<PAGE> 1
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 March 31, 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 Identification No.)
incorporation or organization)
23 Pasteur, Irvine, California 92718-3804
- - ------------------------------------------------------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (714) 727-1000
--------------
</TABLE>
NONE
- - ------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by X 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 April 30, 1994, the registrant had 21,937,321 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 24.
<PAGE> 2
Part I FINANCIAL INFORMATION
Item I Financial Statements
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
-------------- --------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Cash, interest-bearing deposits with other
financial institutions and other short-
term investments $ 127,912,806 $ 162,556,664
Investment securities available for sale
(market value 1994, $114,860,315;
1993, $118,448,938) 114,860,315 118,001,821
Mortgage-backed securities available for
sale (market value 1994, $92,362,732;
1993, $95,834,925) 92,362,732 94,566,598
Loans receivable net of allowance for loan
losses (1994: $41,065,120;
1993: $39,676,719) 1,128,289,279 1,220,249,876
Loans available for sale 317,897,071 300,731,278
Premises and equipment 68,831,764 67,516,294
Real estate owned, net 36,496,482 43,970,459
Accrued interest receivable 10,354,772 11,603,937
Excess of purchase cost over net assets
acquired 1,162,744 1,183,885
Federal Home Loan Bank stock 17,727,086 17,566,386
Other assets 139,480,695 134,312,140
-------------- --------------
$2,055,375,746 $2,172,259,338
============== ==============
LIABILITIES
Savings deposits $1,361,100,819 $1,357,058,337
Short-term borrowings 124,511,000
Federal Home Loan Bank advances 121,000,000 126,000,000
Other borrowings 16,767,332 26,384,518
Amounts held on behalf of trustee 203,067,816 182,905,242
Unearned insurance premiums and
insurance reserves 5,553,152 5,973,210
Other liabilities 21,623,294 23,889,709
-------------- --------------
1,729,112,413 1,846,722,016
SUBORDINATED DEBENTURES 120,553,416 120,422,201
SHAREHOLDERS' EQUITY
Common stock, par value $1.00 per share;
authorized 45,000,000 shares;
issued and outstanding 21,908,793 shares
in 1994 and 21,894,805 shares in 1993 21,908,793 21,894,805
Paid-in capital 92,487,676 92,392,771
Retained earnings 93,112,165 90,827,545
Net unrealized loss on securities available
for sale (1,798,717)
-------------- --------------
205,709,917 205,115,121
-------------- --------------
$2,055,375,746 $2,172,259,338
============== ==============
</TABLE>
See notes to unaudited financial statements.
2
<PAGE> 3
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------------
1994 1993
----------- ------------
<S> <C> <C>
Interest income:
Loans, including fees $30,480,637 $40,147,794
Investment securities 1,479,119 1,684,348
Mortgage-backed securities 1,262,600 1,565,092
Other 867,423 369,695
----------- -----------
TOTAL INTEREST INCOME 34,089,779 43,766,929
Interest expense:
Savings deposits 14,607,974 21,089,946
Federal Home Loan Bank
advances and other borrowings 6,070,497 6,509,892
----------- -----------
TOTAL INTEREST EXPENSE 20,678,471 27,599,838
----------- -----------
NET INTEREST INCOME 13,411,308 16,167,091
Provision for loan losses 4,241,385 6,679,619
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,169,923 9,487,472
Other income:
Loan servicing fees 14,172,477 7,187,417
Late charges and other fees 3,038,313 2,728,339
Gain on sale of loans 2,346,577 4,376,303
Insurance income 2,118,067 1,725,005
Real estate operations (1,967,081) (1,166,925)
Miscellaneous 1,723,199 427,809
----------- -----------
TOTAL OTHER INCOME 21,431,552 15,277,948
Other expenses:
Salaries and employee benefits 13,239,356 10,465,327
Occupancy 1,957,305 1,785,935
Insurance 1,430,920 1,796,874
Miscellaneous 6,798,215 5,767,703
----------- -----------
TOTAL OTHER EXPENSES 23,425,796 19,815,839
----------- -----------
INCOME BEFORE INCOME TAXES 7,175,679 4,949,581
Income taxes 3,247,946 1,904,109
----------- -----------
NET INCOME $ 3,927,733 $ 3,045,472
=========== ===========
NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENT $ 0.17 $ 0.16
=========== ===========
DIVIDENDS DECLARED PER SHARE
OF COMMON STOCK $ 0.075 $ 0.05
=========== ===========
</TABLE>
See notes to unaudited financial statements.
3
<PAGE> 4
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Loss on
Securities
Common Paid-in Retained Available
Shares Stock Capital Earnings for Sale Total
---------- ----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE December 31, 1993 21,894,805 $21,894,805 $92,392,771 $90,827,545 $205,115,121
Stock Options Issued 13,988 13,988 94,905 108,893
Cash Dividends (1,643,113) (1,643,113)
Net Income 3,927,733 3,927,733
Net Unrealized Loss
on Securities
Available for Sale $(1,798,717) (1,798,717)
---------- ----------- ----------- ----------- ----------- ------------
BALANCE March 31, 1994 21,908,793 $21,908,793 $92,487,676 $93,112,165 $(1,798,717) $205,709,917
========== =========== =========== =========== =========== ============
</TABLE>
4
<PAGE> 5
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------------
1994 1993
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,927,733 $ 3,045,472
Adjustments to reconcile net income
to net cash used in operating
activities:
Provision for losses 4,241,385 7,279,619
Depreciation and amortization 1,656,030 1,811,399
Amortization of deferred fees (427,449) (615,431)
Amortization of issuance costs 143,030 49,541
Decrease in interest receivable 1,249,165 351,413
(Gains) losses on nonoperating activities (831,875) 1,064,277
(Decrease) increase in interest payable (3,080,846) 272,086
Decrease in unearned insurance (420,058) (383,092)
Other, net 8,400,361 (14,669,062)
Net change in loans available for sale (14,819,216) (241,417,908)
------------ -------------
NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES 38,260 (243,211,686)
INVESTING ACTIVITIES
Proceeds from maturities of investment
securities available for sale 3,524,879
Payments received on mortgage-backed
securities available for sale 2,244,064 3,224,688
Net change in loans 80,145,972 396,039,280
Additions to premises and equipment (2,950,359) (1,028,585)
Disposition of real estate owned 13,905,627 25,997,097
Purchase of FHLB stock (160,700)
Proceeds from sales of FHLB stock 1,925,000
Net increase in trust receivable (11,397,557) (551,572)
Net increase in trustee accounts 20,162,574 773,882
------------ ------------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 101,949,621 429,904,669
</TABLE>
5
<PAGE> 6
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------------
1994 1993
------------- -------------
<S> <C> <C>
FINANCING ACTIVITIES
Net increase in deposits $ 4,042,482 $ 42,151,496
Decrease in FHLB advances, net (5,000,000) (31,500,000)
Decrease in short-term borrowings, net (124,511,000) (199,041,409)
Repayment of other borrowings (9,629,001) (12,401,458)
Proceeds from sale of common stock 108,893 55,358
Cash dividends (1,643,113) (879,341)
------------- ------------
NET CASH USED IN
FINANCING ACTIVITIES (136,631,739) (201,615,354)
------------- -------------
DECREASE IN CASH AND EQUIVALENTS (34,643,858) (14,922,371)
Cash and equivalents at beginning of period 162,556,664 114,003,417
------------- -------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 127,912,806 $ 99,081,046
============= =============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 23,759,317 $ 27,327,752
Income taxes 2,950 9,000
Supplemental disclosures of noncash transactions:
Acquisition of real estate acquired
through foreclosure $ 7,945,140 $ 23,309,344
</TABLE>
See notes to unaudited financial statements.
6
<PAGE> 7
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 1994
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements 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 month period
ended March 31, 1994 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1994. For further information, refer
to the consolidated financial statements and footnotes thereto included in
Westcorp's annual report on Form 10-K for the year ended December 31, 1993.
NOTE B - NET LOANS RECEIVABLE
Net loans receivable consisted of the following:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
-------------- -----------------
<S> <C> <C>
Real Estate:
Mortgage $1,195,367,264 $1,310,002,524
Construction 31,731,909 31,684,392
-------------- --------------
1,227,099,173 1,341,686,916
Less undisbursed loan
proceeds 15,135,134 14,889,648
-------------- --------------
1,211,964,039 1,326,797,268
Consumer:
Sales and leasing contracts 319,958,910 258,323,072
Less unearned discounts 45,650,238 27,972,283
-------------- --------------
274,308,672 230,350,789
-------------- --------------
1,486,272,711 1,557,148,057
Allowance for loan losses (41,065,120) (39,676,719)
Deferred loan fees (6,648,290) (5,849,187)
Other 7,627,049 9,359,003
-------------- --------------
1,446,186,350 1,520,981,154
Less loans available for sale:
Consumer 221,188,689 101,724,718
Mortgage 96,708,382 199,006,560
-------------- --------------
317,897,071 300,731,278
-------------- --------------
Total $1,128,289,279 $1,220,249,876
============== ==============
</TABLE>
7
<PAGE> 8
NOTE B - NET LOANS RECEIVABLE -- CONTINUED
The allowance for loan losses by loan category were as follows:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
-------------------------------- ----------------------------------
% of Loans % of Loans
in Each Category in Each Category
Allowance to Total Loans Allowance to Total Loans
----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Consumer $ 6,868,374 18.4% $ 5,571,333 14.8%
Single family residential 4,411,225 47.9% 5,054,419 53.0%
Multifamily residential 29,785,521 33.7% 29,050,967 32.2%
----------- ------ ----------- ------
$41,065,120 100.0% $39,676,719 100.0%
=========== ====== =========== ======
</TABLE>
Loans serviced by Westcorp for the benefit of others totaled approximately
$2,428,697,000 and $2,170,426,000 at March 31, 1994 and December 31, 1993,
respectively. These amounts are not reflected in the accompanying consolidated
financial statements.
NOTE C - DIVIDENDS
On 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.
NOTE D - 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 amounts and approximate market values of investment
securities available for sale were as follows:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
---------------------------------- ----------------------------------
Carrying Market Carrying Market
Amounts Value Amounts Value
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of
other U.S. Government
agencies and
corporations $114,110,754 $111,186,378 $114,049,969 $114,522,852
Corporate bonds 400,000 400,000 400,000 400,000
Obligations of states
and political
subdivisions 3,526,152 3,248,937 3,526,852 3,501,086
Other 25,000 25,000 25,000 25,000
Net unrealized loss on
investment securities
available for sale (3,201,591)
------------ ------------ ------------ ------------
$114,860,315 $114,860,315 $118,001,821 $118,448,938
============ ============ ============ ============
</TABLE>
8
<PAGE> 9
NOTE E - 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.
The aggregate carrying amounts and approximate market values of the mortgage
backed securities available for sale were as follows:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
---------------------------------- ------------------------------------
Carrying Market Carrying Market
Amounts Value Amounts Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
GNMA certificates $ 1,913,212 $ 2,020,475 $ 2,019,992 $ 2,135,226
FNMA certificates 3,570,453 3,548,138 88,782,456 89,851,873
FHLMC participations
certificates 86,661,017 86,622,016 3,591,647 3,675,323
Other participations
certificates 172,103 172,103 172,503 172,503
Net unrealized gain
on mortgaged-backed
securities available
for sale 45,947
----------- ----------- ----------- -----------
$92,362,732 $92,362,732 $94,566,598 $95,834,925
=========== =========== =========== ===========
</TABLE>
NOTE F - REAL ESTATE OWNED
Real estate owned consisted of the following:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
-------------- -----------------
<S> <C> <C>
Real Estate acquired for
investment or development $ 5,093,708 $9,248,085
Real Estate acquired
through foreclosure 24,835,232 17,404,964
Insubstance foreclosures 10,037,387 20,825,533
----------- ------------
39,966,327 47,478,582
Less: allowance for losses 3,469,845 3,508,123
----------- ------------
$36,496,482 $ 43,970,459
=========== ============
</TABLE>
Westcorp has entered into various partnership agreements to acquire and develop
real property. Westcorp's interest in each project is greater than 50% and, in
some cases, includes a participating share of the profits realized upon sale.
9
<PAGE> 10
Condensed financial information for these partnerships follow:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
-------------- -----------------
<S> <C> <C>
Statements of Financial Condition
Total Assets $ 5,093,708 $ 9,248,085
============ ============
Loans from Westcorp $ 4,576,983 $ 6,371,328
Loans from outside sources 2,400,661
------------ ------------
Total Liabilities 4,576,983 8,771,989
Equity 516,725 476,096
------------ ------------
Total Liabilities and Equity $ 5,093,708 $ 9,248,085
============ ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------------------------------
1994 1993
------------ ----------
<S> <C> <C>
Statements of Operations
Rental income $1,056,531
Sales of real estate, net $ 256,973 (89,544)
Other income 53,968 76,000
----------- ----------
310,941 1,042,987
Interest expense (1) 743,943
General and administrative
expense 643,059
----------
1,387,002
----------- ----------
Net Income (Loss) $ 310,941 $ (344,015)
=========== ==========
</TABLE>
Includes $743,943 for the three months ended March 31, 1993 eliminated or
reclassified upon consolidation.
NOTE G - CURRENT ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards 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 financial statements.
NOTE H - OTHER
On March 11, 1994, Westcorp sold $200,000,000 of automobile contracts to a
grantor trust. On April 26, 1994 has filed a registration statement with the
SEC relating to the proposed sale of additional loans to a grantors trust.
NOTE I - RECLASSIFICATIONS
Certain amounts for 1993 have been reclassified to conform with the 1994
presentation.
10
<PAGE> 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Assets decreased $116.9 million or 5.4% to $2.1 billion at March 31, 1994, from
$2.2 billion at December 31, 1993. During the three month period ended March
31, 1994, Westcorp originated $285.7 million of consumer loans and $199.1
million of real estate loans. Offsetting this, Westcorp sold $200.0 million of
consumer loans, and $257.2 million of real estate loans in the three month
period ended March 31, 1994. These sales are an ongoing part of Westcorp's
strategy of managing interest rate risk. The remaining reductions are a result
of prepayments, principal pay downs, and charge-offs.
LOANS
Loans, net of unearned discounts and undisbursed loan proceeds, decreased $70.9
million or 4.6% 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 three month period ended March 31, 1994. Westcorp
has retained the servicing on almost all loans sold and receives a servicing
fee therefrom. Included in the portfolio are loans available for sale of which
$96.7 million are mortgage loans secured primarily by single-family residences
and $221.2 million are retail installment sales contracts secured by motor
vehicles.
The real estate loan portfolio (including those classified as available for
sale) consisted of the following:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
----------------------- ----------------------
Amount % Amount %
---------- ----- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Single family residential loans:
First trust deeds $ 573,142 47.3% $ 673,322 50.7%
Second trust deeds 139,888 11.5 152,160 11.5
---------- ----- ---------- -----
713,030 58.8 825,482 62.2
Multi family residential loans 478,522 39.5 480,692 36.2
Construction loans 31,732 2.6 31,684 2.4
Other 3,815 0.3 3,828 0.3
---------- ----- ---------- -----
1,227,099 1,341,686
Less undisbursed loan proceeds 15,135 1.2 14,889 1.1
---------- ----- ---------- -----
$1,211,964 100.0 $1,326,797 100.0%
========== ===== ========== =====
</TABLE>
11
<PAGE> 12
Westcorp's portfolio includes both fixed and adjustable rate mortgage loans as
shown below:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
----------------------- ----------------------
Amount % Amount %
---------- ----- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed rate loans:
Single family loans $ 132,844 11.0% $184,075 13.9%
Multifamily loans 2,016 0.2 2,181 0.2
Adjustable rate loans:
Negative amortizing loans 713,595 58.8 730,840 55.1
No negative amortizing loans 363,509 30.0 409,701 30.8
---------- ----- ---------- -----
Total portfolio $1,211,964 100.0% $1,326,797 100.0%
========== ===== ========== =====
</TABLE>
The composition of the consumer loan portfolio was as follows:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
--------------------- --------------------
Amount % Amount %
-------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Motor vehicle contracts $313,931 $251,751
Less unearned discounts 45,650 27,972
-------- --------
Net motor vehicle contracts 268,281 97.8% 223,779 97.2%
Deposit account loans 2,386 0.9 2,787 1.2
Other 3,642 1.3 3,785 1.6
-------- ----- -------- -----
Total Portfolio $274,309 100.0% $230,351 100.0%
======== ===== ======== =====
</TABLE>
The 19.1% increase in the consumer loan portfolio was the result of record
originations during the three months ended March 31, 1994.
Consumer loan originations were 32% higher for the period ended March 31, 1994
compared to the period ended March 31, 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 and Arizona. Real estate originations were higher
during the first quarter of 1994 compared to the comparable quarter a year ago.
The 45.8% increase in real estate originations is the result of Westcorp's
expansion of its mortgage banking operations during 1994. Westcorp continues
to expand its dealer center network and mortgage banking offices and is
currently opening offices in Texas.
<TABLE>
<CAPTION>
March 31, 1994 March 31, 1993
----------------------- -----------------------
Amount % Amount %
-------- ----- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Consumer loan originations $285,684 58.9% $216,367 61.3%
Real estate loan originations 199,149 41.1 136,628 38.7
-------- ----- -------- -----
$484,833 100.0% $352,995 100.0%
======== ===== ======== =====
</TABLE>
12
<PAGE> 13
ASSET QUALITY
Delinquency
Real estate delinquencies are shown in the table below:
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
----------------------------- -------------------------------
Amount Past Due % of Amount Past Due % of
Over 60 Days Category Over 60 Days Category
---------------- -------- --------------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Single family $19,931 2.80% $19,646 2.39%
Multifamily 1,896 .40 3,384 .70
------- -------
Total delinquent loans $21,827 1.80% $23,030 1.73%
======= =======
</TABLE>
Total real estate delinquencies over 60 days for March 31, 1994 have increased
.07% compared to December 31, 1993. This increase is attributable to increased
loan sales accompanied by prepayments which reduced the total portfolio and
continued weakness in the California economy.
Nonperforming Assets
Nonperforming assets ("NPA") consist of nonperforming loans ("NPL"),
insubstance foreclosures, ("ISF") and real estate acquired through foreclosure
("REO"). REO's and ISF's 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 ISF's are primarily composed of multifamily
properties. Also included in the NPA's 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 non-performing. NPL's 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
certain. Interest income on NPL is not accrued or recognized. At March 31,
1994 interest on nonaccrual loans excluded from interest income was $6.4
million. At March 31, 1993 such amount was $7.3 million.
Nonperforming loans consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
----------- ------------
<S> <C> <C>
Loans 90 days or more past due $17,780,558 $17,651,418
Performing, nonaccrual loans 23,676,378 14,314,820
----------- -----------
Total nonperforming loans $41,456,936 $31,966,238
=========== ===========
</TABLE>
Nonperforming loans by loan type consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
----------- ------------
<S> <C> <C>
Single family residential $17,089,290 $15,721,812
Multifamily 5-36 units 1,733,973 2,985,106
Multifamily over 36 units 20,301,619 10,134,523
Other 2,332,054 3,124,797
----------- -----------
Total nonperforming loans $41,456,936 $31,966,238
=========== ===========
</TABLE>
13
<PAGE> 14
Total NPA's increased to $79.9 million at March 31, 1994 compared to $74.9
million at December 31, 1993. The overall increase in non-performing assets
was due primarily to the continued weakness of the economic and real estate
markets in California where Westcorp has its concentration of non-performing
assets, particularly multifamily 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 non-performing assets.
The migration of nonperforming loans, insubstance foreclosures and real estate
owned from December 31, 1993 to March 31, 1994 is shown below.
NONPERFORMING LOANS
<TABLE>
<CAPTION>
TOTAL SFR 5-36 37+ Other
----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, 12/31/93 $31,966,238 $15,721,812 $2,985,106 $10,134,523 $3,124,797
New nonperforming loans 19,924,514 7,007,374 563,861 12,353,279
REO/ISF (5,282,465) (3,820,052) (1,462,413)
Cures and payoffs (4,771,791) (1,440,284) (352,581) (2,186,183) (792,743)
Chargeoffs (379,560) (379,560)
----------- ----------- ---------- ----------- ----------
Balance, 3/31/94 $41,456,936 $17,089,290 $1,733,973 $20,301,619 $2,332,054
=========== =========== ========== =========== ==========
</TABLE>
IN-SUBSTANCE FORECLOSURES
<TABLE>
<CAPTION>
Total SFR 5-36 37+ Other
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, 12/31/93 $20,825,533 $1,242,000 $14,858,533 $4,725,000
Transfer to REO (5,352,671) (5,352,671)
Cures (4,725,000) (4,725,000)
Writedowns (710,474) (710,474)
----------- ----------- ---------- ----------- ----------
Balance, 3/31/94 $10,037,388 $ $1,242,000 $ 8,795,388 $
=========== =========== ========== =========== ==========
</TABLE>
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
<TABLE>
<CAPTION>
Total SFR 5-36 37+ Land/Other
------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, 12/31/93 $ 17,404,964 $ 7,468,384 $ 725,097 $ 9,211,483
New REO 13,297,811 5,118,216 1,950,924 $ 6,228,671
Sales (4,860,285) (4,143,969) (716,316)
Writedowns (1,007,258) (3,237) (395,232) (1,009,116) 400,327
------------ ----------- ---------- ----------- -----------
Balance, 3/31/94 $ 24,835,232 $ 8,439,394 $1,564,473 $ 5,219,555 $ 9,611,810
============ =========== ========== =========== ===========
</TABLE>
For nonperforming assets other than nonperforming loans, assets secured by
multifamily residential properties continued to be the dominant asset type
consisting of $16.8 million or 48.2% of these assets. Of the multifamily
residential properties, $2.8 million are properties of 5-36 units and $14
million are properties of 37 units or greater.
Allowance for loan and real estate losses
Consistent with loan volume, loan sales, losses, nonaccrual loans and other
relevant factors, Westcorp maintained its allowance for loan losses at $41.1
million at March 31, 1994 compared with $39.7 million at December 31, 1993.
While Westcorp's nonperforming assets are mainly multifamily 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
effect of the Northridge earthquake. Westcorp is continuing to assess
earthquake-related damage, including on-site inspections of individual
properties. To date, Westcorp has modified 34 loans, typically by deferring
payments for generally two to three months. 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.
14
<PAGE> 15
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
-------------- -----------------
<S> <C> <C>
Total Loans $1,486,272,711 $1,557,148,057
Allowance for loan losses 41,065,120 39,676,719
Allowance for real estate losses 3,469,845 3,508,123
Loans past due 60 days or more 22,754,473 23,885,549
Nonperforming loans 41,456,936 31,966,238
Nonperforming assets 79,933,752 74,972,203
Allowance for loan losses as a
percent of:
Total loans 2.76% 2.55%
Loans past due 60 days or more 180.47% 166.11%
Nonperforming loans 99.05% 124.12%
Total allowance as a percent of
nonperforming assets 55.71% 57.60%
Nonperforming assets as a percent
of total loans 2.79% 2.05%
Nonperforming assets as a percent
of total assets 3.89% 3.45%
</TABLE>
The table below provides an historical analysis of the allowance for loan
losses.
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------------------
1994 1993
----------- -----------
<S> <C> <C>
Balance at beginning of period $39,676,719 $40,655,934
Charge-offs
Real estate - mortgage (1,861,316) (4,773,178)
Consumer (2,428,243) (3,911,668)
----------- -----------
(4,289,559) (8,684,846)
Recoveries
Real estate - mortgage 169,313 463,880
Consumer 1,267,262 1,633,499
----------- -----------
1,436,575 2,097,379
Net charge - offs (2,852,984) (6,587,467)
Provision for loan losses 4,241,385 6,679,619
----------- -----------
$41,065,120 $40,748,086
=========== ===========
Ratio of net charge - offs during
period to average loans out-standing
during the period (annualized) .74% 1.39%
=========== ============
</TABLE>
Changes in the allowance for real estate losses were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------------------
1994 1993
----------- -----------
<S> <C> <C>
Balance at beginning of period $ 3,508,123 $20,185,024
Provision for real estate losses 600,000
Charge - offs, net (38,278) (13,213,155)
----------- -----------
Balance at end of period $ 3,469,845 $ 7,571,869
=========== ===========
</TABLE>
15
<PAGE> 16
RESULTS OF OPERATIONS
Westcorp's net income for the three month period ended March 31, 1994 was $3.9
million or $0.17 per share, compared to net income of $3 million or $0.16 per
share for the same period of 1993. The increase in net income for the three
month period ended March 31, 1994 is primarily attributable to lower loss
provisions in the current quarter compared to the prior year comparable
quarter. This is offset by a lower net interest margin and higher operating
expenses.
NET INTEREST INCOME
Net interest income for the three months ended March 31, 1994 was $13.4 million
compared to $16.2 million for the respective period of 1993. The decrease in
net interest income 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.
Net interest margins narrowed 40 basis points for the three months ended March
31, 1994 compared to the same period of 1993 due primarily to a decrease of 76
basis points in the yield on interest-earning assets, offset by a decrease of
36 basis points in the cost of funds for the same period.
Overall market conditions experienced declining interest rates throughout 1993
and early 1994. Consequently, the rates earned and paid on interest sensitive
instruments have declined. Yields on loans and mortgage backed securities
decreased 118 basis points for the three months ended March 31, 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 55 basis points for the three
months ended March 31, 1994 compared to the same period of 1993. This decrease
reflects a continued replacement of higher-costing deposits with lower costing
ones. Other cost of borrowings increased 15 basis points based primarily on
the replacement of short term borrowings with long term subordinated debentures
as part of Westcorp's policy to manage interest rate risk and increase its
capital base.
The interest spread for Westcorp is summarized in the table below.
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------------------
1994 1993
----------- -----------
<S> <C> <C>
Interest-earning assets:
Loans 7.88% 8.50%
Mortgage-backed securities 5.44 6.00
Investments 4.64 5.45
---- ----
All interest-earning assets 7.40 8.16
Interest-bearing liabilities:
Deposits 4.44 4.99
FHLB advances and other borrowings 7.61 7.46
---- ----
All interest-bearing liabilities 5.05 5.41
---- ----
Interest Spread 2.35% 2.75%
==== ====
</TABLE>
16
<PAGE> 17
ASSET/LIABILITY MANAGEMENT
Synchronizing the repricing of an institution's liabilities and assets to
minimize interest rate risk is referred to as gap management. The net interest
income of the institution is also affected by changes in the economic and
financial environment, the most important of which are economic growth and
changes in interest rates.
Because Westcorp has a positive gap, the impact of future interest rate changes
may be that Westcorp's loans and investments would adjust to interest rate
changes more quickly than its deposits and borrowings.
The following table illustrates the projected interest rate maturities, based
upon certain assumptions regarding the major asset and liability categories of
Westcorp at March 31, 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.
17
<PAGE> 18
Interest Rate Sensitivity Analysis
as of March 31, 1994
(In Thousands)
<TABLE>
<CAPTION>
After After After After
3 Months One Year Three Years Five Years
Within Through Through Through Through After
3 Months One Year Three Years Five Years Ten Years Ten Years Total
---------- ---------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment securities
available for sale $ 5,000 $ 14,935 $ 5,233 $ 86,043 $ 1,540 $ 2,109 $ 114,860
Other investments 135,218 500 135,718
Mortgage-backed securities 86,710 3,801 593 403 685 171 92,363
Total Loans:
Consumer loans (1) 20,955 48,911 113,982 70,566 19,784 111 274,309
Real estate loans:
Adjustable interest rate
mortgage loans (2) 911,918 127,119 11,218 4,369 5,403 480 1,060,507
Fixed rate mortgage
loans (2) 7,610 21,024 46,425 25,409 33,759 632 134,859
Construction loans (2) 16,597 16,597
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest
earning assets 1,184,008 216,290 177,451 186,790 61,171 3,503 1,829,213
========== ========== ========== ========== ========== ========== ==========
Interest bearing
liabilities:
Passbook/statement
accounts (3) 6,636 19,061 44,349 27,548 40,978 17,562 156,134
Money market deposit
accounts (3) 210 504 215 82 50 1,061
Certificate accounts (4) 234,995 628,577 199,770 140,372 192 1,203,906
FHLB advances (4) 24,000 16,000 48,000 26,500 6,500 121,000
Other borrowings (4) (5) 16,704 13 50 120,553 137,320
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest bearing
liabilities 282,545 664,155 292,384 194,502 168,273 17,562 1,619,421
========== ========== ========== ========== ========== ========== ==========
Excess interest earning
assets
(liabilities) 901,463 (447,865) (114,933) (7,712) (107,102) (14,059) 209,792
========== ========== ========= ========= ========= ========= =========
Cumulative excess $ 901,463 $ 453,598 $ 338,665 $ 330,953 $ 223,851 $ 209,792 $209,792
Cumulative differences
as a percentage of
total assets 43.86% 22.07% 16.48% 16.10% 10.89% 10.21% 10.21%
</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) The motor vehicle loan collateralized bonds are amortized based on the
scheduled payments of the collateral.
18
<PAGE> 19
OTHER INCOME
Total other income increased $6.2 million for the three months ended March 31,
1994 to $21.4 million compared to $15.3 million for the same period in 1993.
The primary increase was in the area of loan servicing fees.
Loan servicing fees increased to $14.2 million for the three months ended March
31, 1994 from $7.2 million for the same period in 1993. Loans serviced for
others, all of which were originated by Westcorp, totaled $2.4 billion and $1.7
billion at March 31, 1994 and 1993, respectively. Additionally, servicing
income has continued to increase because of the increased servicing portfolio
and larger servicing fee spreads on more recent consumer loan transactions.
Gain on sale of loans, mortgage-backed securities and investment securities
decreased to $2.3 million for the three months ended March 31, 1994 compared to
$4.4 million for the three months ended March 31, 1993 due to declining spreads
to the market during the first quarter of 1994.
Subsequent to quarter end, general economic interest rates have continued to
experience sharp increases. Increasing interest rates have had a negative
impact on the pricing of loans for sale in the secondary market. To the extent
interest rates continue to rise and profit margins in the secondary market
narrow, gain on sale of loans as well as servicing income will be negatively
impacted.
Real estate operations include the ongoing costs of operation and disposition
associated with Westcorp's investments in joint ventures and REO. Real estate
operations had losses for the three months ended March 31, 1994 of $2 million
compared to a loss of $1.2 million for the same period in 1993. The change
between quarters is due primarily to greater payments made on delinquent
property taxes on non-performing assets acquired through foreclosure.
OTHER EXPENSES
Other expenses, which consist of salaries and employee benefits, occupancy,
insurance and other miscellaneous expenses increased to $23.4 million for the
three months ended March 31, 1994 compared to $19.8 million for the same period
in 1993. The increase is primarily in the areas of salaries and benefits.
Other miscellaneous expenses include marketing and professional fees. The
increase in expenses is related to increased loan servicing portfolios,
expansion into other states and higher levels of nonperforming assets. In
addition, the premium paid to the Savings Association Insurance Fund increased
as a result of an increase in premium rates. The ratio of annualized other
expenses to average serviced assets was 2.18% and 2.05% for the three month
period ended March 31, 1994 and 1993 respectively.
INCOME TAXES
The effective tax rate for the three months ended March 31, 1994 and 1993 was
45.3% and 38.5%.
19
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
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.
Capital Resources
The Bank 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, bank
line of credit 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.
When conditions are favorable, structured finance capital markets are accessed
regularly with respect to the Bank's motor vehicle loans. Through March 1994,
$200 million was raised through one automobile loan sale transactions. These
automobile loan sale transactions received the highest rating provided by
Moody's Investors Service, Inc., and Standard & Poor's Corporation at the time
of sale based on the structure of the transaction and credit enhancement
provided by Financial Security Assurance Inc., ("FSA"). In each transaction,
FSA issued a financial guaranty insurance policy pursuant to which the payment
of interest and principal was guaranteed to the holders of the beneficial
interests in the related grantor trust. In addition, during the three month
period, the Bank sold $257.2 million of real estate loans as part of its
mortgage banking activity. If the Bank does not sell such loans, it will hold
them in its portfolio, relying on its other sources of funds to meet its
liquidity needs.
The Bank 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.
On September 29, 1992 the OTS issued final rules implementing certain
requirements spelled out under the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). The final rule 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 risk-based capital ratio of 10% or
greater, a tier one ratio of 6% or greater and a leverage ratio of 5% or
greater and a strong examination rating by the OTS. The Bank is currently
considered "well capitalized".
20
<PAGE> 21
A reconciliation of the Bank's capital under generally accepted accounting
principles (GAAP) as included in its consolidated balance sheet and regulatory
capital at March 31, 1994 is as follows:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital Capital Capital
------------------ ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Bank shareholder equity-GAAP basis $196,415 $196,415 $196,415
Non-permissible activities at
required phase-in (7,806) (7,806) (7,806)
Supplemental capital:
Subordinated debentures 123,947
General loan valuation allowance 26,530
Less: Fully capitalized assets (24,446)
-------- -------- --------
Regulatory capital 188,609 9.14%(1) 188,609 9.14%(1) 314,640 14.91%(2)
Minimum OTS capital
requirement 30,949 1.50% 61,897 3.00% 168,860 8.00%
-------- -------- --------
Excess capital $157,660 $126,712 $145,780
======== ======== ========
</TABLE>
(1) As a percentage of total adjusted assets.
(2) As a percentage of risk-weighted assets.
21
<PAGE> 22
PART II - OTHER INFORMATION
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 February 1, 1994 announcing that on
January 25, 1994, the Bank was informed by the OTS that the OTS agreement will
be lifted. (See Exhibit 10.4 Agreement by and between Western Financial
Savings Bank and the Office of Thrift Supervision, dated May 14, 1992 for
information relating to the aforementioned "OTS agreement").
22
<PAGE> 23
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
Date May 13, 1994 /s/ Stephen W. Prough
------------------------------ ------------------------------------
Stephen W. Prough
President and
Chief Operating Officer
(Principal Executive Officer)
Date May 13,1994 /s/ Joy Schaefer Fackler
------------------------------ ------------------------------------
Joy Schaefer Fackler
Vice President,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
23
<PAGE> 1
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------------------
1994 1993
----------- -----------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE:
Weighted Average and Common
Equivalent Shares 23,045,852 18,492,025
Net Income $ 3,927,733 $ 3,045,472
Primary Earnings Per Share 0.17 .16
FULLY DILUTED EARNINGS PER SHARE:
Weighted Average and Common
Equivalent Shares 23,045,852 18,516,646
Net Income $ 3,927,733 $ 3,045,472
Fully diluted Earnings
Per Share 0.17 .16
</TABLE>
24
