<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 JUNE 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)
<TABLE>
<S> <C>
CALIFORNIA 51-0308535
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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 July 25, 1994, the registrant had 23,065,867 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
JUNE 30, 1994
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
----------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
June 30, 1994 and December 31, 1993 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1994 and 1993 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 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 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
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>
June 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 $83,003 $162,557
Investment securities available for sale (market value 1994: $107,934;
1993: $118,449) 107,934 118,002
Mortgage-backed securities available for sale (market value 1994: $189,985;
1993: $95,835) 189,985 94,567
Loans receivable, net of allowance for loan losses (1994: $41,648;
1993: $39,677) 1,203,878 1,220,250
Loans held for sale 262,195 300,731
Premises and equipment, net 68,485 67,516
Real estate owned, net 33,145 43,970
Accrued interest receivable 10,104 11,604
Excess of purchase cost over net assets acquired 1,142 1,184
Federal Home Loan Bank stock 17,906 17,566
Other assets 136,811 134,312
---------- ----------
$2,114,588 $2,172,259
========== ==========
LIABILITIES
Savings deposits $1,437,265 $1,357,058
Short-term borrowings 15,972 124,511
Federal Home Loan Bank advances 97,000 126,000
Other borrowings 64 26,385
Amounts held on behalf of trustee 215,372 182,905
Unearned insurance premiums and insurance reserves 5,960 5,973
Other liabilities 21,476 23,889
---------- ----------
1,793,109 1,846,721
SUBORDINATED DEBENTURES 115,861 120,422
SHAREHOLDERS' EQUITY:
Common Stock, par value $1.00 per share; authorized
45,000,000 shares; issued and outstanding 23,061,015
shares in 1994 and 21,894,805 shares in 1993 23,061 21,895
Paid-in capital 101,767 92,393
Retained earnings 85,467 90,828
Unrealized loss on securities available for sale, net of tax (4,677)
---------- ----------
205,618 205,116
---------- ----------
$2,114,588 $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 Six Months Ended
June 30 June 30
----------------------- ------------------------
1994 1993 1994 1993
------- ------- ------- -------
(Dollars in thousands, except per-share amounts)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $27,768 $36,557 $58,248 $76,705
Investment securities 1,402 1,571 2,881 3,256
Mortgage-backed securities 1,443 1,484 2,705 3,050
Other 930 722 1,798 1,091
TOTAL INTEREST INCOME 31,543 40,334 65,632 84,102
Interest expense:
Savings deposits 15,519 20,705 30,127 41,795
Federal Home Loan Bank advances and
other borrowings 3,445 5,245 9,515 11,755
------- ------- ------- -------
TOTAL INTEREST EXPENSE 18,964 25,950 39,642 53,550
------- ------- ------- -------
NET INTEREST INCOME 12,579 14,384 25,990 30,552
Provision for loan losses 2,512 7,446 6,754 14,126
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,067 6,938 19,236 16,426
Other income:
Automobile loan banking activities 17,826 15,449 38,095 27,636
Mortgage banking activities (871) 3,854 (9) 5,991
Investment securities gain 448 448
Insurance income 2,115 1,712 4,233 3,437
Real estate operations 941 (2,421) (1,026) (3,588)
Miscellaneous 135 301 285 697
------- ------- ------- -------
TOTAL OTHER INCOME 20,594 18,895 42,026 34,173
Other expenses:
Salaries and employee benefits 13,445 10,698 26,684 21,163
Occupancy 2,067 1,961 4,025 3,747
Insurance 1,278 1,737 2,709 3,534
Miscellaneous 7,080 5,522 13,877 11,291
------- ------- ------- -------
TOTAL OTHER EXPENSES 23,870 19,918 47,295 39,735
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 6,791 5,915 13,967 10,864
Income taxes 2,692 2,763 5,940 4,667
------- ------- ------- -------
NET INCOME $ 4,099 $ 3,152 $ 8,027 $ 6,197
======= ======= ======= =======
NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENT $0.18 $0.17 $0.35 $0.33
===== ===== ===== =====
DIVIDENDS DECLARED PER SHARE
OF COMMON STOCK $0.075 $0.05 $0.015 $0.10
====== ===== ====== =====
</TABLE>
- - -----------------
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1994 1993
---- ----
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,027 $ 6,197
Adjustments to reconcile net income to net cash used in
operating activities:
Provision for losses, net 5,254 10,437
Depreciation and amortization 3,414 3,776
Amortization of deferred fees (666) (1,282)
Amortization of issuance costs 276 94
Decrease in interest receivable 1,500 2,211
Losses on nonoperating activities 4,049 2,063
Decrease in interest payable (816) (641)
(Decrease) increase in unearned insurance (13) 1,472
Other, net 11,615 (11,038)
Net change in loans available for sale 37,707 (163,391)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 70,347 (150,102)
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of investment securities 5,000 23,769
Purchase of mortgage-backed securities (104,031) (7,047)
Payments on mortgage-backed securities 5,574 6,554
Net change in loans (4,876) 382,295
Additions to premises and equipment (4,340) (1,714)
Disposition of real estate owned 23,641 52,366
Purchase of FHLB stock (340) (152)
Proceeds from sales of FHLB stock 3,000
Net increase in trust receivable (11,735) (6,245)
Net increase in trustee accounts 32,467 29,659
--------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (58,640) 482,485
</TABLE>
5
<PAGE> 6
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1994 1993
--------- ---------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 80,206 $ (29,713)
Decrease in FHLB advances, net (29,000) (40,500)
Decrease in short-term borrowings, net (108,539) (199,041)
Retirement of other borrowings (26,333) (20,366)
Proceeds from issuance of subordinated debentures 120,191
Retirement of subordinated debentures (4,750)
Proceeds from sale of common stock 526 30,808
Cash dividends (3,371) (1,760)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (91,261) (140,381)
--------- ---------
Net (decrease) increase in cash and equivalents (79,554) 192,002
Cash and equivalents at beginning of period 162,557 114,003
--------- ---------
Cash and equivalents at end of period $ 83,003 $ 306,005
========= =========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 40,457 $ 54,191
Income taxes 1,750 5,012
Supplemental disclosures of noncash transactions:
Acquisition of real estate acquired through foreclosure $ 15,058 $ 42,977
</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 six months ended June 30, 1994 are not
necessarily indicative of the results that may be expected for the year ending
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.
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>
JUNE 30, DECEMBER 31,
1994 1993
--------- ------------
(Dollars in thousands)
<S> <C> <C>
Real Estate:
Mortgage $1,195,696 $1,310,003
Construction 34,019 31,684
---------- ----------
1,229,715 1,341,687
Less undisbursed loan proceeds 20,836 14,890
---------- ----------
1,208,879 1,326,797
Consumer:
Sales and leasing contracts 351,532 258,323
Less unearned discounts 53,575 27,972
---------- ----------
297,957 230,351
---------- ----------
1,506,836 1,557,148
Allowance for loan losses (41,648) (39,677)
Deferred loan fees (6,927) (5,849)
Other 7,812 9,360
---------- ----------
1,466,073 1,520,982
Less loans held for sale:
Mortgage 50,779 199,007
Consumer 211,416 101,725
---------- ----------
262,195 300,732
---------- ----------
Total $1,203,878 $1,220,250
========== ==========
</TABLE>
Loans serviced by Westcorp for the benefit of others totaled approximately $2.6
billion and $2.2 billion at June 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 approximate market values of investment
securities available for sale were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1994 DECEMBER 31, 1993
---------------------------- ----------------------------
CARRYING MARKET CARRYING MARKET
AMOUNTS VALUE AMOUNTS VALUE
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S. Government
agencies and corporations $109,173 $104,260 $114,050 $114,523
Corporate bonds 400 400 400 400
Obligations of states and political
subdivisions 3,525 3,249 3,527 3,501
Other 25 25 25 25
Net unrealized loss on investment
securities available for sale (5,189)
-------- -------- -------- --------
$107,934 $107,934 $118,002 $118,449
======== ======== ======== ========
</TABLE>
NOTE D - MORTGAGE-BACKED SECURITIES 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.
9
<PAGE> 10
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The aggregate carrying amounts and approximate market values of the
mortgage-backed securities available for sale were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1994 DECEMBER 31, 1993
---------------------------- ---------------------------
CARRYING MARKET CARRYING MARKET
AMOUNTS VALUE AMOUNTS VALUE
-------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
GNMA certificates $ 82,517 $ 81,360 $ 2,020 $ 2,135
FNMA certificates 83,716 81,885 88,782 89,852
FHLMC participations certificates 3,549 3,568 3,592 3,675
Collateralized mortgage
obligations 23,048 23,000
Other participations certificates 172 172 173 173
Net unrealized loss on mortgage-
backed securities available for sale (3,017)
-------- -------- ------- -------
$189,985 $189,985 $94,567 $95,835
======== ======== ======= =======
</TABLE>
NOTE E - DIVIDENDS
On June 22 and March 18, 1994, Westcorp paid cash dividends of $0.075 per
share. On March 25, 1994, Westcorp also announced a 5% stock dividend for
shareholders of record as of April 5, 1994, payable May 13, 1994. The per
share amounts for all periods presented have been restated to reflect the
increased shares outstanding.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets decreased $57.7 million or 2.7% to 2.1 billion at June 30, 1994
from $2.2 billion at December 31, 1993. This reduction is a result of ongoing
mortgage and automobile loan sales which is part of Westcorp's strategy to
manage interest rate risk.
LOANS
Loans (including those held for sale) net of unearned discounts and undisbursed
loan proceeds, decreased $54.9 million or 3.6% since December 31, 1993. The
decrease is the result of ongoing loan sales. Westcorp continued to sell loans
consistent with loan origination levels in the six month period ended June 30,
1994. 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 $50.8 million are mortgage loans secured primarily by single
family residences and $211.4 million are retail installment sales contracts
secured by motor vehicles. Westcorp's origination activity has continued to
increase even as on-balance sheet loans have decreased, as a result of
continued loan sales in the secondary market.
Consumer loan originations were 36.4% higher for the period ended June 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, and Texas, the states in which Westcorp
originates loans.
Real estate originations were also higher during the six month period of 1994
compared to the same period a year ago. The 4.0% increase in real estate
originations is the result of Westcorp's expansion of its mortgage banking
operations during 1994. The following table sets forth the loan origination,
purchase and sale activity of Westcorp for the periods indicated.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 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) 369,411 574,733 355,372 421,299
Purchases 18 50
Sales 374,660 430,000 348,238 425,000
Principal reductions (2) 112,687 77,127 155,246 109,734
---------- -------- ---------- --------
Ending Balance $1,208,879 $297,957 $1,423,566 $240,766
========== ======== ========== ========
</TABLE>
(1) Includes automobile loans purchased from motor vehicle dealers.
(2) Includes scheduled payments, prepayments and charge-offs.
11
<PAGE> 12
The real estate loan portfolio (including those classified as held for sale)
consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, 1994 DECEMBER 31, 1993
----------------------------- -------------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Single family residential loans:
First trust deeds $ 588,764 48.7% $ 673,322 50.7%
Second trust deeds 131,885 10.9 152,160 11.5
---------- ----- ---------- -----
720,649 59.6 825,482 62.2
Multi-family residential loans 471,287 39.0 480,692 36.2
Construction loans 34,019 2.8 31,684 2.4
Other 3,760 0.3 3,828 0.3
---------- ----- ---------- -----
1,229,715 1,341,686
Less undisbursed loan proceeds 20,836 1.7 14,889 1.1
---------- ----- ---------- -----
$1,208,879 100.0% $1,326,797 100.0%
========== ===== ========== =====
</TABLE>
Westcorp's portfolio included both fixed and adjustable rate mortgage loans
as shown below:
<TABLE>
<CAPTION>
JUNE 30, 1994 DECEMBER 31, 1993
----------------------------- -------------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed rate loans:
Single family residential loans $ 76,966 6.4% $ 184,075 13.9%
Multi-family loans 2,668 0.2 2,181 0.2
Adjustable rate loans:
Negative amortizing loans 777,456 64.3 730,840 55.1
No negative amortizing loans 351,789 29.1 409,701 30.8
---------- ----- ---------- -----
Total portfolio $1,208,879 100.0% $1,326,797 100.0%
========== ===== ========== =====
</TABLE>
The composition of the consumer loan portfolio, all of which is fixed-rate, was
as follows:
<TABLE>
<CAPTION>
JUNE 30, 1994 DECEMBER 31, 1993
------------------------ -----------------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Automobile loans, net $294,462 98.8% $226,566 98.4%
Other 3,495 1.2 3,785 1.6
-------- ----- -------- -----
Total portfolio $297,957 100.0% $230,351 100.0%
======== ===== ======== =====
</TABLE>
12
<PAGE> 13
ASSET QUALITY
GENERAL
The condition of the California real estate market, particularly the
multi-family real estate sector, remains weak. Asset quality was also
adversely affected by the January 17, 1994, Northridge, California earthquake.
Approximately $21.9 million of Westcorp's real estate loan portfolio was
affected by the earthquake. Of this amount, $8.6 million of these loans were
placed on nonaccrual.
DELINQUENCY
Loans 60 days or more delinquent have increased by $4.6 million to $28.4
million at June 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 June 30, 1994 and December 31, 1993:
<TABLE>
<CAPTION>
JUNE 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 $2,621 0.4% $15,913 2.2% $18,534 2.6%
Multi-family residential homes 544 0.1 8,615 1.8 9,159 1.9
Consumer 280 0.1 266 0.1 546 0.2
Other 206 1.0 206 1.0
------ --- ------- --- ------- ---
Total $3,651 0.2% $24,794 1.6% $28,445 1.9%
====== === ======= === ======= ===
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
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 $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>
13
<PAGE> 14
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 $3.6 million 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 June 30,
1994 interest on nonperforming loans excluded from interest income was $6.9
million. At June 30, 1993 such amount was $7.3 million.
Nonperforming loans consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
-------- ------------
(Dollars in thousands)
<S> <C> <C>
Loans 90 days or more past due $23,266 $17,651
Performing, nonaccrual loans 23,869 14,315
------- -------
Total nonperforming loans $47,135 $31,966
======= =======
</TABLE>
Nonperforming loans by loan type consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
-------- ------------
(Dollars in thousands)
<S> <C> <C>
Single family residential $16,964 $15,722
Multi-family 5-36 units 5,982 2,985
Multi-family over 36 units 22,706 10,134
Other 1,483 3,125
------- -------
Total nonperforming loans $47,135 $31,966
======= =======
</TABLE>
Total NPAs increased to $82.3 million at June 30, 1994 compared to $75.0
million at December 31, 1993. The overall increase in nonperforming assets was
due primarily to properties impacted by the Northridge earthquake and the
continued weakness of the economy and real estate markets in California where
Westcorp has its concentration of nonperforming assets, particularly
multi-family residential dwellings. These loans and assets have been more
severely affected by the prevailing economic conditions and consequently have
been the major source of increase in nonperforming assets.
14
<PAGE> 15
The migration of nonperforming loans, insubstance foreclosures and real estate
owned from December 31, 1993 to June 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 34,093 13,045 5,833 15,215
REO/ISF (10,275) (7,832) (2,443)
Cures and payoffs (6,931) (2,253) (393) (2,643) (1,642)
Charge-offs (1,718) (1,718)
-------- ------- ------- ------- -------
Balance, 6/30/94 $ 47,135 $16,964 $ 5,982 $22,706 $ 1,483
======== ======= ======= ======= =======
</TABLE>
INSUBSTANCE FORECLOSURES
<TABLE>
<CAPTION>
TOTAL SFR 5-36 37+ OTHER
-------- ------- ------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, 12/31/93 $20,826 $ $1,242 $14,859 $ 4,725
New ISF 377 377
Transfer to REO (7,077) (7,077)
Cures (4,725) (4,725)
Writedowns (162) (162)
-------- ------- ------ ------- -------
Balance, 6/30/94 $ 9,239 $ $1,619 $ 7,620 $
======== ======= ====== ======= =======
</TABLE>
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
<TABLE>
<CAPTION>
TOTAL SFR 5-36 37+ OTHER
-------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, 12/31/93 $ 17,404 $ 7,468 $ 725 $9,211
New REO 21,758 9,583 2,974 $ 9,201
Sales (10,705) (9,344) (1,361)
Writedowns (3,697) (414) (1,399) (2,407) 523
-------- ------- ------- ------- ------
Balance, 6/30/94 $ 24,760 $ 7,293 $ 939 $ 6,794 $9,734
======== ======= ======= ======= ======
</TABLE>
For nonperforming assets other than nonperforming loans, assets secured by
multi-family residential properties continued to be the dominant asset type
consisting of $16.9 million or 49.9% of these assets. Of the multi-family
residential properties, $14.4 million are properties of 37 units or greater.
15
<PAGE> 16
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 $41.6
million at June 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. Westcorp is continuing to assess
earthquake related damage, including on-site inspections of individual
properties. To date, Westcorp has modified thirty-four loans, typically by
deferring payments for generally two to three months. At June 30, 1994, thirty
of these loans have resumed making payments. 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>
JUNE 30, DECEMBER 31,
1994 1993
---------- ------------
(Dollars in thousands)
<S> <C> <C>
Total loans $1,506,836 $1,557,148
Allowance for loan losses 41,648 39,677
Allowance for real estate losses 2,511 3,508
Loans past due 60 days or more 28,445 23,886
Nonperforming loans 47,135 31,966
Nonperforming assets 82,345 74,972
Allowance for loan losses as a percent of:
Total loans 2.8% 2.6%
Loans past due 60 days or more 146.4 166.1
Nonperforming loans 88.4 124.1
Total allowance as a percent of nonperforming assets 53.6 57.6
Nonperforming loans as a percent of total loans 3.1 2.1
Nonperforming assets as a percent of total assets 3.9 3.5
</TABLE>
16
<PAGE> 17
The table below provides an historical analysis of the allowance for loan
losses.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- ------------------------
1994 1993 1994 1993
------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $41,065 $40,748 $39,677 $40,656
Charge-offs
Real estate (1,176) (7,102) (3,038) (11,875)
Consumer (2,389) (3,649) (4,818) (7,560)
------- ------- ------- -------
(3,565) (10,751) (7,856) (19,435)
Recoveries
Real estate 126 1,985 296 2,448
Consumer 1,510 1,363 2,777 2,996
------- ------- ------- -------
1,636 3,348 3,073 5,444
Net charge-offs (1,929) (7,403) (4,783) (13,991)
Provision for loan losses 2,512 7,446 6,754 14,126
------- ------- ------- -------
$41,648 $40,791 $41,648 $40,791
======= ======= ======= =======
Ratio of net charge-offs during
period to average loans outstanding
during the period (annualized) .53% 1.70% .64% 1.54%
======= ======= ======= =======
</TABLE>
Changes in the allowance for real estate losses were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
1994 1993 1994 1993
------- ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 3,470 $ 7,572 $ 3,508 $ 20,185
Provision for real estate losses (1,500) (4,289) (1,500) (3,689)
Charge-offs, net 541 2,552 503 (10,661)
------- ------- ------- --------
Balance at end of period $ 2,511 $ 5,835 $ 2,511 $ 5,835
======= ======= ======= ========
</TABLE>
17
<PAGE> 18
RESULTS OF OPERATIONS
SUMMARY
Westcorp reported net income of $4.1 million and $8.0 million for the three
months and six months ended June 30, 1994, respectively, compared to $3.2
million and $6.2 million for the respective periods of 1993. As discussed in
greater detail below, net income was most affected by the following four
factors.
o Net interest income declined as interest earning assets decreased and
interest margins narrowed.
o Provision for loan losses decreased consistent with the decrease in loans
and lower chargeoffs.
o Other income increased as a result of increased loan servicing activities.
o Other expense increased as a result of expansion into other states and
expanding servicing portfolios.
NET INTEREST INCOME
Net interest income for the three months and six months ended June 30, 1994 was
$12.6 million and $26.0 million, respectively. For the same periods of 1993,
net interest income totalled $14.4 million and $30.6 million. The decrease in
net interest income for both the three month and six month periods is
attributable to lower levels of interest earning assets and narrowing interest
margins. Interest earning assets have declined through ongoing loan sales in
both the consumer and real estate portfolios. These loan sales have increased
other income. See "Automobile Loan Banking Activities" and "Mortgage Banking
Activities Sections" that follow.
Net interest margins narrowed 40 basis points for the six months ended June 30,
1994 compared to the same period of 1993 due to a decrease of 81 basis points
in the yield on interest-earning assets, offset by a decrease of 41 basis
points in the cost of funds for the same period.
Overall market conditions experienced declining interest rates throughout 1993.
Consequently, the rates earned and paid on interest sensitive instruments have
declined. Yields on loans and mortgage-backed securities decreased 70 basis
points for the six months ended June 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 48 basis points for the six
months ended June 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 other borrowings decreased 4 basis points. The 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.
Interest rates earned and paid for the three and six months ended June 30, 1994
and 1993 are summarized as follows:
18
<PAGE> 19
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------- --------------------------------
1994 1993 1994 1993
------------ ------------ ------------ ------------
YIELD/ YIELD/ YIELD/ YIELD/
RATE RATE RATE RATE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets
Interest-earning assets:
Investment securities 5.11% 6.43% 5.18% 6.30%
Mortgage-backed securities (1) 5.47 5.83 5.45 5.92
Loans:
Consumer 13.18 13.46 13.01 13.42
Real estate 6.46 7.37 6.61 7.37
Other 4.30 4.29 4.07 3.98
----- ----- ----- -----
Total interest-earning assets 7.18 8.02 7.29 8.10
Interest-bearing liabilities:
Deposits 4.47 4.88 4.45 4.93
Public offerings (2) 8.71 9.75 7.46 6.76
FHLB advances and other
borrowings 7.55 7.87 7.64 7.78
----- ----- ----- -----
Total interest-bearing liabilities 4.97 5.44 5.01 5.42
Interest rate spread 2.21% 2.58% 2.28% 2.68%
===== ===== ===== =====
Net yield on average interest
earning assets 2.85% 2.85% 2.86% 2.90%
===== ===== ===== =====
</TABLE>
- - ----------------------------
(1) Includes collateralized mortgage obligations.
(2) Includes subordinated debentures, commercial paper and collateralized
bonds.
19
<PAGE> 20
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. At June 30, 1994, Westcorp serviced $1.4 billion in mortgage real
estate loans for others. ARMs and adjustable-rate mortgage-backed securities
(MBS) amounted to 80% of the total mortgage loans and MBS held by Westcorp at
June 30, 1994. Interest rates generally adjust on a monthly, semiannual or
annual basis with 71% 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. The pass-through rate for these sales 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 June 30, 1994, Westcorp serviced $1.1 billion in
consumer loans for others.
Fixed-rate certificates of deposit (CDs) represent Westcorp's primary source
of funding. At June 30, 1994, the weighted average remaining maturity on CDs
was 316 days. Approximately 84% of Westcorp's other borrowed funds at June 30,
1994 had fixed rates and maturities greater than one year. Subordinated
debentures, which represent 51% 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 June 31, 1994, swaps with a notional amount of $15 million
and caps totalling $20 million were outstanding. In addition, Westcorp had
committed to enter into swaps for an additional $70.5 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 Westcorp's net interest margin during a period of rising rates.
20
<PAGE> 21
The following table illustrates the projected interest rate maturities, based
upon certain assumptions, regarding the major asset and liability categories of
Westcorp at June 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.
21
<PAGE> 22
INTEREST RATE SENSITIVITY ANALYSIS
AT JUNE 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 $ 14,995 $ 13,061 $ 75,952 $ 3,926 $ 107,934
Other investments 90,706 $ 100 90,806
Mortgage-backed securities 84,013 27,850 9,873 10,984 57,265 189,985
Consumer loans (1) 37,891 92,574 125,604 40,458 1,430 297,957
Real estate loans (2):
Adjustable rate mortgages 743,254 324,029 32,458 8,976 7,345 1,116,062
Fixed rate mortgages 2,451 6,611 16,493 12,854 41,225 79,634
Construction loans 13,183 13,183
-------- -------- --------- -------- -------- ----------
Total interest earning assets $986,493 $451,164 $ 197,489 $149,224 $111,191 $1,895,561
======== ======== ========= ======== ======== ==========
Interest bearing liabilities:
Passbook accounts/money
market deposits (3) 7,369 19,794 39,125 25,051 44,616 135,955
Certificates of deposit (4) 483,386 465,919 310,240 41,411 99 1,301,055
FHLB advances (4) 8,000 13,000 63,000 6,500 6,500 97,000
Other borrowings (4) 15,975 9 26 26 115,861 131,897
-------- -------- --------- -------- -------- ----------
Total interest bearing
liabilities $514,730 $498,722 $ 412,391 $ 72,988 $167,076 $1,665,907
======== ======== ========= ======== ======== ==========
Excess interest earning
assets/(liabilities) $471,763 $(47,558) $(214,902) $ 76,236 $(55,885) $ 229,654
======== ======== ========= ======== ======== ==========
Effect of hedging activities $ 15,000 $(15,000)
Cumulative excess $486,763 $439,205 $ 224,303 $300,539 $229,654 $ 229,654
======== ======== ========= ======== ======== ==========
Cumulative excess as a
percentage of total interest
earning assets 25.68% 23.17% 11.83% 15.85% 12.12% 12.12%
</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.
22
<PAGE> 23
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three and six months ended June 30, 1994
were $2.5 million and $6.8 million respectively, compared to $7.4 million and
$14.1 million during the comparable periods of 1993. Westcorp recorded lower
provisions for loan losses for the first six months of 1994 compared to 1993 as
a result of lower charge-offs. Nonetheless, the allowance for loan losses
increased to $41.6 million at June 30, 1994 compared to $39.7 million at
December 31, 1993 and $40.8 million a year ago due to continued uncertainty in
the economy. See "Asset Quality".
OTHER INCOME
Total other income increased for both the three and six months ended June 30,
1994 compared to the same period in 1993. Other income is generated from
automobile 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 six months ended June
30, 1994, automobile loan banking operations generated income of $17.8 million
and $38.1 million, respectively, compared to $15.4 million and $27.6 million
for the same periods of 1993.
During the three months ended June 30, 1994, net losses on automobile loan
sales totalled $1.1 million while net gains totalled $1.1 million for the six
months ended June 30, 1994. This compares to gains from loan sales of $1.8
million and $5.0 million for the three and six months ended June 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 six months of 1994 totalled $430 million compared to $425
million during the first six months of 1993.
Net loan servicing income increased to $16.0 million and $31.1 million for the
three and six months ended June 30, 1994, respectively, compared to $11.4
million and $17.9 million for the comparable periods of 1993. The increase is
the result of a larger servicing portfolio. Westcorp serviced $1.1 billion of
automobile loans for others at June 30, 1994 compared to $905 million at June
30, 1993.
Automobile loan banking income for the three and six month periods ended June
30, 1994 and 1993 is summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
--------------------------- ---------------------------
1994 1993 1994 1993
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net gains (losses) from sale of
automobile loans $(1,140) $ 1,797 $ 1,064 $ 5,013
Loan servicing income, net 15,973 11,369 31,149 17,852
Other 2,993 2,283 5,882 4,771
------- ------- ------- -------
$17,826 $15,449 $38,095 $27,636
======= ======= ======= =======
</TABLE>
23
<PAGE> 24
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 six months ended June
30, 1994, mortgage banking experienced losses of $871 thousand and $9 thousand,
respectively, compared to income of $3.9 million and $6.0 million for the
comparable periods of 1993.
Losses on sales of mortgage loans for the three and six months ended June 30,
1994 totalled $2.0 million and $1.9 million, respectively, compared to gains on
sales of mortgage loans of $3.0 million and $4.1 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
six months of 1994 totalled $374.7 million compared to $348.2 million for the
first six months of 1993. As a result of the rising rate environment, Westcorp
has reduced its mortgage loans held for sale from $199.0 million at December
31, 1993 to $50.8 million at June 30, 1994.
Net loan servicing income increased to $1.1 million and $1.6 million for the
three and six months ended June 30, 1994, respectively, compared to $0.7
million and $1.4 million for the comparable periods of 1993 as a result of a
larger servicing portfolio. At June 30, 1994, Westcorp serviced $1.4 billion
of mortgage loans for others compared to $918 million at June 30, 1993.
Mortgage banking income for the three and six months ended June 30, 1994 and
1993 is summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
---------------------- ----------------------
1994 1993 1994 1993
------- ------ ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net gains (losses) from sale of
mortgage loans $(2,035) $2,969 $(1,893) $4,129
Loan servicing income, net 1,050 678 1,620 1,414
Other 114 207 264 448
------- ------ ------- ------
$ (871) $3,854 $ (9) $5,991
======= ====== ======= ======
</TABLE>
MISCELLANEOUS
Additional sources of other income were primarily insurance income and real
estate operations. The increases in insurance income during the three and six
months ended June 30, 1994 compared with the respective periods of 1993 are
directly related to higher levels of loans serviced.
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 $0.9 million in the three months ended June 30, 1994 and
losses of $1.0 million for the six months ended June 30, 1994 compared to
losses of $2.4 million and $3.6 million for the same periods in 1993. The
changes between quarters are due primarily to
24
<PAGE> 25
reduced expenses on nonperforming assets and increased gains on sales of REO.
OTHER EXPENSE
Other expense consists of compensation and benefits, occupancy expense,
insurance, and other operating expenses increased to $23.9 million and
$47.3 million for the three and six months ended June 30, 1994, respectively,
compared to $19.9 million and $39.7 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, expansion into additional
states and higher levels of nonperforming assets. In addition, the premiums
paid to the Savings Association Insurance Fund increased as a result of an
increase in premium rates. The ratio of annualized operating expense to
average serviced assets was 2.15% and 2.14% for the six months ended June 30,
1994 and 1993, respectively.
INCOME TAXES
The effective tax rate for the six months ended June 30, 1994 and 1993 was
42.5% and 43.0%, 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 second quarter of 1994, Westcorp purchased $104.0 million of MBS to
more profitably employ its excess capital. These securities have been
classified as available for sale in the financial statements to provide
flexibility in maximizing earnings in the portfolio. These purchases included
both fixed and adjustable rate MBS. In order to minimize interest rate risk,
certain portions of this portfolio have been hedged. See "Asset/Liability
Management".
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 of a "well
capitalized" institution. Its regulatory capital position at June 30, 1994 was
as follows:
25
<PAGE> 26
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
------------------- -------------------- --------------------
(Dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital $183,629 8.61%(1) $183,629 8.61%(1) $304,242 14.01%(2)
Minimum OTS capital
requirement 31,975 1.50% 63,949 3.00% 173,701 8.00%
-------- ----- -------- ----- -------- -----
Excess capital $151,654 7.11% $119,680 5.61% $130,541 6.01%
======== ===== ======== ===== ======== =====
</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.
26
<PAGE> 27
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.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of Shareholders was held on May 26, 1994. At the
meeting, the shareholders approved the election of Ernest S. Rady,
Robert W. Jenkins, Stanley E. Foster and Judith M. Bardwick to the
Board of Directors, each for a term of 2 years.
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
A report on Form 8-K was filed June 16, 1994 announcing that on
27
<PAGE> 28
June 14, 1994, Ernest Rady, the Chairman of the Board and Chief
Executive Officer of Westcorp assumed the added duties and titles of
President and Chief Operating Officer, effective immediately, due to
the resignation of Stephen W. Prough from these positions. Mr.
Prough advised Westcorp on June 14, 1994 that he was resigning from
his offices and as a director to become Chairman, President and Chief
Executive Officer of Downey Savings and Loan Association.
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: July 27, 1994 By: /s/Ernest S. Rady
------------------ -----------------------------------
Ernest S. Rady
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
Date: July 27, 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------------- -----------------------------
1994 1993 1994 1993
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER
SHARE:
Weighted average and common
equivalent shares 23,113,959 18,829,705 23,079,918 18,673,070
Net income 4,099,091 3,151,898 8,026,824 6,197,370
Primary earnings per share 0.18 0.17 0.35 0.33
FULLY DILUTED EARNINGS
PER SHARE:
Weighted average and common
equivalent shares 23,169,038 18,829,705 23,134,997 18,673,070
Net Income 4,099,091 3,151,898 8,026,824 6,197,370
Primary earnings per share 0.18 0.17 0.35 0.33
</TABLE>
(1) All amounts have been restated to reflect the effect of the 5% stock
dividend.
30
