(Mark one)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended December 31, 2001
[ ] Transitional Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required)
For the transition period from to
Wilshire Financial Services Group Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 93-1223879 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 1776 SW Madison Street, Portland, OR | 97205 |
| (Address of principal executive offices) | (Zip Code) |
(503) 223-5600
(Registrant's telephone number, including area code)
None.
| Name of each exchange | |
| Title of each class | on which registered |
| Common Stock. | None. |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No____
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing sales price on March 1, 2002, was $17,511,645.
As of March 1, 2002, 16,180,604 shares of Wilshire Financial Services Group Inc.'s common stock, par value $0.01 per share, were outstanding.
None.
Item Page
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PART I 4
1. Business.................................................................................... 4
2. Properties.................................................................................. 14
3. Legal Proceedings........................................................................... 14
4. Submission of Matters to a Vote of Security Holders......................................... 15
PART II 15
5. Market for the Registrant's Common Equity and Related Stockholder Matters................... 15
6. Selected Financial Data and Operating Statistics............................................ 16
7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 20
7A. Quantitative and Qualitative Disclosures About Market Risk................................. 36
8. Financial Statements and Supplementary Data................................................. 36
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 36
PART III 37
10. Directors and Executive Officers of the Registrant......................................... 37
11. Executive Compensation..................................................................... 38
12. Security Ownership of Certain Beneficial Owners and Management............................. 38
13. Certain Relationships and Related Transactions............................................. 39
PART IV 39
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 39
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. All of the statements contained in this Annual Report on Form 10-K which are not identified as historical should be considered forward-looking. In connection with certain forward-looking statements contained in this Annual Report on Form 10-K and those that may be made in the future by or on behalf of the Company which are identified as forward-looking, the Company notes that there are various factors that could cause actual results to differ materially from those set forth in any such forward-looking statements. Such factors include, but are not limited to, the condition of the real estate market, interest rates, regulatory matters, the availability of pools of servicing rights and loans at acceptable prices, the availability and conditions of financing for loan pool acquisitions, mortgage loan servicing rights and other financial assets, and the outcome of the litigation described in Item 3. Accordingly, there can be no assurance that the forward-looking statements contained in this Annual Report on Form 10-K will be realized or that actual results will not be significantly higher or lower. The forward-looking statements have not been audited by, examined by or subjected to agreed-upon procedures by independent accountants, and no third party has independently verified or reviewed such statements. Readers of this Annual Report on Form 10-K should consider these facts in evaluating the information contained herein. The inclusion of the forward-looking statements contained in this Annual Report on Form 10-K should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Annual Report on Form 10-K will be achieved. In light of the foregoing, readers of this Annual Report on Form 10-K are cautioned not to place undue reliance on the forward-looking statements contained herein.
Wilshire Financial Services Group Inc. and subsidiaries ("WFSG" or the "Company"), a diversified financial services company, conducts banking and lending operations in southern California and surrounding states and specialized mortgage loan servicing and investment operations nationwide through its two principal business segments, Banking and Specialty Servicing and Finance.
| o | Banking Operations—Through its wholly-owned subsidiary, First Bank of Beverly Hills, F.S.B. (the “Bank” or “FBBH”), the Company conducts a retail and wholesale banking business focused primarily on specialty-niche products, including the origination of small-balance commercial and multi-family real estate loans and investments in residential whole loans and mortgage-backed securities. At December 31, 2001, FBBH had total assets of approximately $716.8 million and employed 35 people. |
| o | Specialty Servicing and Finance Operations—Through its majority-owned subsidiary, Wilshire Credit Corporation (“WCC”), the Company conducts a full-service mortgage and consumer loan servicing business, specializing in the servicing of labor-intensive mortgage pools requiring expertise in loss mitigation and/or investor reporting. Through its wholly-owned subsidiary, Wilshire Funding Corporation (“WFC”), the Company conducts an investment and co-investment business with institutional investors where such investments align the Company’s interests with those of such institutional investors and provide operating leverage for the servicing operations of WCC. Together, WCC and WFC are referred to as “Specialty Servicing and Finance Operations”. At December 31, 2001, the Company’s Specialty Servicing and Finance Operations employed 270 people and serviced approximately $3.4 billion principal balance of residential and commercial mortgage pools for approximately 700 individual and institutional investors and government agencies. |
The Bank, a federally chartered savings institution regulated by the Office of Thrift Supervision ("OTS"), is headquartered in Calabasas, California and conducts its branch banking activities in Beverly Hills, California. WFSG's administrative, investment and loan servicing headquarters are located at 1776 SW Madison Street, Portland, Oregon 97205, and its telephone number is (503) 223-5600. The Company employed 318 people, including executive and administrative personnel at the parent company, as of December 31, 2001.
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 restructuring was the Company's necessary response to significant adverse market factors arising in late 1998 and continuing into early 1999. For financial reporting purposes, the Company accounted for the Plan effective May 31, 1999. The periods prior to this date have been designated "Predecessor Company" and the periods subsequent to this date have been designated "Reorganized Company." As a result of the Plan, the Company believes that the results of operations of the Reorganized Company are not comparable to those of the Predecessor Company.
In its Banking Operations, the Bank generates deposits and obtains funding from other cost-effective sources, including short-term repurchase agreements and longer-term borrowings. The Bank deploys these funds to invest in securities and originate mortgage loans within our tolerance limits for interest-rate and credit risk. The resultant net interest spread and the Bank's low fixed-cost structure enable the Bank to operate profitably and comply with its regulatory requirements. The Bank seeks to grow its deposit franchise in southern California and to leverage its strengths in residential whole loan and mortgage-backed securities investments and small balance commercial and multi-family mortgage lending to increase its earning-asset base. As discussed more fully below (see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations), the Bank's management has reduced substantially its exposure to credit risk in 2001 through a reduction in its delinquent loans (as a % of total loans) from 3.3% at year-end 2000 to 1.9% at year-end 2001 and has reduced its exposure to interest rate risk through its purchases of adjustable-rate mortgages and mortgage-backed securities and the utilization of longer-term Federal Home Loan Bank ("FHLB") borrowings. In implementing its strategic focus, the Bank is committed to growing its asset platform with high-quality earning assets while maintaining an effective overhead cost structure.
In its Specialty Servicing and Finance Operations, the Company seeks to leverage its core competencies in special servicing, loss mitigation and client-customized investor reporting by expanding its contract servicing for institutional investors, and by investing its capital primarily in the purchase of servicing rights and/or servicing platforms for its own account and through co-investment with institutional investors. Management believes that market opportunities to grow its serviced mortgage assets and resulting servicing income exist and will continue to exist. The Company maintains an infrastructure which anticipates such growth and which it believes provides a scalable platform for high quality earnings growth in the form of recurring long-term servicing and investment income. Through WFC, the Company deploys its capital where such investments or co-investments with others serve to grow its serviced asset platform and provide anticipated superior risk-adjusted rates of return. The Company employs financial leverage in instances where (1) the expected cash flows from the underlying earning assets generally match the contractual repayment terms of the related debt and (2) the employment of such leverage achieves the Company's objectives in growing its serviced asset base.
Management believes that opportunities to grow its Specialty Servicing and Finance Operations exist as a result of the exodus of sub-prime mortgage originators and their related servicing operations from this niche, and a shortage of capacity among competing special servicers in the industry that the Company believes such exodus has created.
The Company believes that its success in implementing this dual strategy in its Banking Operations and in its Specialty Servicing and Finance Operations depends primarily on its ability to (1) evaluate and manage credit risk, (2) efficiently service mortgage loan pools requiring special competence in loss mitigation and specialized client-driven investor reporting, (3) employ financial leverage such that cash flows from the underlying investments generally match the debt service requirements, and (4) effectively manage interest-rate risk.
The Bank originates and acquires loans secured by properties located primarily in California, purchases government and agency securities and other securities (including mortgage-backed securities), substantially all of which are rated AAA or better, and offers specialty lending products to small businesses and professionals. Until June 2001, the Bank also conducted a Visa and Mastercard processing business and operated a commercial banking subsidiary, George Elkins Mortgage Banking ("GEMB"). Effective June 30, 2001, the Bank disposed of these two divisions, and has subsequently refocused on its core retail banking and lending activities.
The Bank originates and acquires high-quality first-mortgage loans secured by residential, multi-family and commercial properties located primarily in California. The following table sets forth the composition of the Bank's portfolio of loans by type of loan at the dates indicated.
Composition of FBBH Loans
December 31,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(Dollars in thousands)
Single-family residential ............................... $ 220,731 $ 225,091 $ 190,375 $ 277,765 $ 185,294
Multi-family residential ................................ 150,367 156,647 96,611 65,482 55,216
Commercial real estate .................................. 151,827 178,205 163,419 126,735 64,695
Consumer and other ...................................... 6,939 9,889 12,575 23,094 15,921
--------- --------- --------- --------- ---------
Loan Portfolio Principal Balance ................... 529,864 569,832 462,980 493,076 321,126
Premium (unaccreted discount) and deferred fees ......... 3,554 2,658 4,018 5,932 (6,228)
Allowance for loan losses (1) ........................... (8,116) (10,233) (18,600) (23,398) (54,971)
--------- --------- --------- --------- ---------
Total Loan Portfolio, net .......................... $ 525,302 $ 562,257 $ 448,398 $ 475,610 $ 259,927
========= ========= ========= ========= =========
| (1) | For discussion of the allowance for loan losses allocation for purchase discount, see "Asset Quality--Allowance for Loan Losses" |
The real properties which secure the Bank's mortgage loans are located throughout the United States. At December 31, 2001, the state with the greatest concentration of properties securing the loans was California, in which the Bank held $379.1 million principal amount of loans, or approximately 72% of the Bank's total portfolio.
The following table sets forth certain information at December 31, 2001 regarding the dollar amount of loans based on their contractual terms to maturity and includes scheduled payments but not potential prepayments, as well as the dollar amount of those loans which have fixed or adjustable interest rates. Loan balances have not been adjusted for unamortized discounts or premiums, deferred loan fees and the allowance for loan losses.
Maturity of FBBH Loans
Maturing in
-------------------------------------------------------------------------------
After One After Five
Year Years
One Year Through Through After Ten
Or Less Five Years Ten Years Years Total
--------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
Single-family residential .......................... $ 37 $ 499 $ 1,149 $219,046 $220,731
Multi-family residential ........................... 4,233 6,843 64,328 74,963 150,367
Commercial and other mortgage loans ................ 10,374 38,964 79,655 22,834 151,827
Consumer and other loans ........................... 67 139 3,072 3,661 6,939
Interest rate terms on amounts due:
Fixed .......................................... 9,098 7,893 73,394 95,432 185,817
Adjustable ..................................... 5,613 38,552 74,810 225,072 344,047
Scheduled contractual principal repayments do not reflect the actual maturities of mortgage loans because of prepayments and, in the case of conventional mortgage loans, due-on-sale clauses. The average life of mortgage loans, particularly fixed-rate loans, tends to increase when current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when current mortgage loan rates are substantially lower than rates on existing mortgages.
The Bank invests in securities to earn positive net interest spread. The following table sets forth the Bank's holdings of mortgage-backed and other securities at the dates indicated:
Mortgage-Backed and Other Securities
December 31,
---------------------------------------
2001 2000 1999
--------- --------- ---------
(Dollars in thousands)
Available for sale:
AAA mortgage-backed securities ................................... $ 51,436 $ -- $ --
Government agency mortgage-backed securities ..................... 64,377 37,817 33,152
Other mortgage-backed securities ................................. 360 421 802
Other asset-backed securities .................................... -- 9,500 --
Other securities ................................................. 8,000 -- --
Held to maturity:
U.S. Government and other securities ............................. -- -- 5,979
Mortgage-backed securities ....................................... -- -- 10,196
-------- -------- --------
Total investment securities ................................. $124,173 $ 47,738 $ 50,129
======== ======== ========
Through June 2001, the Bank conducted a merchant bankcard processing business, which generated revenues through merchant discounts and processing fees for Visa and MasterCard transactions. The Bank sold this division effective June 30, 2001.
The Bank's income from merchant bankcard processing operations for the years ended December 31, 2001, 2000 and 1999 was approximately $0.8 million, $0.7 million and $1.0 million, respectively. The income for 2001 reflects six months' activity.
The Bank's principal funding sources consist of (1) checking, savings and certificate of deposit accounts generated at its Beverly Hills retail branch ("Retail Deposits"); (2) certificates of deposit generated through the Bank's money desk ("Wholesale Deposits"); (3) certificates of deposit generated through independent brokers ("Brokered Deposits"); (4) borrowings from the Federal Home Loan Bank of San Francisco ("FHLB Advances"); and (5) repurchase agreements and other short-term borrowings with major banks.
FBBH generally accumulates deposits through its Beverly Hills branch, local media advertising and by participating in deposit rate surveys which list the Bank among the higher rate-paying insured institutions in the nation. The Bank competes for deposits to a large extent on the basis of rates and, therefore, could experience difficulties in attracting deposits if it could not continue to offer deposit rates at levels above those of other banks and savings institutions.
The following table sets forth information relating to the Bank's borrowings and other interest-bearing obligations at the dates indicated.
Borrowings and Interest-Bearing Obligations
December 31,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
(Dollars in thousands)
Deposits .................................................................. $ 439,469 $ 435,073 $ 419,229
Repurchase agreements and other short-term borrowings ..................... -- 4,272 50
FHLB Advances ............................................................. 189,500 132,000 80,000
------------ ------------ ------------
Total ............................................................... $ 628,969 $ 571,345 $ 499,279
============ ============ ============
Deposits. The following table sets forth information relating to the Bank's deposits at the dates indicated.
December 31,
---------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
Avg. Avg. Avg.
Amount Rate Amount Rate Amount Rate
---------- ------ ---------- ------ ---------- ------
(Dollars in thousands)
Non-interest bearing checking accounts ............ $ 2,794 0.00% $ 10,663 0.00% $ 11,321 0.00%
NOW and money market checking accounts ............ 28,811 2.12 18,743 5.68 4,383 4.46
Savings accounts .................................. 4,265 1.91 872 2.99 399 2.01
Certificates of deposit ........................... 403,599 4.42 404,795 6.46 403,126 5.49
---------- ------ ---------- ------ ---------- ------
Total deposits .............................. $ 439,469 4.22% $ 435,073 6.02% $ 419,229 5.33%
========== ====== ========== ====== ========== ======
As a percentage of the Bank's total deposits at December 31, 2001, Wholesale Deposits account for 28%, Brokered Deposits account for 44% and Retail Deposits account for 28%. Generally, the Bank obtains Wholesale Deposits on terms more financially attractive to it than those obtainable through Brokered Deposits.
The following table sets forth, by various interest rate categories, the Bank's certificates of deposit at December 31, 2001.
Interest Rates for Certificates of Deposit
December 31, 2001
-------------------
(Dollars in thousands)
3.50% or less................................................. $ 103,245
3.51-4.50%.................................................... 48,346
4.51-5.50%.................................................... 210,294
5.51-6.50%.................................................... 19,629
6.51-7.50%.................................................... 22,085
------------
Total................................................... $ 403,599
============
The following table sets forth the amount and maturities of the Bank's certificates of deposit at December 31, 2001.
Maturities of Certificates of Deposit
Original Maturity in Months
-----------------------------------------
12 or Less Over 12 to 36 Over 36
-------------- ------------- ---------
(Dollars in thousands)
Balances Maturing in 3 Months or Less.................. $ 97,470 $ 5,584 $ 127
Weighted Average Rate............................ 4.00% 5.17% 5.98%
Balances Maturing in over 3 Months to 12
Months.............................................. $ 145,851 $ 43,313 $ 278
Weighted Average Rate............................ 3.84% 5.57% 6.11%
Balances Maturing in over 12 Months to 36
Months.............................................. -- $ 108,970 $ 282
Weighted Average Rate............................ -- 5.05% 5.28%
Balances Maturing in over 36 Months.................... -- -- $ 1,724
Weighted Average Rate............................ -- -- 6.47%
At December 31, 2001, the Bank had outstanding an aggregate of approximately $285.6 million of certificates of deposit in face amounts equal to or greater than $100,000 maturing as follows: approximately $69.0 million within three months, approximately $88.2 million over three months through six months, approximately $36.6 million over six months through 12 months, and approximately $91.8 million thereafter.
FHLB Advances. The Bank obtains FHLB Advances based on the security of certain of its assets, provided FBBH has met certain standards related to its creditworthiness. FHLB Advances are available to member financial institutions such as FBBH for investment and lending activities and other general business purposes. FHLB Advances are made pursuant to several different credit programs (each of which has its own interest rate, which may be fixed or adjustable). The Federal Home Loan Bank of San Francisco has agreed to provide a credit facility to the Bank equal to 25% of total assets measured as of each previous quarter-end and for terms of up to 10 years.
The following table sets forth the Bank's FHLB advances at and for the years ended December 31, 2001, 2000, and 1999:
At or for the Year Ended
December 31,
2001 2000 1999
---------- ---------- ----------
(Dollars in thousands)
FHLB Advances:
Average amount outstanding during the period.......................... $ 153,269 $ 111,615 $ 33,115
Maximum month-end balance outstanding during the period............... 189,500 132,000 87,500
Weighted average rate:
During the period............................................... 6.25% 6.53% 5.84%
At end of period................................................ 5.54% 6.58% 6.33%
No short-term FHLB Advances were outstanding during the above periods. As of December 31, 2001, the Bank had $30.5 million of FHLB Advances maturing within one year, $60.0 million maturing within two years, $38.5 million maturing within three years, $26.0 million maturing within four years, and $34.5 million maturing within five years.
Repurchase Agreements and Other Short-Term Borrowings. From time to time, if required for liquidity purposes, the Bank will enter into short-term repurchase agreements which enable the Bank to purchase investment securities and pools of loans with immediate financing. In December 2001 the Bank entered into a repurchase agreement with Countrywide Securities Corporation and, in January 2002, borrowed approximately $35 million under this facility to purchase mortgage-backed and other investment securities.
The Bank is exposed to certain credit risks related to the value of the collateral that secures its loans and the ability of borrowers to repay their loans. The Bank closely monitors its pools of loans and foreclosed real estate for potential problems on a periodic basis.
Non-Performing Loans. It is the Bank's policy to establish an allowance for uncollectible interest previously accrued on loans that are over 90 days past due, or at any time when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. Upon such a determination, those loans are placed on non-accrual status and deemed to be non-performing. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed by a charge to interest income.
Foreclosed Real Estate. The Bank carries its holdings of foreclosed real estate at the lower of cost or fair value less estimated costs to sell. Holding and maintenance costs related to properties are recorded as expenses in the period incurred. Declines in values of foreclosed real estate subsequent to acquisition are charged to income and recognized as a valuation allowance. Subsequent increases in the valuation of real estate owned are reflected as a reduction in the valuation allowance, but not below zero, and credited to income. The following table sets forth the aggregate carrying value of the Bank's holdings of foreclosed real estate (by source of acquisition) at the dates indicated.
Bank Foreclosed Real Estate by Loan Type
December 31,
--------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Loans:
Single-family residential ................... $ 253 $ 648 $ 1,073 $ 9,997 $ 52,235
Multi-family residential .................... -- 32 462 271 3,082
Commercial and other mortgage loans ......... 327 110 929 917 1,227
---------- ---------- ---------- ---------- ----------
Total ................................. 580 790 2,464 11,185 56,544
Valuation allowance for losses .............. (151) (11) (198) (1,715) (5,070)
---------- ---------- ---------- ---------- ----------
Foreclosed real estate owned, net ..... $ 429 $ 779 $ 2,266 $ 9,470 $ 51,474
========== ========== ========== ========== ==========
Allowance for Loan Losses. The Bank maintains an allowance for loan losses at a level believed adequate by management to absorb estimated losses inherent in the loan portfolios. The allowance is increased by provisions for loan losses charged against operations, recoveries of previously charged off loans, and allocations of discounts on purchased loans, and is decreased by loan charge-offs. Loans are charged off when they are deemed to be uncollectable, or in the case of automobile, mobile home and other consumer loans, when payments are delinquent by more than 120 days.
The Bank uses its internal asset review system to evaluate all loans individually and to classify loans as pass, special mention, substandard, doubtful or loss. These terms correspond to varying degrees of risk that the loans will not be collected in part or in full. The frequency at which a specific loan is subjected to internal asset review depends on the type and size of the loan and the presence or absence of other risk factors, such as delinquency and changes in collateral values. The allowance for loan losses includes specific valuation allowances ("SVAs") established for impaired loans and for certain other classified loans, and general valuation allowances ("GVAs").
SVAs are based on the estimated fair value of the collateral for impaired or troubled collateral dependent loans, in most cases. GVAs are based on qualitative and quantitative factors that are updated each quarter. The qualitative factors are subject to management's evaluation after consideration of certain credit risk characteristics. These factors include, but are not limited to, the following: the institution's historical and recent loss experience in its portfolios; the volume, severity and trend of non-performing assets; the extent to which refinances or loan modifications are made to maintain loans in a current status; known deterioration in credit concentrations or certain classes of loans; loan to value ratios of real estate secured loans; risks associated with specific types of collateral; the quality and effectiveness of the lending policy, loan purchase policy, internal asset review policy, charge-off, collection and recovery policies; current and anticipated conditions in the general and local economies which might affect the collectability of the institution's asset; anticipated changes in the composition or volume of the portfolio; reasonableness standards in accordance with regulatory agency policies; and the comparison of the Bank's GVA with that of industry peers.
To assess the adequacy of the Bank's allowance for loan losses, the portfolio is segmented into three components: impaired loans, homogeneous loans, and non-homogeneous loans.
• Impaired loans have been defined as all loan types classified either substandard, doubtful, or loss (including loans which may have been upgraded but which are troubled debt restructurings). SVAs are measured on a loan-by-loan basis utilizing either the discounted cash flow or fair market value approaches, as defined under the accounting standards for impaired loans.
• Homogeneous loans have been defined as loans secured by one to four single-family residences, mobile home loans, and consumer loans, and are analyzed by their respective loan group. GVA loss estimates are measured utilizing annual loss rates for homogeneous pools. The Bank currently uses a loss horizon of four years for this analysis.
• Non-homogeneous loans include the following loan types: multifamily, commercial real estate, “bridge” loans, construction loans, and commercial unsecured. The non-homogeneous loans are analyzed individually. GVA loss estimates are developed based upon risk rating utilizing migration analysis, which considers the impact of losses on a loan-by-loan basis. A loss horizon of four years has been developed with the objective of achieving loss data to capture a full business cycle.
When FBBH increases the allowance for loan losses related to loans, it records a corresponding increase to the provision for loan losses in the statement of operations. The OTS, as part of its examination process, periodically reviews the Bank's allowances for losses and the carrying values of its assets. There can be no assurance that the OTS will not require additional reserves following future examinations.
The following table sets forth information with respect to the Bank's allowance for loan losses by category of loan.
Allowance for Loan Losses by Loan Category
December 31,
--------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Allowance for loan losses:
Real estate ............................................. $ 6,912 $ 8,845 $ 11,363 $ 13,182 $ 20,429
Non-real estate ......................................... 1,060 961 2,601 4,981 3,511
Discounted loans ........................................ 144 427 4,636 5,235 31,031
---------- ---------- ---------- ---------- ----------
Total allowance for loan losses ......................... $ 8,116 $ 10,233 $ 18,600 $ 23,398 $ 54,971
========== ========== ========== ========== ==========
Percentage of loans in each category to total loans:
Real estate ............................................. 98.6% 98.1% 94.1% 91.5% 51.9%
Non-real estate ......................................... 1.3 1.7 2.6 4.6 4.7
Discounted loans ........................................ 0.1 0.2 3.3 3.9 43.4
---------- ---------- ---------- ---------- ----------
Total ................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ==========
The following table sets forth the activity in the allowance for loan losses during the periods indicated.
Activity in the Allowance for Loan Losses
Year Ended December 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
Balance, beginning of period ................ $ 10,233 $ 18,600 $ 23,398 $ 54,971 $ 37,555
Allocation of purchased loan discount:
at acquisition ........................ -- -- -- -- 49,957
at disposition ........................ -- (1,150) (1,538) (18,259) (33,197)
Charge-offs ................................. (894) (1,794) (2,468) (8,927) --
Recoveries .................................. 507 377 458 713 1,206
Recapture of loan losses .................... (1,730) (5,800) (1,250) (5,100) (550)
------------ ------------ ------------ ------------ ------------
Balance, end of period ...................... $ 8,116 $ 10,233 $ 18,600 $ 23,398 $ 54,971
============ ============ ============ ============ ============
The table below sets forth the delinquency status of the Bank's loans at the dates indicated.
Delinquency Experience for Non-Discounted Loans
December 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
Balance of delinquent loans:
31-60 days .................................... $ 1,788 $ 13,487 $ 2,845 $ 2,148 $ 8,063
61-90 days .................................... 836 920 1,162 931 2,297
91 days or more (1) (2) ....................... 7,570 4,452 3,816 6,940 28,574
------------ ------------ ------------ ------------ ------------
Total loans delinquent .................. $ 10,194 $ 18,859 $ 7,823 $ 10,019 $ 38,934
============ ============ ============ ============ ============
Delinquent loans as a percentage of total
loan portfolio:
31-60 days .................................... 0.3% 2.4% 0.6% 0.4% 4.4%
61-90 days .................................... 0.2 0.1 0.3 0.2 1.3
91 days or more (1) (2) ....................... 1.4 0.8 0.8 1.5 15.7
------------ ------------ ------------ ------------ ------------
Total ................................... 1.9% 3.3% 1.7% 2.1% 21.4%
============ ============ ============ ============ ============
(1) All loans delinquent over 90 days were on nonaccrual status.
(2) The Bank classifies loans as discounted or non-discounted on a pool basis. Each pool is designated as discounted or non-discounted based on whether the pool consists primarily of discounted or non-discounted loans at the time of acquisition. For example, a pool of non-discounted loans may contain non-performing loans at the time of acquisition as long as the non-performing loans were not the primary component of the pool at the time. At year-end 2001, the Bank held discounted loans with an aggregate principal balance of $0.7 million.
The Company's Specialty Servicing and Finance Operations are conducted by WCC, a majority-owned subsidiary of the Company formed in June 1999, and by WFC, a wholly-owned investment subsidiary. WCC provides loan portfolio management services, including billing, portfolio administration and collection services for pools of loans. WCC has developed specialized procedures and proprietary software designed to service performing, non-performing and sub-performing loans and foreclosed real estate. As part of its loan pool acquisition or servicing analysis, WCC develops a strategy for each pool of loans that is intended to maximize cash flow from that pool of loans. The Company is the majority owner of WCC and, as such, shares in 50.01% of WCC's revenues and expenses. The remaining 49.99% interest in WCC's operations is reflected as "Minority interest" in the Company's consolidated statements of operations.
The following table sets forth the composition of loans serviced by WCC by type of loan at the dates indicated.
December 31,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
(Dollars in thousands)
Single-family residential ............................... $ 3,020,267 $ 1,909,761 $ 1,516,536
Multi-family residential ................................ 141,297 163,511 104,307
Commercial real estate .................................. 192,275 223,539 221,605
Consumer and other (1) .................................. 90,497 265,598 271,515
------------ ------------ ------------
Total ............................................. $ 3,444,336 $ 2,562,409 $ 2,113,963
============ ============ ============
(1) Approximately $166 million in unpaid principal balance of fully-reserved consumer loans previously acquired by the Company were charged off in January 2001.
Prior to June 1999, the Specialty Servicing and Finance Operations acquired pools of performing and sub-performing residential, multi-family and commercial mortgage loans and, to a lesser degree, mortgage backed securities and servicing rights. Currently, and for the foreseeable future, the Company intends to focus primarily on contract servicing for third parties, the acquisition of servicing rights and, to a lesser degree, the acquisition of loan pools through co-investment arrangements with institutional investors.
Loan pools acquired by the Company's Specialty Servicing and Finance Operations, at the time of acquisition, consist primarily of discounted loans. At December 31, 2001, WCC and WFC held approximately $15.3 million of discounted loans.
The following table sets forth the composition of such discounted loans held by WCC and WFC by type of loan at the dates indicated.
Composition of Discounted Loans
December 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
Single-family residential .......................... $ 6,643 $ 8,684 $ 17,879 $ 258,121 $ 628,992
Multi-family residential ........................... 1,142 634 1,477 3,015 29,385
Commercial real estate ............................. 1,582 3,464 14,990 31,768 109,808
Consumer and other (1) ............................. 54,852 211,836 220,439 287,967 271,674
------------ ------------ ------------ ------------ ------------
Discounted Loans Principal Balance ........... 64,219 224,618 254,785 580,871 1,039,859
Unaccreted discount and deferred fees .............. (3,497) (1,385) (4,624) (6,569) (308,046)
Allowance for loan losses (1) (2) (3) .............. (45,413) (213,019) (223,675) (270,588) (63,304)
------------ ------------ ------------ ------------ ------------
Total Discounted Loans, net (4) ................ $ 15,309 $ 10,214 $ 26,486 $ 303,714 $ 668,509
============ ============ ============ ============ ============
| (1) | Prior to 1999, the predecessor company to the Company purchased pools of non-performing loans at prices representing a significant discount from the loans' unpaid balances. The Company fully reserved for estimated losses on these discounted loans at the time of their acquisition. Currently, the Company is seeking to sell these loans, and continues to pursue collection on such loans when permitted by applicable collection statutes and where it is deemed cost-effective. Approximately $166 million in unpaid principal balance of fully-reserved discounted loans were charged off in January 2001. |
| (2) | For discussion of the allowance for loan losses allocation for purchase discount, see "Asset Quality--Allowance for Loan Losses." |
| (3) | Included in the allowance for loan losses at December 31, 1998 is $30.4 million classified as market valuation losses and impairments in the audited financial statements. The balance represents other than temporary impairment recognized to reduce the carrying value of certain non-discounted loans at December 31, 1998. |
| (4) | The real properties that secure the Company's discounted loans are located throughout the United States. At December 31, 2001, the five states with the greatest concentration of properties securing our discounted loans were California, Florida, Texas, Oregon and Massachusetts, in which the Company held $13.6 million, $10.4 million, $5.5 million, $2.9 million and $2.8 million principal amount of loans, respectively. |
Funding sources for the Company's servicing rights and, to a lesser extent, loan pool acquisitions consist largely of recourse and non-recourse debt secured by the underlying earning assets. The anticipated cash flows from these assets generally match the contractual repayment terms of such debt.
The carrying value of our subordinated mortgage-backed securities at December 31, 2001, 2000, and 1999 totaled $3.4 million, $6.4 million and $9.6 million, respectively. The related short-term repurchase agreement which financed these securities was repaid in full in February 2001. We intend to purchase such securities in the future only in instances where such purchases carry the rights to service the underlying loan pools backing such securities.
Our Specialty Servicing and Finance Operations are exposed to certain credit risks related to the value of the collateral that secures our loans and the ability of borrowers to repay their loans. We monitor our pools of loans and foreclosed real estate for potential problems on a periodic basis.
Non-Performing Loans. It is our policy to establish an allowance for uncollectible interest on previously accrued loans that are over 90 days past due, or at any time when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. Upon such a determination, those loans are placed on non-accrual status and deemed to be non-performing. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed by a charge to interest income.
Foreclosed Real Estate. WCC and WFC carry their holdings of foreclosed real estate at the lower of cost or fair value less estimated costs to sell. Holding and maintenance costs related to properties are recorded as expenses in the period incurred. Declines in values of foreclosed real estate subsequent to acquisition are charged to income and recognized as a valuation allowance. Subsequent increases in the valuation of real estate owned are reflected as a reduction in the valuation allowance, but not below zero, and credited to income. The following table sets forth the aggregate carrying value of our holdings of foreclosed real estate (by source of acquisition) at the dates indicated.
WCC and WFC Foreclosed Real Estate by Loan Type
December 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
Loans (1):
Single-family residential ................. $ 358 $ 449 $ 1,872 $ 18,827 $ 45,501
Multi-family residential .................. 118 53 199 2,610 2,270
Commercial and other mortgage loans ....... 380 834 2,916 5,831 9,970
------------ ------------ ------------ ------------ ------------
Total ............................... 856 1,336 4,987 27,268 57,741
Foreclosed real estate purchased directly:
Single-family residential ................. -- -- -- 4,173 40,706
Commercial and other mortgage loans ....... -- -- 273 2,011 --
Valuation allowance for losses .................. (554) (345) (1,567) -- --
------------ ------------ ------------ ------------ ------------
Foreclosed real estate owned, net ......... $ 302 $ 991 $ 3,693 $ 33,452 $ 98,447
============ ============ ============ ============ ============
(1) The decreases in foreclosed real estate are due to sale of the properties to third parties.
Allowance for Loan Losses. We maintain an allowance for loan losses at a level believed adequate by management to absorb estimated incurred losses in the loan portfolios. The allowance is increased by provisions for loan losses charged against operations, recoveries of previously charged-off loans, and allocations of discounts on purchased loans, and is decreased by loan charge-offs. Loans are charged off when they are deemed to be uncollectable, or in the case of automobile and other consumer loans, when payments are delinquent by more than 120 days.
When the Company acquires pools of discounted loans, it records an increase to the allowance for loan losses by allocating a portion of the purchase discount deemed to be associated with measurable credit risk. The allocation is based on the analyses of specific and general valuation allowances discussed above. Amounts allocated to the allowance for loan losses from purchase discounts do not increase the provision for loan losses recorded in the statement of operations; rather they decrease the amounts of the purchase discounts that are accreted into the interest income over the lives of the loans. If, after the initial allocation of the purchase discount to the allowance for loan losses, management subsequently identifies the need for additional allowances against discounted loans, the additional allowances are established through charges to the provision for loan losses.
The Company's corporate headquarters and loan servicing operations are located in Portland, Oregon, where the Company leases approximately 61,000 square feet of office space from Watumull Properties Corp. pursuant to lease agreements expiring June 30, 2003 and December 31, 2003. The Bank leases its branch office in Beverly Hills, California, office space for its wholesale lending unit in Woodland Hills, California, and office space for its administrative offices in Calabasas, California pursuant to leases expiring September 30, 2003, February 28, 2004, and August 31, 2004, respectively.
While the Company believes that its facilities are suitable and adequate for its present business purposes, it is currently exploring alternative real estate locations to meet its anticipated future growth needs.
Between 1994 and 1998 Capital Consultants, LLC ("CCL"), as investment advisor to and on behalf of various clients, made a number of loans to the privately-owned company then known as Wilshire Credit Corporation and now known as Capital Wilshire Holdings Inc. ("CWH"). As part of the Company's June 1999 restructuring, it purchased the assets of CWH. In exchange it gave CCL for the benefit of its clients 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.
The receiver and a number of CCL's clients ("CCL Investors") have filed lawsuits in the U.S. District Court for the District of Oregon against CCL, some of its former executives, the Company, WCC and the Bank and some of their executives, and a number of other corporations and pension trust trustees. Some of the defendants in these cases, in turn, have filed lawsuits against others. The Company has been named as a defendant in the following cases which were filed on the dates indicated:
| Schultz v. Kirkland, et al, U.S. District Court Case No. CV 00-1377 KI (October 10, 2000) | |
| Miller v. Clinton, et al, U.S. District Court Case No. CV 00-1317 HA (September 26, 2000) | |
| Eidem and Malcolm v. Trustees, et al, U.S. District Court Case No. CV 00-1446 HE (October 26, 2000) | |
| Hazzard, et al. v. Trustees, et al, U.S. District Court Case No. CV 00-1338 HU (September 29, 2000) | |
| Madole v. Capital Consultants, LLC, et al, U.S. District Court Case No. CV 00-1660 AS (December 1, 2000) | |
| Chilia, et al. v. Capital Consultants, LLC, U.S. District Court Case No. CV 00-1633-JE (November 29, 2000) | |
| American Funeral & Cemetery Trust Services, et al. v. Capital Consultants, LLC, et al., U.S. District Court Case No. CV 01-609-HU (May 4, 2001) | |
| Dyer, et al. v. Grayson, et al., U.S. District Court Case No. CV 01-1496-JO (October 9, 2001) |
The plaintiffs allege that the Company, WCC and the Bank and some of their executives wrongfully participated in various transactions in which CCL made improper loans to WCC from 1994 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 Company believes that it has strong defenses with regard to such allegations and intends to contest the claims vigorously unless a satisfactory settlement can be reached. Without limitation, as part of the June 1999 reorganization of the Company, CCL, on behalf of the CCL Investors, provided the Company with a release of all claims that they might have had against the Company, pursuant to the Plan of Reorganization approved by the Delaware Bankruptcy Court. The plaintiffs contend that CCL did not have authority to provide this release and that the releases were fraudulently obtained. In addition, the Company's former executives have requested that the Company indemnify them as directors and officers of the Company for their costs and potential liability to the extent such amounts are not covered by insurance.
The District Court of Oregon appointed a mediator to supervise a limited discovery procedure in most of the above cases and to determine if the claims can be resolved by settlement. The Company and the plaintiffs continue to participate in the mediation process. The parties are under a confidentiality order prohibiting any disclosure of the status of any settlement discussions.
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.
Not applicable.
The Company's common stock, par value $0.01 per share (the "Common Stock") is traded over-the-counter under the symbol "WFSG.OB." The approximate number of record holders of the Company's Common Stock at March 1, 2002 was 44.
The following table sets forth the range of high and low sales prices for Common Stock for the periods indicated:
Period High Low
------ ----- -----
Year ended December 31, 2001:
First Quarter.......................... $1.78 $1.13
Second Quarter......................... $2.42 $1.69
Third Quarter.......................... $1.95 $1.60
Fourth Quarter......................... $2.05 $1.75
Year ended December 31, 2000:
First Quarter.......................... $1.44 $0.81
Second Quarter......................... $1.88 $0.81
Third Quarter.......................... $1.69 $1.05
Fourth Quarter......................... $1.38 $1.03
The Company has not paid any cash dividends on its Common Stock. It is the current intention of the Company's Board of Directors to retain earnings to finance the growth of the Company's business rather than to pay dividends.
The following tables present selected financial information for the Company at the dates and for the periods indicated. The historical income statement and balance sheet data for the five years presented have been derived from the audited consolidated financial statements of the Company. The 1999 income statement and operating data includes the five-month period ended May 31, 1999 prior to reorganization ("Predecessor Company") and the seven-month period ended December 31, 1999 following reorganization ("Reorganized Company"). Management does not believe that the results of the Predecessor Company are comparable to those of the Reorganized Company.
Year Ended December 31,
-------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(Dollars in thousands, except per-share amounts)
Income Statement Data:
Total interest income .............................................. $ 57,516 $ 54,520 $ 64,623 $ 140,516 $ 110,057
Total interest expense ............................................. 35,687 35,655 43,992 125,458 86,836
--------- --------- --------- --------- ---------
Net interest income .......................................... 21,829 18,865 20,631 15,058 23,221
(Recapture of) provision for loan losses(1) ........................ (1,784) (4,027) 3,722 13,338 1,991
--------- --------- --------- --------- ---------
Net interest income after (recapture of) provision for loan
losses ..................................................... 23,613 22,892 16,909 1,720 21,230
Other income (loss):
Servicing income ............................................. 17,366 12,691 9,674 6,497 5,580
Loan fees and charges ........................................ 2,080 3,145 4,492 4,210 825
Market valuation losses and impairments ...................... -- -- (10,837) (113,711) --
Permanent write-down of mortgage servicing rights ............ -- -- -- (13,704) --
Gain on sale of loans ........................................ 1,475 1,244 1,494 19,240 39,049
(Loss) gain on sale of securities ............................ (262) (438) 423 4,024 3,742
Trading account gain, net .................................... -- -- -- 1,630 2,330
Real estate owned, net ....................................... (46) (308) 3,814 5,508 6,309
Bankcard income, net ......................................... 2,286 4,115 4,142 4,908 1,995
Gain on sale of Bankcard operations .......................... 5,118 -- -- -- --
Discontinuation of European operations ....................... -- -- (2,365) -- --
Other income (loss), net ..................................... 1,684 5,096 4,823 (12,755) 1,473
--------- --------- --------- --------- ---------
Total other income (loss) .............................. 29,701 25,545 15,660 (94,153) 61,303
--------- --------- --------- --------- ---------
Other expenses:
Compensation and employee benefits ........................... 25,052 23,653 29,298 36,787 14,404
Loan service fees and expenses ............................... -- -- 8,523 39,277 28,126
Professional services ........................................ 6,560 4,596 6,413 9,306 3,171
Occupancy .................................................... 2,106 2,405 2,682 2,461 1,125
FDIC insurance premiums ...................................... 703 892 812 896 1,049
Corporate travel and development ............................. 475 1,002 2,622 6,851 3,439
Depreciation and amortization ................................ 2,429 3,520 2,551 3,995 495
Investor participation interest .............................. 1,036 -- -- -- --
Other general and administrative expenses .................... 6,988 6,794 9,223 13,709 4,923
--------- --------- --------- --------- ---------
Total other expenses ................................... 45,349 42,862 62,124 113,282 56,732
--------- --------- --------- --------- ---------
Income (loss) before reorganization items, minority interest,
income tax provision (benefit) and extraordinary items .......... 7,965 5,575 (29,555) (205,715) 25,801
Reorganization items ............................................... -- -- (52,034) -- --
--------- --------- --------- --------- ---------
Income (loss) before minority interest, income tax provision
(benefit) and extraordinary items ............................... 7,965 5,575 (81,589) (205,715) 25,801
Minority interest(2)................................................ 647 1,203 542 -- --
--------- --------- --------- --------- ---------
Income (loss) before income tax provision (benefit) and
extraordinary items ............................................. 8,612 6,778 (81,047) (205,715) 25,801
Income tax provision (benefit) ..................................... 3,000 3,596 1,312 (4,056) 10,637
--------- --------- --------- --------- ---------
Income (loss) before extraordinary items ........................... 5,612 3,182 (82,359) (201,659) 15,164
Extraordinary items, net of tax .................................... -- 239 225,606 -- --
--------- --------- --------- --------- ---------
Net income (loss) .................................................. $ 5,612 $ 3,421 $ 143,247 $(201,659) $ 15,164
========= ========= ========= ========= =========
Basic income (loss) per share(3) ................................... $ 0.28 $ 0.17 N/A $ (18.93) $ 1.79
December 31,
-------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ----------
(Dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents ........................................... $ 37,876 $ 9,516 $ 54,168 $ 23,468 $ 66,115
Portfolio Assets:(4)
Discounted Loans, net ......................................... 15,309 10,214 22,518 51,989 463,355
Non-Discounted Loans, net ..................................... 525,034 561,876 460,656 740,233 464,602
Mortgage-backed and other securities .......................... 127,540 54,138 59,728 134,005 362,347
Foreclosed real estate, net ................................... 731 1,770 11,571 62,168 169,612
--------- --------- --------- --------- ---------
Total portfolio assets .................................. 668,614 627,998 554,473 988,395 1,459,916
Total assets ........................................................ 769,004 696,050 654,518 1,084,253 1,629,027
Deposits ............................................................ 439,469 435,073 419,285 510,430 362,598
Short-term debt ..................................................... 9,970 9,123 31,927 420,816 966,500
FHLB advances ....................................................... 189,500 132,000 80,000 -- --
Long-term financing ................................................. 14,474 1,634 -- -- --
Notes payable ....................................................... -- -- -- 184,245 184,245
Stockholders' equity (deficit) ...................................... 91,420 86,595 78,333 (92,795) 99,122
Year Ended December 31,
----------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- ---------- ---------- ----------
Financial Ratios and Other Data:
Return on average assets(5) ......................................... 0.75% 0.50% 17.86% (11.85) 1.22%
Return on average equity(6) ......................................... 6.18% 4.16% 1,172.46% (273.93) 19.48%
Average interest yield on total loans(7) ............................ 7.89% 6.17% 5.97% 7.91% 9.68%
Net interest spread(8)(9) ........................................... 1.61% (0.07) 0.42% 0.17% 2.03%
Net interest margin(9)(10)........................................... 2.80% 2.18% 2.04% 0.86% 2.03%
Ratio of earnings to fixed charges(11):
Including interest on deposits ................................ 1.24 1.19 0.34 -- 1.30
Excluding interest on deposits ................................ 1.80 1.70 -- -- 1.42
Long-term debt to total capitalization(12) .......................... 0.69 0.60 0.52 2.01 0.65
Total financial liabilities to equity ............................... 7.41 7.03 7.36 N/A 15.43
Average equity to average assets(13) ................................ 12.08% 11.96% 1.52% 4.33% 6.25%
Non-performing loans to loans at end of period(14)(15) .............. 1.43% 0.78% 2.95% 3.27% 12.83%
Allowance for loan losses to total loans at end of period ........... 1.58% 1.86% 5.74% 4.53% 5.98%
Year Ended December 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- ------------
Operating Data: (Dollars in thousands)
Investments and originations:
Discounted Loans and foreclosed real estate ....... $ 15,515 $ 5,403 $ 3,830 $ 179,105 $ 584,014
Non-Discounted Loans .............................. 150,137 155,385 164,023 907,328 673,234
Mortgage originations ............................. 74,026 56,177 32,317 811,769 77,918
Mortgage-backed and other securities .............. 102,535 15,048 792 133,092 310,220
----------- ----------- ----------- ----------- -----------
Total ....................................... 342,213 232,013 200,962 2,031,294 1,645,386
Repayments .............................................. (260,976) (109,319) (163,666) (327,785) (196,646)
Loan sales and securitizations .......................... (37,963) (28,362) (354,634) (1,535,501) (486,109)
Net change in portfolio assets .......................... 40,616 73,525 (433,922) (471,521) 885,160
| (1) | In 2001 and 2000, FBBH had recaptures of loan loss reserves of $2.1 million and $5.8 million, respectively, which were partially offset by loan loss provisions by the Bank and in the Company's Specialty Servicing and Finance Operations. |
| (2) | WCC incurred net losses in 2001, 2000 and 1999. Consequently, the share of WCC's results in which WFSG does not have an interest is presented as an addition on WFSG's consolidated statements of operations. |
| (3) | Earnings per share amounts are based on weighted average number of shares outstanding of WFSG stock during the applicable periods. For 1999, earnings per share for the full year is not applicable, as the company had a different issuance of common stock for the five-month period ended May 31, 1999 (prior to the reorganization) than for the seven-month period ended December 31, 1999 (subsequent to the reorganization). See Item 14(a)--Financial Statements for earnings per share amounts for the Predecessor Company for the five months ended May 31, 1999 and for the Reorganized Company for the seven months ended December 31, 1999. |
| (4) | During 1998 the Company sold to Wilshire Real Estate Investment Inc. ("WREI", now known as Fog Cutter Capital Group Inc.) (i) $44.1 million of loans, (ii) mortgage-backed securities for approximately $127.2 million, and (iii) international investments in the United Kingdom for approximately $3.3 million. |
| (5) | Excluding the extraordinary gain on extinguishment of debt and non-recurring costs incurred in connection with the reorganization, the Company's return on average assets for 1999 was (3.78)%. |
| (6) | The results for 1999 reflect the Company's deficit balance in its equity for the first five months of 1999, which significantly reduced the average equity (denominator) for the year. For the seven-month period subsequent to the reorganization, the Company's annualized return on average equity was (27.85)%. |
| (7) | The decrease in yield for 1999 was due to the large proportion of Discounted Loans in the Company's portfolio. The average balance of Discounted Loans represents the gross unpaid principal balance before adjusting for allowances for loan losses, but interest on such loans is recognized only when cash is received. As a result, these loans have an adverse effect on the overall loan yield. In January 2001, the Company charged off approximately $166 million in Discounted Loans. |
| (8) | Net interest spread represents average yield on interest-earning assets minus average rate paid on interest-bearing liabilities. |
| (9) | The reductions in net interest margin and net interest spread in 1998 primarily reflected the significant increase in the Company's holdings of Discounted Loans. The acquisition of a pool of Discounted Loans tends to reduce net interest margin and net interest spread, because the interest cost of the debt used to fund the acquisition is not offset by a corresponding increase in interest income. Relatively little cash flow from a pool of Discounted Loans is generally received during the six to nine months following the acquisition of a pool of Discounted Loans and the Company only recognizes interest and discount on Discounted Loans when those loans result in the receipt of cash. In addition, a significant portion of the income associated with Discounted Loans generally results from gains on sales of foreclosed real estate, which are not reflected in interest income. The reductions also reflected interest expense on the Company's $184.2 million in 13% Notes and 13% Series B Notes payable (the "Notes"), the proceeds of which were held for part of such periods in a lower-yielding liquid investment prior to their use by the Company to fund acquisitions. In March 1999, these Notes were canceled and subsequently converted into equity as part of the Company's restructuring. |
| (10) | Net interest margin represents net interest income divided by total average interest-earning assets. The increase in interest margin in 1999 was primarily due to the cancellation of the Notes as part of the Company's restructuring. As a result, the Company's interest expense on the Notes decreased by approximately $21.3 million during 1999, significantly increasing net interest income as a percentage of interest-earning assets. |
| (11) | The ratios of earnings to fixed charges were computed by dividing (x) income from continuing operations before income taxes and extraordinary gains plus fixed charges by (y) fixed charges. Fixed charges represent total interest expense, including and excluding interest on deposits, as applicable, as well as the interest component of rental expense. During 1999 and 1998, earnings were inadequate to cover fixed charges by $15.0 million and $80.3 million, respectively. |
| (12) | Total capitalization equals long-term debt plus equity. |
| (13) | Average equity to average assets decreased substantially in 1999, as the Company had a deficit balance in its equity for the first five months of 1999, significantly reducing the average equity (numerator) for the year. For the seven-month period subsequent to the reorganization, the Company's average equity to average assets was 11.58%. |
| (14) | Non-performing loans include all Non-Discounted Loans that have been placed on non-accrual status by the Company. Non-Discounted Loans are placed on non-accrual status when they became past due more than 90 days or sooner when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. |
| (15) | Discounted Loans are not included in non-performing loans. |
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.
Our consolidated net income was approximately $5.6 million, or $0.28 per basic share, for the year ended December 31, 2001, compared with $3.4 million, or $0.17 per basic share, for the year ended December 31, 2000. This increase in net income resulted from a number of factors, including the following: (1) Our banking subsidiary, First Bank of Beverly Hills, F.S.B. ("FBBH" or the "Bank"), recorded a pre-tax gain of $5.1 million on the sale of its bankcard processing division in June 2001; (2) our net servicing income increased by approximately $4.7 million during 2001, reflecting the significant growth of our asset servicing operations despite the steady decline in interest rates throughout 2001 and resultant increase in loan prepayments; and (3) our consolidated net interest income increased by approximately $3.0 million from 2000 to 2001 as a result of problem asset recoveries and overall improvement in our portfolio of interest-earning assets.
Our results continue to be negatively impacted by certain events that occurred prior to our 1999 restructuring. During 2001 we incurred approximately $3.0 million in legal expenses related to litigation arising from such events, including $2.1 million of costs that we advanced to two of the Company's former executives. A portion of these advances have been recovered through insurance, and additional amounts may be recoverable in the future. In the fourth quarter of 2001 the Company incurred approximately $1.0 million in other legal fees and write-downs related to pre-restructuring events. These legal expenses contributed to a $2.5 million increase in other operating expenses, which partially offset the gains described above. Also offsetting our increases in income was a decrease in recaptures of loan loss provisions of $2.2 million and a decrease in miscellaneous income, as the results for 2000 included a gain from settlement of litigation with our former affiliate, Wilshire Real Estate Investment Inc. (now known as Fog Cutter Capital Group Inc.).
Our consolidated stockholders' equity was $91.4 million at December 31, 2001, compared with $86.6 million at December 31, 2000, an increase of $4.8 million. This increase reflects our net income for the year and after-tax unrealized gains of $0.2 million. In addition, in 2001 we recognized the benefit of a portion of our pre-reorganization net operating loss carryforwards and, as a result, we recorded approximately $8.7 million in related tax benefits during the year. The realization of these tax benefits is reflected as a direct increase to stockholders' equity, and not as a tax benefit on the consolidated statement of operations, since the related net operating losses were generated in periods prior to our June 1999 reorganization.
In December 2001 we repurchased approximately 4.2 million shares of our common stock, representing nearly 21% of the total shares then outstanding, from one of our shareholders, partially offsetting the increases in stockholders' equity described above. We financed this purchase primarily through borrowings on an existing line of credit, which were subsequently repaid with proceeds from approximately $7.7 million in 8% convertible subordinated debentures due December 15, 2005, which we issued in a private placement in January and February 2002.
A significant portion of our consolidated earnings arises from net interest income, which is the difference between interest income received and interest expense paid. Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities, the degree of mismatch in the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities, the percentage of discounted loans included in the portfolio and the timing of receipt or accretion of purchase discount. In addition, net interest income reflects the full interest cost of funding the acquisition of discounted loans and foreclosed real estate but does not reflect any accretion of purchase discount on those assets until cash is collected (which generally occurs later in the life of a pool of discounted loans) and does not reflect any gain on sales of foreclosed real estate.
The following table sets forth, for the periods indicated, information regarding the total amount of the Company's income from interest-earning assets and the resulting average yields, the interest expense associated with interest-bearing liabilities, expressed in dollars and rates, and the net interest spread and net interest margin. (The interest income and expense amounts in the table below are consolidated, but primarily represent the results of our Banking Operations. As discussed later in this section, the principal source of revenues for our Specialty Servicing and Finance Operations is loan servicing fees.) Information is based on monthly balances during the indicated periods. For 1999, the interest income and expense amounts represent the sum of those for the five months ended May 31, 1999 ("Predecessor Company") and for the seven months ended December 31, 1999 ("Reorganized Company").
Interest-Earning Assets and Interest-Bearing Liabilities
Year Ended December 31,
--------------------------------------------------------------------------------------
2001 2000 1999
---------------------------- --------------------------- -----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
-------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
Average Assets:
Mortgage-backed securities ................ $ 56,350 $ 4,265 7.57% $51,817 $ 4,084 7.88% $98,007 $ 10,794 11.01%
Loan portfolio net of unaccreted discounts
/unamortized premium(1) ................. 646,345 50,982 7.89 789,510 48,717 6.17 872,387 52,099 5.97
Investment securities and other ........... 78,299 2,269 2.90 24,926 1,719 6.90 42,543 1,730 4.07
-------- -------- --------- ------- -------- --------- --------- -------- ----------
Total interest-earning assets ........ 780,994 57,516 7.36 866,253 54,520 6.29 1,012,937 64,623 6.38
-------- -------- --------- ------- -------- --------- --------- -------- ----------
Non-interest earning cash ................. 1,711 4,445 8,487
Allowance for loan losses ................. (68,818) (237,558) (279,645)
Other assets .............................. 37,769 55,115 70,488
-------- -------- ---------
Total assets ......................... $751,656 $688,255 $ 812,267
======== ======== =========
Average Liabilities and Stockholders' Equity:
Interest-bearing deposits ................. $453,223 $ 24,914 5.50% $424,418 $ 26,014 6.13% $ 466,187 $ 25,913 5.56%
FHLB advances ............................. 153,269 9,575 6.25 111,615 7,294 6.53 33,115 1,935 5.84
Short-term borrowings ..................... 5,270 121 2.30 21,323 1,935 9.07 161,209 11,000 6.82
Other borrowings(2) ....................... 9,273 1,077 11.61 3,336 412 12.35 77,840 5,144 6.61
-------- -------- --------- -------- -------- --------- --------- -------- ---------
Total interest-bearing liabilities ... 621,035 35,687 5.75 560,692 35,655 6.36 738,351 43,992 5.96
-------- -------- --------- -------- -------- --------- --------- -------- ---------
Non-interest bearing deposits ............. 7,874 12,902 12,108
Other liabilities ......................... 31,914 32,354 49,590
-------- -------- ---------
Total liabilities .................... 660,823 605,948 800,049
Stockholders' equity ...................... 90,833 82,307 12,218
-------- -------- ---------
Total liabilitie and stockholders'
equity .......................... $751,656 $688,255 $ 812,267
======== ======== =========
Net interest income ....................... $ 21,829 $ 18,865 $ 20,631
======== ======== ========
Net interest spread(3)(4) ................. 1.61% (0.07)% 0.42%
Net interest margin(4) .................... 2.80% 2.18% 2.04%
Ratio of average interest-earning assets to
average interest-bearing liabilities .... 125.76% 154.50% 137.19%
| (1) | The average balances of the loan portfolio include Discounted Loans and non-performing loans, on which interest is recognized on a cash basis. |
| (2) | Interest expense on other borrowings includes financing charges and other fees not associated with any borrowing balance. Our weighted-average contractual rate of interest paid on other borrowings was approximately 3.50% for 2001. |
| (3) | Net interest spread represents average yield on interest-earning assets minus average rate paid on interest-bearing liabilities. |
| (4) | Net interest margin represents net interest income divided by total average interest-earning assets. |
The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior rate), (ii) changes in rate (change in rate multiplied by prior volume) and (iii) total change in rate and volume. Changes attributable to both volume and rate have been allocated proportionately to the change due to volume and the change due to rate.
Changes in Net Interest Income
Year Ended December 31,
--------------------------------------------------------------------------------------------
2001 v. 2000 2000 v. 1999 1999 v. 1998
----------------------------- ------------------------------ -----------------------------
Increase (Decrease) Net (Decrease) Increase Net (Decrease) Increase Net
Rate Volume Change Rate Volume Change Rate Volume Change
-------- ---------- -------- ---------- --------- -------- ---------- ------- ---------
Interest-Earning Assets:
Mortgage-backed securities.......... $ (167) $ 348 $ 181 $ (2,525) $ (4,185) $ (6,710) $ 2,853 $(17,735) $(14,882)
Loan portfolio...................... 12,069 (9,804) 2,265 1,689 (5,071) (3,382) (23,267) (36,078) (59,345)
Investment securities and other..... (1,451) 2,001 550 892 (903) (11) (135) (1,531) (1,666)
------- ---------- -------- --------- -------- -------- --------- --------- ---------
Total interest-earning assets.. 10,451 (7,455) 2,996 56 (10,159) (10,103) (20,549) (55,344) (75,893)
Interest-Bearing Liabilities:
Interest-bearing deposits........... (2,793) 1,693 (1,100) 2,534 (2,433) 101 (1,088) 1,435 347
FHLB advances....................... (334) 2,615 2,281 255 5,104 5,359 -- 1,935 1,935
Short-term borrowings and other
Interest-bearing obligations..... (904) (910) (1,814) 2,761 (11,826) (9,065) (7,258) (56,116) (63,374)
Long-term debt...................... (26) 691 665 2,434 (7,166) (4,732) (9,681) (10,693) (20,374)
------- ---------- -------- --------- -------- -------- --------- --------- --------
Total interest-bearing
liabilities................. (4,057) 4,089 32 7,984 (16,321) (8,337) (18,027) (63,439) (81,466)
------- ---------- -------- --------- -------- -------- --------- --------- --------
Increase (decrease) in net
interest income................. $14,508 $ (11,544) $ 2,964 $ (7,929) $ 6,163 $ (1,766) $ (2,522) $ 8,095 $ 5,573
======= ========== ======== ========= ======== ======== ========= ========= ========
The Company's consolidated net interest income was approximately $21.8 million for the year ended December 31, 2001, compared with $18.8 million for the year ended December 31, 2000, an increase of approximately $3.0 million. The consolidated net interest spread and margin were 1.61% and 2.80%, respectively, for the year ended December 31, 2001, compared with (0.07)% and 2.18%, respectively, for the year ended December 31, 2000.
Average interest-earning assets were $781.0 million for the year ended December 31, 2001, down from $866.3 million for the year ended December 31, 2000. The average yield earned on our interest-earning assets was 7.36% in 2001, compared with 6.29% in 2000. Average interest-bearing liabilities were $621.0 million for the year ended December 31, 2001, compared with $560.7 million for the year ended December 31, 2000. The average cost of our interest-bearing liabilities was 5.75% for 2001, compared with 6.36% for 2000.
The increase in the consolidated net interest spread from 2000 to 2001 was largely due to the charge-off of approximately $166 million unpaid principal balance of non-performing loans in our Specialty Servicing and Finance Operations in January 2001. This contributed to a 172-basis point increase in the consolidated yield on loans (from 6.17% in 2000 to 7.89% in 2001) and a 107-basis point increase in the yield on total interest-earning assets, despite the steady decline in interest rates throughout the year. In addition, as discussed earlier, the average cost of interest-bearing liabilities decreased by 61 basis points from 2000 to 2001.
The increase in the consolidated net interest margin from 2000 to 2001 was primarily due to two factors: (1) consolidated loan interest income increased by $2.3 million as a result of FBBH's and WFC's purchases of loan portfolios during the year, and (2) average interest-earning assets decreased by approximately $85.3 million from 2000 to 2001 as a result of the loan charge-offs described above, and also due to increases in loan prepayments triggered by the sharp decline in interest rates.
Following is a discussion of the operating results of the Company's two business segments: our Banking Operations and our Specialty Servicing and Finance Operations.
The following tables compare operating income before taxes for FBBH for the years ended December 31, 2001 and 2000 (dollars in thousands):
Year Ended December 31,
------------------------------------------
Increase
2001 2000 (Decrease)
------------ ------------ ------------
Interest income ........................ $ 51,901 $ 50,847 $ 1,054
Interest expense ....................... 34,472 33,946 526
------------ ------------ ------------
Net interest income .................... 17,429 16,901 528
Recapture of loan losses ............... (1,730) (5,800) 4,070
------------ ------------ ------------
Net interest income after recapture of
loan losses ......................... 19,159 22,701 (3,542)
Other income ........................... 9,227 6,744 2,483
Other expense .......................... 15,845 21,143 (5,298)
------------ ------------ ------------
Income before taxes .................... $ 12,541 $ 8,302 $ 4,239
============ ============ ============
Net Interest Income
The Bank's net interest income for the year ended December 31, 2001 was approximately $17.4 million, compared with approximately $16.9 million
for the year ended December 31, 2000. Total interest income increased by approximately $1.1 million from 2000 to 2001, which was partially offset
by a $0.5 million increase in interest expense.
FBBH's average balance of interest-earning assets increased by approximately $65.4 million in 2001, largely due to the Bank's purchase of $131 million in adjustable-rate mortgage loans in the second quarter, and also as a result of an increase in the average fed funds balance during the year. However, the declining interest-rate environment in 2001 particularly affected the Bank's interest-earning assets, which generally reprice in advance of its interest-bearing liabilities. The Bank's average yield on loans decreased from 8.57% in 2000 to 8.17% in 2001, and its yield on fed fund investments declined from 5.9% in 2000 to 4.0% in 2001. These decreases in yields, in addition to the unusually high prepayments of loans triggered by the drop in rates, offset much of the effects of the higher asset volume.
The Bank's average deposits balance increased by approximately $28.8 million from 2000 to 2001, as the Bank raised significant amounts of certificates of deposit in the second quarter to fund the loan purchases described above. However, the average rate paid on deposits declined by 63 basis points, from 6.13% in 2000 to 5.50% in 2001, resulting in a $1.1 million decrease in deposit interest expense.
The Bank made additional FHLB Advance borrowings in the first and fourth quarters of 2001 to replace certificates of deposit and to fund some of its purchases of mortgage-backed and other investment securities. As a result, the average balance of FHLB Advances increased by approximately $41.7 million in 2001, and the Bank's interest expense on FHLB Advances increased by approximately $2.3 million from 2000 to 2001. Substantially all of the Bank's FHLB Advances had fixed rates of interest and thus were unaffected by the declines in interest rates.
Provision for Loan Losses
Provisions for losses on loans are charged to operations to maintain an allowance for losses on the loan portfolio at a level which the Bank
believes is adequate based on an evaluation of the inherent risks in the portfolio. The Bank's evaluation is based on an analysis of the loan
portfolio, historical loss experience, current economic conditions and trends, collateral values, and other relevant factors.
The Bank's provision for loan losses for the year ended December 31, 2001 was a net recapture of $1.7 million, compared with recaptures of $5.8 million for the year ended December 31, 2000. In September 2001, pursuant to the settlement and payoff of a troubled loan, the Bank recaptured $2.1 million in provision previously taken on such loan. This recapture was partially offset by loan loss provisions of approximately $0.4 million during the current year. The reversals of reserves in 2000 were the result of two factors: (1) the Bank sold $13.1 million book value of non-performing and sub-performing loans in June 2000 and recaptured the related reserves and (2) the Bank's periodic analyses of the adequacy of loan loss reserves indicated that the reserves were excessive due to the continued seasoning and improved loss performance of the Bank's loan portfolio.
Other Income
The Bank's other income was approximately $9.2 million for the year ended December 31, 2001, compared with approximately $6.7 million for the
year ended December 31, 2000. This increase in other income was primarily due to the Bank's sale of its Bankcard division in June 2001 for a gain
of $5.1 million, and a $0.9 million increase in gains on sales of loans. These increases were partially offset by a $1.8 million decline in
Bankcard income from 2000 to 2001, as the 2001 results included only six months' activity. Also offsetting the gains described above was a $0.4
million decrease in real estate income due to reduced sales activity in 2001, a loss of approximately $0.3 million on the Bank's sale of its mortgage banking subsidiary, George Elkins Mortgage Banking ("GEMB") in
June 2001, and a decline in loan fees of approximately $1.2 million due to the sale of GEMB.
Other Expenses
The Bank's other expenses were approximately $15.8 million for the year ended December 31, 2001, compared with approximately $21.1 million for
the year ended December 31, 2000, a decrease of $5.3 million. This decrease was largely due to the Bank's sales of its Bankcard and mortgage
banking divisions in June 2001, which resulted in savings of approximately $5.0 million in other operating expenses (primarily compensation and
employee benefits and, to a lesser extent, occupancy, data processing and marketing expenses) for the remainder of 2001. In addition, the year 2000
expenses contained approximately $2.0 million in write-downs of goodwill related to GEMB and other capitalized costs. However, these decreases
were partially offset by additional charges earlier in 2001, including severance pay for some of the Bank's former executives, and professional
services and consulting fees associated with conversions of the Bank's accounting and deposit systems.
Through June 30, 2001, the Bank's businesses consisted of three primary divisions: lending and deposit banking services, mortgage loan origination and brokerage services (GEMB) and Bankcard processing. The GEMB and Bankcard divisions were sold in June 2001. Consequently, the Bank's income subsequent to June 30, 2001 has been derived solely from its core retail banking and lending activities.
The operating results (before income taxes) of the Bank's businesses for the years ended December 31, 2001 and 2000 are summarized in the following table and discussed in further detail below:
Year Ended
December 31,
------------------------------
2001 2000
------------- -------------
(Dollars in thousands)
Lending and deposit banking services........... $ 7,150 $ 10,522
Net gain on sales of Bankcard and GEMB......... 4,798 --
George Elkins.................................. (246) (2,922)
Bankcard income, net........................... 839 702
------------- -------------
Total Bank income (pre-tax)................ $ 12,541 $ 8,302
============= =============
Lending and Deposit Banking
Income in FBBH's banking operations was approximately $7.2 million for the year ended December 31, 2001, compared with $10.5 million for the
year ended December 31, 2000. This decrease was primarily due to a $4.1 million decrease in recaptures of loan losses from 2000 to 2001, partially offset by an
increase in net interest income.
George Elkins
The net loss from the Bank's mortgage loan origination and brokerage services in 2001 was approximately $0.2 million, reflecting GEMB's
operations through June 30, 2001. For the year ended December 31, 2000, GEMB's loss was approximately $2.9 million, which included approximately
$2.0 million in write-downs of goodwill and other capitalized costs. Effective June 30, 2001, the Bank sold this division for a net loss of
approximately $0.3 million.
Bankcard Division
The Bank's income from its merchant bankcard operations was approximately $0.8 million for the year ended December 31, 2001, compared with
$0.7 million for the year ended December 31, 2000. The increase in income was primarily due to recaptures of loan losses of $0.2 million in 2001,
compared with loan loss provisions of $0.2 million in 2000. Gross bankcard revenues and expenses decreased substantially from 2000 to 2001, as the
amounts for 2001 reflect only six months' activity.
Following are condensed statements of financial condition for FBBH as of December 31, 2001 and 2000:
December 31, December 31,
2001 2000
------------ ------------
(Dollars in thousands)
ASSETS:
Cash and cash equivalents .................................. $ 35,841 $ 7,907
Mortgage-backed securities available for sale, at fair value 116,173 47,738
Investment securities available for sale, at fair value .... 8,000 --
Loans, net ................................................. 525,302 562,257
Real estate owned, net ..................................... 429 779
Receivables from loan servicers ............................ 1,114 3,089
Other assets ............................................... 29,907 24,603
------------ ------------
Total assets ........................................... $ 716,766 $ 646,373
============ ============
LIABILITIES:
Deposits ................................................... $ 439,469 $ 435,073
FHLB advances .............................................. 189,500 132,000
Other liabilities .......................................... 19,203 17,322
------------ ------------
Total liabilities ...................................... 648,172 584,395
NET WORTH .................................................. 68,594 61,978
------------ ------------
Total liabilities and net worth ........................ $ 716,766 $ 646,373
============ ============
Mortgage-Backed and Other Securities. The Bank's portfolio of mortgage-backed securities increased by approximately $68.4 million during the year ended December 31, 2001. This increase was due to purchases of $94.5 million in securities (substantially all of which occurred in November and December), partially offset by principal repayments of $25.3 million and an increase in unrealized holding losses of $0.5 million. The Bank also purchased $8.0 million in other investment securities available for sale in December 2001.
Loans, net. The Bank's portfolio of loans, net of discounts and allowances, decreased by approximately $37.0 million during the year ended December 31, 2001. The decline in interest rates throughout the year triggered an acceleration of loan repayments, which totaled $229.7 million for the year. The Bank also sold for a gain approximately $31.4 million of loans in June 2001. Partially offsetting these repayments and sales were loan purchases during the year of $150.1 million and new loan originations of $74.0 million.
Real Estate Owned, net. The Bank's real estate owned, net decreased by $0.35 million during 2001 due to sales of properties for proceeds of approximately $1.2 million, partially offset by acquisitions of real estate during the year through foreclosures from its portfolio of loans.
Deposits. The Bank's deposits increased by approximately $4.4 million during the year ended December 31, 2001. As a result of the decline in interest rates, the Bank significantly increased its certificates of deposit in the second quarter of 2001 to fund its loan acquisitions, and again prior to year-end to fund the purchases of mortgage-backed and other investment securities discussed above. These increases were largely offset by maturities of time deposits, substantially all of which were not renewed, and by a decrease in Bankcard reserve deposits pursuant to the sale of the Bankcard division in June 2001.
FHLB Advances. The Bank's FHLB Advances increased by $57.5 million during the year ended December 31, 2001, as a result of new borrowings of $70.5 million, partially offset by repayments of $13.0 million. These advances have original maturities ranging from two 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 anticipated maturities of its investments to its overall borrowings.
Federally insured savings associations such as FBBH are required to maintain minimum levels of regulatory capital. Those standards generally are as stringent as the comparable capital requirements imposed on national banks. The OTS also is authorized to impose capital requirements in excess of these standards on a case-by-case basis. In connection with the year 2000 examination, the OTS indicated that the capital level of FBBH exceeds the minimum requirement for "well capitalized" status under provisions of the Prompt Corrective Action Regulation.
The following table sets forth the regulatory capital ratios of the Bank at December 31, 2001.
Regulatory Capital Ratios
To be Categorized
as
Amount Required "Well Capitalized"
For Capital under Prompt
Adequacy Corrective Action
Actual Purposes Provisions
-------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
--------- -------- --------- -------- --------- --------
(Dollars in thousands)
Total Capital to Risk-Weighted Assets (Risk-Based
Capital).............................................. $ 70,858 15.7% $ 36,014 =>8.0% $ 45,018 =>10.0%
Tier 1 Capital to Risk-Weighted Assets................ 65,204 14.5% Not Applicable 27,018 => 6.0%
Core Capital to Tangible Assets....................... 65,204 9.2% 28,442 =>4.0% 35,553 => 5.0%
Tangible Capital to Tangible Assets................... 65,204 9.2% 10,666 =>1.5% Not Applicable
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 make payments for general business purposes. The Bank's sources of liquidity include retail and wholesale deposits, FHLB advances (up to 25% of the Bank's total assets as of the previous quarter-end), repurchase agreements, 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 December 31, 2001, the Bank's cash balances totaled approximately $35.8 million, compared with $7.9 million at December 31, 2000. The increase in cash during 2001 was primarily due to a significant increase in certificates of deposit in the second quarter of 2001 and, to a lesser extent, increases in certificates of deposit and FHLB Advances in the fourth quarter.
At December 31, 2001, the Bank had approximately $403.6 million of certificates of deposit. Scheduled maturities of certificates of deposit during the 12 months ending December 31, 2002 and thereafter amounted to approximately $292.6 million and approximately $111.0 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. Bank management continues its effort to reduce its exposure to interest rate changes by utilizing funding sources whose repricing characteristics more closely match those of the Bank's interest-earning assets.
The Bank is party to various contractual financial obligations, including repayment of borrowings, operating lease payments and commitments to extend credit. The table below presents the Bank's future financial obligations outstanding as of December 31, 2001:
Payments due within time period at December 31, 2001
-----------------------------------------------------------------------------
0-12 Months 1-3 Years 4-5 Years After 5 Years Total
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
Operating leases............................ $ 742 $ 974 $ 69 $ -- $ 1,785
FHLB Advances............................... 30,500 98,500 60,500 -- 189,500
------------- ------------- ------------- ------------- -------------
Total $ 31,242 $ 99,474 $ 60,569 $ -- $ 191,285
============= ============= ============= ============= =============
At December 31, 2001 the Bank had commitments to extend credit of approximately $7.3 million. For additional information regarding future commitments, this discussion and analysis should be read in conjunction with our consolidated financial statements and related notes including the footnote "Commitments, Contingencies and Off-Balance-Sheet Risk".
In March 2001, the OTS rescinded the regulatory requirement that institutions maintain an average daily balance of liquid assets of at least 4% of its liquidity base. Even though the percentage requirement has been eliminated, the Bank is still required by the OTS to maintain adequate liquidity to assure safe and sound operation. It is the Bank's responsibility to determine the appropriate level of liquidity to be maintained.
WFSG conducts its Specialty Servicing and Finance Operations through WFC, our wholly-owned investment subsidiary, and through WCC, our majority-owned servicing subsidiary which was formed pursuant to our June 10, 1999 reorganization. As the majority owner of WCC, the Company shares in 50.01% of WCC's revenues and expenses. The remaining 49.99% interest in WCC's operations is reflected as "Minority interest" in the Company's consolidated statements of operations. In addition, certain of WFC's and WCC's activities are conducted with lenders who have participation interests in the returns generated by the assets that serve as collateral for the loans. The share of such activities held by these lenders is reflected as "Investor participation interest" in the Company's consolidated statements of operations.
The following table compares operating loss (before taxes and minority interest) of our Specialty Servicing and Finance Operations for the year ended December 31, 2001 and 2000 (dollars in thousands).
WCC and WFC for the Year
Ended December 31,
------------------------------------------
Increase
2001 2000 (Decrease)
------------ ------------ ------------
Servicing income ............................$ 18,801 $ 14,257 $ 4,544
Interest income ............................. 5,305 4,364 941
Investment and other income ................. 1,294 2,942 (1,648)
------------ ------------ ------------
Total income ........................... 25,400 21,563 3,837
------------ ------------ ------------
Interest expense ............................ 1,358 1,276 82
(Recapture of) provision for loan losses ... (54) 1,669 (1,723)
Compensation expense ........................ 15,507 13,132 2,375
Other expenses .............................. 10,297 9,033 1,264
------------ ------------ ------------
Total expenses ......................... 27,108 25,110 1,998
------------ ------------ ------------
Loss before taxes ...........................$ (1,708) $ (3,547) $ 1,839
============ ============ ============
Servicing Income
The components of servicing income in our Specialty Servicing and Finance Operations are reflected in the following table:
Year Ended
December 31,
---------------------------
2001 2000
------------ ------------
(Dollars in thousands)
Servicing revenue ............................................ $ 21,306 $ 10,539
Ancillary fees ............................................... 4,986 2,994
Amortization of mortgage servicing rights .................... (5,847) (396)
Valuation allowance for mortgage servicing rights ............ (1,552) --
Custodial float .............................................. 2,438 1,719
Curtailment expense .......................................... (2,530) (599)
------------ ------------
Total servicing income ................................... $ 18,801 $ 14,257
============ ============
Servicing income for the year ended December 31, 2001 was approximately $18.8 million, compared with approximately $14.3 million for the year ended December 31, 2000. WCC's servicing operations grew significantly during 2001 due to several acquisitions of servicing portfolios throughout the year. As a result of this continued expansion, our gross servicing revenues and ancillary fees (primarily late charges and prepayment penalties) increased by approximately 102% and 67%, respectively, over their 2000 levels. However, the continuing decline in mortgage interest rates during 2001 has adversely impacted our servicing income in a number of ways.
First, the drop in mortgage rates triggered a significant increase in prepayments on the underlying loans in our servicing portfolio, which in turn resulted in accelerated amortization of our mortgage servicing rights (MSRs). Amortization of MSRs was $5.8 million for the year ended December 31, 2001, compared with $0.4 million for 2000 (though a portion of the increase in amortization was attributable to the larger volume of our servicing portfolio). In addition, in 2001 we recorded a valuation allowance for our MSRs of approximately $1.6 million. Further, as a result of underlying loan prepayments, we incurred an increase in the interest we are required to pay to securitization trusts ("curtailment interest expense") under our servicing agreements.
The following table sets forth the composition of loans serviced by WCC by type of loan at the dates indicated.
December 31, December 31,
2001 2000
-------------- --------------
(Dollars in thousands)
Single-family residential............................ $ 3,020,267 $ 1,909,761
Multi-family residential............................. 141,297 163,511
Commercial real estate............................... 192,275 223,539
Consumer and other................................... 90,497 265,598
-------------- --------------
Total.......................................... $ 3,444,336 $ 2,562,409
============== ==============
Interest Income and Interest Expense
Interest income was approximately $5.3 million for the year ended December 31, 2001, compared with approximately $4.4 million for the year
ended December 31, 2000, an increase of $0.9 million. This increase was due to higher loan interest income resulting from WFC's purchase of
approximately $10.5 million in principal balance of discounted loans in the third quarter of 2001.
Interest expense was approximately $1.4 million for the year ended December 31, 2001, compared with $1.3 million for the year ended December 31, 2000. This increase was due to additional borrowings which funded the loan acquisition described above in addition to acquisitions of servicing rights. The additional interest expense generated by the third quarter 2001 borrowings was offset by paydowns of late 2000 and early 2001 borrowings with proceeds from asset sales, and by lower interest rates in 2001.
Investment and Other Income
The components of investment and other income in our Specialty Servicing and Finance Operations are reflected in the following table:
Year Ended
December 31,
------------------------------
2001 2000
------------- -------------
(Dollars in thousands)
Investment and other income:
Real estate owned, net......................... $ (165) $ (847)
Gain on sale of loans.......................... 851 1,484
Loss on sale of securities..................... (262) (495)
Other, net..................................... 870 2,800
------------- -------------
Total investment and other income.......... $ 1,294 $ 2,942
============= =============
The decrease in investment and other income in 2001 as compared with 2000 is primarily a result of a decline in gains on sales of loans due to reduced sales activity in the current year. In addition, other, net decreased primarily due to reimbursements received for inter-company expenses occurring in 2000 and not in 2001 as such expenses were not incurred in 2001, and the receipt of a $0.5 million settlement in the second quarter of 2000 on a prior loan purchase.
Compensation Expense
Compensation and employee benefits were approximately $15.5 million for the year ended December 31, 2001, compared with approximately $13.1
million for the year ended December 31, 2000. This increase was due to higher salary expenses and contract labor costs over the prior year. WCC's
employee head count increased by approximately 31% from December 31, 2000 to December 31, 2001, reflecting the growth in the size of our servicing
business.
Other Expenses
Other expenses in our Specialty Servicing and Finance Operations were approximately $10.3 million for the year ended December 31, 2001,
compared with approximately $9.0 million for the year ended December 31, 2000. The amount for 2001 includes approximately $1.0 million in "investor
participation interest," which represents the share in certain of our activities held by outside co-investors.
Despite our generally successful efforts to reduce and control operating overhead, we were adversely affected throughout 2001 by litigation that arose from events prior to our 1999 restructuring. Our legal expenses, which consisted primarily of defense costs and advances to former executives related to such litigation, increased by $1.8 million, net of insurance recoveries, from 2000 to 2001. We believe that some costs may be recoverable through insurance in the future.
In several other expense categories, our operating expenses declined from the year ended December 31, 2000 to the year ended December 31, 2001. Depreciation and amortization expenses decreased by approximately $0.9 million from the prior year, largely due to a one-time charge to depreciation expense of approximately $0.8 million in September 2000 pursuant to a change in the estimated lives of depreciable assets. In addition, our expenses for occupancy, audit and tax services, insurance, tax and licenses, and business travel declined by a total of approximately $0.7 million in 2001 as a result of our ongoing cost-reduction efforts.
Following are condensed statements of financial condition for our Specialty Servicing and Finance Operations as of December 31, 2001 and 2000:
December 31, December 31,
2001 2000
------------ ------------
(Dollars in thousands)
ASSETS:
Cash and cash equivalents ................................................... $ 262 $ 1,143
Mortgage-backed securities available for sale, at fair value ................ 3,367 6,400
Loans and discounted loans, net ............................................. 15,309 10,214
Real estate owned, net ...................................................... 302 991
Servicer advance receivables, net ........................................... 18,266 19,063
Service fees receivable ..................................................... 3,100 2,198
Purchased mortgage servicing rights, net .................................... 8,473 4,544
Intercompany receivables .................................................... 18,544 5,523
Other assets ................................................................ 2,541 4,249
------------ ------------
Total assets ............................................................ $ 70,164 $ 54,325
============ ============
LIABILITIES:
Short-term borrowings ....................................................... $ 9,970 $ 4,851
Long-term investment financing .............................................. 14,474 1,634
Other liabilities ........................................................... 8,643 9,622
------------ ------------
Total liabilities ....................................................... 33,087 16,107
NET WORTH ................................................................... 37,077 38,218
------------ ------------
Total liabilities and net worth ......................................... $ 70,164 $ 54,325
============ ============
Mortgage-Backed Securities Available for Sale. WFC's portfolio of mortgage-backed securities available for sale decreased by approximately $3.0 million during the year ended December 31, 2001. This decrease was primarily due to principal paydowns of $1.3 million and a disposition of $2.6 million of securities. In April 2001 WFC sold approximately $1.5 million of loans underlying such securities, and retained an interest in real property comprising the remaining $1.1 million of the securitization. In September 2001 this property was sold for a gain of approximately $0.1 million. WFC currently holds only those securities which are backed by loans in WCC's servicing portfolio, as such investments provide operating leverage to our core business.
Loans and Discounted Loans, net. In our Specialty Servicing and Finance Operations, loans and discounted loans, net increased by approximately $5.1 million during the year ended December 31, 2001. This increase was primarily due to purchases of approximately $14.9 million book value of loans, partially offset by sales of approximately $5.8 million and loan resolutions occurring in the ordinary course of business.
Real Estate Owned, net. Real estate owned, net decreased by approximately $0.7 million during the year ended December 31, 2001. The decrease was primarily due to sales of properties for proceeds of approximately $1.9 million, partially offset by acquisitions of real estate during the year through foreclosure from our portfolio of loans.
Servicer Advance Receivables, net. Servicer advance receivables, net decreased by approximately $0.8 million during the year ended December 31, 2001. This decrease resulted from recoveries by WCC of scheduled principal and interest advances on loans previously made, partially offset by new advances made during the year.
Purchased Mortgage Servicing Rights, net. Purchased mortgage servicing rights, net (MSRs) increased by approximately $3.9 million for the year ended December 31, 2001, primarily due to our purchases of $12.1 million in MSRs associated with new servicing portfolio acquisitions. However, the decline in mortgage interest rates during the year has triggered an increase in prepayments of the underlying loans being serviced, which, in turn, resulted in accelerated amortization of our servicing rights. As a result, we recorded amortization of MSRs of $5.8 million in 2001, in addition to a valuation write-down of $1.6 million.
Intercompany Receivables. Intercompany receivables increased by approximately $13.0 million from December 31, 2000 to December 31, 2001. This increase was primarily due to borrowings by WFSG at year-end to finance the Company's repurchase of 4.2 million shares of outstanding stock for approximately $10.0 million. In January 2002, WCC received settlement on this receivable from WFSG with the proceeds from WFSG's issuance of 8% convertible subordinated debentures.
Short-Term Borrowings and Long-Term Investment Financing. Short-term borrowings and long-term investment financing in our Specialty Servicing and Finance Operations increased by a total of $18.0 million from December 31, 2000 to December 31, 2001. In December 2001 we borrowed $9.2 million under one of our line of credit facilities for WFSG's repurchase of approximately 4.2 million shares of common stock from one of our shareholders. This borrowing was substantially repaid in January 2002 with proceeds from WFSG's issuance of 8% convertible subordinated debentures, which funded the majority of the stock repurchase. WCC's and WFC's other borrowings increased during 2001 to fund acquisitions of investments, including the loan purchases described above, and mortgage servicing rights.
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 make payments 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, lines of credit from commercial banks, and borrowings from institutional lenders. The availability of liquidity from our line of credit facilities is subject to the Company's maintenance of sufficient available collateral to pledge against such borrowings. We are currently maintaining sufficient collateral under the credit agreements. 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 December 31, 2001, liquidity in our Specialty Servicing and Finance Operations (including cash and unused borrowings under our credit facilities) totaled $9.8 million, compared with approximately $5.6 million at December 31, 2000. Based on our current and expected asset size, capital levels, and organizational infrastructure, we believe there will be sufficient available liquidity to meet our needs. 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 have no present intent to securitize loans as a source of liquidity.
We no longer own subordinated mortgage-backed securities backed by loan pools originated or serviced by unaffiliated third parties, and currently hold subordinated mortgage-backed securities only where we act as servicer of the loan pools backing these securities. At December 31, 2001 we held $3.4 million of such mortgage-backed securities. The related short-term repurchase agreement which financed these securities was repaid in full in February 2001.
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 in part 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 could be significantly curtailed or delayed.
WCC and WFC are party to various contractual financial obligations, including repayment of borrowings and capital and operating lease payments. The table below presents financial obligations outstanding in our Specialty Servicing and Finance Operations as of December 31, 2001:
Payments due within time period at December 31, 2001
-----------------------------------------------------------------------------
0-12 Months 1-3 Years 4-5 Years After 5 Years Total
------------- ------------- ------------- ------------- -------------
(Dollars in thousands)
Short-term borrowings............................... $ 9,970 $ -- $ -- $ -- $ 9,970
Capital leases...................................... 572 -- -- -- 572
Operating leases.................................... 309 506 40 -- 855
Long-term investment financing...................... 2,366 12,108 -- -- 14,474
------------- ------------- ------------- ------------- -------------
Total $ 13,217 $ 12,614 $ 40 $ -- $ 25,871
============= ============= ============= ============= =============
For additional information regarding future commitments, this discussion and analysis should be read in conjunction with our consolidated financial statements and related notes including the footnote "Commitments, Contingencies and Off-Balance-Sheet Risk".
Our Holding Company and Miscellaneous Operations consist of other operating revenues and expenses not directly attributable to our Banking Operations or Specialty Servicing and Finance Operations, and also includes eliminations of intercompany accounts and transactions. Primary sources of liquidity include funds available from the Company's wholly-owned non-Bank subsidiaries and payments received from FBBH pursuant to a tax allocation agreement between the Company and the Bank. However, the OTS has presently limited the amount of these payments to the lesser of (1) the Bank's stand-alone tax liability and (2) the total tax payments made by the Company. In April 2001, the Bank remitted $2.0 million to the Company for a portion of prior years' liabilities. In February 2002, the Bank remitted $0.7 million for a portion of its 2001 liability under the foregoing formula.
In the following discussion, the amounts for the year ended December 31, 1999 represent the sum of the Predecessor Company's operations for the five months ended May 31, 1999 and the Reorganized Company's operations for the seven months ended December 31, 1999, as reported in the accompanying consolidated statements of operations.
Our consolidated net income was approximately $3.4 million for the year ended December 31, 2000, compared with $143.2 million for the year ended December 31, 1999. However, the 1999 results included an extraordinary gain of $225.6 million on the extinguishment of debt, and costs of $52.0 million related to our reorganization. Our net income from recurring operations, before income tax, was $6.8 million for the year ended December 31, 2000, compared with a net loss of $29.0 million for the year ended December 31, 1999. This increase in net income for the current year was due primarily to a decrease in other expenses of $19.3 million, an increase in other income of $9.9 million, and a decrease in provision for loan losses of $7.7 million, partially offset by a decrease in net interest income of $1.8 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.
The following table compares operating income for the Bank for the years ended December 31, 2000 and December 31, 1999 (dollars in thousands):
Year Ended December 31,
------------------------------------------
Increase
2000 1999 (Decrease)
------------ ------------ ------------
Interest income....................... $ 50,847 $ 46,121 $ 4,726
Interest expense...................... 33,946 29,127 4,819
------------ ------------ ------------
Net interest income................... 16,901 16,994 (93)
Recapture of loan losses.............. (5,800) (1,250) (4,550)
------------ ------------ ------------
Net interest income after
recapture of loan losses........... 22,701 18,244 4,457
Other income.......................... 6,744 5,859 885
Other expense......................... 21,143 17,678 3,465
------------ ------------ ------------
Income before taxes................... 8,302 6,425 1,877
Income tax provision.................. 3,570 2,963 607
------------ ------------ ------------
Net income............................ $ 4,732 $ 3,462 $ 1,270
============ ============ ============
Net Interest Income
The Bank's net interest income for the year ended December 31, 2000 was approximately $16.9 million, compared with approximately $17.0 million
for the year ended December 31, 1999. Interest income increased by $4.7 million, primarily due to the Bank's purchase of approximately $155.3
million of mortgage loans during the year. This increase in interest income was offset by a $4.8 million increase in interest expense which
resulted from an increase in 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 year ended December 31, 2000 was a net recapture of $5.8 million, compared with net recoveries of $1.25
million for 1999. These reversals of reserves were a result of periodic analyses 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.
Other Income
The Bank's other income was $6.7 million for the year ended December 31, 2000, compared with $5.9 million for the year ended December 31,
1999. This increase was primarily due to smaller losses on sales of loans (loss of $0.2 million in the current year compared with a loss of $2.2
million in the prior year), and a $0.7 million increase in gains on sales of real estate, partially offset by a $1.7 million decrease in loan fees
and charges. 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 $3.5 million from the year ended December 31, 1999 to the year ended December 31, 2000.
This increase was primarily due to a $2.0 million write-down of goodwill and other capitalized costs related to the Bank's mortgage banking
operations. In addition, the Bank incurred approximately $0.7 million in professional services and other expenses incurred in connection with its
relocation of its administrative headquarters, and approximately $1.3 million related to its June, 2000 branch acquisition.
For the years ended December 31, 2000 and 1999, the Bank's core businesses have consisted of three primary divisions: lending and deposit banking services, mortgage loan origination and brokerage services (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:
Year Ended
December 31,
---------------------------
2000 1999
------------ ------------
(Dollars in thousands)
Lending and deposit banking services............... $ 10,522 $ 5,070
George Elkins...................................... (2,922) 318
Bankcard income, net............................... 702 1,037
------------ ------------
Total Bank net income (pre-tax).................... $ 8,302 $ 6,425
============ ============
Lending and Deposit Banking
Net income in our commercial banking operations was approximately $10.5 million for the year ended December 31, 2000, compared with $5.1
million for the year ended December 31, 1999. This increase was primarily due to the net recapture of $5.8 million in loan loss reserves, as
discussed previously, compared with recoveries of $1.25 million for 1999.
The banking segment's operating results for the year ended December 31, 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 credit risk 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 $81.5 million in retail deposits, is expected to lower the overall cost of funds and increase the Bank's retail deposit growth and fee revenue. (3) The Bank relocated its administrative headquarters to Calabasas, California, at a cost of approximately $0.7 million.
George Elkins
The net loss from our mortgage loan origination and brokerage services was approximately $2.9 million for the year ended December 31, 2000,
compared with net income of approximately $0.3 million for the year ended December 31, 1999. The decrease was primarily due to a $1.5 million
write-down of goodwill during 2000. In addition, loan fee income decreased from $4.5 million for the year ended December 31, 1999 to $3.4 million
for the ended December 31, 2000, as the volume of loans brokered declined from $467.5 million in 1999 to $323.2 million in 2000.
Bankcard Division
Bankcard income, net of other related expenses, was $0.7 million for the year ended December 31, 2000, compared with $1.0 million for the year
ended December 31, 1999. This decrease was primarily due to a $1.6 million decline in net bankcard revenues resulting from lower processing
volumes, and a $0.3 million increase in other expenses, partially offset by decreases in processing expenses and provision for losses.
Following are condensed statements of financial condition for FBBH as of December 31, 2000 and 1999:
December 31, December 31,
2000 1999
------------ ------------
(Dollars in thousands)
ASSETS:
Cash and cash equivalents................................................. $ 7,907 $ 48,393
Mortgage-backed securities available for sale, at fair value.............. 47,738 33,954
Mortgage-backed securities held to maturity, at amortized cost............ -- 10,196
Investment securities held to maturity, at amortized cost................. -- 5,979
Loans, net 562,257 448,398
Real estate owned, net.................................................... 779 2,266
Other assets.............................................................. 27,692 17,569
------------ ------------
Total assets.......................................................... $ 646,373 566,755
============ ============
LIABILITIES:
Deposits .............................................................. $ 435,073 $ 419,229
FHLB advances............................................................. 132,000 80,000
Other liabilities......................................................... 17,322 10,231
------------ ------------
Total liabilities..................................................... 584,395 509,460
NET WORTH 61,978 57,295
------------ ------------
Total liabilities and net worth....................................... $ 646,373 $ 566,755
============ ============
Mortgage-Backed and Other Securities. The Bank's portfolio of mortgage-backed and other securities available for sale increased approximately $13.8 million during the year ended December 31, 2000. This increase was primarily due to the transfer of $21.9 million of mortgage-backed securities and other securities previously classified as held-to-maturity to available-for-sale, partially offset by principal repayments of $7.2 million, sales of $0.6 million, and an increase in unrealized holding losses of $0.1 million.
The Bank's holdings of mortgage-backed and other securities held to maturity decreased approximately $10.2 million and $6.0 million, respectively, during the year ended December 31, 2000, primarily due to the transfer of such securities to the available-for-sale classification described above.
Loans, net. The Bank's portfolio of loans, net of discounts and allowances, increased by approximately $113.9 million during the year ended December 31, 2000. This increase is primarily attributable to the acquisition and origination of performing commercial loans.
Deposits. The Bank's deposits increased by approximately $15.8 million during the year ended December 31, 2000, primarily due to the purchase of a branch of Fidelity Federal Bank, which had approximately $81.5 million in retail deposits. This increase was largely offset by maturities of higher-rate certificates of deposit, as the Bank permitted the run-off of such deposits in an effort to reduce its overall cost of funds.
FHLB Advances. The Bank's FHLB advances increased by $52.0 million during year ended December 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 the Bank's sensitivity to market interest-rate fluctuations and enables the Bank to more closely match the maturities of its investments and borrowings.
The following table compares operating income (before taxes and extraordinary items) of our Specialty Servicing and Finance Operations for the years ended December 31, 2000 and 1999. The 1999 amounts represent the sum of the Predecessor Company's WFC operations for the five months ended May 31, 1999 and the Reorganized Company's Specialty Servicing and Finance Operations for the seven months ended December 31, 1999.
WCC and WFC for the Year Ended December 31,
-------------------------------------------
(Dollars in thousands)
Increase
2000 1999 (Decrease)
------------ ------------ ------------
Servicing income........................... $ 14,257 $ 10,550 * $ 3,707
Interest income............................ 4,364 15,996 * (11,632)
Investment and other income (loss) ........ 2,942 (1,929)* 4,871
------------ ------------ ------------
Total revenues............................. 21,563 24,617 (3,054)
------------ ------------ ------------
Interest expense........................... 1,276 7,191 * (5,915)
Provision for loan losses.................. 1,669 5,060 (3,391)
Compensation expense....................... 13,132 13,602 * (470)
Other expenses............................. 9,033 17,335 * (8,302)
------------ ------------ ------------
Total provisions and expenses.............. 25,110 43,188 (18,078)
------------ ------------ ------------
Operating loss............................. $ (3,547) $ (18,571) $ 15,024
============ ============ ============
* Amounts include WCC's servicing operations only for the seven-month period ended December 31, 1999.
Servicing Income
Servicing income for the year ended December 31, 2000 was approximately $14.3 million, compared with approximately $10.6 million for the year
ended December 31, 1999. Excluding $2.4 million in servicing fees earned by a subsidiary of WFC for the Company's securitizations, our Specialty
Servicing and Finance Operations, through WCC, earned $8.2 million in servicing revenues in 1999. Thus, our revenue from loan servicing increased
by approximately $6.1 million from 1999 to 2000. This increase reflects a full year's servicing activity of WCC, our majority-owned servicing
subsidiary, in 2000, compared with only seven months of such activity in 1999. (WCC was formed in connection with the Company's reorganization and
commenced operations in June 1999. Prior to the reorganization, the activities of our Prior Servicer were not included in the consolidated
financial statements of WFSG.)
The increase in servicing revenue described above was partially offset by the run-off of loans in the servicing portfolio during the year and, to a lesser extent, by sales of loans owned by the Company's subsidiaries which had been serviced by WCC (thereby reducing WCC's fees earned).
The following table sets forth the composition of loans serviced by WCC by type of loan at the dates indicated.
December 31, December 31,
2000 1999
------------ ------------
(Dollars in thousands)
Single-family residential................ $ 1,909,761 $ 1,516,536
Multi-family residential................. 163,511 104,307
Commercial real estate................... 223,539 221,605
Consumer and other (1)................... 265,598 271,515
------------ ------------
Total................................ $ 2,562,409 $ 2,113,963
============ ============
(1) Approximately $166 million in unpaid principal balance of fully-reserved consumer loans were charged off in January, 2001.
During the fourth quarter of 2000, our Specialty Servicing and Finance Operations completed the transfer of servicing rights in two significant acquisitions: (1) we acquired, from subsidiaries of Transamerica Finance Corporation and from DLJ Mortgage Capital, the servicing rights and related servicer advance receivables for approximately 10,500 residential mortgage loans totaling approximately $370 million in aggregate unpaid principal balances, and (2) we 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.
Interest Income and Interest Expense
Interest income was approximately $4.4 million for the year ended December 31, 2000, compared with approximately $16.0 million for the year
ended December 31, 1999, a decrease of $11.6 million. Interest expense was approximately $1.3 million for the year ended December 31, 2000,
compared with approximately $7.2 million for the year ended December 31, 1999, a decrease of $5.9 million. 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 (Loss)
The components of other income (loss) in our Specialty Servicing and Finance operations are reflected in the following table:
Year Ended
December 31,
----------------------------
2000 1999
------------ ------------
(Dollars in thousands)
Other income (loss):
Real estate owned, net.......................... $ (847) $ 1,128
Gain on sale of loans........................... 1,484 3,687
(Loss) gain on sale of securities............... (495) 665
Market valuation losses and impairments......... -- (8,068)
Other, net...................................... 2,800 659
------------ ------------
Total other income (loss)................... $ 2,942 $ (1,929)
============ ============
The increase in other income during the year ended December 31, 2000 was primarily due to the absence of market valuation losses and impairments in the current year. (We incurred $8.1 million of such losses in our Specialty Servicing and Finance Operations during 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 gains 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 in our Specialty Servicing and Finance Operations were approximately $13.1 million for the year ended
December 31, 2000, compared with approximately $13.6 million for the year ended December 31, 1999, a decrease of $0.5 million. This decrease was
primarily due to reductions in our workforce during 1999, resulting in savings in the year 2000 of approximately $4.8 million. However, these
expense reductions were partially offset by the inclusion of a full year's compensation expense for WCC in 2000, compared with only seven months of
compensation in 1999. Prior to June 1999, such expenses were incurred by CWH, and thus were not included in WFSG's consolidated statements of
operations. As a result, only $7.2 million of compensation expense for WCC is included in the 1999 statement of operations, compared with $11.6
million for 2000.
Other Expenses
Other expenses were approximately $9.0 million for the year ended December 31, 2000, compared with approximately $17.3 million for the year
ended December 31, 1999, a decrease of $8.3 million. This decrease was primarily due to a $9.8 million decline in loan service fees and expenses
paid by WFC to the Prior Servicer from January 1 to May 31, 1999. Any expenses incurred by WFC for the servicing of its loan portfolio are now
eliminated in consolidation.
In addition to the aforementioned decrease in loan service fees, our other miscellaneous general and administrative expenses declined slightly from 1999 to 2000, reflecting our efforts to reduce general corporate overhead.
Following are condensed statements of financial condition for our Specialty Servicing and Finance Operations as of December 31, 2000 and 1999:
December 31, December 31,
2000 1999
------------ ------------
(Dollars in thousands)
ASSETS:
Cash and cash equivalents .............................................. $ 1,143 $ 3,467
Mortgage-backed securities available for sale, at fair value ........... 6,400 9,560
Loans and discounted loans, net ........................................ 10,214 26,486
Real estate owned, net ................................................. 991 3,420
Servicer advance receivables, net ...................................... 21,261 25,074
Mortgage servicing rights, net ......................................... 4,544 507
Other assets ........................................................... 9,772 8,428
------------ ------------
Total assets ....................................................... $ 54,325 $ 76,942
============ ============
LIABILITIES:
Short-term borrowings .................................................. $ 6,485 $ 26,193
Other liabilities ...................................................... 9,622 9,686
------------ ------------
Total liabilities ................................................. 16,107 35,879
NET WORTH .............................................................. 38,218 41,063
------------ ------------
Total liabilities and net worth .................................... $ 54,325 $ 76,942
============ ============
Mortgage-Backed Securities Available for Sale. WFC's portfolio of mortgage-backed securities available for sale decreased by approximately $3.2 million during the year ended December 31, 2000, primarily due to sales of approximately $4.3 million in carrying value of securities and principal repayments of $0.2 million, partially offset by unrealized holding gains of $1.3 million. The sales reflect our efforts to reduce our balance sheet exposure to fluctuations in the market values of mortgage-backed securities. As a result, we currently hold only those securities which are backed by loans in WCC's servicing portfolio, as such investments provide operating leverage to our core business.
Loans and Discounted Loans, net. In our Specialty Servicing and Finance Operations, loans and discounted loans, net decreased by approximately $16.3 million during the year ended December 31, 2000. This decrease was primarily due to the sale of loans to 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 $2.4 million during the year ended December 31, 2000. The decrease was primarily due to sales of properties for proceeds of approximately $3.0 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 $3.8 million during the year ended December 31, 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.
Purchased Mortgage Servicing Rights, net. Purchased mortgage servicing rights, net increased by approximately $4.0 million during the year ended December 31, 2000. The increase was due to purchases of $4.4 million of servicing rights associated with new servicing portfolio acquisitions during the year, partially offset by amortization of $0.4 million of such rights.
Short-Term Borrowings. Short-term borrowings in our Specialty Servicing and Finance Operations decreased by approximately $19.7 million during the year ended December 31, 2000. This decrease was primarily due to repayments of debt facilities with the proceeds from the asset sales described above.
Managing risk is an essential part of successfully operating a financial services company. The most prominent risk exposures are credit quality, interest rate sensitivity, and liquidity. Credit quality risk is the risk of not collecting interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of net interest income as the result of changes in interest rates. Rate movements can affect the repricing of assets and liabilities differently, as well as their market value. Liquidity risk is the possible inability to fund obligations to depositors, investors and borrowers.
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 the 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 activity, and maturities of investments and borrowings. FBBH'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 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. In the past, we have utilized interest rate swap agreements 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. The Bank had approximately $18.2 million notional principal amount in an interest rate swap agreement which was designated as a hedge of certain fixed rate loans in order to convert fixed rate income streams on loans to a variable rate. In April 2001, this swap agreement expired.
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. In general, when a pool of loans, securities or mortgage servicing rights is acquired, we will determine whether or not to hedge.
In addition, as required by OTS regulations, the 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 the Bank.
The following table quantifies the potential changes in the Company's net portfolio value at December 31, 2001, should interest rates increase or decrease by 100 to 300 basis points, assuming the yield curves of the rate shocks will be parallel to each other.
Interest Rate Sensitivity of Net Portfolio Value
Net Portfolio Value NPV as % of Assets
--------------------------------------- ------------------------
$Amount $Change % Change NPV Ratio Change
---------- ----------- ---------- ----------- ----------
Change in Rates (Dollars in thousands)
+300bp........................................... $ 80,128 $ (19,869) (20)% 10.87% (191) bp
+200bp........................................... 85,925 (14,072) (14) 11.44 (134) bp
+100bp........................................... 94,508 (5,489) (5) 12.30 (48) bp
0bp........................................... 99,997 -- -- 12.78 --
-100bp........................................... 95,799 (4,198) (4) 12.17 (61) bp
-200bp........................................... 89,228 (10,769) (11) 11.30 (148) bp
-300bp........................................... 84,039 (15,958) (16) 10.59 (219) bp
Management also believes that the assumptions (including prepayment assumptions) it uses 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.
On February 8, 1999, the OTS terminated a Cease and Desist Order (the "Order") to which the Bank had stipulated in 1996. The Order had prohibited the Bank from increasing total assets in excess of $750 million; purchasing any loans or real estate without the approval of the OTS until certain acquisition and servicing deficiencies had been corrected; and purchasing any non-performing assets or foreclosed real estate until such time as the Bank was rated a composite "3" rating according to the Uniform Financial Institutions Rating System.
On June 8, 2000, the OTS terminated an OTS directive letter (the "Directive") issued to the Bank on June 3, 1999. The Directive had required prior written approval of the OTS Assistant Regional Director for the Bank to engage in certain activities including material cash expenditures, loan pool purchases, capital distributions and the hiring of any executive officers. Additionally, the Directive had required the adoption of a monthly board resolution indicating that the Bank complied with the provisions stated in the Directive.
On January 9, 2001, the OTS terminated Cease and Desist Orders to which WFSG, Wilshire Acquisitions Corporation ("WAC ", the holding company for the Bank), and WCC had stipulated on January 7, 2000. The orders had prohibited these entities from entering into transactions that would cause the Bank to violate or be in violation of transactions with affiliates' regulations. The orders also had required 30-day advance notification before adding, replacing or terminating any member of the Bank's board of directors or any senior executive of the Bank.
The "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as disclosures included elsewhere in this Form 10-K, are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. On an ongoing basis, we evaluate the estimates used, including those related to allowances for loan losses, other than temporary impairment in the market values of investment securities and other assets, assumptions used to estimate fair values of certain financial instruments for which there is not an active market, the allocation of basis between assets sold and retained, the selection of yields utilized to recognize interest income on certain mortgage-backed securities, and contingencies and litigation. We base our estimates on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources as well as identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of the consolidated financial statements:
• Allowance for Loan Losses. In estimating the allowance for loan losses, management utilizes historical experience as well as other factors, including the effect of changes in the real estate market on collateral values, the effect on the loan portfolio of current economic indicators and their probable impact on borrowers, and increases or decreases in nonperforming and impaired loans. Changes in these factors may cause management’s estimate of the allowance to increase or decrease and result in adjustments to the Company’s provision for loan losses.
• Mortgage Servicing Rights. Our loan servicing business represents an increasingly significant proportion of our operations. In determining the fair value of our mortgage servicing rights, we make assumptions of market discount rates, prepayment speeds and default rates which affect the estimated present value of future cash flows. Changes in these assumptions and economic factors may result in increases or decreases in the valuation of our mortgage servicing rights.
• Contingencies. We are party to various legal proceedings, as discussed above and in the notes to the consolidated financial statements. These matters have a high degree of uncertainty associated with them. We continually assess the likely outcomes of these matters and the adequacy of amounts provided for these matters. There can be no assurance that the ultimate outcome will not differ materially from our assessment of them. There can also be no assurance that all matters that may be brought against us or that we may bring against other parties are known to us at any point in time.
For further information on these and other significant accounting policies, see Note 1 to the Consolidated Financial Statements.
See Item 7--Asset and Liability Management--of Part II of this Report.
See Item 14 of Part IV of this Report.
Information regarding changes in accountants is incorporated herein by reference to the Company's report on Form 8-K/A dated October 20, 2000.
The following sets forth information about the executive officers and directors of the Company as of March 1, 2002. The business address of each executive officer and director is the address of the Company, 1776 SW Madison Street, Portland, OR 97205, and each executive officer and director is a United States Citizen, unless otherwise noted.
Larry B. Faigin, age 59, was appointed to the Board of Directors in June 1999 and has been Chairman since September 1999. In May 2001, Mr. Faigin was re-elected to a one-year term. Mr. Faigin is President and Chief Executive Officer of GreenPark Remediation, LLC, a company that specializes in acquiring environmentally-impacted land and remediating and improving the property for further development. Prior to joining that company, he was Chief Executive Officer of Home Capital Corporation, a subsidiary of HomeFed Bank. He also has served as a consultant to Chevron Corporation, and Chief Executive Officer and Director of Wood Bros. Homes, Inc.
Howard Amster, age 54, was appointed to the Board of Directors in November 2001. Mr. Amster is a principal of Ramat Securities Ltd., a Cleveland-based investment firm. Previously, Mr. Amster was an investment consultant with First Union Securities (formerly Kemper Securities) from 1992 to June 2000. From June 1979 to 1991, Mr. Amster was co-manager of a convertible bond hedging department at Kemper Securities. Mr. Amster is also a director of Horizon Group Properties, Inc., Maple Leaf Financial, and Astrex Inc., and previously served as a director of American Savings of Florida.
Robert M. Deutschman, age 44, has been a director of the Company since June 1999 and, in May 2001, was re-elected to a one-year term. Mr. Deutschman is a Managing Director of Cappello Capital Corp., a financial service and advisory company which engages in merchant banking, venture capital and investment banking. Prior to joining Cappello, Mr. Deutschman was a Managing Director of Saybrook Capital Corp. From 1991 until 1994, Mr. Deutschman was a Senior Vice President and Director of Principal Investments in the Public Finance Group of Houlihan Lokey Howard & Zukin.
Peter S. Fishman, age 54, has been a director of the Company since September 1999, and in May 2001, was re-elected to a one-year term. Mr. Fishman has been a Vice President at Houlihan Lokey, Howard & Zukan, an investment banking firm, since January 2000. Previously, Mr. Fishman was a Director of Helix Capital services, a private merchant bank engaged in investing in and providing merger and acquisition advisory services to its clients. Prior to joining Helix, Mr. Fishman was a partner in law firms in Los Angeles and San Francisco, specializing in financial reorganizations and restructurings. Mr. Fishman's practice focused on the representation of underperforming and troubled companies, both public and private, and the representation of financial institutions and other lenders in structuring new financings and the workout of troubled credits.
Stephen P. Glennon, age 57, has been the Company's Chief Executive Officer since September 1999 and a director since December 1999. In May 2001, he was re-elected to a one-year term on the Board of Directors. From 1994 until joining the Company, Mr. Glennon served as Chief Executive Officer of Glennon Associates, a firm of private investment bankers specializing in financial restructuring and turnaround management of financial sector companies. Mr. Glennon previously served as an investment banker with Lehman Brothers, N.Y. and Lepercq, de Neuflize & Co., N.Y. Mr. Glennon currently serves as a director of New Water Street Corporation, N.Y. and Point Clear Holdings, N.Y.
Robert H. Kanner, age 54, was appointed to the Board of Directors in January 2002. From 1987 until the present, Mr. Kanner has been Chairman of the Board and President of Pubco Corporation, a manufacturer and marketer of computer printer and labeling products and supplies, and has been the company's President and a director since 1983. Mr. Kanner also serves as a director of Prime Retail, Inc., a real estate investment trust that owns, develops and manages more than forty discount factory outlet centers throughout the U.S.
Edmund M. Kaufman, age 72, has been a director of the Company since March 2000 and, in May 2001, was re-elected to a one-year term. Mr. Kaufman is a private investor and the owner of a bookstore specializing in mystery and crime fiction. Previously, Mr. Kaufman was a partner with the law firm of Irell & Manella LLP for thirty-six (36) years, specializing in mergers and acquisitions and corporate finance. Mr. Kaufman is a director emeritus of the Los Angeles Opera, and is a member of the Board of Trustees of the Friends of the University of California Press.
Daniel A. Markee, age 44, has been a director of the Company since June 1999 and, in May 2001, was re-elected to a one-year term. Mr. Markee is a principal of LendSource, Inc., a firm specializing in the origination of first mortgage, home equity and consumer installment debt. From 1993 until 1997, Mr. Markee was involved in the real estate investment business as President of Forterra, Inc., and as a principal of Euro-American Partners, Inc.
Bruce A. Weinstein, age 39, has been Executive Vice President and Chief Financial Officer of the Company since April 2001, and was appointed to the Board of Directors in January 2002. From April 2000 to April 2001 Mr. Weinstein was Senior Vice President and Chief Financial Officer of the Company. Prior to this appointment, Mr. Weinstein served as Senior Vice President and Chief Financial Officer of Wilshire Credit Corporation since November 1999. From August 1998 to November 1999, Mr. Weinstein was Vice President, Finance of the Company. From March 1997 to August 1998, Mr. Weinstein had various operations and finance responsibilities at the predecessor company to WCC. Mr. Weinstein is a Certified Public Accountant.
Stephen P. Glennon, age 57, has been the Company's Chief Executive Officer since September 1999 and a director since December 1999. In May 2001, he was re-elected to a one-year term on the Board of Directors. From 1994 until joining the Company, Mr. Glennon served as Chief Executive Officer of Glennon Associates, a firm of private investment bankers specializing in financial restructuring and turnaround management of financial sector companies. Mr. Glennon previously served as an investment banker with Lehman Brothers, N.Y. and Lepercq, de Neuflize & Co., N.Y. Mr. Glennon currently serves as a director of New Water Street Corporation, N.Y. and Point Clear Holdings, N.Y.
Joseph W. Kiley III, age 46, has been President and Chief Executive Officer of FBBH since September 2001 and a director of FBBH since November 2001. From March 2001 until this appointment, Mr. Kiley served as the Bank's Executive Vice President and Chief Financial Officer. Prior to joining the Bank, Mr. Kiley was Executive Vice President of Operations and Chief Financial Officer of National Mercantile Bancorp, the parent of Mercantile National Bank in Century City, California from July 1996 to February 2001. Previously, Mr. Kiley was Chief Financial Officer of Hancock Savings Bank, F.S.B. in Los Angeles, California from 1992 to 1996. Mr. Kiley is a Certified Public Accountant.
Jay H. Memmott, age 40, has been President and Chief Executive Officer of Wilshire Credit Corporation since November 1999. Prior to his appointment as President, Mr. Memmott served as Vice President in charge of Loan Servicing of the Company's prior affiliated servicer from August 1997 to November 1999. From April 1990 to August 1997, Mr. Memmott served as a Vice President of Coast Federal Bank in Los Angeles, California.
Bruce A. Weinstein, age 39, has been Executive Vice President and Chief Financial Officer of the Company since April 2001 and a director since January 2002. From April 2000 to April 2001 Mr. Weinstein was Senior Vice President and Chief Financial Officer of the Company. Prior to this appointment, Mr. Weinstein served as Senior Vice President and Chief Financial Officer of Wilshire Credit Corporation since November 1999. From August 1998 to November 1999, Mr. Weinstein was Vice President, Finance of the Company. From March 1997 to August 1998, Mr. Weinstein had various operations and finance responsibilities at the predecessor company to WCC. Mr. Weinstein is a Certified Public Accountant.
Mark H. Peterman, age 54, has been the Company's Executive Vice President, Legal Counsel and Secretary since November 1999. Mr. Peterman served as Senior Vice President and Legal Counsel from July 1998 through November 1999. Previously, Mr. Peterman was a partner in the law firm of Stoel Rives LLP between 1975 and July 1998.
Russell T. Campbell, age 38, has been Senior Vice President, Acquisitions since April 2000. Mr. Campbell held several management positions at the Company from 1997 to April 2000. From 1992 to 1997, he was Chief Financial Officer for Oregon Business Media. Prior to 1992, Mr. Campbell was a CPA working in the commercial real estate industry.
Bradley B. Newman, age 40, has been Senior Vice President, Capital Markets since November 1999. Previously, Mr. Newman was Vice President, Capital Markets/Securitization for the Company from August 1998 to November 1999. From September 1995 to August 1998, Mr. Newman was Chief Operating Officer of J.G. Newman Co., an insurance underwriter.
Section 16(a) of the Securities Exchange Act of 1934 requires a company's directors and executive officers, and beneficial owners of more than 10% of the common stock of such company, to file with the Securities and Exchange Commission initial reports of ownership and periodic reports of changes in ownership of the company's securities. Due to an administrative oversight, the Company inadvertently failed to furnish a Form 3 on behalf of Joseph W. Kiley III reporting that he had been appointed President of FBBH. The Company subsequently disclosed his appointment and reportable holdings with the SEC. To the knowledge of the Company, no other director, officer, or beneficial owner of more than 10% of the Company's Common Stock has failed to timely furnish reports required of such person by Section 16(a) on Forms 3, 4 and 5.
Each member of the Board of Directors who is not an officer or employee of the Company is paid a monthly stipend of $2,083, a per-meeting fee of $1,000 for each Board of Directors' meeting attended in person, $500 for each meeting attended telephonically, and a $500 per-meeting fee for each committee meeting attended on days other than when Board of Directors' meetings are held. Effective December 1, 2001, non-employee directors who are also directors of FBBH receive an additional monthly stipend of $833. Directors who serve as the chair of the Audit Committee or of the Board receive an additional yearly stipend of $10,000, and the chairperson of the Compensation Committee receives an additional yearly stipend of $5,000. Other members of the Audit Committee and Compensation Committee receive yearly stipends of $5,000 and $2,500, respectively. In March 2002, the Board authorized one-time payments of $10,000 to the chairperson and $5,000 to each of the other two members of a special committee of the Board which was formed to analyze and advise the Board regarding a proposed transaction. Officers and employees of the Company who also serve as directors do not receive any retainer or additional fees for serving as a director.
Upon joining the Board, each non-employee director was granted an option to purchase 30,000 shares of common stock at a price per share equal to the fair market value of the shares of common stock on the grant date. Each director also receives options to purchase an additional 20,000 shares of common stock on each annual meeting date and the continuation of his or her appointment. All options granted to the directors vest in thirds on each anniversary of the grant date.
The following table sets forth the total compensation paid or accrued by the Company for services rendered during the year ended December 31, 2001 to the Chief Executive Officer of the Company and each of the four other most highly compensated executive officers of the Company who were serving as executive officers at December 31, 2001.
Long-Term
Annual Compensation Compensation
-------------------------------------------- ------------
Other Securities
Annual Underlying Options/
Name and Principal Position Year Salary ($) Bonus ($) Comp.($) SARs(#)
- --------------------------- ---- ------------ ------------ ------------ ------------
Stephen P. Glennon.................................. 2001 $ 24 $ 250,000 $ 74,583(1) --
Chief Executive Officer 2000 $ 75,016 $ 100,000 $ 68,406(2) 975,000
1999 $ 89,349(3) $ -- -- --
Jay H. Memmott...................................... 2001 $ 225,224 $ 175,000 -- 100,000
Chief Executive Officer and President, 2000 $ 217,530 $ 135,000 -- 250,000
Wilshire Credit Corporation 1999 $ 139,450 $ 50,000 -- --
Bruce A. Weinstein.................................. 2001 $ 214,223 $ 175,000 -- 100,000
Executive Vice President and 2000 $ 198,632 $ 150,000 -- 250,000
Chief Financial Officer 1999 $ 130,109 $ 50,000 -- --
Mark H. Peterman.................................... 2001 $ 258,249 $ 70,000 -- 10,000
Executive Vice President, Legal Counsel 2000 $ 269,010 $ 50,000 -- 125,000
and Secretary 1999 $ 253,242 $ 250,000 -- --
Joseph W. Kiley III................................. 2001 $ 172,197(4) $ 107,500 -- 200,000
Chief Executive Officer and President,
First Bank of Beverly Hills, FSB
- ----------------
(1) Includes $60,487 for personal living expenses and taxes.
(2) Includes $45,365 for personal living expenses and taxes.
(3) Mr. Glennon was hired in September 1999.
(4) Mr. Kiley was hired in March 2001.
The following table provides information concerning stock options granted by the Company during the year ended December 31, 2001 to each of the named executive officers.
% of Total Potential Realizable
Options/SARs Value at Assumed
Number of Granted to Annual Rates of Stock
Securities Employees in Price Appreciation for
Underlying Year Ended Exercise or Option Term (1)
Options/SARs December 31, Base Price Expiration ---------------------------
Name Granted (#) 2000 ($/sh) Date 5% 10%
- ---- ----------- ------------ ---------- ---------- ------------ ------------
Jay H. Memmott............. 100,000 15.15% $1.90 2011 $ 119,490 $ 302,811
Bruce A. Weinstein......... 100,000 15.15% $1.90 2011 $ 119,490 $ 302,811
Mark H. Peterman........... 10,000 1.52% $1.87 2011 $ 11,760 $ 29,803
Joseph W. Kiley............ 150,000 22.73% $1.63 2011 $ 153,293 $ 388,475
Joseph W. Kiley............ 50,000 7.58% $1.90 2011 $ 59,745 $ 151,406
_________________
| (1) | These amounts represent hypothetical gains that could be achieved for the options if they are exercised at the end of their terms. The assumed 5% and 10% rates of stock price appreciation are mandated by rules of the Securities and Exchange Commission. They do not represent the Company’s estimate or projection of future prices of the Common Stock. |
The following table lists the aggregate number of unexercised options and the value of unexercised in-the-money options at December 31, 2001 for each of the named executive officers. The Company has no outstanding SARs.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at FY-End (#) Options/SARs at FY-End ($)
Shares Acquired Value ----------------------------- ----------------------------
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ----- --------------- ------------ ----------- ------------- ----------- -------------
Stephen P. Glennon......... -- -- 791,666 183,334 $716,145 $174,792
Jay H. Memmott............. -- -- 116,666 233,334 99,583 100,417
Bruce A. Weinstein......... -- -- 116,666 233,334 99,583 100,417
Mark H. Peterman........... -- -- 74,999 50,001 71,457 44,168
Joseph W. Kiley............ -- -- -- 200,000 -- 70,500
No long term incentive plan awards were made during the 2001 fiscal year to any of the named executive officers.
From April 1, 2000 to February 28, 2002, the Company's Chief Executive Officer, Mr. Stephen P. Glennon, received a salary of $24 per year for two years, and was reimbursed for certain living expenses. Mr. Glennon also was granted 575,000 stock options at a price of $1.1875 per share. The options vested at the rate of 25,000 per month and had vested in full as of February 28, 2002. In March 2002 Mr. Glennon entered into a new employment agreement with the Company. Pursuant to this agreement, Mr. Glennon will receive a salary of $100,000 from March 1, 2002 to February 28, 2003 and a salary of $300,000 from March 1, 2003 to February 29, 2004, and will continue to be reimbursed for certain living expenses. Mr. Glennon also was granted 300,000 stock options at a price of $2.34 per share, vesting at the rate of 12,500 per month for each month of employment completed by Mr. Glennon. Mr. Glennon's new agreement provides that, in the event of a change in control of the Company, all of his options will vest and immediately become exercisable, and he will be paid $500,000 in consideration of a general release of all claims. If the Company terminates Mr. Glennon's employment without cause, all of his stock options will vest and he will be paid $150,000 in exchange for a general release of all claims. In the event Mr. Glennon voluntarily terminates his employment, he shall receive only those options that vested through the date of his resignation and will receive no further salary.
The Company and the Bank entered into an Employment, Confidentiality and Severance Agreement with Mr. Joseph W. Kiley III, effective as of March 12, 2001, thereafter, amended, generally effective as of August 30, 2001 (the "Kiley Agreement"). The Kiley Agreement provides that Mr. Kiley serve as Executive Vice President and Chief Financial Officer of the Bank for the periods between March 12, 2001 and August 30, 2001; thereafter, as President of the Bank. Pursuant to the Kiley Agreement, Mr. Kiley's employment is for a term of two years commencing on March 12, 2001, with an option to renew for successive periods of twelve months each. Under the Kiley Agreement, Mr. Kiley receives an annual base salary of $180,000, increased to $200,000 effective as of August 30, 2001, and a car allowance of $750.00 per month. In addition, Mr. Kiley is entitled to participate in the Bank's employee benefit plans, medical, dental, vision, disability or insurance programs, if any, to the extent offered to other officers of similar position under the Bank's personnel policies. The Kiley Agreement also provides for a stock option grant to Mr. Kiley under the Company's 1999 Equity Participation Plan, covering an aggregate of 150,000 shares of the Company's Common Stock at a price of $1.625 per share. The stock option grant vests in three equal annual installments beginning on March 12, 2002 and is subject to forfeiture under certain circumstances prior to September 12, 2002. Under the Kiley Agreement, Mr. Kiley is granted an additional stock option grant under the Company’s 1999 Equity Participation Plan, covering an aggregate of 50,000 shares of Company Common Stock at a price of $1.90 per share effective as of October 2, 2001. The additional stock option grant vests in three equal annual installments beginning on October 2, 2002. All stock options granted under the Kiley Agreement are granted at a price equal to the fair market value of the Company's Common Stock on the date of grant. Pursuant to the Kiley Agreement, in the event Mr. Kiley's employment is terminated upon the occurrence of an "Other Event of Termination," (as defined in the Kiley Agreement) he is entitled to an amount equal to his then annual base salary and to life, medical, dental and disability coverage substantially identical to the coverage maintained by the Bank or the Company for Mr. Kiley prior to his termination of employment at no cost to him for a period of one year, subject to certain limitations. Under the Kiley Agreement, in the event of a "change in control" (as defined in the Kiley Agreement) of the Bank or the Company, Mr. Kiley's stock options become immediately vested and exercisable. Furthermore, in the event Mr. Kiley's employment is terminated within 12 months after a "change in control," without "cause" (as defined in the Kiley Agreement) or following Mr. Kiley's resignation following an Other Event of Termination, Mr. Kiley is entitled to a sum equal to two times the average of his "Annual Cash Compensation," as defined below, for the five most recent taxable years that Mr. Kiley is employed by the Bank (subject to certain adjustments) and to life, medical, dental and disability coverage substantially identical to the coverage maintained by the Bank or the Company for Mr. Kiley prior to his termination of employment at no cost to him for a period of one year, subject to certain limitations. Under the Kiley Agreement, "Annual Cash Compensation" includes base salary, commissions, bonuses, and directors or committee fees. The Kiley Agreement is attached hereto as Exhibit 10.2.
In October 2000, the Company gave change-in-control agreements to Messrs. Bruce A. Weinstein, Jay H. Memmott, Mark H. Peterman, Russell T. Campbell and Bradley B. Newman. The Company revised portions of these agreements in April 2001. These agreements provide that, in the event of a change in control of the Company, these executives would be entitled to receive a severance payment if within a specified period of time after a change in control, their employment is involuntarily terminated by the Company for any reason other than cause or death or disability, or they voluntarily terminate their employment after certain adverse changes in the terms of their employment ("Good Reason"). The specified period of time is 120 days for Messrs. Weinstein, Memmott, Campbell and Newman and one year for Mr. Peterman. In addition, Messrs. Weinstein, Memmott, Campbell and Newman are entitled to their severance payment if they terminate their employment after the 120-day period, whether or not they have been terminated without cause or voluntarily terminate for Good Reason. The amount of the severance payment for Messrs. Weinstein, Memmott, Campbell and Newman would be twice their annual base salary, and the severance payment for Mr. Peterman would be equal to his base salary.
The Compensation Committee report below shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended (the "Securities Act") or under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), except to the extent the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under the Securities Act or Exchange Act. The Compensation Committee of the Board of Directors of the Company (the "Committee") is made up exclusively of non-employee directors. The Committee administers the executive compensation programs of the Company. All actions of the Committee pertaining to executive compensation are submitted to the Board of Directors for approval.
The Company's executive compensation program is designed to attract, retain, and motivate high caliber executives and to focus the interests of the executives on objectives that enhance stockholder value. These goals are attained by emphasizing "pay for performance" by having a portion of the executive's compensation dependent upon business results and by providing equity interests in the Company. The principal elements of the Company's executive compensation program are base salary and stock options. In addition, the Company anticipates that it will recognize individual contributions as well as overall business results, using a discretionary bonus program.
Base Salary
Base salaries for the Company's executives are intended to reflect the scope of each executive's responsibilities, the success of the Company, and contributions of each executive to that success. Executive salaries are adjusted gradually over time and only as necessary to meet this objective. Increases in base salary may be moderated by other considerations, such as geographic or market data, industry trends or internal fairness within the Company.
Base Salary
Annual discretionary bonuses were paid by the Company and the Bank in 2001. The amount of the annual discretionary bonuses paid to executives by the Company was determined by the Committee, and the amount of the annual discretionary bonuses paid by the Bank was determined by the Bank's board of directors. Annual bonuses paid to other employees were based on their individual contributions towards meeting the overall objectives of the Company.
Incentive Stock Option Plan
At its annual shareholder meeting in December 1999, the Company adopted a new stock option plan (the "Equity Participation Plan"). The purpose of the Equity Participation Plan is to enable the Company to attract, retain and motivate key employees, directors and, on occasion, consultants, by providing them with equity participation in the Company. Accordingly, the Equity Participation Plan permits the Company to grant incentive stock options ("ISOs"), non-statutory stock options ("NSOs"), restricted stock and stock appreciation rights (collectively "Awards") to employees, directors and consultants of the Company and subsidiaries of the Company. The Plan was subsequently amended at the Company's June 2000 shareholder meeting to (1) increase the number of shares reserved for issuance under the Plan by 1,200,000 shares of common stock to an aggregate of 4,000,000 shares and (2) allow any participant in the Plan to receive grants of options or other awards with respect to up to 1,000,000 shares of common stock per year. In January 2001 the Plan was further amended to revise the definition of "change in control" in those provisions of the Plan that permit accelerated vesting of the options in the event of a change in control. In April 2001 the Board of Directors passed a resolution providing that upon a change in control of the Company, all granted options would vest and immediately become exercisable. In March 2002 the Board passed a resolution providing that future options granted would not automatically include a provision for immediate vesting upon a change in control. The Board of Directors has delegated administration of the Equity Participation Plan to the Committee.
Under the Equity Participation Plan, the Committee may grant ISOs and NSOs. The option exercise price of both ISOs and NSOs may not be less than the fair market value of the shares covered by the option on the date the option is granted. The Committee also may grant Awards of restricted shares of Common Stock. Each restricted stock Award would specify the number of shares of Common Stock to be issued to the recipient, the date of issuance, any consideration for such shares and the restrictions imposed on the shares (including the conditions of release or lapse of such restrictions). The Committee also may grant Awards of stock appreciation rights. A stock appreciation right entitles the holder to receive from the Company, in cash or Common Stock, at the time of exercise, the excess of the fair market value at the date of exercise of a share of Common Stock over a specified price fixed by the Committee in the Award, multiplied by the number of shares as to which the right is being exercised. The specified price fixed by the Committee will not be less than the fair market value of shares of Common Stock at the date the stock appreciation right was granted.
CEO Compensation
As discussed previously, from April 1, 2000 to February 28, 2002 Mr. Glennon agreed to forego substantially all of his cash compensation for options to acquire 575,000 shares of the Company's common stock. The purpose of this arrangement was to improve the Company's cash flow and to provide added incentive for high levels of performance and for unusual efforts to increase the earnings and performance of the Company. Mr. Glennon's new employment agreement, while providing for a base salary, continues to provide incentives for improving the Company's earnings and shareholder value, as the agreement grants an additional 300,000 stock options at the current market price. The Committee believes that these arrangements are in the best interests of the Company and its stockholders, as the value of Mr. Glennon's compensation is directly aligned with the financial performance of the Company.
| COMPENSATION COMMITTEE | |
| Daniel A. Markee | |
| Robert M. Deutschman | |
| Edmund M. Kaufman |
Daniel A. Markee, Robert M. Deutschman and Edmund M. Kaufman served on the Compensation Committee throughout 2001. No Committee member was, during the year ended December 31, 2001, an officer or employee of the Company or any of its subsidiaries.
The following Performance Graph covers the period beginning July 7, 1999 when the Company's new Common Stock commenced trading, through December 31, 2001. The graph compares the performance of the Company's Common Stock to the S&P 500 and a Financial Services Index ("FSI").
2001 Measurement Period(1)(2)
July 7, December 31, December 31, December 31,
1999 1999 2000 2001
--------- --------- --------- ---------
Company................................... $ 100.00 $ 39.29 $ 35.71 $ 58.57
FSI(3).................................... 100.00 94.64 77.91 77.30
S&P 500................................... 100.00 105.26 94.59 82.25
___________________
| (1) | Assumes all distributions to stockholders are reinvested on the payment dates. |
| (2) | Assumes $100 invested on July 7, 1999 in the Company's Common Stock, the S&P 500 Index and the FSI. |
| (3) | The companies included in the FSI through December 31, 2000 were Advanta Corporation, American Business Financial Services Inc., American Express Company, Bingham Financial Services Corporation, CIT Group Inc., Equivest Finance Inc., Resource America Inc. and Ocwen Financial Corporation. CIT Group Inc. and Equivest Finance Inc. were acquired by larger institutions during 2001 and consequently were excluded from the FSI at December 31, 2001. |
The shares of common stock constitute the only outstanding class of voting securities of the Company. As of March 1, 2002, there were 16,180,604 shares of common stock outstanding and entitled to vote and approximately 44 stockholders of record.
The following table shows, as of March 1, 2002, the beneficial ownership of common stock with respect to (i) each person who was known by the Company to own beneficially more than 5% of the outstanding shares of common stock, (ii) each director, (iii) each named executive officer, and (iv) all directors and executive officers as a group.
Amount and Nature of
Beneficial Percent of
Name, Title and Address of Beneficial Owner Ownership (1) Class
- -------------------------------------------- ------------- -----
Fog Cutter Capital Group Inc..................................................... 2,874,791 17.8%
1410 SW Jefferson Street
Portland, Oregon 97201
Capital Research and Management - Income Fund.................................... 2,150,517 13.3%
333 South Hope Street, 55th Floor
Los Angeles, CA 90071
Capital Research and Management - Bond Fund...................................... 1,601,967 9.9%
333 South Hope Street, 55th Floor
Los Angeles, CA 90071
Lutheran Brotherhood Research Corp............................................... 1,457,358 9.0%
625 4th Avenue South
Minneapolis, MN 55415
Jayhawk Capital Management....................................................... 947,000 5.9%
8201 Mission Road, Suite 110
Prairie Village, KS 66208
Directors and executive officers:
Larry B. Faigin (2).............................................................. 96,249 (3) *
Howard Amster.................................................................... 1,859,615 11.5%
23811 Chagrin Blvd. #200
Beachwood, OH 44122
Robert M. Deutschman (2) ........................................................ 131,249 (3) *
Peter S. Fishman (2) ............................................................ 29,999 (3) *
Stephen P. Glennon (2)........................................................... 841,666 (4) 4.9%
Robert H. Kanner................................................................. -- *
3830 Kelley Ave
Cleveland, OH 44114
Edmund M. Kaufman (2)............................................................ 84,999 (3) *
Daniel A. Markee (2)............................................................. 46,249 (3) *
Bruce A. Weinstein (2)........................................................... 119,866 (5) *
Jay H. Memmott (2)............................................................... 116,666 (5) *
Mark H. Peterman (2)............................................................. 74,999 (6) *
Joseph W. Kiley III (2).......................................................... 50,000 (7) *
All directors and executive officers as a group (12 persons)..................... 3,451,557 (8) 19.7%
_________________________
| (1) | Amounts include stock options vesting within 60 days of March 1, 2002. |
| (2) | The address for this stockholder is c/o Wilshire Financial Services Group Inc., 1776 S.W. Madison Street, Portland, OR 97205. |
| (3) | Includes 29,999 shares of common stock which may be acquired upon the exercise of options. |
| (4) | Includes 841,666 shares of common stock which may be acquired upon the exercise of options. |
| (5) | Includes 116,666 shares of common stock which may be acquired upon the exercise of options. |
| (6) | Includes 74,999 shares of common stock which may be acquired upon the exercise of options. |
| (7) | Includes 50,000 shares of common stock which may be acquired upon the exercise of options. |
| (8) | Includes 1,349,992 shares of common stock which may be acquired upon the exercise of options. |
* Less than 1%.
Edmund M. Kaufman, a Director of the Company, is a Senior Partner emeritus with the law firm of Irell & Manella LLP, one of the Company's counsel. Previously, Mr. Kaufman was a Senior Partner with Irell & Manella LLP for thirty-six years. In 2001, the Company paid approximately $783,000 in legal fees to Irell & Manella.
In April 2001 the Company sold approximately $1.5 million in mortgage-backed securities to Fog Cutter Capital Group Inc. ("FCCG", formerly known as Wilshire Real Estate Investment Inc. ("WREI")) for proceeds of approximately $1.2 million. FCCG owned approximately 14% of the Company's outstanding common stock on the date of the transaction and approximately 18% at December 31, 2001.
In July 2001 Amster Trading Company (of which Howard Amster, a Director of the Company, is a 100% shareholder) was paid a fee of $103,200 for services rendered in connection with the sale of the Bank's bankcard division. Amster Trading Company received an additional $5,333 in March 2002 relating to such sale and, if certain conditions are satisfied, may receive an additional contingent payment of up to $10,667 at a future date.
In December 2001 the Company repurchased 4,168,854 shares of its common stock from entities affiliated with American Express Financial Advisors Inc. (collectively, "AXP"). These shares represented AXP's entire interest in the Company's common stock, or approximately 21% of the total WFSG shares previously outstanding. The purchase price for the shares was approximately $10.0 million, or $2.40 per share.
In January and February 2002 the Company issued a total of $7.69 million in 8% convertible subordinated debentures due December 15, 2005 to five of its Directors in a private placement. The proceeds from this issuance provided the majority of the financing for the common stock repurchase described above. The following Directors purchased debentures in the following amounts: Robert H. Kanner, $4.2 million; Howard Amster, $2.25 million; Daniel A. Markee, $1.0 million; Larry B. Faigin, $132,000; and Edmund M. Kaufman, $108,000. Commencing in July 2002, the debentures will be convertible at $2.40 per share and, at the option of the Company, will be redeemable (if certain conditions are satisfied) at a premium, decreasing to par over the subsequent nine-month period.
(a) Financial Statements
See Index to Financial Statements immediately following Exhibit Index.
(b) Reports on Form 8-K
| (i) | Current report on Form 8-K, dated November 15, 2001 | |
| (ii) | Current report on Form 8-K, dated January 2, 2002 | |
| (iii) | Current report on Form 8-K/A, dated January 7, 2002 |
(c) Exhibits
See Exhibit Index immediately following the signature page.
Page
----
Wilshire Financial Services Group Inc. and Subsidiaries
Independent Auditors' Report................................................................................. F-2
Report of Independent Public Accountants..................................................................... F-3
Consolidated Financial Statements:
Consolidated Statements of Financial Condition
December 31, 2001 and 2000.......................................................................... F-4
Consolidated Statements of Operations
Years ended December 31, 2001 and 2000, seven months ended December 31, 1999, and five months ended
May 31, 1999........................................................................................ F-5
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 2001 and 2000, seven months ended December 31, 1999, and five months ended
May 31, 1999........................................................................................ F-7
Consolidated Statements of Cash Flows
Years ended December 31, 2001 and 2000, seven months ended December 31, 1999, and five months ended
May 31, 1999........................................................................................ F-8
Notes to Consolidated Financial Statements............................................................. F-10
To the Board of Directors and Stockholders of
Wilshire Financial Services Group Inc.
Portland, Oregon
We have audited the accompanying consolidated statements of financial condition of Wilshire Financial Services Group Inc. and Subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Wilshire Financial Services Group Inc. and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Portland, Oregon
March 1, 2002
To Wilshire Financial Services Group Inc. and Subsidiaries:
We have audited the accompanying consolidated statements of operations, stockholders' equity (deficit) and cash flows of Wilshire Financial Services Group Inc. and Subsidiaries (the “Company”) for the seven months ended December 31, 1999 and the five months ended May 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
As discussed in Note 1, effective June 10, 1999, the Company was reorganized under a plan confirmed by the United States Bankruptcy Court in Wilmington, Delaware. At May 31, 1999, the Company adopted a new basis of accounting whereby all remaining assets and liabilities were adjusted to their estimated fair values. Accordingly, the consolidated financial statements for periods subsequent to the reorganization are not comparable to the consolidated financial statements presented for prior periods.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Wilshire Financial Services Group Inc. and Subsidiaries for the seven months ended December 31, 1999 and the five months ended May 31, 1999 in conformity with accounting principles generally accepted in the United States.
/S/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Portland, Oregon
March 17, 2000
December 31, December 31,
2001 2000
------------ ------------
ASSETS
Cash and cash equivalents ........................................................... $ 37,876 $ 9,516
Government agency mortgage-backed securities available for sale, at fair value ...... 64,377 37,817
AAA mortgage-backed securities available for sale, at fair value .................... 51,436 --
Other mortgage-backed securities available for sale, at fair value .................. 3,727 6,821
Investment securities available for sale, at fair value ............................. 8,000 9,500
Loans, net of allowance for loan losses of $8,384 and $10,614 ....................... 525,034 561,876
Discounted loans, net of allowance for loan losses of $45,413 and $213,019 .......... 15,309 10,214
Stock in Federal Home Loan Bank of San Francisco, at cost ........................... 9,475 6,615
Real estate owned, net .............................................................. 731 1,770
Leasehold improvements and equipment, net ........................................... 3,198 3,939
Accrued interest receivable ......................................................... 4,190 4,133
Servicer advance receivables, net ................................................... 18,266 19,063
Service fees receivable ............................................................. 3,100 2,198
Purchased mortgage servicing rights ................................................. 8,473 4,544
Receivables from other loan servicers ............................................... 1,788 3,161
Intangible assets, net .............................................................. 3,960 4,529
Prepaid expenses and other assets ................................................... 10,064 10,354
------------ ------------
TOTAL ................................................................... $ 769,004 $ 696,050
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits .................................................. $ 2,794 $ 10,663
Interest-bearing deposits ..................................................... 436,675 424,410
Short-term borrowings ......................................................... 9,970 9,123
FHLB advances ................................................................. 189,500 132,000
Long-term investment financing ................................................ 14,474 1,634
Accounts payable and other liabilities ........................................ 14,381 21,716
Investor participation liability .............................................. 528 --
------------ ------------
Total liabilities ....................................................... 668,322 599,546
------------ ------------
MINORITY INTEREST ................................................................... 9,262 9,909
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, 0 shares
outstanding ................................................................ -- --
Common stock, $0.01 par value, 24,035,458 and 20,035,458 shares
authorized, 20,349,458 and 20,035,458 shares issued (including treasury
shares of 4,168,854 in 2001 and 0 in 2000) ................................. 105,530 96,516
Treasury stock, 4,168,854 and 0 shares, at cost ............................... (10,005) --
Accumulated deficit ........................................................... (5,058) (10,670)
Accumulated other comprehensive income, net ................................... 953 749
------------ ------------
Total stockholders' equity .............................................. 91,420 86,595
------------ ------------
TOTAL ................................................................... $ 769,004 $ 696,050
============ ============
See notes to consolidated financial statements.
Predecessor
Reorganized Company Company
------------------------------------------ ------------
Seven Months Five Months
Year Ended Year Ended Ended Ended
December 31, December 31, December 31, May 31,
2001 2000 1999 1999
------------ ------------ ------------ ------------
INTEREST INCOME:
Loans ..................................................... $ 50,982 $ 48,717 $ 30,389 $ 21,710
Mortgage-backed securities ................................ 4,265 4,084 5,313 5,481
Securities and federal funds sold ......................... 2,269 1,719 1,056 674
------------ ------------ ------------ ------------
Total interest income .................................. 57,516 54,520 36,758 27,865
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Deposits ................................................. 24,914 26,014 14,707 11,206
Borrowings ............................................... 10,773 9,641 6,156 11,923
------------ ------------ ------------ ------------
Total interest expense ................................. 35,687 35,655 20,863 23,129
------------ ------------ ------------ ------------
NET INTEREST INCOME ............................................. 21,829 18,865 15,895 4,736
(RECAPTURE OF) PROVISION FOR LOSSES ON LOANS .................... (1,784) (4,027) 1,025 2,697
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER (RECAPTURE OF) PROVISION FOR
LOSSES ON LOANS .............................................. 23,613 22,892 14,870 2,039
------------ ------------ ------------ ------------
OTHER INCOME (LOSS):
Servicing income ......................................... 17,366 12,691 6,365 3,309
Loan fees and charges .................................... 2,080 3,145 2,796 1,696
Market valuation losses and impairments .................. -- -- (10,837) --
Gain (loss) on sales of loans ............................ 1,475 1,244 (1,671) 3,165
(Loss) gain on sale of securities ........................ (262) (438) 423 --
Real estate owned, net ................................... (46) (308) 2,348 1,466
Bankcard income, net ..................................... 2,286 4,115 1,807 2,335
Gain on sale of Bankcard operations ...................... 5,118 -- -- --
Discontinuation of European Operations ................... -- -- (2,365) --
Other income, net ........................................ 1,684 5,096 3,035 1,788
------------ ------------ ------------ ------------
Total other income ..................................... 29,701 25,545 1,901 13,759
------------ ------------ ------------ ------------
OTHER EXPENSES:
Compensation and employee benefits ....................... 25,052 23,653 17,502 11,796
Loan service fees and expenses ........................... -- -- -- 8,523
Professional services .................................... 6,560 4,596 3,661 2,752
Occupancy ................................................ 2,106 2,405 1,297 1,385
FDIC insurance premiums .................................. 703 892 311 501
Data processing .......................................... 1,443 1,553 648 379
Communication ............................................ 1,363 1,515 977 590
Insurance ................................................ 1,130 1,045 385 475
Corporate travel and development ......................... 475 1,002 1,847 775
Depreciation ............................................. 1,816 2,705 1,276 1,008
Amortization of intangibles .............................. 613 815 114 153
Postage and courier expense .............................. 957 440 320 61
Investor participation interest .......................... 1,036 -- -- --
Other general and administrative expense ................. 2,095 2,241 2,412 2,976
------------ ------------ ------------ ------------
Total other expenses ................................... 45,349 42,862 30,750 31,374
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE REORGANIZATION ITEMS, MINORITY
INTEREST, INCOME TAX PROVISION AND
EXTRAORDINARY ITEMS ......................................... 7,965 5,575 (13,979) (15,576)
REORGANIZATION ITEMS ............................................ -- -- -- (52,034)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTEREST, INCOME TAX
PROVISION AND EXTRAORDINARY ITEMS ........................... 7,965 5,575 (13,979) (67,610)
MINORITY INTEREST ............................................... 647 1,203 542 --
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAX PROVISION ....................... 8,612 6,778 (13,437) (67,610)
INCOME TAX PROVISION ............................................ 3,000 3,596 654 658
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS ........................ 5,612 3,182 (14,091) (68,268)
EXTRAORDINARY ITEMS, NET OF TAX (See Note 3) .................... -- 239 -- 225,606
------------ ------------ ------------ ------------
NET INCOME (LOSS) ............................................... $ 5,612 $ 3,421 $ (14,091) $ 157,338
============ ============ ============ ============
See notes to consolidated financial statements.
Predecessor
Reorganized Company Company
------------------------------------------------ --------------
Seven Months Five Months
Year Ended Year Ended Ended Ended
December 31, December 31, December 31, May 31,
2001 2000 1999 1999
-------------- -------------- -------------- --------------
EARNINGS (LOSS) PER SHARE:
Basic:
Income (loss) before extraordinary items .... $ 0.28 $ 0.16 $ (0.70) $ (6.27)
Extraordinary items ......................... -- 0.01 -- 20.72
-------------- -------------- -------------- --------------
Net income (loss) ........................... $ 0.28 $ 0.17 $ (0.70) $ 14.45
Diluted:
Income (loss) before extraordinary items .... $ 0.27 $ 0.16 $ (0.70) $ (6.27)
Extraordinary items ......................... -- 0.01 -- 20.72
-------------- -------------- -------------- --------------
Net income (loss) ........................... $ 0.27 $ 0.17 $ (0.70) $ 14.45
Weighted average shares outstanding - basic ........ 20,138,015 20,035,458 20,033,600 10,885,000
Weighted average shares outstanding - diluted ...... 21,176,069 20,255,363 20,033,600 10,885,000
See notes to consolidated financial statements.
Accumulated
Preferred Stock Common Stock Treasury Stock Other
--------------- ------------------ ----------------- Accumulated Comprehensive
Shares Amount Shares Amount Shares Amount Deficit (Loss) Income Total
------ ------ ---------- -------- --------- -------- --------- ---------- -------
(Predecessor Company)
BALANCE, December 31, 1998 -- $ -- 11,070,000 $117,708 185,000 $ (2,852) $(183,294) $(24,357) $(92,795)
Comprehensive income:
Net income............................ 157,338 157,338
Unrealized holding losses on available
for sale securities - net of tax
benefit of $46..................... (720) (720)
Unrealized loss on foreign currency
translation........................ (1,662) (1,662)
--------
Total comprehensive income.............. 154,956
Impact of reorganization:
Elimination of former equity in
connection with bankruptcy plan....... (11,070,000)(117,708) (185,000) 2,852 25,956 26,739 (62,161)
Issuance of new equity in connection
with bankruptcy plan.................. 20,033,600 86,819 86,819
--------------------------------------------------------------------------------------
BALANCE, May 31, 1999 - (Reorgainzed Company)
(Fresh-start reporting date) ........... -- -- 20,033,600 86,819 -- -- -- -- 86,819
Comprehensive loss:
Net loss.............................. (14,091) (14,091)
Unrealized holding losses on available
for sale securities - net of tax
benefit of $22..................... (29) (29)
Unrealized loss on foreign currency
translation........................ (89) (89)
--------
Total comprehensive loss................ (14,209)
Impact of reorganization:
Contribution of equity of WCC......... 5,723 5,723
--------------------------------------------------------------------------------------
BALANCE, December 31, 1999 -- -- 20,033,600 92,542 -- -- (14,091) (118) 78,333
Comprehensive income:
Net income............................ 3,421 3,421
Unrealized holding gains on available
for sale securities - net of tax
expense of $540 (1)................ 778 778
Unrealized gain on foreign currency
translation........................ 89 89
--------
Total comprehensive income.............. 4,288
Tax benefit from utilization of
pre-reorganizational Net Operating
Losses (Note 13)...................... 3,974 3,974
Allocation of additional shares pursuant
to reorganization..................... 1,858
--------------------------------------------------------------------------------------
BALANCE, December 31, 2000................. -- -- 20,035,458 96,516 -- -- (10,670) 749 86,595
Comprehensive income:
Net income............................ 5,612 5,612
Unrealized holding gains on available
for sale securities - net of tax
expense of $143 (2)................ 204 204
--------
Total comprehensive income.............. 5,816
Tax benefit from utilization of
pre-reorganizational Net Operating
Losses (Note 13)...................... 8,683 8,683
Exercise of stock options............... 314,000 331 331
Treasury stock acquired................. (4,168,854) (10,005) (10,005)
--------------------------------------------------------------------------------------
BALANCE, December 31, 2001.............. -- $ -- 20,349,458 $105,530 (4,168,854) $(10,005) $ (5,058) $ 953 $ 91,420
====== ===== ========== ======== ========= ======== ========= ======== ========
| (1) | Includes reclassification adjustment for gain included in net income of $19, net of tax expense of $14. |
| (2) | Includes reclassification adjustment for gain included in net income of $176, net of tax expense of $127. |
See notes to consolidated financial statements.
Predecessor
Reorganized Company Company
------------------------------------- -----------
Seven Months Five Months
Year Ended Year Ended Ended Ended
December 31, December 31, December 31, May 31,
2001 2000 1999 1999
---------- ---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 5,612 $ 3,421 $ (14,091) $ 157,338
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Market valuation losses and impairments ....................... -- -- 10,837 --
(Recapture of) provision for estimated losses on loans ........ (1,784) (4,027) 1,025 2,697
Provision for losses on real estate owned ..................... 49 90 638 --
Write-downs from discontinuation of European operations ....... -- -- 1,740 --
Valuation allowance for mortgage servicing rights ............. 1,552 -- -- --
Asset valuation adjustments ................................... -- -- 158 647
Depreciation and amortization ................................. 2,429 3,520 1,390 1,161
Tax effect from utilization of net operating loss carryforward .. 4,183 3,974 -- --
Gain on sale of real estate owned ............................. (17) (43) (1,748) (2,192)
Loss on disposal of equipment ................................. 44 6 -- 62
(Gain) loss on sale of loans .................................. (1,475) (1,244) 1,671 (3,165)
Loss (gain) on sale of securities ............................. 262 438 (423) --
Gain on sale of mortgage servicing rights ..................... (414) -- -- --
Amortization of discounts and deferred fees ................... 451 2,157 30 869
Amortization of mortgage servicing rights ..................... 5,847 396 11 154
Federal Home Loan Bank stock dividends ........................ (453) (390) (128) (73)
Income on equity investments .................................. -- -- -- (218)
Minority interest in WCC ...................................... (647) (1,203) (542) --
Receipt of income tax refund .................................. -- -- -- 12,219
Other ......................................................... -- -- (370) --
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 ................................ -- (239) -- (225,606)
Change in:
Servicer advance receivables ................................ 797 4,709 3,348 (2,545)
Service fees receivable ..................................... (902) (896) (1,302) --
Accrued interest receivable ................................. (57) (194) 1,199 330
Receivables from other loan servicers ....................... 1,373 (2,240) (921) --
Prepaid expenses and other assets ........................... 926 (9,772) 3,297 (3,334)
Accounts payable and other liabilities ...................... (3,939) (7,600) 2,135 12,893
Investor participation liability ............................ 528 -- -- --
---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities . 14,365 (9,137) 7,954 2,649
---------- ---------- ---------- ----------
See notes to consolidated financial statements.
Predecessor
Reorganized Company Company
--------------------------------------- -----------
Seven Months Five Months
Year Ended Year Ended Ended Ended
December 31, December 31, December 31, May 31,
2001 2000 1999 1999
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans ................................................. $ (150,137) $ (155,385) $ (76,035) $ (87,988)
Loan repayments ................................................... 234,350 98,592 74,512 70,412
Loan originations ................................................. (74,026) (56,177) (20,402) (11,915)
Proceeds from sale of loans ....................................... 32,101 12,160 94,439 --
Purchase of discounted loans ...................................... (15,515) (5,159) (1,493) (1,629)
Proceeds from sale of discounted loans ............................ 7,337 17,446 5,844 255,845
Purchase of mortgage-backed securities available for sale ......... (94,535) -- -- --
Repayments of mortgage-backed securities available for sale ....... 26,626 7,429 6,388 9,010
Proceeds from sale of mortgage-backed securities available for sale 1,271 4,448 42,476 --
Purchase of investment securities available for sale .............. (8,000) -- -- --
Purchase of mortgage-backed securities held to maturity ........... -- (5,607) -- --
Repayments of mortgage-backed securities held to maturity ......... -- 3,298 1,800 1,544
Purchase of securities held to maturity ........................... -- (9,441) -- --
Proceeds from sale of securities held to maturity ................. -- 5,997 -- --
Proceeds from redemption of FHLB stock ............................ -- 776 -- 750
Purchases of FHLB stock ........................................... (2,407) (1,426) (792) --
Purchases of real estate owned .................................... -- (244) -- (708)
Proceeds from sale of real estate owned ........................... 3,054 12,676 26,755 28,359
Purchases of leasehold improvements and equipment ................. (1,285) (2,406) (750) (768)
Proceeds from sale of leasehold improvements and equipment ........ 166 175 -- --
Purchase of mortgage servicing rights ............................. (12,124) (4,433) (518) --
Proceeds from sale of mortgage servicing rights ................... 1,210 -- -- --
----------- ----------- ----------- -----------
Net cash (used in) provided by investing activities ....... (51,914) (77,281) 152,224 262,912
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits ............................... 4,396 15,788 (78,139) (13,256)
Proceeds from FHLB advances ....................................... 70,500 68,000 66,500 21,000
Repayments of FHLB advances ....................................... (13,000) (16,000) (7,500) --
Proceeds from short-term borrowings ............................... 38,280 104,985 151,517 78,579
Repayments of short-term borrowings ............................... (37,433) (127,366) (262,788) (353,800)
Proceeds from long-term financing ................................. 20,567 1,634 -- --
Repayment of notes payable to Wilshire Real Estate Investment Inc. -- (5,275) (2,152) --
Proceeds from debtor-in-possession financing ...................... -- -- -- 5,000
Repayments of long-term financing ................................. (7,727) -- -- --
Issuance of common stock .......................................... 331 -- -- --
Purchase of treasury stock ........................................ (10,005) -- -- --
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities ........ 65,909 41,766 (132,562) (262,477)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................................. 28,360 (44,652) 27,616 3,084
CASH AND CASH EQUIVALENTS:
Beginning of period ............................................... 9,516 54,168 26,552 23,468
----------- ----------- ----------- -----------
End of period ..................................................... $ 37,876 $ 9,516 $ 54,168 $ 26,552
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION--Cash paid during the period for:
Interest .......................................................... $ 33,983 $ 32,953 $ 18,653 $ 17,083
Income taxes, net ................................................. 625 875 240 1,327
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned acquired in settlement of loans .... 1,963 2,917 1,830 3,547
Transfer of securities classified as held to maturity to available
for sale ........................................................ -- 21,909 -- --
Transfer of loans classified as discounted to available for sale .. -- -- 9,743 --
NONCASH REORGANIZATION ITEMS:
Cancellation of old common stock .................................. -- -- -- 114,856
Issuance of new common stock in exchange for notes payable
and accrued interest thereon .................................. -- -- -- 86,819
Contribution of net assets of WCC ................................. -- -- 5,723 --
See notes to consolidated financial statements.
Nature of Operations--Wilshire Financial Services Group Inc. ("WFSG" or the "Company") conducts its operations primarily through non-bank subsidiaries, Wilshire Credit Corporation ( "WCC ") and Wilshire Funding Corporation ("WFC"), and through a second-tier subsidiary savings bank, First Bank of Beverly Hills, F.S.B. ( "FBBH" or the "Bank ").
WCC conducts a full-service mortgage loan servicing business, specializing in the servicing of labor-intensive mortgage pools. WFC conducts an investment and co-investment business with institutional investors where such investments align the Company's interests with those of such institutional investors and provide operating leverage for the servicing operations of WCC. The Bank is engaged in a retail and wholesale banking business focused primarily on specialty-niche lending products, including small-balance commercial and multi-family real estate lending. Until June 2001, the Bank also conducted a Visa and Mastercard processing business and operated a commercial banking subsidiary, George Elkins Mortgage Banking ("GEMB"). Effective June 30, 2001, the Bank disposed of these two divisions.
Administrative headquarters of the Company, WCC and WFC are located in Portland, Oregon. The Bank, a federally chartered savings institution regulated by the Office of Thrift Supervision ( "OTS "), conducts its operations through a branch and a lending office in Southern California.
The Company commenced loan acquisition and loan servicing operations in France, the United Kingdom and Ireland (the "European Operations ") in 1996. In the second quarter of 2000, the Company disposed of its European loan acquisition and servicing operations and loan portfolios.
Principles of Consolidation--WFSG was incorporated in 1996 to be the holding company for Wilshire Acquisitions Corporation ("WAC "), which is the holding company for the Bank. WFSG formed certain non-bank subsidiaries, including WFC, and completed an initial public offering of common stock and a public debt offering in the fourth quarter of 1996. Intercompany accounts have been eliminated in consolidation.
Effective May 31, 1999, as part of its restructuring (discussed below), the Company formed a majority-owned (50.01%) subsidiary, WCC, to perform loan servicing operations. The accompanying consolidated financial statements include the accounts of WCC for periods subsequent to May 31, 1999. The remaining 49.99% interest in WCC is reflected as "Minority Interest" in the accompanying consolidated financial statements.
WCC and WFC conduct certain activities with lenders who have participation interests in the returns generated by loans that serve as collateral for the borrowings. The accompanying consolidated financial statements include all of the accounts of these joint ventures. The share of these activities held by the lenders is reflected as "Investor Participation Interest" in the Company's consolidated statements of financial condition, operations and cash flows.
Restructuring of the Company--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. Pursuant to the Plan, (i) the holders of the Company's $184.2 million in outstanding publicly issued notes payable exchanged their notes for new common stock in the Company; (ii) the Company's existing common stock and options were canceled; and (iii) the noteholders reallocated approximately 0.6% of the new common stock to the then-existing stockholders of the Company.
The Company accounted for the Plan effective May 31, 1999, and adopted fresh-start reporting at that date. (See Note 2 for a discussion of fresh-start reporting and its effects on the Company's Statement of Financial Condition.) Accordingly, the financial statements presented include consolidated statements of financial condition of the reorganized company as of December 31, 2001 and 2000; consolidated statements of operations, stockholders' equity and cash flows of the reorganized company for the years ended December 31, 2001 and 2000 and the seven months ended December 31, 1999; and consolidated statements of operations, stockholders' equity (deficit) and cash flows of the predecessor company for the five-month period ended May 31, 1999.
Revenues and expenses resulting from the reorganization of the Company while it was in Chapter 11 were segregated and recorded as Reorganization Items in the consolidated statement of operations and include the following for the five months ended May 31, 1999:
Five Months Ended
May 31, 1999
-------------
Write-off of unamortized debt issuance costs.......................... $ 11,319
Professional services................................................. 609
European restructuring costs.......................................... 2,492
Fresh-start reporting adjustments to assets and liabilities
(See Note 2)....................................................... 37,601
Other general and administrative expenses............................. 13
-------------
Total reorganization items...................................... $ 52,034
=============
Pursuant to the Plan, the servicing of the Company's loans is conducted by WCC, its majority-owned subsidiary. Prior to the reorganization, the Company's assets were serviced by the company formerly named Wilshire Credit Corporation (now known as Capital Wilshire Holdings Inc. ("CWH")), a company previously owned by the Company's former principal stockholders. As part of the Plan, the Company entered into an agreement with the owners of CWH and the principal creditor of CWH, Capital Consultants, LLC ("CCL"), to incorporate the servicing operations of CWH into WFSG. CWH was in default on a loan from its principal creditor, CCL. A portion of that loan had been guaranteed by the Company. CCL took control of CWH and in exchange for releases from such debt, CWH contributed its assets and certain liabilities to WCC and, in exchange for such assets and liabilities and CCL's release of the Company's loan guaranty to CCL, WFSG transferred 49.99% of the equity of WCC to CWH. As a result, the Company currently owns 100% of the Class A voting common stock (representing 50.01% of the economic value) of WCC, and CWH owns 100% of the Class B non-voting common stock and the remaining 49.99% economic interest of WCC. Class B non-voting common stock is convertible into voting common stock on a share-for-share basis and, under certain circumstances, convertible into WFSG Common stock. Class B non-voting common stock also has a liquidation preference of approximately $19.3 million. The Company accounted for the acquisition of the assets and certain liabilities of CWH as a purchase under Accounting Principles Board Opinion No. 16, Business Combinations.
Use of Estimates in the Preparation of the Consolidated Financial Statements--The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Significant estimates include allowances for loan losses, valuation allowances for real estate owned and net deferred tax assets, the determination of fair values of certain financial instruments for which there is not an active market, the allocation of basis between assets sold and retained, the evaluation of other than temporary impairment in the market values of investment securities and other assets, and the selection of yields utilized to recognize interest income on certain mortgage-backed securities. Estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents--For purposes of reporting financial condition and cash flows, cash and cash equivalents include cash and due from banks, federal funds sold, and securities with original maturities less than 90 days.
Securities and Mortgage-Backed Securities--The Company's securities portfolios consist of mortgage-backed and other debt securities that are classified as available for sale. Securities classified as available for sale are reported at their fair market values with unrealized holding gains and losses on securities reported, net of tax, when applicable, as a separate component of accumulated other comprehensive income (loss) in stockholders' equity (deficit). Holding gains and losses on securities classified as available for sale that are determined by management to be other than temporary in nature are reclassified from the unrealized holding losses included in accumulated other comprehensive income (loss) to current operations. Realized gains and losses from the sales of available for sale securities are reported separately in the Consolidated Statements of Operations and are calculated using the specific identification method.
Loans and Discounted Loans, and Allowance for Loan Losses--Prior to the Company's June, 1999 reorganization, its principal non-Bank business involved acquiring performing, sub-performing and non-performing loan portfolios, for prices generally at or below face value (i.e., unpaid principal balances plus accrued interest). Nonperforming loans ("discounted loans") are generally acquired at deep discounts to face value and are recorded as Discounted loans, net in the Consolidated Statements of Financial Condition.
Discounted loans are carried net of unaccreted discount and allowance for loan losses established for those loans. Unaccreted discounts represent the portion of the difference between the purchase price and the principal face amount on specific loans that is available for accretion to interest income. The allowance for loan losses includes valuation allowances for estimated losses against the cost of the loans that are established at acquisition and for subsequent valuation adjustments that are provided for through current period earnings and are based on discounted future cash flows or the fair value of the underlying real estate collateral for collateral dependent loans. If total cash received on a pool of loans exceeds original estimates, excess specific valuation allowances are recorded as additional discount accretion on the cost-recovery method. The allocated specific valuation allowances are included in the allowance for loan losses.
Loans other than discounted loans are presented in the Consolidated Statements of Financial Condition in substantially the same manner as discounted loans. Interest income is recognized on an accrual basis. Originated loans are carried net of unamortized deferred origination fees and costs. Deferred fees and costs are recognized in interest income over the terms of the loans using a method that approximates the interest method.
The Company evaluates commercial and multi-family real estate loans (whether purchased or originated and whether classified as loans or discounted loans) for impairment. Commercial and multi-family real estate loans are considered to be impaired, for financial reporting purposes, when it is probable that the Company will be unable to collect all principal or interest when due. Specific valuation allowances are established, either at acquisition or through provisions for losses, as described above, for impaired loans based on the fair value of the underlying real estate collateral or the present value of anticipated cash flows.
The Company evaluates single-family real estate, consumer and other smaller balance, homogeneous loans for impairment on a collective basis. Management evaluates these loans for impairment by comparing management's estimate of net realizable value to the net carrying value of the portfolios.
All specific and general valuation allowances established for pools of loans and discounted loans are recorded in the allowance for loan losses. The allowance for each pool is decreased by the amount of loans charged off and is increased by the provision for estimated losses on loans and recoveries of previously charged-off loans. The allowance for each pool is maintained at a level believed adequate by management to absorb probable losses. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, previous loan loss experience, current economic conditions, volume, growth and composition of the portfolio and other relevant factors. Actual losses may differ from management's estimates.
It is the Company's policy to establish an allowance for uncollectible interest on loans that are past due more than 90 days or sooner when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. Upon such a determination, those loans are placed on non-accrual status and deemed to be non-performing. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed by a charge to interest income.
Purchased Mortgage Servicing Rights--Purchased Mortgage Servicing Rights (MSRs) are reported at the lower of amortized cost or fair value. At the time a servicing portfolio is acquired, the Company capitalizes the purchase price of the MSRs, and subsequently amortizes such costs on a monthly basis in proportion to and over the period of the estimated future net servicing revenues.
On a quarterly basis, the Company evaluates MSRs for impairment. MSRs are stratified based on the predominant risk characteristics of the underlying financial assets. The fair value of the MSRs is then determined by estimating the present value of expected future cash flows, using a discount rate that is considered commensurate with the risks involved. The amounts and timing of the cash flows are estimated after considering various economic factors including prepayment speeds, delinquency and default assumptions. The amount, if any, by which the amortized cost exceeds the fair value is recorded as an impairment and recognized through a valuation allowance.
Intangible Assets, net. Intangible assets consist of goodwill and core deposit intangibles at FBBH. The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Foreign Currency Translation--All assets and liabilities relating to the Company's European activities were translated at current exchange rates. The results of the Company's foreign operations were translated at the average exchange rate for each reporting period. Translation adjustments, related hedging results and applicable income taxes were included, when material, in the accumulated translation adjustments as a separate component of accumulated other comprehensive income (loss) within stockholders' equity (deficit). The Company disposed of its European operations during the second quarter of 2000.
Real Estate Owned--Real estate acquired in settlement of loans or purchased directly is held for sale and is originally recorded at the lower of fair value less estimated costs to sell, or purchase price, respectively. Any excess of net loan cost basis over the fair value less estimated selling costs of real estate acquired through foreclosure is charged to the allowance for loan losses. Any subsequent operating expenses or income, reductions in estimated fair values, as well as gains or losses on disposition of such properties, are recorded in current operations.
Leasehold Improvements and Equipment--Office leasehold improvements and equipment are stated at cost, less accumulated depreciation and amortization, computed on the straight-line method over the estimated useful lives of the assets, which currently range from one to seven years. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter.
Servicer Advance Receivables, net--In the normal course of performing loan servicing activities, WCC makes servicer advances to various unrelated third parties which represent (1) impound payments on behalf of borrowers, (2) scheduled remittances of principal and interest on certain securitizations, and (3) loan collection costs on securitizations and other servicing arrangements. In the accompanying consolidated financial statements, these advances are presented net of collections from mortgagors which, in certain circumstances, are used to fund these advances.
Income Taxes--The provision (benefit) for income taxes is based on income (loss) recognized for financial statement purposes. The Company and its eligible subsidiaries file a consolidated U.S. federal income tax return. WCC, which is consolidated for financial reporting purposes, is not eligible to be included in WFSG's consolidated U.S. federal income tax return and files its own separate return. A separate provision for income taxes has been determined for WCC. Income taxes are accounted for using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company's income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some portion of the potential deferred tax asset will not be realized.
The Company and its subsidiaries have entered into a tax sharing agreement under which the tax liability is to be allocated pro rata among entities that would have paid tax if they had filed separate income tax returns. In addition, those entities reimburse loss entities pro rata for the reduction in tax liability as a result of their losses. The OTS has presently limited the amount of the Bank's tax payments to the lesser of (1) the Bank's stand-alone tax liability and (2) the total tax payments made by the Company.
Bankcard Operations--Bankcard income, net, includes merchant discounts and transaction fees for processing Visa(R)and Mastercard(R)transactions and is offset by bankcard expense consisting primarily of fees paid to the Company's third-party processors and interchange fees paid to card-issuing banks. Other direct and indirect costs of Bankcard operations are included in various other categories of expenses and are not specifically allocated separately from other operating expenses of the Company. The Bankcard division was sold effective June 30, 2001.
Income (Loss) per Share--Basic income (loss) per share ("EPS") excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if the outstanding stock option contracts were exercised and resulted in the issuance of common stock that then shared in the earnings (loss) of the Company.
New Accounting Pronouncements--In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement, as amended and interpreted, 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 of the hedged item in the consolidated statement of operations, or in certain circumstances to 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. The Company adopted SFAS No. 133, as amended, as of January 1, 2001. The adoption of SFAS No. 133 did not have a material impact on the Company's 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 No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of the provisions of SFAS No. 125 without reconsideration. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of SFAS No. 140 has not had a material impact on the Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires the purchase method of accounting for all business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The adoption of SFAS No. 141 did not have a material impact on the Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 requires that goodwill and intangible assets that have indefinite useful lives no longer be amortized, and instead be tested for impairment at least annually. Intangible assets that have finite useful lives will continue to be amortized over their useful lives. In addition, the standard includes provisions for the reassessment of the useful lives of existing recognized intangibles and the identification of reporting units for purposes of assessing potential future impairments of goodwill. The Company is currently evaluating the impact that SFAS No. 142 may have on its financial position and results of operations. Amortization of intangibles was approximately $0.6 million for the year ended December 31, 2001.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for fiscal years beginning after December 15, 2001. This pronouncement supercedes SFAS No. 121 and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 for the disposal of a segment of a business. The Company does not believe that the adoption of SFAS No. 144 will have a material impact on its financial position and results of operations.
Reclassifications--Certain items in the consolidated financial statements for 2000 and 1999 were reclassified to conform to the 2001 presentation, none of which affect previously reported net income.
The Company's Plan was accounted for in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). The accounting of SOP 90-7 resulted in the creation of a new entity for financial reporting purposes. The Company adopted fresh-start reporting because holders of the Company's existing common stock immediately before filing and confirmation of the Plan received less than 50% of the new common stock of the emerging entity and the Company's reorganized value is less than its postpetition liabilities and allowed claims. The reorganization value of the Company was determined by estimating the fair value of its net assets as of the fresh-start reporting date.
For financial reporting purposes, the Company accounted for the consummation of the reorganization effective May 31, 1999. The periods prior to this date have been designated "Predecessor Company" and the periods subsequent to this date have been designated "Reorganized Company." As a result of the adoption of the fresh-start reporting, the Reorganized Company's consolidated financial statements are not comparable to the Predecessor Company's consolidated financial statements.
The effect of the plan of reorganization and the implementation of fresh-start reporting on the Company's consolidated balance sheet (condensed) as of May 31, 1999 is as follows (unaudited):
Adjustments to Record Confirmation of Plan
----------------------------------------------------------------------------------
Predecessor Reorganized
Company's Forgiveness Fresh-Start Cancellation Issuance of Company's
Balance Sheet of Debt Adjustments of Old Stock New Stock Balance Sheet
------------- --------- ----------- ------------ --------- -----------
(Dollars in thousands)
TOTAL ASSETS ................................. $ 792,436 $ -- $ (5,149) $ -- $ -- $ 787,287
========= ========= ========= ========= ======== =========
Total liabilities ............................ 925,495 (225,606) 579 -- -- 700,468
--------- --------- --------- --------- -------- ---------
Stockholders' equity:
Common stock ............................... 117,708 (117,708) 86,819 86,819
Treasury stock ............................. (2,852) 2,852 --
Retained deficit ........................... (216,042) 225,606 (37,601) 114,856 (86,819) --
Accumulated other comprehensive
loss, net ............................... (31,873) -- 31,873 -- -- --
--------- --------- --------- --------- -------- ---------
Total stockholders' (deficit) equity ......... (133,059) 225,606 (5,728) -- -- 86,819
--------- --------- --------- --------- -------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY .................................... $ 792,436 $ -- $ (5,149) $ -- $ -- $ 787,287
========= ========= ========= ========= ======== =========
In August 2000, the Company entered into a settlement agreement with its former affiliate, Fog Cutter Capital Group Inc. (then known as 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.
In May, 1999, in connection with its restructuring, the Company exchanged its notes payable and certain other outstanding claims for new common stock in the Company. This gain on extinguishment of debt is reported in the consolidated statements of operations for the five-month period ended May 31, 1999 as an extraordinary item in the amount of $225.6 million, and is comprised of the following liabilities:
Notes payable................................................................... $ 184,245
Accrued interest on notes payable............................................... 14,536
Payable to Capital Wilshire Holdings, Inc.
(formerly known as Wilshire Credit Corporation).............................. 18,338
Payable to Fog Cutter Capital Group Inc. (formerly known as Wilshire
Real Estate Investment Inc.)................................................ 8,487
-------------
$ 225,606
=============
The above debt was cancelled as part of the reorganization, and the Notes payable, accrued interest thereon and payable to WREI were converted into equity of the Reorganized Company. No funds were expended in the extinguishment of such debt. The extraordinary gain caused a reduction of tax attributes, such as net operating losses, capital losses and the tax basis of assets (see Note 13).
The Company evaluates, on an ongoing basis, the carrying value of its securities portfolio. To the extent differences between the book bases of the securities accounted for as available-for-sale and their current market values are deemed to be temporary in nature, such unrealized gains or losses are reflected directly in stockholders' equity, as "accumulated other comprehensive income or (loss)." Impairments that are deemed to be other than temporary are charged to income, as "market valuation losses and impairments." In evaluating impairments as other than temporary, the Company considers the magnitude and trend in the decline of the market value of securities, the Company's ability to collect all amounts due according to the contractual terms and the Company's expectations at the time of purchase.
There were no recorded market valuation losses and impairments for the years ended December 31, 2001 or 2000, or for the five months ended May 31, 1999. Total market valuation losses and impairments reported in net loss for the seven months ended December 31, 1999 was approximately $10.8 million. Of this amount, $5.1 million related to sales of mortgage-backed securities, $1.5 million related to other than temporary impairment of mortgage-backed securities remaining in the portfolio, $0.4 million related to real estate owned which was sold in 2000, $1.6 million related to our investment in WREI which was sold in December 1999, $0.9 million related to sales of other assets, and $1.3 million related to equipment and other assets remaining at December 31, 1999. The Company believes that the decline in the value of these assets was other than temporary.
The amortized cost, fair value and gross unrealized gains and losses on mortgage-backed and other investment securities as of December 31, 2001 and 2000 are shown below. Fair market value estimates were obtained using discounted cash-flow models or from independent parties.
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Values
---------- ---------- ---------- ----------
December 31, 2001
Available-for-sale:
Government agency mortgage-backed securities.......... $ 64,965 $ 333 $ 921 $ 64,377
AAA mortgage-backed securities........................ 51,630 63 257 51,436
Other mortgage-backed securities...................... 1,356 2,371 -- 3,727
Investment securities................................ 8,000 -- -- 8,000
---------- ---------- ---------- ----------
Total available for sale........................ $ 125,951 $ 2,767 $ 1,178 $ 127,540
========== ========== ========== ==========
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Values
---------- ---------- ---------- ----------
December 31, 2000
Available-for-sale:
Mortgage-backed securities............................ $ 5,424 $ 1,397 $ -- $ 6,821
Government agency mortgage-backed securities.......... 38,031 339 553 37,817
Investment securities................................ 9,441 59 -- 9,500
---------- ---------- ---------- ----------
Total available for sale........................ $ 52,896 $ 1,795 $ 553 $ 54,138
========== ========== ========== ==========
As of December 31, 2001, the Company had approximately $77 fair value and $75 unamortized cost of securities maturing in over one year through five years, $5,242 fair value and $4,922 unamortized cost of securities maturing in over five years through ten years, and approximately $122,221 fair value and $120,954 unamortized cost of securities maturing after ten years. However, the Company expects to receive payments on its securities over periods considerably shorter than their contractual maturities.
The Company received proceeds of approximately $1,271, $4,448 and $42,476, respectively, on sales of available-for-sale securities during the years ended December 31, 2001 and 2000 and the seven months ended December 31, 1999. There were no such sales during the five months ended May 31, 1999. Gains and losses from sales of available-for-sale securities were $0 and $262, respectively, during the year ended December 31, 2001; $28 and $471, respectively, during the year ended December 31, 2000; and $571 and $148, respectively, during the seven months ended December 31, 1999.
During the year ended December 31, 2000, the Company sold a held-to-maturity security with an amortized cost of $5,992 for a realized gain of $5, which is included in loss on sale of securities in the Consolidated Statements of Operations. The Company reclassified all of its held-to-maturity securities to available-for-sale at December 31, 2000. Such securities had an amortized cost of $21,909, with a net unrealized loss of $8 reported as a component of other comprehensive income. The decision to sell the held-to-maturity security, and accordingly to reclass the remaining held to maturity securities to available for sale, was due to management's desire for flexibility to earn higher yields.
At December 31, 2001 and 2000, securities with carrying values of $114,938 and $23,217, respectively, and market values of approximately $114,938 and $23,217, respectively, were pledged to secure merchant bankcard transactions, short-term borrowings and lines of credit (see Note 12), and a Liquidation Bond issued by the Company to Capital Consultants, LLC ("CCL") (see Note 14).
The following is a summary of each loan category by type as of December 31, 2001 and 2000:
December 31,
--------------------------
2001 2000
---------- ----------
Loans
Real estate loans:
One to four units.............................................. $ 220,731 $ 225,091
Over four units................................................ 150,367 156,647
Commercial..................................................... 151,827 178,205
---------- ----------
Total loans secured by real estate............................. 522,925 559,943
Consumer and other loans............................................. 6,939 9,889
---------- ----------
529,864 569,832
Add: Premium on purchased loans and deferred fees................... 3,554 2,658
Less: Allowance for loan losses..................................... (8,384) (10,614)
---------- ----------
$ 525,034 $ 561,876
========== ==========
December 31,
--------------------------
2001 2000
------------ ----------
Discounted Loans
Real estate loans:
One to four units................................................. $ 6,643 $ 8,684
Over four units................................................... 1,142 634
Commercial........................................................ 1,582 3,464
Land.............................................................. 250 2,010
---------- ----------
Total loans secured by real estate................................ 9,617 14,792
Consumer and other loans................................................ 54,602 209,826
---------- ----------
64,219 224,618
Less:
Discounts on purchased loans...................................... (3,497) (1,385)
Allowance for loan losses.......................................... (45,413) (213,019)
---------- ----------
$ 15,309 $ 10,214
========== ==========
As of December 31, 2001 and 2000 loans with adjustable rates of interest were $404,046 and $298,053, respectively, and loans with fixed rates of interest were $190,037 and $496,397, respectively. Adjustable-rate loans are generally indexed to U.S. Treasury Bills, the FHLB's Eleventh District Cost of Funds Index, LIBOR or Prime and are subject to limitations on the timing and extent of adjustment. Most loans adjust within six months of changes in the index.
At December 31, 2001 and 2000, loans with unpaid principal balances of approximately $315,989 and $317,759, respectively, were pledged to secure credit line borrowings and repurchase agreements included in short-term borrowings (see Note 12).
Activity in the allowance for loan losses is summarized as follows:
Predecessor
Reorganized Company Company
------------------------------------------ ------------
Seven Months Five Months
Year Ended Year Ended Ended Ended
December 31, December 31, December 31, May 31,
2001 2000 1999 1999
------------ ------------ ------------ ------------
Balance, beginning of period .................................... $ 223,633 264,498 $ 275,402 $ 288,868
Allocations of purchased reserves:
at acquisition ............................................ 7,626 3,261 2,145 2,733
at disposition ............................................ (175,178) (16,737) (12,027) (15,962)
Addition due to discontinuation of European Operations .......... -- -- 1,739 --
Net change pursuant to fresh-start reporting .................... (113) 1,007 452 (1,078)
Charge-offs ..................................................... (894) (23,805) (1,400) (1,068)
Recoveries ...................................................... 507 377 272 186
(Recapture of) provision for losses on loans .................... (1,784) (4,027) 1,025 2,697
Currency translation adjustment ................................. -- (941) (3,110) (974)
------------ ------------ ------------ ------------
Balance, end of period .......................................... $ 53,797 223,633 $ 264,498 $ 275,402
============ ============ ============ ============
At December 31, 2001 and 2000, the Company had impaired loans (other than discounted loans) totaling $19,614 and $23,615, respectively, and had recorded specific valuation allowances to measure the impairments of those loans totaling $3,165 and $4,110, respectively. The average unpaid principal balances of impaired loans during the years ended December 31, 2001, 2000 and 1999 were $28,214, $34,016, and $55,379, respectively. Interest income recognized on impaired loans during 2001, 2000 and 1999 was $1,354, $1,991, and $2,503, respectively, based on cash payments. These amounts exclude consideration of single-family residential and other loan pools evaluated for impairment on a pooled basis.
The above amounts do not include impaired discounted loans. Management has determined that generally all discounted loans meet the criteria for impairment and collectively evaluates these loans for impairment.
The Bank has a geographic concentration of mortgage loans in the western United States, primarily in southern California. The five states with the greatest concentration of the Bank's loans were California, Washington, Arizona, Colorado, and Oregon, which had $379.1 million, $23.9 million, $15.6 million, $14.4 million, and $13.6 million principal amount of loans, respectively, at December, 31, 2001. The five states with the greatest concentration of the Company's Loans and Discounted Loans were California, Florida, Texas, Oregon, and Massachusetts, which had $13.6 million, $10.4 million, $5.5 million, $2.9 million and $2.8 million principal amount of loans, respectively, at December 31, 2001.
Management's estimates are utilized to determine the adequacy of the allowance for loan losses. Estimates are also involved in determining the ultimate recoverability of purchased loans and, consequently, the pricing of purchased loans. These estimates are inherently uncertain and depend on the outcome of future events. Although management believes the levels of the allowance as of December 31, 2001 and 2000 are adequate to absorb losses inherent in the loan portfolio, changes in interest rates, various other economic factors and regulatory requirements may result in increasing levels of losses. Those losses will be recognized if and when these events occur.
Real estate owned consists of property that was obtained through foreclosure or was purchased directly, and is reported at its fair value, less estimated costs to sell. Activity in real estate owned is as follows for the periods indicated:
Predecessor
Reorganized Company Company
------------------------------------------ ------------
Seven Months Five Months
Year Ended Year Ended Ended Ended
December 31, December 31, December 31, May 31,
2001 2000 1999 1999
------------ ------------ ------------ ------------
Balance, beginning of period .......................... $ 1,770 $ 11,571 $ 35,374 $ 62,168
Foreclosures .......................................... 1,963 2,917 1,830 3,547
Purchases ............................................. -- 244 -- 708
Adjustment pursuant to Fresh-Start reporting .......... -- -- -- 1,408
Sales and exchanges ................................... (2,953) (12,633) (24,571) (27,271)
Depreciation .......................................... -- -- (5) (25)
Valuation write-downs ................................. -- -- (581) (2,514)
Provision for losses .................................. (49) (90) (638) --
Currency translation adjustment ....................... -- (239) 162 (2,647)
------------ ------------ ------------ ------------
Balance, end of period ................................ $ 731 $ 1,770 $ 11,571 $ 35,374
============ ============ ============ ============
Real estate owned with a net carrying value of $193 and $97 at December 31, 2001 and 2000, respectively, collateralizes short-term borrowings (see Note 12).
Leasehold improvements and equipment consist of the following:
December 31,
-----------------------
2001 2000
---------- ----------
Leasehold improvements.............................................. $ 421 $ 452
Furniture and equipment............................................. 9,825 10,021
---------- ----------
Total cost.......................................................... 10,246 10,473
Accumulated depreciation and amortization........................... (7,048) (6,534)
---------- ----------
$ 3,198 $ 3,939
========== ==========
At December 31, 2001, gross servicer advance receivables totaled $43,585, which were netted for purposes of the accompanying consolidated financial statements by $25,319 of collections from mortgagors which were used to fund these advances. The net amount totals $18,266 and is included in the accompanying consolidated statement of financial condition as Servicer advance receivables, net as of December 31, 2001.
As part of these servicing activities, the Company held customer cash in custodial accounts totaling $102,031 at December 31, 2001 which, for purposes of these consolidated financial statements, is offset against a liability representing amounts due to investors at that date. These amounts are not included in the accompanying consolidated statements of financial condition.
Loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of mortgage and other loans serviced were $3,444,336, $2,562,409 and $2,113,963 at December 31, 2001, 2000, and 1999, respectively.
The balances of the Company's purchased mortgage servicing rights (MSRs) as of December 31, 2001 and 2000, and changes during the periods then ended, were as follows:
Predecessor
Reorganized Company Company
------------------------------------------ ------------
Seven Months Five Months
Year Ended Year Ended Ended Ended
December 31, December 31, December 31, May 31,
2001 2000 1999 1999
------------ ------------ ------------ ------------
Purchased mortgage servicing rights, beginning of period ..... $ 4,544 $ 507 $ -- $ 2,346
Purchases of mortgage servicing rights ....................... 12,124 4,433 518 --
Sales of mortgage servicing rights ........................... (796) -- -- --
Amortization ................................................. (5,847) (396) (11) (154)
Valuation allowance .......................................... (1,552) -- -- --
Write-down pursuant to fresh-start reporting ................. -- -- -- (2,192)
------------ ------------ ------------ ------------
Purchased mortgage servicing rights, end of period ........... $ 8,473 $ 4,544 $ 507 $ --
============ ============ ============ ============
The changes in the Company's valuation allowance for impairment of MSRs are as follows for the periods indicated:
Predecessor
Reorganized Company Company
------------------------------------------ ------------
Seven Months Five Months
Year Ended Year Ended Ended Ended
December 31, December 31, December 31, May 31,
2001 2000 1999 1999
------------ ------------ ------------ ------------
Balance, beginning of period.................. $ -- $ -- $ -- $ --
Additions for impairment...................... (1,552) -- -- --
------------ ------------ ------------ ------------
Balance, end of period........................ $ (1,552) $ -- $ -- $ --
============ ============ ============ ============
The Company evaluates MSRs for impairment by stratifying MSRs based on the predominant risk characteristics of the underlying financial assets. At December 31, 2001 and 2000, the fair values of the Company's MSRs were $10,099 and $7,533, respectively, which were estimated using a discount rate of 15% and prepayment assumptions ranging from 30% to 60% and 14% to 37%, respectively.
At December 31, 2001, the key economic assumptions and the sensitivity of the current fair value for purchased MSRs to immediate 10% and 20% adverse changes in those assumptions were as follows (dollars in thousands):
Year Ended
December 31,
2001
------------
Fair value of capitalized MSRs.............................. $ 10,099
CPR......................................................... 30-60%
Impact on fair value of 10% adverse change.................. (979)
Impact on fair value of 20% adverse change.................. (1,881)
Future cash flows discounted at............................. 15.00%
Impact on fair value of 10% adverse change.................. (243)
Impact on fair value of 20% adverse change.................. (472)
These sensitivities are hypothetical and should be used with caution. As the amounts indicate, changes in fair value based on a variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, however, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.
Deposits consist of the following:
December 31,
---------------------------
2001 2000
------------ ------------
Passbook accounts........................................ $ 4,265 $ 872
Money market accounts.................................... 28,811 18,743
NOW/checking............................................. 2,794 10,663
Time deposits:
Less than $100..................................... 118,002 166,009
$100 or more....................................... 285,597 238,786
------------ ------------
Total deposits........................................... $ 439,469 $ 435,073
============ ============
A summary of time deposits as of December 31, 2001, by maturity, is as follows:
2002..................................................... $ 292,623
2003..................................................... 62,486
2004..................................................... 46,766
2005..................................................... 1,587
2006 and thereafter...................................... 137
------------
$ 403,599
============
Short-term borrowings at December 31, 2001 consisted of short-term notes payable and line of credit borrowings in our Specialty Servicing and Finance Operations. The notes payable were used for the acquisition of purchased mortgage servicing rights during the year. Our line of credit facilities are primarily used to fund servicer advances and, to a lesser extent, loan pools. In December 2001 we borrowed $9.2 million under one of our lines of credit to repurchase approximately 4.2 million shares of common stock from one of our shareholders. This borrowing was substantially repaid in January 2002 with proceeds from the issuance of approximately $7.7 million in 8% subordinated debentures, which funded the majority of the stock repurchase. Following is information about our short-term borrowings:
Predecessor
Reorganized Company Company
------------------------------------------ ------------
Seven Months Five Months
Year Ended Year Ended Ended Ended
December 31, December 31, December 31, May 31,
2001 2000 1999 1999
------------ ------------ ------------ ------------
Average balance during the period................... $ 5,270 $ 21,323 $ 95,521 $ 245,900
Highest amount outstanding during the period........ 9,970 45,506 150,339 420,816
Average interest rate-during the period............. 2.3% 9.1% 7.1% 7.3%
Average interest rate-end of period................. 2.0% 6.4% 8.1% 6.1%
In addition to the borrowings described above, our Specialty Servicing and Finance Operations have secured longer-term investment financing, consisting of other notes payable and lines of credit from institutional lenders. These borrowing facilities are primarily used for acquisitions of mortgage servicing rights and loan pools and are collateralized by the assets acquired. At December 31, 2001, we had outstanding approximately $14.5 million of such financing, which bears interest at an average rate of 6.0% and matures in 2003.
The Bank has an agreement with the Federal Home Loan Bank of San Francisco (the "FHLB") whereby the Bank can apply for advances not to exceed 25% of the Bank's total assets. These advances are secured by FHLB stock, mortgage-backed securities and loans. The balances of FHLB Advances outstanding as of December 31, 2001 and 2000 were $189.5 million and $132.0 million, respectively, and the weighted average interest rate paid on the outstanding balance at December 31, 2001 is 5.54%. As of December 31, 2001, the Bank had $30.5 million of FHLB Advances maturing within one year, $60.0 million maturing within two years, $38.5 million maturing within three years, $26.0 million maturing within four years, and $34.5 million maturing within five years.
From time to time, if required for liquidity purposes, the Bank will enter into short-term repurchase agreements which enable the Bank to purchase investment securities and pools of loans with immediate financing. In December 2001 the Bank entered into a repurchase agreement with Countrywide Securities Corporation and, in January 2002, borrowed approximately $35 million under this facility to purchase mortgage-backed and other investment securities.
The domestic and foreign components of income (loss) before domestic and foreign income and other taxes were as follows:
Predecessor
Reorganized Company Company
-------------------------------------------- ------------
Seven Months Five Months
Year Ended Year Ended Ended Ended
December 31, December 31, December 31, May 31,
2001 2000 1999 1999
------------ ------------ ------------ ------------
Domestic $ 8,612 $ 6,488 $ (10,009) $ (62,165)
Foreign -- 290 (3,428) (5,445)
------------ ------------ ------------ ------------
Total................................. $ 8,612 $ 6,778 $ (13,437) $ (67,610)
============ ============ ============ ============
The components of the income tax provision were as follows:
Predecessor
Reorganized Company Company
------------------------------------------ -----------
Seven Months Five Months
Year Ended Year Ended Ended Ended
December 31, December 31, December 31, May 31,
2001 2000 1999 1999
------------ ------------ ------------ ------------
Current tax (benefit) provision:
Federal ......................................... $ (1,213) $ (428) $ 467 $ 470
State ........................................... 350 50 187 188
------------ ------------ ------------ ------------
Total current tax (benefit) provision ..... (863) (378) 654 658
------------ ------------ ------------ ------------
Deferred tax benefit:
Federal ......................................... (3,507) -- -- --
State ........................................... (1,313) -- -- --
------------ ------------ ------------ ------------
Total deferred tax benefit ................ (4,820) -- -- --
------------ ------------ ------------ ------------
Increase to stockholders' equity
Pre-reorganization tax benefits ................. 8,683 3,974 -- --
------------ ------------ ------------ ------------
Total increase to stockholders' equity .... 8,683 3,974 -- --
------------ ------------ ------------ ------------
Total income tax provision ................ $ 3,000 $ 3,596 $ 654 $ 658
============ ============ ============ ============
The current federal tax provision for the years ended December 31, 2001 and 2000 and the seven-month and five-month periods ended December 31, 1999 and May 31, 1999, respectively, included excess inclusion income earned on certain residual interests in REMICs which cannot be offset by tax losses. In addition, in 2001 and 2000 the Company realized certain benefits related to the resolution and closing of open audit years.
The increase in stockholders' equity resulted from the realization of pre-reorganization tax benefits and the reduction in valuation allowance. The tax effect is recorded as an increase to stockholders' equity in accordance with SOP 90-7 and not as a benefit on the statement of operations.
The difference between the effective tax rate in the consolidated financial statements and the statutory federal income tax rate can be attributed to the following:
Predecessor
Reorganized Company Company
------------------------------------------ ------------
Seven Months Five Months
Year Ended Year Ended Ended Ended
December 31, December 31, December 31, May 31,
2001 2000 1999 1999
------------ ------------ ------------ ------------
Federal income tax provision (benefit) at statutory rate ... 34.0% 34.0% (34.0)% (34.0)%
State taxes, net of federal tax effect ..................... 5.2 6.9 (6.8) (6.8)
Unconsolidated net operating loss not benefited ............ 2.5 6.0 -- --
Excess inclusion income from residual interests in REMICs .. 5.8 10.0 -- --
Foreign losses with no federal tax benefit ................. -- -- 8.7 2.2
Subpart F income ........................................... -- -- 3.4 0.5
Stock issuance costs ....................................... -- -- -- 6.4
Valuation allowance for deferred tax asset ................. -- -- 34.9 36.5
Resolution and closing of open audit years ................. (17.4) -- -- --
Other ...................................................... 4.7 (3.9) (1.5) (3.8)
------------ ------------ ------------ ------------
Effective income tax rate .................................. 34.8% 53.0% 4.7% 1.0%
============ ============ ============ ============
Deferred income taxes are provided for temporary differences between income tax and financial statement recognition of revenue and expenses. Deferred income tax assets and liabilities are summarized as follows:
December 31,
---------------------------
2001 2000
------------ ------------
Deferred tax assets:
Loans - purchase discounts, allowance for loan losses
and market valuation adjustments ................................. $ 8,292 $ 10,308
Market adjustment on mortgage-backed securities and hedge instruments 1,991 --
Capitalized mortgage servicing rights ............................... 2,833 2,181
Depreciation and amortization ....................................... 1,465 1,222
Pass-through income ................................................. 494 1,272
Net operating loss carryforward, net of COD income .................. 20,745 32,686
Accrued expenses .................................................... 1,231 974
Capitalized costs ................................................... 5,593 5,971
Goodwill ............................................................ 1,454 2,400
Capital loss carryforward ........................................... 15,797 14,066
Other ............................................................... 5,019 4,958
------------ ------------
Gross deferred tax assets ..................................... 64,914 76,038
------------ ------------
Deferred tax liabilities:
Market adjustment on mortgage-backed securities and hedge instruments -- (2,205)
Deferred loan fees .................................................. (51) (55)
State taxes ......................................................... (4,398) (1,991)
Purchase accounting ................................................. (422) (439)
------------ ------------
Gross deferred tax liabilities ................................ (4,871) (4,690)
------------ ------------
Total deferred tax asset, net ....................................... 60,043 71,348
Valuation allowance ................................................. (55,223) (71,348)
------------ ------------
Net deferred tax asset ........................................ $ 4,820 $ --
============ ============
SFAS Statement No. 109, "Accounting for Income Taxes," requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Management believes sufficient uncertainty exists regarding the realizability of the asset that a valuation allowance is required. Although realization is not assured, management believes that it is more likely than not that the Company will realize a portion of the deferred tax asset. The Company's net deferred tax asset at December 31, 2001 is included in prepaid expenses and other assets on the accompanying consolidated statements of financial condition. As pre-reorganization tax benefits are realized and the valuation allowance is reduced, the tax effect is recorded as an increase to stockholders' equity in accordance with SOP 90-7 and not as a benefit on the statement of operations.
As of December 31, 2001, the Company had U.S. net operating loss carryforwards and capital loss carryforwards of approximately $58 million and $36 million, respectively. In addition, the Company has state net operating loss carryforwards. The federal carryforward period runs through 2021. Cancellation of indebtedness income in the amount of $137.3 million was excluded from taxable income in 1999 due to an exception for bankruptcy related debt forgiveness. The amount of cancellation of indebtedness income that was excluded from taxable income has been applied to reduce tax attributes, such as net operating loss and capital loss carryforwards.
The Company has not provided for U.S. deferred income taxes on undistributed earnings of foreign subsidiaries as cumulative losses were generated in each foreign jurisdiction since inception. The Company disposed of its foreign operations during the second quarter of 2000.
During 1999 the Internal Revenue Service ("IRS") concluded a field audit of the Bank's (formerly known as Girard Savings Bank) income tax return for the year ended December 31, 1995. The Bank agreed to two temporary adjustments that resulted in a $300 thousand payment in 1999.
Lease Commitments--The following is a schedule of future minimum rental payments under operating leases as of December 31, 2001:
2002...................................................... $ 1,924
2003...................................................... 1,667
2004...................................................... 555
2005...................................................... 108
--------
Total................................................ $ 4,254
========
Financial Instruments Involving Off-Balance Sheet Risk--In hedging the interest rate exposure of a fixed-rate or lagging-index asset, the Company may create a hedge which matches the principal amortization of such an asset against the maturity of the Company's liabilities generally by entering into short sales or forward sales of U.S. Treasury securities, Government Securities or interest rate futures contracts. This results in market gains or losses on hedging instruments, in response to interest rate increases or decreases, respectively, which approximate the amount of the corresponding market losses or gains, respectively, on loans being hedged.
At December 31, 2000 the Bank had approximately $20.9 million notional principal amount interest rate swap agreement outstanding. In April 2001, this swap agreement expired. This swap was designated as a hedge to convert fixed rate income streams on loans to variable rate, and had the effect of increasing the Company's net interest income by approximately $18 thousand and $0.1 million for the years ended December 31, 2001 and 2000, respectively.
In 2001, the Bank purchased interest-rate put options on 30-year U.S. Treasury bonds. The Bank paid a premium of $45 for the put options, which expire in March 2002. A put option contract grants the Bank the right, but not the obligation, to sell a financial instrument at a stated price within a specified period of time. The put option contracts were purchased to reduce the interest rate risk in the Bank's fixed-rate mortgage-backed securities portfolio during a rising interest rate environment. The fair value of the put options as of December 31, 2001 was $31.
Purchase Commitments--From time to time, the Company enters into various commitments and letters of intent relating to purchases of loans, foreclosed real estate portfolios and other investments. There can be no assurance that any of such transactions will ultimately be consummated. It is the Company's policy to generally record such transactions in the financial statements in the period in which such transactions are closed. At December 31, 2001 the Bank had outstanding commitments to purchase approximately $50.0 million in mortgage-backed securities. The Bank purchased these securities in January 2002.
Litigation--The Company, the Bank and WCC, among other parties, are currently defendants to certain lawsuits brought by a number of CCL's clients. Between 1994 and 1998 CCL, as agent for various clients, made a number of loans to the privately-owned company then known as Wilshire Credit Corporation ("WCC") and now known as Capital Wilshire Holdings Inc. ("CWH"). As part of the Company's June 1999 restructuring, it purchased the assets of CWH. In exchange it gave CCL as agent a 49.99% nonvoting ownership interest in WCC with certain rights to convert such interest to a portion of the Company's stock. The plaintiffs allege that the Company, WCC and the Bank and some of their executives wrongfully participated in various transactions in which CCL made improper loans to WCC, 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 Company believes that it has strong defenses with regard to such allegations and intends to contest the claims vigorously unless a satisfactory settlement can be reached. Without limitation, as part of the June 1999 reorganization of the Company, CCL, on behalf of the CCL Investors, provided the Company with a release of all claims that they might have had against the Company, pursuant to the Plan of Reorganization approved by the Delaware Bankruptcy Court. The plaintiffs contend that CCL did not have authority to provide this release and that the releases were fraudulently obtained. In addition, the Company's former executives have requested that the Company indemnify them as directors and officers of the Company for their costs and potential liability to the extent such amounts are not covered by insurance.
The District Court of Oregon appointed a mediator to supervise a limited discovery procedure and to determine if the claims can be resolved by settlement. The Company and the plaintiffs continue to participate in the mediation process. The parties are under a confidentiality order prohibiting any disclosure of the status of any settlement discussions.
The Company is a defendant in other legal actions arising from transactions conducted in the ordinary course of business. Management, after consultation with legal counsel, believes the ultimate liability, if any, arising from such actions will not materially affect the Company's consolidated results of operations or financial position.
Other--In connection with the transfer of the Company's minority ownership interest in WCC to CWH, described in Note 1, 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 CWH 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. A receiver has been appointed for CCL in Securities and Exchange Commission v. Capital Consultants, LLC, et al., U.S. District Court for the District of Oregon, Case No. CV 00-1290 KI, and now holds this Liquidation Bond and controls the minority ownership interest in WCC on behalf of CCL's investors.
In addition, the holder of the minority ownership interest in WCC is entitled to convert its interest into WCC's voting Class A common stock. The holder also may convert its interest into the Company's common stock or, under certain circumstances, be paid $19.3 million less any prior distributions received from the minority interest at any time upon a merger of the Company into a third party, the sale of substantially all assets of the Company to a third party, or the purchase of substantially all the stock of the Company by a single third party. Upon the conversion into WCC Class A common stock or into the Company's common stock or payment of the $19.3 million, the Liquidation Bond is cancelled. The formula for the conversion into the Company's common stock permits the holder of the minority interest in WCC to convert such interest into the number of shares of the common stock of the Company approximately equal to:
45% x WCC's trailing 12 month GAAP earnings
- ------------------------------------------------------------
WFSG's 12 trailing month GAAP earnings per share
Each calculation of earnings is adjusted for extraordinary items and is net after taxes.
The Company is the guarantor on a $50 million credit facility agreement between WCC and a major commercial bank. WCC accumulates earnings credits through the maintenance of certain deposit balances that would not otherwise earn interest. The earnings credits are used first to offset costs of banking services, and then to offset certain borrowing costs. To the extent excess earnings credits exist, they are used to pay certain interest costs related to the $50 million investment line facility.
Regulatory Agreements--On February 8, 1999, the OTS terminated a Cease and Desist Order (the "Order") to which the Bank had stipulated in 1996. The Order had prohibited the Bank from increasing total assets in excess of $750 million; purchasing any loans or real estate without the approval of the OTS until certain acquisition and servicing deficiencies had been corrected; and purchasing any non-performing assets or foreclosed real estate until such time as the Bank was rated a composite "3" rating according to the Uniform Financial Institutions Rating System.
On June 8, 2000, the OTS terminated an OTS directive letter (the "Directive") issued to the Bank on June 3, 1999. The Directive had required prior written approval of the OTS Assistant Regional Director for the Bank to engage in certain activities including material cash expenditures, loan pool purchases, capital distributions and the hiring of any executive officers. Additionally, the Directive had required the adoption of a monthly board resolution indicating that the Bank complied with the provisions stated in the Directive.
On January 9, 2001, the OTS terminated Cease and Desist Orders to which WFSG, WAC and WCC had stipulated on January 7, 2000. The orders had prohibited these entities from entering into transactions that would cause the Bank to violate or be in violation of transactions with affiliates' regulations. The orders also had required 30-day advance notification before adding, replacing or terminating any member of the Bank's board of directors or any senior executive of the Bank.
Capital Requirements--The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2001, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2001 and 2000, the most recent notification from the OTS categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized", the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank's category. As of December 31, 2001 and 2000, the total core capital and total risk-based capital amounts of the Bank, compared to the OTS minimum requirements, were as follows:
To Be
Amount Required "Well Capitalized"
For Capital under
Adequacy Prompt Corrective
Actual Purposes Action Regulations
-------------------- ---------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- --------- ---------- ---------- ---------- ----------
December 31, 2001
Total Capital to Risk-Weighted Assets
(Risk-Based Capital)........................... $ 70,858 15.7% $ 36,014 =>8.0% $ 45,018 =>10.0%
Tier 1 Capital to Risk-Weighted Assets............ 65,204 14.5% Not Applicable 27,018 => 6.0%
Core Capital to Adjusted Tangible Assets.......... 65,204 9.2% 28,442 =>4.0% 35,553 => 5.0%
Tangible Capital to Tangible Assets............... 65,204 9.2% 10,666 =>1.5% Not Applicable
December 31, 2000
Total Capital to Risk-Weighted Assets
(Risk-Based Capital)........................... $ 62,092 13.5% $ 36,770 =>8.0% $ 45,963 =>10.0%
Tier 1 Capital to Risk-Weighted Assets............ 56,261 12.2% Not Applicable 27,578 => 6.0%
Core Capital to Adjusted Tangible Assets.......... 56,261 8.7% 25,759 =>4.0% 32,199 => 5.0%
Tangible Capital to Tangible Assets............... 56,261 8.7% 9,659 =>1.5% Not Applicable
In April 2001 the Company sold mortgage-backed securities with a book value of $1.5 million to Fog Cutter Capital Group Inc. ("FCCG", formerly known as Wilshire Real Estate Investment Inc. ("WREI")) for a loss of approximately $0.3 million. FCCG owned approximately 18% of the Company's outstanding common stock at December 31, 2001 and approximately 14% at December 31, 2000.
From WREI's inception in April 1998 until September 1999, Wilshire Realty Services Corporation ("WRSC"), a subsidiary of the Company, was the manager of WREI and earned a management fee based on the level of WREI's investment assets. The Company, through WRSC, earned management fee income of $1.1 million for the seven months ended December 31, 1999 and $1.3 million for the five months ended May 31, 1999. From 1999 until August 2000, the Company had a $5.0 million note payable to WREI bearing interest at 12%, which was funded under a debtor-in-possession ("DIP") facility.
In October 1999, WFSG sold mortgage-backed securities with a book value of $20.9 million and transferred related debt of $18.5 million to WREI for net proceeds of approximately $2.4 million. Such amount was applied to the $5.8 million discounted present value (book value) of a 6%, unsecured pay-in-kind ("PIK") note payable to WREI. No gain or loss was recorded on this sale, as the mortgage-backed securities had previously been written down to the sales price in the accompanying consolidated financial statements.
In December 1999, the Company entered into an agreement with WREI. The principal terms of the agreement include, but are not limited to, the following: WFSG sold to WREI all of its interest in WREI's common stock, including 992,587 shares of WREI common stock, rights to previously declared dividends on such shares, and options to purchase an additional 1,112,500 shares; WFSG released WREI from the management fee otherwise payable by WREI under a management agreement between WFSG and WREI for the quarterly period ended September 30, 1999; WREI cancelled WFSG's obligations under the PIK note previously issued by WFSG to WREI; and WFSG issued to WREI an unsecured promissory note in the amount of $275 bearing interest at 9%.
In August 2000, the Company reached an agreement with WREI pursuant to which the $5.0 million DIP loan and the $275 promissory note were settled in full and WREI was released from any additional management fees payable after September 1999. During the year ended December 31, 2000, the Company incurred approximately $0.4 million in interest expense to WREI on these notes.
At December 31, 2001 and 2000, the Company had an outstanding loan to a principal of CCL (the 49.99% minority owner of WCC) with an unpaid principal balance of approximately $2.6 million, bearing interest at 15.5%, and had recorded a specific valuation allowance of $1.5 million.
The Company has outstanding stock options which are considered common stock equivalents in the calculation of earnings per share. Following is a reconciliation of net income available to common shareholders and weighted average shares outstanding as used to calculate basic and diluted earnings per share for the years ended December 31, 2001 and 2000.
Weighted
Average Per Share
Income Shares Amount
------------ ------------ ------------
Year ended December 31, 2001
Net income applicable to common stock...................... $ 5,612 20,138,015 $ 0.28
Dilution from stock options................................ -- 1,038,054 --
------------ ------------ ------------
Diluted income per share................................... $ 5,612 21,176,069 $ 0.27
============ ============ ============
Weighted
Average Per Share
Income Shares Amount
------------ ------------ ------------
Year ended December 31, 2000
Net income before extraordinary item....................... $ 3,182 20,035,458 $ 0.16
Extraordinary item, net of tax............................. 239 20,035,458 0.01
------------ ------------ ------------
Net income applicable to common stock...................... 3,421 20,035,458 0.17
Dilution from stock options................................ -- 219,905 --
------------ ------------ ------------
Diluted income per share................................... $ 3,421 20,255,363 $ 0.17
============ ============ ============
For the seven-month period subsequent to the Company's restructuring, the Company had outstanding stock options on its new common stock, some of which are required to be considered common stock equivalents. However, the Company experienced a loss for this period, which resulted in common stock equivalents having an anti-dilutive effect on loss per share. Therefore, loss per share is calculated by dividing net loss by the 20,033,600 outstanding shares of the Company's new common stock.
Weighted
Average Per Share
Net Loss Shares Amount
-------------- ------------- ----------
Seven months ended December 31, 1999
Net loss applicable to common stock.................... $ (14,091) 20,033,600 $ (0.70)
Dilution from stock options............................ -- -- --
-------------- ------------- ----------
Diluted loss per share................................. $ (14,091) 20,033,600 $ (0.70)
============== ============= ==========
For the five months ended May 31, 1999, the Company had outstanding stock options on its old common stock which were considered common stock equivalents in the calculation of (loss) earnings per share. However, because the exercise price of the options then outstanding on the Company's old common stock exceeded the average market price of the common stock during the period, exercise of the options would have been anti-dilutive. As a result, the weighted average shares outstanding is the same for basic and diluted (loss) earnings per share, which is calculated by dividing (loss) income by the 10,885,000 outstanding shares of old common stock, as follows:
Weighted
Average Per Share
(Loss) Income Shares Amount
------------- ------------ ----------
Five months ended May 31, 1999
Net loss before extraordinary item...................... $ (68,268) 10,885,000 $ (6.27)
Extraordinary item, net of tax.......................... 225,606 10,885,000 20.72
------------- ------------ ----------
Net income applicable to common stock................... 157,338 10,885,000 14.45
Dilution from stock options............................. -- -- --
------------- ------------ ----------
Diluted income per share................................ $ 157,338 10,885,000 $ 14.45
============= ============ ==========
Profit Sharing Plan--The Company's employees participate in a defined contribution profit sharing and 401(k) plan sponsored by companies included in the Company's "control group." At the discretion of the Company's Board of Directors, the Company may elect to contribute to the plan based on profits of the Company or based on matching participants' contributions. The Company contributed $431, $468 and $395, respectively, for the years ended December 31, 2001 and 2000 and for the seven-month period ended December 31, 1999. There was no such contribution for the five-month period ended May 31, 1999.
Employment Agreements--From April 1, 2000 to February 28, 2002, the Company's Chief Executive Officer, Mr. Stephen P. Glennon, received a salary of $24.00 per year for two years, and was reimbursed for certain living expenses. Mr. Glennon also was granted 575,000 stock options at a price of $1.1875 per share. The options vested at the rate of 25,000 per month and had vested in full as of February 28, 2002. In March 2002 Mr. Glennon entered into a new employment agreement with the Company. Pursuant to this agreement, Mr. Glennon will receive a salary of $100,000 from March 1, 2002 to February 28, 2003 and a salary of $300,000 from March 1, 2003 to February 29, 2004, and will continue to be reimbursed for certain living expenses. Mr. Glennon also was granted 300,000 stock options at a price of $2.34 per share, vesting at the rate of 12,500 per month for each month of employment completed by Mr. Glennon. Mr. Glennon's new agreement provides that, in the event of a change in control of the Company, all of his options will vest and immediately become exercisable, and he will be paid $500,000 in consideration of a general release of all claims. If the Company terminates Mr. Glennon's employment without cause, all of his stock options will vest and he will be paid $150,000 in exchange for a general release of all claims. In the event Mr. Glennon voluntarily terminates his employment, he shall receive only those options that vested through the date of his resignation and will receive no further salary.
The Company and the Bank entered into an Employment, Confidentiality and Severance Agreement with Mr. Joseph W. Kiley III, effective as of March 12, 2001, thereafter, amended, generally effective as of August 30, 2001 (the "Kiley Agreement"). The Kiley Agreement provides that Mr. Kiley serve as Executive Vice President and Chief Financial Officer of the Bank for the periods between March 12, 2001 and August 30, 2001; thereafter, as President of the Bank. Pursuant to the Kiley Agreement, Mr. Kiley's employment is for a term of two years commencing on March 12, 2001, with an option to renew for successive periods of twelve months each. Under the Kiley Agreement, Mr. Kiley receives an annual base salary of $180,000, increased to $200,000 effective as of August 30, 2001, and a car allowance of $750.00 per month. In addition, Mr. Kiley is entitled to participate in the Bank's employee benefit plans, medical, dental, vision, disability or insurance programs, if any, to the extent offered to other officers of similar position under the Bank's personnel policies. The Kiley Agreement also provides for a stock option grant to Mr. Kiley under the Company's 1999 Equity Participation Plan, covering an aggregate of 150,000 shares of the Company's Common Stock at a price of $1.625 per share. The stock option grant vests in three equal annual installments beginning on March 12, 2002 and is subject to forfeiture under certain circumstances prior to September 12, 2002. Under the Kiley Agreement, Mr. Kiley is granted an additional stock option grant under the Company’s 1999 Equity Participation Plan, covering an aggregate of 50,000 shares of Company Common Stock at a price of $1.90 per share effective as of October 2, 2001. The additional stock option grant vests in three equal annual installments beginning on October 2, 2002. All stock options granted under the Kiley Agreement are granted at a price equal to the fair market value of the Company's Common Stock on the date of grant. Pursuant to the Kiley Agreement, in the event Mr. Kiley's employment is terminated upon the occurrence of an "Other Event of Termination," (as defined in the Kiley Agreement) he is entitled to an amount equal to his then annual base salary and to life, medical, dental and disability coverage substantially identical to the coverage maintained by the Bank or the Company for Mr. Kiley prior to his termination of employment at no cost to him for a period of one year, subject to certain limitations. Under the Kiley Agreement, in the event of a "change in control" (as defined in the Kiley Agreement) of the Bank or the Company, Mr. Kiley's stock options become immediately vested and exercisable. Furthermore, in the event Mr. Kiley's employment is terminated within 12 months after a "change in control," without "cause" (as defined in the Kiley Agreement) or following Mr. Kiley's resignation following an Other Event of Termination, Mr. Kiley is entitled to a sum equal to two times the average of his "Annual Cash Compensation," as defined below, for the five most recent taxable years that Mr. Kiley is employed by the Bank (subject to certain adjustments) and to life, medical, dental and disability coverage substantially identical to the coverage maintained by the Bank or the Company for Mr. Kiley prior to his termination of employment at no cost to him for a period of one year, subject to certain limitations. Under the Kiley Agreement, "Annual Cash Compensation" includes base salary, commissions, bonuses, and directors or committee fees. The Kiley Agreement is attached hereto as Exhibit 10.2.
In October 2000, the Company gave change-in-control agreements to Messrs. Bruce A. Weinstein, Jay H. Memmott, Mark H. Peterman, Russell T. Campbell and Bradley B. Newman. The Company revised portions of these agreements in April 2001. These agreements provide that, in the event of a change in control of the Company, these executives would be entitled to receive a severance payment if within a specified period of time after a change in control, their employment is involuntarily terminated by the Company for any reason other than cause or death or disability, or they voluntarily terminate their employment after certain adverse changes in the terms of their employment ("Good Reason"). The specified period of time is 120 days for Messrs. Weinstein, Memmott, Campbell and Newman and one year for Mr. Peterman. In addition, Messrs. Weinstein, Memmott, Campbell and Newman are entitled to their severance payment if they terminate their employment after the 120-day period, whether or not they have been terminated without cause or voluntarily terminate for Good Reason. The amount of the severance payment for Messrs. Weinstein, Memmott, Campbell and Newman would be twice their annual base salary, and the severance payment for Mr. Peterman would be equal to his base salary.
Stock Options--The Company adopted a new stock option plan, the Equity Participation Plan, on December 2, 1999. The Equity Participation Plan permits the Company to grant incentive stock options ("ISOs"), non-statutory stock options ("NSOs"), restricted stock and stock appreciation rights (collectively "Awards") to employees, directors and consultants of the Company and subsidiaries of the Company. In June 2000 the Equity Participation Plan was amended to increase the number of shares reserved for issuance by 1,200,000 shares of common stock to an aggregate of 4,000,000 shares, and to allow any participant in the Plan to receive grants of options or other awards with respect to up to 1,000,000 shares of common stock per year. In January 2001 the Plan was further amended to revise the definition of "change in control" in those provisions of the Plan that permit accelerated vesting of the options in the event of a change in control and in April 2001, the Plan was amended to provide that all options would vest upon a change in control. The Board of Directors has delegated administration of the Equity Participation Plan to the Compensation Committee (the "Committee").
Under the Equity Participation Plan, the Committee may grant ISOs and NSOs. The option exercise price of both ISOs and NSOs may not be less than the fair market value of the shares covered by the option on the date the option is granted. The Committee may also grant Awards of restricted shares of Common Stock. Each restricted stock Award would specify the number of shares of Common Stock to be issued to the recipient, the date of issuance, any consideration for such shares and the restrictions imposed on the shares (including the conditions of release or lapse of such restrictions). The Committee may also grant Awards of stock appreciation rights. A stock appreciation right entitles the holder to receive from the Company, in cash or Common Stock, at the time of exercise, the excess of the fair market value at the date of exercise of a share of Common Stock over a specified price fixed by the Committee in the Award, multiplied by the number of shares as to which the right is being exercised. The specified price fixed by the Committee will not be less than the fair market value of shares of Common Stock at the date the stock appreciation right was granted.
A summary of the Company's stock options as of December 31, 2001, 2000 and 1999, and changes during the periods then ended, is presented below:
Reorganized Company Predecessor Company
---------------------------------------------------------------------- -----------------------
Year Ended Year Ended Seven Months Ended Five Months Ended
December 31, 2001 December 31, 2000 December 31, 1999 May 31, 1999
----------------------- ------------------------ -------------------- -----------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- -------- ---------- ---------- ----------
Outstanding at beginning of
period........................ 3,157,000 $ 1.16 370,000 $ 1.10 -- $ -- 1,809,776 $ 15.62
Cancelled........................ -- -- -- -- -- -- (1,809,776) --
Granted ........................ 810,000 1.61 3,135,000 1.15 370,000 1.10 -- --
Exercised........................ (314,000) 1.06 -- -- -- -- -- --
Forfeited........................ (463,000) 1.12 (348,000) 1.06 -- -- -- --
---------- ---------- ---------- ---------- -------- ---------- ---------- ---------
Outstanding at end of
period....................... 3,190,000 $ 1.35 3,157,000 $ 1.16 370,000 $ 1.10 -- $ --
========== ========== ========== ========== ======== ========== ========== =========
Exercisable at end of
period....................... 1,508,320 $ 1.17 806,659 $ 1.10 -- $ -- -- $ --
========== ========== ========== ========== ======== ========== ========== =========
Additional information regarding options outstanding as of December 31, 2001 is as follows:
Average Average
Range of Remaining Exercise
Exercise Prices Shares Life Price
--------------- ------------ ----------- --------
$0.88...................................................... 30,000 8.24 $0.88
$1.06-$1.19................................................ 1,640,000 8.18 $1.11
$1.22-$1.38................................................ 710,000 8.59 $1.35
$1.64-$1.90................................................ 780,000 9.65 $1.84
$2.20...................................................... 30,000 9.44 $2.20
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its Equity Participation Plan. Accordingly, no compensation expense has been recognized for grants under the Equity Participation Plan. Had compensation expense for the Company's Equity Participation Plan been determined based on the fair value at the grant date consistent with the methods of SFAS No. 123, the Company's net income and earnings per share for the years ended December 31, 2001 and 2000 would have been reduced to the pro forma amounts indicated below. There was no pro-forma adjustment to record compensation expense under SFAS No. 123 for the seven months ended December 31, 1999 as the options were granted near year-end. In addition, there was no pro-forma adjustment under SFAS No. 123 for the five months ended May 31, 1999 since the options then outstanding were canceled as part of the Company's reorganization (see Note 1).
Year Ended Year Ended
December 31, December 31,
2001 2000
------------ ------------
Net income to common shareholders:
As reported............................................ $ 5,612 $ 3,421
Pro forma.............................................. 4,980 3,009
Net income per common and common share equivalent:
Basic earnings per share:
As reported...................................... $ 0.28 $ 0.17
Pro forma........................................ 0.25 0.15
Diluted earnings per share:
As reported...................................... $ 0.27 $ 0.17
Pro forma........................................ 0.24 0.15
There were no options granted during the years ended December 31, 2001 or 2000 or the seven months ended December 31, 1999 with exercise prices below the market value of the stock at the grant date. (The Company did not grant any options during the five months ended May 31, 1999.) The weighted average fair values of options granted during the years ended December 31, 2001 and 2000 and the seven months ended December 31, 1999 were $0.77, $0.94, and $0.88, respectively. Fair values were estimated using the Black-Scholes option-pricing model with the following weighted average assumptions used: no dividend yield, expected volatility of 40% (2001) and 72% (2000), risk-free interest rate of 4.3% (2001) and 4.8% (2000), and expected lives of five years.
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
December 31, 2001 December 31, 2000
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents ............................ $ 37,876 $ 37,876 $ 9,516 $ 9,516
Mortgage-backed securities available for sale ........ 119,540 119,540 44,638 44,638
Investment securities available for sale ............. 8,000 8,000 9,500 9,500
Loans and discounted loans, net ...................... 540,343 552,564 572,090 585,007
Federal Home Loan Bank stock ......................... 9,475 9,475 6,615 6,615
Servicer advance receivables, net .................... 18,266 14,206 19,063 15,206
Purchased mortgage servicing rights .................. 8,473 10,099 4,544 7,533
Service fees receivable .............................. 3,100 3,100 2,198 2,198
Receivables from other loan servicers ................ 1,788 1,788 3,161 3,161
Liabilities:
Deposits ............................................. 439,469 441,321 435,073 418,883
Short-term borrowings ................................ 9,970 9,970 9,123 9,123
FHLB advances ........................................ 189,500 194,984 132,000 136,034
Long-term investment financing ....................... 14,474 14,474 1,634 1,634
Off-balance-sheet instruments:
Interest-rate swaps .................................. -- -- -- 22
The methods and assumptions used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value are explained below:
Cash and Cash Equivalents--The carrying amounts approximate fair values due to the short-term nature of these instruments.
Securities and Mortgage-Backed Securities--The fair values of securities are generally obtained from discounted cash flow models, market bids for similar or identical securities, independent security brokers or dealers.
Loans and Discounted Loans--Loans are segregated by type, such as fixed- and adjustable-rate interest terms. The fair values of fixed-rate mortgage loans are based on discounted cash flows utilizing applicable risk-adjusted spreads relative to the current pricing of similar fixed-rate loans as well as anticipated prepayment schedules. The fair values of adjustable-rate mortgage loans are based on discounted cash flows utilizing discount rates that approximate the pricing of available mortgage-backed securities having similar rate and repricing characteristics, as well as anticipated prepayment schedules. No value adjustments have been made for changes in credit within the loan portfolio. It is management's opinion that the allowance for estimated loan losses pertaining to loans results in a fair value adjustment of the credit risk of such loans. The fair value of discounted loans, which are predominately non-performing loans, is more difficult to estimate due to uncertainties as to the nature, timing and extent to which the loans will be either collected according to original terms, restructured, or foreclosed upon. Discounted loans' fair values were estimated using the Company's best judgement for these factors in determining the estimated present value of future net cash flows discounted at a risk-adjusted market rate of return. For other loans, fair values are estimated for portfolios of loans with similar financial characteristics.
Federal Home Loan Bank Stock--The carrying amounts approximate fair values because the stock may be sold back to the Federal Home Loan Bank at carrying value.
Servicer Advance Receivables--The fair value calculation for servicer advance receivables is separately performed for the following categories of advances:
| 1) | Advances related to scheduled remittances on certain securitizations for borrowers who are current | |
| 2) | Advances related to scheduled remittances on certain securitizations for borrowers who are delinquent | |
| 3) | Impound payments and loan collection costs on securitizations and other servicing arrangements |
Advances on scheduled remittances on certain securitizations approximate their book value for borrowers who are current, as the funds expended are generally repaid by the mortgagors in a matter of days. For advances on scheduled remittances on certain securitizations where the borrowers are delinquent, the expected repayments are anticipated to occur generally within twelve months, although a portion of such advances may be repaid over the term of the underlying loans, and have been discounted utilizing the Company's cost of funds. Impound payments and loan collection costs on securitizations and other servicing arrangements are also generally recovered within twelve months, and have been discounted utilizing the Company's costs of funds.
Purchased Mortgage Servicing Rights--The fair value of MSRs is determined by estimating the present value of expected future cash flows, using a discount rate that is considered commensurate with the risks involved. The amounts and timing of the cash flows are estimated after considering various economic factors including prepayment speeds, delinquency and default assumptions.
Service Fees Receivable and Receivables from Other Loan Servicers--The carrying amounts of service fees receivable and receivables from other loan servicers approximate fair value as the amounts are generally recovered on a monthly basis.
Deposits--The fair values of deposits are estimated based on the type of deposit products. Demand accounts, which include passbook and transaction accounts, are presumed to have equal book and fair values, since the interest rates paid on these accounts are based on prevailing market rates. The estimated fair values of time deposits are determined by discounting the cash flows of settlements of deposits having similar maturities and rates, utilizing a yield curve that approximated the prevailing rates offered to depositors as of the reporting date.
Short-Term Borrowings--The carrying amounts of short-term borrowings approximate fair value due to the short-term nature of these instruments.
FHLB Advances--The carrying value of FHLB advances maturing within one year approximates fair value. The fair value of FHLB advances with maturities greater than one year is estimated using rates currently offered for borrowings and advances of similar maturities.
Long-term Investment Financing--The carrying value of the Company's long-term investment financing is a reasonable approximation of fair value, as these borrowings have remaining maturities of approximately one year and bear interest at prevailing market rates.
Off-Balance-Sheet Liabilities--The fair values of interest-rate swaps are estimated at the net present value of the future payable, based on the current spread, discounted at a current rate. Fair values of off-balance-sheet commitments to lend are estimated based on deferred fees associated with such commitments, which are immaterial as of the reporting date.
The fair value estimates presented herein are based on pertinent information available to management as of each reporting date. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented herein.
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 FBBH. The Bank is engaged in a wholesale banking business focused primarily on small-balance commercial and multi-family real estate lending and acquisitions of securities. The primary source of liquidity for the Bank's acquisitions and originations is wholesale certificates of deposit, retail deposits, FHLB advances, and, to a lesser extent, short-term credit facilities. The Bank is a federally chartered savings bank and is regulated by the OTS.
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"). WCC conducts a full-service mortgage and consumer loan servicing business, specializing in the servicing of labor-intensive mortgage pools requiring expertise in loss mitigation and/or investor reporting. WFC operates an investment and co-investment business with institutional investors where such investments (1) align the Company's interests with those of such institutional investors and (2) provide operating leverage for the servicing operations of WCC. The Company's Specialty Servicing and Finance Operations' funding sources consist primarily of internal liquidity, commercial bank financing, institutional lenders and co-investors under debt service repayment terms which generally parallel the schedule of anticipated cash flows of the underlying collateral.
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.
Segment data for the years ended December 31, 2001 and 2000, the seven months ended December 31, 1999, and the five months ended May 31, 1999 are as follows:
Year Ended December 31, 2001
---------------------------------------------------------
Specialty
Servicing Holding
Banking and Finance Company Total
------------ ------------ ------------ ------------
Interest income ....................................... $ 51,901 $ 5,305 $ 310 $ 57,516
Interest expense ...................................... 34,472 1,358 (143) 35,687
------------ ------------ ------------ ------------
Net interest income ................................... 17,429 3,947 453 21,829
Recapture of loan losses .............................. (1,730) (54) -- (1,784)
------------ ------------ ------------ ------------
Net interest income after recapture of loan losses .... 19,159 4,001 453 23,613
Other income .......................................... 9,227 20,095 379 29,701
Other expense ......................................... 15,845 25,804 3,700 45,349
------------ ------------ ------------ ------------
Income (loss) before minority interest and taxes ...... 12,541 (1,708) (2,868) 7,965
Minority interest ..................................... -- -- 647 647
------------ ------------ ------------ ------------
Income (loss) before taxes ............................ 12,541 (1,708) (2,221) 8,612
Income tax provision (benefit) ........................ 5,619 -- (2,619) 3,000
------------ ------------ ------------ ------------
Net income (loss) ..................................... $ 6,922 $ (1,708) $ 398 $ 5,612
============ ============ ============ ============
Total assets .......................................... $ 716,766 $ 70,164 $ (17,926) $ 769,004
============ ============ ============ ============
Year Ended December 31, 2000
---------------------------------------------------------
Specialty
Servicing Holding
Banking and Finance Company Total
------------ ------------ ------------ ------------
Interest income ....................................... $ 50,847 $ 4,364 $ (691) $ 54,520
Interest expense ...................................... 33,946 1,276 433 35,655
------------ ------------ ------------ ------------
Net interest income (loss) ............................ 16,901 3,088 (1,124) 18,865
(Recapture of) provision for loan losses .............. (5,800) 1,669 104 (4,027)
------------ ------------ ------------ ------------
Net interest income (loss) after (recapture of)
provision for loan losses .......................... 22,701 1,419 (1,228) 22,892
Other income .......................................... 6,744 17,199 1,602 25,545
Other expense ......................................... 21,143 22,165 (446) 42,862
------------ ------------ ------------ ------------
Income (loss) before minority interest, taxes and
extraordinary item ................................. 8,302 (3,547) 820 5,575
Minority interest ..................................... -- -- 1,203 1,203
------------ ------------ ------------ ------------
Income (loss) before taxes and extraordinary item ..... 8,302 (3,547) 2,023 6,778
Income tax provision .................................. 3,570 -- 26 3,596
------------ ------------ ------------ ------------
Income (loss) before extraordinary item ............... 4,732 (3,547) 1,997 3,182
Extraordinary item .................................... -- -- 239 239
------------ ------------ ------------ ------------
Net income (loss) ..................................... $ 4,732 $ (3,547) $ 2,236 $ 3,421
============ ============ ============ ============
Total assets .......................................... $ 646,373 $ 54,325 $ (4,648) $ 696,050
============ ============ ============ ============
Reorganized Company
-------------------
Seven Months Ended
December 31, 1999
---------------------------------------------------------
Specialty
Servicing Holding
Banking and Finance Company Total
------------ ------------ ------------ ------------
Interest income ....................................... $ 28,350 $ 7,459 $ 949 $ 36,758
Interest expense ...................................... 17,447 2,459 957 20,863
------------ ------------ ------------ ------------
Net interest income (loss) ............................ 10,903 5,000 (8) 15,895
(Recapture of) provision for loan losses .............. (1,250) 2,185 90 1,025
------------ ------------ ------------ ------------
Net interest income (loss) after (recapture
of) provision for loan losses ...................... 12,153 2,815 (98) 14,870
Other income (loss) ................................... 1,481 2,067 (1,647) 1,901
Other expense ......................................... 9,900 14,500 6,350 30,750
------------ ------------ ------------ ------------
Income (loss) before minority interest and
taxes .............................................. 3,734 (9,618) (8,095) (13,979)
Minority interest ..................................... -- -- 542 542
------------ ------------ ------------ ------------
Income (loss) before taxes ............................ 3,734 (9,618) (7,553) (13,437)
Income tax provision (benefit) ........................ 1,606 -- (952) 654
------------ ------------ ------------ ------------
Net income (loss) ..................................... $ 2,128 $ (9,618) $ (6,601) $ (14,091)
============ ============ ============ ============
Total assets .......................................... $ 566,755 $ 76,942 $ 10,821 $ 654,518
============ ============ ============ ============
Predecessor Company
-------------------
Five Months Ended
May 31, 1999
---------------------------------------------------------
Specialty
Servicing Holding
Banking and Finance Company Total
------------ ------------ ------------ ------------
Interest income ....................................... $ 17,771 $ 8,537 $ 1,557 $ 27,865
Interest expense ...................................... 11,680 4,732 6,717 23,129
------------ ------------ ------------ ------------
Net interest income (loss) ............................ 6,091 3,805 (5,160) 4,736
Provision for (recapture of) loan losses .............. -- 2,875 (178) 2,697
------------ ------------ ------------ ------------
Net interest income (loss) after provision for
(recapture of) loan losses ......................... 6,091 930 (4,982) 2,039
Other income .......................................... 4,378 6,554 2,827 13,759
Other expense ......................................... 7,778 16,437 7,159 31,374
------------ ------------ ------------ ------------
Income (loss) before reorganization items, taxes
and extraordinary item ............................. 2,691 (8,953) (9,314) (15,576)
Reorganization items .................................. -- (27,636) (24,398) (52,034)
------------ ------------ ------------ ------------
Income (loss) before taxes and extraordinary item ..... 2,691 (36,589) (33,712) (67,610)
Income tax provision (benefit) ........................ 1,357 -- (699) 658
------------ ------------ ------------ ------------
Income (loss) before extraordinary item ............... 1,334 (36,589) (33,013) (68,268)
Extraordinary item .................................... -- 78,978 146,628 225,606
------------ ------------ ------------ ------------
Net income ............................................ $ 1,334 $ 42,389 $ 113,615 $ 157,338
============ ============ ============ ============
Total assets .......................................... $ 606,954 $ 125,893 $ 54,440 $ 787,287
============ ============ ============ ============
Quarters Ended
---------------------------------------------------------
December 31, September 30, June 30, March 31,
2001 2001 2001 2001
------------ ------------ ------------ ------------
Interest income ......................................... $ 12,699 $ 15,535 $ 14,348 $ 14,934
Interest expense ........................................ 7,870 9,305 9,758 8,754
------------ ------------ ------------ ------------
Net interest income ..................................... 4,829 6,230 4,590 6,180
Provision for (recapture of) loan losses ................ 13 (2,082) 135 150
------------ ------------ ------------ ------------
Net interest income after provision for (recapture of)
loan losses .......................................... 4,816 8,312 4,455 6,030
Other income ............................................ 4,084 6,143 12,158 7,316
Other expense ........................................... 10,977 9,498 12,679 12,195
------------ ------------ ------------ ------------
(Loss) income before minority interest and taxes ........ (2,077) 4,957 3,934 1,151
Minority interest ....................................... 727 (94) 574 (560)
------------ ------------ ------------ ------------
(Loss) income before taxes .............................. (1,350) 4,863 4,508 591
Income tax (benefit) provision .......................... (1,051) 1,955 1,965 131
------------ ------------ ------------ ------------
Net (loss) income ....................................... $ (299) $ 2,908 $ 2,543 $ 460
============ ============ ============ ============
(Loss) earnings per share - basic........................ $ (0.01) $ 0.14 $ 0.13 $ 0.02
(Loss) earnings per share - diluted...................... $ (0.01) $ 0.14 $ 0.12 $ 0.02
Quarters Ended
---------------------------------------------------------
December 31, September 30, June 30, March 31,
2000 2000 2000 2000
------------ ------------ ------------ ------------ ------------ ------------- ------------- -------
Interest income ......................................... $ 13,673 $ 14,291 $ 14,088 $ 12,468
Interest expense ........................................ 9,994 9,321 9,031 7,309
------------ ------------ ------------ ------------
Net interest income ..................................... 3,679 4,970 5,057 5,159
Provision for (recapture of) for loan losses ............ 200 (1,131) (1,700) (1,396)
------------ ------------ ------------ ------------
Net interest income after provision for (recapture of)
loan losses .......................................... 3,479 6,101 6,757 6,555
Other income ............................................ 6,592 7,401 5,427 6,125
Other expense ........................................... 10,386 11,264 10,225 10,987
------------ ------------ ------------ ------------
(Loss) income before minority interest, taxes and
extraordinary item ................................... (315) 2,238 1,959 1,693
Minority interest ....................................... (7) 614 95 501
------------ ------------ ------------ ------------
(Loss) income before taxes and extraordinary item ....... (322) 2,852 2,054 2,194
Income tax provision .................................... 453 1,238 929 976
------------ ------------ ------------ ------------
(Loss) income before extraordinary item ................. (775) 1,614 1,125 1,218
Extraordinary item ...................................... -- 239 -- --
------------ ------------ ------------ ------------
Net (loss) income ....................................... $ (775) $ 1,853 $ 1,125 $ 1,218
============ ============ ============ ============
Basic and diluted (loss) earnings per share.............. $ (0.04) $ 0.09 $ 0.06 $ 0.06
============ ============ ============ ============
December 31,
-------------------------
2001 2000
----------- -----------
ASSETS
Cash and cash equivalents..................................................... $ 1,600 $ 255
Investment in subsidiaries.................................................... 96,063 88,721
Prepaid expenses and other assets............................................. 16,226 6,089
----------- -----------
$ 113,889 $ 95,065
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities........................................ $ 3,977 $ 2,594
Due to affiliates, net........................................................ 18,492 5,876
----------- -----------
Total liabilities................................................. 22,469 8,470
Stockholders' equity ......................................................... 91,420 86,595
----------- -----------
$ 113,889 $ 95,065
=========== ===========
Year Ended December 31,
--------------------------------------
2001 2000 1999
----------- ---------- -----------
Interest income............................................................... $ 275 $ 66 $ 1,144
Interest expense.............................................................. 46 454 18,197
----------- ---------- -----------
Net interest income (expense)................................................. 229 (388) (17,053)
Non-interest income (loss).................................................... 150 3,150 (2,441)
Non-interest expense.......................................................... 4,360 1,606 13,934
----------- ---------- -----------
(Loss) income before income tax (benefit) provision, equity in earnings
of subsidiaries, and extraordinary item.................................... (3,981) 1,156 (33,428)
Income tax (benefit) provision................................................ (2,618) 495 (968)
Equity in earnings of subsidiaries............................................ 6,975 2,521 25,536
Extraordinary item............................................................ -- 239 150,171
----------- ---------- -----------
Net income.................................................................... $ 5,612 $ 3,421 $ 143,247
=========== ========== ===========
Year Ended December 31,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $ 5,612 $ 3,421 $ 143,247
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Market valuation losses and impairments .............................. -- -- 2,770
Amortization and accretion of discounts .............................. -- 89 88
Loss on sale of mortgage backed securities available for sale ........ -- -- 110
Tax effect from utilization of net operating loss carryforward ....... 4,183 3,974 --
Equity in earnings of subsidiaries ................................... (6,975) (2,521) (25,536)
Reorganization items:
Write-off of unamortized debt issuance costs ...................... -- -- 11,319
Gain on extinguishment of debt .................................... -- -- (150,171)
Other ................................................................ -- -- (414)
Change in:
Prepaid expenses and other assets ................................. (5,637) (4,852) 16,824
Accounts payable and other liabilities ............................ 1,383 (3,577) 5,621
Due to affiliate, net ............................................. 12,453 5,635 (4,680)
------------ ------------ ------------
Net cash provided by (used in) operating activities ............ 11,019 2,169 (822)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayment of mortgage-backed securities available for sale . -- -- 228
Proceeds from sale of mortgage-backed securities, available for sale . -- -- 11,298
Dividend received from subsidiary .................................... -- -- 385
Net investment in subsidiaries ....................................... -- (230) (250)
------------ ------------ ------------
Net cash (used in) provided by investing activities ............ -- (230) 11,661
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short term borrowings .................................. -- -- 2,241
Repayments of short term borrowings .................................. -- (2,474) (13,964)
Issuance of common stock ............................................. 331 -- --
Purchase of treasury stock ........................................... (10,005) -- --
------------ ------------ ------------
Net cash used in financing activities ........................ (9,674) (2,474) (11,723)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................... 1,345 (535) (884)
CASH AND CASH EQUIVALENTS:
Beginning of year .................................................... 255 790 1,674
------------ ------------ ------------
End of year .......................................................... $ 1,600 $ 255 $ 790
============ ============ ============
NONCASH REORGANIZATION ITEMS:
Cancellation of old common stock ..................................... -- -- $ 114,856
Issuance of new common stock in exchange for
Notes payable and accrued interest thereon ........................ -- -- 86,819
In January and February 2002 the Company issued a total of approximately $7.7 million in 8% convertible subordinated debentures due December 15, 2005. The debentures were issued in a private placement to certain of the Company's directors. Commencing in July 2002, the debentures will be convertible at $2.40 per share and, at the option of the Company, will be redeemable (if certain conditions are satisfied) at a premium, decreasing to par over the subsequent nine-month period.
The proceeds from this issuance provided the majority of the financing for the Company's purchase, on December 31, 2001, of a total of 4,168,854 shares of its common stock from entities affiliated with American Express Financial Advisors Inc. (collectively, "AXP"). These shares represented AXP's entire interest in the Company's common stock, or approximately 21% of the total WFSG shares previously outstanding. The purchase price for the shares was approximately $10.0 million, or $2.40 per share.
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf on March 22, 2002 by the undersigned, thereunto duly authorized.
| WILSHIRE FINANCIAL SERVICES GROUP INC. |
| By: | /s/ STEPHEN P. GLENNON |
| Stephen P. Glennon | |
| Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 22, 2002 by the following persons on behalf of the Registrant and in the capacities indicated.
| Signature | Title |
| /s/ LARRY B. FAIGIN | Chairman of the Board | |
| Larry B. Faigin | ||
| /s/ STEPHEN P. GLENNON | Chief Executive Officer and Director | |
| Stephen P. Glennon | ||
| /s/ BRUCE A. WEINSTEIN | Executive Vice President, Chief Financial Officer and Director | |
| Bruce A. Weinstein | ||
| /s/ KENT M. GARDNER | Vice President and Corporate Controller | |
| Kent M. Gardner | ||
| /s/ HOWARD AMSTER | Director | |
| Howard Amster | ||
| /s/ ROBERT M. DEUTSCHMAN | Director | |
| Robert M. Deutschman | ||
| /s/ PETER S. FISHMAN | Director | |
| Peter S. Fishman | ||
| /s/ ROBERT H. KANNER | Director | |
| Robert H. Kanner | ||
| /s/ EDMUND M. KAUFMAN | Director | |
| Edmund M. Kaufman | ||
| /s/ DANIEL A. MARKEE | Director | |
| Daniel A. Markee |
The following exhibits are filed as part of this report.
| 2.1 | Solicitation and Disclosure Statement dated February 1, 1999 (incorporated by reference to the Company’s current report on Form 8-K dated February 8, 1999). |
| 2.2 | Form of Plan of Reorganization (incorporated by reference to the Company’s current report on form 8-K dated February 8, 1999). |
| ‡3.1 | Certificate of Incorporation |
| 3.2 | Amended and Restated By-laws (incorporated by reference to the Company’s Report on Form 10-K dated March 30, 2001) |
| ±4.1 | Debenture Purchase Agreements between Wilshire Financial Services Group Inc. and Robert H. Kanner et al., dated December 28, 2001 |
| ±4.2 | 8% Convertible Subordinated Debentures due December 15, 2005 |
| *10.1 | Employment Agreement dated March 20, 2002 between the Company and Stephen P. Glennon |
| *10.2 | Employment Agreement dated March 12, 2001 between the Company and Joseph W. Kiley III, as modified on December 19, 2001 |
| *10.3 | Stock Purchase Agreement dated December 28, 2001 between the Company and entities affiliated with American Express Financial Advisors, Inc. |
| 10.15 | Amended and Restated 1999 Equity Participation Plan dated January 31, 2001 (incorporated by reference to the Company’s Report on Form 10-K dated March 30, 2001) |
| 10.22 | Stock Option Agreement dated January 27, 2000 between the Company and Stephen P. Glennon (incorporated by reference to the Company's Report on Form 10-K dated March 30, 2001) |
| 10.23 | Incentive Stock Option Agreement dated February 29, 2000 between the Company and Stephen P. Glennon (incorporated by reference to the Company's Report on Form 10-K dated March 30, 2001) |
| 10.24 | Wilshire Financial Services Group Inc. Change In Control Plan (incorporated by reference to the Company's Report on Form 10-K dated March 30, 2001) |
| *21.1 | Subsidiaries |
| *23 | Consent of Experts |
* Filed herewith
‡ 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 January 7, 2002.