---

# SECURITIES
AND EXCHANGE COMMISSIONWashington,
D.C. 20549

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# FORM 10-Q

(Mark one)

[X]             Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2001

# or

[     ]           Transitional Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                    to

# Commission
file number 0-21845

Wilshire Financial Services Group Inc.(Exact name of registrant as specified in its charter)

|Delaware                                                       | 93-1223879                          
|-------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
|                                                               |                                     
|1776 SW Madison Street, Portland, OR                           | 97205                               
|(Address of principal executive offices)                       | (Zip Code)                          

(503) 223-5600
                                         (Registrant's telephone number, including area code)

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 [___]

# Applicable only to issuers involved in bankruptcy proceedings during the preceding five years:

Indicate by check mark whether the registrant has filed all documents and reports  required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes [ X ]        No [___]

# Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

|Class                                  | Outstanding at July 31, 2001
|-------------------------------------- | ----------------------------
|Common Stock, par value $.01 per share | 20,079,125 shares           

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# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

# INDEX

## PART I.       
FINANCIAL INFORMATION

`Item 1.  Interim Consolidated Financial Statements (Unaudited):

               Consolidated Statements of Financial Condition................................3

               Consolidated Statements of Operations.........................................4

               Consolidated Statement of Stockholders' Equity................................5

               Consolidated Statements of Cash Flows.........................................6

               Notes to Interim Consolidated Financial Statements............................8

      Item 2.  Management's Discussion and Analysis of Financial Condition
               and Results of Operations.....................................................15

      Item 3.  Quantitative and Qualitative Disclosures About Market Risk....................27

PART II. OTHER INFORMATION

      Item 1.  Legal Proceedings.............................................................29

      Item 2.  Changes in Securities.........................................................29

      Item 3.  Defaults Upon Senior Securities...............................................29

      Item 4.  Submission of Matters to a Vote of Security Holders...........................29

      Item 5.  Other Information.............................................................29

      Item 6.  Exhibits and Reports on Form 8-K..............................................29`

2

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# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

(Dollars in
thousands)

`June 30,     December 31,
                                                                                        2001           2000
                                                                                    ------------   ------------
                                      ASSETS

Cash and cash equivalents ......................................................    $    101,704   $      9,516
Mortgage-backed securities available for sale, at fair value ...................          44,214         54,138
Loans, net .....................................................................         593,758        561,876
Loans and discounted loans held for sale, net, at lower of cost or market ......          11,047         10,214
Stock in Federal Home Loan Bank of San Francisco, at cost ......................           7,725          6,615
Real estate owned, net .........................................................           2,132          1,770
Leasehold improvements and equipment, net ......................................           3,831          4,064
Accrued interest receivable ....................................................           3,447          4,133
Servicer advance receivables, net ..............................................          16,139         19,063
Service fees receivable ........................................................           2,743          2,198
Mortgage servicing rights ......................................................          13,086          4,544
Receivables from loan servicers ................................................          11,837          3,161
Prepaid expenses and other assets ..............................................          16,505         14,272
                                                                                    ------------   ------------
TOTAL ..........................................................................    $    828,168   $    695,564
                                                                                    ============   ============

     LIABILITIES & STOCKHOLDERS' EQUITY

Liabilities:
     Noninterest-bearing deposits ..............................................    $     11,934   $     10,663
     Interest-bearing deposits .................................................         537,882        424,410
     Short-term borrowings .....................................................           5,795          9,123
     FHLB advances .............................................................         139,000        132,000
     Long-term investment financing ............................................           6,682          1,634
     Accounts payable and other liabilities ....................................          24,462         21,230
     Minority interest .........................................................           9,895          9,909
     Investor participation liability ..........................................             702             --
                                                                                    ------------   ------------
        Total liabilities ......................................................         736,352        608,969
                                                                                    ------------   ------------

Commitments and Contingencies (see Note 2)

Stockholders' Equity:
     Common stock ..............................................................          98,393         96,516
     Retained deficit ..........................................................          (7,667)       (10,670)
     Accumulated other comprehensive income, net ...............................           1,090            749
                                                                                    ------------   ------------
        Total stockholders' equity .............................................          91,816         86,595
                                                                                    ------------   ------------
TOTAL ..........................................................................    $    828,168   $    695,564
                                                                                    ============   ============`

See notes to interim consolidated financial statements

3

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# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share data)

`Quarter Ended               Six Months Ended
                                                                             June 30,                      June 30,
                                                                    ---------------------------   ---------------------------
                                                                        2001           2000           2001           2000
                                                                    ------------   ------------   ------------   ------------
INTEREST INCOME:
         Loans ..................................................   $     12,566   $     12,571   $     26,238   $     23,332
         Mortgage-backed securities .............................            997          1,047          1,861          2,196
         Securities and federal funds sold ......................            785            470          1,183          1,028
                                                                    ------------   ------------   ------------   ------------
       Total interest income ....................................         14,348         14,088         29,282         26,556
                                                                    ------------   ------------   ------------   ------------
INTEREST EXPENSE:
         Deposits ...............................................          7,051          6,245         13,335         11,827
         Borrowings .............................................          2,707          2,786          5,177          4,513
                                                                    ------------   ------------   ------------   ------------
         Total interest expense .................................          9,758          9,031         18,512         16,340
                                                                    ------------   ------------   ------------   ------------
NET INTEREST INCOME .............................................          4,590          5,057         10,770         10,216
PROVISION FOR (RECAPTURE OF) ESTIMATED LOSSES ON LOANS ..........            135         (1,700)           285         (3,096)
                                                                    ------------   ------------   ------------   ------------
NET INTEREST  INCOME AFTER  PROVISION FOR  (RECAPTURE  OF)
    ESTIMATED LOSSES ON LOANS ...................................          4,455          6,757         10,485         13,312
                                                                    ------------   ------------   ------------   ------------
OTHER INCOME:
         Servicing income .......................................          4,193          3,134          8,043          6,220
         Real estate owned, net .................................             66           (569)          (177)           179
         Bankcard income, net ...................................          1,381            968          2,286          1,759
         Gain on sale of loans ..................................          1,018            299          1,504          1,244
         Loss on sale of securities .............................           (262)            --           (262)            --
         Loan fees and charges ..................................          1,066            826          2,046          1,064
         Gain on sale of Bankcard operations ....................          4,981             --          4,981             --
         Other, net .............................................           (285)           769          1,053          1,086
                                                                    ------------   ------------   ------------   ------------
         Total other income .....................................         12,158          5,427         19,474         11,552
                                                                    ------------   ------------   ------------   ------------
OTHER EXPENSES:
         Compensation and employee benefits .....................          7,256          5,690         14,302         12,239
         Professional services ..................................          1,805          1,386          3,155          2,453
         Occupancy ..............................................            502            593          1,045          1,318
         FDIC insurance premiums ................................            205            199            417            418
         Corporate travel and development .......................            132            179            245            339
         Depreciation ...........................................            565            451            919          1,042
         Amortization ...........................................            123             39            393            174
         Other general and administrative expenses ..............          1,804          1,688          3,689          3,229
                                                                    ------------   ------------   ------------   ------------
         Total other expenses ...................................         12,392         10,225         24,165         21,212
                                                                    ------------   ------------   ------------   ------------
INCOME BEFORE INVESTOR PARTICIPATION AND MINORITY
   INTEREST AND INCOME TAXES ....................................          4,221          1,959          5,794          3,652
Investor participation interest .................................           (287)            --           (709)            --
Minority interest ...............................................            574             95             14            596
                                                                    ------------   ------------   ------------   ------------
INCOME BEFORE INCOME TAXES ......................................          4,508          2,054          5,099          4,248
INCOME TAX PROVISION ............................................          1,965            929          2,096          1,905
                                                                    ------------   ------------   ------------   ------------
NET INCOME ......................................................   $      2,543   $      1,125   $      3,003   $      2,343
                                                                    ============   ============   ============   ============

Earnings per share - basic ......................................   $       0.13   $       0.06   $       0.15   $       0.12
Earnings per share - diluted ....................................   $       0.12   $       0.06   $       0.14   $       0.12

Weighted average shares outstanding - basic .....................     20,079,125     20,035,458     20,063,239     20,035,458
Weighted average shares outstanding - diluted ...................     21,427,492     20,035,458     21,163,601     20,035,458`

See notes to interim consolidated financial statements

4

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# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

(Unaudited)

(Dollars in thousands, except share data)

`Accumulated
                                       Preferred Stock      Common Stock                      Other
                                      ----------------- ---------------------  Retained   Comprehensive
                                      Shares   Amount     Shares     Amount     Deficit       Income       Total
                                      ------- --------- ----------- --------- ----------- -------------- ----------
BALANCE, January 1, 2001............      --  $      --  20,035,458 $  96,516 $  (10,670) $          749 $   86,595
  Comprehensive income:
  Net income........................                                               3,003                      3,003
  Unrealized holding gains on
   available for sale securities
   - net of tax liability of $278...                                                                 341        341
                                                                                                         ----------
  Total comprehensive income........                                                                          3,344
  Exercise of stock options.........                         43,667        46                                    46
  Tax effect from utilization of
   pre-reorganizational Net
   Operating Losses (Note 3)........                                    1,831                                 1,831
                                      ------- --------- ----------- --------- ----------- -------------- ----------
BALANCE, June 30, 2001..............      --  $      --  20,079,125 $  98,393 $   (7,667) $        1,090 $   91,816
                                      ======= ========= =========== ========= =========== ============== ==========`

See notes to interim consolidated financial statements

5

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# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

`Six Months Ended
                                                                                        June 30,
                                                                               ---------------------------
                                                                                   2001           2000
                                                                               ------------   ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income ...............................................................  $      3,003   $      2,343
   Adjustments to reconcile net income to net cash (used in) provided by
      operating activities:
        Provision for (recapture of) estimated losses on loans ..............           285         (3,096)
        Provision for losses on real estate owned ...........................            18             68
        Depreciation and amortization .......................................         1,312          1,216
        Loss (gain) on sale of real estate owned ............................           157           (338)
        Loss on disposal of equipment .......................................            60              6
        Purchase of loans held for sale .....................................        (7,418)        (5,058)
        Proceeds from sale of loans held for sale ...........................         6,912         17,446
        Gain on sale of loans ...............................................        (1,504)        (1,244)
        Loss on sale of securities ..........................................           262             --
        (Accretion) amortization of discounts and deferred fees .............          (169)           736
        Provision for deferred income taxes .................................         1,831          1,679
        Federal Home Loan Bank stock dividends ..............................          (110)          (175)
        Minority interest ...................................................           (14)          (596)
        Change in:
          Servicer advance receivables ......................................         2,924          7,393
          Service fees receivable ...........................................          (545)          (767)
          Mortgage servicing rights .........................................        (8,542)           189
          Accrued interest receivable .......................................           686           (213)
          Receivables from loan servicers ...................................        (8,676)         1,432
          Prepaid expenses and other assets .................................        (2,588)        (7,944)
          Accounts payable and other liabilities ............................         2,595        (10,447)
          Investor participation liability ..................................           702             --
                                                                               ------------   ------------
             Net cash (used in) provided by operating activities ............        (8,819)         2,630
                                                                               ------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
        Purchase of loans ...................................................      (150,137)      (155,384)
        Loan repayments .....................................................       117,695         49,204
        Loan originations ...................................................       (30,411)       (16,097)
        Proceeds from sale of loans .........................................        32,101         12,872
        Purchase of mortgage-backed securities available for sale ...........        (6,343)        (9,919)
        Proceeds on sale of mortgage-backed securities available for sale ...         1,271             --
        Repayments of mortgage-backed securities available for sale .........        14,110         13,580
        Repayments of mortgage-backed securities held to maturity ...........            --          1,801
        Purchase of real estate owned .......................................            --           (244)
        Proceeds from sale of real estate owned .............................           996          9,639
        Purchase of FHLB stock ..............................................        (1,000)        (1,426)
        Proceeds from redemption of FHLB stock ..............................            --            776
        Purchases of leasehold improvements and equipment ...................          (910)          (293)
        Proceeds from sale of leasehold improvements and equipment ..........           126            148
                                                                               ------------   ------------
             Net cash used in investing activities ..........................       (22,502)       (95,343)
                                                                               ------------   ------------`

See notes to interim consolidated financial statements

6

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# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

(Dollars in thousands)

`Six Months Ended
                                                                                        June 30,
                                                                               ---------------------------
                                                                                   2001           2000
                                                                               ------------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
        Net increase in deposits ............................................  $    114,743   $     76,327
        Proceeds from FHLB advances .........................................        20,000         48,000
        Repayments of FHLB advances .........................................       (13,000)       (16,000)
        Proceeds from short-term borrowings .................................        18,860         66,172
        Repayments of short-term borrowings .................................       (22,188)       (85,434)
        Proceeds from long-term financing ...................................         7,344             --
        Repayment of long-term financing ....................................        (2,296)            --
        Repayment of note payable to WREI ...................................            --           (692)
        Issuance of common stock pursuant to exercise of stock options ......            46             --
                                                                               ------------   ------------
             Net cash provided by financing activities ......................       123,509         88,373
                                                                               ------------   ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................        92,188         (4,340)
CASH AND CASH EQUIVALENTS:
        Beginning of period .................................................         9,516         54,168
                                                                               ------------   ------------
        End of period .......................................................  $    101,704   $     49,828
                                                                               ============   ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--Cash paid for:
        Interest ............................................................  $     15,596   $     15,566
        Income taxes ........................................................           450            601
NONCASH INVESTING ACTIVITIES:
        Additions to real estate owned acquired in settlement of loans ......         1,449          1,447`

See notes to interim consolidated financial statements

7

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# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)
(Dollars in thousands, except share data and where noted)

## 1.   BASIS OF
PRESENTATION

The
accompanying interim consolidated financial statements of Wilshire Financial
Services Group Inc. and Subsidiaries (WFSG or the
Company) are unaudited and should be read in conjunction with the
2000 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 2000 Annual Report on Form 10-K.

In
the opinion of management, all adjustments, other than the adjustments described
below, generally comprised of normal recurring accruals necessary for fair
presentation of the interim consolidated financial statements, have been
included and all intercompany accounts and material transactions have been
eliminated in consolidation. Operating results for the six months ended June 30,
2001 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2001.

The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (GAAP) requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Certain
reclassifications of 2000 amounts were made in order to conform to the 2001
presentation, none of which affect previously reported net income.

## 2.   COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK

At
June 30, 2001, the Companys banking subsidiary, First Bank of Beverly
Hills, F.S.B. (FBBH or the Bank), had outstanding
commitments to fund $14.2 million in new mortgage loans.

The
Company may be liable under an indemnification agreement for additional criminal
and civil defense costs on behalf of two of its former executives. In May 2001,
pursuant to this agreement and as a result of an arbitration decision, the
Company advanced approximately $0.8 million in legal fees to the former
executives. The Company believes that a portion of such costs will be
recoverable through its insurance carrier.

In
connection with the transfer of the Companys minority ownership interest
in Wilshire Credit Corporation (WCC) to Capital Consultants, LLC
(CCL) as part of its June 1999 restructuring (described in Note 7),
the Company provided to CCL a contingent Liquidation Bond in the form of a
non-interest bearing obligation to pay CCL, in the event of any liquidation or
dissolution of WCC, $19.3 million less any distributions that CCL receives from
its minority ownership interest in WCC. WCC is obligated to keep the bond
collateralized with assets of WCC or the Company having a fair market value
equal to such bond and, to the extent that it does not do so, the Company may be
responsible for the deficiency. A receiver has been appointed for CCL in
Securities and Exchange Commission v. Capital Consultants, LLC, et al.,
U.S. District Court for the District of Oregon, Case No. CV 00-1290 KI, and now
holds this Liquidation Bond and controls the minority ownership interest in WCC
on behalf of CCLs investors.

In
addition, the holder of the minority ownership interest in WCC is entitled to
convert its interest into the Companys common stock. The holder also may
convert its interest into the Companys common stock or, under certain
circumstances, be paid $19.3 million less any prior distributions received from
the minority interest at any time upon a merger of the Company into a third
party, the sale of substantially all assets of the Company to a third party, or
the purchase of substantially all the stock of the Company by a single third
party. Upon the stock conversion or payment of the $19.3 million, the
Liquidation Bond is cancelled. The formula for the stock conversion permits the
holder of the minority interest in WCC to convert such interest into the number
of shares of the common stock of the Company approximately equal to:

8

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# WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                          NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollars in thousands, except share data and where noted)

45% x WCC's trailing 12 month GAAP earnings
------------------------------------------------------------
WFSG's 12 trailing month GAAP earnings per share

Each calculation of
earnings is adjusted for extraordinary items and is net of taxes.

## 3.   INCOME TAXES

The
Company files consolidated federal income tax returns with its eligible
subsidiaries. WCC is not eligible to be included in the consolidated federal
income tax return as it does not meet the required ownership threshold of 80%
(the Companys economic interest is 50.01%).

Although
the Company has net operating loss carryforwards and deductible temporary
differences available to offset income earned during the six months ended June
30, 2001, the Company recorded income tax expense of $2.1 million. There are two
components to the income tax provision: current taxes of approximately $0.3
million and deferred taxes of approximately $1.8 million. The current tax
provision results from excess inclusion income earned on certain residual
interests in REMICs which cannot be offset by tax losses, and is therefore a
cash cost to the Company. 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 differences between amounts that have been
recognized in the financial statements and amounts that have been recognized in
the income tax returns. The deferred tax provision results from a decrease in
the amount of deferred tax assets during the six months ended June 30, 2001.

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. The Company is currently evaluating the valuation allowance in light
of current operating results. 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
(partially subject to the annual limits discussed below) at June 30, 2001 was
$71.3 million.

The
Companys net operating losses have been reduced by cancellation of
indebtedness income that was excluded from taxable income in 1999. All of the
Companys remaining net operating loss and capital loss carryforwards that
were generated in the pre-reorganization period are subject to a limitation on
the amount that may be utilized annually to offset taxable income. The annual
limitation on the use of pre-reorganization net operating or capital loss
carryforwards is approximately $4.3 million plus any unused annual limitation
from prior years. At June 30, 2001 the Company had approximately $8.0 million in
available net operating loss carryforwards relating to the pre-organization
period which could be utilized in the current year. There is no limitation on
the Companys ability to utilize deductible temporary differences.

WCC
currently has net operating loss carryforwards of approximately $5.0 million
that may be available to offset taxable income.

## 4.   SIGNIFICANT
TRANSACTIONS

On
June 29, 2001, the Bank sold its Bankcard Processing division for a gain, before
income taxes, of approximately $5.0 million. Pursuant to the sale agreement, the
Bank will continue to service the merchant accounts for a period not to exceed
60 days. In a separate transaction, in June 2001 the Bank completed the sale of
its wholly owned subsidiary, George Elkins Mortgage Banking (GEMB), to
GEMBs management, subject to the California Department of Real
Estates approval, which was received in July 2001. The loss on sale of
approximately $0.3 million is reflected in the Companys consolidated
statements of operations for the quarter and six months ended June 30, 2001.

9

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# WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                          NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollars in thousands, except share data and where noted)

In
April and May 2001, the Bank purchased approximately $48 million and $83
million, respectively, of adjustable-rate single-family residential mortgages.
In June 2001, the Bank sold $31.4 million of commercial mortgage loans for a
gain of approximately $0.7 million.

During
the second quarter of 2001 our Specialty Servicing and Finance Operations
completed the transfer of servicing rights to approximately 5,500 residential
mortgage loans totaling approximately $240 million in aggregate principal
balances. The servicing portfolio was acquired from DLJ Mortgage Capital.

## 5.   RELATED
PARTY TRANSACTION

In
April 2001 the Company sold mortgage-backed securities with a book value of $1.5
million to Fog Cutter Capital Group Inc. (FCCG) for a loss of
approximately $0.3 million. FCCG owned 14.3% of the Companys outstanding
common stock at June 30, 2001.

## 6.   SUBSEQUENT
EVENT

In
July 2001, the Companys Specialty Servicing and Finance Operations
acquired from Old Kent Mortgage Company the servicing rights and related
servicer advance receivables to approximately 1,500 residential mortgage loans
totaling approximately $178 million in aggregate principal balance.

## 7.   OPERATING
SEGMENTS

The
Companys reportable operating segments, as defined by the Companys
management, consist of its Banking operations and Specialty Servicing and
Finance operations. The operating segments differ in terms of regulatory
environment, funding sources and asset acquisition strategies, as described
below:

|o | Banking OperationsThrough FBBH, the Company conducts a retail
and wholesale banking business focused primarily on specialty-niche products,
including small-balance commercial lending. The primary source of liquidity for
the Banks acquisitions and originations is wholesale certificates of
deposit, retail deposits, FHLB advances, and, to a lesser extent, short-term
credit facilities. The Bank is a federally chartered savings bank and is
regulated by the Office of Thrift Supervision (OTS). At June 30,
2001, FBBH had total assets of approximately $769.8 million.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Specialty Servicing and Finance OperationsThrough its
majority-owned subsidiary, Wilshire Credit Corporation (WCC), the
Company conducts a full-service mortgage and consumer loan servicing business,
specializing in the servicing of labor-intensive mortgage pools requiring
expertise in loss mitigation and/or investor reporting. Through the
Companys 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 June 30,
2001, the Companys Specialty Servicing and Finance Operations serviced
approximately $2.9 billion principal balance of residential and commercial
mortgage pools for approximately 800 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. A primary
source of liquidity includes payments received from FBBH pursuant to a tax
allocation agreement between the Company and the Bank. However, the OTS has
presently limited the amount of these payments to the lesser of (1) the
Banks stand-alone tax liability and (2) the total tax payments made by the
Company.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

---

# WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                          NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollars in thousands, except share data and where noted)

Segment data for the quarters ended June 30, 2001 and 2000 is as follows:

`Three Months Ended June 30, 2001
                                                             -------------------------------------------------------------
                                                                                                Holding
                                                                               Specialty        Company
                                                                               Servicing          and
                                                                                  and        Miscellaneous
                                                                Banking         Finance       Operations         Total
                                                             -------------   -------------   -------------   -------------
  Interest income .......................................    $      13,489   $         791   $          68   $      14,348
  Interest expense ......................................            9,471             318             (31)          9,758
                                                             -------------   -------------   -------------   -------------
  Net interest income ...................................            4,018             473              99           4,590
  Provision for (recapture of) loan losses ..............              150             (15)             --             135
                                                             -------------   -------------   -------------   -------------
  Net interest income after provision for (recapture
    of) loan losses .....................................            3,868             488              99           4,455
  Other income ..........................................            6,832           4,632             694          12,158
  Other expense .........................................            5,240           6,127           1,025          12,392
                                                             -------------   -------------   -------------   -------------
  Income (loss) before investor participation and
    minority interest and taxes .........................            5,460          (1,007)           (232)          4,221
  Investor participation interest .......................               --            (287)             --            (287)
  Minority interest .....................................               --              --             574             574
                                                             -------------   -------------   -------------   -------------
  Income (loss) before taxes ............................            5,460          (1,294)            342           4,508
  Income tax provision (benefit) ........................            2,348              --            (383)          1,965
                                                             -------------   -------------   -------------   -------------
  Net income (loss) .....................................    $       3,112   $      (1,294)  $         725   $       2,543
                                                             =============   =============   =============   =============
  Total assets ..........................................    $     769,803   $      61,723   $      (3,358)  $     828,168
                                                             =============   =============   =============   =============



                                                                           Three Months Ended June 30, 2000
                                                             -------------------------------------------------------------
                                                                                                Holding
                                                                               Specialty        Company
                                                                               Servicing          and
                                                                                  and        Miscellaneous
                                                                Banking         Finance       Operations         Total
                                                             -------------   -------------   -------------   -------------
  Interest income .......................................    $      12,943   $       1,243   $         (98)  $      14,088
  Interest expense ......................................            8,489             369             173           9,031
                                                             -------------   -------------   -------------   -------------
  Net interest income (expense) .........................            4,454             874            (271)          5,057
  (Recapture of) provision for loan losses ..............           (1,700)             --              --          (1,700)
                                                             -------------   -------------   -------------   -------------
  Net interest income (expense) after (recapture of)
    provision for loan losses ...........................            6,154             874            (271)          6,757
  Other income ..........................................            2,185           4,592          (1,350)          5,427
  Other expense .........................................            4,939           5,448            (162)         10,225
                                                             -------------   -------------   -------------   -------------
  Income (loss) before minority interest and taxes ......            3,400              18          (1,459)          1,959
  Minority interest .....................................               --              --              95              95
                                                             -------------   -------------   -------------   -------------
  Income (loss) before taxes ............................            3,400              18          (1,364)          2,054
  Income tax provision (benefit) ........................            1,462              --            (533)            929
                                                             -------------   -------------   -------------   -------------
  Net income (loss) .....................................    $       1,938   $          18   $        (831)  $       1,125
                                                             =============   =============   =============   =============
  Total assets ..........................................    $     676,546   $      60,538   $         155   $     737,239
                                                             =============   =============   =============   =============`

11

---

# WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                          NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
(Dollars in thousands, except share data and where noted)

Segment data for the six months ended June 30, 2001 and 2000 is as follows:

`Six Months Ended June 30, 2001
                                                             -------------------------------------------------------------
                                                                                                Holding
                                                                               Specialty        Company
                                                                               Servicing          and
                                                                                  and        Miscellaneous
                                                                Banking         Finance       Operations         Total
                                                             -------------   -------------   -------------   -------------
  Interest income .......................................    $      27,023   $       2,145   $         114   $      29,282
  Interest expense ......................................           18,120             436             (44)         18,512
                                                             -------------   -------------   -------------   -------------
  Net interest income ...................................            8,903           1,709             158          10,770
  Provision for (recapture of) loan losses ..............              300             (15)             --             285
                                                             -------------   -------------   -------------   -------------
  Net interest income after provision for (recapture
     of) loan losses ....................................            8,603           1,724             158          10,485
  Other income ..........................................            8,396          10,461             617          19,474
  Other expense .........................................           11,100          11,545           1,520          24,165
                                                             -------------   -------------   -------------   -------------
  Income (loss) before investor participation and
    minority interest and taxes .........................            5,899             640            (745)          5,794
  Investor participation interest .......................               --            (709)             --            (709)
  Minority interest .....................................               --              --              14              14
                                                             -------------   -------------   -------------   -------------
  Income (loss) before taxes ............................            5,899             (69)           (731)          5,099
  Income tax provision (benefit) ........................            2,537              --            (441)          2,096
                                                             -------------   -------------   -------------   -------------
  Net income (loss) .....................................    $       3,362   $         (69)  $        (290)  $       3,003
                                                             =============   =============   =============   =============
  Total assets ..........................................    $     769,803   $      61,723   $      (3,358)  $     828,168
                                                             =============   =============   =============   =============



                                                                            Six Months Ended June 30, 2000
                                                             -------------------------------------------------------------
                                                                                                Holding
                                                                               Specialty        Company
                                                                               Servicing          and
                                                                                  and        Miscellaneous
                                                                Banking         Finance       Operations         Total
                                                             -------------   -------------   -------------   -------------
  Interest income .......................................    $      23,915   $       2,671   $         (30)  $      26,556
  Interest expense ......................................           15,422             573             345          16,340
                                                             -------------   -------------   -------------   -------------
  Net interest income (expense) .........................            8,493           2,098            (375)         10,216
  (Recapture of) provision for loan losses ..............           (3,200)             --             104          (3,096)
                                                             -------------   -------------   -------------   -------------
  Net interest income (expense) after (recapture of)
    provision for loan losses ...........................           11,693           2,098            (479)         13,312
  Other income ..........................................            3,111           8,844            (403)         11,552
  Other expense .........................................            9,071          11,310             831          21,212
                                                             -------------   -------------   -------------   -------------
  Income (loss) before minority interest and taxes ......            5,733            (368)         (1,713)          3,652
  Minority interest .....................................               --              --             596             596
                                                             -------------   -------------   -------------   -------------
  Income (loss) before taxes ............................            5,733            (368)         (1,117)          4,248
  Income tax provision (benefit) ........................            2,465              --            (560)          1,905
                                                             -------------   -------------   -------------   -------------
  Net income (loss) .....................................    $       3,268   $        (368)  $        (557)  $       2,343
                                                             =============   =============   =============   =============
  Total assets ..........................................    $     676,546   $      60,538   $         155   $     737,239
                                                             =============   =============   =============   =============`

12

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## 8.   LEGAL
MATTERS

Between
1994 and 1998 Capital Consultants, LLC (CCL), as investment advisor
to and on behalf of various clients, made a number of loans to the
privately-owned company then known as Wilshire Credit Corporation and now known
as Capital Wilshire Holdings Inc. (CWH). As part of the
Companys June 1999 restructuring, it purchased the assets of CWH. In
exchange it gave CCL for the benefit of its clients a 49.99% non-voting
ownership interest in WCC with certain rights to convert such interest to a
portion of the Companys stock.

On September 21, 2000 Thomas F. Lennon was appointed by the U.S.  District  Court of Oregon in Securities and
Exchange  Commission v. Capital  Consultants,  LLC, et al. as a receiver for CCL. Mr. Lennon currently is reviewing
claims, if any, that he may have against parties that engaged in transactions with CCL.

A
number of CCLs clients (CCL Investors) have filed lawsuits in
the U.S. District Court for the District of Oregon against CCL, some of its
former executives, the Company, WCC and the Bank and some of their executives,
and a number of other corporations and pension trust trustees in the following
cases on the dates indicated:

| | Schultz v. Kirkland, et al, U.S. District Court Case No. CV 00-1377 KI (October 10, 2000)                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | Miller v. Clinton, et al, U.S. District Court Case No. CV 00-1317 HA (September 26, 2000)                                                           
| | Eidem and Malcolm v. Trustees, et al, U.S. District Court Case No. CV 00-1446 HE (October 26, 2000)                                                 
| | Hazzard, et al. v. Trustees, et al, U.S. District Court Case No. CV 00-1338 HU (September 29, 2000)                                                 
| | McPherson v. Trustees, et al, U.S. District Court Case No. CV 00-1445 HA (October 26, 2000)                                                         
| | Madole v. Capital Consultants, LLC, et al, U.S. District Court Case No. CV 00-1660 AS (December 1, 2000)                                            
| | Herman v. Capital Consultants, LLC, U.S. District Court Case No. CV 00-1291 KI (September 21, 2000)                                                 
| | Chilia,  et al. v. Capital  Consultants,  LLC, U.S.  District  Court Case No. CV 00-1633-JE  (November 29, 2000)                                    
| | American  Funeral & Cemetery Trust Services,  et al. v. Capital  Consultants,  LLC, et al., U.S.  District Court Case No. CV 01-609-HU (May 4, 2001)

The plaintiffs allege that
the Company, WCC and the Bank and some of their executives wrongfully
participated in various transactions in which CCL made improper loans to WCC
from 1994 through 1998, thereafter misled the CCL clients by failing to disclose
significant losses on $160 million of loans to WCC, and used additional CCL
client funds (approximately $71 million) to cover up such losses.

The
Company believes that it has strong defenses with regard to such allegations and
intends to contest the claims vigorously unless a satisfactory settlement can be
reached. Without limitation, as part of the June 1999 reorganization of the
Company, CCL, on behalf of the CCL Investors, provided the Company with a
release of all claims that they might have had against the Company, pursuant to
the Plan of Reorganization approved by the Delaware Bankruptcy Court. The
plaintiffs contend that CCL did not have authority to provide this release and
that the releases were fraudulently obtained. In addition, the Company
executives have requested that the Company indemnify them as directors and
officers of the Company for their costs and potential liability to the extent
such amounts are not covered by insurance.

The
District Court of Oregon has appointed a mediator to supervise a limited
procedure to permit all of the parties to discover the relevant documents held
by each party and to interview some of the relevant witnesses. The mediator is
currently conducting a mediation proceeding to determine if the numerous claims
among the parties can be settled. The Company is participating in the mediation
process. The parties to this process are under a confidentiality order
prohibiting any disclosure of the status of any settlement discussions.

The
Company is a defendant in other legal actions arising from transactions
conducted in the ordinary course of business. Management, after consultation
with legal counsel, believes the ultimate liability, if any, arising from such
actions will not materially affect the Companys consolidated results of
operations or financial position.

13

---

## 9.   NEW
ACCOUNTING PRONOUNCEMENTS

In
June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 (SFAS 141),
Business Combinations. SFAS 141 requires the purchase method of
accounting for all business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The Company does not believe that
the adoption of SFAS 141 will have a material impact on its financial position
or results of operations.

In
June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which is effective for fiscal years beginning after December 15,
2001. SFAS 142 will require that goodwill no longer be amortized, and instead be
tested for impairment at least annually. In addition, the standard includes
provisions for the reclassification of certain existing recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill, and the identification of reporting units for purposes of assessing
potential future impairments of goodwill. The Company is currently evaluating
the impact that SFAS 142 may have on its financial position and results of
operations.

14

---

# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

|ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------

The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements of Wilshire Financial Services Group Inc. and
the notes thereto included elsewhere in this filing. References in this filing
to Wilshire Financial Services Group Inc., WFSG, the
Company, we, our, and us refer
to Wilshire Financial Services Group Inc., our wholly owned subsidiaries, and
Wilshire Credit Corporation (WCC), our majority-owned subsidiary,
unless the context indicates otherwise.

Wilshire
Financial Services Group Inc., a financial services company, conducts (1)
community banking 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 Portland, Oregon. The Bank is
headquartered in Calabasas, California and conducts its branch banking
activities in Beverly Hills, California.

OVERVIEW

In the  second  quarter  of 2001  the  Company  continued  its  initiative  to  focus on its core
businesses.  The quarter was highlighted by the following significant developments:

|o | The Bank sold its Bankcard  processing  division  and its mortgage
banking  subsidiary,  George  Elkins Mortgage Banking;
|- | -------------------------------------------------------------------------------------------------------------------------

|o | The Bank acquired two loan portfolios totaling approximately $131 million unpaid
principal balance, and funded the purchases through an increase in deposits; and
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Our Specialty Servicing and Finance Operations continued to grow their core
servicing-related revenues while managing expenses, despite a significant
increase in prepayments on underlying loans during the first six months of 2001.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

## RESULTS OF  OPERATIONS--QUARTER  AND SIX MONTHS  ENDED JUNE 30, 2001  COMPARED TO QUARTER AND SIX MONTHS  ENDED JUNE
30, 2000

Our
consolidated net income was approximately $2.5 million for the quarter ended
June 30, 2001, compared with $1.1 million for the quarter ended June 30, 2000.
This increase in net income was primarily due to a pre-tax gain of $5.0 million
on the sale of the Banks bankcard processing division and an increase of
$1.1 million in servicing income. During the quarter, we incurred $1.0 million
in legal expenses related to litigation that arose from events prior to our
restructuring. Approximately $0.8 million of these expenses consisted of costs
that we advanced to two of the Companys former executives for their
criminal and civil defenses (see Notes 2 and 8 to the interim consolidated
financial statements). We anticipate that a portion of these advances may be
recoverable through insurance. These legal expenses contributed to a $2.2
million increase in other operating expenses, which partially offset the gains
described above. Also offsetting our increased revenue were loan loss provisions
of $0.1 million (compared with a net recapture of $1.7 million in the quarter
ended June 30, 2000) and a decrease in net interest income of $0.4 million.

For
the six months ended June 30, 2001, our consolidated net income was
approximately $3.0 million, compared with $2.3 million for the six months ended
June 30, 2000. This increase in net income was primarily due to the pre-tax gain
of $5.0 million on the sale of the Banks bankcard processing division, an
increase of $1.8 million in servicing income, and an increase in net interest
income of $0.5 million. These increases were partially offset by an increase in
operating expenses of $3.0 million (including the legal expenses described
above) and a loan loss provision of $0.3 million (compared with recaptures of
$3.1 million during the six months ended June 30, 2000).

15

---

Following is a discussion of the  operating  results of the  Company's  two discrete  businesses:  our Banking
Operations and our Specialty Servicing and Finance Operations.

## FIRST BANK OF BEVERLY HILLS, F.S.B.

The
following tables compare operating income (before taxes) for FBBH for the
quarter and six-month periods ended June 30, 2001 and 2000 (dollars in
thousands):

`Quarter Ended June 30,                  Six Months Ended June 30,
                                        ----------------------------------------  ----------------------------------------
                                                                      Increase                                  Increase
                                            2001          2000       (Decrease)       2001          2000       (Decrease)
                                        ------------  ------------  ------------  ------------  ------------  ------------
Interest income ......................  $     13,489  $     12,943  $        546  $     27,023  $     23,915  $      3,108
Interest expense .....................         9,471         8,489           982        18,120        15,422         2,698
                                        ------------  ------------  ------------  ------------  ------------  ------------
Net interest income ..................         4,018         4,454          (436)        8,903         8,493           410
Provision for (recapture of)
  loan losses ........................           150        (1,700)        1,850           300        (3,200)        3,500
                                        ------------  ------------  ------------  ------------  ------------  ------------
Net interest income after provision
  for (recapture of) loan losses .....         3,868         6,154        (2,286)        8,603        11,693        (3,090)
Other income .........................         6,832         2,185         4,647         8,396         3,111         5,285
Other expense ........................         5,240         4,939           301        11,100         9,071         2,029
                                        ------------  ------------  ------------  ------------  ------------  ------------
Income before taxes ..................  $      5,460  $      3,400  $      2,060  $      5,899  $      5,733  $        166
                                        ============  ============  ============  ============  ============  ============`

Net Interest Income
        The
Banks net interest income for the quarter ended June 30, 2001 was
approximately $4.0 million, compared with approximately $4.5 million for the
quarter ended June 30, 2000. Interest income increased by $0.5 million due to a
$44.5 million increase in the average balance of loans, reflecting the
Banks purchases of loan portfolios in 2000 and in the second quarter of
2001, and an increase in overnight investments, resulting from the significant
increase in deposits during the quarter. These higher volumes of
interest-earning assets were partially offset by the lower interest rates in the
second quarter of 2001 as compared with the second quarter of 2000. In
particular, the declining rate environment affected the Banks portfolio of
loans, due to the short-term repricing characteristics of such loans. The
Banks interest expense increased by approximately $1.0 million from the
quarter ended June 30, 2000 to the quarter ended June 30, 2001. Interest expense
on deposits increased by approximately $0.8 million as a result of an increase
in the average balance of deposits from $428.0 million for the quarter ended
June 30, 2000 to $505.2 million for the quarter ended June 30, 2001. In
addition, interest expense on borrowings increased by $0.2 million due to a
$14.3 million increase in the average balance of FHLB advances. However, these
increases in balances of interest-bearing liabilities were partially offset by
declines in interest rates from the 2000 period to the 2001 period.

For
the six months ended June 30, 2001, the Banks net interest income was
approximately $8.9 million, compared with approximately $8.5 million for the six
months ended June 30, 2000. Interest income increased by $3.1 million due to the
higher average loan volume in the current year to date, resulting from the loan
purchases described above, and also as a result of the increase in the average
balance of overnight investments, partially offset by a decline in yields on
interest-earning assets from the 2000 period to the 2001 period. The Banks
interest expense increased by approximately $2.7 million from the six months
ended June 30, 2000 to the six months ended June 30, 2001. Interest expense on
deposits increased by approximately $1.5 million as a result of an increase in
the average balance of deposits from $417.0 million for the six months ended
June 30, 2000 to $467.5 million for the six months ended June 30, 2001. In
addition, interest expense on borrowings increased by $1.3 million due to a
$41.5 million increase in the average balance of short-term borrowings and FHLB
advances. These increases in balances of interest-bearing liabilities were
partially offset by declines in interest rates from the 2000 period to the 2001
period.

16

---

Provision for Loan Losses
        Provisions
for losses on loans are charged to operations to maintain an allowance for
losses on the loan portfolio at a level which the Bank believes is adequate
based on an evaluation of the inherent risks in the portfolio. The Banks
evaluation is based on an analysis of the loan portfolio, historical loss
experience, current economic conditions and trends, collateral values, and other
relevant factors.

Provision
for loan losses for the quarter and six-month periods ended June 30, 2001 was
$0.15 million and $0.3 million, respectively. During the quarter and six-month
periods ended June 30, 2000, the Bank recaptured $1.7 million and $3.2 million,
respectively, of loan loss provisions. The reversals of reserves in 2000 were
the result of two factors: (1) the Bank sold $13.1 million book value of
non-performing and sub-performing loans in June 2000 and recaptured the related
reserves and (2) the Banks periodic analyses of the adequacy of loan loss
reserves indicated that the reserves were excessive due to the continued
seasoning and improved loss performance of the Banks loan portfolio.

Other Income
        The
Banks other income was $6.8 million for the three months ended June 30,
2001, compared with $2.2 million for the three months ended June 30, 2000. For
the six months ended June 30, 2001, other income was $8.4 million, compared with
$3.1 million for the six months ended June 30, 2000. The increase in other
income was primarily due to the Banks sale of its Bankcard division in
June 2001 for a gain of approximately $5.0 million, and increases in loan fees
and charges and gains on sales of loans. These increases were partially offset
by a loss of approximately $0.3 million on the Banks sale of GEMB.

Other Expenses
        The
Banks other expenses were $5.2 million for the quarter ended June 30,
2001, compared with $4.9 million for the quarter ended June 30, 2000. For the
six months ended June 30, 2001, other expenses totaled $11.1 million, compared
with $9.1 million for the six months ended June 30, 2000. A number of factors
contributed to the increase in the Banks operating expenses in the first
six months of 2001. Compensation and employee benefits increased by
approximately $0.7 million primarily as a result of severance pay for former
executives and higher compensation costs and commissions paid at the Banks
mortgage banking subsidiary (which was sold in June 2001). In addition,
professional services increased by approximately $0.6 million during the 2001
period, due to consulting fees associated with conversions of the Banks
accounting and deposit systems, and also due legal fees incurred in connection
with litigation, some of which was resolved in the first quarter of 2001.
Further, data processing costs increased by $0.4 million due to a rise in
service bureau costs. The Bank anticipates that the sales of its Bankcard
division and GEMB will result in future reductions in its other operating
expenses. However, there can be no assurance that the desired cost savings will
be realized.

## Operating Segments

Through
June 30, 2001, the Banks businesses consisted of three primary segments:
lending and deposit banking services, mortgage loan origination and brokerage
services (George Elkins Mortgage Banking or GEMB), and
Bankcard processing. As discussed previously, the GEMB and Bankcard divisions
were sold in June 2001. Consequently, in future periods there no longer will be
income or loss attributable to these divisions, and the Bank intends to focus on
its core retail banking and lending activities.

The
operating results (before income taxes) of the Banks businesses for the
quarter and six-month periods ended June 30, 2001 and 2000 are summarized in the
following table and discussed in further detail below:

`Quarter Ended                Six Months Ended
                                                             June 30,                      June 30,
                                                    ---------------------------   ---------------------------
                                                        2001           2000           2001           2000
                                                    ------------   ------------   ------------   ------------
                                                                     (Dollars in thousands)
         Lending and deposit banking services ...   $      4,683   $      3,549   $      5,401   $      6,375
         George Elkins ..........................             83           (225)          (341)          (576)
         Bankcard income (loss), net ............            694             76            839            (66)
                                                    ------------   ------------   ------------   ------------
            Total Bank income (pre-tax) .........   $      5,460   $      3,400   $      5,899   $      5,733
                                                    ============   ============   ============   ============`

17

---

Lending and Deposit Banking
        Income
in the Banks commercial banking operations was approximately $4.7 million
for the quarter ended June 30, 2001, compared with $3.5 million for the quarter
ended June 30, 2000. For the six months ended June 30, 2001, income was $5.4
million, compared with $6.4 million for the six months ended June 30, 2000. In
June 2001 the Bank sold its Bankcard division for a gain of approximately $5.0
million and GEMB for a loss of approximately $0.3 million. The net gain from
these sales was offset by loan loss provisions during the quarter and six-month
periods ended June 30, 2001 (compared with recaptures of provisions for the
comparable 2000 periods) and increases in general and administrative expenses,
as discussed previously.

George Elkins
        Income
from the Banks mortgage loan origination and brokerage services was
approximately $0.1 million for the quarter ended June 30, 2001, compared with a
loss of approximately $0.2 million for the quarter ended June 30, 2000. For the
six months ended June 30, 2001, GEMBs loss was $0.3 million, compared with
a loss of $0.6 million for the six months ended June 30, 2000. The improved
operating results for 2001 were due to an increase in loan origination fee
income, partially offset by an increase in compensation and employee benefits.

Bankcard Division
        Bankcard
income, net of other related expenses, was approximately $0.7 million for the
quarter ended June 30, 2001, compared with approximately $0.1 million for the
quarter ended June 30, 2000. For the six months ended June 30, 2001, Bankcard
income was $0.8 million, compared with a loss of approximately $0.1 million for
the six months ended June 30, 2000. This increase in income in 2001 was
primarily due to the reversal of approximately $0.4 million in loss provisions
upon the sale of the division in June 2001 and decreases in other related
Bankcard expenses, partially offset by a decline in net bankcard revenues
resulting from lower processing volumes.

The
financial results of the Banks merchant bankcard processing operations for
the quarter and six-month periods ended June 30, 2001 and 2000 were as follows:

`Quarter Ended                Six Months Ended
                                                             June 30,                      June 30,
                                                    ---------------------------   ---------------------------
                                                        2001           2000           2001           2000
                                                    ------------   ------------   ------------   ------------
                                                                     (Dollars in thousands)
         Bankcard revenues, net of
              processing expenses ...............   $      1,066   $      1,118   $      2,046   $      2,339
         (Recapture of) provision for losses ....           (315)           150           (240)           580
                                                    ------------   ------------   ------------   ------------
         Bankcard income, net ...................          1,381            968          2,286          1,759
         Other expenses .........................           (687)          (892)        (1,447)        (1,825)
                                                    ------------   ------------   ------------   ------------
         Income (loss) after other expenses .....   $        694   $         76   $        839   $        (66)
                                                    ============   ============   ============   ============`

## Changes in
Financial Condition  First Bank of Beverly Hills

Following  are condensed  statements of financial  condition for FBBH as of June 30, 2001 and December 31,
2000:

`June 30,     December 31,
                                                                            2001           2000
                                                                        ------------   ------------
                                                                           (Dollars in thousands)
ASSETS:
Cash and cash equivalents ............................................  $     99,189   $      7,907
Mortgage-backed securities available for sale, at fair value .........        40,311         47,738
Loans, net ...........................................................       594,095        562,257
Real estate owned, net ...............................................           467            779
Receivables from loan servicers ......................................        11,837          3,089
Other assets .........................................................        23,904         27,142
                                                                        ------------   ------------
    Total assets .....................................................  $    769,803   $    648,912
                                                                        ============   ============

LIABILITIES:
Deposits .............................................................  $    549,816   $    435,073
FHLB advances ........................................................       139,000        132,000
Other liabilities ....................................................        15,393         19,861
                                                                        ------------   ------------
    Total liabilities ................................................  $    704,209   $    586,934

NET WORTH ............................................................        65,594         61,978
                                                                        ------------   ------------
    Total liabilities and net worth ..................................  $    769,803   $    648,912
                                                                        ============   ============`

18

---

Mortgage-Backed
and Other Securities. The Banks portfolio of mortgage-backed and other
securities available for sale decreased by approximately $7.4 million during the
six months ended June 30, 2001. This decrease was primarily due to principal
repayments of $14.1 million, partially offset by purchases of $6.3 million and
an increase in unrealized holding gains of $0.4 million.

Loans,
net. The Banks portfolio of loans, net of discounts and allowances,
increased by approximately $31.8 million during the six months ended June 30,
2001. The Bank has purchased approximately $150.1 million and originated an
additional $30.4 million in loans during the current year to date. These
increases were partially offset by approximately $113.9 million in principal
repayments during the year, and by a sale of approximately $31.4 million of
loans in June 2001.

Receivables
from Loan Servicers. The Banks receivables from loan servicers
increased by approximately $8.7 million during the six months ended June 30,
2001. This increase was primarily due to principal repayments on loans occurring
at quarter-end which were initially remitted to the servicers of such loans. The
Bank collected the amounts due from the servicers at the beginning of the third
quarter.

Deposits.
The Banks deposits increased by approximately $114.7 million during the
six months ended June 30, 2001, primarily due to a significant increase in
certificates of deposit. As market rates of interest continued to decline during
the second quarter, the Bank increasingly utilized deposits with average
maturities of two to three years as a source of funds to finance its loan
acquisitions.

FHLB  Advances.  The Bank's FHLB Advances  increased by $13.0 million during the six months ended
June 30, 2001,  resulting  from new borrowings of $20.0  million,  partially  offset by repayments of $7.0 million.
These advances have  maturities  ranging from two to five years,  which assists in reducing the Bank's  sensitivity
to market  interest-rate  fluctuations and enables the Bank to more closely match the maturities of its investments
and  borrowings.  However,  as  discussed  above,  due to recent  declines  in  interest  rates  the Bank  utilized
longer-term certificates of deposit, in lieu of FHLB Advances, to fund its second-quarter loan acquisitions.

## Regulatory
Capital Requirements

Federally
insured savings associations such as FBBH are required to maintain minimum
levels of regulatory capital. Those standards generally are as stringent as the
comparable capital requirements imposed on national banks. The OTS also is
authorized to impose capital requirements in excess of these standards on a
case-by-case basis. In connection with the year 2000 examination, the OTS
indicated that the capital level of FBBH exceeds the minimum requirement for
well capitalized status under provisions of the Prompt Corrective
Action Regulation.

The
following table sets forth the regulatory capital ratios of the Bank at June 30,
2001.

19

---

# Regulatory
Capital Ratios

`To be Categorized
                                                                                                                as
                                                                                  Amount Required      "Well Capitalized"
                                                                                    For Capital           under Prompt
                                                                                     Adequacy           Corrective Action
                                                               Actual                Purposes              Provisions
                                                        ---------------------  ---------------------  ---------------------
                                                          Amount      Ratio      Amount      Ratio      Amount      Ratio
                                                        ----------  ---------  ----------  ---------  ----------  ---------
                                                                            (Dollars in thousands)
Total Capital to Risk-Weighted Assets (Risk-Based
   Capital)..........................................   $   67,649      13.6%  $   39,911     =>8.0%  $   49,888    =>10.0%
Tier 1 Capital to Risk-Weighted Assets...............       61,403      12.3%     Not Applicable          29,933    => 6.0%
Core Capital to Tangible Assets......................       61,403       8.0%      30,631     =>4.0%      38,239    => 5.0%
Tangible Capital to Tangible Assets..................       61,403       8.0%      11,487     =>1.5%     Not Applicable`

## Liquidity and
Capital Resources

Liquidity  is the  measurement  of the  Bank's  ability to meet  potential  cash  requirements,  including
ongoing commitments to repay borrowings,  fund investments,  purchase pools of loans, and make payments for general
business  purposes.  The Bank's sources of liquidity include retail and wholesale  deposits,  FHLB advances,  whole
loan and  mortgage-backed  securities  sales,  and net  interest  income.  Liquidity  in the Bank's  operations  is
actively managed on a daily basis and periodically reviewed by the Bank's Board of Directors.

At
June 30, 2001, the Banks cash balances totaled approximately $99.2
million, compared with $7.9 million at December 31, 2000. The increase in cash
during 2001 was primarily due to an increase in certificates of deposit,
repayments of loans and mortgage-backed securities, and sales of loans,
partially offset by purchases and originations of new loans.

At
June 30, 2001, the Bank had approximately $510.5 million of certificates of
deposit. Scheduled maturities of certificates of deposit during the 12 months
ending June 30, 2002 and thereafter amounted to approximately $376.3 million and
approximately $134.2 million, respectively. Wholesale deposits generally are
more responsive to changes in interest rates than core deposits and, thus, are
more likely to be withdrawn by the investor upon maturity as changes in interest
rates and other factors are perceived by investors to make other investments
more attractive. The Banks management is attempting to reduce exposure to
changes in interest rates by increasing the amount of longer-term certificates
of deposit and FHLB advance borrowings as a percentage of total borrowings,
developing core deposits (which are less sensitive to interest rate changes),
and purchasing and originating variable-rate loans.

The
Bank is required under applicable federal regulations to maintain specified
levels of liquid investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
Current OTS regulations require that a savings association maintain liquid
assets of not less than 4% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less, of which at least
1% must consist of short-term liquid assets. The Bank has complied with these
requirements.

## SPECIALTY SERVICING AND FINANCE OPERATIONS

WFSG
conducts its Specialty Servicing and Finance Operations through WFC, our
wholly-owned investment subsidiary, and through WCC, our majority-owned
servicing subsidiary which was formed pursuant to our June 10, 1999
reorganization. As the majority owner of WCC, the Company shares in 50.01% of
WCCs revenues and expenses. The remaining 49.99% interest in WCCs
operations is reflected as Minority interest in the Companys
consolidated statements of operations. In addition, certain of WFCs and
WCCs activities are conducted with lenders who have participation
interests in the assets that serve as collateral for the loans. The share of
such activities held by these lenders is reflected as Investor
participation interest in the Companys consolidated statements of
operations.

20

---

The
following table compares operating income (before taxes and minority and
investor participation interests) of our Specialty Servicing and Finance
Operations for the quarter and six-month periods ended June 30, 2001 and 2000
(dollars in thousands).

`WCC and WFC for the Quarter                WCC and WFC for the Six Months
                                                Ended June 30,                               Ended June 30,
                                  ------------------------------------------   ------------------------------------------
                                                                  Increase                                     Increase
                                      2001           2000        (Decrease)        2001           2000        (Decrease)
                                  ------------   ------------   ------------   ------------   ------------   ------------
Servicing income ...............  $      4,521   $      3,393   $      1,128   $      8,900   $      6,696   $      2,204
Interest income ................           791          1,243           (452)         2,145          2,671           (526)
Other income ...................           111            950           (839)         1,561          1,899           (338)
                                  ------------   ------------   ------------   ------------   ------------   ------------
     Total revenues ............         5,423          5,586           (163)        12,606         11,266          1,340
                                  ------------   ------------   ------------   ------------   ------------   ------------
Interest expense ...............           318            369            (51)           436            573           (137)
Recapture of loan losses .......           (15)            --            (15)           (15)            --             15)
Compensation expense ...........         3,771          3,280            491          7,431          6,893             38
Other expenses .................         2,356          1,919            437          4,114          4,168            (54)
                                  ------------   ------------   ------------   ------------   ------------   ------------
     Total expenses ............         6,430          5,568            862         11,966         11,634             32
                                  ------------   ------------   ------------   ------------   ------------   ------------
(Loss) income before taxes .....  $     (1,007)  $         18   $     (1,025)  $        640   $       (368)  $      1,008
                                  ============   ============   ============   ============   ============   ============`

Servicing Income
        The
components of servicing income in our Specialty Servicing and Finance operations
are reflected in the following table:

`Quarter Ended                Six Months Ended
                                                          June 30,                      June 30,
                                                 ---------------------------   ---------------------------
                                                     2001           2000           2001           2000
                                                 ------------   ------------   ------------   ------------
                                                                    (Dollars in thousands)
Servicing revenue .............................  $      5,687   $      2,580   $     10,007   $      5,188
Ancillary fees ................................         1,267            585          2,404          1,074
Amortization of mortgage servicing rights .....        (1,543)           (44)        (2,589)           (76)
Write-down of mortgage servicing rights .......          (795)            --           (795)            --
Custodial float ...............................           278            440            940            827
Curtailment expense ...........................          (310)          (168)        (1,067)          (317)
                                                 ------------   ------------   ------------   ------------
    Total servicing income ....................  $      4,521   $      3,393   $      8,900   $      6,696
                                                 ============   ============   ============   ============`

Servicing
income for the quarter ended June 30, 2001 was approximately $4.5 million,
compared with approximately $3.4 million for the quarter ended June 30, 2000.
For the six months ended June 30, 2001, servicing income was $8.9 million,
compared with approximately $6.7 million for the six months ended June 30, 2000.
Gross servicing revenues and ancillary fees (primarily late charges and
prepayment penalties) increased significantly from 2000 to 2001 due to the
expansion of WCCs servicing operations through several acquisitions of
servicing portfolios. However, the decline in mortgage interest rates from June
2000 to June 2001 adversely impacted our servicing income in a number of ways.

First,
the drop in rates triggered a significant increase in prepayments on the
underlying loans in our servicing portfolio, which in turn resulted in
accelerated amortization of our mortgage servicing rights (MSRs). Amortization
of MSRs was $1.5 million and $2.6 million, respectively, for the quarter and
six-month periods ended June 30, 2001, compared with less than $0.1 million for
the comparable 2000 periods (though a portion of the increase in amortization
was attributable to the larger volume of our servicing portfolio). In addition,
in June 2001 we wrote down our MSRs by an additional $0.8 million to their
estimated market value. Further, as a result of underlying loan prepayments, we
incurred an increase in the interest we are required to pay to securitization
trusts (curtailment interest expense) under our servicing
agreements. Despite these adverse effects of the drop in interest rates, we
continue to earn positive yields on each of our MSR acquisitions.

21

---

The
following table sets forth the composition of loans serviced by WCC by type of
loan at the dates indicated.

`June 30,     December 31,
                                                2001           2000
                                            ------------   ------------
                                               (Dollars in thousands)
Single-family residential ................  $  2,465,920   $  1,909,761
Multi-family residential .................       134,816        163,511
Commercial real estate ...................       226,149        223,539
Consumer and other .......................        93,826        265,598
                                            ------------   ------------
     Total ...............................  $  2,920,711   $  2,562,409
                                            ============   ============`

Interest Income and Interest Expense
        Interest
income was approximately $0.8 million for the quarter ended June 30, 2001,
compared with approximately $1.2 million for the quarter ended June 30, 2000.
For the six months ended June 30, 2001, interest income was approximately $2.1
million, compared with approximately $2.7 million for the six months ended June
30, 2000. This decrease was primarily due to sales of mortgage-backed securities
and loans in late 2000 and early 2001 to provide liquidity and pay down the
related debt.

Interest
expense was approximately $0.3 million for the quarter ended June 30, 2001,
compared with approximately $0.4 million for the quarter ended June 30, 2000.
For the six months ended June 30, 2001, interest expense was approximately $0.4
million, compared with approximately $0.6 million for the six months ended June
30, 2000. These decreases were primarily due to the payoffs of borrowings with
proceeds from the above-mentioned asset sales. However, during the quarter and
six months ended June 30, 2001 our Specialty Servicing and Finance Operations
incurred additional borrowings using certain debt facilities. The proceeds from
such borrowings were deployed in acquisitions of interest-earning assets and
servicing rights. It is anticipated that interest income and expense may
increase in subsequent periods, as a result of additional acquisitions.

Other Income
        The
components of other income in our Specialty Servicing and Finance operations are
reflected in the following table:

`Quarter Ended               Six Months Ended
                                                     June 30,                      June 30,
                                            ---------------------------   ---------------------------
                                                2001           2000           2001           2000
                                            ------------   ------------   ------------   ------------
                                                                  (Dollars in thousands)
         Other income:
         Real estate owned, net .........   $         50   $       (336)  $       (210)  $       (437)
         Gain on sale of loans ..........            306            539            792          1,484
         Loss on sale of securities .....           (262)            --           (262)            --
         Other, net .....................             17            747          1,241            852
                                            ------------   ------------   ------------   ------------
             Total other income .........   $        111   $        950   $      1,561   $      1,899
                                            ============   ============   ============   ============`

The
decrease in other income for the quarter and six-month periods ended June 30,
2001 was primarily attributable to a decline in gains on sales of loans during
the current year due to reduced sales activity, and a $0.3 million loss on sale
of securities in the second quarter of 2001. Other, net decreased by $0.7
million in the second quarter of 2001 from the second quarter of 2000 primarily
due to the receipt of a $0.5 million settlement in the second quarter of 2000 on
a prior loan purchase. However, for the six months ended June 30, 2001, other,
net increased over the comparable 2000 period due to a recovery of $0.8 million
beyond our cost in certain assets purchased in the prior year.

Compensation Expense
        Compensation
and employee benefits were approximately $3.8 million for the quarter ended June
30, 2001, compared with approximately $3.3 million for the quarter ended June
30, 2000. For the six months ended June 30, 2001, compensation and employee
benefits were $7.4 million, compared with $6.9 million for the six months ended
June 30, 2000. These increases during the current quarter and year to date are
primarily due to higher salary expenses and contract labor costs over the prior
year. Beginning in late 2000 and continuing into the current year, we have
increased our hiring of personnel in our Specialty Servicing and Finance
Operations, reflecting the growth in the size of our servicing business.

22

---

Other Expenses
        Other
expenses in our Specialty Servicing and Finance Operations were approximately
$2.4 million for the quarter ended June 30, 2001, compared with approximately
$1.9 million for the quarter ended June 30, 2000. During the quarter, we
incurred $1.0 million in legal expenses related to litigation that arose prior
to our restructuring. Pursuant to an arbitration decision regarding our
indemnification obligations, in May 2001 we advanced approximately $0.8 million
in legal fees to two of the Companys former executives, though we believe
that a portion of such fees will be recoverable in future periods through our
insurance carrier. For the six months ended June 30, 2001, other expenses were
$4.1 million, compared with $4.2 million for the six months ended June 30, 2000.
Excluding the increase in legal charges, our other operating expenses have
declined by approximately $0.6 million during the current year to date. This
decrease was due to declines in several expense categories, particularly
professional services and data processing, reflecting our continuing efforts to
reduce corporate overhead.

## Changes in
Financial Condition  Specialty Servicing and Finance Operations

Following
are condensed statements of financial condition for our Specialty Servicing and
Finance Operations as of June 30, 2001 and December 31, 2000:

`June 30,     December 31,
                                                                                        2001           2000
                                                                                    ------------   ------------
                                                                                       (Dollars in thousands)
ASSETS:
Cash and cash equivalents ........................................................  $        134   $      1,143
Mortgage-backed securities available for sale, at fair value .....................         3,770          6,400
Loans and discounted loans held for sale, net, at lower of cost or market ........        11,047         10,214
Real estate owned, net ...........................................................         1,665            991
Servicer advance receivables, net ................................................        16,139         19,062
Service fees receivable ..........................................................         2,743          2,199
Mortgage servicing rights, net ...................................................        13,086          4,544
Other assets (includes intercompany receivables) .................................        13,139         10,312
                                                                                    ------------   ------------
    Total assets .................................................................  $     61,723   $     54,865
                                                                                    ============   ============

LIABILITIES:
Short-term borrowings ............................................................  $      5,795   $      4,851
Long-term investment financing ...................................................         6,682          1,634
Other liabilities ................................................................        11,066          9,623
                                                                                    ------------   ------------
     Total liabilities ...........................................................        23,543         16,108

NET WORTH ........................................................................        38,180         38,757
                                                                                    ------------   ------------
     Total liabilities and net worth .............................................  $     61,723   $     54,865
                                                                                    ============   ============`

Mortgage-Backed
Securities Available for Sale. WFCs portfolio of mortgage-backed
securities available for sale decreased by approximately $2.6 million during the
six months ended June 30, 2001, due to the disposition of a security in April
2001. WFC sold approximately $1.5 million of loans underlying such securities,
and retained an interest in real property comprising the remaining $1.1 million
of the securitization. We are currently in negotiations to sell this property.
We currently hold only those securities which are backed by loans in WCCs
servicing portfolio, as such investments provide operating leverage to our core
business.

Loans
and Discounted Loans Held for Sale, Net, at Lower of Cost or Market. In our
Specialty Servicing and Finance Operations, loans and discounted loans held for
sale, net, at lower of cost or market increased by approximately $0.8 million
during the six months ended June 30, 2001. This increase was primarily due to
purchases of approximately $7.4 million of loans, partially offset by sales of
approximately $5.8 million and loan resolutions occurring in the ordinary course
of business.

23

---

Real
Estate Owned, net.Real estate owned, net increased by approximately $0.7
million during the six months ended June 30, 2001. The increase was primarily
due to the acquisition of a property pursuant to the liquidation of a security
described above, partially offset by sales of properties for proceeds of
approximately $0.5 million.

Servicer
Advance Receivables, net. Servicer advance receivables, net decreased by
approximately $2.9 million during the six months ended June 30, 2001. This
decrease was primarily due to recoveries by WCC of scheduled principal and
interest advances on loans previously made, partially offset by new advances
made during the period.

Mortgage
servicing rights, net.Mortgage servicing rights, net (MSRs) increased by
approximately $8.5 million during the six months ended June 30, 2001, primarily
due to our purchases of $11.9 million in MSRs associated with new servicing
portfolio acquisitions. However, as discussed previously, the decline in
mortgage interest rates during the year has triggered an increase in prepayments
of the underlying loans being serviced, which, in turn, resulted in accelerated
amortization of our servicing rights. As a result, we recorded amortization of
$2.6 million and a valuation write-down of MSRs of $0.8 million.

Short-Term  Borrowings and Long-Term Investment  Financing.  Short-term  borrowings and long-term
investment  financing  in our  Specialty  Servicing  and Finance  Operations  increased  by a total of $6.0 million
during the six months ended June 30, 2001.  This increase was primarily  due to  additional  borrowings  during the
current year, to fund acquisitions of investments and mortgage servicing rights.

## Liquidity and
Capital Resources

Liquidity
is the measurement of our ability to meet potential cash requirements, including
ongoing commitments to repay borrowings, fund investments, purchase pools of
loans, and 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.
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
June 30, 2001, liquidity in our Specialty Servicing and Finance Operations
(including cash and unused borrowings under our $12 million credit facility)
totaled $8.5 million, compared with approximately $5.6 million at December 31,
2000. In addition, we have obtained a commitment for a new $10 million borrowing
facility to support the acquisition of mortgage servicing rights. 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. We continue to aggressively seek new capital partners and financing.
There can be no assurance, however, that we will be able to obtain new capital
or will have sufficient cash flows. In addition, as part of our business
strategy to use bank and institutional co-investment financing, we intend to use
our available capital in a manner which will not make us dependent on
securitizations as a source of liquidity. As a result, we have no present intent
to securitize loans as a source of liquidity.

We
no longer own subordinated mortgage-backed securities backed by loan pools
originated or serviced by unaffiliated third parties, and currently hold
subordinated mortgage-backed securities only where we act as servicer of the
loan pools backing these securities. At June 30, 2001 we held $3.8 million of
such mortgage-backed securities. The related short-term repurchase agreement
which financed these securities was repaid in full in February 2001.

Adequate
credit facilities and other sources of funding are essential to the continuation
of the Companys ability to purchase servicing assets and pools of loans.
The Companys growth strategy is dependent in part on its ability to find
credit facilities and equity partners for purchases of servicing assets and, to
a lesser extent, loan pools. Such growth will depend largely on the
Companys ability to find and use capital partners for growth of our
Specialty Servicing and Finance Operations. Otherwise, such growth could be
significantly curtailed or delayed.

24

---

## HOLDING COMPANY AND MISCELLANEOUS OPERATIONS

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. In the second quarter of 2001, approximately $0.3
million in legal fees advanced to the Companys former executives
(discussed earlier) was allocated to the Holding Company. A primary source of
liquidity includes payments received from FBBH pursuant to a tax allocation
agreement between the Company and the Bank. However, the OTS has presently
limited the amount of these payments to the lesser of (1) the Banks
stand-alone tax liability and (2) the total tax payments made by the Company. In
April 2001, the Bank remitted $2.0 million to the Company for a portion of prior
years liabilities.

25

---

## IMPORTANT
FACTORS RELATING TO FORWARD-LOOKING STATEMENTS

The
Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. All of the statements
contained in this Quarterly Report on Form 10-Q which are not identified as
historical should be considered forward-looking. In connection with certain
forward-looking statements contained in this Quarterly Report on Form 10-Q and
those that may be made in the future by or on behalf of the Company which are
identified as forward-looking, the Company notes that there are various factors
that could cause actual results to differ materially from those set forth in any
such forward-looking statements. Such factors include, but are not limited to,
the condition of the real estate market, the availability and conditions of
financing for loan pool acquisitions, mortgage-backed securities, mortgage loan
servicing rights and other financial assets as well as interest rates.
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.

26

---

## ITEM 3.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

It is our objective to attempt to control risks  associated  with  interest  rate  movements.  In
general,  management's  strategy is to limit our exposure to earnings  variations  and  variations  in the value of
assets and  liabilities  as  interest  rates  change  over time.  Our asset and  liability  management  strategy is
formulated  and  monitored  by the asset and  liability  committees  for the  Company  and 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.  Interest rate swap  agreements  have
been utilized to reduce our exposure  caused by the narrowing of the interest  spread between fixed rate loans held
for investment and  associated  liabilities  funding those loans caused by changes in market  interest  rates.  The
Bank had  approximately  $18.2  million  notional  principal  amount in an interest rate swap  agreement  which was
designated  as a hedge of certain  fixed rate loans in order to  convert  fixed rate  income  streams on loans to a
variable rate. In April 2001, this swap agreement expired.

We evaluate the interest rate  sensitivity  of each pool of loans or  securities  in  conjunction
with the current  interest rate  environment and decide whether to hedge the interest rate exposure of a particular
pool. In general,  when a pool of loans,  securities or mortgage  servicing  rights is acquired,  we will determine
whether or not to hedge and,  with respect to any sale or financing  of any pool of loans  through  securitization,
will determine whether or not to discontinue its  duration-matched  hedging activities with respect to the relevant
assets.

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 June 30, 2001, should interest rates increase or decrease by
100 to 300 basis points, assuming the yield curves of the rate shocks will be
parallel to each other.

27

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`Interest Rate Sensitivity of Net Portfolio Value

                                             Net Portfolio Value                   NPV as % of Assets
                                  ------------------------------------------   ---------------------------
                                    $ Amount       $ Change       % Change      NPV Ratio        Change
                                  ------------   ------------   ------------   ------------   ------------
        Change in Rates                              (Dollars in thousands)
      +300bp ..................         87,550         (9,772)           (10)%        10.92%        (68)bp
      +200bp ..................         93,722         (3,600)            (4)         11.48         (12)bp
      +100bp ..................         96,008         (1,314)            (1)         11.59          (1)bp
         0bp ..................         97,322             --             --          11.60             --
      -100bp ..................         96,099         (1,223)            (1)         11.32         (28)bp
      -200bp ..................         93,966         (3,356)            (3)         10.96         (64)bp
      -300bp ..................         91,541         (5,781)            (6)         10.57        (103)bp`

Management  also believes that the  assumptions  (including  prepayment  assumptions)  it uses to
evaluate the  vulnerability  of our  operations to changes in interest  rates  approximate  actual  experience  and
considers them reasonable;  however,  the interest rate sensitivity of our assets and liabilities and the estimated
effects of changes in interest rates on NPV could vary  substantially if different  assumptions were used or actual
experience differs from the historical experience on which they are based.

28

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# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

## PART II. OTHER
INFORMATION

## Item 1. Legal
Proceedings.

The
Company is a defendant in other legal actions arising from transactions
conducted in the ordinary course of business. Management, after consultation
with legal counsel, believes the ultimate liability, if any, arising from such
actions will not materially affect the Companys consolidated results of
operations or financial position.

## Item 2.
Changes in Securities.

Not applicable.

## Item 3. Defaults
Upon Senior Securities.

Not applicable.

## Item 4.  Submission of Matters to a Vote of Security Holders.

No
matter was submitted to a vote of security holders during the period covered by
this report.

## Item 5. Other
Information.

Not applicable.

## Item 6.
Exhibits and Reports on Form 8-K.

|(a) | Exhibits.                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------
|    | 11              Statement re Computation of Per Share Earnings                                                 
|    |                                                                                                                
|(b) | Reports on Form 8-K during the quarter ended June 30, 2001:                                                    
|    | (i)      Report on Form 8-K
dated April 3, 2001, reporting the record date for the annual stockholders
meeting.
|    | (ii)     Report on Form 8-K dated April 5, 2001, reporting the
Companys rejection of an acquisition proposal. 

29

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# SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

| | WILSHIRE FINANCIAL SERVICES GROUP INC.
| | --------------------------------------

Date: August 14, 2001

|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     

30

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`Exhibit 11

                                                                     Quarter Ended               Six Months Ended
                                                                       June 30,                      June 30,
                                                              ---------------------------   ---------------------------
                                                                  2001           2000           2001           2000
                                                              ------------   ------------   ------------   ------------
                                                                        (Dollars in thousands, except share data)
Diluted net income per share:
    Net income ............................................   $      2,543   $      1,125   $      3,003   $      2,343
                                                              ------------   ------------   ------------   ------------

    Average number of shares outstanding ..................     20,079,125     20,035,458     20,063,239     20,035,458
    Net  effect  of  dilutive  stock  options  - based
      on treasury stock method ............................      1,348,367             --      1,100,362             --
                                                              ------------   ------------   ------------   ------------
        Total average shares ..............................     21,427,492     20,035,458     21,163,601     20,035,458
                                                              ============   ============   ============   ============
    Diluted net income per share ..........................   $       0.12   $       0.06   $       0.14   $       0.12
                                                              ============   ============   ============   ============`

31

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