<PAGE>
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
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)
<TABLE>
<S> <C>
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 (Zip Code)
offices)
</TABLE>
(503) 223-5600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
Indicate by check mark whether the registrant has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate 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.
<TABLE>
<CAPTION>
Class Outstanding at April 30, 2000
<S> <C>
Common Stock, par value $.01 per share 20,033,600 Shares
</TABLE>
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<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C> <C> <C>
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....................... 5
Consolidated Statements of Stockholders' Equity............. 6
Notes to Interim Financial Statements....................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 21
Item 2. Changes in Securities....................................... 21
Item 3. Defaults Upon Senior Securities............................. 21
Item 4. Submission of Matters to a Vote of Security Holders......... 21
Item 5. Other Information........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 21
</TABLE>
2
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 28,216 $ 54,168
Mortgage-backed securities available for sale, at fair
value..................................................... 41,543 43,583
Mortgage-backed securities held to maturity, at amortized
cost...................................................... 9,653 10,166
Securities held to maturity, at amortized cost.............. 6,032 5,979
Loans, net.................................................. 513,334 437,600
Discounted loans, net....................................... 11,329 11,424
Loans and discounted loans held for sale, net, at lower of
cost or market............................................ 18,279 34,150
Stock in Federal Home Loan Bank of San Francisco, at cost... 5,600 5,575
Real estate owned, net...................................... 10,799 11,571
Leasehold improvements and equipment, net................... 3,909 4,425
Accrued interest receivable................................. 4,373 3,939
Servicer advances, net...................................... 21,711 25,074
Prepaid expenses and other assets........................... 8,116 6,864
-------- --------
TOTAL....................................................... $682,894 $654,518
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deposits.................................................. $424,414 $419,285
Short-term borrowings..................................... 25,194 31,927
FHLB advances............................................. 112,000 80,000
Notes payable to Wilshire Real Estate Investment Inc. .... 5,110 5,275
Accounts payable and other liabilities.................... 25,547 28,586
Minority interest in Wilshire Credit Corporation.......... 10,611 11,112
-------- --------
Total liabilities....................................... 602,876 576,185
-------- --------
Commitments and Contingencies (see Note 2)
Stockholders' Equity:
Common stock.............................................. 93,481 92,542
Retained deficit.......................................... (12,873) (14,091)
Accumulated other comprehensive loss, net................. (590) (118)
-------- --------
Total stockholders' equity.............................. 80,018 78,333
-------- --------
TOTAL....................................................... $682,894 $654,518
======== ========
</TABLE>
See notes to interim financial statements
3
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
-------------- --------------
QUARTER ENDED QUARTER ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
INTEREST INCOME:
Loans..................................................... $ 10,761 $ 13,547
Mortgage-backed securities................................ 1,149 3,291
Securities and federal funds sold......................... 945 365
---------- ----------
Total interest income..................................... 12,855 17,203
---------- ----------
INTEREST EXPENSE:
Deposits.................................................. 5,582 6,769
Borrowings................................................ 1,876 9,858
---------- ----------
Total interest expense.................................... 7,458 16,627
---------- ----------
NET INTEREST INCOME......................................... 5,397 576
PROVISION FOR ESTIMATED LOSSES ON LOANS..................... (1,396) 70
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR ESTIMATED LOSSES ON
LOANS..................................................... 6,793 506
---------- ----------
OTHER INCOME:
Servicing revenue......................................... 2,300 1,915
Real estate owned, net.................................... 748 1,473
Bankcard income, net...................................... 791 1,297
Gain on sale of loans..................................... 945 2,555
Loan fees and charges..................................... 786 960
Other, net................................................ 364 1,264
---------- ----------
Total other income........................................ 5,934 9,464
---------- ----------
OTHER EXPENSES:
Compensation and employee benefits........................ 6,549 7,472
Loan service fees and expenses paid to affiliate.......... 47 5,267
Professional services..................................... 1,067 3,340
Occupancy................................................. 725 799
FDIC insurance premiums................................... 219 307
Corporate travel and development.......................... 160 380
Depreciation and amortization............................. 726 709
Other general and administrative expenses................. 1,541 2,841
Minority interest in WCC.................................. (501) --
---------- ----------
Total other expenses...................................... 10,533 21,115
---------- ----------
INCOME (LOSS) BEFORE RESTRUCTURING ITEMS AND INCOME TAX
EXPENSE................................................... 2,194 (11,145)
RESTRUCTURING ITEMS......................................... -- (14,433)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE..................... 2,194 (25,578)
INCOME TAX EXPENSE.......................................... 976 375
---------- ----------
NET INCOME (LOSS)........................................... $ 1,218 $ (25,953)
========== ==========
INCOME (LOSS) PER SHARE..................................... $ 0.06 $ (2.38)
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 20,033,600 10,885,000
</TABLE>
See notes to interim financial statements
4
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
-------------- --------------
QUARTER ENDED QUARTER ENDED
MARCH 31, 2000 MARCH 31,1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,218 $(25,953)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for estimated losses on loans................. (1,396) 70
Provision for losses on real estate owned............... 49 --
Depreciation and amortization........................... 726 709
Gain on sale of real estate owned....................... (870) (1,630)
Purchase of loans held for sale......................... -- (832)
Proceeds from sale of loans held for sale............... 10,176 151,982
Gain on sale of loans................................... (945) (2,555)
Amortization of discounts and deferred fees............. 203 631
Income on equity investments............................ -- (219)
Other................................................... 8 --
Restructuring items:
Write-off of unamortized debt issuance costs............ -- 11,319
European restructuring costs............................ -- 2,492
Change in:
Servicer advances....................................... 3,363 (3,011)
Accrued interest receivable............................. (434) 746
Prepaid expenses and other assets....................... (382) 10,502
Due to affiliates, net.................................. -- 11,106
Accounts payable and other liabilities.................. (2,535) (5,847)
Minority interest....................................... (501) --
------- --------
Net cash provided by operating activities............. 8,680 149,510
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans......................................... (86,960) (45,918)
Loan repayments........................................... 22,884 48,255
Loan originations......................................... (5,270) (6,056)
Proceeds from sale of loans............................... -- 43,281
Purchase of mortgage-backed securities available for
sale.................................................... (9,919) --
Repayment of mortgage-backed securities available for
sale.................................................... 11,759 6,444
Repayments of mortgage-backed securities held to
maturity................................................ 452 986
Purchase of real estate owned............................. (33) --
Proceeds from sale of real estate owned................... 2,272 17,980
Purchase of investment equity securities.................. (25) --
Purchases of leasehold improvements and equipment......... (98) (240)
------- --------
Net cash (used in) provided by investing activities... (64,938) 64,732
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits....................... $ 5,129 $(31,799)
Proceeds from FHLB advances............................... 32,000 --
Proceeds from short-term borrowings....................... 10,933 41,247
Repayments of short-term borrowings....................... (17,591) (233,384)
Repayment of note payable to WREI......................... (165) --
Proceeds from debtor-in-possession financing.............. -- 5,000
------- --------
Net cash provided by (used in) financing activities... 30,306 (218,936)
------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (25,952) (4,694)
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 54,168 23,468
------- --------
End of period............................................. $28,216 $ 18,774
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--Cash paid
for:
Interest.................................................. $ 6,483 $ 13,151
Income taxes.............................................. 625 --
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned acquired in settlement of
loans................................................... 877 1,970
NONCASH RESTRUCTURING ITEMS:
Transfer of notes payable and certain related party
payables to liabilities subject to compromise........... -- 235,510
</TABLE>
See notes to interim financial statements
5
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED STOCK COMMON STOCK OTHER
------------------- --------------------- RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT DEFICIT LOSS TOTAL
-------- -------- ---------- -------- --------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 2000............. -- $ -- 20,033,600 $92,542 $(14,091) $(118) $78,333
Comprehensive income:
Net income....................... 1,218 1,218
Unrealized holding losses on
available for sale
securities -- net of tax....... (139) (139)
Unrealized loss on foreign
currency translation........... (333) (333)
-------
Total comprehensive income......... 746
Tax benefit from utilization of
pre-reorganizational Net
Operating Losses (Note 3)........ 939 939
----- ---- ---------- ------- -------- ----- -------
BALANCE, March 31, 2000.............. -- $ -- 20,033,600 $93,481 $(12,873) $(590) $80,018
===== ==== ========== ======= ======== ===== =======
</TABLE>
See notes to interim financial statements
6
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
(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 quarter ended March 31, 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
March 31, 2000; consolidated statements of operations and cash flows of the
predecessor company for the three-month period ended March 31, 1999; and
consolidated statements of operations and cash flows of the reorganized company
for the three-month period ended March 31, 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 $28.8 million notional principal
amount in an interest rate swap agreement outstanding at March 31, 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 $5 thousand during
the quarter ended March 31, 2000. The market value of these swaps currently
deferred was $0.2 million at March 31, 2000.
The Company and its directors are currently defendants to a lawsuit brought
on behalf of each of Andrew A. Wiederhorn, the Company's former Chief Executive
Officer, and Lawrence A. Mendelsohn, the Company's former President. On
August 19, 1999, the Board of Directors of the Company notified each of
Messrs. Wiederhorn and Mendelsohn of the Company's intention to terminate his
employment for "cause" pursuant to his employment agreement with the Company.
The Company suspended the employment of each of Messrs. Wiederhorn and
Mendelsohn that same day. On September 2, 1999, the Company terminated the
employment of each of them for cause, although they remain executives of the
Company's former affiliate and current stockholder, Wilshire Real Estate
Investment Inc. ("WREI"). Mr. Wiederhorn and Mr. Mendelsohn have brought suit
alleging, inter alia, that they were wrongfully terminated and
7
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED)
2. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK (CONTINUED)
defamed by the Company's and the directors' actions. The Company has filed its
response denying the allegations and has filed counterclaims against
Messrs. Wiederhorn and Mendelsohn.
The Company is also currently a party to a lawsuit with WREI. In August
1999, WREI filed suit against the Company alleging that the aforementioned
suspensions of Mr. Wiederhorn and Mr. Mendelsohn caused a facilities sharing
agreement between the Company and WREI to come into effect, thereby suspending
WREI's obligations under a management agreement between WREI and Wilshire Realty
Services Corporation ("WRSC"), a subsidiary of the Company (Messrs. Wiederhorn
and Mendelsohn were simultaneously serving as the senior executive officers of
WREI). WREI's motion for preliminary injunctive relief to prevent the Company
from removing Messrs. Wiederhorn and Mendelsohn from the Company's headquarters
facilities and for other relief was denied in a written ruling. WREI thereafter
amended its complaint to assert that, as a result of the termination of
Messrs. Wiederhorn and Mendelsohn, (i) the Company had breached the management
agreement with WREI (which permitted WREI to terminate that agreement), (ii) a
facilities sharing agreement between the Company and WREI had been triggered,
requiring WREI to pay the Company only for the cost of the management provided
by the Company's employees (and no further fees would be payable under the
management agreement), and (iii) WFSG is in default under a $5 million loan
agreement due to alleged material adverse changes. WREI also alleges that the
Company's subsidiary, Wilshire Credit Corporation ("WCC"), has 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 has
denied the allegations and counterclaimed, alleging that (i) WREI has failed to
pay management fees owed to the Company under the management agreement, which
approximate $1.3 million in the aggregate for the quarters ended December 31,
1999 and March 31, 2000, (ii) WREI is not entitled to terminate the management
agreement until April 6, 2000 (because WRSC had not breached the agreement) and
any purported termination of that agreement by WREI entitles the Company to a
termination fee in excess of $3 million, and (iii) the facilities sharing
agreement is inapplicable and/or invalid. The Company also asserts that the
prepaid servicing credit is only $2.3 million, and that it may only be used for
assets owned by WREI. WCC is no longer servicing assets owned by WREI.
The Company will continue to vigorously contest the claims made by
Messrs. Wiederhorn and Mendelsohn and WREI and assert its counterclaims against
the same. Management, after consulting legal counsel, believes that the Company
will likely substantially prevail on its claims and its defenses.
The Company is a 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.
As part of the restructuring the Company issued a Liquidation Bond to
Capital Consultants Inc. ("CCI") which is a non-interest bearing obligation to
pay CCI, upon any liquidation or dissolution of WCC, $19.3 million less any
distributions that CCI receives from its 49.99% ownership interest in WCC. WCC
is obligated to keep the bond collateralized with assets of WCC or WFSG having a
fair market value equal to the bond and, to the extent that it does not do so,
WFSG may be responsible for the deficiency.
8
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED)
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% (our
interest is 50.01%). WCC incurred a loss during the quarter ended March 31,
2000. This loss cannot offset earnings of the Company and its other subsidiaries
for purposes of determining income tax liabilities. 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 quarter ended
March 31, 2000, the Company recorded income tax expense of $976 thousand. There
are two components to the income tax provision: current taxes of $37 thousand
and deferred taxes of $939 thousand. The current tax provision results from
excess inclusion earned on certain residual interests in REMICs which cannot be
offset by tax losses. Deferred taxes are discussed below.
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, 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 deferred tax asset during the quarter ended March 31, 2000.
The Company has established a valuation allowance against the net deferred
tax asset as there is not presumptive evidence that it is more likely than not
that the deferred tax asset will be realized. 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 $2.4 million of
pre-reorganization tax benefits were realized in the quarter ended March 31,
2000. This results in a corresponding decrease in the valuation allowance and
the tax effect, $939 thousand, 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 March 31, 2000 was
$66.4 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. In the quarter
ended March 31, 2000 the limitation on the Company's ability to utilize
pre-reorganization net operating losses is approximately $3.4 million (25% of
the current year limitation plus a carryover of unused limitation from the prior
year).
9
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED)
4. SIGNIFICANT TRANSACTIONS
During the quarter ended March 31, 2000 the Company sold loans held for sale
with a carrying value of approximately $9.6 million for proceeds of
$10.2 million. These sales were made primarily to repay short-term borrowing
facilities for which the loans served as collateral and to provide liquidity. In
addition, during the quarter ended March 31, 2000, First Bank purchased
approximately $87.5 million in unpaid principal balance of adjustable-rate
loans.
5. SUBSEQUENT EVENTS
In the second quarter of 2000, the Company disposed of its French loan
acquisition and servicing operations and its U.K. loan portfolio. In addition,
in May 2000, the Company disposed of its remaining assets in the U.K. In the
fourth quarter of 1999, the Company provided approximately $2.4 million to cover
expected losses from the closure of its European operations. No further
provisions were recorded during the quarter ended March 31, 2000. Management is
in the process of developing the information necessary to measure the financial
impact of these sales, but does not believe the impact will be material to its
financial condition or results of operations.
In May of 2000, First Bank entered into an agreement to purchase a branch of
Fidelity Federal Bank. The branch, which is located in Beverly Hills,
California, has approximately $82 million in deposits. The Bank expects to
complete this purchase during June 2000, although there can be no assurance that
the transaction will be consummated by that time. In addition, the purchase is
subject to approval by the Office of Thrift Supervision.
6. OPERATING SEGMENTS
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "DISCLOSURE ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION," effective for fiscal years beginning
after December 15, 1998. The Company opted not to adopt this statement prior to
that date.
The Company's reportable operating segments, as defined by the Company's
management, are banking and non-banking (primarily loan servicing) operations.
The operating segments vary in terms of regulatory environment, funding sources
and asset acquisition focus. A description of the Company's operating segments
is as follows:
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 financing for First Bank's
acquisitions and originations is wholesale certificates of deposit, 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.
NON-BANKING - The Company's non-banking operations are conducted primarily
through Wilshire Credit Corporation ("WCC") and Wilshire Funding Corporation
("WFC"). In addition to loan servicing operations, the non-banking operating
segment also performs mortgage loan acquisitions and loan sales. Historically,
the primary funding sources utilized for non-banking operations were line of
credit and repurchase agreement facilities with nationally recognized investment
and commercial banking firms.
10
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA AND WHERE NOTED)
6. OPERATING SEGMENTS (CONTINUED)
Segment data for the quarters ended March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
NON-
2000 SEGMENT DATA BANKING BANKING TOTAL
----------------- -------- -------- --------
<S> <C> <C> <C>
Interest income............................................. $ 10,972 $ 1,883 $ 12,855
Interest expense............................................ 6,933 525 7,458
-------- -------- --------
Net interest income......................................... 4,039 1,358 5,397
Provision for loan losses................................... (1,500) 104 (1,396)
-------- -------- --------
Net interest income after provision for loan losses......... 5,539 1,254 6,793
Other income................................................ 1,226 4,708 5,934
Other expense............................................... 4,432 6,101 10,533
-------- -------- --------
Income (loss) before taxes.................................. 2,333 (139) 2,194
Income tax provision (benefit).............................. 1,003 (27) 976
-------- -------- --------
Net income (loss)........................................... $ 1,330 $ (112) $ 1,218
======== ======== ========
Total assets................................................ $613,133 $ 69,761 $682,894
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
NON-
1999 SEGMENT DATA BANKING BANKING TOTAL
----------------- -------- -------- --------
<S> <C> <C> <C>
Interest income............................................. $ 10,403 $ 6,800 $ 17,203
Interest expense............................................ 6,851 9,776 16,627
-------- -------- --------
Net interest income (loss).................................. 3,552 (2,976) 576
Provision for loan losses................................... -- 70 70
-------- -------- --------
Net interest income (loss) after provision for loan
losses.................................................... 3,552 (3,046) 506
Other income................................................ 2,577 6,887 9,464
Other expense............................................... 4,366 16,749 21,115
-------- -------- --------
Income (loss) before restructuring items and taxes.......... 1,763 (12,908) (11,145)
Restructuring items......................................... -- (14,433) (14,433)
-------- -------- --------
Income (loss) before taxes.................................. 1,763 (27,341) (25,578)
Income tax provision (benefit).............................. 958 (583) 375
-------- -------- --------
Net income (loss)........................................... $ 805 $(26,758) $(25,953)
======== ======== ========
Total assets................................................ $576,056 $275,415 $851,471
======== ======== ========
</TABLE>
11
<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. is a diversified financial services
company. We specialize in loan portfolio acquisition and servicing. We offer
banking through our subsidiary, First Bank of Beverly Hills, F.S.B. ("First
Bank"). First Bank is a federally chartered savings bank regulated by the Office
of Thrift Supervision ("OTS") with one branch, a merchant bankcard processing
center, and a lending center in Southern California. Administrative headquarters
of WFSG are located in Portland, Oregon.
OVERVIEW
During the period subsequent to our restructuring (which was effective
June 10, 1999), we have instituted a new business strategy emphasizing our core
strengths in our loan pool acquisition, loan servicing, and banking operations.
In addition, we have focused on the following specific objectives:
- addressing regulatory concerns and restrictions at First Bank;
- managing effectively our interest rate and credit risks at each of our
business units;
- winding down our European operations;
- reducing corporate overhead; and
- expanding our loan servicing and investment relationships with strategic
partners.
We believe we have made significant progress in this regard. Additional
discussion and analysis of our results of operations appears below.
RESULTS OF OPERATIONS--QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED
MARCH 31, 1999
NET INCOME (LOSS)
Our net income was approximately $1.2 million for the quarter ended
March 31, 2000, compared with a net loss of approximately $26.0 million for the
quarter ended March 31, 1999. The increase in net income is primarily
attributable to the absence of restructuring costs for the 2000 period (compared
with $14.4 million of such expenses for the 1999 period), a decrease in other
expenses of $10.6 million, and an increase in net interest income of
$4.8 million, partially offset by a decrease in other income of $3.5 million.
NET INTEREST INCOME
Our net interest income was approximately $5.4 million for the quarter ended
March 31, 2000 compared with approximately $0.6 million for the quarter ended
March 31, 1999. This increase was due to a decline in interest expense of
$9.1 million, partially offset by a decline in interest income of $4.3 million,
reflecting our reduction during 1999 in the levels of loans and other
interest-earning assets and paydown of the related short-term borrowing
facilities.
INTEREST INCOME. Our interest income was approximately $12.9 million for
the quarter ended March 31, 2000 compared with approximately $17.2 million for
the quarter ended March 31, 1999, a
12
<PAGE>
decrease of $4.3 million. This decrease was primarily due to a decrease in the
average balance of our interest-earning assets from approximately
$847.0 million for the quarter ended March 31, 1999, to approximately
$612.3 million for the quarter ended March 31, 2000, resulting from the sale of
certain loans and other assets to provide liquidity and repay certain short-term
borrowing facilities.
INTEREST EXPENSE. Our interest expense was approximately $7.5 million for
the quarter ended March 31, 2000, compared with approximately $16.6 million for
the quarter ended March 31, 1999, a decrease of $9.1 million. The decrease in
interest expense was primarily due to a decrease in our interest-bearing
liabilities to approximately $566.7 million at March 31, 2000 from approximately
$894.7 million at March 31, 1999, resulting primarily from the repayments of
short-term borrowing facilities with proceeds from the asset sales described
above. In addition, during the quarter ended March 31, 1999, we recognized $4.2
million of interest on our 13% Notes and 13% Series B Notes (the "Notes")
payable through the date on which we filed our voluntary Chapter 11 petition,
which was March 3, 1999. As part of our restructuring, in June 1999 the Notes
were converted to equity of WFSG.
PROVISION FOR LOSSES ON LOANS
Provision for losses on loans for the quarter ended March 31, 2000 was a net
recovery of approximately $1.4 million, compared with a provision of
approximately $0.1 million for the three months ended March 31, 1999. During the
quarter ended March 31, 2000 the Bank reversed $1.5 million of provisions for
loan losses recorded in prior periods. The reversal of these prior provisions
was a result of the quarterly analysis performed to determine the adequacy of
current loan loss reserve levels, which were deemed excessive due to the
continued seasoning and improved loss performance of the Bank's loan portfolio.
This provision reversal was partially offset by additional provisions of
approximately $0.1 million taken on discounted loans in our non-banking
operations.
OTHER INCOME
Our other income decreased to approximately $5.9 million for the quarter
ended March 31, 2000 from approximately $9.5 million for the quarter ended
March 31, 1999. The components of our other income are reflected in the
following table:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Other income:
Servicing revenue........................................... $2,300 $1,915
Real estate owned, net...................................... 748 1,473
Bankcard income, net........................................ 791 1,297
Gain on sale of loans....................................... 945 2,555
Loan fees and charges....................................... 786 960
Other, net.................................................. 364 1,264
------ ------
Total other income...................................... $5,934 $9,464
====== ======
</TABLE>
The decrease in other income was primarily attributable to a $1.6 million
decrease in gain on sale of loans, a $0.9 million decrease in other, net, a
$0.7 million decrease in real estate owned, net, and a $0.5 million decrease in
bankcard income, net, offset in part by a $0.4 million increase in servicing
revenue. The components of other income are further described below.
SERVICING REVENUE. Servicing revenue for the three months ended March 31,
2000 was $2.3 million, compared with $1.9 million for the three months ended
March 31, 1999, an increase of $0.4 million. The
13
<PAGE>
increase reflects the servicing activity of WCC, a newly formed, majority-owned
subsidiary. Such operations were previously performed by a former affiliate,
Capital Wilshire Holdings Inc. (CWH, formerly known as Wilshire Credit
Corporation), and were not included in the consolidated financial statements of
WFSG. Certain assets and liabilities of Wilshire Credit Corporation (including
its name) were transferred to WCC effective June 10, 1999 as part of our
reorganization.
REAL ESTATE OWNED, NET. Real estate owned, net decreased approximately $0.7
million from the quarter ended March 31, 1999 to the quarter ended March 31,
2000 due to a decline in gains on sales of properties acquired through
foreclosure or deed-in-lieu thereof.
BANKCARD INCOME, NET. Bankcard income, net was approximately $0.8 million
during the quarter ended March 31, 2000, compared with approximately
$1.3 million for the three months ended March 31, 1999. This decrease is
attributable in part to a management decision to discontinue processing for
high-risk audiotext merchants at the end of 1999, focusing on growth in
internet, mail order and retail merchant processing. Total processing volume
increased during the first quarter of 2000 over the similar period in the prior
year, but bankcard income, net declined due to smaller processing margins on the
current mix of merchants. In addition, approximately $0.4 million in loss
reserves were recorded during the current quarter, with no such provision during
the first quarter of 1999. These additional reserves were needed to offset
continuing losses incurred principally as a result of terminating auditotext
merchant relationships.
The financial results of First Bank's merchant bankcard processing
operations for the quarters ended March 31, 2000 and 1999 have been as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Bankcard revenues........................................... $ 3,970 $ 3,486
Bankcard processing expenses................................ (3,179) (2,189)
------- -------
Bankcard income, net........................................ 791 1,297
Other expenses.............................................. (933) (725)
------- -------
(Loss) income after other expenses.......................... $ (142) $ 572
======= =======
</TABLE>
GAIN ON SALE OF LOANS. Gain on sale of loans decreased by approximately
$1.6 million from the three months ended March 31, 1999 to the three months
ended March 31, 2000. The decrease is primarily due to gains of $2.6 million on
sales of approximately $192.7 million carrying value of loans during the three
months ended March 31, 1999, compared with gains of $0.9 million on sales of
approximately $9.6 million carrying value of loans for the 2000 period.
LOAN FEES AND CHARGES. Loan fees and charges decreased from approximately
$1.0 million for the three months ended March 31, 1999 to approximately
$0.8 million for the three months ended March 31, 2000. The decrease was
primarily due to a decline in new loan production at First Bank, partially
offset by ancillary charges and late fee income on loans serviced by WCC. Such
servicing operations were previously preformed by CWH, but were transferred to
WCC effective June 10, 1999 as part of our reorganization.
OTHER, NET. Other, net was approximately $0.4 million for the three months
ended March 31, 2000, compared with approximately $1.3 million for the three
months ended March 31, 1999. The decrease is primarily attributable to
management fees earned from WREI of $0.9 million for the quarter ended
March 31, 1999. No such fees have been accrued during the quarter ended
March 31, 2000. See Note 2 to the interim consolidated financial statements.
14
<PAGE>
OTHER EXPENSES
Our other expenses totaled approximately $11.0 million for the quarter ended
March 31, 2000 compared with approximately $21.1 million for the quarter ended
March 31, 1999, a decrease of $10.1 million. This decrease was primarily due to
decreases in loan service fees and expenses of $5.2 million, professional
services of $2.3 million, other general and administrative of $1.3 million, and
compensation and employee benefits of $0.9 million.
LOAN SERVICE FEES AND EXPENSES PAID TO AFFILIATE. Loan service fees and
expenses paid to affiliate decreased from $5.3 million for the quarter ended
March 31, 1999 to less than $0.1 million for the quarter ended March 31, 2000.
This decrease was primarily due to the inclusion of WCC's operating results with
WFSG in 1999 resulting from the restructuring.
PROFESSIONAL SERVICES. Professional services decreased to approximately
$1.1 million for the quarter ended March 31, 2000 from approximately
$3.3 million during the quarter ended March 31, 1999. In the 1999 period, we
incurred higher legal, accounting and consulting fees in connection with our
restructuring plan prior to the March 3, 1999 Chapter 11 petition filing. No
such non-recurring costs were incurred for the quarter ended March 31, 2000.
OTHER GENERAL AND ADMINISTRATIVE EXPENSES. Other general and administrative
expenses decreased to approximately $1.5 million for the quarter ended
March 31, 2000 from approximately $2.8 million for the quarter ended March 31,
1999, reflecting our efforts to reduce corporate overhead.
COMPENSATION AND EMPLOYEE BENEFITS. Compensation and employee benefits
totaled approximately $6.5 million for the quarter ended March 31, 2000,
compared with approximately $7.5 million for the quarter ended March 31, 1999.
This decrease was primarily due to reductions in our workforce, including our
European operations, during 1999, resulting in savings for the first quarter of
2000 of approximately $4.0 million, and a reduction in employee bonuses of
approximately $1.1 million. However, these reductions in compensation expense
were partially offset by the inclusion of approximately $4.2 million of total
compensation and benefits for WCC, of which the Company owns a 50.01% interest.
Such expenses were previously incurred by CWH, and were not included in WFSG's
consolidated financial statements prior to our reorganization, which was
effective June 10, 1999.
CHANGES IN FINANCIAL CONDITION
MORTGAGE-BACKED AND OTHER SECURITIES. For accounting purposes, our
mortgage-backed and other securities are classified as available for sale and
held to maturity. Our holdings of mortgage-backed securities available for sale
decreased approximately $2.0 million during the quarter ended March 31, 2000.
This decrease was primarily due to principal repayments of $11.8 million and an
increase in unrealized holding losses of $0.2 million, partially offset by
purchases of $9.9 million. Our holdings of mortgage-backed securities held to
maturity decreased approximately $0.5 million during the quarter ended
15
<PAGE>
March 31, 2000 primarily due to principal repayments. The following table sets
forth our holdings of mortgage-backed and other securities as of March 31, 2000
and December 31, 1999:
MORTGAGE-BACKED SECURITIES AND OTHER SECURITIES
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Available for sale:
Mortgage-backed securities.................................. $10,243 $10,362
Agency mortgage-backed securities........................... 31,300 33,221
Held to maturity:
U.S. Government and other securities........................ 6,032 5,979
Mortgage-backed securities.................................. 9,653 10,166
------- -------
Total investment securities............................. $57,228 $59,728
======= =======
</TABLE>
LOANS, NET. Our portfolio of loans, net of discounts and allowances,
increased by approximately $75.7 million during the quarter ended March 31,
2000. This increase is primarily attributable to the acquisition of Performing
loans at First Bank, 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. Our portfolio of discounted loans decreased by
approximately $0.1 million during the quarter ended March 31, 2000, primarily
due to principal repayments. It is anticipated that our future investments in
discounted loans as a percentage of our total loan portfolio will be reduced.
Discounted loans require significant capital resources prior to resolution,
which is generally six to twenty-four months following acquisition.
LOANS AND DISCOUNTED LOANS HELD FOR SALE, NET, AT LOWER OF COST OR
MARKET. Loans and discounted loans held for sale, net, at lower of cost or
market decreased by approximately $15.9 million during the quarter ended
March 31, 2000 primarily as a result of the sale of loans to increase liquidity
and reduce outstanding borrowings.
REAL ESTATE OWNED, NET. Real estate owned, net decreased by approximately
$0.8 million during the quarter ended March 31, 2000. The decrease was primarily
due to sales of properties for proceeds of approximately $2.3 million, partially
offset by acquisitions of real estate through foreclosure or deed-in-lieu
thereof from our portfolio of discounted loans.
DEPOSITS. First Bank's deposits increased by approximately $5.1 million
during the quarter ended March 31, 2000, primarily due to an increase in
wholesale certificates of deposit to fund the Bank's loan acquisitions.
SHORT-TERM BORROWINGS. Short-term borrowings decreased by approximately
$6.7 million during the quarter ended March 31, 2000. This decrease was
primarily due to repayments of debt facilities with the proceeds from the loan
sales described above, partially offset by $10.0 million in additional
borrowings at First Bank to fund new loan acquisitions.
FHLB ADVANCES. First Bank's FHLB advances increased by $32.0 million during
the quarter ended March 31, 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 our sensitivity to market interest-rate
fluctuations and enables the Bank to more closely match the maturities of its
investments and borrowings.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the measurement of our ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, purchase pools of loans, and for general business purposes. Our
sources of cash flow include certificates of deposit, FHLB advances, whole loan
and mortgage-backed securities sales, net interest income, borrowings under
repurchase financing facilities (if available), lines of credit from commercial
banks, and currently to a lesser extent, from securitizations, institutional
investors and other lenders. We also have borrowed from WREI. Our liquidity is
actively managed on a daily basis and is reviewed periodically by our Board of
Directors. This process is intended to ensure the maintenance of sufficient
funds to meet the needs of the Company.
Since late 1998, the market for mortgage-backed securities, particularly
subordinate mortgage-backed securities, has been depressed and the financial
markets generally continue to be volatile. Further, certain of our lenders have
expressed concern about continued lending to this industry given market
conditions and to us given recent operating losses. It is not clear to what
extent we can rely on short-term repurchase agreements as a source of liquidity.
At March 31, 2000, our cash balances totaled approximately $28.2 million;
however, $21.3 million of the balance was held at First Bank and is not
available for use by any Wilshire entity other than First Bank. At December 31,
1999, our cash balance was approximately $54.2 million, of which $48.4 million
was held at First Bank. The decrease in cash during the quarter was primarily
due to the Bank's acquisitions of new loans, as described above, partially
offset by additional borrowings to finance the acquisitions.
Based on our current and expected asset size, capital levels, and
organizational infrastructure, we believe there will be sufficient available
cash to meet our needs. We intend aggressively to seek new capital and financing
to permit us to more fully and more efficiently utilize our banking and loan
servicing platforms. There can be no assurance, however, that we will be able to
obtain new capital or will have sufficient cash flows. In addition, given
current market conditions, we likely will not securitize loans as a source of
liquidity.
Sources of liquidity for First Bank include wholesale certificates of
deposit, FHLB advances, and mortgage-backed securities repurchase borrowings. At
March 31, 2000, First Bank had approximately $405.8 million of certificates of
deposit. At March 31, 2000, scheduled maturities of certificates of deposit
during the 12 months ending March 31, 2001 and thereafter amounted to
approximately $369.3 million and approximately $36.5 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. However, management of
First Bank believes it can adjust the rates paid on certificates of deposit to
retain deposits in changing interest rate environments and that wholesale
deposits can be both a relatively efficient and stable source of funds. In
addition, First Bank management is currently increasing the amount of its FHLB
advance borrowings as a percentage of its total borrowings and deposits and is
exploring new ways to reduce its exposure to changes in interest rates,
including efforts to develop core deposits (which are less sensitive to interest
rate changes) and the purchase and origination of variable-rate loans.
Mortgage-backed securities which are subject to repurchase agreements, as
well as loans and real estate which secure other indebtedness, periodically are
revalued by the lender, and a decline in the value that is recognized by the
lender (whether or not the lender recognized the full fair value of the
security) may result in the lender requiring us to provide additional collateral
to secure the indebtedness. Primarily as a result of asset sales, we have had
adequate cash and cash equivalents to meet calls for additional collateral to
repay a portion of the related indebtedness or to meet our other operating and
financing requirements. In most instances, lenders under repurchase agreements
secured by mortgage-backed securities have withheld principal and/or interest
payments on such securities in order to reduce outstanding, unpaid margin calls.
At March 31, 2000, there were no outstanding collateral calls, as determined by
17
<PAGE>
our lenders, net of withheld principal and interest payments. If we are unable
to fund additional collateral requirements or to repay, renew or replace
maturing indebtedness on terms reasonably satisfactory to us, we may be required
to sell (on short notice) a portion of our assets, and could incur losses as a
result. Furthermore, since, from time to time, there is extremely limited
liquidity in the market for subordinate and residual interests in
mortgage-related securities, there can be no assurance that we will be able to
dispose of such securities promptly for fair value in such situations.
Adequate credit facilities and other sources of funding are essential to the
continuation of the Company's ability to purchase pools of loans and servicing
rights. The Company's growth strategy is dependent on its ability to raise
additional debt and/or equity financing and growth at First Bank and to find
equity partners for purchases of loan pools and servicing rights by our
servicing operation. To the extent that the current market environment persists,
such growth will depend largely on the Company's ability to find and use equity
partners for growth of our servicing operation portfolios and on growth at First
Bank. Otherwise, such growth may be significantly curtailed or delayed.
First Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
Current OTS regulations require that a savings association maintain liquid
assets of not less than 4% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less, of which short-term
liquid assets must consist of not less than 1%. Monetary penalties may be
imposed for failure to meet applicable liquidity requirements. First Bank has
complied with these requirements.
IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. All of the statements
contained in this Quarterly Report on Form 10-Q which are not identified as
historical should be considered forward-looking. In connection with certain
forward-looking statements contained in this Quarterly Report on Form 10-Q and
those that may be made in the future by or on behalf of the Company which are
identified as forward-looking, the Company notes that there are various factors
that could cause actual results to differ materially from those set forth in any
such forward-looking statements. Such factors include, but are not limited to,
the real estate market, interest rates, cease and desist orders existing with
regard to the Company, directive letter with regard to First Bank and other
regulatory matters, the availability of pools of loans at acceptable prices, the
availability of financing for existing assets, loan portfolio acquisitions and
servicing portfolio expansion, and the availability of additional financing.
Accordingly, there can be no assurance that the forward-looking statements
contained in this Quarterly Report on Form 10-Q will be realized or that actual
results will not be significantly higher or lower. The forward-looking
statements have not been audited by, examined by or subjected to agreed-upon
procedures by independent accountants, and no third-party has independently
verified or reviewed such statements. Readers of this Quarterly Report on
Form 10-Q should consider these facts in evaluating the information contained
herein. The inclusion of the forward-looking statements contained in this
Quarterly Report on Form 10-Q should not be regarded as a representation by the
Company or any other person that the forward-looking statements contained in
this Quarterly Report on Form 10-Q will be achieved. In light of the foregoing,
readers of this Quarterly Report on Form 10-Q are cautioned not to place undue
reliance on the forward-looking statements contained herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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
18
<PAGE>
and liabilities as interest rates change over time. Our asset and liability
management strategy is formulated and monitored by the asset and liability
committees for the Company and First Bank (the "Asset and Liability Committee")
which meets regularly to review, among other things, the sensitivity of our
assets and liabilities to interest rate changes, the book and market values of
assets and liabilities, unrealized gains and losses, including those
attributable to hedging transactions, purchase and securitization activity, and
maturities of investments and borrowings. First Bank's Asset and Liability
Committee coordinates with the Bank's Board of Directors and the Company's
investment committees with respect to overall asset and liability composition.
The Asset and Liability Committee is authorized to utilize a wide variety of
off-balance sheet financial techniques to assist them in the management of
interest rate risk. These techniques include interest rate swap agreements,
pursuant to which the parties exchange the difference between fixed-rate and
floating-rate interest payments on a specified principal amount (referred to as
the "notional amount") for a specified period without the exchange of the
underlying principal amount. Interest rate swap agreements are utilized to
reduce our exposure caused by the narrowing of the interest spread between fixed
rate loans held for investment and associated liabilities funding those loans
caused by changes in market interest rates. First Bank had approximately
$28.8 million notional principal amount in an interest rate swap agreement
outstanding at March 31, 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
$5 thousand during the quarter ended March 31, 2000.
At times, we have also hedged the interest rate exposure of fixed-rate or
lagging-index loans or securities that are either held or available for sale.
The Company creates a hedge which matches the principal amortization of such
assets against the maturity of our liabilities generally by entering into short
sales or forward sales of U.S. Treasury securities, Government securities,
interest rate futures contracts or interest rate swap agreements. This results
in market gains or losses on hedging instruments, in response to interest rate
increases or decreases, respectively, which approximate the amount of
corresponding market losses or gains, respectively, on assets being hedged. We
evaluate the interest rate sensitivity of each pool of loans or securities in
conjunction with the current interest rate environment and decide whether to
hedge the interest rate exposure of a particular pool. We generally do not hedge
the interest rate risk associated with holding non-lagging index adjustable-rate
mortgages pending their sale or securitization due to the decreased significance
of such risk. In general, when a pool of loans or securities are acquired, we
will determine whether or not to hedge and, with respect to any sale or
financing of any pool of loans through securitization, will determine whether or
not to discontinue its duration-matched hedging activities with respect to the
relevant loans.
In addition, as required by OTS regulations, First Bank's Asset and
Liability Committee also regularly reviews interest rate risk by forecasting the
impact of alternative interest rate environments on 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.
The following table quantifies the potential changes in our net portfolio
value at March 31, 2000, should interest rates go up or down (shocked) by 100 to
300 basis points, assuming the yield curves of the rate shocks will be parallel
to each other.
19
<PAGE>
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
<TABLE>
<CAPTION>
NPV AS % OF PV OF
NET PORTFOLIO VALUE ASSETS
------------------------------ --------------------
$ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
-------- -------- -------- --------- --------
CHANGE IN RATES (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+300bp...................................... $39,303 $(34,268) (47)% 6.32% (465)bp
+200bp...................................... 51,732 (21,839) (30) 8.09 (288)bp
+100bp...................................... 63,411 (10,160) (14) 9.67 (130)bp
0bp...................................... 73,571 -- 0 10.97 --
- -100bp...................................... 81,424 7,853 11 11.92 95bp
- -200bp...................................... 86,268 12,697 17 12.45 148bp
- -300bp...................................... 88,484 14,913 20 12.64 167bp
</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.
20
<PAGE>
WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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.
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.
No matter was submitted to a vote of security holders during the period
covered by this report.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
<C> <S>
++3.1 Certificate of Incorporation.
++3.2 By-laws
+10.5 Master Repurchase Agreement between First Bank of Beverly
Hills, F.S.B. and Bear Stearns Mortgage Capital
Corporation dated as of May 22, 1996
+10.6 Supplemental Terms and Conditions dated as of May 22, 1996
between First Bank of Beverly Hills, F.S.B. and Bear
Stearns Mortgage Capital Corporation
+10.7 Master Repurchase Agreement between Girard Savings Bank FSB
and Bear Stearns Mortgage Capital Corporation dated as of
December 22, 1995
10.12 Cease and Desist Order (Wilshire Financial Services Group
Inc. and Wilshire Acquisition Corporation) (incorporated
by reference to the Company's report on Form 10-K dated
April 2, 1999)
10.13 Purchase and Sale Agreement dated October 14, 1998 between
Salomon Brothers Realty Corp. and WMFC 1997-4 Inc.
(Incorporated by reference to the Company's report on
Form 8-K dated October 14, 1998).
10.14 Mortgage Loan Purchase Agreement dated October 30, 1998
between Wilshire Funding Corporation and Bear Stearns
Mortgage Capital Corporation (Incorporated by reference to
the Company's current report on Form 8-K dated
October 30, 1998).
*10.15 1999 Equity Participation Plan.
*10.16 Master Repurchase Agreement dated November 26, 1999 between
CS First Boston Mortgage Capital LLC and Wilshire Funding
Corp.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
*10.17 Master Repurchase Agreement dated December 15, 1999 between
CS First Boston (Europe) Limited and Wilshire Funding
Corp.
*10.18 Post-Restructuring Agreement dated June 8, 1999 among WCC,
Capital Consultants, Inc. and Wilshire Financial Services
Group Inc.
*10.19 DIP Loan Agreement dated March 3, 1999 between Wilshire Real
Estate Partnership L.P. and Wilshire Financial Services
Group Inc.
#10.20 Settlement Agreement dated December 10, 1999 between
Wilshire Real Estate Investment Inc. and Wilshire
Financial Services Group Inc.
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
-----------------------------------
* Incorporated by reference to the Company's report on Form 10-K
dated March 30, 2000.
+ Incorporated by reference to the Company's Registration Statement
on Form S-1 dated December 19, 1996 (Registration No. 333-15263).
++ Incorporated by reference to the Company's report on Form 8-K
dated June 15, 1999.
# Incorporated by reference to the Company's report on Form 8-K
dated December 29, 1999.
(b) Report on Form 8-K dated January 12, 2000, reporting the resignation
of the Company's President and Chief Operating Officer.
22
<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: May 15, 2000
By: /s/ STEPHEN P. GLENNON
----------------------------------
STEPHEN P. GLENNON
CHIEF EXECUTIVE OFFICER
By: /s/ BRUCE A. WEINSTEIN
----------------------------------
BRUCE A. WEINSTEIN
CHIEF FINANCIAL OFFICER
23
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-----------------------------
2000 1999
------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Diluted net income (loss) per share:
Net income (loss)......................................... $ 1,218 $ (25,953)
Average number of shares outstanding...................... 20,033,600 10,885,000
Net effect of dilutive stock options-based on treasury
stock method............................................ -- --
----------- -----------
Total average shares.................................... 20,033,600 10,885,000
=========== ===========
Diluted net loss per share................................ $ 0.06 $ (2.38)
=========== ===========
</TABLE>
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Balance Sheet as of March 31, 2000 and Statement of Earnings for the
three months ended March 31, 2000 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 28,216
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,543
<INVESTMENTS-CARRYING> 15,685
<INVESTMENTS-MARKET> 15,508
<LOANS> 542,942
<ALLOWANCE> 256,680
<TOTAL-ASSETS> 682,894
<DEPOSITS> 424,414
<SHORT-TERM> 25,194
<LIABILITIES-OTHER> 153,268
<LONG-TERM> 0
0
0
<COMMON> 93,481
<OTHER-SE> (13,463)
<TOTAL-LIABILITIES-AND-EQUITY> 682,894
<INTEREST-LOAN> 10,761
<INTEREST-INVEST> 1,149
<INTEREST-OTHER> 945
<INTEREST-TOTAL> 12,855
<INTEREST-DEPOSIT> 5,582
<INTEREST-EXPENSE> 7,458
<INTEREST-INCOME-NET> 5,397
<LOAN-LOSSES> (1,396)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,533
<INCOME-PRETAX> 2,194
<INCOME-PRE-EXTRAORDINARY> 1,218
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,218
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.06
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 264,498
<CHARGE-OFFS> 2,709
<RECOVERIES> 330
<ALLOWANCE-CLOSE> 256,680
<ALLOWANCE-DOMESTIC> 234,705
<ALLOWANCE-FOREIGN> 21,975
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
