<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
COMMISSION FILE NUMBER 33-13646
WESTCORP
_____________________________________________________
(Exact name of registrant as specified in its charter)
CALIFORNIA 51-0308535
_______________________________ __________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 PASTEUR, IRVINE, CALIFORNIA 92718-3804
_________________________________________
(Address of principal executive offices)
(714) 727-1000
___________________________________________________
(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 / /
As of November 7, 1994, the registrant had 23,143,655 outstanding shares of
common stock, $1.00 par value. The shares of common stock represent the only
class of common stock of the registrant.
The total number of sequentially numbered pages is 30.
<PAGE> 2
WESTCORP AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1994
TABLE OF CONTENTS
_____________________________
<TABLE>
<CAPTION>
Page No.
----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
September 30, 1994 and December 31, 1993 3
Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 1994 and 1993 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1994 and 1993 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
Exhibit 11 Computation of Earnings Per Share 30
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash, interest-bearing deposits with other financial institutions and
other short-term investments $ 76,256 $ 162,557
Investment securities available for sale (market value 1994: $92,450;
1993: $118,449) 92,450 118,002
Mortgage-backed securities held to maturity (market value 1994: $202,667) 205,884
Mortgage-backed securities available for sale (market value 1994: $164,797;
1993: $95,835) 164,797 94,567
Loans receivable, net of allowance for loan losses (1994: $41,455;
1993: $39,677) 1,340,210 1,220,250
Loans held for sale 298,330 300,731
Premises and equipment, net 66,849 67,516
Real estate owned, net 30,433 43,970
Accrued interest receivable 10,729 11,604
Excess of purchase cost over net assets acquired 1,120 1,184
Federal Home Loan Bank stock 19,474 17,566
Other assets 141,309 134,312
---------- ----------
$2,447,841 $2,172,259
========== ==========
LIABILITIES
Savings deposits $1,539,839 $1,357,058
Securities sold under agreements to repurchase 44,858
Short-term borrowings 221,284 124,511
Federal Home Loan Bank advances 89,000 126,000
Other borrowings 59 26,385
Amounts held on behalf of trustee 215,280 182,905
Unearned insurance premiums and insurance reserves 4,040 5,973
Other liabilities 20,734 23,889
---------- ----------
2,135,094 1,846,721
SUBORDINATED DEBENTURES 103,732 120,422
SHAREHOLDERS' EQUITY:
Common stock, par value $1.00 per share; authorized
45,000,000 shares; issued and outstanding 23,143,655
shares in 1994 and 21,894,805 shares in 1993 23,144 21,895
Paid-in capital 102,363 92,393
Retained earnings 88,714 90,828
Unrealized loss on securities available for sale, net of tax (5,206)
---------- ----------
209,015 205,116
---------- ----------
$2,447,841 $2,172,259
========== ==========
</TABLE>
__________________________________
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------------------------------------
1994 1993 1994 1993
------- ------- -------- --------
(Dollars in thousands, except per-share amounts)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $29,998 $33,924 $ 88,246 $110,629
Investment securities 1,323 1,555 4,204 4,811
Mortgage-backed securities 3,960 1,444 6,666 4,494
Other 987 1,463 2,785 2,554
------- ------- -------- --------
TOTAL INTEREST INCOME 36,268 38,386 101,901 122,488
Interest expense:
Savings deposits 17,745 18,323 47,872 60,118
Repurchase agreements 499 60 499 60
Federal Home Loan Bank advances and
other borrowings 3,676 6,973 13,192 18,728
------- ------- -------- --------
TOTAL INTEREST EXPENSE 21,920 25,356 61,563 78,906
------- ------- -------- --------
NET INTEREST INCOME 14,348 13,030 40,338 43,582
Provision for loan losses 3,273 6,192 10,026 20,318
------- ------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 11,075 6,838 30,312 23,264
Other income:
Automobile loan banking activities 15,190 14,731 53,285 42,367
Mortgage banking activities 514 3,303 505 9,294
Investment and mortgage-backed securities gains 313 2,301 761 2,301
Insurance income 1,392 1,757 5,626 5,194
Real estate operations 3,470 285 2,444 (3,304)
Miscellaneous 58 204 342 902
------- ------- -------- --------
TOTAL OTHER INCOME 20,937 22,581 62,963 56,754
Other expenses:
Salaries and employee benefits 12,951 11,117 39,635 32,281
Occupancy 2,223 2,114 6,248 5,861
Insurance 1,179 1,751 3,888 5,285
Miscellaneous 7,124 6,829 21,002 18,119
------- ------- -------- --------
TOTAL OTHER EXPENSES 23,477 21,811 70,773 61,546
------- ------- -------- --------
INCOME BEFORE INCOME TAXES 8,535 7,608 22,502 18,472
Income taxes 3,552 3,290 9,492 7,957
------- ------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 4,983 4,318 13,010 10,515
Extraordinary loss from the redemption of
subordinated debt, net of applicable income tax
benefit of $811. $(1,113) $ (1,113)
------- ------- -------- --------
NET INCOME $ 4,983 $ 3,205 $ 13,010 $ 9,402
======= ======= ======= ========
Net income per common share and common share
equivalent:
Before extraordinary loss $ 0.21 $ 0.19 $ 0.56 $ 0.52
Extraordinary loss due to the redemption of
subordinated debentures (0.05) (0.05)
------- ------- -------- --------
NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENT $ 0.21 $ 0.14 $ 0.56 $ 0.47
======= ======= ======== ========
CASH DIVIDENDS DECLARED PER SHARE OF
COMMON STOCK $ 0.075 $ 0.05 $ 0.225 $ 0.15
======= ======= ======== ========
</TABLE>
__________________________________
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1994 1993
--------- ---------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,010 $ 9,402
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Extraordinary loss, net of taxes 1,113
Provision for losses, net 7,920 13,643
Depreciation and amortization 5,245 5,577
Amortization of deferred fees (310) (1,734)
Amortization of issuance costs 452 266
Decrease in interest receivable 875 2,669
Losses on nonoperating activities 5,446 1,518
(Decrease) increase in interest payable (3,625) 202
(Decrease) increase in unearned insurance (1,933) 435
Other, net 13,325 (8,604)
Net change in loans available for sale 521 (171,708)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 40,926 (147,221)
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of investment securities 20,000 28,906
Purchase of investment securities available for sale (90,848)
Purchase of mortgage-backed securities available for sale (128,256) (7,052)
Purchase of mortgage-backed securities held to maturity (201,845)
Proceeds from sale of investment securities available for sale 62,617
Proceeds from sale of mortgage-backed securities available for sale 43,018 4,662
Payments on mortgage-backed securities 7,509 12,263
Net change in loans (157,971) 433,562
Purchase of loans (139) (170)
Additions to premises and equipment (4,515) (3,052)
Disposition of real estate owned 40,096 84,975
Purchase of FHLB stock (4,440) (329)
Proceeds from sales of FHLB stock 2,532 3,602
Net increase in trust receivable (15,856) (5,895)
Net increase in trustee accounts 32,374 39,751
--------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (367,493) 562,992
</TABLE>
5
<PAGE> 6
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1994 1993
-------- --------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $182,781 $(213,368)
Increase in securities under agreement to repurchase 44,858
Decrease in FHLB advances, net (37,000) (48,500)
Increase (decrease) in short-term borrowings, net 96,773 (199,696)
Retirement of other borrowings (26,325) (39,357)
Proceeds from issuance of subordinated debentures 120,297
Retirement of subordinated debentures (16,918)
Redemption of subordinated debentures (44,858)
Proceeds from sale of common stock 1,204 35,429
Cash dividends (5,107) (2,854)
-------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 240,266 (392,907)
-------- ---------
Net (decrease) increase in cash and equivalents (86,301) 22,864
Cash and equivalents at beginning of period 162,557 114,003
-------- ---------
Cash and equivalents at end of period $ 76,256 $ 136,867
======== =========
- ------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 65,188 $ 78,704
Income taxes 2,100 8,814
Supplemental disclosures of noncash transactions:
Acquisition of real estate acquired through foreclosure $ 28,309 $ 80,915
</TABLE>
__________________________________
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 1994 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1994. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and footnotes
thereto included in Westcorp's annual report on Form 10-K for the year ended
December 31, 1993.
Certain amounts from the 1993 consolidated financial statement amounts have
been reclassified to conform to the 1994 presentation.
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 114, "Accounting by Creditors for
Impairment of a Loan" ("SFAS 114") which is effective on or before fiscal years
beginning after December 15, 1994. Westcorp has not adopted SFAS 114 and it is
not expected to have a material impact on Westcorp's consolidated financial
statements.
In October 1994, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures" ("SFAS 118")
which is effective on or before fiscal years beginning after December 15, 1994.
SFAS 118 amends portions of SFAS 114. Westcorp has not adopted SFAS 118 and it
is not expected to have a material impact on Westcorp's consolidated financial
statements.
In October 1994, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 119, "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments",
("SFAS 119") which is effective on or before fiscal years beginning after
December 15, 1994. Westcorp has not adopted SFAS 119 and it is not expected to
have a material impact on Westcorp's consolidated financial statements.
7
<PAGE> 8
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - LOANS RECEIVABLE
Loans receivable consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
--------------- --------------
(Dollars in thousands)
<S> <C> <C>
Real Estate:
Mortgage $1,281,351 $1,310,003
Construction 28,003 31,684
---------- ----------
1,309,354 1,341,687
Less undisbursed loan proceeds 12,831 14,890
---------- ----------
1,296,523 1,326,797
Consumer:
Sales and leasing contracts 451,973 258,323
Less unearned discounts 72,476 27,972
---------- ----------
379,497 230,351
---------- ----------
1,676,020 1,557,148
Allowance for loan losses (41,455) (39,677)
Deferred loan fees (5,924) (5,849)
Other 9,899 9,359
---------- ----------
1,638,540 1,520,981
Less loans held for sale:
Mortgage 24,748 199,007
Consumer 273,582 101,724
---------- ----------
298,330 300,731
---------- ----------
Total $1,340,210 $1,220,250
========== ==========
</TABLE>
Loans serviced by Westcorp for the benefit of others totaled approximately $2.7
billion and $2.2 billion at September 30, 1994 and December 31, 1993,
respectively. These amounts are not reflected in the accompanying consolidated
financial statements.
8
<PAGE> 9
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - INVESTMENTS AVAILABLE FOR SALE
Effective January 1, 1994, Westcorp adopted SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities". Accordingly, securities available
for sale are adjusted to fair market value. The net unrealized gains or losses
on securities available for sale (net of applicable taxes) are included as a
separate component of shareholders' equity.
The aggregate carrying amount and estimated fair values of investment
securities available for sale were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
AVAILABLE FOR SALE SECURITIES
--------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSS FAIR VALUE
-------- ------------ ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations $ 94,197 $ 84 $5,550 $ 88,731
Corporate bonds 400 400
Obligations of states and political
subdivisions 3,523 229 3,294
Other 25 25
-------- ----- ------ --------
Total debt securities $ 98,145 $ 84 $5,779 $ 92,450
======== ===== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
AVAILABLE FOR SALE SECURITIES
-------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSS FAIR VALUE
-------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations $114,050 $1,073 $ 600 $114,523
Corporate bonds 400 400
Obligations of states and political
subdivisions 3,527 2 28 3,501
Other 25 25
-------- ------ ------ --------
Total debt securities $118,002 $1,075 $ 628 $118,449
======== ====== ====== ========
</TABLE>
9
<PAGE> 10
NOTE D - MORTGAGE-BACKED SECURITIES
Effective January 1, 1994, Westcorp adopted SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities". Accordingly, securities available
for sale are adjusted to fair market value. The net unrealized gains or losses
on securities available for sale (net of applicable taxes) are included as a
separate component of shareholders' equity.
The aggregate carrying amounts and estimated fair values of the mortgage-backed
securities available for sale and held to maturity were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
AVAILABLE FOR SALE SECURITIES
--------------------------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSS VALUE
-------- ---------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
GNMA certificates $ 59,401 $1,100 $1,540 $ 58,961
FNMA certificates 82,798 2,700 80,098
FHLMC participation certificates 3,226 1 15 3,212
Collateralized mortgage
obligations 22,810 54 338 22,526
-------- ------ ------ --------
Total mortgage-backed securities $168,235 $1,155 $4,593 $164,797
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
AVAILABLE FOR SALE SECURITIES
--------------------------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSS VALUE
-------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
GNMA certificates $ 2,020 $ 131 $ 16 $ 2,135
FNMA certificates 88,782 1,070 89,852
FHLMC participation certificates 3,592 83 3,675
Other participation certificates 173 173
------- ------ ------ -------
Total mortgage-backed securities $ 94,567 $1,284 $ 16 $ 95,835
======== ====== ====== ========
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
HELD TO MATURITY SECURITIES
----------------------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSS VALUE
-------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
GNMA Certificates $205,713 $22 $3,239 $202,496
Other participation certificates 171 171
-------- --- ------ ---------
Total mortgage-backed securities $205,884 $22 $3,239 $202,667
======== === ====== ========
</TABLE>
NOTE E - DIVIDENDS
On March 18, June 22 and August 31, 1994, Westcorp paid cash dividends of
$0.075 per share. On November 10, 1994 Westcorp declared a cash dividend of
$0.075 per share payable on December 8, 1994 to shareholders of record on
November 28, 1994. On May 13, 1994, Westcorp also paid a 5% stock dividend.
The per share amounts for all periods presented have been restated to reflect
the increased shares outstanding.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets increased $275.6 million or 12.9% to $2.4 billion at September 30,
1994 from $2.2 billion at December 31, 1993. This increase is the result of
increased loans receivable and the purchase of mortgage-backed securities in
the held to maturity portfolio.
LOANS
Loans (including those held for sale) net of unearned discounts and undisbursed
loan proceeds, increased $117.6 million or 7.7% since December 31, 1993. The
increase is the result of the differential between loans originated and sold
during the nine month period. Westcorp has retained the servicing on almost
all loans sold and receives a servicing fee therefrom. Included in the
portfolio are loans held for sale of which $24.7 million are mortgage loans
secured primarily by single family residences and $273.6 million which are
retail installment sales contracts secured by motor vehicles. Westcorp's
origination activity has continued to increase generating the increase in on
balance sheet loans despite continued loan sales in the secondary market.
Consumer loan originations were 47% higher for the nine months ended September
30, 1994 compared to the same period in 1993. This increase was primarily the
result of Westcorp's continued expansion throughout 1993 and into 1994 of its
dealer center network and favorable market conditions for automobile sales in
California, Oregon, Nevada, Arizona, Texas, and Washington - the states in
which Westcorp originates loans.
Real estate originations were lower during the nine month period of 1994
compared to the same period a year ago. The 13.3% decrease in real estate
originations is reflective of the lower level of refinancings due to the
general increase in interest rates. The following table sets forth the loan
origination, purchase and sale activity of Westcorp for the periods indicated.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30
---------------------------------------------------------------------
1994 1993
------------------------------ ----------------------------
MORTGAGE CONSUMER MORTGAGE CONSUMER
---------- --------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Beginning balance $1,326,797 $230,351 $1,571,628 $354,201
Originations (1) 535,986 898,244 618,477 611,144
Purchases 139 170
Sales 415,697 630,000 555,531 612,500
Principal reductions (2) 150,702 119,098 267,817 136,992
---------- -------- ---------- --------
Ending Balance $1,296,523 $379,497 $1,366,927 $215,853
========== ======== ========== ========
</TABLE>
(1) Includes automobile loans purchased from motor vehicle dealers.
(2) Includes scheduled payments, prepayments and charge-offs.
12
<PAGE> 13
The real estate loan portfolio (including those classified as held for sale)
consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 DECEMBER 31, 1993
----------------------------- ----------------------------
AMOUNT % AMOUNT %
---------- ----- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Single family residential loans:
First trust deeds $ 692,775 53.4% $ 673,322 50.7%
Second trust deeds 121,939 9.4 152,160 11.5
---------- ----- ---------- -----
814,714 62.8 825,482 62.2
Multi-family residential loans 463,172 35.7 480,692 36.2
Construction loans 28,003 2.2 31,684 2.4
Other 3,465 0.3 3,828 0.3
---------- ----- ---------- -----
1,309,354 1,341,686
Less undisbursed loan proceeds 12,831 1.0 14,889 1.1
---------- ----- ---------- -----
$1,296,523 100.0% $1,326,797 100.0%
========== ===== ========== =====
</TABLE>
Westcorp's portfolio consisted primarily of adjustable rate mortgage loans as
shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 DECEMBER 31, 1993
--------------------------- --------------------------
AMOUNT % AMOUNT %
-------- ----- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed rate loans:
Single family residential loans $59,574 4.6% $ 184,075 13.9%
Multi-family loans 2,624 .2 2,181 0.2
Adjustable rate loans:
Negative amortizing loans 880,814 67.9 730,840 55.1
No negative amortizing loans 353,511 27.3 409,701 30.8
---------- ----- ---------- -----
Total portfolio $1,296,523 100.0% $1,326,797 100.0%
========== ===== ========== =====
</TABLE>
The composition of the consumer loan portfolio, all of which is fixed-rate, was
as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 DECEMBER 31, 1993
---------------------------- ---------------------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Automobile loans, net $ 376,080 99.1% $ 226,566 98.4%
Other 3,417 0.9 3,785 1.6
---------- ----- -------- -----
Total portfolio $ 379,497 100.0% $ 230,351 100.0%
========== ===== ========== =====
</TABLE>
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
During the third quarter of 1994, Westcorp purchased a portfolio of
mortgage-backed securities held to maturity totalling $201.8 million at quarter
end. This portfolio is part of Westcorp's overall strategy to fully employ
capital and enhance net interest income.
13
<PAGE> 14
ASSET QUALITY
GENERAL
The condition of the California real estate market has shown some recent signs
of recovery. Nonetheless, the market continues to demonstrate significant
areas of weakness and $7.2 million of loans are still on nonaccrual as a result
of the Northridge, California earthquake compared to $8.6 million at June 30,
1994.
DELINQUENCY
Loans 60 days or more delinquent increased by $2.4 million to $26.3 million at
September 30, 1994 compared to $23.9 million at December 31, 1993. This
increase is mostly a result of properties affected by the Northridge
earthquake. Delinquent loans by type of loan and as a percentage of loans by
type are summarized as follows at September 30, 1994 and December 31, 1993:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
NUMBER OF DAYS DELINQUENT
---------------------------------------------------------------
60-89 90 OR MORE TOTAL
-------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
-------- -------- ---------- -------- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Single family residential homes $3,161 0.4% $14,815 1.8% $17,976 2.2%
Multi-family residential homes 998 0.2 6,294 1.4 7,292 1.6
Consumer 487 0.1 295 0.1 782 0.2
Other 206 1.0 206 1.0
------ --- ------- --- ------- ---
Total $4,646 0.3% $21,610 1.3% $26,256 1.6%
====== === ======= === ======= ===
DECEMBER 31, 1993
NUMBER OF DAYS DELINQUENT
---------------------------------------------------------------
60-89 90 OR MORE TOTAL
-------------------- -------------------- ------------------
AMOUNT % AMOUNT % AMOUNT %
-------- -------- ---------- -------- ---------- -----
(Dollars in thousands)
Single family residential homes $4,043 0.5% $15,603 1.9% $19,646 2.4%
Multi-family residential homes 1,574 0.3 1,811 0.4 3,385 0.7
Consumer 504 0.2 351 0.2 855 0.4
------ --- ------- --- ------- ---
Total $6,121 0.4% $17,765 1.1% $23,886 1.5%
====== === ======= === ======= ===
</TABLE>
14
<PAGE> 15
NONPERFORMING ASSETS
Nonperforming assets ("NPA") consist of nonperforming loans ("NPL"),
insubstance foreclosures, ("ISF") and real estate acquired through foreclosure
("REO"). REOs and ISFs are accounted for at fair value. A loan is classified
as an ISF when the risk of loss has substantively passed from the borrower to
the lender. Westcorp's ISFs are primarily composed of multi-family properties.
Also, included in NPAs is $582 thousand of real estate acquired for investment
("REI") that due to its deteriorating collateral value and inability to repay
its debt, is considered nonperforming. NPLs are defined as all loans on
nonaccrual and includes mortgage loans 90 days or more past due and performing
loans where full collection of principal and interest is not reasonably
assured. Interest income on NPL is not accrued or recognized. At September
30, 1994 interest on nonperforming loans excluded from interest income was $4.4
million. At September 30, 1993 such amount was $6.8 million.
Nonperforming loans consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Loans 90 days or more past due $20,357 $17,651
Performing, nonaccrual loans 3,785 14,315
------- -------
Total nonperforming loans $24,142 $31,966
======= =======
Nonperforming loans by loan type consisted of the following:
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
(Dollars in thousands)
Single family residential $15,012 $15,722
Multi-family 5-36 units 4,836 2,985
Multi-family over 36 units 2,775 10,134
Other 1,519 3,125
------- -------
Total nonperforming loans $24,142 $31,966
======= =======
</TABLE>
Total NPAs decreased 25% to $56.5 million at September 30, 1994 compared to
$75.0 million at December 31, 1993. This is the lowest level of nonperforming
assets since December 1991. The overall decrease is largely attributable to
the improvements in the multifamily portfolio. At September 30, 1994, NPAs
represented 2.3% of total assets compared to 3.5% at December 31, 1993.
15
<PAGE> 16
The migration of nonperforming loans, insubstance foreclosures and real estate
owned from December 31, 1993 to September 30, 1994 is shown below.
NONPERFORMING LOANS
<TABLE>
<CAPTION>
TOTAL SFR 5-36 37+ OTHER
------- ------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, 12/31/93 $31,966 $15,722 $ 2,985 $10,134 $3,125
New nonperforming loans 39,769 16,792 7,556 15,215 206
REO/ISF (17,337) (10,442) (3,380) (3,515)
Cures and payoffs (28,189) (4,993) (2,325) (19,059) (1,812)
Charge-offs (2,067) (2,067)
------- ------- ------- ------- ------
Balance, 9/30/94 $24,142 $15,012 $ 4,836 $ 2,775 $1,519
======= ======= ======= ======= ======
INSUBSTANCE FORECLOSURES
TOTAL SFR 5-36 37+ OTHER
------- ------- ------- ------- ------
(Dollars in thousands)
Balance, 12/31/93 $20,826 $ 1,242 $14,859 $4,725
New ISF 4,370 377 3,993
Transfer to REO (8,892) (8,892)
Cures (4,725) (4,725)
Writedowns (857) (9) (848)
------- ------- ------- ------- ------
Balance, 9/30/94 $10,722 $ 1,610 $ 9,112
======= ======= ======= ======= ======
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
TOTAL SFR 5-36 37+ OTHER
------- -------- -------- ------- -----
(Dollars in thousands)
Balance, 12/31/93 $17,404 $ 7,468 $ 725 $9,211
New REO 32,831 12,638 6,622 13,571
Sales (21,691) (12,470) (2,203) (3,122) (3,896)
Writedowns (7,508) (1,473) (1,882) (3,942) (211)
------- ------- ------- ------- ------
Balance, 9/30/94 $21,036 $ 6,163 $ 3,262 $ 6,507 $5,104
======= ======= ======= ======= ======
</TABLE>
For nonperforming assets other than nonperforming loans, assets secured by
multi-family residential properties continued to be the dominant asset type
consisting of $20.5 million or 64.5% of these assets. Of the multi-family
residential properties, $15.6 million are properties of 37 units or greater.
16
<PAGE> 17
ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES
Consistent with loan volume, loan sales, losses, nonaccrual loans and other
relevant factors, Westcorp increased its allowance for loan losses to $41.5
million at September 30, 1994 compared to $39.7 million at December 31, 1993.
While Westcorp's nonperforming assets are mainly multi-family and construction
loans, no single loan or series of such loans predominate. The provision and
allowance for loan losses are indicative of loan volumes, loss trends and
management's analysis of market conditions. These conditions include the
effects of the Northridge earthquake. The allowance for loan losses is
maintained at a level believed adequate by management to absorb potential
losses in the loan portfolio.
The following table presents summarized data relative to the allowance for loan
losses.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Total loans $1,676,020 $1,557,148
Allowance for loan losses 41,455 39,677
Allowance for real estate losses 1,906 3,508
Loans past due 60 days or more 26,257 23,886
Nonperforming loans 24,142 31,966
Nonperforming assets 56,482 74,972
Allowance for loan losses as a percent of:
Total loans 2.5% 2.6%
Loans past due 60 days or more 157.9 166.1
Nonperforming loans 171.7 124.1
Total allowance as a percent of nonperforming assets 76.8 57.6
Nonperforming loans as a percent of total loans 1.4 2.1
Nonperforming assets as a percent of total assets 2.3 3.5
</TABLE>
17
<PAGE> 18
The table below provides an historical analysis of the allowance for loan
losses.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- ---------------------------
1994 1993 1994 1993
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $41,648 $40,791 $39,677 $40,656
Charge-offs
Real estate (3,179) (4,088) (6,217) (15,963)
Consumer (2,786) (2,707) (7,604) (10,268)
------- ------- ------- -------
(5,965) (6,795) (13,821) (26,231)
Recoveries
Real estate 457 512 753 2,961
Consumer 2,042 1,398 4,820 4,394
------- ------- ------- -------
2,499 1,910 5,573 7,355
------- ------- ------- -------
Net charge-offs (3,466) (4,885) (8,248) (18,876)
Provision for loan losses 3,273 6,192 10,026 20,318
------- ------- ------- -------
$41,455 $42,098 $41,455 $42,098
Ratio of net charge-offs during ======= ======= ======= =======
period to average loans out-standing
during the period (annualized) .89% 1.17% .72% 1.43%
======= ======= ======= =======
</TABLE>
Changes in the allowance for real estate losses were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- ---------------------------
1994 1993 1994 1993
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 2,511 $ 6,446 $ 3,508 $20,185
Provision for real estate losses (606) (2,800) (2,106) (6,489)
Charge-offs, net 1 (16) 504 (10,066)
------- ------- ------- -------
Balance at end of period $ 1,906 $ 3,630 $ 1,906 $ 3,630
======= ======= ======= =======
</TABLE>
18
<PAGE> 19
RESULTS OF OPERATIONS
SUMMARY
Westcorp reported net income of $5.0 million and $13.0 million for the three
months and nine months ended September 30, 1994, respectively, compared to $3.2
million and $9.4 million for the respective periods of 1993. Return on average
assets was 0.97% and 0.85% for the three and nine months ended September 30,
1994, respectively, compared to 0.55% and 0.54% for the same periods of 1993.
Return on average equity was 9.64% and 8.39% for the three and nine months
ended September 30, 1994, respectively, compared to 7.25% and 7.09% for the
respective periods of 1993. As discussed in greater detail below, net income
was most affected by the following four factors.
- Net interest income declined as interest margins narrowed while interest
earning assets increased.
- Provision for loan losses decreased consistent with lower loan losses.
- Other income increased as a result of increased loan servicing activities.
- Other expenses increased as a result of expansion into other states and
expanding servicing portfolios.
NET INTEREST INCOME
Net interest income for the three months and nine months ended September 30,
1994 was $14.3 million and $40.3 million, respectively. For the same periods
of 1993, net interest income totalled $13.0 million and $43.6 million.
The decrease in net interest income for the nine month period is attributable
to the overall narrowing of interest margins due to the rising interest rate
environment. Net interest margins narrowed 25 basis points for the nine months
ended September 30, 1994 compared to the same period of 1993 due to a decrease
of 63 basis points in the yield on interest-earning assets, offset by a
decrease of 38 basis points in the cost of funds for the same period.
Yields on loans and mortgage-backed securities decreased 62 basis points for
the nine months ended September 30, 1994 compared to the same period of 1993 as
a result of higher prepayments and the reinvestment of funds into loans and
mortgage-backed securities at lower rates than the rates on those assets sold
or repaid.
Similarly, the cost of savings deposits declined 31 basis points for the nine
months ended September 30, 1994 compared to the same period of 1993. This
decrease reflects a continued replacement of higher-costing deposits with lower
costing ones. The cost of FHLB advances and other borrowings decreased 32
basis points. The relatively smaller decrease in the cost of other borrowings
is the result of replacing short term borrowings with long term subordinated
debentures as part of Westcorp's strategy to manage interest rate risk and
increase its capital base.
The increase in net interest income for the three month period is primarily
attributable to the purchase of higher yielding mortgage-backed securities, and
the increased level of interest earning assets, particularly consumer loans.
Net interest margins increased 8 basis points for the three months ended
September 30, 1994 compared to the same period of 1993 due to an increase of 81
basis points in the yield on mortgage-backed securities and a decrease of 34
basis points in the cost of funds for the same period.
19
<PAGE> 20
Interest rates earned and paid for the three and nine months ended September
30, 1994 and 1993 are summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- --------------------------
1994 1993 1994 1993
-------- --------- --------- --------
YIELD/ YIELD/ YIELD/ YIELD/
RATE RATE RATE RATE
<S> <C> <C> <C> <C>
Assets
Interest-earning assets:
Investment securities 5.18% 5.92% 5.20% 6.18%
Mortgage-backed securities (1) 6.51 5.70 6.01 5.85
Loans:
Consumer 13.42 13.35 13.16 13.40
Real estate 6.31 7.16 6.51 7.30
Other 5.36 3.95 4.46 4.20
----- ----- ----- -----
Total interest-earning assets 7.35 7.61 7.31 7.94
Interest-bearing liabilities:
Deposits 4.71 4.66 4.54 4.85
Public offerings (2) 7.90 8.93 7.59 7.54
Repurchase agreements 3.26 2.77 3.26 2.77
FHLB advances and other
borrowings 7.44 8.23 7.59 7.91
----- ----- ----- -----
Total interest-bearing liabilities 5.02 5.36 5.02 5.40
Interest rate spread 2.33% 2.25% 2.29% 2.54%
===== ===== ===== =====
Net yield on average interest
earning assets 2.94% 2.62% 2.88% 2.81%
===== ===== ===== =====
</TABLE>
__________________________________
(1) Includes collateralized mortgage obligations.
(2) Includes subordinated debentures, commercial paper and collateralized
bonds.
20
<PAGE> 21
ASSET/LIABILITY MANAGEMENT
The continued profitability of Westcorp is dependent upon, among other factors,
the extent to which the effect of changes in interest rates on its earnings are
minimized. Thus, a major objective of Westcorp's asset/liability management
program has been to control interest rate risk through matching the maturity
and repricing characteristics of its interest-earning assets with those of its
interest-bearing liabilities.
Westcorp originates both adjustable-rate mortgages (ARMs) and fixed-rate
mortgages. To minimize the interest rate risk associated with its real estate
loan portfolio, Westcorp generally retains the ARMs in its own loan portfolio
and sells its fixed-rate loans in the secondary market with servicing rights
retained. Westcorp has also purchased mortgage servicing rights which act as a
potential hedge against rising interest rates. At September 30, 1994, Westcorp
serviced $1.6 billion in mortgage real estate loans for others. ARMs and
adjustable-rate mortgage-backed securities (MBS) amounted to 83% of the total
mortgage loans and MBS held by Westcorp at September 30, 1994. Interest rates
generally adjust on a monthly, semiannual or annual basis with 68% of
Westcorp's adjustable products adjusting monthly.
Westcorp also originates fixed-rate consumer loans. To minimize interest rate
risk associated with its consumer loan portfolio, Westcorp has sold
approximately two-thirds of its consumer loan production and retained the
servicing rights and a portion of the interest payable. The interest rate
passed through to the purchasers of those consumer loans is fixed, which
provides off-balance sheet match funding for the majority of Westcorp's
consumer loans. The consumer loans retained on-balance sheet have an average
life of 1.8 years. At September 30, 1994, Westcorp serviced $1.2 billion in
consumer loans for others.
Fixed-rate certificates of deposit (CDs) represent Westcorp's primary source of
funding. Westcorp has lengthened the weighted average remaining maturity on
CDs from 317 days as of June 30, 1994 to 340 days as of September 30, 1994 to
reduce its exposure to rising interest rates. Approximately 38% of Westcorp's
other borrowed funds at September 30, 1994 had fixed rates and maturities
greater than one year. Subordinated debentures, which represent 59% of this
total, are redeemable in six years and mature in nine years.
Westcorp has entered into or committed to interest rate swaps and an interest
rate cap as hedges against market value changes in designated portions of its
MBS portfolio. At September 30, 1994, swaps with a notional amount of $60.5
million and caps totalling $20 million were outstanding. In addition, Westcorp
had committed to enter into swaps for an additional $25 million for settlement
after quarter-end.
The sensitivity of earnings to interest rate changes may be measured by the
difference, or gap, between the amount of assets and liabilities scheduled to
reprice, based on certain assumptions, within the same period expressed as a
percentage of interest-earning assets. Conceptually, the lower the amount of
this gap, the less sensitive earnings are to interest rate changes. A positive
gap means an excess of assets over liabilities repricing during the same
period. However, this method of measuring interest rate sensitivity does not
take into account the differing repricing characteristics of various types of
assets and liabilities. Thus, certain assets and liabilities that have similar
maturities or periods to repricing may react in different ways to changes in
market interest rates. For instance, Westcorp's ARMs are mainly tied to the
Eleventh District Cost of Funds (COFI) which typically lags the market, and
also generally have restrictions on the maximum amounts of periodic and/or
total changes in interest rates and payments. On the other hand, maturing
borrowings have no such restrictions and will reprice at current market rates.
Overall, Westcorp's interest-bearing liabilities react to changes in market
interest rates faster than do its interest-earning assets. This tends to
decrease
21
<PAGE> 22
Westcorp's net interest margin during a period of rising rates.
The following table illustrates the projected interest rate maturities, based
upon certain assumptions, regarding the major asset and liability categories of
Westcorp at September 30, 1994. The interest rate sensitivity of Westcorp's
assets and liabilities illustrated in the following table could vary
substantially if different assumptions were used or actual experience differs
from the assumptions set forth.
22
<PAGE> 23
INTEREST RATE SENSITIVITY ANALYSIS
AT SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
WITHIN 3 MONTHS 1 YEAR TO 3 YEARS TO AFTER 5
3 MONTHS TO 1 YEAR 3 YEARS 5 YEARS YEARS TOTAL
---------- --------- ----------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Investment securities $ 12,294 $ 76,439 $ 3,717 $ 92,450
Other investments $ 82,655 $ 500 83,155
Mortgage-backed
securities(5) 109,484 48,740 22,384 24,908 165,165 370,681
Consumer loans (1) 45,653 115,654 164,513 51,808 1,869 379,497
Real estate loans (2):
Adjustable rate mortgages 902,272 272,284 27,503 8,288 6,848 1,217,195
Fixed rate mortgages 2,553 6,792 14,842 10,262 27,749 62,198
Construction loans 17,130 17,130
---------- ---------- --------- -------- --------- ----------
Total interest earning assets $1,159,747 $ 443,970 $ 241,536 $171,705 $ 205,348 $2,222,306
========== ========== ========= ======== ========= ==========
Interest bearing liabilities:
Passbook accounts/money
market deposits (3) $ 6,622 $ 17,797 $ 35,224 $ 22,592 $ 40,340 $122,575
Certificates of deposit (4) 245,232 793,512 365,705 12,510 1,416,959
FHLB advances (4) 17,000 59,000 6,500 6,500 89,000
Other borrowings (4) 266,145 14 42 103,732 369,933
---------- ---------- --------- -------- --------- ----------
Total interest bearing
liabilities $ 517,999 $ 828,323 $ 459,971 $ 41,602 $ 150,572 $1,998,467
========== ========== ========= ======== ========= ==========
Excess interest earning
assets/(liabilities) $ 641,748 $ (384,353) $(218,435) $130,103 $ 54,776 $ 223,839
---------- ---------- --------- -------- --------- ----------
Effect of hedging activities $ 80,500 $(45,500) $ (35,000)
Cumulative excess $ 722,248 $ 337,895 $ 119,460 $204,063 $ 223,839 $ 223,839
========== ========== ========= ======== ========= ==========
Cumulative excess as a
percentage of total interest
earning assets 32.50% 15.20% 5.38% 9.18% 10.07% 10.07%
</TABLE>
(1) Based on contractual maturities adjusted by Westcorp's historical
prepayment rate.
(2) Based on interest rate repricing adjusted for projected prepayments.
(3) Based on assumptions established by the Office of Thrift Supervision.
(4) Based on contractual maturity.
(5) Includes both mortgage-backed securities available for sale and held to
maturity.
23
<PAGE> 24
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three and nine months ended September 30,
1994 was $3.3 million and $10.0 million respectively, compared to $6.1 million
and $20.3 million during the comparable periods of 1993. Westcorp recorded
lower provisions for loan losses for the first nine months of 1994 compared to
1993 as a result of lower charge-offs. Nonetheless, the allowance for loan
losses increased to $41.5 million at September 30, 1994 compared to $39.7
million at December 31, 1993 due to continued uncertainty in the economy. See
"Asset Quality".
OTHER INCOME
Total other income increased for both the three and nine months ended September
30, 1994 compared to the same period in 1993. Other income is generated from
automobile loan banking activities, mortgage banking activities, and other
ancillary sources.
AUTOMOBILE LOAN BANKING ACTIVITIES
Westcorp originates and sells automobile sales contracts with servicing rights
retained in the secondary market through a grantor trust structure. Income
from automobile loan banking includes gains or losses from the sale of loans,
loan servicing income net of amortization of capitalized servicing, and other
related income such as late charges. For the three and nine months ended
September 30, 1994, automobile loan banking operations generated income of
$15.2 million and $53.3 million, respectively, compared to $14.7 million and
$42.4 million for the same periods of 1993.
During the three months ended September 30, 1994, net losses on automobile loan
sales totalled $0.2 million while net gains totalled $0.8 million for the nine
months ended September 30, 1994. This compares to gains from loan sales of
$2.9 million and $7.9 million for the three and nine months ended September 30,
1993, respectively. The lower gains and the realized losses on sales during
1994 are a result of narrower interest margins driven by a rising interest rate
environment, which affects the pricing of loan sales. Automobile loans sold
during the first nine months of 1994 totalled $630 million compared to $612.5
million during the first nine months of 1993.
Net loan servicing income increased to $11.9 million and $43.1 million for the
three and nine months ended September 30, 1994, respectively, compared to $9.4
million and $27.3 million for the comparable periods of 1993. The increase is
the result of a larger servicing portfolio. Westcorp serviced $1.2 billion of
automobile loans for others at September 30, 1994 compared to $968 million at
September 30, 1993.
Automobile loan banking income for the three and nine month periods ended
September 30, 1994 and 1993 is summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
---------------------- ------------------------
1994 1993 1994 1993
------ ------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net gains (losses) from sale of
automobile loans $ (249) $ 2,902 $ 815 $ 7,916
Loan servicing income, net 11,904 9,421 43,052 27,273
Other 3,535 2,408 9,418 7,178
------- ------- ------- -------
$15,190 $14,731 $53,285 $42,367
======= ======= ======= =======
</TABLE>
24
<PAGE> 25
MORTGAGE BANKING ACTIVITIES
Westcorp originates mortgage loans for sale in the secondary market. Mortgage
banking operations include gains and losses on the sale of loans, loan
servicing income net of amortization of capitalized servicing, and other income
which is primarily late charges. During the three and nine months ended
September 30, 1994, mortgage banking generated income of $514 thousand and $505
thousand, respectively, compared to income of $3.3 million and $9.3 million for
the comparable periods of 1993.
Losses on sales of mortgage loans for the three and nine months ended September
30, 1994 totalled $0.7 million and $2.6 million, respectively, compared to
gains on sales of mortgage loans of $2.3 million and $6.4 million during the
comparable periods of 1993. Gains and losses on mortgage loans are directly
related to the overall interest rate environment. During 1994, interest rates
have increased for mortgage loans in contrast to the declining interest rate
environment during 1993. This change in the interest rate environment has
adversely affected the pricing of mortgage loans. Loans sold during the first
nine months of 1994 totalled $415.7 million compared to $555.5 million for the
first nine months of 1993. As a result of the rising rate environment and the
corresponding reduction in loan originations, mortgage loans held for sale
decreased from $199.0 million at December 31, 1993 to $24.7 million at
September 30, 1994.
Net loan servicing income increased to $1.1 million and $2.7 million for the
three and nine months ended September 30, 1994, respectively, compared to $0.8
million and $2.2 million for the comparable periods of 1993 as a result of a
larger servicing portfolio. At September 30, 1994, Westcorp serviced $1.6
billion of mortgage loans for others compared to $1.0 billion at September 30,
1993.
Mortgage banking income for the three and nine months ended September 30, 1994
and 1993 is summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
----------------------- -----------------------
1994 1993 1994 1993
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net gains (losses) from sale of
mortgage loans $ (702) $ 2,298 $(2,595) $ 6,426
Loan servicing income, net 1,073 800 2,692 2,214
Other 143 205 408 654
------- ------- ------- -------
$ 514 $ 3,303 $ 505 $ 9,294
======= ======= ======= =======
</TABLE>
MISCELLANEOUS
Other sources of income include insurance income and real estate operations.
Insurance income is generated primarily from commissions earned on the sale of
loan-related insurance products as well as insurance-related investment
products. Insurance income for the three months and nine months ended
September 30, 1994, totalled $1.4 million and $5.6 million, respectively,
compared to $1.8 million and $5.2 million for the same periods in 1993.
25
<PAGE> 26
Real estate operations include the ongoing costs of operations and disposition
associated with Westcorp's investments in joint ventures and REO. Real estate
operations earned $3.5 million in the three months and $2.4 million in the nine
months ended September 30, 1994 compared to income of $285 thousand and losses
of $3.3 million for the same periods in 1993. The changes between quarters is
primarily a result of reduced expenses on nonperforming assets and increased
gains on sales of REO.
OTHER EXPENSES
Other expenses consists of compensation and benefits, occupancy expense,
insurance, and other operating expenses. Other expenses increased to $23.5
million and $70.8 million for the three and nine months ended September 30,
1994, respectively, compared to $21.8 million and $61.5 million for the same
periods in 1993. The increase is chiefly in compensation and benefits and is
primarily a function of increased loan servicing portfolios, and expansion of
operations into additional states. The ratio of annualized operating expense
to average serviced assets was 2.1% for both the nine months ended September
30, 1994 and 1993.
INCOME TAXES
The effective tax rates for the nine months ended September 30, 1994 and 1993
were 42.3% and 43.1%, respectively.
CAPITAL RESOURCES AND LIQUIDITY
Westcorp has diversified sources of funds generated through its operations.
Primary sources include deposits, loan principal and interest payments
received, sales of real estate loans and consumer loans, sale of
mortgage-backed securities ("MBS") and the maturity or sale of investment
securities. Other sources include commercial paper, Federal Home Loan Bank
advances and reverse repurchase agreements. Prepayments on loans and
mortgage-backed securities and deposit inflows and outflows are affected
significantly by interest rates, real estate sales activity and general
economic conditions.
Westcorp uses these sources to meet its business needs which includes funding
maturing certificates of deposits and savings withdrawals, repayment of
borrowings, funding loan and investment commitments and real estate operations,
meeting operating expenses, and maintaining minimum regulatory liquidity and
capital levels.
During the third quarter of 1994, Westcorp purchased $329.5 million of MBS to
more profitably employ its excess capital and enhance interest spreads. These
securities have been segregated into the available for sale portfolio and the
held to maturity portfolio in the financial statements on an individual
security basis in accordance with management's intent and ability to hold to
maturity. These purchases included both fixed and adjustable rate MBS.
Westcorp's wholly-owned subsidiary, Western Financial Savings Bank, F.S.B.,
(the "Bank") is a federally chartered savings and loan. As such, it is subject
to certain minimum capital requirements. The Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") separates all financial
institutions into one of five capital categories: "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
and "critically undercapitalized". In order to be considered "well
capitalized", an institution must have a total risk-based capital ratio of 10%
or greater, a Tier 1 (i.e., core) risk-based capital ratio of 6% or greater, a
leverage ratio of 5% or greater and not be subject to any OTS order or
directive to meet and maintain a specific capital level for any capital
measure. The Bank currently meets all the requirements
26
<PAGE> 27
of a "well capitalized" institution. Its regulatory capital position at
September 30, 1994 was as follows:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
----------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Regulatory capital $185,465 7.52%(1) $185,465 7.52%(1) $279,832 12.77%(2)
Minimum OTS capital
requirement 36,994 1.50% 73,988 3.00% 175,246 8.00%
-------- ---- -------- ---- -------- -----
Excess capital $148,471 6.02% $111,477 4.52% $104,586 4.77%
======== ==== ======== ==== ======== =====
</TABLE>
(1) As a percentage of total adjusted assets.
(2) As a percentage of risk-weighted assets.
As a member of the FHLB System, the Bank is required to maintain a specified
ratio of cash, short-term United States government and other qualifying
securities to net withdrawable accounts and borrowings payable in a year or
less. The required liquidity ratio is currently 5%. The Bank has maintained
liquidity in excess of the required amount in 1994.
27
<PAGE> 28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 11, 1994, Westcorp Financial Services,
Inc., the consumer lending subsidiary of the
Bank, was served with a lawsuit entitled Denise
Whitehouse, suing individually, on behalf of the
general public vs. Westcorp Financial Services,
Inc., brought in the Superior Court of
California, County of Contra Costa. The suit
seeks injunctive relief, restitution and damages
for alleged violations of certain consumer
protection and Business and Profession Codes
involving the placement of collateral protection
insurance by the lender under the contractual
provisions on its automobile-secured consumer
loans. No class has yet been certified and
Westcorp Financial Services is vigorously
defending. It is not yet possible to estimate
potential liability or the likelihood thereof.
In addition, Westcorp is involved as a party to
certain legal proceedings incidental to its
business. Westcorp believes that the outcome of
such proceedings will not have a material effect
upon Westcorp's business or financial condition.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
(B) REPORTS ON FORM 8-K
None
28
<PAGE> 29
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.
WESTCORP
- ------------------------------------------------------------------------------
(Registrant)
Date: November 11, 1994 By: /s/Ernest S. Rady
----------------- -----------------------------------------------
Ernest S. Rady
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Date: November 11, 1994 By: /s/Joy Schaefer
----------------- -----------------------------------------------
Joy Schaefer
Executive Vice President
Chief Financial Officer and Treasurer
(Principal Financial Officer)
29
<PAGE> 1
Exhibit 11 - Computation of Earnings Per Share (1)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------- -------------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER
SHARE:
Weighted average and common
equivalent shares 23,205,470 22,962,687 23,119,997 20,005,633
Net income before extraordinary
loss $ 4,982,919 $ 4,318,409 $13,009,743 $10,515,779
Extraordinary loss (1,113,486) (1,113,486)
----------- ----------- ----------- -----------
Net income $ 4,982,919 $ 3,204,923 $13,009,743 $ 9,402,293
=========== =========== =========== ===========
Net income per share before
extraordinary loss $ 0.21 $ 0.19 $ 0.56 $ 0.52
Extraordinary loss per share (0.05) (0.05)
----------- ----------- ----------- -----------
Net income per share $ 0.21 $ 0.14 $ 0.56 $ 0.47
=========== =========== =========== ===========
FULLY DILUTED EARNINGS
PER SHARE:
Weighted average and common
equivalent shares 23,205,470 23,029,136 23,119,997 20,092,982
Net income before extraordinary
loss $ 4,982,919 $ 4,318,409 $13,009,743 $10,515,779
Extraordinary loss (1,113,486) (1,113,486)
----------- ----------- ----------- -----------
Net income $ 4,982,919 $ 3,204,923 $13,009,743 $ 9,402,293
=========== =========== =========== ===========
Net income per share before
extraordinary loss $ 0.21 $ 0.19 $ 0.56 $ 0.52
Estraordinary loss per share (0.05) (0.05)
----------- ----------- ----------- -----------
Net income per share $ 0.21 $ 0.14 $ 0.56 $ 0.47
=========== =========== =========== ===========
</TABLE>
(1) All amounts have been restated to reflect the effect of the 5% stock
dividend.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 73,870
<INT-BEARING-DEPOSITS> 2,386
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 257,247
<INVESTMENTS-CARRYING> 205,884
<INVESTMENTS-MARKET> 202,667
<LOANS> 1,676,020
<ALLOWANCE> 41,455
<TOTAL-ASSETS> 2,447,841
<DEPOSITS> 1,539,839
<SHORT-TERM> 266,142
<LIABILITIES-OTHER> 240,113
<LONG-TERM> 192,732
<COMMON> 23,144
0
0
<OTHER-SE> 185,871
<TOTAL-LIABILITIES-AND-EQUITY> 2,447,841
<INTEREST-LOAN> 88,246
<INTEREST-INVEST> 10,870
<INTEREST-OTHER> 2,785
<INTEREST-TOTAL> 101,901
<INTEREST-DEPOSIT> 47,872
<INTEREST-EXPENSE> 61,563
<INTEREST-INCOME-NET> 40,338
<LOAN-LOSSES> 10,026
<SECURITIES-GAINS> 761
<EXPENSE-OTHER> 70,773
<INCOME-PRETAX> 22,502
<INCOME-PRE-EXTRAORDINARY> 13,010
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,010
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
<YIELD-ACTUAL> 2.88
<LOANS-NON> 24,142
<LOANS-PAST> 268
<LOANS-TROUBLED> 25,160
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 39,677
<CHARGE-OFFS> 13,821
<RECOVERIES> 5,573
<ALLOWANCE-CLOSE> 41,455
<ALLOWANCE-DOMESTIC> 41,455
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
