2000.
5. EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT
In August 2000, the Company entered into a settlement agreement with its
former affiliate, Wilshire Real Estate Investment Inc. ("WREI"), pursuant to
which all disputes between the two companies were resolved. As part of this
agreement, the Company settled a note payable with a book value of $1.6 million
with cash payments of $1.2 million, resulting in a gain on the extinguishment of
debt (before income taxes) of approximately $0.4 million. This extraordinary
gain is reported in the consolidated statement of operations net of related
income taxes of approximately $0.2 million.
6. OPERATING SEGMENTS
The Company's reportable operating segments, as defined by the Company's
management, consist of its Banking operations and Specialty Servicing and
Finance operations. The operating segments differ in terms of regulatory
environment, funding sources and asset acquisition strategies, as described
below:
Banking - The Company's banking operations are conducted through First
Bank. The Bank is engaged in the acquisition and origination of mortgage loans,
and merchant bankcard processing. The primary source of liquidity for First
Bank's acquisitions and originations is wholesale certificates of deposit,
retail deposits, FHLB advances, and, to a lesser extent, committed short-term
line of credit facilities. The Bank is a federally chartered savings bank and is
regulated by the Office of Thrift Supervision.
Specialty Servicing and Finance - The Company conducts its Specialty
Servicing and Finance Operations through its majority-owned servicing
subsidiary, Wilshire Credit Corporation ("WCC"), and through its wholly-owned
investment subsidiary, Wilshire Funding Corporation ("WFC"). As more fully
discussed below, WCC invests in and services mortgage pools which require
special expertise in potential or actual loss mitigation and/or investor
reporting. WFC co-invests with institutional investors in such mortgage pools
and servicing rights (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," below). The Company's Specialty Servicing
and Finance Operations' funding sources consist primarily of internal liquidity,
commercial banking, institutional lenders and co-investors, under debt service
repayment terms which generally parallel the principal repayments and
prepayments of the underlying loan pools.
Holding Company and Miscellaneous Operations - The Company's Holding
Company and Miscellaneous Operations consist of other operating revenues and
expenses not directly attributable to the aforementioned business segments, and
includes eliminations of intercompany accounts and transactions. A primary
source of liquidity is revenue from the Bank pursuant to a tax allocation
agreement permitting the Company to use its operating loss carryforwards to
offset taxable amounts otherwise owed by the Bank.
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollars in thousands, except share data and where noted)
Segment data for the three months ended September 30, 2000 and 1999 are as
follows:
<TABLE>
Reorganized Company
-------------------
Three Months Ended September 30, 2000
----------------------------------------------------------
Specialty
Servicing and Holding
Banking Finance Company Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income........................................ $ 13,455 $ 1,361 $ (154) $ 14,662
Interest expense....................................... 8,953 500 (3) 9,450
------------- ------------- ------------- -------------
Net interest income (loss)............................. 4,502 861 (151) 5,212
Provision for loan losses.............................. (2,800) 1,669 -- (1,131)
------------- ------------- ------------- -------------
Net interest income (loss) after provision for loan
losses.............................................. 7,302 (808) (151) 6,343
Other income........................................... 2,327 3,544 1,922 7,793
Other expense.......................................... 7,703 6,166 (2,585) 11,284
------------- ------------- ------------- -------------
Income (loss) before taxes and extraordinary item...... 1,926 (3,430) 4,356 2,852
Income tax provision................................... 828 -- 410 1,238
------------- ------------- ------------- -------------
Net income (loss) before extraordinary item............ 1,098 (3,430) 3,946 1,614
Extraordinary item..................................... -- -- 239 239
------------- ------------- ------------- -------------
Net income (loss)...................................... $ 1,098 $ (3,430) $ 4,185 $ 1,853
============= ============= ============= =============
Total assets........................................... $ 665,413 $ 51,777 $ (5,292) $ 711,898
============= ============= ============= =============
Reorganized Company
-------------------
Three Months Ended September 30, 1999
----------------------------------------------------------
Specialty
Thrift Servicing and Holding
Banking Finance Company Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income...................................... $ 11,903 $ 4,529 $ 241 $ 16,673
Interest expense..................................... 7,451 1,341 627 9,419
------------- ------------- ------------- -------------
Net interest income (loss)........................... 4,452 3,188 (386) 7,254
Provision for loan losses............................ (1,250) 500 9 (741)
------------- ------------- ------------- -------------
Net interest income (loss) after
provision for loan losses.......................... 5,702 2,688 (395) 7,995
Other income (loss).................................. 1,434 (1,136) (861) (563)
Other expense........................................ 4,552 7,890 1,822 14,264
------------- ------------- ------------- -------------
Income (loss) before taxes........................... 2,584 (6,338) (3,078) (6,832)
Income tax provision (benefit)....................... 1,111 -- (807) 304
------------- ------------- ------------- -------------
Net income (loss).................................... $ 1,473 $ (6,338) $ (2,271) $ (7,136)
============= ============= ============= =============
Total assets......................................... $ 612,743 $ 106,269 $ 26,014 $ 745,026
============= ============= ============= =============
</TABLE>
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollars in thousands, except share data and where noted)
Segment data for the nine months ended September 30, 2000, four months
ended September 30, 1999, and five months ended May 31, 1999 are as follows:
<TABLE>
Reorganized Company
-------------------
Nine Months Ended September 30, 2000
----------------------------------------------------------
Specialty
Servicing and Holding
Banking Finance Company Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income.............................. $ 37,370 $ 4,859 $ (184) $ 42,045
Interest expense............................. 24,375 1,390 343 26,108
------------- ------------- ------------- -------------
Net interest income (loss)................... 12,995 3,469 (527) 15,937
Provision for loan losses.................... (6,000) 1,669 104 (4,227)
------------- ------------- ------------- -------------
Net interest income (loss) after
provision for loan losses.................. 18,995 1,800 (631) 20,164
Other income................................. 6,205 11,878 691 18,774
Other expense................................ 17,541 17,476 (3,179) 31,838
------------- ------------- ------------- -------------
Income (loss) before taxes and extraordinary
item....................................... 7,659 (3,798) 3,239 7,100
Income tax provision (benefit)............... 3,293 -- (150) 3,143
------------- ------------- ------------- -------------
Net income (loss) before extraordinary item.. 4,366 (3,798) 3,389 3,957
Extraordinary item........................... -- -- 239 239
------------- ------------- ------------- -------------
Net income (loss)............................ $ 4,366 $ (3,798) $ 3,628 $ 4,196
============= ============= ============= =============
Total assets................................. $ 665,413 $ 51,777 $ (5,292) $ 711,898
============= ============= ============= =============
Reorganized Company Predecessor Company
------------------- -------------------
Four Months Ended Five Months Ended
September 30, 1999 May 31, 1999
--------------------------------------------- -----------------------------------------------
Specialty Specialty
Servicing Servicing
and Holding and Holding
Banking Finance Company Total Banking Finance Company Total
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income............ $ 16,110 $ 5,863 $ 581 $ 22,554 $ 17,771 $ 8,537 $ 1,557 $ 27,865
Interest expense........... 9,849 1,782 740 12,371 11,680 4,732 6,717 23,129
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income (loss). 6,261 4,081 (159) 10,183 6,091 3,805 (5,160) 4,736
Provision for loan losses.. (1,250) 500 90 (660) -- 2,875 (178) 2,697
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income (loss)
after provision for loan
losses................... 7,511 3,581 (249) 10,843 6,091 930 (4,982) 2,039
Other income............... 2,355 701 (408) 2,648 4,232 6,554 3,019 13,805
Other expense.............. 6,166 11,925 2,909 21,000 7,632 16,437 7,351 31,420
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
reorganization items,
taxes and extraordinary
item..................... 3,700 (7,643) (3,566) (7,509) 2,691 (8,953) (9,314) (15,576)
Reorganization items....... -- -- -- -- -- (27,636) (24,398) (52,034)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before taxes
and extraordinary item... 3,700 (7,643) (3,566) (7,509) 2,691 (36,589) (33,712) (67,610)
Income tax provision
(benefit)................ 1,591 -- (1,162) 429 1,357 -- (699) 658
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item....... 2,109 (7,643) (2,404) (7,938) 1,334 (36,589) (33,013) (68,268)
Extraordinary item......... -- -- -- -- -- 78,978 146,628 225,606
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss).......... $ 2,109 $ (7,643) $ (2,404) $ (7,938) $ 1,334 $ 42,389 $ 113,615 $ 157,338
========== ========== ========== ========== ========== ========== ========== ==========
Total assets............... $ 612,743 $ 106,269 $ 26,014 $ 745,026 $ 606,954 $ 127,627 $ 54,787 $ 789,368
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
7. LEGAL MATTERS
As part of the Company's June 1999 restructuring, it purchased the assets
of the Company's prior privately owned servicer from a company owned by Capital
Consultants, LLC ("CCL") as agent for certain investors. In exchange it gave CCL
as agent a 49.99% non-voting ownership interest in WCC with certain rights to
convert such interest to a portion of the Company's stock. On September 21, 2000
Thomas F. Lennon was appointed by the U.S. District Court of Oregon in
Securities and Exchange Commission v. Capital Consultants, LLC, et al. as a
receiver for CCL.
A number of CCL's clients have filed lawsuits against CCL, Jeffrey Grayson,
Barclay Grayson, Andrew Wiederhorn, Lawrence Mendelsohn, a number of
corporations and a number of pension trust trustees in Tom Hazzard, et al. v.
Capital Consultants, LLC, et al.; Andrew McPherson, et al. v. Trustees of Eighth
Dist. Electrical Profit Sharing Pension and Health and Welfare Plans; and Mark
Keith Eidem et al. v. Trustees United Assoc. Union Local No. 290 Plumber,
Steamfitter and Shipfitter Industry 401(k), Pension Trust and Welfare Trust,
each filed in the U.S. District Court for the District of Oregon. The plaintiffs
allege that CCL and the other defendants made improper loans to WCC from 1995
through 1998, thereafter misled the CCL clients by failing to disclose
significant losses on $160 million of loans to WCC, and used additional CCL
client funds (approximately $71 million) to cover up such losses. The plaintiffs
have named the Company and WCC as defendants. The Company does not understand
the reason for the plaintiffs' inclusion of the Company and WCC as defendants.
Without limitation, as part of the June 1999 reorganization of the Company, CCL,
as agent for these pension funds, provided the Company with a release of all
claims that these funds might have had against the Company other than claims
covered by Company-held insurance policies. While the Company has not yet
obtained a clarification from the plaintiffs as to the basis of their
allegations, or engaged in any discovery proceedings, the Company intends to
deny the allegations and contest the claims vigorously, and does not believe
that the claims should materially adversely affect the Company's financial
position.
As part of the Company's June 1999 restructuring CCL released any claims
that it might have against the Company except for claims that are covered by the
Company's insurance policies. The Company, CCL and the Company's insurers have
entered into a tolling agreement effective July 1, 2000 in which all parties
have agreed that any statutory periods in which these insurance-covered claims
must be filed are suspended. The Company has denied the validity of any of the
claims CCL has alleged. Since the only claims that CCL may bring are those
covered by insurance, the Company does not believe such claim would have a
material effect on the Company.
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.
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("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 January 1, 2001. The Company does not believe that the
adoption of SFAS No. 133 will have a material impact on its financial position
or results of operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." This
pronouncement replaces SFAS No. 125, issued in June 1996. SFAS is effective for
transfers occurring after March 31, 2001 and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. The Company does not believe that the adoption of SFAS No.
140 will have a material impact on its financial position or results of
operations.
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements of Wilshire Financial Services Group Inc.
and the notes thereto included elsewhere in this filing. References in this
filing to "Wilshire Financial Services Group Inc.," "WFSG," the "Company," "we,"
"our," and "us" refer to Wilshire Financial Services Group Inc., our wholly
owned subsidiaries, and Wilshire Credit Corporation ("WCC"), our majority-owned
subsidiary, unless the context indicates otherwise.
Wilshire Financial Services Group Inc., a financial services company,
conducts (1) community banking and Visa/Mastercard bankcard processing
operations through our wholly-owned subsidiary, First Bank of Beverly Hills,
F.S.B. (referred to herein as our "Banking Operations" or the "Bank"); and (2)
specialized mortgage loan servicing and investment operations through our
subsidiaries, Wilshire Credit Corporation ("WCC") and Wilshire Funding
Corporation ("WFC"). Together, WCC and WFC are referred to as our "Specialty
Servicing and Finance Operations." WFSG's administrative, investment and loan
servicing headquarters are located in Portland, Oregon. The Bank is
headquartered in Calabasas, California and conducts its branch banking
activities in Beverly Hills, California.
OVERVIEW
During the past quarter we have continued to focus on the Company's core
competencies in the discrete markets served by each of our operating platforms.
The quarter was highlighted by the following:
o We settled the substantial litigation with Wilshire Real Estate
Investment Inc. and Andrew Wiederhorn and Lawrence Mendelsohn.
o We repaid our $5 million debtor-in-possession financing.
o We integrated our Portland banking operations into our California
headquarters for First Bank of Beverly Hills and commenced the
integration of our new branch in Beverly Hills.
o We obtained new and expanded servicing ratings from Standard &
Poor's and Fitch for our servicing platform.
o We continued our specific negotiations for new servicing rights for
our servicing platform which thus far in the fourth quarter has
resulted in the acquisition of new servicing rights for over 37,500
loans having an aggregate balance of approximately $800 million.
RESULTS OF OPERATIONS--THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED
TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
In the following discussion, the amounts for the nine months ended
September 30, 1999 represent the sum of the Predecessor Company's operations for
the five months ended May 31, 1999 and the Reorganized Company's operations for
the four months ended September 1999, as reported in the accompanying
consolidated statements of operations.
CONSOLIDATED RESULTS
Our consolidated net income was approximately $1.9 million for the three
months ended September 30, 2000, compared with a net loss of approximately $7.1
million for the three months ended September 30, 1999. This increase in net
income was primarily attributable to an $8.4 million increase in other operating
income and a $3.0 million decrease in other expenses as compared with the third
quarter of the prior year.
For the nine months ended September 30, 2000, our consolidated net income
was $4.2 million, compared with $149.4 million for the nine months ended
September 30, 1999. However, pre-tax net income from recurring operations
(excluding restructuring costs in the prior year, and extraordinary gains in
both years) was $7.1 million for the nine months ended September 30, 2000,
compared with a net loss of $23.1 million for the nine months ended September
30, 1999. This increase in net income for the current year was primarily due to
a decrease in other expenses of $20.6 million, a decrease in provision for loan
losses of $6.3 million, an increase in other income of $2.3 million, and an
increase in net interest income of $1.0 million.
These improvements in operating results reflect our efforts to reduce
corporate overhead and manage credit and liquidity risk in our business
segments. Following is a discussion of the operating results of the Company's
two discrete businesses: our Banking Operations and our Specialty Servicing and
Finance Operations.
FIRST BANK OF BEVERLY HILLS, F.S.B.
In its Banking Operations, the Bank seeks to (1) leverage its core
competencies in community banking, small-balance commercial mortgage lending and
Bankcard processing to grow its managed asset platform and (2) establish a
deposit franchise in Southern California.
As discussed more fully below, the Bank management has reduced
substantially its interest rate-risk profile (through sales of fixed-rate
mortgages, purchases and originations of adjustable-rate mortgages, and
replacement of interest-rate sensitive deposits with FHLB borrowings) and
established a California deposit franchise through its recent purchase of a
Beverly Hills branch office.
In implementing its strategic focus, the Bank is committed to growing its
asset platform with high-quality earning assets while at the same time
augmenting its earnings growth potential through its core competencies and
achieving a growing deposit franchise. Management of the Bank believes that
opportunities to execute this strategy will continue due to the recent exodus of
larger banking institutions from the community banking business in California
and from what it believes to be growing opportunities to service small
businesses and professionals in this marketplace in a more personalized
relationship.
The following table compares operating income for the Bank for the
three-month and nine-month periods ended September 30, 2000 and September 30,
1999 (dollars in thousands):
<TABLE>
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------- -----------------------------------
Increase Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest income.............. $ 13,455 $ 11,903 $ 1,552 $ 37,370 $ 33,881 $ 3,489
Interest expense............. 8,953 7,451 1,502 24,375 21,529 2,846
---------- ---------- ----------- ---------- ---------- -----------
Net interest income.......... 4,502 4,452 50 12,995 12,352 643
Provision for loan losses.... (2,800) (1,250) (1,550) (6,000) (1,250) (4,750)
---------- ---------- ----------- ---------- ---------- -----------
Net interest income after
provision for loan losses.. 7,302 5,702 1,600 18,995 13,602 5,393
Other income................. 2,327 1,434 893 6,205 6,587 (382)
Other expense................ 7,703 4,552 3,151 17,541 13,798 3,743
---------- ---------- ----------- ---------- ---------- -----------
Income before taxes.......... 1,926 2,584 (658) 7,659 6,391 1,268
Income tax provision ........ 828 1,111 (283) 3,293 2,948 345
---------- ---------- ----------- ---------- ---------- -----------
Net income................... $ 1,098 $ 1,473 $ (375) $ 4,366 $ 3,443 $ 923
========== ========== =========== ========== ========== ===========
</TABLE>
Net Interest Income
The Bank's net interest income for the three months ended September 30,
2000 was $4.5 million, compared with a similar result for the three months ended
September 30, 1999. Net interest income for the nine months ended September 30,
2000 was $13.0 million, compared with $12.4 million for the nine months ended
September 30, 1999. This increase was primarily due to an increase in interest
income on loans of approximately $3.2 million, resulting from the Bank's
purchase of approximately $156.4 million of mortgage loans during the first
three quarters of 2000. The increase in interest income was partially offset by
a $2.8 million increase in interest expense which primarily related to
borrowings, as the Bank utilized FHLB advances and short-term borrowings to fund
its loan acquisitions.
Provision for Loan Losses
Provision for loan losses for the three months ended September 30, 2000 was
a net recovery of $2.8 million. This reversal of reserves on purchased loans was
a result of the quarterly analysis performed to determine the adequacy of loan
loss reserve levels, which were deemed excessive due to the continued seasoning
and improved loss performance of the Bank's loan portfolio. For the nine months
ended September 30, 2000, the Bank reversed a total of $6.0 million of loan loss
reserves into income.
Other Income
The Bank's other income was $2.3 million for the three months ended
September 30, 2000, compared with $1.4 million for the three months ended
September 30, 1999. This increase was primarily due to a $1.3 million increase
in Bankcard income, net, partially offset by a $0.6 million decrease in loan
fees and charges. For the nine months ended September 30, 2000, other income was
$6.2 million, a $0.4 million decrease from the prior year. This decrease was due
to a $1.3 million decrease in loan fees and charges, partially offset by a $0.7
million increase in income from real estate and a $0.4 million increase in
bankcard, net. The financial results of the Bank's Bankcard division are
discussed in further detail below.
Other Expenses
The Bank's other expenses increased by approximately $3.1 million for the
three months ended September 30, 2000 and $3.7 million for the nine months ended
September 30, 2000. These increases were primarily due to a $2.0 million
write-down of goodwill and other capitalized costs related to the Bank's
mortgage banking operations, and increases in professional services and other
expenses incurred in connection with the Bank's June, 2000 branch acquisition.
Operating Segments
For the nine months ended September 30, 2000 and 1999, the Bank's core
businesses consist of three primary segments: lending and deposit banking
services, mortgage loan origination and brokerage services ("George Elkins
Mortgage Banking" or "GEMB"), and Bankcard processing. The operating results
(before income taxes) of these businesses are summarized in the following table
and discussed in further detail below:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Lending and deposit banking services..............$ 1,590 $ 3,248 $ 7,965 $ 5,584
George Elkins..................................... (79) 275 (655) 416
Bankcard income, net.............................. 415 (939) 349 391
---------- ---------- ---------- ----------
Total Bank net income (pre-tax)...................$ 1,926 $ 2,584 $ 7,659 $ 6,391
========== ========== ========== ==========
</TABLE>
Lending and Deposit Banking
Net income in our commercial banking operations was approximately $7.6
million for the nine months ended September 30, 2000, compared with $5.6 million
for the nine months ended September 30, 1999. This increase was primarily due to
net recoveries of $6.0 million in loan loss provisions recorded in prior
periods, as discussed previously, compared with recoveries of $1.25 million
during the nine months ended September 30, 1999. The increase in recoveries was
partially offset by the write-downs of $2.0 million of goodwill and other
capitalized costs related to the Bank's mortgage banking operations.
The banking segment's operating results for the nine months ended September
30, 2000 were highlighted by the following events: (1) The Bank sold
approximately $14.8 million principal balance of non-performing and
sub-performing loans. This sale reflected the Bank's strategy of reducing its
exposure through the sale of sub-standard assets. As a result of the sale, the
Bank incurred a loss of approximately $0.2 million, but recaptured $1.7 million
of loan loss reserves through a provision reversal. (2) The Bank purchased a
branch in Beverly Hills, California. This branch, which contains approximately
$82 million in retail deposits, is expected to lower our overall cost of funds
and increase our retail deposit growth and fee revenue. (3) The Bank relocated
its administrative headquarters to Calabasas, California, at a cost of
approximately $0.5 million.
George Elkins
The net loss from our mortgage loan origination and brokerage services was
approximately $0.7 million for the nine months ended September 30, 2000,
compared with net income of approximately $0.4 for the nine months ended
September 30, 1999. The decrease was primarily due to a decrease in loan fee
income from $3.0 million for the nine months ended September 30, 1999 to $2.4
million for the current year to date, as the volume of loans brokered declined
from $342.3 million for the nine months ended September 30, 1999 to $237.2
million for the current year.
Bankcard Division
Bankcard income, net of other related expenses, was $0.4 million for the
three months ended September 30, 2000, compared with a loss of $0.9 million for
the three months ended September 30, 1999. This increase was primarily due to
net recoveries of $0.2 million in the 2000 period, compared with provisions for
losses of $1.2 million in the 1999 period. Bankcard income for the nine months
ended September 30, 2000 was $0.3 million, down slightly from income of $0.4
million for the comparable 1999 period.
The financial results of the Bank's merchant bankcard processing operations
for the three-month and nine-month periods ended September 30, 2000 and 1999
were as follows:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Bankcard revenues................................$ 3,370 $ 4,440 $ 10,948 $ 12,190
Bankcard processing expenses..................... (2,351) (3,379) (7,590) (8,387)
Provision for losses............................. (190) 1,200 390 1,200
---------- ---------- ---------- ----------
Bankcard income, net............................. 1,209 (139) 2,968 2,603
Other expenses................................... (794) (800) (2,619) (2,212)
---------- ---------- ---------- ----------
Income (loss) after other expenses.......... $ 415 $ (939) $ 349 $ 391
========== ========== ========== ==========
</TABLE>
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 business.
Changes in Financial Condition - First Bank of Beverly Hills
Mortgage-Backed and Other Securities. For accounting purposes, the Bank's
mortgage-backed and other securities are classified as available for sale and
held to maturity. Mortgage-backed securities available for sale decreased
approximately $5.5 million during the nine months ended September 30, 2000. This
decrease was primarily due to principal repayments of $15.2 million and an
increase in unrealized holding losses of $0.1 million, partially offset by
purchases of $9.9 million. The Bank's holdings of mortgage-backed and other
securities held to maturity decreased approximately $2.8 million during the nine
months ended September 30, 2000 primarily due to principal repayments. The
following table sets forth our holdings of mortgage-backed and other securities
as of September 30, 2000 and December 31, 1999:
Mortgage-Backed Securities and Other Securities
<TABLE>
September 30, December 31,
2000 1999
------------- ------------
(Dollars in thousands)
Available for sale:
<S> <C> <C>
Mortgage-backed securities.................................................. $ 778 $ 802
Agency mortgage-backed securities........................................... 27,709 33,152
Held to maturity:
U.S. Government and other securities........................................ 5,992 5,979
Mortgage-backed securities.................................................. 7,413 10,196
------------- ------------
Total investment securities............................................. $ 41,892 $ 50,129
============= ============
</TABLE>
Loans, net. The Bank's portfolio of loans, net of discounts and allowances,
increased by approximately $137.5 million during the nine months ended September
30, 2000. This increase is primarily attributable to the acquisition of
performing loans, reflecting our emphasis on increasing the level of investment
in performing loans as a percentage of the total loan portfolio. See "Discounted
Loans, net" below.
Discounted Loans, net. The Bank's portfolio of discounted loans decreased
by approximately $10.1 million during the nine months ended September 30, 2000.
This decrease was primarily due to the sale of approximately $12.4 million in
carrying value of non-performing discounted loans. The Bank has continued to
reduce its level of investment in discounted loans, which comprised less than 1%
of the total loans in its portfolio at September 30, 2000.
Deposits. First Bank's deposits increased by approximately $29.6 million
during the nine months ended September 30, 2000, primarily due to the purchase
of a branch of Fidelity Federal Bank, which had approximately $82 million in
retail deposits. The increase was partially offset by maturities of the Bank's
time deposits, some of which were not renewed.
FHLB Advances. First Bank's FHLB advances increased by $47.0 million during
the nine months ended September 30, 2000, as these borrowings were utilized to
fund the Bank's new loan acquisitions. These advances have maturities ranging
from three to five years, which assists in reducing the Bank's sensitivity to
market interest-rate fluctuations and enables the Bank to more closely match the
maturities of its investments and borrowings.
Liquidity and Capital Resources
Liquidity is the measurement of the Bank's ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, purchase pools of loans, and for general business purposes. The
Bank's sources of liquidity include retail and wholesale deposits, FHLB
advances, whole loan and mortgage-backed securities sales, and net interest
income. Liquidity in the Bank's operations is actively managed on a daily basis
and periodically reviewed by the Bank's Board of Directors.
At September 30, 2000, the Bank's cash balances totaled approximately $21.4
million, compared with $48.4 million at December 31, 1999. The decrease in cash
during the nine months was primarily due to the Bank's acquisitions of new
loans, as described above, partially offset by additional borrowings to finance
the acquisitions.
At September 30, 2000, the Bank had approximately $416.0 million of
certificates of deposit. Scheduled maturities of certificates of deposit during
the 12 months ending September 30, 2001 and thereafter amounted to approximately
$367.7 million and approximately $48.3 million, respectively. 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. The Bank's management has continued to reduce
exposure to changes in interest rates by increasing the amount of FHLB advance
borrowings as a percentage of total borrowings, developing core deposits (which
are less sensitive to interest rate changes), and purchasing and originating
variable-rate loans. The retail branch acquisition should reduce the Bank's
overall cost of funds, rebalance the mix of retail/wholesale deposits, and add
new core relationships to further retail deposit growth.
The 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 than 1%. The Bank has complied with these
requirements.
SPECIALTY SERVICING AND FINANCE OPERATIONS
Our Specialty Servicing and Finance operations are conducted by WCC, the
Company's majority-owned servicing subsidiary which commenced operations in June
1999, and by WFC, the Company's wholly-owned investment subsidiary. As discussed
in more detail below (see Restructuring of the Company), the Company's servicing
operations were conducted by a company previously owned by the Company's former
management and principal stockholders before the Company's reorganization.
WCC provides general and specialized loan portfolio management services,
including billing, portfolio administration, collection and investor reporting
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
servicing analysis, WCC designs servicing plans that are intended to maximize
cash flow. Problem loans are generally resolved within one to two years through
foreclosure, compromise, a discounted payoff or reinstatement. Other loans are
actively serviced to facilitate timely collection of payments and accurate
investor reporting over their remaining lives.
The Company uses WFC to co-invest in loan pool acquisitions and servicing
investments with institutional investors, where such co-investment by WFC
increases the platform of loans serviced by WCC.
The following table compares operating income (before taxes and
extraordinary item) for our Specialty Finance and Loan Servicing platform for
the three-month and nine-month periods ended September 30, 2000 and 1999.
However, comparisons of year-to-date amounts between 2000 and 1999 are often
difficult, as WCC did not effectively commence operations until our June 1999
reorganization.
<TABLE>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------- ----------------------------------------
Increase Increase
2000 1999 (Decrease) 2000 1999 (Decrease)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Servicing revenue............. $ 2,218 $ 3,326 $ (1,108) $ 7,330 $ 7,813 $ (483)
Ancillary income ............. 681 439 242 1,755 660 1,095
Interest income............... 1,361 4,529 (3,168) 4,859 14,400 (9,541)
Other income (loss)........... 645 (4,901) 5,546 2,793 (1,218) 4,011
----------- ----------- ----------- ----------- ----------- -----------
Total revenues................ 4,905 3,393 1,512 16,737 21,655 (4,918)
----------- ----------- ----------- ----------- ----------- -----------
Interest expense.............. 500 1,341 (841) 1,390 6,514 (5,124)
Provision for loan losses..... 1,669 500 1,169 1,669 3,375 (1,706)
Compensation expense.......... 2,914 4,582 (1,668) 9,807 11,281 (1,474)
Other expenses................ 3,252 3,308 (56) 7,669 17,081 (9,412)
----------- ----------- ----------- ----------- ----------- -----------
Total provisions and expenses. 8,335 9,731 (1,396) 20,535 38,251 (17,716)
----------- ----------- ----------- ----------- ----------- -----------
Operating loss................ $ (3,430) $ (6,338) $ 2,908 $ (3,798) $ (16,596) $ 12,798
=========== =========== =========== =========== =========== ===========
</TABLE>
Servicing Revenue
Servicing revenue for the three months ended September 30, 2000 was $2.2
million, compared with $3.3 million for the three months ended September 30,
1999, a decrease of $1.1 million. For the nine months ended September 30, 2000,
servicing revenue was $7.3 million, compared with $7.8 million for the nine
months ended September 30, 1999. The decrease in servicing revenue is primarily
attributable to sales of loans by the Company's subsidiaries which had been
serviced by WCC (thereby reducing WCC's fees earned), and, to a lesser extent,
the run-off of loans in the servicing portfolio, partially offset by new
servicing acquired during the period. Our servicing revenue reflects the
servicing activity of WCC, a majority-owned subsidiary formed in connection with
the Company's reorganization in June 1999. Such operations were previously
performed by a former affiliate, now called Capital Wilshire Holdings Inc., and
were not included in the consolidated financial statements of WFSG. WCC
effectively commenced its servicing operations in June 1999 at the time of our
reorganization.
The following table sets forth the composition of loans serviced by WCC by
type of loan at the dates indicated.
<TABLE>
September 30, December 31,
2000 1999
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Single-family residential....................... $ 1,276,835 $ 1,516,536
Multi-family residential........................ 156,622 104,307
Commercial real estate.......................... 209,457 221,605
Consumer and other............................. 260,235 271,515
------------- -------------
Total....................................... $ 1,903,149 $ 2,113,963
============= =============
</TABLE>
During the quarter ended September 30, 2000 our Specialty Servicing and
Finance operations, through WCC, acquired from two subsidiaries of Transamerica
Finance Corporation and from DLJ Mortgage Capital the servicing rights and
related servicer advance receivables to approximately 10,500 residential
mortgage loans totaling approximately $370 million in aggregate unpaid principal
balances. In addition, WCC contracted with Wells Fargo as Master Servicer, and
MBIA as certificate insurer, to service approximately 27,000 residential
mortgage loans totaling approximately $424 million in aggregate unpaid principal
balances. In connection with each of these three transactions, the transfer of
servicing is expected to be completed in the fourth quarter, 2000.
Ancillary Income
Ancillary income (primarily late charges) for the quarter ended September
30, 2000 was approximately $0.7 million, compared with $0.4 million for the
quarter ended September 30, 1999. For the nine months ended September 30, 2000,
ancillary income was approximately $1.8 million, compared with $0.7 million for
the nine months ended September 30, 1999. These increases resulted from our
efforts in the current year to improve late fee collections.
Interest Income and Interest Expense
Interest income decreased by approximately $3.2 million for the quarter
ended September 30, 2000 and $9.5 million for the nine months ended September
30, 2000. Interest expense decreased by approximately $0.8 million and $5.1
million, respectively, for the same periods. These decreases were primarily due
to the sale of certain loans and other interest-earning assets throughout 1999
and 2000 to provide liquidity and pay down the related debt facilities.
Other Income
The components of other income in our Specialty Servicing and Finance
operations are reflected in the following table:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ----------------------------
2000 1999 2000 1999
--------------- -------------- ------------- -------------
(Dollars in thousands) (Dollars in thousands)
Other income:
<S> <C> <C> <C> <C>
Real estate owned, net............................$ 150 $ 1,009 $ (288) $ 1,322
Gain on sale of loans............................. -- 152 1,484 3,239
(Loss) gain on sale of securities................. (516) 402 (503) 535
Market valuation losses and impairments........... -- (6,583) -- (6,583)
Other, net........................................ 1,011 119 2,100 269
-------------- -------------- ------------- -------------
Total other income (loss).....................$ 645 $ (4,901) $ 2,793 $ (1,218)
============== ============== ============= =============
</TABLE>
The increase in other income during the quarter and nine months ended
September 30, 2000 was primarily due to the absence of market valuation losses
and impairments in the current year. (We incurred $6.6 million of such losses in
the third quarter of 1999, as we wrote down the carrying value of our portfolio
of mortgage-backed securities and certain other assets.) This increase in other
income was partially offset by decreases in income from real estate operations
and a decrease in gain on sales of loans, due to reduced sales activity in 2000
as compared to 1999. In addition, we incurred losses on sales of securities in
2000, compared with gains on such sales in 1999.
Compensation Expense
Compensation and employee benefits decreased by approximately $1.7 million
from the three months ended September 30, 1999 to the three months ended
September 30, 2000, and by approximately $1.5 million from the nine months ended
September 30, 1999 to the nine months ended September 30, 2000. This decrease in
compensation was primarily due to reductions in our workforce during 1999,
resulting in savings during the current year.
Other Expenses
Other expenses decreased by approximately $9.4 million from the nine months
ended September 30, 1999 to the nine months ended September 30, 2000, primarily
due to a $7.0 million decrease in loan service fees and expenses. This decrease
resulted from the inclusion of WCC's operating results with WFSG beginning in
June 1999 pursuant to the restructuring. Any expenses incurred by WFC for the
servicing of its loan portfolio are now eliminated in consolidation. Prior to
June 1999, our servicing operations were performed by CWH, which was not part of
the consolidated group. Consequently, for periods prior to June 1999, WFC's
expenses related to the servicing of its loan portfolio were included in WFSG's
consolidated operating results.
In addition to the aforementioned decrease in loan service fees, our travel
and development costs decreased by approximately $1.5 million from the nine
months ended September 30, 1999 to the nine months ended September 30, 2000,
reflecting our efforts to reduce general corporate overhead.
Changes in Financial Condition - Specialty Servicing and Finance Operations
Mortgage-Backed Securities Available for Sale. WFC's mortgage-backed
securities available for sale are reported at current fair value. WFC's
portfolio of mortgage-backed securities available for sale decreased by
approximately $4.4 million during the nine months ended September 30, 2000, due
to sales of approximately $4.2 million in carrying value of securities and
principal repayments of $0.2 million.
Loans and Discounted Loans Held for Sale, Net, at Lower of Cost or Market.
In our Specialty Servicing and Finance Operations, loans and discounted loans
held for sale, net, at lower of cost or market decreased by approximately $15.3
million during the nine months ended September 30, 2000, primarily due to the
sale of loans to increase liquidity and reduce outstanding borrowings, to a
lesser extent bulk sales of loans considered opportunistic by management, and
loan resolutions that occur in the ordinary course of business.
Real Estate Owned, net. Real estate owned, net decreased by approximately
$1.0 million during the nine months ended September 30, 2000. The decrease was
primarily due to sales of properties for proceeds of approximately $2.2 million,
partially offset by acquisitions of real estate through foreclosure or
deed-in-lieu thereof from our portfolio of discounted loans.
Servicer Advance Receivables, net. Servicer advance receivables, net
decreased by approximately $6.8 million during the nine months ended September
30, 2000. This decrease was primarily due to recoveries by WCC of scheduled
principal and interest advances on loans previously made, partially offset by
new advances made during the period.
Short-Term Borrowings. Short-term borrowings in our Specialty Servicing and
Finance operations decreased by approximately $20.4 million during the nine
months ended September 30, 2000. This decrease was primarily due to repayments
of debt facilities with the proceeds from the asset sales described above.
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 for our Specialty Servicing and Finance Operations include
servicing revenue, whole loan and mortgage-backed securities sales, net interest
income, borrowings under repurchase financing facilities, lines of credit from
commercial banks (including an $8 million credit facility with a major
commercial bank that was obtained in May, 2000), and borrowings from
institutional investors and other lenders. Liquidity in our Specialty Servicing
and Finance operations is actively managed on a daily basis and is periodically
reviewed by our Board of Directors. This process is intended to ensure the
maintenance of sufficient funds to meet the needs of the Company.
At September 30, 2000, cash balances in our Specialty Servicing and Finance
Operations totaled approximately $3.1 million, compared with approximately $5.8
million at December 31, 1999. 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 continue to aggressively seek
new capital partners and financing. There can be no assurance, however, that we
will be able to obtain new capital or will have sufficient cash flows. In
addition, as part of our business strategy to use bank and institutional
co-investment financing, we intend to use our available capital in a manner
which will not make us dependent on securitizations as a source of liquidity. As
a result, we likely will not securitize loans as a source of liquidity.
During 1999, we sold all subordinated mortgage-backed securities backed by
loan pools originated or serviced by unaffiliated third parties. Currently, we
hold only such securities where we act as servicer of the loan pools backing the
securities. At September 30, 2000 we held $5.1 million of such mortgage-backed
securities, which in turn are financed by a short-term repurchase agreement with
a remaining unpaid principal balance of $3.0 million. Also at September 30,
2000, we held loans and real estate with a carrying value of $14.9 million which
were subject to short-term indebtedness of $2.8 million in addition to the
aforementioned short-term repurchase agreement.
Adequate credit facilities and other sources of funding are essential to
the continuation of the Company's ability to purchase servicing assets and pools
of loans. The Company's growth strategy is dependent on its ability to find
credit facilities and equity partners for purchases of servicing assets and, to
a lesser extent, loan pools. Such growth will depend largely on the Company's
ability to find and use capital partners for growth of our Specialty Servicing
and Finance Operations. Otherwise, such growth may be significantly curtailed or
delayed.
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING 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. The
Company notes that there are various factors that could cause actual results to
differ materially from those set forth in forward-looking statements. Such
factors include, but are not limited to, the real estate market, interest rates,
regulatory matters, the availability of pools of servicing rights and loans at
acceptable prices, the availability of financing for existing assets, loan
portfolio acquisitions and servicing portfolio expansion, the availability of
additional financing, and the outcome of the pension fund litigation described
in Note 7. 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 factors 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.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
It is our objective to attempt to control risks associated with interest
rate movements. In general, management's strategy is to limit our exposure to
earnings variations and variations in the value of assets and liabilities as
interest rates change over time. Our asset and liability management strategy is
formulated and monitored by the asset and liability committees for the Company
and First Bank (the "Asset and Liability Committees") which meet 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 with respect to overall asset and liability composition.
The Asset and Liability Committees are authorized to utilize a wide variety
of off-balance sheet financial techniques to assist it 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 $23.5
million notional principal amount in an interest rate swap agreement outstanding
at September 30, 2000, which was designated as a hedge of certain fixed rate
loans in order to convert variable rate liabilities to fixed rate. The swap had
the effect of increasing our net interest income by approximately $67 thousand
and $99 thousand, respectively, during the quarter and nine months ended
September 30, 2000.
At times, we also have 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 the interest rate
sensitivity of Net Portfolio Value ("NPV"), which is defined as the net present
value of an institution's existing assets, liabilities and off-balance sheet
instruments. The Committee further evaluates such impacts against the maximum
potential changes in the interest rate sensitivity of NPV that is authorized by
the Board of Directors of First Bank.
At September 30, 2000 the Company's Specialty Servicing and Finance
operations carried no significant assets or liabilities which might have a
material impact on the value of the Company's assets or liabilities, as interest
rates change over time.
The following table quantifies the potential changes in the Bank's net
portfolio value at September 30, 2000, should interest rates increase or
decrease (shocked) by 100 to 300 basis points, assuming the yield curves of the
rate shocks will be parallel to each other. (The table does not include the net
portfolio value of our Specialty Servicing and Finance operations, as such
portfolio is not currently material to our consolidated operations and is not
currently sensitive to interest rate fluctuations.)
<PAGE>
<TABLE>
Interest Rate Sensitivity of Net Portfolio Value
Net Portfolio Value NPV as % of PV of Assets
-------------------------------- ------------------------
$ Amount $ Change %Change NPV Ratio Change
--------- ---------- -------- ------------ ---------
Change in Rates (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
+300bp.....................................$ 33,733 $ (21,738) (39)% 5.45% (300)bp
+200bp..................................... 41,932 (13,539) (24) 6.63 (182)bp
+100bp..................................... 49,352 (6,119) (11) 7.65 (80)bp
0bp..................................... 55,471 -- 0 8.45 --
-100bp..................................... 59,625 4,154 7 8.95 50bp
-200bp..................................... 61,503 6,032 11 9.13 68bp
-300bp..................................... 61,718 6,247 11 9.07 62bp
</TABLE>
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 NPV could vary
substantially if different assumptions were used or actual experience differs
from the historical experience on which they are based.
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
As part of the Company's June 1999 restructuring, it
purchased the assets of the Company's prior privately owned
servicer from a company owned by Capital Consultants, LLC
("CCL") as agent for certain investors. In exchange it gave
CCL as agent a 49.99% non-voting ownership interest in WCC
with certain rights to convert such interest to a portion of
the Company's stock. On September 21, 2000 Thomas F. Lennon
was appointed by the U.S. District Court of Oregon in
Securities and Exchange Commission v. Capital Consultants,
LLC, et al. as a receiver for CCL.
A number of CCL's clients have filed lawsuits against
CCL, Jeffrey Grayson, Barclay Grayson, Andrew Wiederhorn,
Lawrence Mendelsohn, a number of corporations and a number of
pension trust trustees in Tom Hazzard, et al. v. Capital
Consultants, LLC, et al.; Andrew McPherson, et al. v. Trustees
of Eighth Dist. Electrical Profit Sharing Pension and Health
and Welfare Plans; and Mark Keith Eidem et al. v. Trustees
United Assoc. Union Local No. 290 Plumber, Steamfitter and
Shipfitter Industry 401(k), Pension Trust and Welfare Trust,
each filed in the U.S. District Court for the District of
Oregon. The plaintiffs allege that CCL and the other
defendants made improper loans to WCC from 1995 through 1998,
thereafter misled the CCL clients by failing to disclose
significant losses on $160 million of loans to WCC, and used
additional CCL client funds (approximately $71 million) to
cover up such losses. The plaintiffs have named the Company
and WCC as defendants. The Company does not understand the
reason for the plaintiffs' inclusion of the Company and WCC as
defendants. Without limitation, as part of the June, 1999
reorganization of the Company, CCL, as agent for these pension
funds, provided the Company with a release of all claims that
these funds might have had against the Company other than
claims covered by Company-held insurance policies. While the
Company has not yet obtained a clarification from the
plaintiffs as to the basis of their allegations, or engaged in
any discovery proceedings, the Company intends to deny the
allegations and contest the claims vigorously, and does not
believe that the claims should materially adversely affect the
Company's financial position.
As part of the Company's June 1999 restructuring CCL
released any claims that it might have against the Company
except for claims that are covered by the Company's insurance
policies. The Company, CCL and the Company's insurers have
entered into a tolling agreement effective July 1, 2000 in
which all parties have agreed that any statutory periods in
which these insurance-covered claims must be filed are
suspended. The Company has denied the validity of any of the
claims CCL has alleged. Since the only claims that CCL may
bring are those covered by insurance, the Company does not
believe such claim would have a material effect on the
Company.
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.
On September 2, 1999, the Company terminated the
employment of Andrew A. Wiederhorn and Lawrence A. Mendelsohn.
Messrs. Wiederhorn and Mendelsohn subsequently filed suit
against the Company and its outside directors, alleging
defamation and wrongful termination. On August 28, 2000, the
Company entered into a settlement agreement with Messrs.
Wiederhorn and Mendelsohn which resolved all disputes between
the Company and the former executives.
In August 1999, Wilshire Real Estate Investment Inc.
("WREI") filed suit against the Company, alleging that the
aforementioned terminations 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. WREI thereafter amended its
complaint to assert that (i) the Company had breached the
management agreement with WREI, (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 (iii) WFSG
was in default under a $5 million loan agreement due to
alleged material adverse changes. WREI also alleged that the
Company's subsidiary, Wilshire Credit Corporation ("WCC"), had
provided WREI with a prepaid credit for servicing WREI's
assets in the amount of $3.2 million, and that WREI may use
this credit for loans that WCC services for securitization
trustees where WREI owns the residual securities. The Company
denied the allegations and counterclaimed, alleging that (i)
WREI failed to pay management fees owed to the Company under
the management agreement (ii) WREI was not entitled to
terminate the management agreement until April 6, 2000 and any
purported termination of that agreement by WREI entitled the
Company to a termination fee in excess of $3 million. In
August 2000 the Company and WREI settled this lawsuit pursuant
to which all of these disputes were resolved. The settlement
included an agreement on the amount of the prepaid credit for
servicing, that WREI could not use the credit for existing
WREI residual securities, and new agreements for use of the
credits.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
11 Statement re: Computation of Per-Share Earnings
27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WILSHIRE FINANCIAL SERVICES GROUP INC.
Date: November 14, 2000
By: /s/ STEPHEN P. GLENNON
--------------------------
Stephen P. Glennon
Chief Executive Officer
By: /s/ BRUCE A. WEINSTEIN
--------------------------
Bruce A. Weinstein
Chief Financial Officer
<PAGE>
Exhibit 11
<TABLE>
Three Months Three Months
Ended Ended
September 30, September 30,
2000 1999
----------------- -----------------
(Dollars in thousands, except share data)
Diluted net income (loss) per share:
<S> <C> <C>
Net income (loss).............................................. $ 1,853 $ (7,136)
----------------- -----------------
Average number of shares outstanding........................... 20,035,458 20,033,600
Net effect of dilutive stock options-based on treasury stock method 130,195 --
----------------- -----------------
Total average shares....................................... 20,165,653 20,033,600
================= =================
Diluted net income (loss) per share............................ $ 0.09 $ (0.36)
================= =================
Predecessor
Reorganized Company Company
---------------------------------- -----------------
Nine Months Four Months Five Months
Ended Ended Ended
September 30, September 30, May 31,
2000 1999 1999
--------------- ---------------- -----------------
(Dollars in thousands, except share data)
Diluted net income (loss) per share:
<S> <C> <C> <C>
Net income (loss)......................................... $ 4,196 $ (7,938) $ 157,338
-------------- --------------- -----------------
Average number of shares outstanding...................... 20,035,458 20,033,600 10,885,000
Net effect of dilutive stock options-based on treasury
stock method........................................... 47,839 -- --
-------------- --------------- -----------------
Total average shares................................... 20,083,297 20,033,600 10,885,000
============== =============== =================
Diluted net income (loss) per share....................... $ 0.21 $ (0.40) $ 14.45
============== =============== =================
</TABLE>
<PAGE>
