<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
COMMISSION FILE NUMBER 33-13646
WESTCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 51-0308535
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 PASTEUR, IRVINE, CALIFORNIA 92718-3804
-----------------------------------------
(Address of principal executive offices)
(714) 727-1000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
----- -----
As of October 31, 1995, the registrant had 26,539,797 outstanding shares of
common stock, $1.00 par value. The shares of common stock represent the only
class of common stock of the registrant.
The total number of sequentially numbered pages is 30.
<PAGE> 2
WESTCORP AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1995
TABLE OF CONTENTS
-----------------------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
September 30, 1995 and December 31, 1994 3
Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 1995 and 1994 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1995 and 1994 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(Dollars in thousands,
except per-share amounts)
<S> <C> <C>
ASSETS
Cash, interest-bearing deposits with other financial institutions and
other short term investments $ 125,156 $ 166,293
Investment securities held to maturity (fair value 1995: $1,472) 1,507
Investment securities available for sale 114,596 114,764
Mortgage-backed securities held to maturity (fair value 1995: $543,792;
1994: $305,466) 537,995 316,511
Mortgage-backed securities available for sale 187,639 154,158
Loans receivable, net of allowance for loan losses (1995: $40,029;
1994: $41,323) 1,403,077 1,411,052
Loans held for sale 284,114 304,506
Premises and equipment, net 65,260 66,465
Real estate owned, net 14,139 23,927
Accrued interest receivable 15,739 13,309
Excess of purchase cost over net assets acquired 1,036 1,099
Federal Home Loan Bank stock 23,624 24,474
Other assets 211,890 145,731
---------- ----------
$2,985,772 $2,742,289
========== ==========
LIABILITIES
Savings deposits $1,773,663 $1,632,782
Securities sold under agreements to repurchase 373,603 246,074
Short term borrowings 6,935 210,578
Federal Home Loan Bank advances 72,000 89,000
Amounts held on behalf of trustee 307,849 216,204
Unearned insurance premiums and insurance reserves 5,862 5,096
Other liabilities 34,351 26,392
---------- ----------
2,574,263 2,426,126
SUBORDINATED DEBENTURES 104,230 103,851
MINORITY INTEREST 18,947
SHAREHOLDERS' EQUITY:
Common stock, par value $1.00 per share; authorized
45,000,000 shares; issued and outstanding 24,521,304
shares in 1995 and 23,145,640 shares in 1994 24,521 23,146
Paid-in capital 166,807 102,376
Retained earnings 98,439 92,788
Unrealized loss on securities available for sale, net of tax (1,435) (5,998)
---------- ----------
288,332 212,312
---------- ----------
$2,985,772 $2,742,289
========== ==========
</TABLE>
____________________
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1995 1994 1995 1994
----------- --------- ---------- -----------
(Dollars in thousands, except per-share amounts)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 41,958 $ 29,998 $ 119,171 $ 88,246
Mortgage-backed securities 13,451 3,960 33,700 6,666
Investment securities 1,628 1,323 4,906 4,204
Other 1,157 987 4,408 2,785
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME 58,194 36,268 162,185 101,901
Interest expense:
Savings deposits 26,421 17,745 75,044 47,872
Securities sold under agreements to repurchase 5,557 499 13,109 499
Federal Home Loan Bank advances and
other borrowings 4,617 3,676 13,934 13,192
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 36,595 21,920 102,087 61,563
------------ ----------- ----------- -----------
NET INTEREST INCOME 21,599 14,348 60,098 40,338
Provision for loan losses 3,641 3,273 8,374 10,026
------------ ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 17,958 11,075 51,724 30,312
Other income:
Automobile lending 25,115 15,376 63,306 53,789
Mortgage banking 742 448 2,774 465
Investment and mortgage-backed securities gains 698 313 1,184 761
Insurance income 1,853 1,392 4,261 5,626
Real estate operations (206) 3,470 462 2,444
Rental operations (33) (102) (191) (399)
Miscellaneous 200 40 469 277
----------- ----------- ----------- -----------
TOTAL OTHER INCOME 28,369 20,937 72,265 62,963
Other expenses:
Salaries and employee benefits 16,858 12,951 46,183 39,635
Occupancy 2,617 2,223 7,270 6,248
Insurance 1,350 1,179 4,307 3,888
Miscellaneous 8,144 7,124 23,859 21,002
----------- ----------- ----------- -----------
TOTAL OTHER EXPENSES 28,969 23,477 81,619 70,773
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 17,358 8,535 42,370 22,502
Income taxes 7,125 3,552 17,503 9,492
----------- ------------ ----------- -----------
INCOME BEFORE MINORITY INTEREST 10,233 4,983 24,867 13,010
Minority interest 1,160 1,160
----------- ----------- ----------- -----------
NET INCOME $ 9,073 $ 4,983 $ 23,707 $ 13,010
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENT $ 0.37 $ 0.20 $ 0.96 $ 0.54
=========== =========== =========== ===========
CASH DIVIDENDS DECLARED PER SHARE OF
COMMON STOCK $ 0.090 $ 0.075 $ 0.270 $ 0.225
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
AND COMMON SHARE EQUIVALENTS 24,824,526 24,365,744 24,642,100 24,275,997
=========== =========== =========== ===========
</TABLE>
_______________________
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1995 1994
--------- ---------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,707 $ 13,010
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses 8,274 7,920
Depreciation and amortization 5,593 5,245
Amortization of deferred fees 1,702 (310)
Amortization of issuance costs 379 452
(Increase) decrease in interest receivable (2,430) 875
(Gains) losses on nonoperating activities (16,353) 5,446
Decrease in interest payable (3,392) (3,625)
Increase (decrease) in unearned insurance 766 (1,933)
Minority interest 1,160
Other, net (35,645) 13,325
Net change in loans available for sale 30,673 521
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,434 40,926
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available for sale (14,198)
Maturities of investment securities 20,000 20,000
Purchase of mortgage-backed securities available for sale (200,753) (128,256)
Purchase of mortgage-backed securities held to maturity (245,375) (201,845)
Proceeds from the sale of mortgage-backed securities available for sale 164,722 43,018
Payments received on mortgage-backed securities 30,433 7,509
Net change in loans (16,582) (157,971)
Purchase of loans (203) (139)
Additions to premises and equipment (4,322) (4,515)
Disposition of real estate owned 27,238 40,096
Purchase of FHLB stock (842) (4,440)
Proceeds from sales of FHLB stock 1,692 2,532
Net increase in trust receivable (22,342) (15,856)
Net increase in trustee accounts 91,645 32,374
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (168,887) (367,493)
</TABLE>
_________________________
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1995 1994
----------- ----------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from public stock offering $ 70,207
Net increase in deposits 140,881 $ 182,781
Increase in securities sold under agreements to repurchase 127,529 44,858
Decrease in FHLB advances, net (17,000) (37,000)
(Decrease) increase in short-term borrowings, net (203,630) 96,773
Repayment of other borrowings (26,325)
Redemption of subordinated debentures (16,918)
Proceeds from sale of common stock 1,813 1,204
Cash dividends (6,484) (5,107)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 113,316 240,266
--------- ---------
Net decrease in cash and equivalents (41,137) (86,301)
Cash and equivalents at beginning of period 166,293 162,557
--------- ---------
Cash and equivalents at end of period $ 125,156 $ 76,256
========= =========
- ----------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 105,479 $ 65,188
Income taxes 12,050 3,850
Supplemental disclosures of noncash transactions:
Acquisition of real estate acquired through foreclosure $ 25,098 $ 28,309
</TABLE>
________________________
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 1995 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1995. 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, 1994.
Certain amounts from the 1994 consolidated financial statement amounts have
been reclassified to conform to the 1995 presentation.
7
<PAGE> 8
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - NET LOANS RECEIVABLE
Net loans receivable consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------ -----------
(Dollars in thousands)
<S> <C> <C>
Real estate:
Mortgage $1,350,080 $1,308,585
Construction 5,004 19,813
---------- ----------
1,355,084 1,328,398
Less: Undisbursed loan proceeds 647 7,614
---------- ----------
1,354,437 1,320,784
Consumer:
Sales contracts 374,776 513,470
Less: Unearned discounts 3,861 82,762
---------- ----------
370,915 430,708
---------- ----------
1,725,352 1,751,492
Allowance for loan losses (40,029) (41,323)
Deferred loan fees (7,070) (5,141)
Dealer participation 8,938 10,530
---------- ----------
1,687,191 1,715,558
Less: Loans held for sale:
Mortgage 72,024 2,954
Consumer 212,090 301,552
---------- ----------
284,114 304,506
---------- ----------
Total $1,403,077 $1,411,052
========== ==========
</TABLE>
Loans serviced by Westcorp for the benefit of others totalled approximately
$4.9 billion and $2.9 billion at September 30, 1995 and December 31, 1994,
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 - INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity consisted of the following:
<TABLE>
<CAPTION>
September 30, 1995
Held to Maturity Securities
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
----------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations $ 1,507 $ 35 $ 1,472
----------- ---------- ---------- ----------
$ 1,507 $ 35 $ 1,472
=========== ========== ========== ==========
</TABLE>
9
<PAGE> 10
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D - INVESTMENT SECURITIES AVAILABLE FOR SALE
The aggregated amortized cost and approximate fair value of investment
securities available for sale were as follows:
<TABLE>
<CAPTION>
September 30, 1995
Available for Sale Securities
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------- ----------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations $112,875 $ 192 $ 1,890 $111,177
Obligations of states and political
subdivisions 3,522 128 3,394
Other 25 25
-------- ---------- --------- --------
$116,422 $ 192 $ 2,018 $114,596
======== ========== ========= ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
Available for Sale Securities
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations $119,013 $7,336 $111,677
Obligations of states and political
subdivisions 3,524 462 3,062
Other 25 25
-------- ------------ ------ --------
$122,562 $7,798 $114,764
======== ============ ====== ========
</TABLE>
10
<PAGE> 11
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity consisted of the following:
<TABLE>
<CAPTION>
September 30, 1995
Held to Maturity Securities
-----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
------------ ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
GNMA certificates $425,106 $6,653 $938 $430,821
FNMA participation certificates 103,074 103,074
FHLMC participation certificates 9,651 82 9,733
Other participation certificates 164 164
-------- ------ ---- --------
$537,995 $6,735 $938 $543,792
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
Held to Maturity Securities
----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
GNMA certificates $208,307 $246 $6,539 $202,014
FNMA participation certificates 108,033 4,752 103,281
Other participation certificates 171 171
-------- ---- ------- --------
$316,511 $246 $11,291 $305,466
======== ==== ======= ========
</TABLE>
NOTE F - MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The aggregated amortized cost and approximate fair value of mortgage-backed
securities available for sale were as follows:
<TABLE>
<CAPTION>
September 30, 1995
Available for Sale Securities
----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
GNMA certificates $ 27,282 $1,048 $1,722 $ 26,608
FNMA participation certificates 78,232 4 425 77,811
FHLMC participation certificates 83,088 611 479 83,220
-------- ------ ------ --------
$188,602 $1,663 $2,626 $187,639
======== ====== ====== ========
</TABLE>
11
<PAGE> 12
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1994
Available for Sale Securities
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
GNMA certificates $ 50,637 $1,572 $1,036 $ 51,173
FNMA certificates 80,622 2,788 77,834
FHLMC participation certificates 3,082 85 2,997
Other participation certificates 22,543 389 22,154
-------- ------ ------ --------
$156,884 $1,572 $4,298 $154,158
======== ====== ====== ========
</TABLE>
NOTE G - DIVIDENDS
On March 13, 1995, June 8, 1995, and August 14, 1995, Westcorp paid a cash
dividend of $0.09 per share. In addition, Westcorp paid a 5% stock dividend on
April 12, 1995. The per share amounts for all periods presented have been
restated to reflect the increased shares outstanding. On October 24, 1995,
Westcorp announced a cash dividend of $0.09 per share for shareholders of
record as of November 9, 1995, payable November 24, 1995.
NOTE H - OTHER EVENTS
Effective August 8, 1995, WFS Financial Inc ("WFS") sold to the public 4.6
million shares of common stock at a price of $16.50 per share raising
approximately $70 million in additional capital. Westcorp retained an
ownership interest in WFS of 80.3%.
On October 3, 1995, Westcorp announced that it intends to acquire an 80%
ownership interest in The Hammond Company, a privately held mortgage banking
company located in California. The final purchase price, expected to range
from $7 to $10 million, will be determined upon completion of due diligence by
Westcorp. Following receipt of all corporate and regulatory clearances, the
transaction is expected to be completed before the end of 1995.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets increased $243 million or 8.9% to $3.0 billion at September 30,
1995 from $2.7 billion at December 31, 1994. This increase is primarily the
result of the purchase of mortgage-backed securities.
LOANS
Loans (including those held for sale), net of unearned discounts and
undisbursed loan proceeds, decreased $26.1 million or 1.5% since December 31,
1994. The decrease is the result of the differential between loans originated
and sold as well as principal reductions during the nine month period ended
September 30, 1995. 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 $72.0 million are mortgage loans secured
primarily by single family residences and $212 million which are consumer loans
secured by motor vehicles. Since December 31, 1994, Westcorp has increased the
amount of consumer loans securitized, thereby reducing the overall amount of
loans held on the balance sheet.
Consumer loan originations were 30.6% and 24.7% higher for the three and nine
months ended September 30, 1995 compared to the same periods in 1994. This
increase was primarily the result of Westcorp's continued expansion throughout
1994 and into 1995 of its dealer center and branch network and favorable market
conditions for automobile sales in Arizona, California, Colorado, Florida,
Georgia, Idaho, Kansas, Missouri, New Mexico, Nevada, Oregon, Texas, Utah and
Washington - the states in which Westcorp maintains offices.
Real estate originations were lower during the first three and nine month
periods of 1995 compared to the same periods a year ago. The decrease in real
estate originations is reflective of the lower level of refinancings due to the
general increase in interest rates compared to the same periods of 1994 and the
continued sluggish California economy. However, to offset the decline in real
estate originations, Westcorp purchased rights to service $1.5 billion of
single family real estate loans thereby increasing Westcorp's servicing
portfolio. The following table sets forth the loan origination, purchase and
sale activity of Westcorp for the periods indicated.
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
----------------------------------------------------------------------
1995 1994
------------------------------ ------------------------------
Mortgage Consumer Mortgage Consumer
---------- -------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Beginning balance $1,352,578 $ 369,484 $1,208,879 $ 297,957
Originations (1) 147,899 422,547 166,574 323,511
Purchases 2 121
Sales (112,264) (375,000) (41,037) (200,000)
Principal reductions (2) (33,778) (46,116) (38,014) (41,971)
---------- --------- ---------- ---------
Ending balance $1,354,437 $ 370,915 $1,296,523 $ 379,497
========== ========= ========== =========
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
----------------------------------------------------------------------
1995 1994
------------------------------ --------------------------------
Mortgage Consumer Mortgage Consumer
---------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Beginning balance $1,320,784 $ 430,708 $1,326,797 $ 230,351
Originations (1) 268,337 1,119,698 535,986 898,244
Purchases 203 139
Sales (132,779) (1,055,000) (415,697) (630,000)
Principal reductions (2) (102,108) (124,491) (150,702) (119,098)
---------- ----------- ---------- ---------
Ending balance $1,354,437 $ 370,915 $1,296,523 $ 379,497
========== =========== ========== =========
</TABLE>
(1) Includes automobile loans purchased from automobile dealers.
(2) Includes scheduled payments, prepayments and chargeoffs.
The real estate loan portfolio (including those classified as held for sale)
consisted of the following:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------------------- -----------------------------
Amount % Amount %
---------- ----- ---------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Single family residential loans:
First trust deeds $ 760,400 56.1% $ 718,924 54.4%
Second trust deeds 118,783 8.8 126,365 9.6
---------- ----- ---------- -----
879,183 64.9 845,289 64.0
Multifamily residential loans 467,663 34.5 459,883 34.8
Other 8,238 0.7 23,226 1.8
---------- ----- ---------- -----
1,355,084 1,328,398
Less: Undisbursed loan proceeds 647 0.1 7,614 0.6
---------- ----- ---------- -----
$1,354,437 100.0% $1,320,784 100.0%
========== ===== ========== =====
</TABLE>
Westcorp's real estate portfolio consisted primarily of adjustable rate
mortgage loans as shown below:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------------------ -----------------------------
Amount % Amount %
---------- ----- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed rate loans:
Single family $ 133,674 9.9% $ 103,189 7.8%
Multifamily 254 0.1 394 0.1
Adjustable rate loans:
Negative amortizing 903,599 66.6 916,916 69.3
No negative amortizing 316,910 23.4 300,285 22.8
---------- ----- ---------- -----
$1,354,437 100.0% $1,320,784 100.0%
========== ===== ========== =====
</TABLE>
14
<PAGE> 15
The composition of the consumer loan portfolio, all of which is fixed rate,
was as follows:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
----------------------------- -----------------------------
Amount % Amount %
--------- ----- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Automobile loans, net $359,913 97.0% $427,175 99.2%
Other 11,002 3.0 3,533 0.8
-------- ----- -------- ------
Total portfolio $370,915 100.0% $430,708 100.0%
======== ===== ======== =====
</TABLE>
MORTGAGE-BACKED SECURITIES
During the first nine months of 1995, Westcorp purchased and sold
mortgage-backed securities totalling $446 million and $165 million
respectively, for a net increase of $282 million. This is part of Westcorp's
overall strategy to fully employ capital and enhance net interest income.
ASSET QUALITY
GENERAL
Westcorp's real estate loan portfolio delinquency has increased over the past
year. From mid-1992 through early 1994, the economy in California, where
substantially all of the collateral for Westcorp's real estate loans is
located, experienced severe downturns in the market values of real estate, high
levels of unemployment and a continued slump in residential construction and
new home sales. The problems created by this economic slump have been
especially noticeable in the multifamily mortgage portfolio. While the economy
has not fully recovered, the downward spiral appears to have stabilized.
DELINQUENCY
The percent of loans 60 days or more delinquent increased to 1.2% at September
30, 1995 compared to 1.0% at December 31, 1994. Delinquent loans by type of
loan and as a percentage of loans by type are summarized as follows at
September 30, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
September 30, 1995
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 $2,543 0.3% $12,696 1.4% $15,239 1.7%
Multifamily residential homes 998 0.2 2,207 0.5 3,205 0.7
Consumer 1,069 0.3 610 0.2 1,679 0.5
------ ---- ------- ---- ------- ----
Total $4,610 0.3% $15,513 0.9% $20,123 1.2%
====== ==== ======= ==== ======= ====
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
December 31, 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 $ 899 0.1% $13,253 1.6% $14,152 1.7%
Multifamily residential homes 317 0.1 1,393 0.3 1,710 0.4
Consumer 576 0.1 228 0.1 804 0.2
------ ---- ------- ---- ------- ----
Total $1,792 0.1% $14,874 0.8% $16,666 1.0%
====== ==== ======= ==== ======= ====
</TABLE>
NONPERFORMING ASSETS
Total nonperforming assets ("NPA") decreased 20.0% to $34.6 million at
September 30, 1995 compared to $43.3 million at December 31, 1994. The overall
decrease is primarily attributable to an effective nonperforming asset
disposition process and improving overall asset quality. At September 30,
1995, NPAs represented 1.2% of total assets compared to 1.6% at December 31,
1994.
NPAs consist of nonperforming loans ("NPL") and real estate acquired through
foreclosure ("REO"). REOs are accounted for at fair value. NPLs are defined
as all loans on nonaccrual which includes mortgage loans 90 days or more past
due or performing loans where full collection of principal and interest is not
reasonably assured. When a loan is designated as nonaccrual, all previous
accrued interest is reversed. At September 30, 1995, interest on nonperforming
loans excluded from interest income was $1.0 million compared to $4.4 million
at September 30, 1994.
As a result of the adoption of SFAS No. 114, Westcorp reclassified $3.0 million
of NPAs back to NPLs. A loan is impaired when, based on current information
and events, it is probable that Westcorp will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Westcorp
measures impairment based on the fair value of the loan's collateral. Changes
in the fair value are recorded through the allowance for loan losses. At
September 30, 1995, $5.5 million in loans were considered impaired.
Nonperforming loans consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Loans 90 days or more past due $14,024 $13,950
Performing, nonaccrual loans 5,691 3,717
------- -------
Total nonperforming loans $19,715 $17,667
======= =======
</TABLE>
16
<PAGE> 17
Nonperforming loans by loan type consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Single family residential $13,017 $13,856
Multifamily 5-36 units 4,323 2,616
Multifamily 37+ units 2,375 59
Other 1,136
------- -------
Total nonperforming loans $19,715 $17,667
======= =======
</TABLE>
The migration of nonperforming loans and real estate owned from December 31,
1994 to September 30, 1995 is shown below.
NONPERFORMING LOANS
<TABLE>
<CAPTION>
Single
Family Multifamily Multifamily
Total 1 - 4 Units 5 - 36 Units 37+ Units Construction
----- ----------- ------------ ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, 12/31/94 $17,667 $13,856 $2,616 $59 $1,136
New nonperforming loans 17,862 12,467 5,395
Adjustment for impaired loans 3,006 350 2,390 266
REO (10,279) (7,386) (1,541) (59) (1,293)
Cures and payoffs (6,915) (4,844) (1,947) (15) (109)
Chargeoffs (1,626) (1,076) (550)
------- ------- ------ ------ ------
Balance, 9/30/95 $19,715 $13,017 $4,323 $2,375 $0
======= ======= ====== ====== ======
</TABLE>
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
<TABLE>
<CAPTION>
Single
Family Multifamily Multifamily
Total 1 - 4 Units 5 - 36 Units 37+ Units Construction
----- ----------- ------------ ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, 12/31/94 $20,737 $5,271 $4,028 $10,499 $939
New REO 25,098 9,492 8,718 4,361 2,527
Sales (24,154) (7,601) (7,237) (9,316)
Writedowns (6,757) (1,631) (2,248) (1,020) (1,858)
------- ------ ------ ------ ------
Balance, 9/30/95 $14,924 $5,531 $3,261 $4,524 $1,608
======= ====== ====== ====== ======
</TABLE>
For nonperforming assets other than nonperforming loans, assets secured by
multifamily residential properties continued to be the dominant asset type
consisting of $7.8 million or 52.2% of these assets. Of the multifamily
residential properties, $4.5 million are properties of 37 units or greater.
17
<PAGE> 18
ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES
Consistent with loan volume, loan sales, losses, nonaccrual loans and other
relevant factors, Westcorp decreased its allowance for loan losses to $40.0
million for September 30, 1995 compared to $41.3 million for December 31, 1994.
While Westcorp's nonperforming assets are mainly multifamily and construction
loans, no single loan, borrower 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. The allowance for loan
losses is maintained at a level believed adequate by management to absorb
potential losses in the loan portfolio.
The following table presents summarized data relative to the allowance for loan
losses.
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Total loans $1,725,352 $1,751,492
Allowance for loan losses 40,029 41,323
Allowance for real estate losses 784 1,684
Loans past due 60 days or more 20,123 16,666
Nonperforming loans 19,715 17,667
Nonperforming assets 34,639 43,278
Allowance for loan losses as a percent of:
Total loans 2.3% 2.4%
Loans past due 60 days or more 198.9 247.9
Nonperforming loans 203.0 233.9
Total allowance as a percent of nonperforming assets 117.8 99.4
Nonperforming loans as a percent of total loans 1.1 1.0
Nonperforming assets as a percent of total assets 1.2 1.6
</TABLE>
18
<PAGE> 19
The table below provides a historical analysis of the allowance for loan
losses.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1995 1994 1995 1994
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $41,256 $41,648 $41,323 $39,677
Chargeoffs:
Real estate (2,653) (3,179) (5,011) (6,217)
Consumer (3,549) (2,786) (8,946) (7,604)
------- ------ ------- -------
(6,202) (5,965) (13,957) (13,821)
Recoveries:
Real estate 57 457 184 753
Consumer 1,277 2,042 3,305 4,820
------- ------ ------- -------
1,334 2,499 3,489 5,573
------- ------ ------- -------
Net chargeoffs (4,868) (3,466) (10,468) (8,248)
Transfers from the allowance for real
estate losses 800
Provision for loan losses 3,641 3,273 8,374 10,026
------- ------- ------- -------
Balance at end of period $40,029 $41,455 $40,029 $41,455
======= ======= ======= =======
Ratio of net chargeoffs during
period to average loans outstanding
during the period (annualized) 1.10% .89% .80% .72%
======= ======= ======= =======
</TABLE>
Changes in the allowance for real estate losses were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
1995 1994 1995 1994
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $784 $2,511 $1,684 $3,508
Provision for real estate losses (606) (100) (2,106)
Chargeoffs, net 1 504
Transfers to the allowance for loan
losses (800)
---- ------ ------ ------
Balance at end of period $784 $1,906 $ 784 $1,906
==== ====== ====== ======
</TABLE>
Westcorp transferred $0.8 million of allowance for real estate losses to
allowance for loan losses at March 31, 1995 as part of implementing SFAS 114.
19
<PAGE> 20
RECENT EVENTS
Effective August 8, 1995, WFS sold to the public 4.6 million shares of common
stock at a price of $16.50 per share raising approximately $70 million in
additional capital. Westcorp retained an ownership interest in WFS of 80.3%.
On October 3, 1995, Westcorp announced that it intends to acquire an 80%
ownership interest in The Hammond Company, a privately held mortgage banking
company located in California. The final purchase price, expected to range
from $7 to $10 million, will be determined upon completion of due diligence by
Westcorp. Following receipt of all corporate and regulatory clearances, the
transaction is expected to be completed before the end of 1995.
RESULTS OF OPERATIONS
SUMMARY
Westcorp reported net income of $9.1 million and $23.7 million for the three
and nine months ended September 30, 1995, compared to $5.0 million and $13.0
million for the respective periods of 1994. Return on average assets was 1.3%
and 1.1% for the three and nine months ended September 30, 1995, compared to
0.97% and 0.85% for the same periods of 1994. Return on average equity was
15.5% and 13.5% for the three and nine months ended September 30, 1995,
compared to 9.6% and 8.4% for the respective periods of 1994. Net income was
most affected by the following four factors:
o Net interest income increased as interest margins widened and interest
earning assets increased.
o Provision for loan losses decreased for the nine months ended due to a
lower level of loans receivable held on the balance sheet.
o Automobile lending and Mortgage banking income increased as overall
servicing portfolios increased.
o Other expenses increased as a result of continued expansion into other
states and expansion of servicing portfolios.
NET INTEREST INCOME
Net interest income for the three and nine months ended September 30, 1995 was
$21.6 million and $60.1 million. For the same periods of 1994, net interest
income totalled $14.3 million and $40.3 million.
Overall interest rate spread increased 9 basis points for the nine months ended
September 30, 1995, compared to the same period of 1994 due to an increase of
104 basis points in the yield on interest-earning assets while the cost of
funds increased 95 basis points for the same period.
The increase in yield on interest earning assets for the nine months ended
September 30, 1995, compared to the same period of 1994 was affected by a 128
basis point increase in the consumer loan portfolio, which is due to increased
originations of contracts with higher yields. Additionally, the yield on
mortgage-backed securities increased 130 basis points due to the reinvestment
of funds into mortgage-backed securities at higher rates than the rates on
those assets sold or repaid as well as an increase in the overall amount of
securities held.
20
<PAGE> 21
The increase in the cost of funds was affected by a 122 basis point increase
in the cost of savings deposits and a $141 million increase in the amount of
savings deposits for which interest was paid for the nine months ended
September 30, 1995 compared to the same period of 1994. This increase
reflects a continued replacement of lower costing deposits with higher
costing ones.
Interest rates earned and paid for the three and nine months ended September
30, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1995 1994 1995 1994
------ ------ ------ ------
Yield/ Yield/ Yield/ Yield/
Rate Rate Rate Rate
----- ------ ------ ------
<S> <C> <C> <C> <C>
Interest-earning assets:
5.42% 5.28% 5.48% 5.21%
Investment securities
Mortgage-backed securities (1) 7.55 6.51 7.31 6.01
Loans:
Consumer 14.35 13.42 14.61 13.33
Mortgage 7.91 6.30 7.46 6.50
Other 5.67 6.04 5.67 4.70
----- ----- ----- -----
Total interest-earning assets 8.66 7.37 8.39 7.35
Interest-bearing liabilities:
Savings deposits 5.92 4.66 5.74 4.52
Public debt offerings (2) 6.99 7.90 7.19 7.59
Repurchase agreements 5.86 3.26 5.66 3.26
FHLB advances and other
borrowings 7.61 7.44 7.51 7.59
----- ----- ----- -----
Total interest-bearing liabilities 6.11 4.98 5.95 5.00
Interest rate spread 2.55% 2.39% 2.44% 2.35%
===== ===== ===== =====
Net yield on average interest
earning assets 3.29% 2.96% 3.21% 2.91%
===== ===== ===== =====
</TABLE>
__________________________________
(1) Includes collateralized mortgage obligations.
(2) Includes subordinated debentures and commercial paper.
21
<PAGE> 22
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 ("ARM") and fixed-rate
mortgages. To minimize the interest rate risk associated with its real estate
loan portfolio, Westcorp generally retains the ARMs in its own loan portfolio
and sells its fixed-rate loans in the secondary market with servicing rights
retained. Westcorp has also purchased mortgage servicing rights (PMSR) which
act as a potential hedge against rising interest rates. During the first nine
months of 1995, Westcorp purchased rights to service $1.5 billion of single
family residential mortgage loans for $13.4 million. At September 30, 1995,
Westcorp serviced $3.2 billion in mortgage real estate loans for others. ARMs
and adjustable-rate mortgage-backed securities ("MBS") amounted to 68% of the
total mortgage loans and MBS held by Westcorp at September 30, 1995. Interest
rates generally adjust on a monthly, semiannual or annual basis with 98% 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 82% of its
consumer loan production and retained the servicing rights in securitization
transactions. The interest rate passed through to the purchasers of those
consumer loans is fixed, which provides off balance sheet match funding for the
majority of Westcorp's consumer loans. At September 30, 1995, Westcorp
serviced $1.7 billion in consumer loans for others.
Approximately 27% of Westcorp's other borrowed funds at September 30, 1995 had
fixed rates and maturities greater than one year. Subordinated debentures,
which represent 70% of this total, are redeemable in five years and mature in
eight years.
Westcorp has entered into or committed to interest rate swaps and interest rate
caps as hedges against market value changes in designated portions of its MBS
portfolio. At September 30, 1995, swaps with a notional amount of $139 million
and caps totalling $118 million were outstanding. Westcorp also uses two-year
Treasury securities forward agreements as hedges against market value changes
in its consumer loan portfolio. These agreements are entered into by Westcorp
in numbers and amounts which generally correspond to the principal amount of
the securitization transactions. The market value of these forward agreements
responds inversely to the market value changes of the underlying loans.
Because of this inverse relationship, Westcorp can effectively lock in its
gross interest rate spread at the time the hedge transaction occurs. Gains and
losses relative to these agreements are deferred and recognized in full at the
time of securitization as an adjustment to the gain or loss on the sale of
consumer loans. Westcorp uses only highly rated counterparties and further
reduces its risk by avoiding any material concentration with a single
counterparty. Credit exposure is limited to those agreements with a positive
fair value and only to the extent of that fair value.
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
22
<PAGE> 23
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 may reprice at current market rates.
The following table illustrates the projected interest rate maturities, based
upon certain assumptions, regarding the major asset and liability categories of
Westcorp at September 30, 1995. 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.
23
<PAGE> 24
INTEREST RATE SENSITIVITY ANALYSIS
AT SEPTEMBER 30, 1995
<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 $ 4,923 $ 108,150 $ 3,030 $ 116,103
Other investments $ 116,848 116,848
Mortgage-backed securities 22,925 16,321 77,702 $ 82,901 525,785 725,634
Consumer loans (1) 48,036 108,532 154,249 55,509 4,589 370,915
Mortgage loans:
Adjustable rate (2) 929,814 271,271 13,174 1,051 193 1,215,503
Fixed rate (2) 4,870 15,427 35,550 24,830 53,252 133,929
Construction (2) 5,005 5,005
---------- -------- --------- -------- -------- ----------
Total interest earning assets 1,127,498 416,474 388,825 164,291 586,849 2,683,937
Interest bearing liabilities:
Savings deposits:
Passbook/statement
accounts(3) 3,737 10,038 19,884 12,764 22,919 69,342
Money market deposit
accounts (3) 32 87 171 110 195 595
Certificate accounts (4) 382,000 818,413 465,378 37,713 36 1,703,540
FHLB advances (4) 27,000 32,000 6,500 6,500 72,000
Other borrowings (4) 380,502 15 21 104,230 484,768
---------- -------- --------- -------- -------- ----------
Total interest bearing
liabilities 766,271 855,553 517,454 57,087 133,880 2,330,245
---------- -------- --------- -------- -------- ----------
Excess interest earning
assets (liabilities) 361,227 (439,079) (128,629) 107,204 452,969 353,692
Effect of hedging activities 97,500 (45,500) (25,000) (27,000)
---------- -------- --------- -------- -------- ----------
Hedged excess $ 458,727 $(439,079) $(174,129) $ 82,204 $425,969 $ 353,692
========== ========= ========= ======== ======== ==========
Cumulative excess $ 458,727 $ 19,648 $(154,481) $(72,277) $353,692 $ 353,692
========== ========= ========= ======== ======== ==========
Cumulative excess as a
percentage of total assets 17.09% 0.73% (5.76)% (2.58)% 13.18% 13.18%
</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
("OTS").
(4) Based on contractual maturity.
24
<PAGE> 25
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three and nine months ended September 30,
1995 was $3.6 million and $8.4 million compared to $3.3 million and $10.0
million during the comparable periods of 1994. Westcorp recorded lower
provisions for loan losses for the first nine months of 1995 compared to 1994
as a result of a lower level of loans receivable held on the balance sheet.
OTHER INCOME
Total other income for the three and nine months ended September 30, 1995 was
$28.4 million and $72.3 million compared to $20.9 million and $63.0 million
during the comparable periods of 1994. Other income is generated from
automobile lending activities, mortgage banking activities, and other
ancillary sources.
AUTOMOBILE LENDING
Westcorp originates and sells automobile sales contracts with servicing rights
retained in the secondary market. Income from automobile lending includes
gain or loss from the sale of loans, loan servicing income net of amortization
of capitalized servicing and other related income such as document fees and
late charges. For the three and nine months ended September 30, 1995,
automobile lending generated income of $25.1 million and $63.3 million compared
to $15.4 million and $53.8 million for the same periods of 1994.
During the three and nine months ended September 30, 1995, net gain on
automobile loan sales totalled $5.3 million and $11.8 million. This compares
to loss from loan sales of $0.2 million and gain from loan sales of $0.8
million for the three and nine months ended September 30, 1994. The higher
gain on sales during 1995 are a result of wider interest margins driven by
rising yields on loans sold, which affects the pricing of loan sales.
Automobile loans sold during the first nine months of 1995 totalled $1.1
billion compared to $630 million during the same period of 1994.
Loan servicing income totalled $19.8 million and $51.5 million for the
three and nine months ended September 30, 1995, compared to $15.6 million and
$53.0 million for the comparable periods of 1994. Westcorp regularly evaluates
the methods and assumptions used to estimate its excess servicing asset. In
1994, Westcorp made an adjustment to servicing income earned on securitized
consumer loans. Prior to 1994, regulatory guidance provided by the OTS
regarding losses to be expected from auto financing activities precluded full
recognition of cash flows received from securitized consumer loans as income.
As a result of subsequent regulatory guidance on this issue, and not because of
a result in changes in the underlying assumptions used by Westcorp, Westcorp
recognized an additional $3.3 million of additional servicing income in each of
the first two quarters of 1994. Absent such adjustment, servicing income would
have been $46.4 million for the nine months ended September 30, 1994. Westcorp
serviced $1.7 billion of automobile loans for others at September 30, 1995
compared to $1.2 billion at September 30, 1994.
25
<PAGE> 26
Automobile lending income for the three and nine months ended September 30,
1995 and 1994 is summarized as follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1995 1994 1995 1994
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net gain (loss) from sale of
automobile loans $ 5,303 $ (249) $11,845 $ 815
Loan servicing income, net 14,229 11,904 36,197 43,053
Other 5,583 3,721 15,264 9,921
------- ------- ------- -------
$25,115 $15,376 $63,306 $53,789
======= ======= ======= =======
</TABLE>
MORTGAGE BANKING
Westcorp originates mortgage loans for sale in the secondary market. Mortgage
banking operations include gain and loss on the sale of loans, loan servicing
income net of amortization of capitalized servicing and other income which is
primarily late charges. During the three and nine months ended September 30,
1995, mortgage banking generated income of $0.7 million and $2.8 million
compared to $0.4 million and $0.5 million for the comparable periods of 1994.
Loss on sales of mortgage loans for the three and nine months ended September
30, 1995 totalled $1.0 million and $1.6 million compared to $0.7 million and
$2.6 million during the comparable periods of 1994. Gain and loss on mortgage
loan sales are directly related to the overall interest rate environment.
During 1995, interest rates have increased for mortgage loans in contrast to
the declining interest rate environment during 1993 and early 1994. This
change in the interest rate environment has adversely affected loan volumes and
the pricing of mortgage loans. Loans sold during the first nine months of 1995
totalled $132.8 million compared to $415.7 million for the same period of 1994.
Mortgage loans held for sale increased from $3.0 million at December 31, 1994
to $72 million at September 30, 1995.
Net loan servicing income was $1.5 million and $3.6 million for the three and
nine months ended September 30, 1995 compared to $1.1 million and $2.7 million
for the comparable periods of 1994 as a result of a larger servicing portfolio.
At September 30, 1995, Westcorp serviced $3.2 billion of mortgage loans for
others compared to $1.6 billion at September 30, 1994.
Mortgage banking income for the three and nine months ended September 30, 1995
and 1994 is summarized as follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
1995 1994 1995 1994
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net loss from sale of
mortgage loans $(1,037) $ (702) $(1,564) $(2,595)
Loan servicing income, net 1,506 1,073 3,566 2,693
Other 273 77 772 367
------- ------ ------- -------
$ 742 $ 448 $ 2,774 $ 465
======= ====== ======= =======
</TABLE>
26
<PAGE> 27
MISCELLANEOUS
Other sources of income include insurance income and real estate
operations. Insurance income is generated primarily from commissions earned on
the sale of loan-related insurance products as well as insurance-related
investment products. Insurance income for the three and nine months ended
September 30, 1995, totalled $1.9 million and $4.3 million compared to $1.4
million and $5.6 million for the same periods in 1994.
Real estate operations include the ongoing costs of operation and disposition
associated with Westcorp's REO. Real estate operations had a loss of $0.2
million and earned $0.5 million in the three and nine months ended September
30, 1995 compared to earnings of $3.5 million and $2.4 million for the same
periods in 1994.
OTHER EXPENSES
Other expenses consist of compensation and benefits, occupancy expense,
insurance and other operating expenses. Other expenses increased to $29.0
million and $81.6 million for the three and nine months ended September 30,
1995 compared to $23.5 million and $70.8 million for the same periods in 1994.
The increase is primarily in compensation and benefits and is a function of
increased loan servicing portfolios and expansion of operations into additional
states. The ratio of annualized operating expense to average serviced loans
was 2.1% for the nine months ended September 30, 1995 compared to 2.4% for the
nine months ended September 30, 1994.
INCOME TAXES
The effective tax rates for the nine months ended September 30, 1995 and 1994
were 41.3% and 42.2%, 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, sale of mortgage loans and consumer loans, sale of 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 include 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 first nine months of 1995, Westcorp purchased $446 million of MBS to
more profitably employ its excess capital and enhance interest spreads. These
securities have been segregated, on an individual security basis, into the
available for sale portfolio and the held to maturity portfolio in the
financial statements in accordance with management's intent and ability to hold
to maturity. These purchases included both fixed and adjustable rate MBS.
27
<PAGE> 28
Westcorp's wholly-owned subsidiary, Western Financial Savings Bank ("the
Bank") is a federally chartered savings bank. As such, it is subject to
certain minimum capital requirements. The Federal Deposit Insurance
Corporation Improvement Act of 1991 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 (i.e., core) 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. At September 30, 1995 the Bank had a total risk-based capital ratio
of 14.61%, a Tier 1 risk-based capital ratio of 12.2% and a leverage ratio of
8.93%. The Bank currently meets all the requirements of a "well
capitalized" institution. Its regulatory capital position at September 30,
1995 was 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>
Regulatory capital $267,276 8.94%(1) $267,276 8.94%(1) $319,911 14.61%(2)
Minimum OTS capital requirement 44,852 1.50% 89,703 3.00% 175,220 8.00%
-------- ---- -------- ---- -------- ----
Excess capital $222,424 7.44% $177,573 5.94% $144,691 6.61%
======== ==== ======== ==== ======== ====
</TABLE>
(1) As a percentage of total adjusted assets.
(2) As a percentage of risk-weighted assets.
As a member of the Federal Home Loan Bank 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 1995.
28
<PAGE> 29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1994, WFS, the consumer lending subsidiary of
the Bank, was served with a lawsuit on behalf of
the general public that 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 loans. The class has been certified
and WFS is vigorously defending. In addition,
the Bank has been served with a class action
lawsuit, Charles Hubbard suing individually, on
behalf of the general public and on behalf of all
other similarly situated v. Western Financial
Savings Bank, Los Angeles County Superior Court
Case No. BC131541, filed on July 18, 1995. The
lawsuit asserts certain allegations relating to
the "forced placement" of collateral protection
insurance, similar to the lawsuit pending against
WFS. It is not yet possible to estimate
potential liability for either lawsuit or the
likelihood thereof.
Westcorp or its subsidiaries are also involved as
parties to certain legal proceedings incidental
to their businesses. Westcorp believes that the
outcome of such proceedings will not have a
material effect upon Westcorp's business or
financial condition.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
None
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTCORP
- --------------------------------------------------------------------------
(Registrant)
Date: November 8, 1995 By: /s/ Joy Schaefer
-------------------------- ----------------------------
Joy Schaefer
Vice President and
Chief Operating Officer
Date: November 8, 1995 By: /s/ Lee A. Whatcott
-------------------------- -------------------------
Lee A. Whatcott
Assistant Vice President,
Controller and Chief
Financial Officer
(Principal Financial
and Accounting Officer)
30
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 124,483
<INT-BEARING-DEPOSITS> 673
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 302,235
<INVESTMENTS-CARRYING> 539,502
<INVESTMENTS-MARKET> 545,264
<LOANS> 1,725,352
<ALLOWANCE> 40,029
<TOTAL-ASSETS> 2,985,772
<DEPOSITS> 1,773,663
<SHORT-TERM> 380,538
<LIABILITIES-OTHER> 348,062
<LONG-TERM> 176,230
<COMMON> 0
0
24,521
<OTHER-SE> 263,811
<TOTAL-LIABILITIES-AND-EQUITY> 2,985,772
<INTEREST-LOAN> 119,171
<INTEREST-INVEST> 38,606
<INTEREST-OTHER> 4,408
<INTEREST-TOTAL> 162,185
<INTEREST-DEPOSIT> 75,044
<INTEREST-EXPENSE> 102,087
<INTEREST-INCOME-NET> 60,098
<LOAN-LOSSES> 8,374
<SECURITIES-GAINS> 1,184
<EXPENSE-OTHER> 81,619
<INCOME-PRETAX> 42,370
<INCOME-PRE-EXTRAORDINARY> 23,707
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,707
<EPS-PRIMARY> .96
<EPS-DILUTED> .96
<YIELD-ACTUAL> 3.21
<LOANS-NON> 19,715
<LOANS-PAST> 610
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 41,323
<CHARGE-OFFS> 13,957
<RECOVERIES> 4,289
<ALLOWANCE-CLOSE> 40,029
<ALLOWANCE-DOMESTIC> 40,029
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
