(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002
[ ] Transitional Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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.) |
| 14523 SW Millikan Way, Suite 200, Beaverton, OR | 97005 |
| (Address of principal executive offices) | (Zip Code) |
(503) 223-5600
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
| Class | Outstanding at October 31, 2002 |
| Common Stock, par value $.01 per share | 18,152,995 shares |
PART I. FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited):
Consolidated Statements of Financial Condition........................3
Consolidated Statements of Operations.................................4
Consolidated Statements of Stockholders' Equity.......................5
Consolidated Statements of Cash Flows.................................6
Notes to Interim Condensed Consolidated Financial Statements..........8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................18
Item 3. Quantitative and Qualitative Disclosures About Market Risk............32
Item 4. Controls and Procedures...............................................34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................35
Item 2. Changes in Securities.................................................35
Item 3. Defaults Upon Senior Securities.......................................35
Item 4. Submission of Matters to a Vote of Security Holders...................36
Item 5. Other Information.....................................................36
Item 6. Exhibits and Reports on Form 8-K......................................36
Signatures......................................................................37
Certifications..................................................................38
September 30, December 31,
2002 2001
------------ ------------
ASSETS
Cash and cash equivalents ................................................................ $ 43,081 $ 39,974
Government agency mortgage-backed securities available for sale, at fair value ........... 204,790 64,377
AAA mortgage-backed securities available for sale, at fair value ......................... 62,059 51,436
Other mortgage-backed securities available for sale, at fair value ....................... 3,056 3,727
Investment securities available for sale, at fair value .................................. 11,936 8,000
Loans, net of allowance for loan losses of $7,982 and $8,384 ............................. 459,270 526,070
Discounted loans, net of allowance for loan losses of $40,568 and $45,413 ................ 7,647 15,309
Stock in Federal Home Loan Bank of San Francisco, at cost ................................ 10,675 9,475
Real estate owned, net ................................................................... 1,588 731
Leasehold improvements and equipment, net ................................................ 3,376 3,198
Accrued interest receivable .............................................................. 4,244 4,190
Servicer advance receivables, net ........................................................ 15,851 18,266
Service fees receivable .................................................................. 2,801 3,100
Purchased mortgage servicing rights ...................................................... 4,999 8,473
Receivables from other loan servicers .................................................... 473 1,788
Intangible assets, net ................................................................... 3,766 3,960
Prepaid expenses and other assets ........................................................ 7,273 7,966
------------ ------------
TOTAL ........................................................................ $ 846,885 $ 770,040
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing deposits ....................................................... $ 4,179 $ 2,794
Interest-bearing deposits .......................................................... 414,087 436,675
Short-term borrowings .............................................................. 66,539 9,970
Accounts payable and other liabilities ............................................. 14,753 15,417
FHLB advances ...................................................................... 213,500 189,500
Long-term investment financing ..................................................... 5,679 14,474
Trust preferred subordinated debt .................................................. 20,000 --
Investor participation liability ................................................... 1,169 528
------------ ------------
Total liabilities ............................................................ 739,906 669,358
------------ ------------
MINORITY INTEREST ........................................................................ 9,948 9,262
COMMITMENTS AND CONTINGENCIES (NOTE 3)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, 0 shares
outstanding ..................................................................... -- --
Common stock, $0.01 par value, 90,000,000 shares authorized, 23,779,207
and 20,349,458 shares issued (including treasury shares of 5,626,212 and
4,168,854) ...................................................................... 113,486 105,530
Treasury stock, 5,626,212 and 4,168,854 shares, at cost ............................ (15,106) (10,005)
Accumulated deficit ................................................................ (4,638) (5,058)
Accumulated other comprehensive income, net ........................................ 3,289 953
------------ ------------
Total stockholders' equity ................................................... 97,031 91,420
------------ ------------
TOTAL ........................................................................ $ 846,885 $ 770,040
============ ============
See notes to unaudited interim condensed consolidated financial statements
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Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
INTEREST INCOME:
Loans ................................................... $ 9,226 $ 13,552 $ 29,709 $ 39,975
Mortgage-backed securities .............................. 4,256 1,119 9,661 2,980
Securities and federal funds sold ....................... 274 813 914 1,996
------------ ------------ ------------ ------------
Total interest income ...................................... 13,756 15,484 40,284 44,951
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Deposits ................................................ 3,810 6,580 12,160 19,915
Borrowings .............................................. 3,523 2,725 10,028 7,906
------------ ------------ ------------ ------------
Total interest expense .................................. 7,333 9,305 22,188 27,821
------------ ------------ ------------ ------------
NET INTEREST INCOME ................................................ 6,423 6,179 18,096 17,130
PROVISION FOR (RECAPTURE OF) LOSSES ON LOANS ....................... 136 (2,082) 372 (1,797)
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR
(RECAPTURE OF) LOSSES ON LOANS ................................. 6,287 8,261 17,724 18,927
------------ ------------ ------------ ------------
OTHER INCOME:
Servicing income ........................................ 6,917 5,011 18,463 13,062
Loan fees and charges ................................... 32 57 103 1,922
Real estate owned, net .................................. (45) 85 (156) (92)
Bankcard income, net .................................... -- -- -- 2,286
Gain on sale of loans ................................... 25 14 2,505 1,518
Gain (loss) on sale of securities ....................... 1,490 -- 1,428 (262)
Market valuation losses and impairments ................. (2,238) -- (3,611) --
Gain on sale of Bankcard Operations ..................... -- -- -- 4,997
Investor participation interest ......................... (20) (173) (1,565) (882)
Other, net .............................................. 155 1,025 1,361 2,073
------------ ------------ ------------ ------------
Total other income ...................................... 6,316 6,019 18,528 24,622
------------ ------------ ------------ ------------
OTHER EXPENSES:
Compensation and employee benefits ...................... 6,279 5,065 18,097 19,246
Professional services ................................... 879 1,488 3,697 4,695
Occupancy ............................................... 677 477 1,759 1,523
FDIC insurance premiums ................................. 107 101 316 587
Data processing ......................................... 247 314 879 1,158
Communication ........................................... 276 329 878 1,052
Insurance ............................................... 316 264 870 805
Corporate travel and development ........................ 74 101 243 346
Depreciation ............................................ 486 436 1,345 1,355
Amortization of intangibles ............................. 65 122 194 515
Postage and courier expense ............................. 247 227 767 719
Provision for litigation claims ......................... -- -- 3,600 --
Other general and administrative expenses ............... 1,363 399 2,641 1,506
------------ ------------ ------------ ------------
Total other expenses .................................... 11,016 9,323 35,286 33,507
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST AND
INCOME TAXES ................................................. 1,587 4,957 966 10,042
Minority interest .................................................. (561) (94) (686) (80)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES ......................................... 1,026 4,863 280 9,962
INCOME TAX PROVISION (BENEFIT) ..................................... 159 1,955 (140) 4,051
------------ ------------ ------------ ------------
NET INCOME ......................................................... $ 867 $ 2,908 $ 420 $ 5,911
============ ============ ============ ============
Earnings per share - basic.......................................... $ 0.05 $ 0.14 $ 0.02 $ 0.29
Earnings per share - diluted........................................ $ 0.04 $ 0.14 $ 0.02 $ 0.28
Weighted average shares outstanding - basic......................... 18,000,489 20,166,009 16,799,210 20,097,872
Weighted average shares outstanding - diluted....................... 20,016,196 21,174,107 18,550,728 21,166,751
See notes to unaudited interim condensed consolidated financial statements
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Accumulated
Preferred Stock Common Stock Treasury Stock Other
--------------- ---------------------- ---------------------- Accumulated Comprehensive
Shares Amount Shares Amount Shares Amount Deficit Income Total
------ ------- ----------- --------- ---------- ---------- ----------- ------------- --------
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(1) ...... 204 204
---------
Total comprehensive income... 5,816
Tax benefit from utilization
of pre-reorganizational
Net Operating Losses....... 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
Comprehensive income:
Net income................. 420 420
Unrealized holding gains
on available for sale
securities - net of tax
expense of $1,761 (2).... 2,336 2,336
---------
Total comprehensive income... 2,756
Exercise of stock options.... 33,333 40 40
Conversion of subordinated
debentures................. 3,396,416 7,690 7,690
Receipt of income tax refund
related to
pre-reorganizational
income (Note 4)............ 226 226
Treasury stock acquired...... (1,457,358) (5,101) (5,101)
------ ------- ----------- -------- ----------- ---------- ----------- ------------- ---------
BALANCE, September 30, 2002.. -- $ -- 23,779,207 $113,486 (5,626,212) $ (15,106) $ (4,638) $ 3,289 $ 97,031
====== ======= =========== ======== =========== ========== =========== ============= =========
_________
(1) Includes reclassification adjustment for gain included in net income of $176, net of tax expense of $127.
(2) Includes reclassification adjustment for loss included in net income of $16, net of tax benefit of $12.
See notes to unaudited interim condensed consolidated financial statements
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Nine Months Ended
September 30,
---------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................. $ 420 $ 5,911
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for (recapture of) losses on loans .......................... 372 (1,797)
Provision for losses on real estate owned ............................. 33 15
Valuation allowance for mortgage servicing rights ..................... 577 795
Market valuation losses and impairments ............................... 3,611 --
Depreciation and amortization ......................................... 1,539 1,870
Tax effect from utilization of net operating loss carryforward ........ -- 3,746
Loss on sale of real estate owned ..................................... 102 62
Gain on sale of loans ................................................. (2,505) (1,518)
(Gain) loss on sale of securities ..................................... (1,428) 262
Loss on disposal of equipment ......................................... 43 44
Gain on sale of mortgage servicing rights ............................. -- (414)
Amortization of discounts and deferred fees ........................... 2,556 507
Amortization of mortgage servicing rights ............................. 2,642 4,532
Federal Home Loan Bank stock dividends ................................ (399) (110)
Minority interest ..................................................... 686 80
Change in:
Servicer advance receivables .......................................... 2,415 1,538
Service fees receivable ............................................... 299 (912)
Accrued interest receivable ........................................... (54) (18)
Receivables from other loan servicers ................................. 1,315 565
Prepaid expenses and other assets ..................................... 907 (2,446)
Accounts payable and other liabilities ................................ (2,303) 329
Investor participation liability ...................................... 641 499
------------ ------------
Net cash provided by operating activities ....................... 11,469 13,540
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of loans ..................................................... (12,556) (150,137)
Proceeds from sale of loans ........................................... -- 32,101
Loan repayments ....................................................... 146,433 179,636
Loan originations ..................................................... (67,251) (50,800)
Purchase of discounted loans .......................................... (10) (14,825)
Proceeds from sale of discounted loans ................................ 7,395 6,893
Purchase of mortgage-backed securities available for sale ............. (254,233) (6,343)
Proceeds from sale of mortgage-backed securities available for sale ... 71,462 1,271
Repayment of mortgage-backed securities available for sale ............ 31,703 22,545
Purchase of investment securities available for sale .................. (13,731) --
Proceeds from sale of investment securities available for sale ........ 10,599 --
Proceeds from sale of real estate owned ............................... 740 2,582
Purchase of FHLB stock ................................................ (801) (1,113)
Purchases of leasehold improvements and equipment ..................... (1,585) (1,081)
Proceeds from sale of leasehold improvements and equipment ............ 18 126
Purchase of mortgage servicing rights ................................. (80) (11,745)
Proceeds from sale of mortgage servicing rights ....................... 335 1,207
------------ ------------
Net cash (used in) provided by investing activities ............. (81,562) 10,317
------------ ------------
See notes to unaudited interim condensed consolidated financial statements
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Nine Months Ended
September 30,
---------------------------
2002 2001
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits ................................... $ (21,203) $ 7,827
Proceeds from FHLB advances ........................................... 94,000 20,000
Repayments of FHLB advances ........................................... (70,000) (13,000)
Net increase (decrease) in short-term borrowings ...................... 56,569 (5,793)
Proceeds from long-term financing ..................................... 2,444 19,189
Repayment of long-term financing ...................................... (11,239) (4,329)
Issuance of convertible subordinated debentures ....................... 7,690 --
Issuance of trust preferred subordinated debt ......................... 20,000 --
Issuance of common stock pursuant to exercise of stock options ........ 40 196
Purchase of treasury stock ............................................ (5,101) --
------------ ------------
Net cash provided by financing activities ....................... 73,200 24,090
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...................................... 3,107 47,947
CASH AND CASH EQUIVALENTS:
Beginning of period ................................................... 39,974 9,516
------------ ------------
End of period ......................................................... $ 43,081 $ 57,463
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--Cash paid for:
Interest .............................................................. $ 20,780 $ 23,554
Income taxes .......................................................... 473 625
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned acquired in settlement of loans ........ 1,732 1,645
NONCASH FINANCING ACTIVITIES:
Conversion of subordinated debentures into common stock ............... 7,690 --
See notes to unaudited interim condensed consolidated financial statements
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The accompanying interim condensed consolidated financial statements of Wilshire Financial Services Group Inc. and its subsidiaries (“WFSG” or the “Company”) are unaudited and should be read in conjunction with the 2001 Annual Report on Form 10-K. A summary of the Company’s significant accounting policies is set forth in Note 1 to the Consolidated Financial Statements in the 2001 Annual Report on Form 10-K.
In the opinion of management, all adjustments, other than the adjustments described below, generally comprised of normal recurring accruals necessary for fair presentation of the interim condensed consolidated financial statements, have been included and all intercompany accounts and transactions have been eliminated in consolidation. Operating results for the nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts and results could differ from those estimates.
Certain reclassifications of 2001 amounts were made in order to conform to the 2002 presentation, none of which affect previously reported net income.
On May 13, 2002, the Company entered into an agreement to resolve all issues with all of the plaintiffs in litigation arising from the financial collapse of Capital Consultants LLC (“CCL”). The settlement agreement also provided for the Company to enter into a purchase agreement to purchase the 49.99% minority interest in the Company’s subsidiary, Wilshire Credit Corporation (“WCC”). On June 19, 2002, the settlement agreement and agreement to purchase the minority interest in WCC were approved by the Federal District Court for the State of Oregon. The execution of the settlement agreement does not affect WFSG’s complete denial of all such claims. The Company has substantially completed all of its obligations under the settlement, including the purchase of the WCC stock subsequent to quarter-end.
Under the settlement agreement, the claimants release the Company and all of its subsidiaries, as well as their present and former officers and directors, from all liability. The legal actions are to be dismissed after the plaintiffs complete various requirements which will entitle them to disbursement of the settlement proceeds which are not being held in trust as described below. The settlement agreement also includes provisions to protect the Company in any future legal proceedings which the claimants may pursue against other parties.
The principal terms of the settlement provide for the Company, certain other parties and their respective insurers to pay to the claimants $29.5 million plus a share of the proceeds from a sale of real property. A portion of these funds are held in trust to protect the Company and other parties against potential residual claims which might arise from claimants’ actions against other non-settling parties. The Company funded its $4.5 million portion of the settlement on July 11, 2002 (Note 5—Significant Transactions).
On October 10, 2002, pursuant to the settlement agreement, the Company purchased the 49.99% minority interest in WCC from the receiver for CCL for $10.5 million. As a result of this purchase, WFSG now owns 100% of WCC. In addition, the liquidation bond associated with this minority interest, which would have entitled the receiver to a $19.3 million preference upon liquidation of WCC and the right to convert such interest into WFSG’s common stock, was cancelled (Note 12—Subsequent Events).
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The Company’s cash cost of the settlement and stock acquisition totaled approximately $15 million plus a share of the proceeds from the above-mentioned sale of real property. For the nine-month period ended September 30, 2002, the Company recorded charges of $3.6 million in connection with the settlement and minority interest acquisition and approximately $1.9 million in legal fees relating to the settlement and to the defense costs of some of its former executives. In addition, the Company recorded approximately $0.55 million in legal fees and expenses, net of insurance reimbursement, associated with finalizing and implementing this settlement. The settlement is expected to eliminate most of the Company’s future costs arising from the financial collapse of CCL. However, the Company does expect to incur additional expenses in connection with legal costs for prior officers arising from the events that gave rise to the litigation. Such costs were approximately $0.4 million and $1.3 million, respectively, for the quarter and nine months ended September 30, 2002.
At September 30, 2002, the Company’s banking subsidiary, First Bank of Beverly Hills, F.S.B. (“FBBH” or the “Bank”), had outstanding commitments to fund $17.0 million in new mortgage loans.
The Company may be required to make payments under indemnification agreements for additional defense costs (related to the events that gave rise to the previously-discussed litigation) on behalf of certain individuals.
The Company files consolidated federal income tax returns with its eligible subsidiaries. For tax years through the year ended December 31, 2001, WCC was not eligible to be included in WFSG’s consolidated federal income tax return because it did not meet the required ownership threshold of 80% (the Company’s economic interest was 50.01%). As a result of the October 2002 purchase of WCC’s minority interest described above, WCC will be included in the Company’s consolidated tax return for the remaining portion of the 2002 tax year since WFSG now owns 100% of WCC.
The Company recorded a current net income tax benefit of approximately $0.1 million for the nine months ended September 30, 2002. During the first quarter of 2002, the Company determined that it was due a refund of approximately $0.6 million in federal income taxes pursuant to the filing of amended tax returns for the years 1998-2000. In accordance with Accounting Principles Board Opinion No. 28, the Company will recognize the benefit of approximately $0.4 million of such refund relating to WFSG’s post-reorganizational period over the full year ending December 31, 2002 through a reduction in its overall effective tax rate for the year. Approximately $0.2 million of the refund relates to the Company’s pre-reorganizational period and has been reflected as a direct increase to stockholders’ equity. Deferred taxes are discussed below.
Deferred tax assets and liabilities represent the tax effect of future deductible or taxable amounts. They are attributable to carryforwards, such as net operating losses, capital losses, and temporary timing differences between amounts that have been recognized in the financial statements and amounts that have been recognized in the income tax returns. On an annual basis, the Company evaluates its net deferred tax asset and records decreases (increases) as a deferred tax provision (benefit) in the consolidated statement of operations.
The Company established a valuation allowance against the net deferred tax asset at its restructuring date (June 10, 1999) as there was not presumptive evidence at that time that it was more likely than not that the deferred tax asset would be realized. As these pre-reorganization tax benefits are realized from reductions in the valuation allowance, the tax effect is recorded as an increase to stockholders’ equity in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (“SOP 90-7”), and not as a tax benefit in the statement of operations. The maximum pre-reorganization tax benefit available to the Company at September 30, 2002 was approximately $54.7 million. This amount reflects a reduction for cancellation of indebtedness income that was excluded from taxable income in 1999.
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In June 2002 the Company experienced a change in control as set forth by Section 382 of the Internal Revenue Code. In general, a change in control is defined as a greater than 50% ownership shift as measured over the prior three-year period. The change in control will limit the Company’s ability to utilize certain tax attributes, such as net operating loss and capital loss carryforwards, in future periods. The Company is currently in the process of finalizing calculations relating to the application of the annual limitation and quantifying the annual limitation on its tax attributes.
At December 31, 2001, WCC had net operating loss carryforwards of approximately $0.9 million that may be available to offset taxable income. Subsequent to WFSG’s acquisition of the minority interest in WCC, any tax attributes of WCC may be subject to limitation as set forth by the Internal Revenue Code and applicable regulations. The Company is in the process of calculating any tax attributes available and will reflect any such limitation in the financial statements as appropriate.
During the quarter and nine-month periods ended September 30, 2002, the Bank purchased approximately $122 million and $268 million, respectively, of mortgage-backed and other investment securities. The Bank sold $61 million of its securities in the third quarter of 2002 for a net gain of approximately $1.5 million.
On July 11, 2002, the Company’s wholly-owned subsidiary, Wilshire Acquisitions Corporation (“WAC”), issued $20 million principal amount of thirty-year floating rate junior subordinated debt in connection with its participation in a multi-issuer private placement of trust pass through securities, issued by TPref Funding I, Ltd. The terms of the long-term borrowing provide for the payment of interest quarterly at a rate equal to the then previous three-month LIBOR rate plus 3.65% (approximately 5.5% initially) and for the repayment of principal at maturity. The borrowing may be prepaid after July 11, 2007 (in whole or in part) at par. A total of $5.1 million of the proceeds was used to repurchase Company stock as discussed below. The remaining proceeds of the borrowing were used primarily to fund the cash costs associated with the Company’s purchase of the minority interest in WCC (Note 12 – Subsequent Events) and for general corporate purposes. The purchase of the minority interest in WCC is pursuant to the litigation settlement agreement which WFSG entered into on May 13, 2002, as discussed in Note 2.
On July 11, 2002, the Company funded its $4.5 million portion of the settlement agreement discussed in Note 2. The amount was paid to a trust established by the plaintiffs in the litigation.
On July 15, 2002, the Company converted its $7.69 million in 8% convertible subordinated debentures due December 15, 2005 into common stock pursuant to elections of the holders of the debentures. Pursuant to this conversion, a total of 3,396,416 shares of WFSG common stock were issued to the holders of the debentures, and the debentures were canceled. The debentures were issued in January and February 2002 to provide the majority of the financing for the Company’s December 2001 repurchase of approximately 4.2 million shares of its common stock.
On July 24, 2002, the Company repurchased a total of 1,457,358 shares of its common stock from Thrivent Financial for Lutherans (“TFL,” formerly known as Lutheran Brotherhood). These shares represented TFL’s entire interest in the Company’s common stock, or approximately 7% of the total WFSG shares previously outstanding. The purchase price for the shares was approximately $5.1 million, or $3.50 per share.
In March and August 2002, the Bank purchased a total of $13.1 million in interest-only federal agency-guaranteed mortgage-backed securities (I/Os) to hedge the Bank’s exposure to possible increases in interest rates. The Bank classified the I/Os as available-for-sale in its portfolio of investment securities. As a result of the continuing decline in interest rates, the fair market value of the I/Os declined significantly, and the Bank recorded write-downs on these securities of $2.2 million and $3.6 million, respectively, for the quarter and nine-month periods ended September 30, 2002. Since this impairment was deemed to be other than temporary, the write-downs are reflected as “Market valuation losses and impairments” in the accompanying statements of operations, and not as a direct reduction to stockholders’ equity. In August 2002, the Bank sold two of the I/Os for an additional loss of approximately $0.1 million. This loss on sale is included in the net gain on sales of securities in the accompanying consolidated statements of operations. Subsequent to quarter-end, the remaining I/O substantially recovered in value, and the Bank sold the security for a realized gain of approximately $0.8 million (see Note 12—Subsequent Events).
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In September 2002 the Company moved its corporate headquarters and loan servicing operations from various locations in Portland, Oregon to a single facility in Beaverton, Oregon. The Company has entered into a 10-year lease for the rental of the Beaverton facility. For the quarter ended September 30, 2002, the Company incurred approximately $0.9 million in relocation-related expenses and charges which are included in “Other general and administrative expenses” in the accompanying statements of operations. In accordance with Emerging Issues Task Force Issue No. 88-10, these expenses include a one-time charge of $0.8 million which represents WFSG’s remaining lease obligation at the abandoned Portland facilities, net of estimated sublease income.
Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and potentially dilutive stock options outstanding during the period. Following is a reconciliation of the number of shares used in the calculation of basic and diluted earnings per share for the quarters and nine-month periods ended September 30, 2002 and 2001.
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income ................................................. $ 867 $ 2,908 $ 420 $ 5,911
============ ============ ============ ============
Weighted average number of common shares
outstanding - basic ..................................... 18,000,489 20,166,009 16,799,210 20,097,872
------------ ------------ ------------ ------------
Net effect of dilutive stock options - based on
treasury stock method ................................... 2,015,707 1,008,098 1,751,518 1,068,879
------------ ------------ ------------ ------------
Weighted average number of common
shares outstanding - diluted ............................ 20,016,196 21,174,107 18,550,728 21,166,751
------------ ------------ ------------ ------------
Net income per share - basic............................ $ 0.05 $ 0.14 $ 0.02 $ 0.29
============ ============ ============ ============
Net income per share - diluted.......................... $ 0.04 $ 0.14 $ 0.02 $ 0.28
============ ============ ============ ============
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:
| o | Banking Operations—Through FBBH, the Company conducts a banking business focused primarily on specialty-niche products, including small-balance commercial and multi-family real estate lending and acquisitions of mortgage-backed securities. The primary sources of liquidity for the Bank’s acquisitions and originations are wholesale certificates of deposit, retail deposits, FHLB advances and repurchase agreements. The Bank is a federally chartered savings bank and is regulated by the Office of Thrift Supervision (“OTS”). At September 30, 2002, FBBH had total assets of approximately $789.7 million. |
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| 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. (Subsequent to quarter-end, the Company purchased the minority interest in WCC and, as a result, now owns 100% of WCC. See Note 12 – Subsequent Events.) Through its wholly-owned subsidiary, Wilshire Funding Corporation (“WFC”), the Company conducts 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. Together, WCC and WFC are referred to as “Specialty Servicing and Finance Operations”. As of September 30, 2002, the Company’s Specialty Servicing and Finance Operations serviced approximately $4.0 billion principal balance of residential and commercial mortgage pools for approximately 600 individual and institutional investors and government agencies. 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. |
| o | 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. Primary sources of liquidity include funds available from the Company’s wholly-owned non-bank subsidiaries, proceeds from WAC’s issuance of junior subordinated debt (see Note 5), and payments received from FBBH pursuant to a tax allocation agreement between the Company and the Bank. However, the OTS has 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. |
- 12 -
Segment data for the quarters ended September 30, 2002 and 2001 are as follows:
Three Months Ended September 30, 2002
---------------------------------------------------------
Holding
Specialty Company and
Servicing and Miscellaneous
Banking Finance Operations Total
------------ ------------ ------------ ------------
Interest income ................................................. $ 11,600 $ 2,090 $ 66 $ 13,756
Interest expense ................................................ 6,856 206 271 7,333
------------ ------------ ------------ ------------
Net interest income (expense) ................................... 4,744 1,884 (205) 6,423
Provision for loan losses ....................................... -- 136 -- 136
------------ ------------ ------------ ------------
Net interest income (expense) after provision for loan losses ... 4,744 1,748 (205) 6,287
Realized and unrealized (losses) gains .......................... (748) 25 -- (723)
Servicing income ................................................ 130 7,192 (405) 6,917
Other (loss) income ............................................. (90) (129) 341 122
Compensation and benefits ....................................... (1,035) (4,896) (347) (6,278)
Other expense ................................................... (1,304) (1,566) (1,868) (4,738)
------------ ------------ ------------ ------------
Income (loss) before minority interest and taxes ................ 1,697 2,374 (2,484) 1,587
Minority interest ............................................... -- -- (561) (561)
------------ ------------ ------------ ------------
Income (loss) before taxes ...................................... 1,697 2,374 (3,045) 1,026
Income tax provision (benefit) .................................. 717 -- (558) 159
------------ ------------ ------------ ------------
Net income (loss) ............................................... $ 980 $ 2,374 $ (2,487) $ 867
============ ============ ============ ============
Total assets .................................................... $ 789,674 $ 55,032 $ 2,179 $ 846,885
============ ============ ============ ============
Three Months Ended September 30, 2001
---------------------------------------------------------
Holding
Specialty Company and
Servicing and Miscellaneous
Banking Finance Operations Total
------------ ------------ ------------ ------------
Interest income .............................................. $ 13,414 $ 1,935 $ 135 $ 15,484
Interest expense ............................................. 8,858 480 (33) 9,305
------------ ------------ ------------ ------------
Net interest income .......................................... 4,556 1,455 168 6,179
Recapture of loan losses ..................................... (2,030) (52) -- (2,082)
------------ ------------ ------------ ------------
Net interest income after recapture of loan losses ........... 6,586 1,507 168 8,261
Realized gains on asset sales ................................ -- 14 -- 14
Servicing income ............................................. 403 5,308 (700) 5,011
Other income ................................................. 313 105 577 995
Compensation and benefits .................................... (998) (3,802) (265) (5,065)
Other expense ................................................ (1,265) (2,208) (786) (4,259)
------------ ------------ ------------ ------------
Income (loss) before minority interest and taxes ............. 5,039 924 (1,006) 4,957
Minority interest ............................................ -- -- (94) (94)
------------ ------------ ------------ ------------
Income (loss) before taxes ................................... 5,039 924 (1,100) 4,863
Income tax provision (benefit) ............................... 2,257 -- (302) 1,955
------------ ------------ ------------ ------------
Net income (loss) ............................................ $ 2,782 $ 924 $ (798) $ 2,908
============ ============ ============ ============
Total assets ................................................. $ 667,140 $ 68,297 $ (3,863) $ 731,574
============ ============ ============ ============
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Segment data for the nine months ended September 30, 2002 and 2001 are as follows:
Nine Months Ended September 30, 2002
---------------------------------------------------------
Holding
Specialty Company and
Servicing and Miscellaneous
Banking Finance Operations Total
------------ ------------ ------------ ------------
Interest income ................................................. $ 34,686 $ 5,211 $ 387 $ 40,284
Interest expense ................................................ 20,852 881 455 22,188
------------ ------------ ------------ ------------
Net interest income (expense) ................................... 13,834 4,330 (68) 18,096
Provision for loan losses ....................................... -- 372 -- 372
------------ ------------ ------------ ------------
Net interest income (expense) after provision for loan losses ... 13,834 3,958 (68) 17,724
Realized and unrealized (losses) gains .......................... (2,183) 2,505 -- 322
Servicing income ................................................ 501 19,463 (1,501) 18,463
Other (loss) income ............................................. (255) (1,244) 1,242 (257)
Compensation and benefits ....................................... (2,915) (14,128) (1,053) (18,096)
Other expense ................................................... (4,004) (6,247) (6,939) (17,190)
------------ ------------ ------------ ------------
Income (loss) before minority interest and taxes ................ 4,978 4,307 (8,319) 966
Minority interest ............................................... -- -- (686) (686)
------------ ------------ ------------ ------------
Income (loss) before taxes ...................................... 4,978 4,307 (9,005) 280
Income tax provision (benefit) .................................. 2,066 -- (2,206) (140)
------------ ------------ ------------ ------------
Net income (loss) ............................................... $ 2,912 $ 4,307 $ (6,799) $ 420
============ ============ ============ ============
Total assets .................................................... $ 789,674 $ 55,032 $ 2,179 $ 846,885
============ ============ ============ ============
Nine Months Ended September 30, 2001
---------------------------------------------------------
Holding
Specialty Company and
Servicing and Miscellaneous
Banking Finance Operations Total
------------ ------------ ------------ ------------
Interest income ................................................. $ 40,621 $ 4,080 $ 250 $ 44,951
Interest expense ................................................ 26,981 916 (76) 27,821
------------ ------------ ------------ ------------
Net interest income ............................................. 13,640 3,164 326 17,130
Recapture of loan losses ........................................ (1,730) (67) -- (1,797)
------------ ------------ ------------ ------------
Net interest income after recapture of loan losses .............. 15,370 3,231 326 18,927
Realized gains on asset sales ................................... 712 544 -- 1,256
Servicing income ................................................ 606 14,217 (1,761) 13,062
Other income .................................................... 7,628 418 2,258 10,304
Compensation and benefits ....................................... (7,179) (11,225) (842) (19,246)
Other expense ................................................... (6,199) (6,330) (1,732) (14,261)
------------ ------------ ------------ ------------
Income (loss) before minority interest and taxes ................ 10,938 855 (1,751) 10,042
Minority interest ............................................... -- -- (80) (80)
------------ ------------ ------------ ------------
Income (loss) before taxes ...................................... 10,938 855 (1,831) 9,962
Income tax provision (benefit) .................................. 4,794 -- (743) 4,051
------------ ------------ ------------ ------------
Net income (loss) ............................................... $ 6,144 $ 855 $ (1,088) $ 5,911
============ ============ ============ ============
Total assets .................................................... $ 667,140 $ 68,297 $ (3,863) $ 731,574
============ ============ ============ ============
- 14 -
In June 2000, FBBH acquired a branch location and recorded goodwill of $3,393 and a core deposit intangible of $1,294. Through December 31, 2001, the goodwill was amortized on a straight-line basis over an estimated useful life of 15 years. In January 2002 the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” and, as a result, no longer amortizes goodwill, but tests it at least annually for impairment. The Company will continue to amortize the core deposit intangible over an estimated useful life of 5 years.
Following is a summary of the Company's intangible assets:
Intangible Assets
As of September 30, 2002
--------------------------------
Gross Carrying Accumulated
Amount Amortization
-------------- --------------
Goodwill............................ $ 3,393 $ (339)
Core deposit intangible............. 1,294 (582)
-------------- --------------
Total............................. $ 4,687 $ (921)
============== ==============
For the quarter and nine months ended September 30, 2002 the Company recorded amortization expense of $65 and $194, respectively, related to the core deposit intangible. The estimated amortization of the September 30, 2002 balance for the remainder of 2002 and the five succeeding fiscal years is $64 (2002), $259 (2003), $259 (2004), $130 (2005), and none thereafter.
There were no changes in the carrying value of goodwill during the quarter or nine months ended September 30, 2002. The Company tested goodwill for impairment in March 2002 and determined that no impairment valuation was required.
The Company’s purchased mortgage servicing rights (MSRs) totaled approximately $5.0 million at September 30, 2002, $8.5 million at December 31, 2001, and $10.2 million at September 30, 2001. Amortization expense for MSRs was $0.8 million and $2.6 million, respectively, for the quarter and nine months ended September 30, 2002, and $1.9 million and $4.5 million, respectively, for the quarter and nine months ended September 30, 2001. The estimated amortization expense of the September 30, 2002 balance of MSRs for the remainder of 2002 and the five succeeding fiscal years is $0.6 million (2002), $2.0 million (2003), $1.4 million (2004), $1.0 million (2005), $0.7 million (2006) and $0.5 million (2007). The estimated amortization expense is based only on currently held MSRs and on current information regarding loan payments and prepayments. Actual results may vary as a result of changes in the rate of prepayments and other market factors.
SFAS No. 142 requires disclosure of what reported net income would have been in all periods presented exclusive of amortization expense (including any related tax effects) recognized in those periods related to intangible assets that are no longer being amortized, any deferred credit related to an excess over cost, equity method goodwill, and changes in amortization periods for intangible assets that will continue to be amortized (including any related tax effects). The Company’s amortization expense and net income for the quarters and nine-month periods ended September 30, 2002 and 2001 were as follows (net of income taxes):
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Amortization of goodwill ................................... $ -- $ (40) $ -- $ (166)
Amortization of deferred acquisition costs ................. -- (1) -- (31)
Amortization of core deposit intangible .................... (43) (38) (127) (114)
Amortization of MSRs ....................................... (508) (1,146) (1,733) (2,673)
Net income ................................................. $ 867 $ 2,908 $ 420 $ 5,911
- 15 -
Below is a reconciliation of reported net income to adjusted net income (including per-share amounts) showing the pro-forma effect if SFAS No. 142 had been adopted in the prior year:
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Reported net income ........................................ $ 867 $ 2,908 $ 420 $ 5,911
Add back: Amortization of goodwill ......................... -- 40 -- 166
Add back: Amortization of deferred acquisition costs ....... -- 1 -- 31
------------ ------------ ------------ ------------
Adjusted net income ........................................ $ 867 $ 2,949 $ 420 $ 6,108
============ ============ ============ ============
Basic earnings per share:
Reported net income ........................................ $ 0.05 $ 0.14 $ 0.02 $ 0.29
Amortization of goodwill ................................... -- -- -- 0.01
Amortization of deferred acquisition costs ................. -- -- -- --
------------ ------------ ------------ ------------
Adjusted net income ........................................ $ 0.05 $ 0.14 $ 0.02 $ 0.30
============ ============ ============ ============
Diluted earnings per share:
Reported net income ........................................ $ 0.04 $ 0.14 $ 0.02 $ 0.28
Amortization of goodwill ................................... -- -- -- 0.01
Amortization of deferred acquisition costs ................. -- -- -- --
------------ ------------ ------------ ------------
Adjusted net income ........................................ $ 0.04 $ 0.14 $ 0.02 $ 0.29
============ ============ ============ ============
In October 2002, the Financial Accounting Standards Board issued SFAS No. 147, “Acquisitions of Certain Financial Institutions.” SFAS No. 147 provides that the excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired in a business combination represents goodwill that should be accounted for under SFAS No. 142, “Goodwill and Other Intangible Assets.” Thus, the specialized accounting guidance in paragraph 5 of SFAS No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions,” will not apply after September 30, 2002. In addition, SFAS No. 147 amends the scope of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” to include certain long-term customer-relationship intangible assets recognized in an acquisition of a financial institution. The Company does not believe that SFAS No. 147 will have a material effect on its financial condition or results of operations.
On October 10, 2002, the Company purchased the 49.99% minority interest in WCC from the receiver for CCL for a purchase price of $10.5 million. As a result of this purchase, WFSG now owns 100% of WCC. In addition, the liquidation bond associated with this minority interest, which would have entitled the receiver to a $19.3 million preference upon liquidation of WCC and the right to convert such interest into WFSG’s common stock, was cancelled. The purchase of the minority interest and cancellation of the liquidation bond were completed pursuant to a settlement agreement entered into on May 13, 2002 between WFSG and certain other parties to resolve litigation which arose from the financial collapse of CCL (Note 2—Settlement of Litigation). The execution of the settlement agreement does not affect the Company’s denial of all related claims.
In October 2002, as a result of improving market conditions, the Bank sold its remaining I/O security for a realized gain of approximately $0.8 million. Previously, the Bank had recorded other than temporary impairment charges related to this I/O totaling approximately $1.2 million, which are included in “Market valuation losses and impairments” in the accompanying consolidated statements of operations for the quarter and nine months ended September 30, 2002.
- 16 -
In November 2002 the Bank entered into a $35 million notional principal amount interest rate swap agreement which is designated as a hedge against fluctuations in interest rates. The agreement will become effective in December 2002 and mature in December 2004. Pursuant to the agreement, the Bank will pay interest each quarter at a fixed rate of 2.2% and receive quarterly interest payments at the three-month LIBOR rate.
- 17 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the Interim Condensed 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 (WCC will be wholly owned for periods subsequent to September 30, 2002), unless the context indicates otherwise.
Wilshire Financial Services Group Inc., a financial services company, conducts (1) community banking operations (referred to herein as our “Banking Operations”) through our wholly-owned subsidiary, First Bank of Beverly Hills, F.S.B. (“FBBH” or the “Bank”); and (2) specialized mortgage loan servicing and investment operations through our subsidiaries, Wilshire Credit Corporation (“WCC”) and Wilshire Funding Corporation (“WFC”). Together, WCC and WFC are referred to as our “Specialty Servicing and Finance Operations.” WFSG’s administrative, investment and loan servicing headquarters are located in Beaverton, Oregon. The Bank is headquartered in Calabasas, California and conducts its branch banking activities in Beverly Hills, California.
RESULTS OF OPERATIONS--QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2001
Our consolidated net income for the quarter ended September 30, 2002 was approximately $0.9 million, or $0.05 per basic share, compared with $2.9 million, or $0.14 per basic share, for the quarter ended September 30, 2001. The decrease in income was primarily attributable to the following factors: (1) the declining interest-rate environment adversely affected the Bank’s investments in certain interest-only securities, resulting in a $2.2 million valuation write-down during the quarter (the Bank has since disposed of all such investments); (2) the Company incurred $0.9 million in expenses and charges related to the relocation of its corporate headquarters and servicing operations from Portland, Oregon to Beaverton, Oregon; and (3) in the third quarter of 2001, the Bank recovered approximately $2.0 million in loan loss reserves due to the settlement and payoff of a troubled loan. These decreases were partially offset by the growth in net servicing income in our Specialty Servicing and Finance Operations, and also by an increase in net interest income.
For the nine months ended September 30, 2002, our net income was approximately $0.4 million, or $0.02 per basic share, compared with $5.9 million, or $0.29 per basic share, for the nine months ended September 30, 2001. Our results for the first nine months of 2002 reflect the settlement agreement reached on May 13, 2002 to resolve litigation arising from events prior to our June 1999 restructuring: we have recorded $3.6 million in provision for estimated charges and losses, approximately $1.3 million in legal fees which were advanced to some of the Company’s former executives for their defense costs related to such litigation, and $0.55 million in estimated legal fees and expenses associated with finalizing and implementing this settlement, net of reimbursements from insurance. The Company believes that this settlement agreement resolves all of the outstanding issues pertaining to this litigation, and that any ongoing expenses associated with the settlement and its implementation will not have a material impact on WFSG’s financial condition or results of operations. However, the Company does expect to incur additional expenses in connection with legal costs for prior officers arising from the events that gave rise to the litigation. Our results for the current year to date also include $3.6 million in valuation write-downs related to the Bank’s interest-only securities and the $0.9 million in relocation-related expenses discussed above.
The income for the nine-month period ended September 30, 2001 reflects a net gain of $4.7 million on the Bank’s June 2001 sales of its Bankcard processing and Mortgage Banking divisions. Excluding the effects of the litigation settlement in the current year and the one-time net gain on the sales of the Bankcard processing and Mortgage Banking divisions in the prior year (and the operating results of these divisions prior to their sale), our pre-tax operating income from recurring items was approximately $5.7 million for the nine months ended September 30, 2002, compared with $4.8 million for the corresponding 2001 period. This increase in our core operating results was primarily due to an increase in servicing income, higher gains on loan and securities sales, and an increase in net interest income, partially offset by the impairment write-downs discussed above.
- 18 -
Subsequent to September 30, 2002, the Company purchased the 49.99% minority interest in WCC, and thus now owns 100% of WCC’s net assets and servicing operations. In addition, in October 2002 the Bank sold its remaining interest-only security for a realized gain of approximately $0.8 million.
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.
FIRST BANK OF BEVERLY HILLS, F.S.B.
The following table compares operating income before taxes for FBBH for the quarters and nine-month periods ended September 30, 2002 and 2001 (dollars in thousands):
Quarter Ended September 30, Nine Months Ended September 30,
------------------------------------ ------------------------------------
Increase Increase
2002 2001 (Decrease) 2002 2001 (Decrease)
---------- ---------- ---------- ---------- ---------- ----------
Interest income ............................. $ 11,600 $ 13,414 $ (1,814) $ 34,686 $ 40,621 $ (5,935)
Interest expense ............................ 6,856 8,858 (2,002) 20,852 26,981 (6,129)
---------- ---------- ---------- ---------- ---------- ----------
Net interest income ......................... 4,744 4,556 188 13,834 13,640 194
Recapture of loan losses .................... -- (2,030) 2,030 -- (1,730) (1,730)
---------- ---------- ---------- ---------- ---------- ----------
Net interest income after recapture of
loan losses .............................. 4,744 6,586 (1,842) 13,834 15,370 (1,536)
Realized and unrealized (losses) gains....... (748) -- (748) (2,183) 712 (2,895)
Other income ................................ 40 716 (676) 246 8,234 (7,988)
Compensation and benefits ................... 1,035 998 37 2,915 7,179 (4,264)
Other expense ............................... 1,304 1,265 39 4,004 6,199 (2,195)
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes ......................... $ 1,697 $ 5,039 $ (3,342) $ 4,978 $ 10,938 $ (5,960)
========== ========== ========== ========== ========== ==========
Net Interest Income
The
Bank’s net interest income was approximately $4.7 million for the quarter
ended September 30, 2002, compared with approximately $4.6 million for the
quarter ended September 30, 2001. For the nine months ended September 30, 2002,
the Bank’s net interest income was approximately $13.8 million, compared
with $13.6 million for the nine months ended September 30, 2001. Average
interest-earning assets increased by $47 million in the first nine months of
2002 over the first nine months of 2001, and interest-bearing liabilities
increased by $37 million over the same periods. Partially offsetting this net
increase in interest-earning assets was a 2-basis point drop in interest spread
from the first nine months of 2001 to the first nine months of 2002.
Throughout 2001 and most of 2002, the declining interest rate environment has impacted the Bank’s interest-earning assets to a greater extent than its interest-bearing liabilities, as a result of more rapid repayments and repricings of its assets. However, this trend appears to have slowed in recent months. The Bank’s net interest spread increased from 1.94% for the third quarter of 2001 to 2.09% for the third quarter of 2002, and the interest margin decreased slightly, from 2.56% to 2.52% for the same periods. For the nine-month periods ended September 30, 2001 and 2002, interest spread decreased from 2.09% to 2.07%, respectively, and interest margin decreased from 2.68% to 2.54% for the same periods.
The Bank’s interest income on loans decreased by $3.9 million from the third quarter of 2001 to the third quarter of 2002 and by $10.6 million from the nine months ended September 30, 2001 to the nine months ended September 30, 2002, as the drop in interest rates has triggered both a repricing of FBBH’s variable-rate loans and an acceleration of prepayments on its fixed-rate loans. These prepayments have exceeded the Bank’s $80 million in loan originations and purchases in the current year. Consequently, the average loan balance declined by $93.9 million from the nine months ended September 30, 2001 to the nine months ended September 30, 2002, and the yield decreased by 128 basis points, from 8.45% to 7.17%, for the same periods.
- 19 -
Interest income on investment securities increased by $2.7 million and $5.9 million, respectively, from the quarter and nine months ended September 30, 2001 to the corresponding 2002 periods, primarily as a result of purchases of $268 million in AAA-rated mortgage-backed and other investment securities during the first nine months of 2002. However, the Bank’s average yield on these investments decreased by 164 basis points from the first three quarters of 2001 to the first three quarters of 2002, partially offsetting the higher asset volume. The Bank incurred net interest expense of $0.3 million on two interest-only federal agency mortgage-backed securities due to accelerated amortization resulting from prepayments. The Bank also recorded impairment write-downs on these securities of $2.2 million and $3.6 million, respectively, for the quarter and nine months ended September 30, 2002, which are reflected as “Market valuation losses and impairments” in the accompanying consolidated statements of operations. The Bank sold two of these securities in the third quarter for an additional loss of $0.1 million, and sold its remaining interest-only security in October 2002 for a realized gain of $0.8 million.
FBBH’s interest expense on deposits decreased by $2.8 million and $7.8 million, respectively, from the quarter and nine months ended September 30, 2001 to the quarter and nine months ended September 30, 2002. These decreases were a result of declines in both the average balance and average rates paid. The Bank raised significant amounts of certificates of deposit throughout 2001 to fund certain loan acquisitions in the prior year but has since permitted the run-off of the higher-rate CDs to reduce its overall cost of funds. As a result, the average balance of deposits decreased by $82 million from the third quarter of 2001 to the third quarter of 2002, and by $56 million from the first nine months of 2001 to the corresponding 2002 period. In addition, the average rate paid on deposits declined by 161 basis points (from 5.22% to 3.61%) from the third quarter of 2001 to the third quarter of 2002, and by 172 basis points (from 5.57% to 3.85%) from the first nine months of 2001 to the first nine months of 2002.
The Bank’s interest expense on borrowings increased by approximately $0.8 million and $1.6 million, respectively, from the quarter and nine months ended September 30, 2001 to the quarter and nine months ended September 30, 2002. This increase was due to a $123 million increase in the total average balance of borrowings for the quarterly periods and a $93 million increase for the nine-month periods. The proceeds from these borrowings were used primarily to fund the purchases of mortgage-backed and other securities described above and, to a lesser extent, to replace matured certificates of deposit. The increase in the volume of borrowings was partially offset by a decrease in the weighted-average rate paid from 6.50% for the third quarter of 2001 to 4.61% for the third quarter of 2002, and from 6.44% for the first nine months of 2001 to 4.84% for the first nine months of 2002. The decrease in market interest rates primarily affected the cost of the Bank’s short-term repurchase agreements only; substantially all of the Bank’s FHLB Advances had fixed rates of interest and thus were unaffected by rate changes.
Provision for Loan Losses
Based
on its quarterly evaluation of the adequacy of its loan loss reserves, the Bank
has not recorded a provision for loan losses in the current year. For the
quarter and nine months ended September 30, 2001, the Bank recorded net
recaptures of provisions of $2.0 million and $1.7 million, respectively,
resulting from the settlement and payoff of a troubled loan in September 2001.
Realized and Unrealized (Losses) Gains
The
Bank incurred approximately $0.7 million in net losses on its investment
securities for the quarter ended September 30, 2002. These losses were due to
write-downs in market value totaling $2.2 million related to three interest-only
mortgage-backed securities (I/Os), partially offset by $1.5 million in net
realized gains on sales of mortgage-backed and treasury securities. The Bank
purchased a total of $13.1 million in I/Os in the current year as a hedge
against interest rate fluctuations. However, as rates declined, the value of the
I/Os was adversely affected. Since this decline in market value was deemed to be
other than temporary, the write-downs have been reflected as “Market
valuation losses and impairments” in the accompanying statements of
operations, and not as a direct reduction to stockholders’ equity. The Bank
sold two of the I/Os in the third quarter for a realized loss of $0.1 million
and, subsequent to quarter-end, sold the remaining I/O for a gain of
approximately $0.8 million.
For the nine months ended September 30, 2002, the Bank’s net losses on its investment securities totaled approximately $2.2 million, compared with net gains of $0.7 million for the nine months ended September 30, 2001. The loss in the 2002 period was due to $3.6 million in valuation write-downs of the I/O securities, partially offset by $1.4 million in net gains on sales of other investment securities. The Bank’s gains in the 2001 period reflect a $0.7 million gain on sale of $31.4 million in loans in June 2001.
- 20 -
Other Income
The
Bank’s other income was less than $0.1 million for the quarter ended
September 30, 2002, compared with $0.7 million for the quarter ended September
30, 2001. This decrease was largely due to the Bank’s receipt of
approximately $0.4 million in fees and other income in the 2001 period, pursuant
to the settlement and payoff of a troubled loan.
For the nine months ended September 30, 2002, the Bank’s other income was approximately $0.2 million, compared with $8.2 million for the nine months ended September 30, 2001. The Bank’s year-to-date other income for the 2001 period reflects a net gain of $4.7 million on the sales of the Bank’s Bankcard processing division and its mortgage loan origination subsidiary, George Elkins Mortgage Banking (GEMB), in addition to the revenues from these divisions prior to their sale.
Compensation and Benefits
The
Bank’s compensation and benefits totaled $1.0 million for the quarter ended
September 30, 2002, compared with a similar amount for the quarter ended
September 30, 2001. For the nine months ended September 30, 2002, compensation
and benefits were $2.9 million, compared with $7.2 million for the corresponding
2001 period. The year-to-date decrease was largely due to the Bank’s sales
of its Bankcard processing operations and GEMB in June 2001. Prior to their
sale, these two divisions incurred a total of approximately $2.8 million in
compensation and related expenses in the prior year. In addition, compensation
and employee benefits decreased further by approximately $1.6 million primarily
as a result of severance pay and bonuses for some of the Bank’s former
executives in early 2001.
Other Expenses
The
Bank’s other expenses were approximately $1.3 million for the quarter ended
September 30, 2002, compared with a similar result for the quarter ended
September 30, 2001. For the nine months ended September 30, 2002, the
Bank’s other expenses totaled approximately $4.0 million, compared with
$6.2 million for the nine months ended September 30, 2001. This decrease was
again primarily due to the sales of the Bankcard processing division and GEMB,
which incurred approximately $0.9 million in general and administrative expenses
prior to their sale in June 2001. In addition, the Bank’s professional
services decreased further by approximately $0.7 million due to consulting fees
associated with conversions of the Bank’s accounting and deposit systems in
the 2001 period, and also due to legal fees incurred in 2001 in connection with
litigation that has since been resolved in the Bank’s favor. The Bank
realized cost savings in several other general and administrative expense
categories through its efforts to reduce corporate overhead.
Following are condensed statements of financial condition for FBBH as of September 30, 2002 and December 31, 2001:
September 30, December 31,
2002 2001
------------ ------------
(Dollars in thousands)
ASSETS:
Cash and cash equivalents ............................................ $ 22,290 $ 37,939
Mortgage-backed securities available for sale, at fair value ......... 267,166 116,173
Other investment securities available for sale, at fair value ........ 11,936 8,000
Loans, net ........................................................... 459,454 526,338
Real estate owned, net ............................................... 1,347 429
Receivables from loan servicers ...................................... 213 1,114
Other assets ......................................................... 27,268 27,809
------------ ------------
Total assets ..................................................... $ 789,674 $ 717,802
============ ============
LIABILITIES:
Deposits ............................................................. $ 418,266 $ 439,469
Short-term borrowings ................................................ 66,539 --
FHLB advances ........................................................ 213,500 189,500
Other liabilities .................................................... 16,956 20,239
------------ ------------
Total liabilities ................................................ 715,261 649,208
NET WORTH ............................................................ 74,413 68,594
------------ ------------
Total liabilities and net worth .................................. $ 789,674 $ 717,802
============ ============
- 21 -
Mortgage-Backed and Other Securities Available for Sale. The Bank’s total portfolio of mortgage-backed securities available for sale increased by $151.0 million during the nine months ended September 30, 2002, primarily as a result of purchases of $254 million which were funded with the Bank’s excess liquidity and a one-year repurchase agreement facility. In addition, the Bank recorded unrealized holding gains of approximately $3.9 million on its securities portfolio during the first nine months of 2002. These increases were partially offset by sales during the year of approximately $70.7 million, principal repayments of $30.9 million, and market valuation write-downs of $3.6 million.
Included in the Bank’s $254 million in purchases were $13.1 million in interest-only federal agency mortgage-backed securities (I/Os) to hedge the Bank’s exposure to rising interest rates. However, as rates continued to decline, the actual and estimated future prepayments on the assets underlying the I/Os accelerated, resulting in a deterioration in their market value. As a result, the Bank recorded write-downs on the I/Os totaling $3.6 in the second and third quarters of 2002. Since the decline in the market value of the I/Os was considered other than temporary, this write-down is reflected as “Market valuation losses and impairments” in the consolidated statements of operations, and not as a direct reduction to the Bank’s net worth. As discussed previously, the Bank sold two of its I/Os in the third quarter and sold its remaining I/O in October 2002.
The Bank’s portfolio of treasury and other investment securities available for sale increased approximately $3.9 million during the nine-month period ended September 30, 2002 primarily due to an investment in a Community Reinvestment Act (CRA)-qualified mutual fund. In January 2002 the Bank purchased approximately $10.0 million in treasuries and sold this investment in the third quarter for a gain of $0.6 million.
Loans, net. The Bank’s portfolio of loans, net of discounts and allowances, decreased by approximately $66.9 million during the nine months ended September 30, 2002. This decrease is primarily attributable to principal repayments of $144.2 million resulting from the continuing decline in market rates of interest, partially offset by new loan originations of $67.2 million and a loan portfolio purchase in July 2002 of $12.6 million.
Real Estate Owned, net. The Bank’s portfolio of real estate owned, net increased by approximately $0.9 million during the nine months ended September 30, 2002, as a result of $1.4 million in new acquisitions of real estate through foreclosure, partially offset by sales of properties for proceeds of approximately $0.5 million.
Deposits. The Bank’s deposits decreased by approximately $21.2 million during the nine months ended September 30, 2002, primarily due to 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.
Short-Term Borrowings. The Bank borrowed $89.1 million in the first nine months of 2002 under a repurchase agreement to fund its purchases of mortgage-backed and other investment securities. These borrowings were partially offset by $22.6 million in repayments.
FHLB Advances. The Bank’s FHLB Advances increased by $24 million during the first three quarters of 2002 as a result of new advances of $94 million, offset by repayments of $70 million. The proceeds from these advances were used to finance the Bank’s purchases of mortgage-backed and other investment securities during the year. In September 2002, to further reduce its cost of funds in the current environment, the Bank prepaid $47 million of short-term FHLB Advances and obtained a new long-term (33-month) advance of $47 million at a fixed rate of 2.75%.
Net Worth. The Bank’s total net worth increased by approximately $5.8 million during the nine months ended September 30, 2002. In March 2002, WFSG contributed $5.5 million of capital to the Bank through the forgiveness of a portion of the Bank’s income tax liability to WFSG. In addition, the Bank earned net income for the nine months ended September 30, 2002 of $2.9 million and recorded $2.4 million in after-tax unrealized gains on available-for-sale securities. These increases in net worth were partially offset by the Bank’s redemption in June 2002 of $5.0 million of its preferred stock held by WFSG.
- 22 -
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 has 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 Bank’s regulatory capital ratios at September 30, 2002.
Amount Required
For Capital To be Categorized
Adequacy as
Actual Purposes "Well Capitalized"
--------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
--------- --------- --------- --------- --------- ----------
(Dollars in thousands)
Total Capital to Risk-Weighted Assets (Risk-Based
Capital).............................................. $ 74,659 16.0% $ 37,318 =>8.0% $ 46,648 =>10.0%
Tier 1 Capital to Risk-Weighted Assets.................... 68,818 14.8% Not Applicable 27,989 => 6.0%
Core Capital to Tangible Assets........................... 68,818 8.8% 31,448 =>4.0% 39,178 => 5.0%
Tangible Capital to Tangible Assets....................... 68,818 8.8% 11,753 =>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, Federal Home Loan Bank ("FHLB") advances, repurchase agreements, whole loan and mortgage-backed securities sales, and net interest income. In August 2002, the FHLB increased the Bank's authorized borrowing limit from 25% to 30% of the Bank's total assets as of the previous quarter-end. Liquidity in the Bank's operations is actively managed on a daily basis and periodically reviewed by the Bank's Board of Directors.
At September 30, 2002, the Bank’s cash balances totaled approximately $22.3 million, compared with $37.9 million at December 31, 2001. The decrease in cash was primarily due to purchases of mortgage-backed and other investment securities, new loan originations, and maturities of certificates of deposit during the first nine months of 2002, partially offset by principal repayments of loans and proceeds from short-term borrowings and FHLB advances.
At September 30, 2002, the Bank had approximately $370.1 million of certificates of deposit. Scheduled maturities of certificates of deposit during the 12 months ending September 30, 2003 and thereafter amounted to approximately $255.1 million and approximately $115.0 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.
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, each 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.
- 23 -
WFSG conducts its Specialty Servicing and Finance Operations through WFC, our wholly-owned investment subsidiary, and through WCC, our servicing subsidiary which was formed pursuant to our June 10, 1999 reorganization. Through September 30, 2002, WFSG was the majority owner of WCC, and has shared 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. As part of WFSG’s litigation settlement, the Company in October 2002 purchased the 49.99% minority interest and, as a result, now owns 100% of WCC. Consequently, for periods subsequent to September 30, 2002, WFSG’s financial statements will no longer contain a minority interest adjustment for WCC.
Certain of WFC’s and WCC’s activities are conducted with a lender which has participation interests in the returns generated by the assets that serve as collateral for the loans. The share of such activities held by this lender is reflected as “Investor participation interest” in the Company’s consolidated statements of operations.
The following table compares operating income before taxes of our Specialty Servicing and Finance Operations for the quarters and nine-month periods ended September 30, 2002 and 2001 (dollars in thousands).
WCC and WFC for the Quarter WCC and WFC for the Nine Months
Ended September 30, Ended September 30,
------------------------------------ ------------------------------------
Increase Increase
2002 2001 (Decrease) 2002 2001 (Decrease)
---------- ---------- ---------- ---------- ---------- ----------
Servicing income .............................. $ 7,192 $ 5,308 $ 1,884 $ 19,463 $ 14,217 $ 5,246
Interest income ............................... 2,090 1,935 155 5,211 4,080 1,131
Realized gains on sales ....................... 25 14 11 2,505 544 1,961
Other (loss) income ........................... (129) 105 (234) (1,244) 418 (1,662)
---------- ---------- ---------- ---------- ---------- ----------
Total income .............................. 9,178 7,362 1,816 25,935 19,259 6,676
---------- ---------- ---------- ---------- ---------- ----------
Interest expense .............................. 206 480 (274) 881 916 (35)
Provision for (recapture of) loan losses ...... 136 (52) 188 372 (67) 439
Compensation and benefits ..................... 4,896 3,802 1,094 14,128 11,225 2,903
Other expenses ................................ 1,566 2,208 (642) 6,247 6,330 (83)
---------- ---------- ---------- ---------- ---------- ----------
Total expenses ............................ 6,804 6,438 366 21,628 18,404 3,224
---------- ---------- ---------- ---------- ---------- ----------
Income before taxes ........................... $ 2,374 $ 924 $ 1,450 $ 4,307 $ 855 $ 3,452
========== ========== ========== ========== ========== ==========
Servicing Income
The
components of servicing income in our Specialty Servicing and Finance Operations
are reflected in the following table:
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Dollars in thousands) (Dollars in thousands)
Servicing revenue ..................................... $ 6,979 $ 5,611 $ 19,520 $ 15,618
Ancillary fees ........................................ 1,573 1,278 4,536 3,691
Amortization of mortgage servicing rights ............. (774) (1,942) (2,642) (4,531)
Valuation allowance for mortgage servicing rights ..... (156) -- (577) (795)
Custodial float ....................................... 472 1,035 1,152 1,975
Prepayment interest shortfall expense ................. (902) (674) (2,526) (1,741)
------------ ------------ ------------ ------------
Total servicing income ............................ $ 7,192 $ 5,308 $ 19,463 $ 14,217
============ ============ ============ ============
- 24 -
Total servicing income for the quarter ended September 30, 2002 was approximately $7.2 million, compared with $5.3 million for the quarter ended September 30, 2001. For the nine months ended September 30, 2002, servicing income was approximately $19.5 million, compared with $14.2 million for the nine months ended September 30, 2001. WCC’s servicing operations have grown significantly over the prior year levels, as shown by the portfolio totals in the table below, due to new contractual flow agreements and, to a lesser extent, servicing portfolio acquisitions. As a result of this continued expansion, our gross servicing revenues and ancillary fees (primarily late charges and prepayment penalties) increased by approximately 24% and 23%, respectively, from the third quarter of 2001 to the third quarter of 2002, and by approximately 25% and 23%, respectively, from the first nine months of 2001 to the first nine months of 2002.
However, the decline in mortgage interest rates throughout 2001 and 2002 has continued to have an adverse effect on our net servicing income. As interest rates have fallen, the prepayment rates on the underlying loans in our servicing portfolio have reached unusually high levels. As a result, we have recorded significant amortization expense on our mortgage servicing rights (MSRs) during the past two years, though the amortization has slowed somewhat in 2002. Our amortization of MSRs was approximately $0.8 million and $2.6 million, respectively, for the quarter and nine months ended September 30, 2002, compared with $1.9 million and $4.5 million for the corresponding 2001 periods. In addition, we recorded further valuation allowances on our MSRs of $0.2 million and $0.6 million for the third quarter and first nine months of 2002. As a result of underlying loan prepayments, we also have incurred an increase in the interest we are required to pay to securitization trusts (“prepayment interest shortfall expense”) under our servicing agreements. Further, the decline in interest rates has adversely affected our float income earned on deposit balances, which decreased by approximately $0.6 million and $0.8 million, respectively, for the quarter and nine-month periods ended September 30, 2002 as compared with the corresponding 2001 periods.
In the third quarter of 2002, WCC secured a new contract for the sub-servicing of approximately 45,000 non-performing consumer loans with an aggregate unpaid principal balance of approximately $300 million, with the servicing fee dependent on WCC’s collections. The transfer of this servicing was completed in November 2002.
The following table sets forth the composition of loans serviced by WCC by type of loan at the dates indicated.
September 30, December 31, September 30,
2002 2001 2001
------------ ------------ ------------
(Dollars in thousands)
Single-family residential .................................. $ 3,585,147 $ 3,020,267 $ 2,983,655
Multi-family residential ................................... 119,269 141,297 141,144
Commercial real estate ..................................... 223,040 192,275 187,208
Consumer and other ......................................... 77,264 90,497 93,837
------------ ------------ ------------
Total ................................................ $ 4,004,720 $ 3,444,336 $ 3,405,844
============ ============ ============
Interest Income and Interest Expense
Interest
income in our Specialty Servicing and Finance Operations was approximately $2.1
million for the third quarter of 2002, compared with $1.9 million for the third
quarter of 2001. For the nine months ended September 30, 2002, interest income
was approximately $5.2 million, compared with $4.1 million for the nine months
ended September 30, 2001. The increases for the 2002 periods were due to
increases of $0.6 million and $1.0 million, respectively, in interest on
WFC’s mortgage-backed securities. WFC received significant cash repayments
on its portfolio in the third quarter, including $0.8 million beyond carrying
value on one security.
Interest income on loans, while higher for the current year to date, declined by $0.4 million in the third quarter of 2002 compared with the corresponding 2001 period as a result of WCC’s and WFC’s sales of $10.6 million aggregate unpaid principal balance of loans in the second quarter of 2002.
Interest expense was approximately $0.2 million for the third quarter of 2002, compared with $0.5 million for the third quarter of 2001. For the nine months ended September 30, 2002, interest expense was approximately $0.9 million, compared with a similar amount for the nine months ended September 30, 2001. The decrease for the third quarter resulted from WCC’s and WFC’s repayments of borrowings in June 2002 with the proceeds from their loan sales.
- 25 -
Realized Gains on Sales
WCC’s
and WFC’s gains on sales were less than $0.1 million for the quarters ended
September 30, 2002 and 2001. For the nine months ended September 30, 2002,
realized gains on sales totaled $2.5 million, compared with $0.5 million for the
nine months ended September 30, 2001. In June 2002, WCC and WFC sold
approximately $7.3 million and $3.3 million, respectively, in unpaid principal
balance of loans for gains of $1.9 million and $0.5 million. Since these loans
were acquired with a co-investor, one-half of the total gain was shared with the
co-investor and included in “Investor participation interest” (see
“Other (Loss) Income” below). The realized gains for the nine months
ended September 30, 2001 reflect a gain of $0.8 million on a loan sale,
partially offset by a loss of $0.3 million on sales of investment securities.
Other (Loss) Income
The
components of other (loss) income in our Specialty Servicing and Finance
Operations are reflected in the following table:
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Dollars in thousands) (Dollars in thousands)
Other (loss) income:
Real estate owned, net ............................. $ (33) $ 51 $ (138) $ (159)
Investor participation interest .................... (19) (173) (1,564) (882)
Other, net ......................................... (77) 227 458 1,459
------------ ------------ ------------ ------------
Total other (loss) income ...................... $ (129) $ 105 $ (1,244) $ 418
============ ============ ============ ============
Other (Loss) Income
The
decrease in other (loss) income for the third quarter of 2002 compared with the
third quarter of 2001 was primarily due to a gain on sales of MSRs of $0.4
million in the 2001 period (included in “Other, net”). For the nine
months ended September 30, 2002, the total other loss of $1.2 million reflects
the co-investor’s share of the gains on WCC’s and WFC’s loan
sales, which is included in “Investor participation interest.” Other,
net decreased by approximately $1.0 million from the 2001 amount due to a
recovery in the 2001 period of approximately $0.8 million beyond our basis in
certain assets, and also due to the gain on sale of MSRs.
Compensation and Benefits
Compensation
and employee benefits were approximately $4.9 million for the quarter ended
September 30, 2002, compared with approximately $3.8 million for the quarter
ended September 30, 2001. For the nine months ended September 30, 2002,
compensation and employee benefits were approximately $14.1 million, compared
with $11.2 million for the nine months ended September 30, 2001. These increases
in the 2002 periods were primarily due to a significant increase in WCC’s
employee head count from 2001 to 2002, reflecting the growth in the volume of
its servicing business.
Other Expenses
Other
expenses in our Specialty Servicing and Finance Operations were approximately
$1.6 million for the quarter ended September 30, 2002, compared with $2.2
million for the quarter ended September 30, 2001. This decrease was due to a
$0.9 million decline in legal expenses for the current quarter. In September
2002, pursuant to an analysis of the legal accrual and our estimated future
expenses, we reduced by approximately $0.5 million our reserves for legal fees
in connection with the settlement of the litigation that arose from events prior
to our 1999 restructuring. In the 2001 period, in contrast, we incurred
significant legal expenses as the litigation and settlement negotiations were
proceeding.
Partially offsetting the decrease in legal expenses for the quarter was a $0.2 million increase in occupancy expense. In September 2002, as we were relocating our offices, we incurred rent expense at both our current facility in Beaverton and our former facilities in Portland.
For the nine months ended September 30, 2002, other expenses totaled $6.2 million, compared with $6.3 million for the nine months ended September 30, 2001. Our legal fees declined in the current year as a result of the reversal of accruals in the third quarter, as discussed above. However, this decrease was partially offset by increases in other expense categories. Our occupancy expense has increased by approximately $0.3 million, largely due to the doubling of rent expense for the month of September and other relocation-related costs, though we expect that our future occupancy costs will approximate those of prior periods. In addition, marketing and advertising expenses increased by approximately $0.2 million due to our increased marketing efforts, and postage expenses also increased by $0.2 million as a result of the continuing growth of our servicing operations.
- 26 -
Following are condensed statements of financial condition for our Specialty Servicing and Finance Operations as of September 30, 2002 and December 31, 2001:
September 30, December 31,
2002 2001
------------ ------------
(Dollars in thousands)
ASSETS:
Cash and cash equivalents .............................................. $ 3,590 $ 262
Mortgage-backed securities available for sale, at fair value ........... 2,738 3,367
Discounted loans, net .................................................. 7,647 15,309
Real estate owned, net ................................................. 241 302
Servicer advance receivables, net ...................................... 15,851 18,266
Purchased mortgage servicing rights, net ............................... 4,999 8,473
Intercompany receivables ............................................... 14,970 18,544
Other assets ........................................................... 4,996 5,641
------------ ------------
Total assets ....................................................... $ 55,032 $ 70,164
============ ============
LIABILITIES:
Short-term borrowings .................................................. $ -- $ 9,970
Long-term investment financing ......................................... 5,679 14,474
Other liabilities ...................................................... 7,899 8,643
------------ ------------
Total liabilities ................................................. 13,578 33,087
NET WORTH .............................................................. 41,454 37,077
------------ ------------
Total liabilities and net worth .................................... $ 55,032 $ 70,164
============ ============
Mortgage-Backed Securities Available for Sale. WFC’s portfolio of mortgage-backed securities available for sale decreased by approximately $0.6 million during the nine months ended September 30, 2002. WFC has received $0.8 million in principal repayments during 2002 on its mortgage-backed securities, one of which has been written down to a book value of zero. Any subsequent payments received related to this security are recorded directly to interest income. These decreases were partially offset by unrealized holding gains of $0.2 million. 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.
Discounted Loans, net. Discounted loans, net decreased by approximately $7.7 million from December 31, 2001 to September 30, 2002. WCC and WFC sold approximately $5.1 million in book value of loans in the second quarter of 2002 for an aggregate gain of $2.4 million (though one-half of these gains were shared with a co-investor and reported as “Investor participation interest”). In addition, the discounted loans portfolio balance decreased due to loan principal payments of $2.2 million and loan loss provisions of $0.4 million.
Servicer Advance Receivables, net. Servicer advance receivables, net decreased by approximately $2.4 million during the nine months ended September 30, 2002. This decrease resulted from recoveries by WCC of scheduled principal and interest advances on loans previously made, partially offset by new advances during the year to date.
Purchased Mortgage Servicing Rights, net. Purchased mortgage servicing rights, net (MSRs) decreased by approximately $3.5 million for the nine-month period ended September 30, 2002. The steady decline in mortgage interest rates throughout 2001 and continuing into 2002 has caused rapid prepayments of the underlying loans being serviced, which, in turn, resulted in accelerated amortization of our servicing rights. Consequently, we recorded approximately $2.6 million in amortization of MSRs and a valuation write-down of $0.6 million for the nine months ended September 30, 2002.
- 27 -
Intercompany Receivables. Intercompany receivables decreased by approximately $3.6 million from year-end 2001 to September 30, 2002. In December 2001 WFSG borrowed funds from WCC to finance the majority of the repurchase of approximately 4.2 million shares of the Company’s stock. In January 2002, WCC received settlement on this receivable from WFSG, resulting in a significant decrease in the intercompany receivable balance. This decrease has been partially offset by an ongoing transfer of funds from WFC to WFSG throughout 2002 to meet WFSG’s operating costs.
Short-Term Borrowings and Long-Term Investment Financing. Short-term borrowings and long-term investment financing in our Specialty Servicing and Finance Operations decreased by a total of approximately $18.8 million during the nine months ended September 30, 2002. In December 2001 WCC borrowed $9.2 million under one of our line of credit facilities to provide financing for WFSG’s repurchase of approximately 4.2 million shares of common stock from a shareholder. This borrowing has been repaid in full by WFSG, primarily with the proceeds from WFSG’s issuance of 8% convertible subordinated debentures. In addition, in June 2002 WCC and WFC repaid approximately $5.3 million in borrowings with proceeds from the loan sales described above.
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 September 30, 2002, liquidity in our Specialty Servicing and Finance Operations (including cash and unused borrowings under our credit facilities) totaled $22.2 million, compared with approximately $9.8 million at December 31, 2001. 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 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 September 30, 2002 we held $2.7 million of such mortgage-backed securities.
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.
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, proceeds from the July 2002 issuance of junior subordinated debt, and payments received from FBBH pursuant to a tax allocation agreement between the Company and the Bank. However, the OTS has 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.
- 28 -
The Company funded the costs of the litigation settlement described above and acquisition of the minority interest in WCC through a combination of proceeds from the subordinated debt and $5 million WFSG received from FBBH’s redemption of preferred stock.
The “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as disclosures included elsewhere in this Form 10-Q, 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:
• Mortgage-Backed and Other Investment Securities Available for Sale. The Company’s mortgage-backed and other investment securities available for sale are reported at their current fair market value. In determining current fair value, we estimate the present value of the anticipated cash flows on the securities based on certain assumptions, including the amount of future repayments, the discount rate to be used, and default rates on the loans underlying the securities. If the change in market value is considered temporary, the unrealized holding gains and losses are reported net of tax, when applicable, as a separate component of accumulated other comprehensive income in stockholders’ equity. In the event of a decline in market value, management must evaluate whether the decline is temporary in nature or other than temporary. Declines that are considered other than temporary are reflected as “Market valuation losses and impairments” in the consolidated statements of operations and not as a direct reduction to stockholders’ equity. The Company’s portfolio of mortgage-backed and other investment securities available for sale has increased throughout 2002 and currently represents more than 30% of consolidated total assets. Consequently, fluctuations in the securities’ value can have a significant impact on our financial condition and results of operations.
• 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 in its consolidated statements of operations and the carrying value of the Company’s loans on its consolidated statement of financial condition.
• 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 (MSRs), 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 carrying value of our MSRs and increases or decreases in the amortization of MSRs and valuation allowances related to MSRs.
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• Contingencies. We are party to various legal proceedings, as discussed above and in the notes to the consolidated financial statements. These matters have a degree of uncertainty associated with them. We continually assess the likely outcomes of these matters, the amounts of any ongoing costs associated with 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 also can 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.
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The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. All of the statements contained in this Quarterly Report on Form 10-Q which are not identified as historical should be considered forward-looking. In connection with certain forward-looking statements contained in this Quarterly Report on Form 10-Q and those that may be made in the future by or on behalf of the Company which are identified as forward-looking, the Company notes that there are various factors that could cause actual results to differ materially from those set forth in any such forward-looking statements. Such factors include, but are not limited to, the condition of the real estate market, interest rates, regulatory matters, the availability of pools of servicing rights and loans at acceptable prices, and the availability and conditions of financing for loan pool acquisitions, mortgage loan servicing rights and other financial assets. Accordingly, there can be no assurance that the forward-looking statements contained in this Quarterly Report on Form 10-Q will be realized or that actual results will not be significantly higher or lower. The forward-looking statements have not been audited by, examined by or subjected to agreed-upon procedures by independent accountants, and no third party has independently verified or reviewed such statements. Readers of this Quarterly Report on Form 10-Q should consider these facts in evaluating the information contained herein. The inclusion of the forward-looking statements contained in this Quarterly Report on Form 10-Q should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Quarterly Report on Form 10-Q will be achieved. In light of the foregoing, readers of this Quarterly Report on Form 10-Q are cautioned not to place undue reliance on the forward-looking statements contained herein.
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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 March and August 2002, the Bank purchased a total of $13.1 million in interest-only federal agency-guaranteed mortgage-backed securities (I/Os) in an attempt to hedge its exposure to possible interest rate increases. However, as interest rates continued to decline, the fair market value of the I/Os decreased significantly, and the Bank recorded write-downs on these securities totaling $3.6 million for the first nine months of 2002. In August 2002, the Bank sold two of the I/Os for an additional loss of approximately $0.1 million. Subsequent to September 30, 2002, the remaining I/O substantially recovered in value, and the Bank sold the security for a realized gain of approximately $0.8 million (see related discussions in Items 1 and 2 of this report). To replace the I/Os as a hedging technique, the Bank in November 2002 entered into a $35 million notional principal amount interest rate swap agreement. This agreement will become effective in December 2002 and mature in December 2004. Pursuant to the agreement, the Bank will pay interest at a fixed rate of 2.2% and receive quarterly interest payments at the three-month LIBOR rate.
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 September 30, 2002, 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.
Net Portfolio Value NPV as % of Assets
---------------------------------------- ------------------------
$ Amount $ Change % Change NPV Ratio Change
------------ ------------ ---------- ----------- ----------
Change in Rates (Dollars in thousands)
+300bp.................................... $ 86,441 $ (31,896) (27)% 10.49% (296)bp
+200bp.................................... 99,620 (18,717) (16) 11.79 (166)bp
+100bp.................................... 115,347 (2,990) (3) 13.28 (17)bp
0bp.................................... 118,337 -- -- 13.45 --
-100bp.................................... 111,816 (6,521) (6) 12.68 (77)bp
-200bp.................................... 106,741 (11,596) (10) 12.06 (139)bp
-300bp.................................... 104,325 (14,012) (12) 11.76 (169)bp
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In determining net portfolio value, Management relies upon various assumptions, including, but not limited to, prepayment speeds on the Company's assets and the discount rates to be used. We review our assumptions regularly and adjust them when it is deemed appropriate based on current and future expected market conditions. At September 30, 2002, we utilized a lower discount rate than at the previous quarter-end because we believe the lower rate represents a more typical coupon rate that could be earned on newly originated commercial and multi-family loans. As a result, our consolidated NPV increased substantially over the prior quarter under every rate-change scenario.
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.
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Evaluation of
Controls and Procedures
We
maintain a set of disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports filed under the
Securities Exchange Act of 1934, as amended (“Exchange Act”) is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. Within the 90 days prior to the date of this
report, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer (CEO) and
our Executive Vice President and Chief Financial Officer (CFO), of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 of the Exchange Act. Based on that
evaluation, our CEO and our CFO concluded that the Company’s disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company’s Exchange Act filings.
Changes in
internal controls
There
have been no significant changes in the Company’s internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of that evaluation.
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Item 1. Legal Proceedings.
On May 13, 2002, the Company entered into an agreement to resolve all issues with all of the plaintiffs in litigation arising from the financial collapse of Capital Consultants LLC (“CCL”). The settlement agreement also provided for the Company to enter into a purchase agreement to purchase the 49.99% minority interest in the Company’s subsidiary, Wilshire Credit Corporation (“WCC”). On June 19, 2002, the settlement agreement and agreement to purchase the minority interest in WCC were approved by the Federal District Court for the State of Oregon. The execution of the settlement agreement does not affect WFSG’s complete denial of all such claims. The Company has substantially completed all of its obligations under the settlement, including the purchase of the WCC stock subsequent to quarter-end.
Under the settlement agreement, the claimants release the Company and all of its subsidiaries, as well as their present and former officers and directors, from all liability. The legal actions are to be dismissed after the plaintiffs complete various requirements which will entitle them to disbursement of the settlement proceeds which are not being held in trust as described below. The settlement agreement also includes provisions to protect the Company in any future legal proceedings which the claimants may pursue against other parties.
The principal terms of the settlement provide for the Company, certain other parties and their respective insurers to pay to the claimants $29.5 million plus a share of the proceeds from a sale of real property. A portion of these funds are held in trust to protect the Company and other parties against potential residual claims which might arise from claimants’ actions against other non-settling parties. The Company funded its $4.5 million portion of the settlement on July 11, 2002.
On October 10, 2002, pursuant to the settlement agreement, the Company purchased the 49.99% minority interest in WCC from the receiver for CCL for $10.5 million. As a result of this purchase, WFSG now owns 100% of WCC. In addition, the liquidation bond associated with this minority interest, which would have entitled the receiver to a $19.3 million preference upon liquidation of WCC and the right to convert such interest into WFSG’s common stock, was cancelled.
The Company’s cash cost of the settlement and stock acquisition totaled approximately $15 million plus a share of the proceeds from the above-mentioned sale of real property. For the nine-month period ended September 30, 2002, the Company recorded charges of $3.6 million in connection with the settlement and minority interest acquisition and approximately $1.9 million in legal fees relating to the settlement and to the defense costs of some of its former executives. In addition, the Company recorded approximately $0.55 million in legal fees and expenses, net of insurance reimbursement, associated with finalizing and implementing this settlement. The settlement is expected to eliminate most of the Company’s future costs arising from the financial collapse of CCL. However, the Company does expect to incur additional expenses in connection with legal costs for prior officers arising from the events that gave rise to the litigation. Such costs were approximately $0.4 million and $1.3 million, respectively, for the quarter and nine months ended September 30, 2002.
Item 2. Changes in Securities.
| Not applicable. |
Item 3. Defaults Upon Senior Securities.
| Not applicable. |
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Item 4. Submission of Matters to a Vote of Security Holders.
| Not applicable. |
Item 5. Other Information.
| Not applicable. |
Item 6. Exhibits and Reports on Form 8-K.
| (a) | Exhibits. |
| 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350 |
| 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. §1350 |
| (b) | The following reports on Form 8-K were filed during the quarter covered by this report, and subsequently through the date of issuance: |
| Current Report on Form 8-K dated July 11, 2002, reporting the Company’s issuance of $20 million in thirty-year floating rate junior subordinated debt in connection with its participation in a multi-issuer private placement of trust pass-through securities. |
| Current Report on Form 8-K dated July 15, 2002, reporting the Company’s conversion of its $7.69 million in 8% convertible subordinated debentures into 3,396,416 shares of common stock. |
| Current Report on Form 8-K dated October 10, 2002, reporting the Company’s purchase of the 49.99% minority interest in its subsidiary, Wilshire Credit Corporation. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| WILSHIRE FINANCIAL SERVICES GROUP INC. |
Date: November 14, 2002
| By: | /s/ STEPHEN P. GLENNON |
| Stephen P. Glennon | |
| Chief Executive Officer | |
| By: | /s/ BRUCE A. WEINSTEIN |
| Bruce A. Weinstein | |
| Executive Vice President and | |
| Chief Financial Officer |
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I, Stephen P. Glennon, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Wilshire Financial Services Group Inc.; |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| Date: November 14, 2002 | /s/ STEPHEN P. GLENNON |
| Stephen P. Glennon | |
| Chief Executive Officer |
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I, Bruce A. Weinstein, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Wilshire Financial Services Group Inc.; |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
| c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): |
| a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| Date: November 14, 2002 | /s/ BRUCE A. WEINSTEIN |
| Bruce A. Weinstein | |
| Executive Vice President and | |
| Chief Financial Officer |
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