<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
23 PASTEUR, IRVINE, CALIFORNIA 92718-3804
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (714) 727-1000
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- -------------------------------------------- --------------------------------------------
<S> <C>
Common Stock $1 par value New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 last 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 27, 1995:
COMMON STOCK, $1.00 PAR VALUE -- $88,305,420
The number of shares outstanding of the issuer's class of common stock as
of February 27, 1995:
COMMON STOCK, $1.00 PAR VALUE -- 23,148,286
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 1995 Annual Meeting of
Shareholders to be held May 23, 1995, are incorporated by reference into Part
III.
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<PAGE> 2
PART I
ITEM 1 -- BUSINESS
OVERVIEW
Westcorp, a California corporation, is a financial services holding company
which specializes in automobile lending ("consumer") and residential real estate
lending ("mortgage"). Westcorp operates principally through its wholly-owned
subsidiary, Western Financial Savings Bank, F.S.B. (the "Bank") and its
subsidiaries. The Bank owns all of the outstanding capital stock of Westcorp
Financial Services, Inc. ("WFS"), Western Financial Auto Loans, Inc. ("WFAL"),
Western Financial Auto Loans 2, Inc. ("WFAL2"), Western Reconveyance Company,
Inc. ("Recon"), Westhrift Life Insurance Company ("Westhrift"), Western Consumer
Services, Inc. ("WCS"), and Westplan Insurance Agency, Inc. ("Westplan").
Westplan owns all the outstanding stock of Westplan Investments ("WI"). Unless
otherwise expressly indicated, a reference herein to Westcorp, or the Bank shall
also be deemed to include a reference to their respective subsidiaries.
Western Thrift Financial Corporation ("WTFC") was formed in 1974 as the
holding company for Western Thrift & Loan Association ("WTL"), a
California-licensed thrift and loan association founded in 1972. WTFC later
changed its name to Westcorp. In 1982, Westcorp acquired Evergreen Savings and
Loan Association ("Evergreen"), a California-licensed savings and loan
association, which became a wholly-owned subsidiary of Westcorp. Evergreen's
name was ultimately changed to Western Financial Savings Bank. In 1992, Western
Financial Savings Bank converted to a federal charter and added F.S.B. to its
name.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance
Corporation ("FDIC"). It is further subject to certain regulations of the Board
of Governors of the Federal Reserve System ("FRB") which governs reserves
required to be maintained against deposits and other matters. The Bank is also a
member of the Federal Home Loan Bank of San Francisco ("FHLB"), one of twelve
regional banks for federally insured savings and loan associations and banks
comprising the Federal Home Loan Bank System ("FHLB System"). The FHLB System is
under the supervision of the Federal Housing Finance Board. WFS is further
regulated by various departments or commissions of the states in which it does
business.
The types of loans which Westcorp may originate are defined by federal
statutes and regulations. Notwithstanding its authority to purchase or originate
a variety of secured and unsecured mortgage, consumer and commercial loans,
Westcorp's strategy is to focus on and expand its two principal lines of
business -- automobile lending and residential mortgage lending. Although the
majority of Westcorp's loans are originated in California, over the past two
years Westcorp has expanded into seven new states and is evaluating ongoing
expansion opportunities in existing states as well as expansion into other
states. Westcorp's business plan includes selling or securitizing loans in the
secondary market and retaining the servicing thereon.
1
<PAGE> 3
The following table sets forth the loan origination, purchase and sale activity
of Westcorp for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans originated:
Consumer loans(1).................. $1,183,188 $ 829,181 $ 673,473 $ 604,069 $ 544,975
Mortgage loans:
Existing property............... 665,480 879,592 570,796 492,341 495,562
Construction.................... 18,853 33,511 27,013 27,965 49,286
---------- ---------- ---------- ---------- ----------
Total loans originated............... 1,867,521 1,742,284 1,271,282 1,124,375 1,089,823
Loans purchased:
Mortgage loans:
Existing property............... 45,373 210 2,441
---------- ---------- ----------
Total loans purchased................ 45,373 210 2,441
Loans sold or securitized:
Consumer loans(2).................. 842,000 777,500 450,000 725,000 313,492
Mortgage loans..................... 541,923 803,992 386,257 166,898 76,710
---------- ---------- ---------- ---------- ----------
Total loans sold or
securitized................... 1,383,923 1,581,492 836,257 891,898 390,202
Principal reductions(3).............. 334,627 529,683 617,017 591,039 550,939
---------- ---------- ---------- ---------- ----------
Increase (decrease) in total loans... $ 194,344 $ (368,681) $ (179,551) $ (358,562) $ 148,682
========= ========= ========= ========= =========
</TABLE>
- ---------------
(1) Includes automobile loans purchased from automobile dealers.
(2) Automobile loans sold to WFAL2 or a grantor trust.
(3) Includes scheduled payments, prepayments and chargeoffs.
Westcorp's loan portfolio totaled $1.8 billion at December 31, 1994, which
consisted of 24.6% retail installment sales contracts secured by automobiles and
other consumer loans and 75.4% loans secured by real property used primarily for
residential purposes. At December 31, 1994, Westcorp also serviced $1.2 billion
of consumer loans and $1.7 billion of mortgage loans for the benefit of others.
Westcorp's revenues are thereby derived principally from interest earned on
loans and servicing income. Interest on deposits and borrowings, provisions for
loan losses, and general and administrative expenses are Westcorp's major
expense items.
2
<PAGE> 4
The following table sets forth the composition of Westcorp's loan portfolio
by type of loan, including loans held for sale, as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------------------- -------------------- -------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consumer loans:
Automobile... $ 507,772 29.0% $ 251,751 16.2% $ 404,381 21.0% $ 387,667 18.4% $ 944,515 38.3%
Deposit
account.... 2,165 0.1 2,787 0.2 5,302 0.3 5,927 0.3 7,351 0.3
Other........ 3,533 0.2 3,785 0.2 5,313 0.3 23,216 1.1 20,805 0.8
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
513,470 29.3 258,323 16.6 414,996 21.6 416,810 19.8 972,671 39.4
Less: unearned
discounts.... 82,762 4.7 27,972 1.8 60,795 3.2 38,670 1.8 154,026 6.2
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
Total
consumer
loans.... 430,708 24.6 230,351 14.8 354,201 18.4 378,140 18.0 818,645 33.2
Mortgage loans:
Loans on
existing
property... 1,298,037 74.1 1,260,670 81.0 1,466,319 76.2 1,592,843 75.7 1,518,626 61.6
Home
improvement 10,548 0.6 49,333 3.2 66,356 3.4 88,961 4.2 83,866 3.4
Construction 19,813 1.1 31,684 2.0 54,648 2.8 76,793 3.6 75,830 3.1
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
Total
mortgage
loans.... 1,328,398 75.8 1,341,687 86.2 1,587,323 82.4 1,758,597 83.5 1,678,322 68.1
Less:
undisbursed
loan
proceeds..... 7,614 0.4 14,890 1.0 15,695 0.8 31,357 1.5 33,025 1.3
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
Total
mortgage
loans...... 1,320,784 75.4 1,326,797 85.2 1,571,628 81.6 1,727,240 82.0 1,645,297 66.8
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
Total
loans.... $1,751,492 100.0% $1,557,148 100.0% $1,925,829 100.0% $2,105,380 100.0% $2,463,942 100.0%
========= ======= ========= ======= ========= ======= ========= ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------------------- -------------------- -------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans serviced
for the
benefit of
others:
Consumer
loans...... $1,210,674 42.2% $1,009,941 46.5% $ 714,665 50.7% $ 658,622 56.2% $ 182,042 31.8%
Mortgage
loans...... 1,656,811 57.8 1,160,485 53.5 696,034 49.3 514,322 43.8 390,323 68.2
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
Total loans
serviced... $2,867,485 100.0% $2,170,426 100.0% $1,410,699 100.0% $1,172,944 100.0% $ 572,365 100.0%
========= ======= ========= ======= ========= ======= ========= ======= ========= =======
</TABLE>
SEGMENT INFORMATION
The automobile lending operations of Westcorp, conducted in part by the
Bank and in part by WFS, purchases retail installment sales contracts secured by
new and used cars and light trucks ("automobiles") primarily from new and used
car dealers and originates direct consumer loans. In February 1995, Westcorp
announced that, subject to receipt of regulatory approvals, these operations
would be consolidated entirely within a wholly-owned subsidiary of the Bank
which is expected to occur sometime in 1995. Westcorp conducts its consumer
operations in California, Texas, Oregon, Nevada, Arizona, New Mexico, Idaho and
Washington through 53 consumer finance offices and 11 automobile dealer centers.
Westcorp continues to originate and purchase loans secured by residential real
estate through 9 mortgage offices in California, Nevada, Oregon and Arizona.
Westcorp's lending activities are funded primarily by attracting deposits from
the public at 26 retail branch offices in California and through loan sales and
other borrowing sources. A summary of the operations of each of these business
segments is provided in Note T to the Consolidated Financial Statements.
LENDING -- GENERAL
Westcorp's primary sources of revenue are net interest income and servicing
income. Net interest income is the difference between the income earned on
interest earning assets and the interest paid on interest bearing liabilities.
Servicing income includes contractual servicing fees earned by servicing loans
for the benefit of others, retained residual interest in sold loans, and
additional fees related to servicing, such as late charges and prepayment fees.
3
<PAGE> 5
Net interest income is significantly affected by the difference between
yields earned by Westcorp on its interest earning assets and the rates paid on
its interest bearing liabilities (interest rate spread), and the relative
amounts of Westcorp's interest earning assets and interest bearing liabilities.
The following table presents information relative to the average balances and
interest rates of Westcorp for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------
1994 1993 1992
------------------------------ ------------------------------ ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Investment securities...... $ 109,547 $ 5,768 5.27% $ 106,705 $ 6,328 5.93% $ 59,424 $ 3,947 6.64%
Other investments.......... 90,223 4,343 4.81 81,015 3,190 3.94 60,988 2,317 3.80
Mortgage-backed
securities(1)............ 218,082 13,879 6.36 100,890 5,788 5.74 164,270 12,134 7.39
Total loans(2):
Consumer loans........... 293,963 38,511 13.10 293,820 39,017 13.28 355,872 47,073 13.23
Mortgage loans........... 1,257,434 81,138 6.45 1,436,468 103,623 7.21 1,685,736 144,950 8.60
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total interest earning
assets..................... 1,969,249 143,639 7.29 2,018,898 157,946 7.82 2,326,290 210,421 9.04
Non interest earning assets:
Premises and equipment and
real estate owned........ 102,354 134,601 143,945
Other assets............... 130,866 169,899 135,080
Less: allowance for loan
losses................... 40,328 44,005 36,416
---------- ---------- ----------
Total........................ $2,162,141 $2,279,393 $2,568,899
========= ========= =========
Interest bearing liabilities:
Savings deposits........... $1,455,058 68,295 4.69 $1,598,585 76,316 4.77 $1,780,484 99,103 5.57
Public debt offerings...... 125,969 10,739 8.53 131,009 11,898 9.08 189,546 14,875 7.85
FHLB advances and other
borrowings............... 104,093 7,864 7.55 164,474 12,929 7.86 279,210 23,976 8.59
Repurchase agreements...... 51,402 1,868 3.63 2,146 60 2.80
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total interest bearing
liabilities................ 1,736,522 88,766 5.11 1,896,214 101,203 5.34 2,249,240 137,954 6.13
Non interest bearing
liabilities:
Unearned insurance premiums
and insurance reserves... 5,433 5,413 5,784
Other liabilities.......... 212,008 194,767 146,381
Shareholders' equity......... 208,178 182,999 167,494
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total........................ $2,162,141 $2,279,393 $2,568,899
========= ========= =========
Net interest income and
interest rate spread....... $ 54,873 2.18% $ 56,743 2.48% $ 72,467 2.91%
======== ===== ======== ===== ======== =====
Net yield on average interest
earning asset.............. 2.79% 2.81% 3.12%
===== ===== =====
</TABLE>
- ---------------
(1) Includes both mortgage-backed securities available for sale and held to
maturity.
(2) For the purposes of these computations, nonaccruing loans are included in
the average loan amounts outstanding.
4
<PAGE> 6
The following table sets forth the changes in net interest income
attributable to (i) changes in volume (change in average portfolio volume
multiplied by prior period average rate), (ii) changes in rates (change in
weighted average interest rate multiplied by prior period average portfolio
balance), and (iii) the combined effect of changes in rates and volume (change
in weighted average interest rate multiplied by change in average portfolio
balance).
<TABLE>
<CAPTION>
1994 COMPARED TO 1993 1993 COMPARED TO 1992
-------------------------------------------- ---------------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
-------- -------- ------ ------- -------- -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Investment securities.... $ 168 $ (704) $ (24) $ (560) $ 3,139 $ (421) $ (337) $ 2,381
Other investments........ 362 704 87 1,153 761 79 33 873
Mortgage-backed
securities............. 6,726 625 740 8,091 (4,683) (2,710) 1,047 (6,346)
Total loans:
Consumer loans......... 18 (528) 4 (506) (8,209) 177 (24) (8,056)
Mortgage loans......... (12,908) (10,917) 1,340 (22,485) (21,437) (23,431) 3,541 (41,327)
-------- -------- ------ ------- -------- -------- ------ --------
Total interest earning
assets................... $ (5,634) $(10,820) $2,147 (14,307) $(30,429) $(26,306) $4,260 (52,475)
======== ======== ======= ======== ======== =======
Interest expense:
Savings deposits......... $ (6,846) $ (1,279) $ 104 (8,021) $(10,131) $(14,244) $1,587 (22,788)
Public debt offerings.... 377 (250) (10) 117 (862) (720) 49 (1,533)
FHLB advances............ (6,920) 1,462 (884) (6,342) (13,939) 3,434 (1,986) (12,491)
Repurchase agreements.... 1,379 19 411 1,809 61 61
-------- -------- ------ ------- -------- -------- ------ --------
Total interest bearing
liabilities.............. $(12,010) $ (48) $ (379) (12,437) $(24,932) $(11,530) $ (289) (36,751)
======== ======== ======= ======== ======== =======
------- --------
Net change in net income... $(1,870) $(15,724)
======= ========
</TABLE>
The trend in interest income, interest expense, and net interest income is
primarily the result of increased sales of loans in the secondary market and
generally lower interest rates. The decrease in net interest income is offset to
a large extent, however, by additional servicing income. Westcorp earns
servicing income by retaining the loan yield in excess of the investor's
pass-through rate determined by the terms of the sale and by retaining the
servicing rights related to the sold loans.
Westcorp's ability to maintain a positive spread during periods of
fluctuating interest rates is determined principally by the maturities and
repricing mechanisms of its interest earning assets and interest bearing
liabilities. Synchronizing the repricing of an institution's assets and
liabilities to minimize interest rate risk is commonly referred to as gap
management. Negative gap occurs when an institution's liabilities reprice more
rapidly than its assets and positive gap occurs when an institution's assets
reprice more rapidly than its liabilities.
Westcorp's asset/liability management strategy is to match its loan and
investment products with interest bearing liabilities having similar repricing
characteristics and durations. This strategy includes originating adjustable
rate loans, securitizing loans with liabilities that have similar repricing and
maturity characteristics, matching fixed rate loans held in the portfolio with
advances from the FHLB, selling fixed rate loans and utilizing financial
instrument agreements. These agreements are used by Westcorp solely to manage
interest rate risk within its portfolio and include interest rate swaps, caps,
options, and forward agreements. See "Management's Discussion and
Analysis -- Asset/Liability Management".
As a result of Westcorp's practice of matching its rate sensitive
liabilities with rate sensitive assets, Westcorp had an overall positive gap of
7.3%. In addition, Westcorp had a positive gap of 4.6% at December 31, 1994, for
assets and liabilities having an interest rate maturity of one year or less and
a negative gap of 1.1% for assets and liabilities having an interest rate
maturity of three years or less. At December 31, 1994, 79% of Westcorp's
interest earning assets had interest rate maturities of less than three years.
Westcorp maintained an overall positive gap by having interest sensitive
assets that adjusted to fluctuations in general interest rates during 1994
almost as frequently as its interest sensitive liabilities adjusted. Westcorp's
ability to maintain a positive gap may be significantly affected by, among other
factors,
5
<PAGE> 7
(i) a large percentage of interest earning assets based on a market lagging
index, (ii) interest earning assets and interest bearing liabilities repricing
at different times, (iii) interest rate caps imposed on its assets, (iv)
interest rates on assets and liabilities responding differently to economic,
market and competitive factors, (v) high interest rate levels adversely
affecting lending markets in general, and (vi) low interest rate levels
increasing the difficulty of originating ARMs and increasing loan prepayments,
which prepayments may be reinvested at lower interest rates.
The following table illustrates the projected interest rate maturities,
based upon certain assumptions regarding the major asset and liability
categories of Westcorp at December 31, 1994. Prepayment and decay assumptions
for loans and savings accounts were developed using both Westcorp's own
prepayment experience and industry averages. For Westcorp's mortgage loans, the
prepayment assumptions range from 7% to 20% of loans prepaying per year
depending upon the interest rate, type of loan and contractual repricing terms.
For passbook and money market deposit accounts, Westcorp uses a rate of 20% to
25% decay per year depending upon the characteristics of each type of account.
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. Although
Westcorp's investment securities and mortgage-backed securities are classified
primarily as available for sale, they are presented in the repricing categories
based on their respective stated maturities adjusted for any appropriate
prepayment assumptions. Loans held for sale are presented as repricing within
three months based on management's intent relative to these assets.
<TABLE>
<CAPTION>
AFTER
AFTER THREE AFTER ONE AFTER THREE FIVE
WITHIN MONTHS YEAR YEARS YEARS
THREE THROUGH THROUGH THROUGH THROUGH AFTER
MONTHS ONE YEAR THREE YEARS FIVE YEARS TEN YEARS TEN YEARS TOTAL
---------- ----------- ----------- ----------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Investment securities..... $ 17,328 $ 94,552 $ 944 $ 1,940 $ 114,764
Other investments......... $ 145,391 $ 563 145,954
Mortgage-backed
securities.............. 83,718 39,528 50,646 47,560 88,220 160,997 470,669
Total loans:
Consumer loans(1)....... 55,115 130,939 179,909 61,716 3,012 17 430,708
Mortgage loans:
Adjustable rate(2).... 939,306 252,503 11,617 712 1,204,138
Fixed rate(2)......... 5,087 12,050 25,665 17,799 26,093 16,889 103,583
Construction(2) 13,063 13,063
---------- ---------- ---------- ---------- -------- -------- ----------
Total interest earning
assets.................... 1,241,680 435,583 285,165 222,339 118,269 179,843 2,482,879
Interest bearing
liabilities:
Savings deposits:
Passbook/statement
accounts(3)........... 5,635 15,140 29,924 19,157 22,911 11,190 103,957
Money market deposit
accounts(3)........... 42 117 231 148 177 86 801
Certificate
accounts(4)........... 305,953 856,896 350,844 14,190 13 1,527,896
FHLB advances(4).......... 8,000 9,000 59,000 6,500 6,500 89,000
Other borrowings(4)....... 456,602 14 36 103,851 560,503
---------- ---------- ---------- ---------- -------- -------- ----------
Total interest bearing
liabilities............... 776,232 881,167 440,035 39,995 133,452 11,276 2,282,157
---------- ---------- ---------- ---------- -------- -------- ----------
Excess interest bearing
assets (liabilities)...... 465,448 (445,584) (154,870) 182,344 (15,183) 168,567 200,722
Effect of hedging
activities................ 205,500 (100,000) (70,500) (35,000)
---------- ---------- ---------- ---------- -------- -------- ----------
Hedged excess............... $ 670,948 $(545,584) $(154,870) $ 111,844 $(50,183) $168,567 $ 200,722
========== ========== =========== ========== ======== ======== ==========
Cumulative excess........... $ 670,948 $ 125,364 $ (29,506) $ 82,338 $ 32,155 $200,722 $ 200,722
========== ========== =========== ========== ======== ======== ==========
Cumulative differences as a
percentage of total
assets.................... 24.5% 4.6% (1.1)% 3.0% 1.2% 7.3% 7.3%
</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 OTS.
(4) Based on contractual maturity.
6
<PAGE> 8
AUTOMOBILE LENDING
Westcorp and its predecessors and affiliates have purchased and originated
automobile loans since 1973. Automobile loans are underwritten and purchased
from approved new and used automobile dealers on a nonrecourse basis ("indirect
contract") or are underwritten and originated directly through a consumer
finance office or automobile dealer center ("direct loan"). Marketing is
performed by sales managers through personal calls to auto dealerships as well
as referrals. Westcorp believes that the creation and maintenance of close
personal relationships with dealerships by its branch offices and dealer centers
are a major factor in promoting the growth and sustaining the quality of its
automobile loan portfolio.
Substantially all loans purchased by Westcorp are reviewed to insure proper
documentation and adherence to underwriting guidelines. Westcorp does not have
minimum or maximum maturity requirements; however, automobile loans with less
than three years' maturity or more than six years' maturity are seldom purchased
due to low customer demand. Each automobile loan is fully amortizing and
provides for level payments over the term of the loan with the portion of
principal and interest of each level payment determined on the basis of the sum
of the digits (also known as the Rule of 78s) or on the simple interest method.
The interest rates charged on automobile loans are primarily determined by
competitive loan rates, which reflect the availability of lendable funds and the
demand for loans.
Westcorp generally lends to the applicant an amount not to exceed the sum
of the dealer's cost, taxes, license fees, and other miscellaneous costs.
Additional advances over the sum of such costs may be made under certain
circumstances based on the creditworthiness of the applicant. For used cars, the
amount loaned generally does not exceed the wholesale "blue book" value for the
car plus related expenses and any additional approved advances.
The following table presents information relative to originations of
indirect contracts and direct loans as well as new and used vehicles for the
periods ending December 31:
<TABLE>
<CAPTION>
1994 1993
---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Indirect contracts................................... $1,092,285 $740,845
Direct loans......................................... 90,903 88,336
---------- --------
Total volume.................................... $1,183,188 $829,181
========= ========
New vehicles......................................... $ 354,787 $269,239
Used vehicles........................................ 828,401 559,942
---------- --------
Total volume.................................... $1,183,188 $829,181
========= ========
</TABLE>
SERVICING
Westcorp's servicing activities include collecting payments and protecting
its interest in the collateral. As part of these activities, Westcorp also earns
other miscellaneous fees, primarily late charges. Payment collection includes
pursuing delinquent accounts, most of which are cured promptly. If not, Westcorp
repossesses and sells the collateral in accordance with the terms of the loan
and statutory guidelines. Deficiency balances are charged off against the
allowance for loan losses. After chargeoff, Westcorp pursues collection of
deficiency balances subject to applicable law.
Each borrower with an automobile loan originated or purchased by Westcorp
is required to maintain insurance covering physical damage to the financed
vehicle, subject to certain limitations. The insurance policy must name Westcorp
as the loss payee under the policy, and must cover loss and damage due to
collision and other risks included in comprehensive coverage. Since borrowers
may choose their own insurers to provide the required coverage, the specific
terms and conditions of their policies vary within limits prescribed under
applicable insurance law and regulation. If a borrower fails to obtain or
maintain the required insurance, Westcorp has the right to obtain such insurance
and add the premium for such insurance to the balance due on the loan. A
subsidiary of the Bank, Westplan, acts as an independent agent for unaffiliated
7
<PAGE> 9
insurers in providing collateral protection insurance coverage on automobiles
securing loans serviced by Westcorp.
SECONDARY MARKET ACTIVITIES
Westcorp regularly sells automobile loans in the secondary market while
retaining the servicing rights thereon. Westcorp has securitized its automobile
loans using an off-balance sheet structure which utilizes a separate grantor
trust for each transaction. Automobile loan securitization provides a stable
source of funding, eliminates interest rate risk on the loans sold, enhances
return on assets and improves the capital position of the Bank. The loans are
sold in publicly underwritten securitization transactions in which Westcorp
continues to service such loans. The issues have been rated "AAA" by Standard &
Poor's Rating Group and "Aaa" by Moody's Investment Service, Inc., their highest
rating categories, either due to the senior/subordinated structure of the
transaction or as a result of third party credit enhancement provided by
Financial Security Assurance, Inc.
These securitizations are structured to be treated as sales without
recourse under GAAP, thereby removing the automobile loans sold from Westcorp's
balance sheet. Westcorp retains a residual interest in the excess interest which
represents the excess of the underlying interest rate on the pool of automobile
loans sold over the sum of the pass-through rate on the grantor trust
securities, credit losses, administrative expenses and contractual servicing
fees. The valuation and recognition of the residual interest is further affected
by actual credit loss and prepayment history, discount rate assumptions and
other factors.
Westcorp securitized $842 million and $778 million of automobile loans
during 1994 and 1993, respectively. At December 31, 1994 and 1993, $302 million
and $102 million, respectively, of automobile loans were held for sale. On
January 18, 1995, Westcorp sold an additional $190 million through a similar
transaction.
RESIDENTIAL REAL ESTATE LENDING
Westcorp's primary mortgage lending focus is originating single family (1-4
units) mortgage loans to enable borrowers to purchase, refinance or improve
residential property. In addition, it also originates mortgage loans secured by
multifamily residences on a limited basis. Westcorp also holds a small portfolio
of construction and commercial mortgage loans. Westcorp's total mortgage loan
portfolio (including those held for sale) consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------
1994 1993
-------------------- --------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Single family residential loans:
First trust deeds................................ $ 718,924 54.4% $ 673,322 50.7%
Second trust deeds............................... 126,365 9.6 152,160 11.5
---------- ----- ---------- -----
845,289 64.0 825,482 62.2
Multifamily residential loans...................... 459,883 34.8 480,692 36.2
Construction loans................................. 19,813 1.5 31,684 2.4
Commercial loans................................... 3,413 0.3 3,828 0.3
---------- ----- ---------- -----
1,328,398 1,341,686
Less undisbursed loan proceeds..................... 7,614 0.6 14,889 1.1
---------- ----- ---------- -----
$1,320,784 100.0% $1,326,797 100.0%
========= ===== ========= =====
</TABLE>
Mortgage loan originations are primarily generated by employees through
referrals from real estate brokers and mortgage brokers. These employees receive
commissions based on the total volume of loans acquired and closed in accordance
with Westcorp's product pricing and underwriting standards. Westcorp has
established criteria for the brokers (from whom it will accept loan referrals),
and the commissioned employees endeavor to increase the number of brokers
approved by Westcorp for this purpose. Westcorp regularly
8
<PAGE> 10
reviews its mortgage loans to ensure compliance with its underwriting guidelines
and with federal and state regulations.
Westcorp's lending strategy includes originating fixed rate loans,
adjustable rate loans ("ARMs") with no negative amortization and ARMs with
potential negative amortization. By diversifying its loan portfolio among three
types of loan products, Westcorp reduces its overall risk exposure, increases
its flexibility in asset/liability management, and provides greater loan
origination opportunities. The following table sets forth information on the
amount of fixed rate mortgage loans and ARMs, net of undisbursed loan proceeds,
in Westcorp's portfolio.
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------
1994 1993
-------------------- --------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed rate loans:
Single family.................................... $ 103,189 7.8% $ 184,075 13.9%
Multifamily...................................... 394 0.1 2,181 0.2
Adjustable rate loans:
Negative amortizing.............................. 916,916 69.3 730,840 55.1
No negative amortizing........................... 300,285 22.8 409,701 30.8
---------- ----- ---------- -----
$1,320,784 100.0% $1,326,797 100.0%
========= ===== ========= =====
</TABLE>
SINGLE FAMILY RESIDENTIAL LOANS
Westcorp originates both ARMs and fixed rate loans for first trust deed
single family residences up to $1.0 million in original principal amount but
generally does not exceed $400,000 in original principal amount. Westcorp has
established lending limits based on the amount of the loan compared to the
property's value ("LTV"). Westcorp will finance loans for the purchase of owner
occupied single family residences for up to 95% of the market value based on the
lesser of the purchase price or appraised value of the property. Mandatory
private mortgage insurance insuring the unpaid balance in excess of 75% of the
property's value is required on loans with a LTV exceeding 80% at origination.
The cost of this insurance is paid by the borrower during the term of the loan.
Single family residential loans are typically made for terms of up to 30 years
and are amortized on a monthly basis with level payments of principal and
interest due each month, subject to periodic adjustment in the case of ARMs.
Interest rates offered by Westcorp are regularly reviewed and adjusted and
generally reflect prevailing competitive terms. Loan demand and availability of
credit affect these market conditions. Loan origination fees are a volatile
source of income varying with the volume and type of loans made and with
competitive conditions in the mortgage markets. The interest rates on adjustable
rate mortgage loans are adjusted monthly, quarterly, semiannually or annually,
at a rate typically equal to 2.25% to 3.0% above a specified index. Westcorp
primarily originates loans using the 11th District Cost of Funds Index ("COFI")
published by the FHLB, but also utilizes Treasury indices, the Federal Cost of
Funds Index, London Interbank Offer Rate ("LIBOR") or other generally recognized
cost of funds indices. Initial interest rates and adjustment periods are set and
reviewed based on prevailing market conditions and, from time to time, have
included initial rates below those which would prevail under the general terms
of the loan. At December 31, 1994, Westcorp held $94.7 million of loans that had
yet to adjust to a fully-indexed rate.
ARM loans are also designed with limits on the amount the interest rate may
change in a given period and with maximum lifetime interest rates, or caps, to
stimulate greater customer acceptance while maintaining the desired interest
rate flexibility. The interest rates on ARMs generally can increase or decrease
no more than 3% to 6% over the life of the loan. All ARMs are assumable by
qualified buyers at the interest rate then in effect on the loan, but the
maximum upward or downward interest rate adjustment over the life of the assumed
loan is reset at the time of assumption. On ARMs with no negative amortization,
the maximum change in interest rate per period may be limited to 2% or less on
certain loan programs. On ARMs with negative amortization, the amount of any
interest due in excess of the monthly payment is capitalized by
9
<PAGE> 11
adding it to the principal balance of the loan resulting in negative
amortization to principal. The monthly payment on ARMs with negative
amortization is adjusted annually, subject to a 7.5% maximum increase, to insure
that the loan fully amortizes over the remaining term to maturity. At the end of
each five-year interval throughout the life of the loan (or sooner if the
outstanding loan amount reaches a dollar figure specified in the contract
generally no greater than 125% of the original loan amount), adjustments are
made regardless of the 7.5% cap. At December 31, 1994, the total amount of
negative amortization capitalized to principal and outstanding totaled $0.2
million.
Westcorp also offers a secured line of credit typically collateralized by a
second trust deed on a single family residence and bearing an adjustable rate of
interest based on a market index. At December 31, 1994 the Bank had committed to
lend approximately $97 million under this program, of which $60 million was
outstanding.
The residential mortgage portfolio also includes both fixed and adjustable
rate residential loans secured by second trust deeds. These loans have original
loan amounts up to $300,000 and maturities ranging from 5 to 15 years. These
loans amortize on a 15 or 30 year basis and, depending upon the repayment option
selected by the borrower, may involve a "balloon" payment at the end of the
term. As part of the terms of the loan, Westcorp requires that it be given
notice in the event of a default under the first trust deed to enable it to take
appropriate steps to protect its interest.
MULTIFAMILY RESIDENTIAL LOANS
During 1994, Westcorp originated multifamily residential loans only to
provide financing on the disposition of real estate owned. Typically, these
loans were offered at terms and rates consistent with prevailing market
conditions. In addition to those loans extended to finance dispositions of real
estate owned, beginning in 1995, Westcorp plans to originate other multifamily
loans. On a limited basis, Westcorp plans to originate adjustable rate permanent
loans secured by multifamily residential properties (generally apartment houses)
for up to $5 million in original principal amount and up to 75% LTV. In
addition, Westcorp continues to service multifamily residential loans made in
earlier years.
CONSTRUCTION LOANS
In the past, Westcorp provided construction loans primarily for multifamily
and single family owner occupied residences. These included loans for the
acquisition and development of unimproved property to be used for residential
purposes. At December 31, 1994, Westcorp's construction loans totaled $19.8
million (of which $6.7 million had not been disbursed as of December 31, 1994)
or less than 1% of total assets. During 1995, Westcorp intends to review the
feasibility of reentering the construction lending market, on a limited basis.
The construction loan portfolio generally consists of loans with terms
ranging from 12 to 18 months with adjustable interest rates equal to 2.0% to
3.5% above an average prime rate of three major banks. Advances are generally
made to cover actual construction costs and include a reserve for paying the
stated interest due on the loan.
SERVICING
Loan servicing includes collecting payments and related servicing income
and protecting Westcorp's interest in the underlying collateral. Additional fees
and charges related to loan servicing include prepayment fees, late charges,
assumption fees and other miscellaneous fees. During 1994, Westcorp purchased
rights to service $242 million of single family residence mortgage loans for
$2.5 million, known as purchased mortgage servicing rights ("PMSR") for various
loan pools and receives servicing income related to the servicing of these
loans, in addition to the servicing retained on loans sold from its own
portfolio. The purchase price of PMSRs are capitalized and amortized over the
expected life of the underlying loans. See "Supervision and
Regulation -- Regulatory Capital Requirements".
10
<PAGE> 12
Westcorp requires title insurance, or in some instances lot book insurance,
which insure the priority of its liens on loans secured by real property, and
may require additional title endorsements to standard policies as necessary to
protect its security in the property encumbered. Westcorp requires that fire and
extended coverage be maintained in amounts at least equal to the replacement
costs of structures and improvements on all properties serving as security for
its loans. If the borrower fails to obtain or maintain the required insurance,
Westcorp has the right to obtain such insurance and add the premium for such
insurance to the balance due on the loan. Westcorp also requires flood insurance
on properties that are within areas defined as having a special flood hazard.
Mortgage loan borrowers are provided a 10 to 15 day period after the date
payment is due before a late charge is assessed. Delinquent customers are
promptly contacted by Westcorp. If delinquencies on mortgage loans are not cured
promptly, Westcorp takes those steps required by law to perfect its interest in
the collateral. This process generally includes recording a notice of default
and a trustee's sale of the property. Westcorp disposes of foreclosed property
as expeditiously as possible. If necessary, the sale of foreclosed property may
be financed by a loan with terms more favorable to the borrower than normally
offered by Westcorp. At December 31, 1994, Westcorp had $20.8 million of these
financing arrangements outstanding compared to $19.2 million at December 31,
1993. Due to legal restrictions and other factors, Westcorp generally does not
pursue a deficiency judgment through a judicial foreclosure.
SECONDARY MARKET ACTIVITIES
Mortgage loans originated or purchased by Westcorp are either held in its
portfolio or sold in the secondary market. As Westcorp has become more active in
the secondary market, it has sold Federal Housing Administration ("FHA") and
Veteran's Administration ("VA") loans, as well as other conforming and
nonconforming loans to the Federal National Mortgage Association ("FNMA"),
Federal Home Loan Mortgage Corporation ("FHLMC") and other established conduits.
With the exception of FHA and VA loans which are sold servicing released,
Westcorp retains the servicing rights to these loans and earns servicing income
therefrom. These sales are generally without recourse, thereby removing the
mortgage loans sold from Westcorp's balance sheet. During 1994, Westcorp sold
$542 million of mortgage loans in the secondary market compared to $804 million
during 1993. Westcorp's portfolio of mortgage loans held for sale, consisting of
single family loans, totaled $3.0 million at December 31, 1994 and $199 million
at December 31, 1993.
ASSET QUALITY
Westcorp has established procedures to assist in the effective
identification, measurement and rehabilitation of delinquent and other problem
loans. An integral part of this process is the Internal Asset Review Department
("IAR"). IAR performs an independent review function to measure risk within
Westcorp's asset portfolio. IAR reviews and classifies assets as Pass, Special
Mention, Substandard, Doubtful or Loss. Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that
Westcorp may sustain some loss unless the deficiencies are corrected. Doubtful
assets have a higher possibility of loss than substandard assets. Special
mention assets are assets not falling in the foregoing categories, but which
have weaknesses or potential weaknesses deserving management's close attention.
The Special Asset Department ("SAD") is responsible for the management,
collection and disposition of loans which have certain characteristics that
indicate current or potential credit weaknesses. These characteristics may
include, but are not limited to, delinquency, delinquent taxes, inadequate debt
service ratios and inadequate or deteriorating collateral. SAD prepares action
plans for each of these loans. These plans vary from recommendations to monitor
and review to recommendations to foreclose depending on each loan's particular
situation.
11
<PAGE> 13
AUTOMOBILE LOAN QUALITY
Westcorp maintains a collection staff to monitor and control delinquencies
within its automobile loan portfolio. Delinquencies have generally decreased
over the past three years attributable to improved collection processes.
Automobile loans are not placed on nonaccrual status since it is Westcorp's
policy to charge off these loans after 120 days past due. Therefore, interest
continues to accrue on automobile loans until the loan is charged off. At the
time an automobile loan is charged off, all accrued but unpaid interest is
reversed. The following table sets forth information with respect to the
delinquency of Westcorp's automobile portfolio.
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------------------- -------------------- -------------------- --------------------- ---------------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF NUMBER OF
MOTOR MOTOR MOTOR MOTOR MOTOR
VEHICLE VEHICLE VEHICLE VEHICLE VEHICLE
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT(2) LOANS AMOUNT(2)
--------- -------- --------- -------- --------- -------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Automobile
loans
owned...... 61,764 $425,010 40,042 $223,792 51,797 $343,602 43,770 $374,607 104,772 $886,139
======== ======== ====== ======== ====== ======== ====== ======== ======= ========
Period of
delinquency
for
automobile
loans
owned(1):
31-59
days... 688 $ 2,069 490 $ 1,259 653 $ 2,218 815 $ 3,161 1,456 $ 11,452
60-89
days... 209 567 138 457 276 879 281 1,706 298 2,428
90 days
or
more... 98 197 83 303 191 747 588 3,531 358 2,613
-------- -------- ------- -------- ------- -------- --------- --------- ------- --------
Total
automobile
loans
delinquent. 995 $ 2,833 711 $ 2,019 1,120 $ 3,844 1,684 $ 8,398 2,112 $ 16,493
======= ======== ======= ======== ======= ======== ======= ======== ======= ========
Delinquencies
for
automobile
loans as a
percentage
of number
and amount
of motor
vehicle
loans owned 1.61% 0.67% 1.78% 0.90% 2.16% 1.12% 3.85% 2.24% 2.02% 1.86%
======= ======= ======= ====== ======= ======= ======= ======= ======= =======
Delinquencies
as a
percentage
of number
and amount
of motor
vehicle
loans
serviced(3). 0.80% 0.74% 0.74% 0.65% 1.28% 1.19% 1.95% 1.42 % 1.81% 1.66%
======= ======= ======= ====== ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) The period of delinquency is based on the number of days payments are
contractually past due.
(2) This amount includes unearned add-on interest.
(3) Includes delinquency information for loans sold to grantor trusts but which
were originated and serviced by Westcorp.
Even though a loan may have been charged off, collection efforts continue,
including obtaining a deficiency judgment, if necessary. Notwithstanding the
growth in Westcorp's servicing portfolio, actual loss experience on its owned
portfolio has decreased since 1992 as shown in the following table.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Portfolio
At end of period (net of unearned add-on
interest)..................................... $425,010 $223,792 $343,602 $336,358 $744,125
======== ======== ======== ======== ========
Average during period (net of unearned add-on
interest)..................................... $285,688 $296,528 $346,448 $591,185 $885,620
======== ======== ======== ======== ========
Gross chargeoffs of automobile loans during
period........................................ $ 10,919 $ 10,529 $ 9,614 $ 12,586 $ 11,856
Recoveries of automobile loans charged off in
prior periods................................. 6,887 5,223 2,503 1,400 850
======== ======== ======== ======== ========
Net chargeoffs................................... $ 4,032 $ 5,306 $ 7,111 $ 11,186 $ 11,006
======== ======== ======== ======== ========
Net chargeoffs as a percent of average automobile
loans owned during period..................... 1.41% 1.79% 2.05% 1.89% 1.24%
======== ======== ======== ======== ========
Net chargeoffs as a percent of average automobile
loans serviced during period(1)............... 1.09% 1.53% 1.73% 1.40% 1.20%
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Includes loan loss information for loans sold to grantor trusts that were
originated and serviced by Westcorp.
12
<PAGE> 14
REAL ESTATE LOAN QUALITY
Westcorp's real estate loan portfolio delinquency has improved over the
past year. From mid 1992 through early 1994, the California economy, 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 were especially noticeable in
the multifamily mortgage portfolio. While the economy has not fully recovered,
the downward spiral appears to have stabilized, providing relief to California
homeowners and borrowers.
The following table sets forth the delinquent percentages relative to the
dollar amounts of Westcorp's total mortgage portfolio, including loans held for
sale, for the past five years.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Period of delinquency:
Two payments (31-59 days)............................... 0.56% 0.40% 0.72% 0.93% 0.13%
Three payments (60-89 days)............................. 0.09 0.42 1.18 0.23 0.12
Four or more payments (90 days or more)................. 1.11 1.31 1.94 1.31 1.03
</TABLE>
The following table of mortgage delinquencies over 60 days by loan type
highlights the fact that delinquencies have decreased over the past three years.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------------
1994 1993 1992
------------------------ ------------------------ ------------------------
AMOUNT PAST AMOUNT PAST AMOUNT PAST
DUE OVER % OF DUE OVER % OF DUE OVER % OF
60 DAYS CATEGORY 60 DAYS CATEGORY 60 DAYS CATEGORY
----------- -------- ----------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single family........... $14,152 1.68% $19,646 2.39% $25,724 2.49%
Multifamily............. 1,710 0.37 3,384 0.70 11,429 2.28
Construction............ 11,884 25.47
Other................... 398 8.58
--------- ------ --------- ------ --------- ------
$15,862 1.20% $23,030 1.73% $49,435 3.12%
========= ====== ========= ====== ========= ======
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets ("NPA") include (i) nonperforming loans ("NPL") which
consists of loans contractually past due 90 days or more and performing
nonaccrual loans with identified credit deficiencies, (ii) insubstance
foreclosures ("ISF"), (iii) real estate acquired through foreclosure ("REO"),
and (iv) real estate acquired for investment or development that would otherwise
be considered insubstance foreclosure ("REI"). NPAs at December 31, 1994 totaled
$43.3 million or 1.6% of total assets compared to $75.0 million and 3.5%,
respectively, at December 31, 1993. NPAs, at December 31, 1994, consisted of
NPLs of $17.7 million, ISFs of $4.9 million and $20.7 million of REO.
NPLs are those loans for which interest is not being currently recognized
due to delinquency or other factors. In general, the accrual of interest on real
estate loans is discontinued when in management's judgment the interest will not
be collectible in the normal course of business or when the loan is 90 days or
more past due. When a loan is placed on nonaccrual status, interest accrued to
date but not collected is reversed. Accordingly, Westcorp does not accrue or
recognize interest income on nonperforming loans. Interest income that would
have been recorded in 1994 if these loans had been current in accordance with
their original terms totaled $0.9 million. Nonperforming loans consisted of the
following at December 31:
<TABLE>
<CAPTION>
1994 1993
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Loans 90 days or more past due........................... $13,950 $17,651
Performing, nonaccrual loans............................. 3,717 14,315
------- -------
Total nonaccrual loans......................... $17,667 $31,966
======= =======
</TABLE>
13
<PAGE> 15
Single family loans accounted for 44.2% of total NPAs at December 31, 1994
while multifamily loans accounted for 51.0%, although no single loan or series
of such loans predominate. The decrease in total NPAs is the result of improving
asset quality and stabilization of market values. The following tables show the
rollforward and migration of NPL, ISF and REO since December 31, 1992.
<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>
NONPERFORMING LOANS
Balance December 31, 1992.............. $ 57,820 $ 20,300 $ 5,673 $ 20,402 $ 11,445
New nonperforming loans.............. 69,091 35,982 14,588 9,735 8,786
REO/ISF.............................. (75,657) (25,343) (14,748) (19,397) (16,169)
Cures and payoffs.................... (15,096) (11,397) (2,346) (606) (747)
Chargeoffs........................... (4,192) (3,820) (182) (190)
-------- ------------- ----------- ----------- ------------
Balance December 31, 1993.............. 31,966 15,722 2,985 10,134 3,125
New nonperforming loans.............. 45,597 21,931 8,186 15,274 206
REO/ISF.............................. (21,966) (13,044) (5,407) (3,515)
Cures and payoffs.................... (35,003) (8,035) (2,939) (21,834) (2,195)
Chargeoffs........................... (2,927) (2,718) (209)
-------- ------------- ----------- ----------- ------------
Balance December 31, 1994.............. $ 17,667 $ 13,856 $ 2,616 $ 59 $ 1,136
======== ========== ========= ========= =========
INSUBSTANCE FORECLOSURES
Balance December 31, 1992.............. $ 22,555 $ 16,222 $ 6,333
New ISF.............................. 53,181 $ 6,052 36,929 10,200
Transfer to REO...................... (40,616) (3,901) (26,244) (10,471)
Cures................................ (5,060) (5,060)
Writedowns........................... (9,235) (910) (6,988) (1,337)
-------- ------------- ----------- ----------- ------------
Balance December 31, 1993.............. 20,825 1,241 14,859 4,725
New ISF.............................. 4,370 377 3,993
Transfer to REO...................... (14,252) (14,252)
Cures................................ (4,725) (4,725)
Writedowns........................... (1,344) (73) (1,271)
-------- ------------- ----------- ----------- ------------
Balance December 31, 1994.............. $ 4,874 $ 1,545 $ 3,329 $
======== ========== ========= ========= =========
REAL ESTATE ACQUIRED THROUGH
FORECLOSURE
Balance December 31, 1992.............. $ 22,091 $ 7,564 $ 1,532 $ 7,893 $ 5,102
New REO.............................. 85,400 25,972 10,933 31,812 16,683
Sales................................ (63,865) (21,595) (9,150) (29,276) (3,844)
Writedowns........................... (26,221) (4,472) (2,590) (10,429) (8,730)
-------- ------------- ----------- ----------- ------------
Balance December 31, 1993.............. 17,405 7,469 725 9,211
New REO.............................. 49,451 16,077 9,859 23,515
Sales................................ (29,683) (16,052) (3,221) (4,523) (5,887)
Writedowns........................... (16,436) (2,223) (3,335) (8,493) (2,385)
-------- ------------- ----------- ----------- ------------
Balance December 31, 1994.............. $ 20,737 $ 5,271 $ 4,028 $ 10,499 $ 939
======== ========== ========= ========= =========
</TABLE>
14
<PAGE> 16
ALLOWANCE FOR LOAN LOSSES
Westcorp increased its allowance for loan losses to $41.3 million at
December 31, 1994, compared with $39.7 million at December 31, 1993, primarily
due to increased loans outstanding. The allowance for loan losses, and related
provisions, are determined by considering loan volumes, loan sales, prepayments,
loss trends, levels of NPLs and management's analysis of market conditions and
other relevant factors. The following table sets forth the activity in the
allowance for loan losses.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31
----------------------------------
1994 1993 1992
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period............................. $ 39,677 $ 40,656 $ 33,933
Chargeoffs:
Mortgage loans........................................... (8,268) (21,502) (19,426)
Consumer loans........................................... (10,951) (11,005) (10,971)
-------- -------- --------
(19,219) (32,507) (30,397)
Recoveries:
Mortgage loans........................................... 945 3,706 62
Consumer loans........................................... 6,887 5,238 2,787
-------- -------- --------
7,832 8,944 2,849
-------- -------- --------
Net chargeoffs............................................. (11,387) (23,563) (27,548)
Provision for loan losses.................................. 13,033 22,584 34,271
-------- -------- --------
Balance at end of period................................... $ 41,323 $ 39,677 $ 40,656
======== ======== ========
Ratio of net chargeoffs during the period to average loans
outstanding during the period............................ 0.73% 1.36% 1.35%
</TABLE>
The allowance for loan loss by loan category was as follows at December 31:
<TABLE>
<CAPTION>
1994 1993
-------------------------- --------------------------
% OF LOANS % OF LOANS
IN EACH IN EACH
CATEGORY TO CATEGORY TO
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
--------- ------------ --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Consumer...................................... $ 9,576 24.6% $ 5,571 14.8%
Single family residential..................... 5,448 48.9 5,054 53.0
Multifamily residential....................... 26,299 26.5 29,052 32.2
------- ----- ------- -----
$41,323 100.0% $39,677 100.0%
======= ===== ======= =====
</TABLE>
The allowance for real estate losses was established to absorb potential
losses in the REO portfolio. Provisions for real estate losses are charged to
real estate operations. Changes in the allowance for real estate losses were as
follows at December 31:
<TABLE>
<CAPTION>
1994 1993
------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Balance at beginning of period.......................... $ 3,508 $ 20,185
Provision for real estate losses........................ (2,106) (6,489)
Chargeoffs, net......................................... 282 (10,188)
------- --------
Balance at end of period................................ $ 1,684 $ 3,508
======= ========
</TABLE>
INVESTMENT SECURITIES
Westcorp's investment securities portfolio consists primarily of United
States Agency and Treasury securities and is classified as available for sale.
Accordingly, the portfolio is reported at fair value with unrealized gains and
losses being reflected as a separate component of shareholders' equity. This
portfolio is maintained primarily for liquidity purposes in accordance with
regulatory requirements. The Bank also holds
15
<PAGE> 17
FHLB stock, which is carried at cost, as required by its affiliation with the
FHLB System. Westcorp also holds minimal amounts of other investments. The
following table summarizes Westcorp's investment securities at the dates
indicated.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest bearing deposits with other
financial institutions.................... $ 563 $ 796 $ 7,593 $ 500 $ 500
Other short term investments................ 145,391 137,162 75,161 65,650
Investment securities:
U.S. Treasury securities and obligations
of other U.S. Government agencies and
corporations........................... 111,677 114,050 114,114 63,891 82,189
Corporate bonds -- investment grade....... 10 15,999
Obligations of states and political
subdivisions........................... 3,062 3,527 998 1,009 2,204
Common stock(1)........................... 27
Other..................................... 25 25 25 25 2,020
Corporate bonds -- below investment
grade.................................. 400 803 1,203 4,388
FHLB stock................................ 24,474 17,566 20,674 21,174 24,314
-------- -------- -------- -------- --------
$285,192 $273,526 $219,368 $153,462 $131,641
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Excludes investment in common stock of subsidiaries.
The following table sets forth the stated maturities of Westcorp's
investment securities at December 31, 1994.
<TABLE>
<CAPTION>
TEN
UP TO ONE YEAR TO FIVE YEARS TO YEARS NO STATED
ONE YEAR FIVE YEARS TEN YEARS OR MORE MATURITY
-------- ----------- ------------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest bearing deposits with other
financial institutions................... $ 563
Other short term investments............... 145,391
Investment securities:
U.S. Treasury securities and obligations
of other U.S. Government agencies and
corporations.......................... 24,654 $87,023
Obligations of states and political
subdivisions.......................... $ 1,765 $1,297
Other.................................... 25
FHLB stock............................... $24,474
-------- ------- ------- ------ -------
$170,608 $87,048 $ 1,765 $1,297 $24,474
======== ======= ======= ====== =======
Weighted average interest rate............. 5.07% 5.42% 5.28% 5.28% 5.18%
</TABLE>
16
<PAGE> 18
MORTGAGE-BACKED SECURITIES
Westcorp invests in mortgage-backed securities ("MBS") to generate net
interest income, to manage its mix of assets and liabilities and to invest in
certain low-income housing programs designed to provide affordable access to the
housing market. Westcorp has designated a specific portion of its MBS portfolio
as held to maturity and accounts for that portion using amortized cost and
designates the rest of the portfolio as available for sale and accounts for that
portion at fair value with unrealized gains or losses being reported as a
separate component of shareholders' equity. The following table summarizes
Westcorp's MBS portfolio by issuer.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1993
-------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Held to maturity securities:
GNMA certificates..................................... $208,307
FNMA participation certificates....................... 108,033
Other................................................. 171
--------
$316,511
========
Available for sale securities:
GNMA certificates..................................... $ 51,173 $ 2,020
FNMA participation certificates....................... 77,834 88,782
FHLMC participation certificates...................... 2,997 3,592
Other................................................. 22,154 173
-------- -------
$154,158 $94,567
======== =======
</TABLE>
The MBS held to maturity, with a total carrying value of $317 million, had
an estimated market value of $306 million and a weighted average interest rate
of 7.4% at December 31, 1994. The carrying value of the MBS available for sale
is equal to its estimated market value of $154 million and has a weighted
average interest rate of 6.1% at December 31, 1994. Westcorp's MBS portfolio had
maturities of ten years or greater at December 31, 1994, although payments are
generally received monthly throughout the life of these securities.
FUNDING SOURCES
Westcorp employs various sources to fund its operations, including
deposits, commercial paper, advances from the FHLB, repurchase agreements, and
other borrowings. The sources used vary depending on such factors as rates paid,
maturities, and the impact on capital. See "Management's Discussion and
Analysis -- Capital Resources and Liquidity".
DEPOSITS
Westcorp attracts both short term and long term deposits from the general
public and institutions by offering a variety of accounts and rates. Westcorp
offers regular passbook accounts, various money market accounts, fixed interest
rate certificates with varying maturities and individual retirement accounts.
Westcorp's deposits are obtained primarily from the areas surrounding its
branches in California and a limited number were solicited from areas outside
California by employees only at the Bank's headquarters.
From time to time in the past, Westcorp obtained brokered deposits when
such deposits were an inexpensive source of funds which generally provided a
means of matching Westcorp's ARMs to certain of its liabilities. The Board of
Directors of Westcorp has authorized Westcorp to hold up to $100 million of
brokered deposits. At December 31, 1994, Westcorp had no brokered deposits.
17
<PAGE> 19
The following table sets forth the amount of Westcorp's deposits by type at
the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
No minimum term:
Passbook accounts.................. $ 104,085 $ 162,185 $ 189,895 $ 187,355 $ 89,867
Money market deposit accounts...... 801 1,149 1,212 1,604 2,528
Certificate accounts:
Certificates (30 days to five
years).......................... 1,335,805 1,026,671 1,313,771 1,494,390 1,575,571
IRA/Keogh.......................... 192,091 167,053 178,019 131,589 88,814
---------- ---------- ---------- ---------- ----------
$1,632,782 $1,357,058 $1,682,897 $1,814,938 $1,756,780
========= ========= ========= ========= =========
</TABLE>
The variety of savings deposits offered by Westcorp has allowed it to
remain competitive in obtaining funds and to respond with flexibility to changes
in customer demand and competitive pressures. In addition, Westcorp, as well as
financial institutions generally, has become more subject to short term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The ability of Westcorp to attract and maintain deposits and control
its cost of funds has been, and will continue to be, significantly affected by
money market conditions. Westcorp's average certificate accounts outstanding are
summarized below.
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Average certificate accounts outstanding.......... $1,315,628 $1,426,614
Average interest rate paid........................ 4.89% 4.99%
</TABLE>
Deposit accounts are generally insured by the FDIC up to $100,000.
Westcorp's maturities of certificate accounts greater than or equal to $100,000
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Three months or less......................................... $ 77,803
Over three months through six months......................... 64,879
Over six months through one year............................. 128,631
Over one year through three years............................ 86,195
Over three years............................................. 950
---------
$ 358,458
=========
</TABLE>
BORROWINGS AND OTHER SOURCES OF FUNDS
Westcorp's other sources of funds include issuing commercial paper and
obtaining advances from the FHLB, selling securities under agreements to
repurchase and other borrowings as well as loan repayments and cash generated
from operations. Westcorp selects from among these funding alternatives based on
the timing and duration of its cash needs, as well as the costs, maturities and
other requirements of each funding source.
The FHLB System functions in a reserve capacity for savings institutions.
As a member, the Bank is required to own capital stock in the FHLB and is
authorized to apply for advances from the FHLB on security of such stock and on
certain residential mortgage loans. The Bank has been preapproved for advances
up to 25% of its assets, based on remaining availability under credit facilities
established by the Bank with the FHLB, with 24 hours notice. Such borrowings may
be made pursuant to several different programs offered from time to time by the
FHLB. Additional funds are available subject to additional collateral and other
requirements. Each credit program has its own interest rate, which may be fixed
or variable, and range of maturities. The FHLB prescribes the acceptable uses to
which advances pursuant to each program may be put, as well as limitations on
the sizes of advances and repayment provisions.
18
<PAGE> 20
At December 31, 1994, the Bank had $211 million of commercial paper
outstanding with a weighted average interest rate of 6.0%. The maximum amount of
commercial paper outstanding at any month-end was $222 million and $200 during
1994 and 1993, respectively. The average amount of commercial paper outstanding
during 1994 and 1993 was $66.6 million and $53.1 million, respectively.
Savings associations such as the Bank also have authority to borrow from
the FRB "discount window." FRB regulations require these institutions to exhaust
all reasonable alternative sources of funds, including FHLB sources, before
borrowing from the FRB. Federal regulations have been promulgated which connect
Community Reinvestment Act ("CRA") performance with access to long term advances
from FHLB to member institutions. The Bank does not believe that there will be
any adverse effect to it relative to access to this source of funds. The Bank
received an "outstanding" in its most recent CRA evaluation, the highest rating
available.
SUBORDINATED CAPITAL DEBENTURES
In 1993, the Bank issued $125 million of 8.5% Subordinated Capital
Debentures due 2003, of which $104 million are currently outstanding. In
addition to being a funding source, the Bank is permitted to include these
Debentures in supplementary capital for purposes of determining compliance with
risk-based capital requirements. See "Supervision and Regulation -- Regulatory
Capital Requirements"
SUBSIDIARIES
WESTERN FINANCIAL SAVINGS BANK, F.S.B.
The Bank is the only subsidiary of Westcorp. Substantially all of
Westcorp's operations are conducted through the Bank and its subsidiaries. The
Bank's subsidiaries are WFS, WFAL, WFAL2, Westplan (which in turn owns all of
the stock of WI), Recon, WCS and Westhrift. Each of these entities are described
in detail below.
WESTCORP FINANCIAL SERVICES, INC.
WFS is in the business of consumer finance in California, Texas, Arizona,
Oregon, Nevada, Washington, New Mexico and Idaho. Each of its offices are
licensed to the extent required by law to conduct business in each respective
state. WFS initiated operations in 1987 to serve markets not covered by the
Bank. During 1994, WFS originated $328.5 million of automobile loans. The loans
which WFS originates are generally sold to the Bank and are serviced by WFS,
regardless of whether such loans are held by the Bank or sold in securitized
offerings. In February 1995, Westcorp announced a plan to combine the operations
of WFS with those of the Bank's auto lending operations, subject to regulatory
approval, into a wholly-owned subsidiary sometime in 1995.
WESTERN FINANCIAL AUTO LOANS, INC.
WFAL is a wholly-owned, limited purpose finance subsidiary of the Bank.
WFAL was organized primarily for the purpose of purchasing automobile loans from
the Bank, originated by the Bank and WFS, and securitizing such loans in the
secondary market. A total of four securitization transactions totaling $842
million were completed during 1994. In January 1995, an additional $190 million
of loans were sold in a similar transaction.
WESTERN FINANCIAL AUTO LOANS 2, INC.
WFAL2 is a wholly-owned, limited purpose finance subsidiary of the Bank.
WFAL2 was organized primarily for the purpose of purchasing automobile loans
from the Bank, originated by the Bank and WFS, and securitizing such loans in
the secondary market and engaging in other asset-backed financing transactions.
19
<PAGE> 21
WESTPLAN INSURANCE AGENCY, INC.
Westplan is licensed by the California Insurance Commissioner to transact
the business of an insurance agency and other jurisdictions where it conducts
business. It acts as an agent for independent insurers in providing property and
casualty insurance coverage on collateral, primarily automobiles, securing loans
made by Westcorp, protection insurance and other noncredit related life and
disability programs. In addition, Westplan offers fixed annuities through the
Bank's branch offices. Westplan's revenues consist of commissions received on
policies sold to customers. In addition, Westplan also holds all outstanding
stock of WI.
WESTPLAN INVESTMENTS
WI began operations in 1994 as a licensed mutual funds broker dealer
selling mutual funds and variable annuities to the general public and is not a
significant source of revenues or expenses.
WESTERN RECONVEYANCE COMPANY, INC.
Recon is a California corporation which acts primarily as the trustee under
trust deed loans made by Westcorp and is not a significant source of revenues or
expenses.
WESTERN CONSUMER SERVICES, INC.
WCS conducted real estate development activities primarily in the form of
joint ventures. The joint ventures engaged in construction of residential units
for sale, construction of rental units and rehabilitation of rental housing, the
latter primarily in low and moderate income neighborhoods. WCS's interest in
these projects ranged from 51% to 100% and, in some cases, included a
participating share of the profits realized upon sale. The joint venture
operations have been discontinued as a result of a declining market and the
capital requirements related to this type of activity.
WCS also owns one of the branch locations of the Bank, having taken title
in a transfer from the Bank which resulted in an increase of $7.8 million of
real estate being carried on the books of WCS. This transfer occurred as a
result of a determination that this property could not be treated as branch
premises for regulatory purposes (based on OTS guidelines) since the Bank did
not occupy 25% of the premises, consistent with OTS guidelines, and was thus
required to divest the property. The Bank is required to hold risk based capital
against this asset as it does against other assets which are held in its real
estate investment subsidiary. If and when the Bank is able to occupy 25% or more
of the premises, it may transfer the property from WCS back to the Bank.
WESTHRIFT LIFE INSURANCE COMPANY
Westhrift, an Arizona corporation, is engaged in the business of reinsuring
credit life and credit disability insurance offered to borrowers of Westcorp and
underwritten by an independent insurer. The credit life insurance policies
provide for full payment to Westcorp of the insured's financial obligation in
the event of the insured's death. The credit disability insurance policies
provide for payment to Westcorp of an insured's financial obligation during a
period of disability resulting from illness or physical injury. Westhrift has a
Certificate of Authority from the California Insurance Commissioner authorizing
it to conduct insurance business in California. At December 31, 1994, credit
life and disability insurance in force was $51.5 million.
For Arizona statutory purposes, Westhrift is required to maintain reserves
for losses on credit life and credit disability policies. Westhrift's aggregate
reserves for credit life and credit disability policies at December 31, 1994
were $1.6 million. The aggregate reserves are computed in accordance with
commonly accepted actuarial standards consistently applied, and are based on
actuarial assumptions which are in accordance with or stronger than those called
for in policy provisions. The policies reinsured are underwritten by the
independent insurer for no more than the amount that the insured owes to the
Bank, not to exceed $25 thousand per loan. Westhrift also maintains a $0.5
million deposit in accordance with California statutory deposit requirements.
Westhrift does not engage in any business except with respect to customers of
the Bank and WFS.
20
<PAGE> 22
In January 1995, ownership of Westhrift was transferred to the Bank from
WCS after obtaining regulatory approval to do so. The Bank paid WCS $4.8 million
for Westhrift.
COMPETITION
Westcorp faces strong competition in its lending and deposit gathering
activities. Westcorp believes it is competitive because of product pricing and
because it offers a high degree of professionalism and quality in the services
it provides through longstanding relationships with borrowers, real estate
brokers and automobile dealers.
The greatest competition for deposits comes from other savings and loan
associations, money market funds, commercial banks, credit unions, thrift and
loan associations, corporate and government securities and mutual funds. Many of
the nation's largest savings and loan associations and other depository
institutions are headquartered or have branches in the areas where Westcorp
primarily conducts its business. The "Riegle-Neal Interstate Banking and Branch
Efficiency Act of 1994" legislated broader interstate banking authority to
financial institutions. At this time, Westcorp does not know the full extent, if
any, this act might have on Westcorp or its competitors. Westcorp competes for
deposits primarily on the basis of interest rates paid and quality of service
provided to its customers. Westcorp does not rely on any individual, group or
entity for a material portion of its deposits. Although the majority of its
deposits are placed by depositors in the geographic areas in which Westcorp's
branches are located, some are placed by depositors located in other regions
across the United States.
Westcorp faces strong competition in the purchase of automobile dealer
generated automobile loans from automobile manufacturer finance subsidiaries,
consumer finance companies, commercial banks, and credit unions. Westcorp
competes for the purchase of such loans on the basis of price and the level of
service provided to the respective dealers, including its promptness in
processing and approving automobile applications submitted by the dealer.
Competition in originating mortgage loans comes primarily from other
savings and loan associations, commercial banks and mortgage bankers. Westcorp
competes for mortgage loans principally on the basis of the interest rates and
loan fees it charges, the types of loans it originates and the quality of
services it provides borrowers and real estate brokers.
TAXATION
FEDERAL INCOME TAXES
Westcorp and its subsidiaries file a calendar tax year consolidated federal
income tax return.
The Bank is a savings and loan association for federal tax purposes.
Savings and loan associations satisfying certain conditions are permitted under
the Code to establish reserves for bad debts and to make annual additions to
these reserves which qualify as deductions from income. The Bank is permitted to
compute its additions to its bad debt reserve on loans using one of the
following two methods: (i) the percentage of taxable income method; or (ii) the
experience method. The Bank intends, when permitted, to compute its annual bad
debt reserve deduction for loans under the method which permits the Bank to
obtain the maximum allowable deduction.
Under the percentage of taxable income method, as revised by the Act, the
Bank may generally deduct an amount equal to 8% of its taxable income, after
deducting certain items . In addition, the bad debt deduction under the
percentage of taxable income method is subject to certain limitations based on
the amount of deposit accounts and outstanding qualifying real property loans.
The allowable deduction under the percentage of taxable income method is
available only if at least 60% of the total dollar amount of the Bank's assets
are qualifying assets. Qualifying assets include, among other things, cash, U.S.
Government obligations, certificates of deposit, loans secured by an interest in
residential real property and loans made for the payment of expenses of a
college or university education. The Bank's qualifying assets exceeded 60% in
1994.
21
<PAGE> 23
A savings and loan association which utilizes the percentage of taxable
income method is subject to recapture taxes on such reserves if it makes certain
distributions to stockholders. Dividends may be paid without the imposition of
any tax on the Bank to the extent that the amounts paid as dividends do not
exceed the Bank's current or accumulated earnings and profits as calculated for
federal income tax purposes. Dividends paid in excess of current and accumulated
earnings and profits, stock redemptions and other distributions with respect to
stock, are deemed to be made from the bad debt reserve for qualifying real
property loans, to the extent that this reserve exceeds the amount that could
have been accumulated under the experience method. The amount of tax that would
be payable upon any distribution which is treated as having been from the bad
debt reserve for qualifying real property loans is also deemed to have been paid
from the reserve to the extent thereof. Management does not contemplate using
the reserve in a manner that will create taxable income, but assuming a 35% tax
rate, distributions to stockholders which are treated as having been made from
the bad debt reserve for qualifying real property loans could result in a
federal recapture tax which is approximately equal to one-half of the amount of
such distributions, unless offset by net operating losses. In addition, certain
large savings and loan associations (including the Bank) are required to
recapture their existing bad debt reserves in the event that for any taxable
year less than 60% of the association's assets are qualifying assets.
Westcorp will be subject to the alternative minimum tax if such tax is
larger than the regular federal tax otherwise payable. Generally, alternative
minimum taxable income is a taxpayer's regular taxable income, increased by the
taxpayer's tax preference items for the year and adjusted by computing certain
deductions in a special manner which negates the acceleration of such deductions
under the regular federal tax. This amount is then reduced by an exemption
amount and is subject to tax at a 20% rate. Significant alternative minimum tax
items generally applicable to savings and loan associations include (i) 100% of
the excess of a savings and loan association's bad debt deduction over the
amount that would have been allowable under the experience method; and (ii) an
amount equal to 75% of the amount by which a corporation's adjusted current
earnings exceed its alternative minimum taxable income. For alternative minimum
tax purposes, net operating losses can offset no more than 90% of alternative
minimum taxable income. In addition, for taxable years beginning after December
31, 1986, and before January 1, 1996, Westcorp will be subject to an additional
environmental tax of 0.12% of its alternative minimum taxable income with
certain adjustments and exclusions.
At December 31, 1994, Westcorp had no net operating loss carry-forwards.
For net operating losses incurred in taxable years beginning after 1986, there
is a 3-year carry back and a 15-year carry-forward period.
The returns of Westcorp and its subsidiaries and affiliates were examined
for the years 1988 and 1989 without material change.
CALIFORNIA FRANCHISE TAX PROVISIONS
The California franchise tax applicable to the Bank is a variable rate tax.
This rate is computed under a formula which is higher than the rate applicable
to nonfinancial corporations because it includes an amount "in lieu" of local
personal property and business license taxes paid by nonfinancial corporations
(but not generally paid by financial institutions such as the Bank). For taxable
year 1994, the total tax rate was set at 11.47%. Under California regulations,
bad debts may be treated by savings and loan associations in either of two ways,
as debts are ascertained to be worthless in whole or in part or by deducting
from income a reasonable reserve addition. The Bank and its subsidiaries file
separate tax returns using the combined reporting method.
The returns of Westcorp and its subsidiaries and affiliates were examined
for the years 1984 through 1987. Assessed amounts were paid by the affiliate
company. The returns for the years 1988 and 1989 are currently under
examination.
For additional information regarding the federal and state taxes payable by
Westcorp, see Note S to the Consolidated Financial Statements.
22
<PAGE> 24
SUPERVISION AND REGULATION
GENERAL
The adoption of FIRREA in 1989 substantially restructured the regulatory
framework in which Westcorp and the Bank operate. In December 1991, The Federal
Deposit Insurance Corporation Improvement Act ("FDICIA") was enacted. FDICIA
requires specified regulatory agencies to adopt regulations having broad
application to insured financial institutions such as the Bank. In 1994 the
Riegle Community Development and Regulatory Improvement Act of 1994 ("RCDA") was
adopted, which act modified several of the requirements initiated by FDICIA.
Set forth below is a discussion of the statutory and regulatory framework
for Westcorp as affected by FIRREA, FDICIA and RCDA and the regulations
promulgated thereunder. However, to the extent that the following information
describes statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. Any change in
applicable law or regulation or in the policies of various regulatory
authorities may have a material effect on the business and prospects of Westcorp
and the Bank.
WESTCORP
The Savings and Loan Holding Company Act
Westcorp, by virtue of its ownership of the Bank, is a savings and loan
holding company within the meaning of the Home Owners' Loan Act ("HOLA"), as
amended by FIRREA. FIRREA transferred, with few changes, the provisions of the
Savings and Loan Holding Company Act from the National Housing Act to HOLA.
Savings and loan holding companies and their savings association subsidiaries
are extensively regulated under federal laws.
As a savings and loan holding company registered with the OTS, Westcorp is
subject to its regulations, examination and reporting requirements. Westcorp is
a "unitary" savings and loan holding company within the meaning of regulations
promulgated by the OTS, and as a result Westcorp is virtually unrestricted in
the types of business activities in which it may engage, provided the Bank
continues to meet the Qualified Thrift Lender test under HOLA. Although Westcorp
intends to remain a unitary savings and loan holding company, if it acquires one
or more insured institutions and operates them as separate subsidiaries rather
than merging them into the Bank, or if certain other circumstances not currently
applicable to Westcorp arise, Westcorp would be treated as a "multiple" savings
and loan holding company and could cause additional regulatory restrictions to
be imposed on Westcorp. Westcorp does not anticipate that those circumstances
will arise unless such institutions are acquired pursuant to a supervisory
acquisition and the insured subsidiaries meet the Qualified Thrift Lender test.
HOLA prohibits a savings and loan holding company, without prior approval
of the OTS, from controlling any other savings association or savings and loan
holding company.
Additionally, FIRREA empowers the OTS to take substantive action when it
determines that there is reasonable cause to believe that the continuation by a
savings and loan holding company of any particular activity constitutes a
serious risk to the financial safety, soundness, or stability of such holding
company's subsidiary savings association. Thus, FIRREA confers on the OTS
oversight authority for all holding company affiliates, not just the Bank.
Specifically, the OTS may, as necessary: (i) limit the payment of dividends by
the Bank; (ii) limit transactions between the Bank, the holding company and the
subsidiaries or affiliates of either; and (iii) limit any activities of the
holding company that might create a serious risk that the liabilities of the
holding company and its affiliates may be imposed on the Bank. Any such limits
may be issued in the form of regulations, or a directive having the effect of a
cease and desist order.
Savings association subsidiaries of a savings and loan holding company are
limited by HOLA in the type of activities and investments in which they may
participate if the investment and/or activity involves an affiliate. In general,
savings association subsidiaries of a savings and loan holding company are
subject to Sections 23A and 23B of the Federal Reserve Act ("FRA") in the same
manner and to the same extent as if the savings association were a member bank
of the Federal Reserve System, as well as being subject to similar
23
<PAGE> 25
regulations adopted by the OTS. Section 23A of the FRA puts certain quantitative
limitations on certain transactions between a bank or its subsidiary and an
affiliate, including transactions involving (i) loans or extensions of credit to
the affiliate; (ii) the purchase of or investment in securities issued by an
affiliate; (iii) purchase of certain assets from an affiliate; (iv) the
acceptance of securities issued by an affiliate as security for a loan or
extension of credit to any person; or (v) the issuance of a guarantee,
acceptance or letter of credit on behalf of an affiliate. Under Section 23B,
transactions between a bank or its subsidiary and an affiliate must meet certain
qualitative limitations. Such transactions must be on terms at least as
favorable to the bank or its subsidiary as transactions with unaffiliated
companies. In addition, Section 11 of the HOLA, as amended by FIRREA, also
specifically prohibits a savings association subsidiary of the savings and loan
holding company from making a loan or extension of credit to an affiliate unless
that affiliate is engaged only in activities permitted to bank holding companies
under Section 4(c) of the Bank Holding Company Act or from purchasing or
investing in the securities of any affiliate (other than a subsidiary of the
savings association). The OTS regulations, consistent with the provisions of
Sections 23A and 23B, exclude transactions between a savings association and its
subsidiaries from the limitations of those sections, but those regulations also
define certain subsidiaries to be affiliates and subject to the requirements of
those sections. At the present time, none of the Bank's subsidiaries are within
the definition of an affiliate for purposes of those regulations.
In addition, amendments made by FIRREA and FDICIA require that savings
associations comply with the requirements of FRA Sections 22(g) and 22(h), and
FRB Regulation O promulgated thereunder, in the same manner as member banks,
with respect to loans to executive officers, directors and principal
shareholders. The RCDA permits loans secured by a first lien on an executive
officer's residence to be made without prior approval of the board of directors
of the financial institution. As a matter of policy, the Bank does not make
loans to executive officers, directors or principal shareholders.
THE BANK
California Savings Association Law
As a federally chartered institution, the Bank's investments and
borrowings, loans, issuance of securities, payments of interest and dividends,
establishment of branch offices and all other aspects of its operations are
subject to the exclusive jurisdiction of the OTS, to the exclusion of the
California Savings Association Law or regulations of the California Savings and
Loan Commissioner.
Federal Home Loan Bank System
The Bank is a member of the FHLB System which consists of 12 regional
Federal Home Loan Banks. The Federal Home Loan Banks provide a central credit
facility for member institutions. The Bank, as a member of the FHLB System, is
required to own capital stock in the FHLB in an amount at least equal to the
greater of 1.0% of the aggregate outstanding balance of its loans secured by
residential real property or 5.0% of the sum of advances outstanding plus
committed FHLB commercial paper lines. The Bank is in compliance with this
requirement.
Since the adoption of FIRREA, the dividends which the Bank has received on
its FHLB stock have been significantly reduced as a result of requirements
imposed by FIRREA on the FHLB System. Each FHLB is required to transfer a
certain portion of its reserves and undivided profits to the Resolution Funding
Corporation ("RFC"), the entity established to raise funds to resolve troubled
thrifts, to fund a portion of the interest and the principal on RFC bonds and
other obligations. Also, each FHLB is required to transfer a percentage of its
annual net earnings to the Affordable Housing Program, as defined in FIRREA,
which amount is to increase from 6% of the annual net income of each FHLB in
1994 to at least 10% in 1995 and thereafter. Accordingly, it is anticipated that
the level of dividends to be received by the Bank from the FHLB will continue to
be less than those received prior to the adoption of FIRREA.
Insurance of Accounts
The FDIC administers two separate deposit insurance funds for financial
institutions: (i) the Savings Association Insurance Fund ("SAIF"), which insures
the deposits of associations that were insured by the
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FSLIC prior to the enactment of FIRREA, and (ii) the Bank Insurance Fund
("BIF"), which insures the deposits of institutions that were insured by the
FDIC prior to FIRREA. Thus, commencing in 1989 the deposits of the Bank became
insured through the SAIF to the maximum amount permitted by law (currently
$100,000).
During 1994 the Bank was required to pay insurance premiums of $3.8
million. FDICIA requires the FDIC to implement, by January 1, 1994, a risk-based
assessment system under which an institution's premiums are based on the FDIC's
determination of the relative risk the condition of such institution poses to
its insurance fund. In response, the FDIC adopted a final rule, effective
January 1, 1994. Under these rules, each insured institution is classified as
"well capitalized," "adequately capitalized" or "undercapitalized," using
definitions substantially the same as those adopted with respect to the "prompt
corrective action" rules adopted by the regulatory agencies under FDICIA. See
"Prompt Corrective Regulatory Action." Within each of these classifications, the
FDIC has created three risk categories into which an institution may be placed,
based upon the supervisory evaluations of the institution's primary federal
financial institution regulatory agency and the FDIC. These three categories
consist of those institutions deemed financially sound, those with demonstrated
weakness that could result in significant deterioration of the institution and
risk of loss to the FDIC, and those which pose a substantial probability of loss
to the FDIC. Each of these nine assessment categories is assigned an assessment
rate ranging from 0.23% to 0.31% of the institutions deposit assessment base.
Under these regulations, an institution is precluded from disclosing the
risk-based assessment category to which it has been assigned.
Pursuant to the provisions of FIRREA, the FDIC has proposed a significant
reduction in the insurance premiums to be paid by those financial institutions,
primarily commercial banks, whose deposits are insured under the BIF, while the
premiums payable by savings associations insured under the SAIF will remain
unchanged. It is currently uncertain as to the effect of the premium
differential on the ability of the Company to compete with BIF member
institutions. It is similarly uncertain whether any legislative action will be
taken to ameliorate that differential.
FIRREA established a five year moratorium on conversions from the SAIF to
the BIF. The Resolution Trust Corporation Completion Act ("RTCCA"), enacted on
December 17, 1993, extended this moratorium until the date on which the SAIF
first meets the reserve ratio designed for it. There are several exceptions to
this moratorium. Most importantly, a SAIF member may convert to bank charter if
the resulting bank remains a SAIF member during the term of the moratorium.
Additionally, conversions to bank charter can take place during the moratorium
if (i) it affects only an "insubstantial" portion of an institution's total
deposits and is approved by the FDIC; (ii) it results from the acquisition of a
troubled institution that is in default or in danger of default and is approved
by the FDIC and the Resolution Trust Corporation (the "RTC"); or (iii) it
results from a merger or consolidation of a bank and a savings association and
is approved by the FDIC or the Office of the Comptroller of the Currency (the
"OCC"), as well as by the FRB.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Bank's deposit insurance.
Liquidity Requirements
Under OTS regulations, the Bank is required to maintain an average daily
balance of liquid assets (cash, certain time deposits, bankers' acceptances and
specified United States government, state or federal agency obligations and
certain corporate debt obligations and commercial paper) equal to at least 5.0%
of its average daily balance of net withdrawal accounts and borrowings payable
on demand or in one year or less. If at any
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time the Bank's liquid assets do not at least equal (on an average daily basis
for any month) the amount required by these regulations (which requirement may
not be set at less than 4.0% nor more than 10.0% of the Bank's net withdrawable
accounts plus short term borrowings), the Bank would be subject to various OTS
enforcement procedures, including monetary penalties. The Bank must also
maintain an average daily balance of short term liquid assets (generally those
having maturities of 12 months or less) equal to at least 1.0% of its average
daily balance of net withdrawable accounts plus short term debt. At December 31,
1994, the Bank's liquidity and short term liquidity percentages as calculated
for the foregoing purposes were 13.4% and 8.8%, respectively. Thus, the Bank was
in compliance with these requirements. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Capital Resources and
Liquidity."
Brokered Deposits
In June 1992, the FDIC issued regulations under FDICIA that provide for
differential regulation relating to brokered deposits based on capital adequacy.
Institutions are divided into categories of "well capitalized," "adequately
capitalized" and "undercapitalized." Only "well capitalized" institutions may
continue to accept brokered deposits without restriction. The RCDA affirmatively
excludes well capitalized institutions from the definition of deposit brokers,
thereby eliminating the need for well capitalized institutions to register as
deposit brokers.
"Adequately capitalized" institutions may accept brokered deposits only if
(i) they first obtain a waiver from the FDIC and (ii) the rate of interest paid
on such brokered deposits, at the time such funds are accepted, does not
"significantly" exceed (defined as more than 75 basis points) (a) the rate paid
on deposits of similar maturity in such institution's normal market area for
deposits accepted in the institution's normal market area or (b) the "national
rate" paid on deposits of comparable maturity for deposits accepted outside the
institution's normal market area. For purposes of these regulations, "national
rate" means 120% of the current yield on similar maturity U.S. Treasury
obligations or, in the case of a deposit at least half of which is uninsured
(institutional or wholesale deposits), 130% of such applicable yield.
Furthermore, because the term "deposit broker" is defined to include an
"adequately capitalized" association which itself solicits deposits by offering
rates of interest that are "significantly" higher (defined as more than 75 basis
points) than the prevailing rates offered by other insured associations in the
offering association's market area, the interest rate limitations applicable to
deposits obtained through third party intermediaries will also apply to deposits
obtained by the offering association.
"Undercapitalized" institutions are prohibited from (i) accepting brokered
deposits or (ii) soliciting any deposits by offering rates of interest that are
"significantly" higher (defined as more than 75 basis points) than the
prevailing rates of interest on insured deposits (i) in such institution's
market area or (ii) in the market area in which such deposits would otherwise be
accepted. The terms "well capitalized," "adequately capitalized" and
"undercapitalized" have the same meanings as under the regulations pertaining to
prompt corrective regulatory action described under "Prompt Corrective
Regulatory Action."
At December 31, 1994, the Bank met the capital requirements of a well
capitalized association as defined by the regulation. Nonetheless, the Bank does
not currently accept brokered deposits as defined by the regulation.
Regulatory Capital Requirements
FIRREA includes capital requirements intended to require the owners of
savings associations to invest more of their own funds in the associations they
control, thus providing a greater incentive for the owners of the associations
to limit the risks such associations incur. FIRREA mandated that the OTS
promulgate final capital regulations which provide capital standards no less
stringent than the capital standards applicable to national banks. Those
regulations were adopted by the OTS and became effective on December 7, 1989.
Additionally, FIRREA requires that these capital standards contain (i) a
leverage limit (core capital) requirement; (ii) a tangible capital requirement;
and (iii) a risk-weighted capital requirement.
FIRREA requires savings associations to maintain "core capital" in an
amount not less than 3.0% of adjusted total assets. Core capital is defined in
the OTS capital regulations as including, among other things,
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(i) common stockholders' equity (including retained earnings); (ii) a certain
portion of the association's qualifying supervisory goodwill; (iii)
noncumulative perpetual preferred stock and related surplus; and (iv) purchased
mortgage servicing rights ("PMSRs") and purchased credit card relationships
("PCCRs") meeting certain valuation requirements. The maximum amount of PMSRs
and PCCRs which can be included in core capital and tangible capital may not
exceed, in the aggregate, an amount equal to 50% of the institutions core
capital, with PCCRs limited to 25% of core capital. At December 31, 1994 the
Bank had $2.1 million of PMSRs, but held no PCCRs. Of the PMSRs held by the
Bank, $0.2 million are in excess of the amount which may be included within the
Banks core capital.
Effective December 31, 1990, the OCC, the principal national bank
regulator, amended its capital regulations by requiring a minimum core capital
requirement of 3.0% of adjusted total assets for national banks with a composite
1 rating (the highest rating available) under the CAMEL rating system for
national banks and substantially higher core capital requirements for lower
rated national banks. It is expected that most national banks will be required
to maintain core capital of 4.0% to 5.0% under the new regulation. Because
FIRREA generally requires that the capital standards applicable to savings
institutions be "no less stringent" than those applicable to national banks,
there is a high likelihood that the OTS will impose substantially equivalent
requirements, and in April 1991, the OTS proposed to modify the 3.0% of adjusted
total assets core capital requirement in the same manner. Under the OTS
proposal, only savings associations rated composite CAMEL 1 will be permitted to
operate at the regulatory minimum core capital ratio of 3.0%. For all other
savings associations, the minimum core capital ratio will be 3.0% plus at least
an additional 100 to 200 basis points, which thus will increase the core capital
ratio requirement to 4.0% to 5.0% (or more) of adjusted total assets. In
determining the amount of additional core capital any savings institution will
be required to maintain, the OTS will assess both the quality of risk management
systems and the level of overall risk in each individual savings association
through the supervisory process on a case-by-case basis. The OTS has not yet
issued a final rule.
The OTS capital regulations permit the OTS to impose a higher individual
minimum capital requirement on a case-by-case basis. Until January 25, 1994, the
Bank was required by an Agreement with the OTS, (the "OTS Agreement") to
maintain core capital of 4.5%, at which date the OTS Agreement was terminated by
the OTS. See "Agreement with the Office of Thrift Supervision". The Bank's core
capital ratio at December 31, 1994 was 6.6%.
A savings association must maintain "tangible capital" in an amount not
less than 1.5% of adjusted total assets. "Tangible capital" means core capital
less any intangible assets (including supervisory goodwill), plus PMSRs and
PCCRs to the extent includable in core capital as described above. At December
31, 1994, the Bank's tangible capital was 6.6%.
A savings institution's investments in and extensions of credit to a
subsidiary engaged in any activities not permissible for national banks
("nonincludable subsidiaries") generally are deducted from the institution's
core capital and tangible capital in determining compliance with capital
standards. This deduction is not required for investments in and extensions of
credit to a subsidiary engaged solely in mortgage banking, to certain
subsidiaries which are themselves insured depository institutions or, unless the
FDIC determines otherwise in the interests of safety and soundness, to a
subsidiary which engages in such impermissible activities solely as agent for
its customers. The Bank is required to deduct from its core and tangible capital
its investments in WCS and Westplan (both equity and extensions of credit), as
the former is engaged in residential real estate activities not permitted to
national banks, and the latter is engaged in an insurance agency business not
permitted to national banks. The amount of the deduction related to WCS is to be
phased-in through June 30, 1996, while the amount of the deduction related to
Westplan is not subject to a phase-in period. By letter dated December 29, 1992,
the OTS approved the inclusion in the Bank's core and tangible capital of its
investment in WCS at the 75% level through June 30, 1994, at the 60% level from
July 1, 1994 through June 30, 1995, and at the 40% level from July 1, 1995
through June 30, 1996. After July 1, 1996 the Bank will not be permitted to
include any of its remaining investment in WCS in its core or tangible capital.
At December 31, 1994 the amount of its investment in WCS excluded from the
Bank's core and tangible capital was $5.9 million (40% of the investment in that
subsidiary).
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Effective January 31, 1995 the Bank was authorized by the OTS to
redesignate Westhrift as an operating subsidiary, and to transfer Westhrift from
WCS to the Bank. As a first tier operating subsidiary of the Bank, the Bank's
investment in Westhrift became includable in capital, as the activities of
Westhrift are those of an includable subsidiary. The Bank paid WCS $4.8 million
for the stock of Westhrift, and WCS subsequently paid a dividend to the Bank in
that amount. As a result, the amount of the Bank's investment in WCS which will
be excluded from the Bank's core and tangible capital will be reduced to $4.1
million.
As of December 31, 1994, the Bank's core capital was $183 million,
exceeding the Bank's regulatory requirement by $100 million. The Bank's tangible
capital at December 31, 1994 was $183 million, exceeding the applicable
regulatory requirement by $141 million.
The risk-based component of the capital standards requires that an
association have total capital equal to 8.0% of risk-weighted assets. The OTS
risk-based capital regulation provides that for assets sold as to which any
recourse liability is retained (including on-balance sheet assets related to the
assets sold which are at risk) a savings association must hold capital as a part
of its risk-based capital requirement equal to the lesser of (i) the amount of
that recourse liability or (ii) the risk-weighted capital requirement for assets
sold off-balance sheet as though the assets had not been sold. In addition, in
the former instance, when calculating the Bank's risk-based capital ratio (a)
the value of those on-balance sheet assets which are subject to recourse, to the
extent of that recourse liability ("fully-capitalized assets"), is deducted from
the Bank's total capital and (b) neither the risk-weighted value of the asset
sold off-balance sheet nor the amount of the fully capitalized assets is
included in the Bank's total risk-weighted assets. The Bank's risk-based capital
requirement at December 31, 1994 included $90.4 million due to its recourse
liability relating to grantor trust financings, including fully capitalized
assets.
The RCDA requires the federal banking agencies, including the OTS, to
review their risk-based capital recourse rules, and to adopt new rules for
assets sold with low levels of recourse to ensure that the risk-based capital
held for such assets does not exceed the contractual maximum recourse liability
retained by the institution upon the sale of those assets. The FRB published
final rules on February 13, 1995 implementing that section of the RCDA. Under
the rules adopted by the FRB, which are applicable for state member banks and
bank holding companies, the amount of capital required as to assets sold with
recourse is the lesser of the capital required as though the asset had not been
sold or the actual amount of recourse liability contractually retained (reduced
further by the amount of any GAAP non-capital liability account established upon
the sale of such asset). The OTS has not yet published final rules under the
provisions of RCDA.
The Bank's total risk-weighted assets are determined by taking the sum of
the products obtained by multiplying each of the Bank's assets and certain
off-balance sheet items by a designated risk-weight. Before an off-balance sheet
item can be assigned a risk-weight, it must be converted to an on-balance sheet
credit equivalent amount.
Four risk-weight categories now exist for on-balance sheet assets. The four
risk-weighted categories are:
Category 1: Zero percent risk-weight. Includes, among other assets,
cash, securities issued by, or backed by the full faith and credit of, the
U.S. government including GNMA mortgage-backed securities, notes and
obligations issued by either the FSLIC or FDIC and backed by the full faith
and credit of the U.S. government, and assets directly and unconditionally
guaranteed by the U.S. government or its agencies;
Category 2: Twenty percent risk-weight. Includes, among other assets,
cash items in the process of collection, mortgage related securities issued
or guaranteed by FNMA or FHLMC, mortgages guaranteed by the VA or FHA,
obligations collateralized by securities issued or guaranteed by the U.S.
government, privately issued mortgage related securities qualifying as such
under the Secondary Mortgage Enhancement Act, stock in the FHLB, and claims
or balances due from the FHLB, the FRB or from domestic depository
institutions;
Category 3: Fifty percent risk-weight. Includes, among other assets,
qualifying mortgage loans (including certain qualifying residential
construction loans) and qualifying multifamily mortgage loans, mortgage
related securities backed by qualifying mortgage loans;
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Category 4: One hundred percent risk-weight. Includes, among other
assets, consumer loans (including motor vehicle loans), commercial loans,
home equity loans, nonqualifying multifamily mortgage loans, nonqualifying
residential construction loans, land loans, investments in fixed assets and
premises, and intangible assets including goodwill not deducted from
capital and equity investments permissible for both savings associations
and national banks.
Before a risk-weight category can be applied to a consolidated off-balance
sheet item, such item must be converted into a credit-equivalent amount by
multiplying its face amount by whichever of four conversion factors is
appropriate. There is a (i) 100% conversion of direct credit substitutes,
including financial guarantees, financial standby letters of credit, assets sold
with recourse (unless the full amount of the recourse retained is less than the
amount of capital required by the credit-risk component for the total assets
sold, in which case the appropriate credit risk component is the full amount of
the recourse, subject to whatever action the OTS takes in response to the RCDA,
as discussed above) and net assets sold under an agreement to repurchase; (ii) a
50.0% conversion factor is applied to transaction-related contingencies, such as
performance bonds or performance-based standby letters of credit and the unused
portions of nonexempt loan commitments; (iii) a 20.0% conversion of
trade-related contingencies, such as commercial letters of credit; (iv) a 0%
conversion factor applies to the unused portion of exempt loan commitments
(those which are unconditionally cancelable, with each draw treated as a
separate potential loan to be evaluated) and unused, unconditionally cancelable
retail credit card lines. Interest-rate contracts (e.g. swaps, caps, collars,
options and forward rate agreements) have special credit equivalent amounts
equal to the sum of their current credit exposure plus their potential credit
exposure. The risk-weight category to be applied to such amounts in determining
the credit risk component would depend on the obligor, but in no event would be
higher than 50.0% risk-weight. As of December 31, 1994, the Bank's total
risk-weighted assets equaled $2.2 billion.
In addition to regulations pertaining to risk-based capital for interest
rate risk, FDICIA also requires the adoption of risk-based capital regulations
regarding excessive exposure to concentration of credit risk and the risks
associated with nontraditional activities. The OTS in December 1994 amended its
individual minimum capital regulation to include these factors as additional
grounds upon which the OTS could impose such requirements. The amended
regulations do not set specific standards, but leave it to the discretion of the
OTS to impose additional capital requirements on a case by case basis. The RCDA
requires the federal banking agencies to add the size and activities of an
institution to that list of factors which may justify the need for additional
risk-based capital. Under the RCDA the federal banking agencies are not to cause
undue reporting burdens in connection with such regulations. The OTS has not yet
proposed new regulations in response to this law.
Total capital, as defined by OTS regulations, is core capital plus
supplementary capital (supplementary capital cannot exceed 100% of core capital)
less direct equity investments not permissible to national banks (subject to a
phase-in schedule), reciprocal holdings of depository institution capital
investments, and that portion of land loans and nonresidential construction
loans in excess of 80.0% loan-to-value ratio. Supplementary capital is comprised
of three elements: (i) permanent capital instruments; (ii) maturing capital
instruments; and (iii) general valuation loan and lease loss allowance.
During 1993 the Bank sold $125.0 million of its 8.5% Subordinated Capital
Debentures, due 2003 (the "8.5% Debentures"), using the proceeds of that
offering to redeem all of its outstanding 11% Subordinated Capital Debentures,
due 1999 (the "11% Debentures") and for general corporate purposes. The 8.5%
Debentures are maturing capital instruments as defined by the OTS capital
regulations. Those regulations require that as the maturity date of a maturing
capital instrument approaches, a specified amount of that instrument must be
deducted from total capital each year. Because the 11% Debentures included a
sinking fund obligation along with its May 1, 1999 maturity date, the Bank was
permitted as of May 1, 1993 to include only $35.1 million of the $52.0 of those
debentures outstanding in its total capital.
The OTS approved the Bank's application to include the 8.5% Debentures as
supplementary capital in 1993. Following that approval and the subsequent
redemption of all of the outstanding 11% Debentures in 1993, the Bank has
included the 8.5% Debentures in its supplementary capital. By the terms of that
approval, the amount of the 8.5% Debentures which may be included in
supplementary capital may not exceed 40% of
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the Bank's total capital, and by September 30, 1995, the amount which may be
included may not exceed one-third of the Bank's total capital. During 1994 the
Bank repurchased and canceled $16.9 million of the 8.5% Debentures, thereby
reducing the amount outstanding at December 31, 1994 to $104 million. At
December 31, 1994 the 8.5% Debentures then outstanding represented 33.6% of the
Bank's total capital. Consistent with the OTS capital regulations, the amount of
the 8.5% Debentures which may be included as supplementary capital will decrease
at the rate of 20% of the amount originally outstanding per year (net of
redemptions), commencing on July 1, 1998.
As required by the provisions of FDICIA, the OTS has adopted an interest
rate risk component to its capital rules. The new rule establishes a method for
determining an appropriate level of capital to be held by savings associations
subject to the supervision of the OTS, such as the Bank, against interest rate
risk ("IRR"). The new rule generally provides that if a savings association's
IRR, calculated in accordance with the rule, exceeds a specified percentage, the
savings association must deduct from its total capital an IRR component when
calculating its compliance with the risk-based capital requirement.
Specifically, the rule provides that a savings association's IRR is to be
determined by the decline in that association's Net Portfolio Value ("NPV")
(i.e. the value of the association's assets as determined in accordance with the
provisions of the rule) resulting from a 200 basis point change in market
interest rates (increase or decrease, whichever results in a lower NPV) divided
by the NPV prior to that change. If that result is a decrease of greater than
2%, the association must deduct from its total capital an amount equal to
one-half of the decline in its NPV in excess of 2% of its NPV prior to the
interest rate change (the "IRR component"). The reduction of an association's
total risk-based capital is effective on the first day of the third quarter
following the reporting date of the information used to make the required
calculations. The rule also contains provisions (i) reducing the IRR component
if the association reduces its IRR by the end of the quarter following the
reporting date and (ii) permitting the OTS to waive or defer the IRR component
on a showing that the association has made meaningful steps to reduce or control
its interest rate risk. Westcorp is not required to reduce its total capital by
an IRR component, and does not anticipate being required to do so during 1995.
Any savings association that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on an association's operations and
the appointment of a conservator or receiver. The OTS' capital regulation
provides that such actions, through enforcement proceedings or otherwise, could
require one or more of a variety of corrective actions. The OTS must prohibit
asset growth by any institution that is in violation of the foregoing minimum
capital requirements, and must require any such institution to comply with a
capital directive issued by the OTS. See "Prompt Corrective Regulatory Action".
In summary, the Bank exceeded the current minimum requirements for core
capital, tangible capital and risk-weighted capital as of December 31, 1994.
However, the required deductions from capital for its investments in WCS,
Westplan and direct real estate investments in facilities in which the Bank uses
less than 25% of the available space in its operations are still being
phased-in. The Bank's core, tangible and risk-weighted capital ratios at
December 31, 1994, on a fully phased-in basis, would be 6.3%, 6.3% and 11.7%,
respectively. Accordingly, the Bank meets all of the fully phased-in capital
requirements. Westcorp believes that the Bank will continue to meet all of the
fully phased-in requirements when required.
Prompt Corrective Regulatory Action
FDICIA requires each applicable agency and the FDIC to take prompt
corrective action to resolve the problems of insured depository institutions
that fall below certain capital ratios. Such action must be accomplished at the
least possible long-term cost to the appropriate deposit insurance fund.
In connection with such action, each agency must promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the adequacy of its regulatory capital
level: well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. The critically
undercapitalized level cannot be set lower than 2% of total assets or
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higher than 65% of the required minimum leverage capital level. In addition to
the various capital levels, FDICIA allows an institution's primary federal
regulatory agency to treat an institution as if it were in the next lower
category if that agency (i) determines (after notice and an opportunity for
hearing) that the institution is in an unsafe or unsound condition or (ii) deems
the institution to be engaged in an unsafe or unsound practice.
At each successive downward level of capital, institutions are subject to
more restrictions and regulators are given less flexibility in deciding how to
deal with the bank or thrift. For example, undercapitalized institutions will be
subject to asset growth restrictions and will be required to obtain prior
approval for acquisitions, branching and engaging in new lines of business. For
significantly undercapitalized institutions, the appropriate agency must require
the institution to sell shares in order to raise capital, must restrict interest
rates offered by the institution, and must restrict transactions with affiliates
unless, in each case, the agency determines that such actions would not further
the purposes of the prompt corrective action system. In addition, for critically
undercapitalized institutions, the agency must require prior agency approval for
any transaction outside the ordinary course of business, and the institution
must be placed in receivership or conservatorship unless the appropriate agency
and FDIC make certain affirmative findings regarding the viability of the
institution (which findings must be reviewed every 90 days).
FDICIA prohibits any insured institution (regardless of its capitalization
category) from making capital distributions to anyone or paying management fees
to any persons having control of the institution if after such transaction the
institution would be undercapitalized. Any undercapitalized institution must
submit an acceptable capital restoration plan to the appropriate agency within
45 days of becoming undercapitalized.
A capital restoration plan will be acceptable only if each company having
control over an undercapitalized institution guarantees that the institution
will comply with the capital restoration plan until the institution has been
adequately capitalized on an average during each of four consecutive calendar
quarters and provides adequate assurances of performance. The aggregate
liability of such guarantee is limited to the lesser of (i) an amount equal to
5% of the institution's total assets at the time the institution became
undercapitalized or (ii) the amount which is necessary to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time the institution fails to comply with its capital
restoration plan.
The OTS, in conjunction with the other federal financial institution
regulatory agencies, adopted regulations defining the five categories of
capitalization and implementing a framework of supervisory actions, including
those described above, applicable to savings institutions in each category. The
regulations provide that a savings association will be deemed to be (i) "well
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier 1 (i.e., core) risk-based capital ratio of 6% or greater, a leverage ratio
of 5% or greater and is not subject to any OTS order or directive to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8% or greater; has a
Tier 1 risk-based capital ratio of 4% or greater and has either (a) a leverage
ratio of 4% or greater or (b) a leverage ratio of 3% or greater and is rated
composite 1 under the CAMEL rating system in the most recent examination of the
institution; (iii) "undercapitalized" if it has a total risk-based capital ratio
that is less than 8%, has a Tier 1 risk-based capital ratio that is less than
4%, has a leverage ratio that is less than 4% or, if rated composite 1 under the
CAMEL rating system in the most recent examination of the institution, has a
leverage ratio that is less than 3%; (iv) "significantly undercapitalized" if it
has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based
capital ratio that is less than 3% or a leverage ratio that is less than 3%; and
(v) "critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2%. At December 31, 1994, the Bank met the
capital requirements to be considered "well capitalized".
Loans to One Borrower
Under FIRREA, the loans-to-one borrower limitations for national banks
apply to all savings associations in the same manner and to the same extent as
they do to national banks. Thus, savings associations generally are not
permitted to make loans to a single borrower in excess of 15% to 25% of the
savings associations' unimpaired capital and unimpaired surplus (depending upon
the type of loan and the collateral provided
31
<PAGE> 33
therefore), except that a savings association may make loans to one borrower in
excess of such limits under one of the following circumstances: (i) for any
purpose, in any amount not to exceed $500,000; (ii) to develop domestic
residential housing units, in an amount not to exceed the lesser of $30.0
million or 30% of the savings association's unimpaired capital and unimpaired
surplus, provided that the association receives the written approval of the OTS
to do so (which approval the Bank has not sought) and certain other conditions
are satisfied; or (iii) to finance the sale of real property which it owns as a
result of foreclosure, providing that no new funds are advanced. In addition,
further restrictions on a savings association's loans-to-one borrower authority
may be imposed by the OTS if necessary to protect the safety and soundness of
the savings association. At December 31, 1994, 15.0% of the Bank's unimpaired
capital and unimpaired surplus for loans-to-one borrower purposes was $47.5
million. The largest amount outstanding at December 31, 1994 to one borrower
(and related entities) was $12.0 million.
Equity Risk Investment Limitations
The Bank generally is not authorized to make equity investments other than
investments in subsidiaries. A savings association may not acquire a new
subsidiary or engage in a new activity through an existing subsidiary without
giving 30 days prior notice to the OTS and the FDIC, and must conduct the
activities of the subsidiary in accordance with the regulations and orders of
the OTS. Under certain circumstances, the OTS also may order a savings
association to divest its interest in, terminate the activities of, or take
other corrective measures with respect to, an existing subsidiary.
The Bank's aggregate investment in service corporation subsidiaries was
$11.7 million as of December 31, 1994. As a result of the redesignation of
Westhrift as an operating subsidiary, and the transfer of that subsidiary from
WCS to the Bank on January 31, 1995, Westcorp's equity position of $4.8 million
in Westhrift will be classified as an investment in operating subsidiary rather
than an investment in service corporation.
Qualified Thrift Lender Test
A Qualified Thrift Lender ("QTL") test was enacted as a part of FIRREA, and
was modified by FDICIA. An association that fails to become or remain a QTL must
either (i) convert to a bank subject to the banking regulations or (ii) be
subject to severe restrictions, including being forbidden to invest in or
conduct any activity that is not permissible to both a savings association and a
national bank, and certain other restrictions on branching, advances from its
Federal Home Loan Bank, and dividends. Effective three years after an
association fails to meet its QTL requirements, the association is forbidden
from retaining any investment or continuing any activity not permitted for a
national bank and must repay promptly all FHLB advances. In addition, companies
that control savings associations that fail the QTL test must, within one year
of such failure, become a bank holding company subject to the Bank Holding
Company Act.
Under the existing QTL requirements, a savings association's "qualified
thrift investments" must equal not less than 65% of the association's "portfolio
assets" measured on a monthly basis, in 9 of every 12 consecutive months.
Qualified thrift investments include all loans or mortgage-backed securities
held by an association which are secured or relate to domestic residential or
manufactured housing, as well as FHLB stock and certain obligations of the FDIC
and related entities. Certain other investments are included as qualified thrift
investments, but are limited to 20% of an association's portfolio assets,
including (i) 50% of residential mortgage loans sold by an association within 90
days of their origination, (ii) investments in subsidiaries which derive at
least 80% of their revenue from domestic residential or manufactured housing,
(iii) subject to certain limitations, 200% of investments relating to "starter
homes" or housing and community facilities in "credit-needy areas", (iv)
consumer loans in the aggregate of not more than 10% of portfolio assets, and
(v) FHLMC and FNMA stock. Portfolio assets are total assets less goodwill and
other intangible assets, the value of the association's facilities and the
association's liquid assets maintained to meet its liquidity requirements (but
not over 20% of its total assets).
At December 31, 1994 the Bank's percentage of qualified thrift investments
to portfolio assets was 83.9%. Westcorp anticipates that the Bank will continue
to remain a QTL.
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<PAGE> 34
Dividend Regulations
The OTS has adopted regulations limiting the amount of capital
distributions a savings association may make. The regulation divides savings
associations into three tiers; those which meet all of the fully phased-in
capital requirements of the OTS both before and after the proposed distribution
(Tier 1 Associations), those which meet all of the current capital requirements
both before and after the proposed distribution (Tier 2 Associations), and those
which fail to meet one or more of the current capital requirements (Tier 3
Associations). A Tier 1 Association may make capital distributions in an amount
equal to the greater of (i) 100% of its net income for the current calendar year
to the date of capital distribution, plus the amount that would reduce by
one-half its "surplus capital ratio" (the amount by which the association's
total capital-to-risk-weighted assets ratio exceeds its fully phased-in
requirement of 8%) at the beginning of the current calendar year (i.e. at the
end of the immediately prior calendar year), or (ii) 75% of its net income over
the most recent four-quarter period preceding the quarter in which the capital
distribution is to be made. A Tier 2 Association may make capital distributions
of up to 75% of its net income over the past four-quarter period. A Tier 3
Association may not make any capital distribution without the prior
authorization of the OTS. Although Tier 1 and Tier 2 Associations do not need to
obtain prior approval to make a capital distribution which complies with the
requirements of the OTS regulation, the savings association must file a notice
with the OTS at least 30 days in advance of the date on which the distribution
is to be made. The OTS has proposed that savings associations which are not
subsidiaries of holding companies and which are rated CAMEL 1 or CAMEL 2 may
make distributions without advance notice to the OTS. The OTS has the authority,
under the regulation, to preclude a savings association from making capital
distributions, notwithstanding its qualification to do so on the above tests, if
the OTS determines that the savings association is in need of more than normal
supervision, or if the proposed distribution will constitute an unsafe or
unsound practice given the condition of the savings association. In addition, a
Tier 1 Association deemed to be in need of more than normal supervision by the
OTS may be downgraded to a Tier 2 or Tier 3 Association as a result of such
determination. A savings association may also apply to the OTS for approval to
make a capital distribution even though it does not meet the above tests, or for
an amount which exceeds the amount permitted by the express terms of the
regulation.
In addition, another OTS regulation pertaining to holding companies
requires that the OTS be given a 30 day advance notice before a savings
association subsidiary pays a dividend to its holding company. The notice
described above can also constitute the notice for this purpose, if so
designated.
The Bank is a Tier 1 Association. As of the date hereof, under the
limitations of the OTS capital distributions regulation, the Bank may pay
dividends up to the greater of 100% of its net income since January 1, 1995 plus
50% of its surplus capital or 75% of its net income over the four-quarter period
ending December 31, 1994. However, the Bank is also subject to certain
limitations on the payment of dividends by the terms of the indenture for its
8.5% Debentures, which limitations are more severe than the OTS capital
distribution regulations. Under the most restrictive of those limitations, the
greatest capital distribution which the Bank could currently make is $4.8
million. See "Market for Registrant's Common Equity and Related Stockholder
Matters -- Dividends." Westcorp received dividends from the Bank during 1994 in
the aggregate amount of $24.6 million. The Bank anticipates making quarterly
dividend payments to Westcorp during 1995.
Community Reinvestment Act
The CRA requires financial institutions regulated by the federal financial
supervisory agencies to ascertain and help meet the credit needs of their
delineated communities, including low- and moderate-income neighborhoods within
those communities, consistent with safe and sound banking practices. The CRA was
amended by FIRREA. The FIRREA amendments require that the federal financial
supervisory agencies evaluate an institution's CRA performance based on a four
tiered descriptive rating system, and that these ratings and written evaluations
be made public. The four possible ratings are: (i) Outstanding record of meeting
community credit needs; (ii) Satisfactory record of meeting community credit
needs; (iii) Needs to improve record of meeting community credit needs; and (iv)
Substantial noncompliance in meeting community credit needs.
33
<PAGE> 35
Many factors play a role in assessing a financial institution's CRA
performance. The institution's regulator must consider its financial capacity
and size, legal impediments, local economic conditions and demographics,
including the competitive environment in which it operates. The evaluation does
not rely on absolute standards and the institutions are not required to perform
specific activities or to provide specific amounts or types of credit.
The Bank received a CRA audit in 1992, which was made public in 1993. The
Bank's rating was "outstanding." An institution in this group, the highest
possible under the CRA, has an outstanding record of ascertaining and helping to
meet the credit needs of its entire delineated community, including low- and
moderate-income neighborhoods, in a manner consistent with its resources and
capabilities.
Each year, the Bank prepares a CRA statement for public viewing. This
document contains the Bank's CRA strategic plan, CRA notice, ascertainment of
community credit needs, marketing and types of credit offered and extended,
community outreach activities, geographical distribution and record of opening
and closing offices, practices intended to discourage discrimination, community
development and a file of public comments.
The OTS, concurrently with the federal banking regulatory agencies, has
proposed to revise the CRA regulations. The proposed procedures are designed to
focus on performance rather than process, to promote consistency in assessments,
to permit more effective enforcement against institutions with poor performance,
and to reduce unnecessary compliance burden while stimulating improved
performance. Specifically, the proposed regulations replace the current
process-based assessment system with a new evaluation system that would rate
institutions based on actual performance in meeting community credit needs. The
new system would evaluate the degree to which an institution is providing (i)
loans, (ii) branches and other services, and (iii) investments to low- and
moderate-income areas. The proposed regulations also emphasize the importance of
an institution's CRA performance in the corporate application process, and seek
to make the regulations more enforceable. The Bank does not believe that its
performance, as might be measured by the regulations if they become adopted as
proposed, will differ materially from its performance under the existing CRA
regulations.
Classification of Assets
The OTS has adopted a classification system for problem assets of insured
institutions. Problem assets are classified as "special mention," "substandard,"
"doubtful" or "loss," depending on the presence of certain characteristics. An
asset will be considered "special mention" when assets do not currently expose a
savings association to a sufficient degree of risk to warrant classification but
possess credit deficiencies or potential weaknesses deserving management's close
attention; an asset is "substandard" if it is inadequately protected by the
current capital and paying capacity of the obligor or by the collateral pledged,
if any. "Substandard" assets exhibit a well-defined weakness or weaknesses,
including the "distinct possibility" that the institution will sustain "some
loss" if the deficiencies are not corrected or that liquidation would not be
timely even if there is little likelihood of loss. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses make
"collection or liquidation in full," on the basis of currently existing facts,
conditions and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Comparison of Results of Operations
- -- Provision for Loan and Real Estate Losses."
Insured institutions are required to classify their own assets and to
establish general valuation allowances (reserves) where appropriate. Assets
classified as substandard or doubtful may be reviewed by the OTS examiner and
valuation allowances may be required to be increased subject to review by the
OTS Regional Director. For the portion of assets classified as loss, the OTS
permits 100% of the amount classified to be charged off or the establishment of
a specific valuation allowance.
The OTS has proposed that it revise its current asset classification scheme
with regard to special mention assets. The OTS is proposing to remove the
specific reference to special mention assets from its asset
34
<PAGE> 36
classification regulation, and instead issue regulatory guidance on this topic
that will more closely align its treatment of special mention assets with the
Interagency Policy Statement on Credit Availability issued by the four federal
banking regulatory agencies and the OTS. Basically, the guidance will clarify
the supervisory treatment of special mention assets and emphasize that such
assets are not considered adversely classified assets. In addition, the OTS is
considering removing the specific description of assets classified as
"substandard," "doubtful" and "loss" from the regulatory text and providing such
descriptions in guidance, as is the practice of the federal banking regulatory
agencies. Westcorp does not anticipate that this proposal, when finalized, will
result in any increase in its classified assets. As of December 31, 1994 the
Bank had established allowances for loan and real estate losses of $43.0
million.
Insurance Operations
The insurance subsidiaries of the Bank are subject to regulation and
supervision in the jurisdictions in which they do business. The method and
extent of such regulation varies, but the insurance laws of most states
establish agencies with broad regulatory and supervisory powers. These powers
relate primarily to the establishment of solvency standards which must be met
and maintained, the licensing of insurers and their agents, the nature and
amount of investments, approval of policy forms and rates, and the form and
content of required financial statements. The Bank, through its insurance
subsidiaries, is also subject to various state laws and regulations covering
extraordinary dividends, transactions with insurance subsidiaries and other
matters. The Bank is in compliance with these state laws and regulations.
Consumer Finance Operations
WFS has offices in California, Texas, Oregon, Nevada, Arizona, New Mexico,
Idaho, and Washington. As such it is subject to audit and examination by the
OTS, the FDIC, and the applicable state agencies for the states in which it
operates. At December 31, 1994, and as of the date hereof, WFS is in compliance
with the licensing and operation laws and regulations applicable to each of its
offices in these states. The Bank does not guarantee nor is the Bank responsible
for the activities of WFS in any of these states.
Investment Powers
Pursuant to FDICIA, the OTS and the other federal financial institution
regulatory agencies promulgated final rules, which became effective March 19,
1993, pertaining to real estate lending standards. Those standards, entitled
Interagency Guidelines for Real Estate Lending Policies, require insured
institutions to adopt lending policies consistent with the guidelines, including
as to loan portfolio management considerations, underwriting standards and loan
administration. In particular, the regulation establishes supervisory
loan-to-value ("LTV") limits for real property secured loans. Each insured
institution is to set its own policy with respect to LTV, but those LTV limits
are not to exceed the LTV limits of the guidelines, except as specifically
permitted by the guidelines. Generally, the LTV limits are as follows: for raw
land, 65%; for land development, 75%; for construction of 1 to 4 family
residential housing, 85%, and 80% for other construction loans; and for improved
property, 85%. Loans secured by owner occupied 1 to 4 family residences are not
subject to a supervisory LTV limit, except that any such loan with a LTV ratio
of greater than 90% at origination requires either private mortgage insurance or
other readily marketable collateral. The Bank's LTV standards are consistent
with these supervisory limitations. In addition, the OTS and the other federal
banking agencies have adopted uniform real estate appraisal guidelines which
require the board of directors of financial institutions to adopt appraisal and
evaluation programs which will cover the selection of appraisers, monitoring
their activities, require needed independence from the real estate transaction
at issue, establish criteria for reports, formats and the use thereof.
Accounting Requirements
FIRREA requires the OTS to establish accounting standards to be applicable
to all savings associations for purposes of complying with regulations, except
to the extent otherwise specified in the capital standards. Such standards must
incorporate generally accepted accounting principles to the same degree as is
prescribed by the federal banking agencies for banks or may be more stringent
than such requirements. Such standards
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<PAGE> 37
must be fully implemented by January 1, 1994 and must be phased-in as provided
in federal regulations in effect on May 1, 1989.
Effective April 1, 1990, the OTS adopted a statement of policy which
provides guidance regarding the proper classification of, and accounting for,
securities held for investment, sale and trading. Securities held for
investment, sale or trading may be differentiated based upon an institution's
desire to earn an interest yield (held for investment), to realize a holding
gain from assets held for indefinite periods of time (held for sale), or to earn
a dealer's spread between the bid and asked prices (held for trading). Critical
to the proper classification of an accounting for securities as investments is
the intent and ability of an institution to hold the securities until maturity.
A positive intent to hold to maturity, not just a current lack of intent to
dispose, is necessary for securities acquired to be considered to be held for
investment purposes. Securities held for investment purposes may be accounted
for at amortized cost while securities held for sale are to be accounted for at
lower of cost or market and securities held for trading are to be accounted for
at market. The Bank believes that its investment activities have been and will
continue to be conducted in accordance with the requirements of OTS policies and
generally accepted accounting principles.
The Federal Financial Institutions Examination Council determined in August
of 1993 that all federal financial institution regulatory agencies must adopt
FAS 115, "Accounting for Certain Investments in Debt and Equity Securities," for
fiscal years commencing on or after January 1, 1994. Under FAS 115, savings
associations will be required to recognize unrealized gains and losses on
"available for sale" securities when measuring shareholders' equity. The OTS has
determined that FAS 115 will not be used as a component in core capital or as a
part of supplementary capital. Westcorp recognized a decrease in shareholders'
equity of approximately $6.0 million at December 31, 1994 as a result of FAS
115. For additional information see the Consolidated Financial Statements.
Annual Examinations
FDICIA significantly reduces regulatory discretion by mandating the
appropriate federal financial institution regulatory agency to conduct a full
scope, on-site examination of each insured depository institution every twelve
months. The Bank's last annual examination ended on December 15, 1994.
FDIC Back-up Enforcement Authority
The FDIC has the statutory authority under FDICIA to direct an insured
institution's principal regulator to take enforcement action, and to take that
action itself if the principal regulator fails to act timely, or in an emergency
situation.
Financial Reporting
FDICIA requires insured institutions to submit independently audited annual
reports to the FDIC and the appropriate agency. These publicly available reports
must include: (i) annual financial statements prepared in accordance with
generally accepted accounting principles and such other disclosure requirements
as required by the FDIC or the appropriate agency and (ii) a report, signed by
the chief executive officer and the chief financial officer or chief accounting
officer of the institution which contains statements, attested to by independent
auditors, about the adequacy of internal controls and compliance with laws and
regulations. Insured institutions such as the Bank are required to monitor these
activities through an independent audit committee.
FDICIA also directs the FDIC to develop with other appropriate agencies a
method for insured depository institutions to provide supplemental disclosure of
the estimated fair market value of assets and liabilities, to the extent
feasible and practicable, in any balance sheet, financial statement, report of
condition or any other report of any insured depository institution.
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<PAGE> 38
Standards for Safety and Soundness
FDICIA requires the federal banking regulatory agencies to prescribe, by
regulation, standards for all insured depository institutions and depository
institution holding companies relating to: (i) internal controls, information
systems and audit systems; (ii) loan documentation; (iii) audit underwriting;
(iv) interest rate risk exposure; (v) asset growth; and (vi) compensation fees
and benefits. The compensation standards would prohibit employment contracts,
compensation or benefit arrangements, stock option plans, fee arrangements or
other compensatory arrangements that would provide excessive compensation, fees
or benefits or could lead to material financial loss. In addition, the federal
banking regulatory agencies are required to prescribe by regulation standards
specifying: (i) maximum classified assets to capital ratios; (ii) minimum
earnings sufficient to absorb losses without impairing capital; and (iii) to the
extent feasible, a minimum ratio of market value to book value for publicly
traded shares of depository institutions and depository institution holding
companies.
The OTS, in conjunction with the federal banking regulatory agencies, has
proposed safety and soundness standards to meet the FDICIA requirements. In
general, the proposed standards identify emerging safety and soundness problems
and ensure that such action is taken to address those concerns before they pose
a risk to the deposit insurance fund. More specifically, the proposed rules
establish safety and soundness standards addressing (i) internal controls and
information systems, (ii) internal audit system, (iii) loan documentation, (iv)
credit underwriting, (v) interest rate exposure, (vi) asset growth, and (vii)
compensation, fees and benefits. In addition, the agencies have proposed
standards specifying (i) maximum ratio of classified assets to capital and (ii)
minimum earnings sufficient to absorb losses without impairing capital. The OTS
determined not to propose a minimum ratio of market value to book value for
publicly traded equity securities as such ratio would not be a feasible means to
achieve the safety and soundness objectives of Congress in enacting the relevant
provisions of FDICIA.
Generally, the standards proposed do not call for savings institutions to
meet specific numerical goals. The proposed rules require savings institutions
to take specific actions or adopt particular policies or practices designed to
reduce safety and soundness concerns. However, the proposed regulations do set a
maximum ratio of 1.0 for classified assets to total capital plus general
valuation reserves otherwise not includable in total capital. If adopted, the
Bank's ratio would have been 0.33 at December 31, 1994. In addition, the minimum
earnings requirement proposed is such earnings over the past four quarters
(whether positive or negative) which, if repeated over the next four quarters,
will not result in the savings association becoming capital deficient as to any
minimum capital requirement.
In the event the OTS determines that a savings association has failed to
satisfy the safety and soundness standards pursuant to the proposed rules, the
OTS may, upon requisite notice, require such association to submit a compliance
plan that sets forth the steps it will take and the time frame required to
correct the deficiency. If the association fails to comply with the OTS request,
the OTS may then issue an order, subject to appeal by the association, requiring
such association to correct a safety and soundness deficiency or to take or
refrain from other actions.
Subsequently, the RCDA has amended the requirements of FDICIA to now
specify only that the federal banking agencies set those standards relating to
asset quality, earnings and stock valuation as they determine to be appropriate.
RCDA permits the federal banking agencies to adopt guidelines or policy
statements in lieu of regulations. The federal banking agencies have not yet
announced what action they will take with respect to the previously proposed
regulations or the adoption of standards in the form of guidelines or policy
statements.
RTC Restructuring Act and RTCCA
The RTC's ability to serve as receiver for insolvent thrifts was extended
from August 9, 1992 to September 30, 1993 by the RTC Restructuring Act. The
RTCCA subsequently extended that period to a date between January 1, 1995 and
July 1, 1995, as determined by the Chairman of the Thrift Depositor Protection
Oversight Board. The Chairman has determined that the final date will be July 1,
1995. Furthermore the RTC Restructuring Act and the RTCCA restructure the RTC
and provide additional funding to carry out the purposes of the RTC.
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<PAGE> 39
Agreement with the Office of Thrift Supervision
On May 14, 1992, the Bank entered into the OTS Agreement at the request of
the OTS, based on the belief of the OTS that certain acts and practices of the
Bank required corrective action. Pursuant to the terms of the OTS Agreement the
Bank took certain corrective actions, including adding William J. Crawford and
Stanley E. Foster to its Board of Directors, reorganized its management
information systems department, upgraded its internal audit and control
functions and implemented a restructuring of its Internal Asset Review
Department. The OTS determined that the Bank had substantially complied with the
requirements of the OTS Agreement and on January 25, 1994 advised the Bank, in
writing, that the OTS Agreement was terminated.
EMPLOYEES
At December 31, 1994, Westcorp had 1,147 full-time and 17 part-time
employees. None of these employees is represented by a collective bargaining
unit or union and Westcorp and its subsidiaries believe they have good relations
with their respective personnel.
ITEM 2 -- PROPERTIES
At December 31, 1994, Westcorp owned 21 properties in California and leases
additional properties at various locations in several states.
The executive offices are located at 23 Pasteur Road, Irvine, California.
The remaining owned and leased properties are used as branch offices, finance
company offices, dealer centers, and mortgage banking offices. At December 31,
1994, the net book value of property and leasehold improvements was
approximately $57.5 million. Westcorp leases space at three locations from
companies controlled by a major shareholder. For further information see "Item
13 -- Certain Relationships and Related Transactions".
ITEM 3 -- LEGAL PROCEEDINGS
In 1994, WFS 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 Code sections involving
the placement of collateral protection insurance by the lender under the
contractual provisions of its automobile loans. The class has been certified and
WFS is vigorously defending. It is not yet possible to estimate potential
liability or the likelihood thereof.
Westcorp is also involved as a party to certain legal proceedings
incidental to its business. Westcorp believes that the outcome of such
proceedings will not have a material effect upon Westcorp's business or
financial condition.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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<PAGE> 40
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE BY QUARTER
The common stock of Westcorp has been publicly traded since 1986 and is
currently traded on the New York Stock Exchange ("NYSE"), identified by the
symbol, WES. The following table illustrates the high and low sale prices by
quarter in 1994 and 1993, as reported by NYSE or AMEX, as applicable, which
prices are believed to represent actual transactions:
<TABLE>
<CAPTION>
1994 1993
------------------ ------------------
HIGH LOW HIGH LOW
--------- ------- -------- -------
<S> <C> <C> <C> <C>
First Quarter.................................... $ 9 13/32 $8 7/32 $ 9 3/8 $7 1/8
Second Quarter................................... 11 3/4 8 5/8 9 3/4 7 3/4
Third Quarter.................................... 11 1/8 9 5/8 10 5/8 8 1/8
Fourth Quarter................................... 10 1/8 7 3/4 11 8 3/4
</TABLE>
There were approximately 1,500 shareholders of Westcorp common stock at
December 31, 1994. The number of shareholders was determined by the number of
record holders, including the number of individual participants, in security
position listings.
DIVIDENDS
Westcorp paid a $0.075 per share quarterly cash dividend and a 5% stock
dividend during 1994. Westcorp paid a $0.05 per share quarterly cash dividend
during 1993. On February 13, 1995, Westcorp declared a quarterly cash dividend
of $0.09 per share and a 5% stock dividend for shareholders of record as of
February 27, 1995. The 5% stock dividend would reduce net income per common
share to $0.77, $0.59 and $0.12 for the years ended December 31, 1994, 1993 and
1992, respectively.
Westcorp is not restricted by regulation or agreement in its ability to pay
dividends.
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<PAGE> 41
ITEM 6 -- SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL SUMMARY
Assets:
Loans:
Consumer(1)............. $ 430,708 $ 230,351 $ 354,201 $ 378,140 $ 818,645
Mortgage(2)............. 1,320,784 1,326,797 1,571,628 1,727,240 1,645,297
Mortgage-backed
securities(3)........... 470,669 94,567 107,757 189,182 182,760
Investments and time
deposits(4)............. 285,192 273,526 219,368 153,462 131,642
Cash and other assets...... 234,936 247,018 266,541 241,017 190,936
---------- ---------- ---------- ---------- ----------
Total assets............... $2,742,289 $2,172,259 $2,519,495 $2,689,041 $2,969,280
========= ========= ========= ========= =========
Liabilities:
Deposits................... $1,632,782 $1,357,058 $1,682,897 $1,814,938 $1,756,780
Public debt offerings(5)... 314,375 267,007 295,029 271,422 426,033
FHLB advances and other
borrowings.............. 335,128 130,311 216,234 297,283 617,189
Other liabilities.......... 247,692 212,768 164,637 145,057 28,340
---------- ---------- ---------- ---------- ----------
Total liabilities............ 2,529,977 1,967,144 2,358,797 2,528,700 2,828,342
Shareholders' equity......... 212,312 205,115 160,698 160,341 140,938
---------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity....... $2,742,289 $2,172,259 $2,519,495 $2,689,041 $2,969,280
========= ========= ========= ========= =========
OTHER SELECTED FINANCIAL DATA
Average assets............... $2,162,141 $2,279,393 $2,568,899 $2,843,993 $2,984,854
Return on average assets..... 0.87% 0.56% 0.09% 0.74% 0.39%
Average shareholders'
equity..................... $ 208,178 $ 182,999 $ 167,494 $ 150,375 $ 137,412
Return on average
shareholders' equity....... 9.04% 7.04% 1.35% 14.01% 8.50%
Equity-to-assets ratio....... 7.74 9.44 6.38 5.96 4.75
Originations:
Consumer loans............. $1,183,188 $ 829,181 $ 673,473 $ 604,069 $ 544,975
Mortgage loans............. 684,333 913,103 597,809 520,306 544,848
Interest rate spread......... 2.18% 2.48% 2.91% 3.17% 2.99%
Number of retail branch
offices.................... 26 26 27 26 24
</TABLE>
- ---------------
(1) Net of unearned discount, and including loans held for sale of $302 million
at December 31, 1994.
(2) Net of undisbursed loan proceeds, and including loans held for sale of $3.0
million at December 31, 1994.
(3) Includes mortgage-backed securities held to maturity of $317 million and
available for sale of $154 million at December 31, 1994.
(4) Includes investments available for sale of $115 million at December 31,
1994.
(5) Includes bonds outstanding issued by finance subsidiaries of the Bank,
subordinated debentures issued by the Bank which are included as part of
risk-based capital and commercial paper issued by the Bank.
40
<PAGE> 42
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income................... $143,639 $157,946 $212,354 $288,305 $329,926
Interest expense.................. 88,766 101,203 137,955 200,402 242,067
-------- -------- -------- -------- --------
Net interest income............. 54,873 56,743 74,399 87,903 87,859
Provision for loan losses......... 13,033 22,584 34,270 24,562 19,573
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses.... 41,840 34,159 40,129 63,341 68,286
Other income...................... 83,190 73,839 32,864 37,645 14,305
Other expenses.................... 92,391 83,625 69,354 65,315 62,838
-------- -------- -------- -------- --------
Income before income taxes and
extraordinary loss........... 32,639 24,373 3,639 35,671 19,753
Income taxes...................... 13,819 10,386 1,384 14,597 8,067
-------- -------- -------- -------- --------
Income before extraordinary
loss............................ 18,820 13,987 2,255 21,074 11,686
Extraordinary loss, net of
applicable income tax benefit of
$811(1)......................... (1,113)
-------- -------- -------- -------- --------
Net income........................ $ 18,820 $ 12,874 $ 2,255 $ 21,074 $ 11,686
======== ======== ======== ======== ========
Book value per share at December
31(2)........................... $ 9.17 $ 9.37 $ 9.14 $ 9.21 $ 8.12
Weighted average number of shares
and common share
equivalents(2).................. 23,157,535 20,831,468 18,568,674 18,371,191 18,250,766
Income before extraordinary
item............................ $ 0.81 $ 0.67 $ 0.12 $ 1.14 $ 0.64
Extraordinary loss due to
redemption of subordinated
debentures...................... (0.05)
-------- -------- -------- -------- --------
Net income per share(2)........... $ 0.81 $ 0.62 $ 0.12 $ 1.14 $ 0.64
======== ======== ======== ======== ========
Dividends......................... $ 0.30 $ 0.20 $ 0.19 $ 0.13 $ 0.12
Dividend Payout Ratio............. 37.0% 32.3% 158.3% 11.4% 18.8%
</TABLE>
- ---------------
(1) During the third quarter of 1993, the Bank redeemed its 11% Subordinated
Capital Debentures due 1999 at a loss. See Note M to the financial
statements.
(2) Gives effect to the issuance of 4.3 million shares of common stock in 1993
and 5% stock dividends in 1991 and 1994.
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSES OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and notes thereto.
OVERVIEW
Westcorp continued to focus on consumer and mortgage lending during 1994.
Westcorp originated (including loans purchased from dealers) record levels of
consumer loans in 1994 totaling $1.2 billion compared to $829 million in 1993.
The 42.7% increase in production is due to increased production within existing
offices, expansion into new markets and a strong automobile market in general.
Westcorp continues to expand its consumer operations and now operates in eight
states. Mortgage loan production during 1994 totaled $684 million compared to
$913 million during 1993. Decreased mortgage production was the result of
general increases in interest rates and sluggish real estate markets in
California, Westcorp's principal mortgage lending market.
During 1994, sales and securitizations of loans in the secondary market
totaled $1.4 billion compared to $1.6 billion in 1993. This included sales or
securitizations of $842 million of consumer loans compared to $778 million in
1993 and sales or securitizations of $542 million of mortgage loans compared to
$804 million in 1993. Loans serviced for the benefit of others increased 31% to
$2.9 billion at December 31, 1994 compared
41
<PAGE> 43
to $2.2 billion at December 31, 1993 and consisted of $1.2 billion of consumer
loans and $1.7 billion of mortgage loans. Secondary market activity is primarily
a function of origination levels and market conditions.
Asset quality improved at Westcorp during 1994 as nonperforming assets
decreased 42%. At December 31, 1994, nonperforming assets totaled $43.3 million
or 1.6% of total assets compared to $75 million or 3.5% of total assets at
December 31, 1993. The decrease is the result of ongoing dispositions of
nonperforming assets combined with improving asset quality in the remaining
portfolio. At December 31, 1994, loans past due 60 days or more as a percentage
of total loans in Westcorp's consumer and real estate loan portfolios declined
to 0.2% and 1.2%, respectively, compared to 0.4% and 1.7% at December 31, 1993.
Westcorp currently exceeds all regulatory capital requirements. At December
31, 1994, the Bank's regulatory capital ratios for tangible, core, and
risk-based capital were 6.6%, 6.6% and 12.2%, respectively, even while Westcorp
continued to employ over $150 million of capital raised during 1993 through a
public offering of shares of common stock and the issuance of subordinated
capital debentures. As a result, total assets increased to $2.7 billion at
December 31, 1994, compared to $2.2 billion at December 31, 1993, and Westcorp's
equity to assets ratio decreased to 7.7% compared to 9.4% a year earlier. During
1994, the OTS Agreement was also terminated as it was determined by the OTS that
the Bank had complied with its terms in all material respects.
RESULTS OF OPERATIONS
GENERAL
The primary sources of income for Westcorp are net interest income and
servicing income which are generated through the effective management of its
interest rate sensitive assets and liabilities and loan sales. Other significant
factors that affect Westcorp's income are asset quality, automobile lending,
mortgage banking, other miscellaneous income, other expenses and income taxes.
Westcorp's net income was $18.8 million for the year ended December 31,
1994, compared to $12.9 million for the year ended December 31, 1993, and $2.3
million for the year ended December 31, 1992. The increases in net income for
the years ended December 31, 1994 and 1993 compared to 1992 are attributable to
continued sales and securitizations in the secondary market, expanded consumer
lending operations and improved asset quality. These activities have resulted in
increased automobile servicing income, lower provisions for loan losses and
improved real estate operations, offset by lower net interest income during 1994
compared to both 1993 and 1992.
ASSET/LIABILITY MANAGEMENT
Asset/liability management is the process of measuring and controlling
interest rate risk through matching the maturity and repricing characteristics
of interest earning assets with those of interest bearing liabilities.
Westcorp's approach to asset/liability management includes originating
adjustable rate loans, securitizing loans with liabilities that have similar
repricing and maturity characteristics, matching fixed rate loans held in the
portfolio with advances from the FHLB and other financial instrument agreements.
Net interest income in 1994 was $54.9 million compared with $56.7 million in
1993 and $74.4 million in 1992. Net interest income has been affected over the
last two years by changes in interest rates and changes in average interest
earning assets and interest bearing liabilities.
Interest rates on Westcorp's interest earning assets, particularly its real
estate loan portfolio, have declined since 1991 corresponding with the direction
of overall market interest rates. The average yield on interest earning assets
decreased to 7.3% for the year ended December 31, 1994, from 7.8% and 9.0%, for
the years ended 1993 and 1992, respectively. Mortgage loans and mortgage-backed
securities comprise the majority of Westcorp's assets and are principally
adjustable rate products. Furthermore, these assets are primarily indexed to
COFI. COFI generally reflects overall market interest rate conditions, although
on a somewhat lagging basis. COFI has decreased from 6.2% in December 1991 to
4.4% in December 1992 to 3.9% in December 1993. It finally reached an all-time
low of 3.6% in March 1994 before finishing the year at 4.6%. As COFI decreased,
the yield on Westcorp's real estate loan portfolio, which represents the
majority of
42
<PAGE> 44
Westcorp's interest earning assets, also declined to 6.5% for the year ended
December 31, 1994, compared to 7.2% and 8.6% for the years ended December 31,
1993 and 1992, respectively. Consumer loan rates, which are less sensitive to
market conditions, were 13.1% for the year ended December 31, 1994 compared to
13.3% and 13.2% for the years ended December 31, 1993 and 1992, respectively.
Interest costs on Westcorp's interest bearing liabilities decreased to 5.1%
for the year ended December 31, 1994, compared with 5.3% and 6.1% for the years
ended December 31, 1993 and 1992, respectively. However, the rate of decline for
interest bearing liabilities has been less dramatic than that for interest
earning assets principally due to deposit repricing and the issuance of
subordinated debentures. The cost of savings deposits for the year ended
December 31, 1994, was 4.7% compared to 4.8% and 5.6% for the years ended
December 31, 1993 and 1992, respectively. During 1993, Westcorp issued $125
million of subordinated capital debentures with an effective fixed interest cost
(including the amortization of issue discounts and costs) of 8.8% which has had
the effect of keeping interest costs relatively higher in a declining rate
environment.
During 1994 and 1993, average interest earning assets were $2.0 billion
compared to $2.3 billion in 1992. Although average interest earning assets in
total did not change in 1994 compared to 1993, the mortgage loan portfolio
decreased $179 million. These decreases were attributable to loan sales,
prepayments and sluggish originations during the second half of 1994 as real
estate interest rates increased. Consequently, these assets were replaced by
mortgage-backed securities and other interest earning assets with comparatively
lower yields. The decrease in interest earning assets in 1993 compared to 1992
was primarily attributable to increased mortgage loan payoffs and
mortgage-backed securities reductions which occurred as borrowers took advantage
of low interest rates to refinance home mortgages. Westcorp elected not to
replace these loans with new portfolio loans, but to concentrate on originating
loans for sale.
Average interest bearing liabilities totaled $1.7 billion during 1994
compared to $1.9 billion in 1993 and $2.2 billion in 1992. These decreases are
due primarily to reducing the deposit base commensurate with the lower asset
base and the effect of utilizing the capital generated by Westcorp's common
stock offering. Average savings deposits, which represents over 80% of
Westcorp's liabilities, have decreased from $1.8 billion in 1992 and $1.6
billion in 1993 to $1.5 billion in 1994. Average interest bearing liabilities as
a percentage of average interest earning assets totaled 88.2% in 1994 compared
to 93.9% in 1993 and 96.7% in 1992.
On a limited basis, Westcorp also manages interest rate risk through
financial instrument agreements. Westcorp uses interest rate swaps, options,
caps and forward agreements as part of its hedging strategy to reduce the
sensitivity of certain assets to changes in interest rates. These instruments
are carried at, and included as part of, the basis of the underlying assets.
Westcorp's interest rate swaps consist of agreements to pay fixed-rate
interest and receive floating-rate interest at specified intervals based on an
agreed notional amount, a specified index and settled on a net basis. The cap
agreements have strike rates at 8.0% or 9.0% with expiration dates ranging from
1999 to 2001. The put option on Treasury futures expires in March 1995. Westcorp
minimizes the effect of changes in interest rates on loans held for sale by
entering into forward agreements that protect the hedged assets from changes in
interest rates.
The current credit exposure under these agreements is limited to the fair
value of the agreements with a positive fair value. Master netting agreements
are arranged or collateral is obtained through physical delivery of, or rights
to, securities to minimize Westcorp's exposure to credit losses in the event of
nonperformance by counter parties to financial instruments. Westcorp also
minimizes its counterpart risk by entering into agreements only with highly
rated counter parties.
The overall interest rate spread for Westcorp was 2.2% during 1994 compared
to 2.5% and 2.9% during 1993 and 1992, respectively. The net yield on average
interest earning assets was 2.8% for the years ended December 31, 1994 and 1993
and 3.1% for the year ended December 31, 1992. For additional information on
Westcorp's interest sensitive assets, see "Business -- Lending -- General".
43
<PAGE> 45
ASSET QUALITY
Nonperforming assets and loan delinquency are considered key measures of
asset quality at Westcorp. Asset quality, in turn, affects the determination of
the allowance for loan losses. In addition to nonperforming assets and loan
delinquency levels, valuation allowances for estimated losses on loans and real
estate are determined by taking into consideration general economic conditions
in the markets Westcorp serves, historical loss experience, individual loan
reviews and the level of assets relative to reserves.
Westcorp's portfolio of nonperforming assets has declined to $43.3 million
or 1.6% of total assets at December 31, 1994, which represents a decline of
42.3% over the $75.0 million or 3.5% of total assets reported at December 31,
1993. See "Business -- Nonperforming Assets". This decrease is primarily
attributable to a well defined process of nonperforming asset disposition and
improving overall asset quality. During 1992 and 1993, the national economy was
adversely affected by negative or low rates of economic growth and high
unemployment. The effect in California, Westcorp's predominant real estate
market, was especially severe. During 1994, real estate markets have stabilized,
although weaknesses still exist in large sectors of the market.
The decrease in nonperforming assets has been accompanied by improved
delinquency as well, which tends to be a better leading indicator of new
weaknesses in asset quality. Mortgage loans past due 60 days or more at December
31, 1994, totaled $15.9 million or 1.2% of total real estate loans compared to
$23.0 million or 1.7% at December 31, 1993. See "Business -- Real Estate Loan
Quality". The decrease has been due, in part, to the migration of delinquent,
nonaccrual loans to foreclosure without an accompanying migration of current
loans to a delinquent or nonaccrual status. Consumer loans past due 60 days or
more totaled $0.8 million and $0.9 million at December 31, 1994 and 1993,
representing 0.2% and 0.4% of total consumer loans at the respective dates. See
"Business -- Consumer Loan Quality".
The allowance for loan losses increased to $41.3 million at December 31,
1994 compared to $39.7 million at December 31, 1993 primarily due to increased
loans outstanding. The allowance for loan losses is reduced by net chargeoffs
and increased by the provision for loan losses. For the year ended December 31,
1994, the provision for loan losses totaled $13.0 million compared to $22.6
million and $34.3 million for the years ended December 31, 1993 and 1992,
respectively. Net chargeoffs for the years ended December 31, 1994, 1993 and
1992 were $11.4 million, $23.6 million and $27.5 million, respectively. See
"Business -- Allowance for Loan Losses". The decreases in provisions for loan
losses for the last two years are the result of lower net chargeoffs. Westcorp
believes that the allowance for loan losses is currently adequate to absorb
potential losses in the portfolio.
44
<PAGE> 46
The allowance for real estate losses totaled $1.7 million at December 31,
1994, compared to $3.5 million at December 31, 1993. The allowance for real
estate losses is charged with writedowns of foreclosed assets for changes in
estimated fair value occurring subsequent to foreclosure. At the time of
foreclosure, individual properties are written down to estimated fair value and
the allowance for loan losses is charged. Management believes that the allowance
for real estate losses is currently adequate to absorb potential losses in the
foreclosed portfolio. The following table presents summarized data relative to
the allowances for loan and real estate losses.
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------------
1994 1993
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total loans......................................... $1,751,492 $1,557,148
Allowance for loan losses........................... 41,323 39,677
Allowance for real estate losses.................... 1,684 3,508
Loans past due 60 days or more...................... 16,666 23,886
Nonperforming loans................................. 17,667 31,966
Nonperforming assets(1)............................. 43,278 74,972
Allowance for loan losses as a percent of:
Total loans (2)................................... 2.4% 2.6%
Loans past due 60 days or more.................... 247.9 166.1
Nonperforming loans............................... 233.9 124.1
Total allowance as a percent of nonperforming
assets............................................ 99.4 57.6
Nonperforming loans as a percent of total loans..... 1.0 2.1
Nonperforming assets as a percent of total assets... 1.6 3.5
</TABLE>
- ---------------
(1) Non performing loans, insubstance foreclosures (including real estate
investments classified as insubstance foreclosures) and real estate owned.
(2) Loans, net of unearned discounts and undisbursed loan proceeds.
AUTOMOBILE LENDING
Westcorp originates and sells automobile loans with servicing rights
retained in the secondary market. During 1994, Westcorp originated $1.2 billion
of consumer loans compared to $829 million in 1993. Income from automobile
lending includes gains and losses from the sale of loans, loan servicing income
net of amortization of capitalized servicing, and other related income such as
late charges. For the year ended December 31, 1994, automobile lending generated
income of $70.2 million compared to $56.4 million and $35.3 million for the
years ended December 31, 1993 and 1992, respectively. Automobile lending is
summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net gains on sale of automobile loans......... $ 1,321 $ 9,685 $ 6,079
Loan servicing income......................... 55,182 36,778 20,618
Other......................................... 13,664 9,888 8,587
------- ------- -------
$70,167 $56,351 $35,284
======= ======= =======
</TABLE>
Gains on the sale of automobile loans totaled $1.3 million for the year
ended December 31, 1994, compared to $9.7 million and $6.1 million for 1993 and
1992, respectively. Gains on loans sold are primarily a function of loan rates,
market pricing and interest rates. The relatively lower gains on sales during
1994 resulted primarily from narrower interest margins as loan rates decreased
and market interest rates rose during 1994. Automobile loans sold during 1994
totaled $842 million compared to $778 million during 1993. Automobile loans held
for sale at December 31, 1994, totaled $302 million compared to $102 million at
December 31, 1993. In January 1995, Westcorp securitized an additional $190
million of loans.
45
<PAGE> 47
Net loan servicing income increased to $55.2 million for the year ended
December 31, 1994, compared to $36.8 million and $20.6 million for 1993 and
1992, respectively. The increase is the result of a larger portfolio of serviced
loans and wider interest spreads. In the aggregate, Westcorp serviced automobile
loans owned and those sold and serviced for the benefit of others, of $1.6
billion at December 31, 1994, $1.3 billion at December 31, 1993, and $1.1
billion at December 31, 1992.
MORTGAGE BANKING
Westcorp originates first trust deed loans secured by single family
residences for sale in the secondary market. During 1994, Westcorp originated
$684 million of mortgage loans compared to $913 million in 1993. Loan production
in 1994 was adversely impacted by rising mortgage interest rates and the
lingering effects of a recession after lower interest rates created a heavy
demand for refinancings in 1993. Income from mortgage banking includes gains and
losses on the sale of loans, loan servicing income net of amortization of
capitalized servicing, and other income which primarily consists of late
charges. As shown in the following table, total mortgage banking income was $2.1
million compared to $13.7 million and $9.8 million, for the years ended December
31, 1994, 1993 and 1992, respectively.
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net gains (losses) from sale of mortgage
loans........................................ $(2,525) $ 8,960 $5,707
Loan servicing income.......................... 3,751 3,059 2,214
Other.......................................... 902 1,668 1,914
------- ------- ------
$ 2,128 $13,687 $9,835
======= ======= ======
</TABLE>
Losses on sales of mortgage loans for 1994 totaled $2.5 million compared to
gains of $9.0 million and $5.7 million for the years ended December 31, 1993 and
1992, respectively. Gains and losses on mortgage loans are directly related to
the overall interest rate environment. During 1994, interest rates have
increased for mortgage loans in contrast to the declining interest rate
environment during 1993. This change in the interest rate environment has
adversely affected the pricing of mortgage loans. Mortgage loans sold during
1994 totaled $542 million compared to $804 million and $386 million for 1993 and
1992, respectively. As a result of the rising rate environment and the
corresponding reduction in loan originations, mortgage loans held for sale
decreased from $199 million at December 31, 1993, to $3.0 million at December
31, 1994.
Net loan servicing income totaled $3.8 million, $3.1 million and $2.2
million for the years ended December 31, 1994, 1993 and 1992, respectively. The
increasing servicing income is principally the result of a larger servicing
portfolio. At December 31, 1994, Westcorp serviced, including loans owned and
those sold and serviced for the benefit of others, mortgage loans of $3.0
billion compared to $2.5 billion and $2.3 billion at December 31, 1993 and 1992,
respectively.
OTHER INCOME
Other income includes primarily insurance income and real estate
operations. Insurance income, which totaled $6.2 million, $7.1 million and $5.3
million for the years ended December 31, 1994, 1993 and 1992, includes premiums
and commissions earned on insurance and insurance-related products, including
credit life, collateral protection, annuities and mutual funds.
Real estate operations includes the costs of managing and disposing of
foreclosed real estate as well as the gains and losses realized upon
disposition. In addition, real estate operations includes the gains and losses
relative to the operation of joint ventures. Total real estate operations income
for 1994 was $4.5 million
compared to net losses of $5.9 million and $19.3 million for 1993 and 1992,
respectively. The income generated in 1994 is primarily the result of sales of
foreclosed assets at prices in excess of their carrying values.
Westcorp's joint venture activities were substantially reduced during 1994
compared to 1993 and 1992 thereby reducing the losses from joint venture
operations and dispositions. Net losses (before elimination of intercompany
expenses) from joint venture operations were $0.2 million in 1994 compared to
$2.0 million and
46
<PAGE> 48
$1.5 million in 1993 and 1992, respectively. At December 31, 1994, Westcorp did
not have investments in joint ventures compared to $9.2 million at December 31,
1993.
OTHER EXPENSES
Other expenses, which consist of salaries and employee benefits, occupancy,
insurance and other miscellaneous expenses increased to $92.4 million in 1994
from $83.6 million in 1993 and $69.4 million in 1992. Other miscellaneous
expenses include marketing, telephone, supplies and legal and professional fees.
The increases in expenses is related to increased loan servicing portfolios and
the cost of expansion into other states. The ratio of other expenses to average
serviced assets was 2.0% in 1994 compared to 2.1% in 1993 and 1.8% in 1992.
INCOME TAXES
Westcorp's effective tax rate was 42% for the year ended December 31, 1994,
compared to 43% and 38% for the years ended December 31, 1993 and 1992,
respectively.
CAPITAL RESOURCES AND LIQUIDITY
Westcorp and its subsidiaries have diversified sources of funds generated
through its operations. Primary sources of funds include deposits, loan
principal and interest payments received, sales of real estate loans and
automobile loans, sales of and payments on mortgage-backed securities, and the
maturity or sale of investment securities. 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.
Other sources of funds include a commercial paper facility totaling $400
million, dollar reverse repurchase agreements, reverse repurchase agreements and
FHLB advances. At December 31, 1994, Westcorp had $211 million of commercial
paper outstanding with approximately $189 million still available from this
source. FHLB advances outstanding at December 31, 1994, totaled $89 million.
Westcorp's unused line of credit at December 31, 1994, totaled approximately
$223 million. Dollar reverse repurchase agreements outstanding at December 31,
1994, totaled $246 million and currently represent an inexpensive source of
short term liquidity.
Westcorp uses its funds to meet its business needs, which include funding
maturing certificates of deposit and savings withdrawals, repaying borrowings,
funding loan and investment commitments, meeting operating expenses, and
maintaining minimum regulatory liquidity and capital levels. OTS regulations
require the Bank, as a savings association, to maintain a specified level of
liquid assets such as cash, short term U.S. government and other qualifying
securities. Such liquid assets must not be less than 5.0% of the Bank's average
daily balance of net withdrawable deposit accounts and borrowings payable in one
year or less, with short term liquid assets (which generally have a term of less
than one year) consisting of not less than 1.0% of that average daily balance
amount. For the years ended December 31, 1994, 1993 and 1992, such ratios were
13.4%, 10.3% and 5.7%, respectively.
EFFECT OF INFLATION AND CHANGING PRICES
Unlike many industrial companies, substantially all of the assets and
liabilities of Westcorp are monetary in nature. As a result, interest rates have
a more significant effect on Westcorp's performance than the general level of
inflation. See "Asset/Liability Management".
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Westcorp's consolidated financial statements begin on page F-2 of this
report.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
47
<PAGE> 49
PART III
Certain information required by Part III is omitted from this report, in
that Westcorp will file a definitive proxy statement (the "Proxy Statement")
within 120 days after the end of its fiscal year pursuant to Regulation 14A of
the Securities Exchange Act of 1934 for its Annual Meeting of Stockholders to be
held May 23, 1995 and the information included therein is incorporated herein by
reference.
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors appears under the caption "Election of
Directors" in the Proxy Statement and is incorporated herein by reference.
Information regarding executive officers appears under the caption "Executive
Officers Who Are Not Directors" in the Proxy Statement and is incorporated
herein by reference.
ITEM 11 -- EXECUTIVE COMPENSATION
Information regarding executive compensation appears under the caption
"Executive Compensation Summary" in the Proxy Statement and is incorporated
herein by reference.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management appears under the caption "Security Ownership of Management and
Certain Stockholders" in the Proxy Statement and is incorporated herein by
reference.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
appears under the caption "Certain Transactions Between Management and Westcorp
or its Subsidiaries" in the Proxy Statement and is incorporated herein by
reference.
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS
The following consolidated financial statements and report of
independent auditors of Westcorp and subsidiaries are included in
this Report commencing on page F-2.
Report of Independent Auditors
Consolidated Statements of Financial Condition -- December 31, 1994
and 1993.
Consolidated Statements of Income -- Year ended December 31, 1994,
1993, and 1992.
Consolidated Statements of Changes in Shareholders' Equity -- Year
ended December 31, 1994, 1993, and 1992.
Consolidated Statements of Cash Flows -- Year ended December 31,
1994, 1993, and 1992.
Notes to Consolidated Financial Statements -- December 31, 1994.
(2) FINANCIAL STATEMENT SCHEDULES
Schedules to the consolidated financial statements are omitted
because the required information is inapplicable or the information
is presented in Westcorp's consolidated financial statements or
related notes.
48
<PAGE> 50
(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ -------
<C> <S>
3.1 Certificate of Incorporation*
3.2 Bylaws*
10.1 Westcorp Incentive Stock Option Plan**
10.2 Westcorp Employee Stock Ownership and Salary Savings Plan*
10.3 Westcorp 1991 Stock Option Plan***
11.1 Statement Re Computation of Earnings Per Share
22.1 Subsidiaries of Westcorp
23.1 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
- ---------------
* Exhibits previously filed with Westcorp Registration Statement on Form S-4
(File No. 33-34286), filed April 11, 1990, incorporated herein by reference
under Exhibit Number indicated.
** Exhibit previously filed with Westcorp Registration Statement on Form S-1
(File No. 33-4295), filed May 2, 1986, incorporated herein by reference
under Exhibit Number indicated.
*** Exhibit previously filed with Westcorp Registration Statement on Form S-8
(File No. 33-43898), filed December 11, 1991, incorporated herein by
reference under the Exhibit Number indicated.
(b) REPORT ON FORM 8-K
A report on Form 8-K was filed December 28, 1994 announcing that Joy
Schaefer was elected Senior Executive Vice President and Chief Operating
Officer of the Bank. Additionally, Lee Whatcott was promoted to Senior
Vice President and Chief Financial Officer and Keith Palmer was promoted
to Treasurer of the Bank.
49
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By JOY SCHAEFER
-------------------------------
Joy Schaefer
Vice President,
Chief Operating Officer
Dated: March 8, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following on behalf of the registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------ ----- -----------
<S> <C> <C>
ERNEST S. RADY Chairman of the Board, March 8, 1995
------------------------------- President and Chief
Ernest S. Rady Executive Officer
ROBERT W. JENKINS Vice Chairman, Director March 8, 1995
-------------------------------
Robert W. Jenkins
JOY SCHAEFER Vice President, March 8, 1995
------------------------------- Chief Operating Officer
Joy Schaefer
ALAN L. MILLIGAN Director March 8, 1995
-------------------------------
Alan L. Milligan
STANLEY E. FOSTER Director March 8, 1995
-------------------------------
Stanley E. Foster
WILLIAM J. CRAWFORD Director March 8, 1995
------------------------------
William J. Crawford
JUDITH M. BARDWICK Director March 8, 1995
------------------------------
Judith M. Bardwick
LEE A. WHATCOTT Assistant Vice President, March 8, 1995
------------------------------ (Principal Financial and
Lee A. Whatcott Accounting Officer), Chief
Financial Officer
</TABLE>
50
<PAGE> 52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
WESTCORP
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT AUDITORS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT AUDITORS........................................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition at The Year Ended December 31, 1994 and
1993................................................................................ F-3
Consolidated Statements of Income for The Year Ended December 31, 1994, 1993 and
1992................................................................................ F-4
Consolidated Statements of Changes in Shareholders' Equity for The Year Ended December
31, 1994, 1993 and 1992............................................................. F-5
Consolidated Statements of Cash Flows for The Year Ended December 31, 1994, 1993 and
1992................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 53
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Westcorp
We have audited the consolidated financial statements of Westcorp and
Subsidiaries listed in the accompanying Index to Financial Statements (Item
14(a)). These financial statements are the responsibility of Westcorp's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements listed in the accompanying Index
to Financial Statements (Item 14(a)) present fairly, in all material respects,
the consolidated financial position of Westcorp and Subsidiaries at December 31,
1994 and 1993, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
January 11, 1995
F-2
<PAGE> 54
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1994 1993
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
Cash................................................................ $ 20,339 $ 24,599
Interest bearing deposits with other financial institutions......... 563 796
Other short term investments........................................ 145,391 137,162
Investment securities available for sale (fair value: 1994,
$114,764;
1993, $118,449)................................................... 114,764 118,002
Mortgage-backed securities held to maturity (fair value: 1994,
$305,466)......................................................... 316,511
Mortgage-backed securities available for sale (fair value: 1994,
$154,158; 1993, $95,835).......................................... 154,158 94,567
Loans receivable, net of allowance for loan losses (1994, $41,323;
1993, $39,677).................................................... 1,411,052 1,220,250
Loans held for sale................................................. 304,506 300,731
Premises and equipment.............................................. 66,465 67,516
Real estate owned, net.............................................. 23,927 43,970
Accrued interest receivable......................................... 13,309 11,604
Excess of purchase cost over net assets acquired.................... 1,099 1,184
Federal Home Loan Bank stock........................................ 24,474 17,566
Other assets........................................................ 145,731 134,312
---------- ----------
$2,742,289 $2,172,259
========== ==========
LIABILITIES
Savings deposits.................................................... $1,632,782 $1,357,058
Securities sold under agreements to repurchase...................... 246,074
Short-term borrowings............................................... 210,524 124,511
Federal Home Loan Bank advances..................................... 89,000 126,000
Other borrowings.................................................... 54 26,385
Amounts held on behalf of trustee................................... 216,204 182,905
Unearned insurance premiums and insurance reserves.................. 5,096 5,973
Other liabilities................................................... 26,392 23,890
---------- ----------
2,426,126 1,846,722
SUBORDINATED DEBENTURES............................................. 103,851 120,422
SHAREHOLDERS' EQUITY
Common stock, par value $1.00 per share; authorized 45,000,000
shares; issued and outstanding 23,145,640 shares in 1994 and
21,894,805 shares
in 1993........................................................... 23,146 21,895
Paid-in capital..................................................... 102,376 92,393
Retained earnings................................................... 92,788 90,827
Unrealized loss on securities available for sale, net of tax........ (5,998)
---------- ----------
212,312 205,115
---------- ----------
$2,742,289 $2,172,259
========== ==========
</TABLE>
F-3
<PAGE> 55
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1994 1993 1992
--------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Interest income:
Loans, including fees................................ $ 119,649 $ 142,640 $ 192,023
Investment securities................................ 5,768 6,328 3,947
Mortgage-backed securities........................... 13,879 5,788 12,134
Other................................................ 4,343 3,190 4,250
---------- ---------- ----------
TOTAL INTEREST INCOME.................................. 143,639 157,946 212,354
Interest expense:
Savings deposits..................................... 68,295 76,316 99,103
Securities sold under agreements to repurchase....... 1,868 60
Federal Home Loan Bank advances and other
borrowings........................................ 18,603 24,827 38,852
---------- ---------- ----------
TOTAL INTEREST EXPENSE................................. 88,766 101,203 137,955
---------- ---------- ----------
NET INTEREST INCOME.................................... 54,873 56,743 74,399
Provision for loan losses.............................. 13,033 22,584 34,270
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.... 41,840 34,159 40,129
Other income:
Automobile lending................................... 70,167 56,351 35,284
Mortgage banking..................................... 2,128 13,687 9,835
Investment and mortgage-backed securities gains...... 336 2,503 1,493
Insurance income..................................... 6,215 7,062 5,262
Real estate operations............................... 4,497 (5,881) (19,257)
Rental operations.................................... (607) (487) (112)
Miscellaneous........................................ 454 604 359
---------- ---------- ----------
TOTAL OTHER INCOME..................................... 83,190 73,839 32,864
Other expenses:
Salaries and employee benefits....................... 51,116 44,464 35,959
Occupancy............................................ 8,527 7,707 8,100
Insurance............................................ 5,033 7,050 6,019
Miscellaneous........................................ 27,715 24,404 19,276
---------- ---------- ----------
TOTAL OTHER EXPENSES................................... 92,391 83,625 69,354
---------- ---------- ----------
INCOME BEFORE INCOME TAXES............................. 32,639 24,373 3,639
Income taxes........................................... 13,819 10,386 1,384
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM....................... 18,820 13,987 2,255
Extraordinary loss from the redemption of subordinated
debentures, net of applicable income tax benefit of
$811................................................. (1,113)
---------- ---------- ----------
NET INCOME............................................. $ 18,820 $ 12,874 $ 2,255
========== ========== ==========
Net income per common share and common share
equivalent:
Before extraordinary loss............................ $ 0.81 $ 0.67 $ 0.12
Extraordinary loss due to the redemption of
subordinated debentures........................... (0.05)
---------- ---------- ----------
NET INCOME PER COMMON SHARE AND COMMON SHARE
EQUIVALENT........................................... $ 0.81 $ 0.62 $ 0.12
========== ========== ==========
Weighted average number of shares and common share
equivalents.......................................... 23,157,535 20,831,468 18,568,674
========== ========== ==========
</TABLE>
F-4
<PAGE> 56
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON
SECURITIES
AVAILABLE
PAID-IN RETAINED FOR SALE,
SHARES PAR VALUE CAPITAL EARNINGS NET OF TAX TOTAL
---------- --------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNT)
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1992........... 17,405,200 $17,405 $ 59,962 $ 82,973 $160,340
Stock options exercised......... 118,323 118 534 652
Stock issued.................... 60,997 62 716 778
Cash dividends.................. (3,327) (3,327)
Net income...................... 2,255 2,255
---------- --------- -------- -------- ---------- --------
Balance December 31, 1992......... 17,584,520 17,585 61,212 81,901 160,698
Stock options exercised......... 26,435 26 180 206
Stock issued.................... 4,283,850 4,284 31,001 35,285
Cash dividends.................. (3,948) (3,948)
Net income...................... 12,874 12,874
---------- --------- -------- -------- ---------- --------
Balance December 31, 1993......... 21,894,805 21,895 92,393 90,827 205,115
Adjustment to beginning balance
for change in accounting
method, net of tax........... $ 995 995
Stock options exercised......... 153,292 153 1,066 1,219
Stock dividend.................. 1,097,543 1,098 8,917 (10,015)
Cash dividends.................. (6,844) (6,844)
Net income...................... 18,820 18,820
Change in unrealized (loss) on
securities available for
sale, net of tax............. (6,993) (6,993)
---------- ------- -------- -------- -------- --------
Balance December 31, 1994......... 23,145,640 $23,146 $102,376 $ 92,788 $ (5,998) $212,312
========== ======= ======== ======== ======== ========
</TABLE>
F-5
<PAGE> 57
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1994 1993 1992
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................................ $ 18,820 $ 12,874 $ 2,255
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for losses................................................ 11,327 16,095 51,965
Depreciation and amortization....................................... 7,119 6,974 6,984
Amortization of deferred fees....................................... 688 (2,089) (3,744)
Amortization of issuance costs...................................... 562 378 590
(Increase) decrease in interest receivable.......................... (1,705) 2,306 3,177
(Gain) loss on nonoperating activities.............................. (6,179) 1,005 (12,945)
Increase (decrease) in interest payable............................. 1,004 3,006 (2,232)
(Decrease) increase in unearned insurance........................... (877) 269 613
Deferred income tax expense (benefit)............................... 7,837 5,790 (12,027)
Extraordinary loss, net of taxes...................................... 1,113
Other, net............................................................ 4,585 (13,448) (13,190)
Net change in loans held for sale..................................... (4,978) (40,144) (230,157)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................... 38,203 (5,871) (208,711)
INVESTING ACTIVITIES
Purchase of investment securities available for sale.................. (24,508) (93,882) (83,510)
Proceeds from sales of investment securities available for sale....... 65,376 29,295
Proceeds from maturities of investment securities available for
sale................................................................ 20,000 28,906 4,147
Purchase of mortgage-backed securities available for sale............. (196,485) (7,052) (6,080)
Proceeds from sale of mortgage-backed securities available for sale... 119,117 4,662 47,329
Purchase of mortgage-backed securities held to maturity............... (203,992)
Payments received on mortgage-backed securities....................... 9,907 15,470 43,647
Net change in loans................................................... (289,353) 311,489 338,741
Purchase of loans..................................................... (45,373) (210) (2,441)
Additions to premises and equipment................................... (5,984) (4,153) (6,656)
Disposition of real estate owned...................................... 51,694 112,506 22,973
Purchases of FHLB stock............................................... (9,440) (494) (1,787)
Proceeds from sales of FHLB stock..................................... 2,532 3,602 2,287
Net increase in trust receivable...................................... (17,819) (11,964) (3,172)
Increase in trustee accounts.......................................... 33,299 39,456 22,014
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES................... (556,405) 463,712 406,787
FINANCING ACTIVITIES
Increase (decrease) in deposits, net.................................. 275,724 (325,839) (132,041)
Increase in securities sold under agreements to repurchase, net....... 246,074
Decrease in FHLB advances, net........................................ (37,000) (58,500) (78,500)
Increase (decrease) in short-term borrowings, net..................... 86,013 (86,181) 112,801
Repayment of other borrowings......................................... (26,331) (45,975) (83,691)
Proceeds from issuance of subordinated debentures..................... 120,524
Retirement of subordinated debentures................................. (16,918) (44,858) (8,230)
Proceeds from sale of common stock.................................... 1,220 35,490 1,430
Cash dividends........................................................ (6,844) (3,948) (3,327)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................... 521,938 (409,287) (191,558)
--------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS................................. 3,736 48,554 6,518
Cash and equivalents at beginning of period........................... 162,557 114,003 107,485
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................ $ 166,293 $ 162,557 $ 114,003
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest.............................................................. $ 87,761 $ 98,196 $ 140,186
Income taxes.......................................................... 10,100 8,814 27,504
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Acquisition of real estate acquired through foreclosure............... $ 39,569 $ 97,965 $ 64,704
Securitization of loans............................................... 108,033 1,656
</TABLE>
F-6
<PAGE> 58
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying consolidated financial statements
include the accounts of Westcorp ("Westcorp"), its wholly-owned subsidiary,
Western Financial Savings Bank, F.S.B. ("the Bank") and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated upon
consolidation. Certain prior year amounts have been reclassified to conform with
the current year's presentation.
Cash and Cash Equivalents: Cash and cash equivalents include cash,
interest-bearing deposits with other financial institutions and other short-term
investments and have no material restrictions as to withdrawal or usage.
Investment Securities and Mortgage Backed Securities Available for
Sale: Westcorp adopted Statement of Financial Accounting Standards No. 115
("SFAS 115") in 1994. Accordingly, investments and mortgage-backed securities
intended to be invested for an indefinite period of time but may be sold in
response to events reasonably expected in the foreseeable future are classified
as available for sale and carried at fair value. Unrealized holding gains and
losses on investments are recorded as a separate component of shareholders'
equity, net of income taxes. Any decline in the fair value of the investments
which is deemed to be other than temporary is charged against current earnings.
Westcorp enters into various off-balance sheet transactions, primarily
interest-rate swap and cap agreements to manage interest rate risk exposure on
its available for sale portfolios. These financial instruments are also recorded
at fair value and are included in the basis of the designated available for sale
securities. The interest rate differential to be paid or received is accrued and
included as part of interest income, thereby adjusting the overall yield on
securities for which management is attempting to reduce its exposure to interest
rate risk.
Mortgage-Backed Securities Held to Maturity: During 1994, Westcorp
purchased certain mortgage-backed securities in which management has both the
positive intent and the ability to hold until maturity. Accordingly, these
securities are carried at their amortized cost. Unrealized holding gains and
losses are not reported in the financial statements until realized or until a
decline in fair value below cost is deemed to be other than temporary.
Westcorp also enters into various off-balance sheet transactions, primarily
cap agreements, to manage interest rate risk exposure on its held to maturity
portfolio. These financial instruments are recorded at cost and are amortized to
interest income over the life of the agreement. The interest rate differential
to be received is accrued and included as part of interest income, thereby
adjusting the overall yield on securities for which management is attempting to
reduce its exposure to interest rate risk.
Loans Held for Sale: Loans held for sale are stated at the lower of
aggregate amortized cost or market. The carrying amount of the specific loan
pools sold is used to compute gains or losses. Market value is based on
prevailing market quotes for real estate loans and discounted cash flow
calculations for consumer loans.
Westcorp enters into forward agreements to hedge the value of its loans
held for sale. Gains or losses on these forward agreements are deferred and
included in the basis of the loans held for sale.
Interest Income and Fee Income: Interest income on real estate and some
consumer loans is earned using the effective yield method and classified on the
balance sheets as interest receivable to the extent not collected. Certain
retail installment sales contracts use the sum of the months digits method,
which approximates the interest method.
F-7
<PAGE> 59
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
Westcorp defers loan origination and commitment fees and certain loan
origination costs. The net amount is amortized as an adjustment to the related
loan's yield, over the contractual life of the related loans. Commitment fees
based on a percentage of a customer's unused line of credit are recognized over
the commitment period. Fees for other services are recorded as income when
earned.
Allowance for Loan Losses: The allowance for loan losses is maintained at a
level believed adequate by management to absorb potential losses in the loan
portfolios. Management's determination of the adequacy of the allowance is based
on an evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio, and other
relevant factors. The allowance is increased by provisions for loan losses
charged against income.
Sales of Receivables: Certain mortgage and consumer receivables are
originated and sold to investors with servicing rights retained by Westcorp.
Gains and losses on sales of loans are determined by the difference between
sales proceeds and the cost of the loans adjusted for the present value of the
difference, if any, between the estimated future servicing revenues and normal
servicing revenues for those loans where servicing is retained by Westcorp.
These excess servicing rights are capitalized and amortized over the expected
repayment patterns of the underlying loans.
Westcorp also purchases mortgage servicing rights, referred to as purchased
mortgage servicing rights ("PMSR"). PMSRs are amortized using the income
forecast method.
Westcorp periodically evaluates the carrying value of its capitalized
servicing rights in light of the actual experience of the underlying loans and
makes adjustments to reduce the carrying value where appropriate. Servicing
income and amortization of excess servicing rights and PMSRs are included in
automobile lending and mortgage banking income in the consolidated statements of
income.
As servicer of these loans, Westcorp holds and remits funds collected from
the borrowers on behalf of the trustee. These amounts are reported as amounts
held on behalf of trustee.
Premises and Equipment: Premises and equipment are recorded at cost and
depreciated over their estimated useful lives principally using the straight
line method for financial reporting and accelerated methods for tax purposes.
Leasehold improvements are amortized over the lives of the respective leases or
the service lives of the improvements, whichever is shorter.
Nonaccrual Loans: Nonaccrual loans are loans on which accrual of interest
has been suspended. Interest is suspended on all real estate loans when, in
management's judgement, the interest will not be collectible in the normal
course of business or when the loan is 90 days or more past due or full
collection of principal is not assured. When a loan is placed on nonaccrual,
interest accrued is reversed against interest income. Interest income is
suspended on all loans, except consumer loans. On these loans, interest
continues to accrue until the loan is charged-off, which occurs automatically
after the loan is past due 120 days.
Real Estate Owned: Real estate acquired through foreclosure is recorded at
the lower of cost or fair value less estimated costs to sell. Costs of holding
this real estate, and related gains and losses on disposition, are credited or
charged to real estate operations as incurred. These values are periodically
reviewed and reduced, if appropriate.
Real estate owned also includes properties classified as insubstance
foreclosed loans. Loans are classified as insubstance foreclosed when, in
management's judgement, the risks and rewards of ownership have been shifted
from the borrower to Westcorp as defined by generally accepted accounting
principles. These properties are transferred to real estate owned at the lower
of the unpaid balance of the loan or fair value. Subsequent valuation
adjustments are made if the fair value of the property falls below the carrying
amount.
F-8
<PAGE> 60
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
Westcorp has in the past entered into certain real estate joint venture
partnerships. Westcorp had ownership interests of greater than 50% in all of its
real estate partnership transactions. All significant intercompany transactions
have been eliminated in consolidation. During 1994, these joint venture
partnerships have been primarily completed with any remaining interests written
off.
Real estate owned is carried net of an allowance for potential losses which
is maintained at a level believed adequate by management to absorb any potential
losses in the portfolio. Management's determination of the adequacy of the
allowance is based on an evaluation of the past loss experience, current
economic conditions, selling costs and other relevant factors.
Income Taxes: Westcorp files consolidated federal and state tax returns
with all its subsidiaries except for Westhrift, which files separate tax
returns.
Excess of Purchase Cost over Net Assets Acquired: The excess of amounts
paid over the fair value of assets acquired of a business purchased in 1982 is
being amortized over twenty-five years, using the straight-line method.
Insurance Commissions: Commissions on insurance policies sold are
recognized as income over the life of the policies.
Insurance Premiums: Premiums for life and accident/health insurance
policies are recognized as income over the term of the insurance contract.
Net Income Per Common Share: Net income per common share is based on
average shares outstanding during each year plus the net effect of dilutive
stock options.
Current Accounting Pronouncements: In May 1993, the Financial Accounting
Standards Board ("FASB") issued Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" ("SFAS 114"), which was subsequently amended by SFAS 118
in October, 1994 which is effective for fiscal years beginning after December
15, 1994. Adoption of these statements is not expected to have a material impact
on Westcorp's financial statements.
NOTE B -- INVESTMENT SECURITIES AVAILABLE FOR SALE
The aggregate amortized cost and approximate fair value of investment
securities available for sale at December 31 were as follows:
<TABLE>
<CAPTION>
1994
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR 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>
F-9
<PAGE> 61
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
1993
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
other U.S. Government agencies and
corporations.................................. $114,050 $1,073 $600 $ 114,523
Corporate bonds................................. 400 400
Obligations of states and political
subdivisions.................................. 3,527 2 28 3,501
Other........................................... 25 25
-------- ------ ---- ---------
$118,002 $1,075 $628 $ 118,449
======== ====== ==== =========
</TABLE>
Proceeds from the sale of investment securities available for sale totaled
approximately $0.4 million and $65.4 million in 1994 and 1993, respectively.
Westcorp realized gross gains of $0.4 million and $2.9 million and gross losses
of $0.4 million and $0.4 million in 1994 and 1993, respectively.
At December 31, 1994, the stated maturities of investment securities
available for sale were as follows:
<TABLE>
<CAPTION>
ONE YEAR TO FIVE YEARS TEN YEARS
UP TO ONE YEAR FIVE YEARS TO TEN YEARS OR MORE
------------------- ------------------- ------------------ ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- ------ --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities and
obligations of other
U.S. Government
agencies and
corporations......... $24,800 $24,654 $94,213 $87,023
Obligations of states
and political
subdivisions......... $ 2,036 $1,765 $ 1,488 $1,297
Other.................. 25 25
------- ------- ------- ------- ------- ------ ------- ------
$24,800 $24,654 $94,238 $87,048 $ 2,036 $1,765 $ 1,488 $1,297
======= ======= ======= ======= ======= ====== ======= ======
</TABLE>
NOTE C -- MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity consisted of the following at
December 31, 1994:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR 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>
Westcorp's mortgage-backed securities held to maturity had maturities at
December 31, 1994 of ten years or more, although payments are generally received
monthly throughout the life of these securities.
F-10
<PAGE> 62
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE D -- MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale consisted of the following at
December 31:
<TABLE>
<CAPTION>
1994
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates............................... $ 50,637 $1,572 $1,036 $ 51,173
FNMA participation certificates................. 80,622 2,788 77,834
FHLMC participation certificates................ 3,082 85 2,997
Collateralized mortgage obligations............. 22,543 389 22,154
--------- ------ ------ --------
$ 156,884 $1,572 $4,298 $154,158
========= ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
1993
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates............................... $ 2,020 $ 131 $16 $ 2,135
FNMA participation certificates................. 88,782 1,070 89,852
FHLMC participation certificates................ 3,592 83 3,675
Other participation certificates................ 173 173
------- ------ --- -------
$94,567 $1,284 $16 $95,835
======= ====== === =======
</TABLE>
Proceeds from the sale of mortgage-backed securities available for sale
totaled approximately $119 million and $4.7 million at 1994 and 1993,
respectively. Westcorp had gross gains of $2.0 million in 1994 and gross losses
of $1.7 million and $33 thousand in 1994 and 1993, respectively.
Westcorp's mortgage-backed securities available for sale had maturities at
December 31, 1994, of ten years or more, although payments are generally
received monthly throughout the life of these securities.
Westcorp has issued certain mortgage-backed securities that include
recourse provisions. Subject to certain limitations, Westcorp is required for
the life of the loans to repurchase the buyer's interest in individual loans on
which foreclosure proceedings have been completed. Securities with recourse
issued by Westcorp had a total outstanding balance of $220 million and $125
million at December 31, 1994 and 1993, respectively.
Westcorp has provided for possible losses that may occur as a result of its
recourse obligations. The maximum remaining exposure under these recourse
provisions at December 31, 1994 and 1993 was $128 and $52.5 million,
respectively. Westcorp has pledged $30.1 million of securities as collateral
under these recourse provisions.
F-11
<PAGE> 63
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE E -- NET LOANS RECEIVABLE
Net loans receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real Estate:
Mortgage.......................................... $1,308,585 $1,310,003
Construction...................................... 19,813 31,684
---------- ----------
1,328,398 1,341,687
Less: Undisbursed loan proceeds..................... 7,614 14,890
---------- ----------
1,320,784 1,326,797
Consumer:
Sales contracts................................... 513,470 258,323
Less unearned discounts........................... 82,762 27,972
---------- ----------
430,708 230,351
---------- ----------
1,751,492 1,557,148
Allowance for loan losses........................... (41,323) (39,677)
Deferred loan fees.................................. (5,141) (5,849)
Other............................................... 10,530 9,359
---------- ----------
1,715,558 1,520,981
Less: Loans held for sale
Mortgage.......................................... 2,954 199,007
Consumer.......................................... 301,552 101,724
---------- ----------
304,506 300,731
---------- ----------
$1,411,052 $1,220,250
========= =========
</TABLE>
Loans serviced by Westcorp for the benefit of others totaled approximately
$2.9 billion, $2.2 billion and $1.4 billion at December 31, 1994, 1993, and
1992, respectively. These amounts are not reflected in the accompanying
consolidated financial statements.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year............... $ 39,677 $ 40,656 $ 33,933
Provision for loan losses.................. 13,033 22,584 34,271
Charged off loans.......................... (19,219) (32,507) (30,397)
Recoveries................................. 7,832 8,944 2,849
-------- -------- --------
Balance at end of year..................... $ 41,323 $ 39,677 $ 40,656
======== ======== ========
</TABLE>
Interest forgone on nonaccrual loans was $0.9 million $1.2 million and $8.1
million for the years ended December 31, 1994, 1993 and 1992, respectively.
F-12
<PAGE> 64
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE F -- PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1994 1993
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land..................................................... $20,396 $20,772
Buildings and improvements............................... 49,206 48,810
Furniture and equipment.................................. 19,666 17,379
Automobiles.............................................. 205 198
------- -------
89,473 87,159
Less: Accumulated depreciation and amortization.......... 23,008 19,643
------- -------
$66,465 $67,516
======= =======
</TABLE>
NOTE G -- REAL ESTATE OWNED
Real estate owned consisted of the following at December 31:
<TABLE>
<CAPTION>
1994 1993
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate acquired for investment or development....... $ 9,248
Real estate acquired through foreclosure................. $20,737 17,405
Insubstance foreclosures................................. 4,874 20,825
------- -------
25,611 47,478
Less: Allowance for losses............................... 1,684 3,508
------- -------
$23,927 $43,970
======= =======
</TABLE>
Changes in the allowance for real estate losses were as follows:
<TABLE>
<CAPTION>
1994 1993
------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of year............................ $ 3,508 $ 20,185
Provision for real estate losses........................ (2,106) (6,489)
Chargeoffs, net......................................... 282 (10,188)
------- --------
Balance at end of year.................................. $ 1,684 $ 3,508
======= ========
</TABLE>
Westcorp has entered into various joint venture partnership agreements to
acquire and develop real property. Westcorp's interest in each project was
greater than 50% and, in some cases, included a participating share of the
profits realized upon sale.
F-13
<PAGE> 65
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
Condensed financial information (unaudited) for these partnerships are as
follows at December 31:
<TABLE>
<CAPTION>
1993
-----------
(DOLLARS IN
THOUSANDS)
<S> <C>
Statements of Financial Condition:
Total assets............................................ $9,248
======
Loans from Westcorp..................................... $6,371
Loans from outside sources.............................. 2,401
------
Total liabilities....................................... 8,772
Equity.................................................. 476
------
Total liabilities and equity............................ $9,248
======
</TABLE>
<TABLE>
<CAPTION>
1994 1993 1992
----- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Statements of operations:
Rental income................................. $ 2,145 $ 4,249
Sales of real estate, net..................... $(209) 561 7
Other income.................................. 144 316
----- ------- -------
(209) 2,850 4,572
Interest expense(1)............................. 1,641 3,471
General and administrative expense.............. 3,222 2,579
----- ------- -------
4,863 6,050
----- ------- -------
Net loss........................................ $(209) $(2,013) $(1,478)
===== ======= =======
</TABLE>
- ---------------
(1) These amounts are eliminated or reclassified upon consolidation.
NOTE H -- ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1994 1993
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest on loans receivable............................. $ 7,633 $ 7,125
Interest on securities................................... 5,115 2,547
Interest on other........................................ 561 1,932
------- -------
$13,309 $11,604
======= =======
</TABLE>
F-14
<PAGE> 66
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE I -- SAVINGS DEPOSITS
Savings deposits consisted of the following at December 31:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE RATE
FOR THE YEAR ENDED
1994 1994 1993
--------------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Passbook accounts............... 2.83% $ 104,085 $ 162,185
Money market deposit accounts... 3.12 801 1,149
Certificate accounts............ 4.89 1,527,896 1,193,724
---------- ----------
$1,632,782 $1,357,058
========== ==========
</TABLE>
The aggregate amount of savings deposits in denominations greater than or
equal to $100,000 at December 31, 1994 was $413 million.
Scheduled maturities of certificate accounts as of December 31, 1994 are as
follows:
<TABLE>
<CAPTION> WEIGHTED
AVERAGE RATE AMOUNT
------------ ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Six months or less........................... 4.78% $ 590,957
More than six months through one year........ 5.45 571,891
More than one year through three years....... 6.31 350,845
More than three years through five years..... 5.71 14,203
----------
$1,527,896
==========
</TABLE>
Interest expense on savings deposits consisted of the following for the
year ended December 31:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Passbook accounts............................. $ 3,895 $ 5,125 $ 7,984
Money market deposit accounts................. 33 36 66
Certificate accounts.......................... 64,367 71,155 91,053
------- ------- -------
$68,295 $76,316 $99,103
======= ======= =======
</TABLE>
The following table summarizes certificate accounts by interest rate within
maturity categories at December 31:
<TABLE>
<CAPTION>
1994
------------------------------------------------------------------
1995 1996 1997 THEREAFTER TOTAL
---------- -------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
0% -- 3.99%...................... $ 62,718 $ 2,303 $ 232 $ 65,253
4.00% -- 5.99%................... 976,405 111,386 10,402 $ 8,390 1,106,583
6.00% -- 7.99%................... 118,884 55,345 171,233 5,793 351,255
8.00% -- 9.99%................... 4,420 209 156 20 4,805
---------- -------- -------- ---------- ----------
$1,162,427 $169,243 $182,023 $ 14,203 $1,527,896
========== ======== ======== ========= ==========
</TABLE>
F-15
<PAGE> 67
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
1993
-------------------------------------------------------------
1994 1995 1996 THEREAFTER TOTAL
-------- -------- ------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
0% -- 3.99%....................... $504,104 $ 13,324 $ 386 $ 86 $ 517,900
4.00% -- 5.99%.................... 225,756 103,179 46,069 13,324 388,328
6.00% -- 7.99%.................... 88,594 25,956 8,165 154,316 277,031
8.00% -- 9.99%.................... 5,917 4,175 203 170 10,465
-------- -------- ------- -------- ----------
$824,371 $146,634 $54,823 $167,896 $1,193,724
======== ======== ======= ======== ==========
</TABLE>
NOTE J -- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Balance at end of period, including accrued interest......... $ 247,242
Average amount outstanding during the period................. 51,401
Maximum amount outstanding during the period................. 266,641
Weighted average interest rate during the period............. 3.6%
Weighted average interest rate at end of period.............. 4.3
</TABLE>
Mortgage-backed securities sold under dollar reverse repurchase agreements
were delivered to dealers who arranged the transactions. The dealers may have
sold, loaned, or otherwise disposed of such securities to other parties in the
normal course of their operations, and have agreed to resell to Westcorp
substantially identical securities at the maturities of the agreements. The
agreements at December 31, 1994, mature within 30 days.
NOTE K -- SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1994 and 1993, respectively,
consisted of a commercial paper line with the Federal Home Loan Bank ("FHLB")
totalling $211 million and $125 million, net of discount (1994, $0.9 million;
1993, $0.5 million). The line is collateralized by eligible mortgage loans with
an approved line of up to $400 million in 1994 and $200 million in 1993, and a
weighted average interest rate of 6.0% at December 31, 1994 and 3.3% at December
31, 1993.
The maximum amount of commercial paper outstanding at any month end during
1994 and 1993 was $222 million and $200 million, respectively. The average
amount of commercial paper outstanding during 1994 and 1993 was $66.6 million
and $53.1 million, respectively, with a weighted average interest rate of 4.7%
and 3.3%, respectively.
F-16
<PAGE> 68
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE L -- FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan Bank (FHLB) are collateralized by the
pledge of certain real estate loans with an uncollected principal balance of
approximately $713 million and $604 million at December 31, 1994 and 1993,
respectively.
Information as to interest rates and maturities on the advances from the
FHLB as of December 31, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Range of interest rates............................. 5.6%-8.5% 5.6%-8.5%
Weighted average interest rate...................... 7.4 7.6
Year due:
1994.............................................. $ 37,000
1995.............................................. $17,000 17,000
1996.............................................. 27,000 27,000
1997.............................................. 32,000 32,000
1998..............................................
1999.............................................. 6,500
Thereafter.......................................... 6,500 13,000
------- --------
$89,000 $126,000
======= ========
</TABLE>
The Bank had an unused line of credit with the FHLB at December 31, 1994 of
approximately $223 million.
NOTE M -- OTHER BORROWINGS AND SUBORDINATED DEBENTURES
Other borrowings and Subordinated Debentures consisted of the following at
December 31:
<TABLE>
<CAPTION>
1994 1993
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Bonds, net of discount (1993, $12 thousand) collateralized by certain
automobile installment sales contracts and cash of approximately
$22.6 million due in 1995 with an interest rate of 8.35%............. $ 22,074
First trust deed notes payable, collateralized by real property due in
various installments with interest rates ranging from 5.5% to 10%,
due 1995............................................................. $ 54 4,311
Subordinated debentures, net of discount (1994, $3.5 million; 1993,
$4.6 million) due in 2003 with an interest rate of 8.5%.............. 103,851 120,422
-------- --------
$103,905 $146,807
======== ========
</TABLE>
On June 17, 1993, the Bank issued $125 million of 8.5% Subordinated Capital
Debentures. Underwriting discounts and expenses totaling $4.8 million associated
with the issuance were capitalized and are being amortized over seven years. The
Debentures are redeemable, in whole or in part, at the option of the Bank, on or
after July 1, 2000 at 100% of the principal amount being redeemed plus accrued
interest to the date of redemption. For regulatory purposes, the Debentures,
subject to certain limitations, are included as part of the Bank's supplementary
capital. During 1994, the Bank repurchased and retired $16.9 million of
Debentures.
On April 29, 1987, the Bank issued $75 million of 11% Subordinated
Debentures, due May 1, 1999. Underwriting discounts and expenses totaling $2
million associated with the issuance were capitalized and amortized over five
years. The Debentures were redeemed, in whole at the option of the Bank, using
the
F-17
<PAGE> 69
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
proceeds from the new Subordinated Debenture offering, on September 10, 1993 at
104.4% of the principal amount then outstanding. This early redemption created
an extraordinary loss of $1.1 million net of respective tax benefit of $.8
million.
NOTE N -- COMMITMENTS AND CONTINGENCIES
Future minimum payments under noncancelable operating leases on premises
and equipment with terms of one year or more as of December 31, 1994, are as
follows (Dollars in thousands):
<TABLE>
<S> <C>
1995................................................................ $2,324
1996................................................................ 2,044
1997................................................................ 1,792
1998................................................................ 1,531
1999................................................................ 678
Thereafter.......................................................... 155
------
$8,524
======
</TABLE>
Rental expense for premises and equipment amounted to $2.5 million, $2.0
million, and $1.7 million in 1994, 1993, and 1992, respectively.
Westcorp's outstanding loan commitments were as follows at December 31:
<TABLE>
<CAPTION>
1994 1993
------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Fixed-rate............................................. $ 513 $22,435
Variable-rate.......................................... 7,969 8,459
------ -------
$8,482 $30,894
====== =======
</TABLE>
Westcorp has pledged certain assets relative to amounts held on behalf of
trustees at December 31 as follows:
<TABLE>
<CAPTION>
1994 1993
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FNMA participation certificates........................ $ 29,901 $ 31,902
Consumer loans......................................... 133,610 108,111
Residential second mortgages........................... 78,966 104,074
Multifamily first mortgages............................ 89,937 100,403
-------- --------
Total collateral pledged..................... $332,414 $344,490
======== ========
</TABLE>
Westcorp is involved in litigation in which it is not yet possible to
estimate the potential liability or the likelihood thereof. However, Westcorp
does not believe the outcome will have any material impact upon financial
condition.
F-18
<PAGE> 70
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE O -- STOCK OPTIONS
In 1986, Westcorp reserved 945,000 shares of common stock for future
issuance to certain employees under an incentive stock option plan. Reserved,
unoptioned shares totaled 352,117 and 352,433 shares at December 31, 1994 and
1993, respectively. The options may be exercised at $7.26 per share one year
following the date of grant in cumulative equal amounts over five years at which
time any option not exercised will expire. Options terminate upon the
termination of employment for any reason.
In 1991, Westcorp reserved an additional 3,150,000 shares of common stock
for future issuance to certain employees under a stock option plan. Reserved,
unoptioned shares totaled 2,351,689 and 2,538,316 shares at December 31, 1994
and 1993, respectively. The options may be exercised at prices ranging from
$7.72 to $11.38 per share one year following the date of grant in cumulative
equal amounts over five years at which time any option not exercised will
expire. Options terminate upon the termination of employment for any reason.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
SHARES PRICE PER SHARE
-------- -----------------
<S> <C> <C>
Outstanding at December 31, 1991................... 653,143 $4.53 - 11.33
Issued........................................... 6,050 7.71 - 8.81
Exercised........................................ (118,323) 4.53 - 7.71
Cancelled........................................ (20,998) 4.53 - 7.71
-------- -----------------
Outstanding at December 31, 1992................... 519,872 6.47 - 11.33
Issued........................................... 409,065 8.81 - 10.00
Exercised........................................ (26,435) 6.47 - 8.81
Cancelled........................................ (203,510) 6.80 - 11.33
-------- -----------------
Outstanding at December 31, 1993................... 698,992 7.26 - 11.33
Issued........................................... 304,411 7.26 - 11.38
Exercised........................................ (153,292) 7.26 - 8.81
Cancelled........................................ (85,315) 7.26 - 10.38
-------- -----------------
Outstanding at December 31, 1994................... 764,796 $7.26 - 11.38
======== =================
</TABLE>
At December 31, 1994, there were 32,150 and 296,209 exercisable stock
options under the 1986 and 1991 plans, respectively.
F-19
<PAGE> 71
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE P -- REGULATORY CAPITAL
The Bank is subject to three capital standards: (i) a leverage (core)
ratio; (ii) a tangible capital requirement; and (iii) a risk-based capital
requirement. The Bank exceeds all current capital standards. A reconciliation of
the Bank's capital under generally accepted accounting principles (GAAP) as
included in its consolidated balance sheet and regulatory capital at December
31, 1994 is as follows:
<TABLE>
<CAPTION>
RISK-BASED
TANGIBLE CAPITAL CORE CAPITAL CAPITAL
---------------- ---------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Bank shareholder equity -- GAAP
basis.............................. $182,990 $182,990 $182,990
Adjustment for unrealized losses
under SFAS 115..................... 5,998 5,998 5,998
Less: Excess qualifying PMSR......... (212) (212) (212)
Non-permissible activities at
required phase-in.................. (5,924) (5,924) (5,924)
Supplemental capital:
Subordinated debentures(3)......... 106,417
General loan valuation allowance... 27,886
Less: Fully capitalized assets..... (47,284)
-------- -------- --------
Regulatory capital................... 182,852 6.62%(1) 182,852 6.62%(1) 269,871 12.16%(2)
Minimum OTS capital requirement...... 41,418 1.50% 82,836 3.00% 177,571 8.00%
-------- -------- --------
Excess capital....................... $141,434 $100,016 $ 92,300
======== ======== ========
</TABLE>
- ---------------
(1) As a percentage of total adjusted assets.
(2) As a percentage of risk-weighted assets.
(3) Excludes capitalized discounts and issue costs.
NOTE Q -- DIVIDENDS AND OTHER RESTRICTIONS
Westcorp paid cash dividends of $.30, $.20, and $.19 per share for the
years ended December 31, 1994, 1993, and 1992, respectively. Westcorp declared a
stock dividend of 5% in April 1994.
NOTE R -- PENSION PLAN
Westcorp has an Employee Stock Ownership and Salary Savings Plan ("Plan"),
which covers essentially all full-time employees who have completed one year of
service. Contributions to the Plan are discretionary and determined by the Board
of Directors within limits set forth under ERISA. Contributions to the Plan are
fully expensed in the year to which the contribution applies.
Westcorp's contribution to the Plan amounted to $1.2 million and $1.0
million in 1994 and 1993, respectively. Westcorp did not contribute to the Plan
in 1992.
F-20
<PAGE> 72
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE S -- INCOME TAXES
Federal and state franchise taxes receivable at December 31 were as
follows:
<TABLE>
<CAPTION>
1994 1993
------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current................................................. $ 8,801 $ 5,240
Deferred................................................ 7,659 13,946
------- -------
$16,460 $19,186
======= =======
</TABLE>
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal...................................... $ 4,271 $2,844 $ 10,382
State franchise.............................. 1,711 940 3,029
------- ------- --------
5,982 3,784 13,411
Deferred:
Federal.................................... 5,994 4,802 (9,232)
State franchise............................ 1,843 988 (2,795)
------- ------- --------
7,837 5,790 (12,027)
------- ------- --------
$13,819 $9,574 $ 1,384
======= ======= ========
</TABLE>
The difference between total tax provisions and the amounts computed by
applying the statutory federal income tax rate of 35% to income before taxes is
due to:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Tax at statutory rate........................ $11,423 $8,530 $1,237
California franchise tax (net of Federal tax
benefit)................................... 2,396 1,688 155
Tax on extraordinary item.................... (811)
Other........................................ 167 (8)
------- ------ ------
$13,819 $9,574 $1,384
======= ====== ======
</TABLE>
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was
signed into law. Among other things, it provided for a higher tax rate of 35%
(previously the tax rate was 34%). This new tax rate was effective beginning
January 1, 1993. Approximately $0.3 million was included in Westcorp's December
31, 1993 deferred tax asset as a result of this change in the law.
F-21
<PAGE> 73
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of
Westcorp's deferred tax liabilities and assets as of December 31, 1994 and 1993
are as follows:
DEFERRED TAX POSITION
ASSETS/(LIABILITIES)
<TABLE>
<CAPTION>
1994 1993
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Loan loss reserves................................... $ 16,189 $ 17,759
Joint venture losses and write-downs in excess of tax
losses............................................ 1,407 4,841
Grantor trust income recognized for tax purposes..... 2,072 4,861
Deferred compensation accrual........................ 1,946 1,965
SFAS 115 deferred taxes.............................. 1,433
-------- --------
Total deferred tax assets.............................. 23,047 29,426
Deferred tax liabilities:
Loan fee income deferred for tax purposes............ (3,335) (7,130)
FHLB dividends....................................... (2,648) (2,495)
Accelerated depreciation for tax purposes............ (1,396) (1,321)
Loan costs........................................... (1,810)
Other -- net......................................... (6,199) (4,534)
-------- --------
Total deferred tax liabilities......................... (15,388) (15,480)
-------- --------
Net deferred tax asset................................. $ 7,659 $ 13,946
======== ========
</TABLE>
NOTE T -- BUSINESS SEGMENT DATA
Westcorp conducts a significant amount of automobile lending in addition to
its principal operations as a savings and loan as presented below at December
31:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Automobile lending................... $ 108,690 $ 94,297 $ 80,424
Savings and loan operations.......... 118,138 137,488 164,794
Operating profit:
Automobile lending................... $ 43,251 $ 41,184 $ 25,080
Savings and loan operations.......... 9,818 4,019 (6,455)
General corporate expenses........... (20,430) (20,830) (14,986)
---------- ---------- ----------
Pretax income..................... $ 32,639 $ 24,373 $ 3,639
========== ========== ==========
Identifiable assets:
Automobile lending................... $ 542,962 $ 323,140 $ 416,900
Savings and loan operations.......... 2,164,852 1,811,541 2,060,557
General corporate assets............. 34,475 37,578 42,038
---------- ---------- ----------
Total assets...................... $2,742,289 $2,172,259 $2,519,495
========== ========== ==========
</TABLE>
F-22
<PAGE> 74
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
The automobile lending operations involve the purchase, origination,
servicing and sale of automobile loans and contracts. The savings and loan
operations includes activities normally associated with a savings and loan
including residential lending, deposit gathering, ancillary insurance services,
and so forth. The revenues for each segment are generated through lending and
related activities from unaffiliated customers.
Operating profit is revenues less interest costs, provisions for loan
losses and general and administrative costs. Interest expense is allocated based
on the interest earning assets of each segment using Westcorp's weighted average
cost of funds. Operating profit does not include general corporate expenses or
income taxes. Identifiable assets are those assets used in the operations of
each segment.
NOTE U -- FINANCIAL INSTRUMENT AGREEMENTS
Westcorp uses interest rate swaps, options and caps, to minimize its
exposure to interest rate risk. The fair value of these agreements may vary
substantially with changes in interest rates. At December 31, 1994, Westcorp's
portfolio of such agreements consisted of the following:
<TABLE>
<CAPTION>
NOTIONAL CREDIT
AMOUNT EXPOSURE
--------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest rate swaps..................................... $ 85,500 $3,186
Interest rate caps and options.......................... 230,000 3,529
--------- ------
$ 315,500 $6,715
========= ======
</TABLE>
Notional amounts do not represent amounts exchanged by parties and, thus,
are not a measure of Westcorp's exposure to loss through its use of these
agreements. The amounts exchanged are determined by reference to the notional
amounts and the other terms of the agreements.
Westcorp's interest rate swaps consisted of agreements with other parties
to exchange, at specified intervals, the difference between fixed-rate and
floating-rate interest amounts calculated by reference to an agreed notional
amount and a specified index. Westcorp pays a fixed interest rate and receives a
floating interest rate on all of its interest rate swaps. At December 31, 1994,
the terms of Westcorp's interest rate swaps were to pay 7.0% fixed rate and were
to receive 6.0% variable rate maturing 1998 with a 3.5% collateral requirement.
Variable interest rates may change in the future.
Westcorp purchases interest rate caps and options to effectively remove
lifetime interest rate caps on securities, to hedge interest rate fluctuations
on assets available for sale and to limit the erosion of net interest income
under extreme increases in interest rates. These agreements reduce Westcorp's
exposure to rising interest rates. The cap agreements have strike rates from
8.0% to 9.0% with expiration dates ranging from 1999 to 2001. The option
contracts expire in March 1995.
The current credit exposure under these agreements is limited to the fair
value of the agreements with a positive fair value at the reporting date. Master
netting agreements are arranged or collateral is obtained through physical
delivery of, or rights to, securities to minimize Westcorp's exposure to credit
losses in the event of nonperformance by counterparties to financial
instruments. Westcorp also minimizes its counterparty risk by entering into
agreements only with highly rated counterparties.
Due to a lower than investment grade rating on its subordinated debentures,
the Bank has been required to deliver securities with a market value at December
31, 1994, of approximately $3.2 million, as collateral on its interest rate swap
positions.
F-23
<PAGE> 75
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE V -- FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair Values of Financial Instruments: Fair value information about
financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value, are reported using quoted market
prices. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and in many cases, could not be realized in immediate settlement of the
instrument. Fair values for certain financial instruments and all non-financial
instruments are not required to be disclosed. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of Westcorp.
The following methods and assumptions were used by Westcorp in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and short-term instruments approximate those assets'
fair values.
Investment securities (including mortgage-backed securities): Fair
values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
Loans Receivable: For variable-rate loans that reprice frequently,
fair values are based on carrying values. The fair values for fixed-rate
mortgage loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in
loan characteristics. The fair values for other loans are estimated using
discounted cash flow analyses, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality.
Interest rate swaps: The carrying amount is determined by taking the
difference of the aggregate cost basis and the notional amount for each
instrument. The fair value is estimated by obtaining market quotes from
brokers.
Interest rate options and caps: The carrying amount comprises the
unamortized premiums paid for the contracts. The fair value is estimated by
obtaining market quotes from brokers.
Forward agreements: The carrying amount comprises the amount of the
gain deferred on expired agreements. The fair value is estimated by
obtaining market quotes from brokers.
Savings Deposits: The fair values disclosed for passbook accounts, and
certain types of money market accounts are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates
currently being offered on certificates of deposit to a schedule of
aggregated expected monthly maturities on time deposits.
Short-term borrowings: The carrying amounts of a commercial paper line
with the FHLB and a bank line of credit approximate their fair values.
Long-term borrowings: The fair values of Westcorp's long-term
borrowings (other than deposits) are estimated using discounted cash flow
analyses, based on Westcorp's current incremental borrowing rates for
similar types of borrowing arrangements.
F-24
<PAGE> 76
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
The estimated fair values of Westcorp's financial instruments are as
follows:
<TABLE>
<CAPTION>
1994 1993
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNTS VALUE AMOUNTS VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents..................... $ 20,902 $ 20,902 $ 25,395 $ 25,395
Other short term investments.................. 145,391 145,393 137,162 137,162
Investment securities and mortgage backed
securities................................. 581,904 578,134 212,569 214,284
Loans (including held for sale)............... 1,756,881 1,758,870 1,560,658 1,547,795
Derivative financial instruments held for
purposes other than trading:
Interest rate contracts
Swaps...................................... 3,186 3,186
Options and caps........................... 3,529 3,730
Forward agreements......................... 959 1,566
Fixed rate loan commitments................... 513 514
Variable rate loan commitments................ 7,969 8,067
Financial liabilities:
Savings deposits.............................. $1,632,782 $1,616,048 $1,357,058 $1,377,448
Securities sold under agreement to
repurchase................................. 246,074 246,043
Federal Home Loan Bank advances............... 89,000 88,800 126,000 131,547
Short term borrowings......................... 210,524 210,550 124,511 125,004
Other borrowings.............................. 54 54 26,385 26,385
Subordinated debentures....................... 103,851 92,810 120,422 123,524
</TABLE>
Westcorp has deferred gains of $0.9 million relating to forward agreements,
used to hedge the value of loans held for sale, at December 31, 1994. These
gains will be recorded as part of the gain or loss on sale of loans, at the time
the loans are sold into the secondary markets.
F-25
<PAGE> 77
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE W -- WESTCORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1993
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets
Cash......................................................... $ 27,778 $ 643
Other short-term investments................................. 8,500
Investment securities........................................ 400
Investment in subsidiaries................................... 182,990 194,025
Other........................................................ 1,725 1,622
-------- --------
$212,493 $205,190
======== ========
Liabilities and equity
Other liabilities............................................ $ 181 $ 75
-------- --------
181 75
Shareholders' equity........................................... 212,312 205,115
-------- --------
$212,493 $205,190
======== ========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1994 1993 1992
------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income
Interest............................................. $ 127 $ 774 $1,095
Other................................................ 129 1,592 578
------- ------- ------
256 2,366 1,673
Other expenses......................................... 1,350 2,417 1,812
------- ------- ------
Loss before income taxes and equity in net income of
subsidiaries......................................... (1,094) (51) (139)
Income tax (benefit) expense........................... (351) (7) 434
------- ------- ------
Loss before equity in net income of subsidiaries....... (743) (44) (573)
Equity in net income of subsidiaries................... 19,563 12,918 2,828
------- ------- ------
NET INCOME............................................. $18,820 $12,874 $2,255
======= ======= ======
</TABLE>
F-26
<PAGE> 78
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993 1992
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $ 18,820 $ 12,874 $ 2,255
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Provision for loan losses.................................. (475) 568
Amortization of investment discount........................ 10 4
Amortization of goodwill................................... 85 85 84
Gain on redemption of subordinated debentures.............. (279)
Gain on sale of investments................................ (657)
Writedown of investments................................... 400 400
Equity in net income of subsidiaries....................... (19,563) (12,918) (2,828)
-------- -------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES............. (733) 740 (1,142)
INVESTMENT ACTIVITIES
Proceeds from sale of investment securities..................... 15,913
Proceeds from the redemption of subordinated debentures......... 8,509
Purchase of investment securities............................... (9,127)
Dividends from subsidiaries..................................... 24,600 7,485
Contributions to subsidiaries................................... (25,000) (8,200)
Proceeds from disposition of subsidiary......................... 1,486
Other, net...................................................... 393 129 336
-------- -------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES............. 24,993 (14,876) 6,407
FINANCING ACTIVITIES
Decrease in short-term borrowings............................... (11,650) (1,672)
Dividends paid.................................................. (6,844) (3,948) (3,327)
Proceeds from sale of common stock.............................. 1,219 35,491 1,430
-------- -------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES............. (5,625) 19,893 (3,569)
-------- -------- -------
INCREASE IN CASH................................................ 18,635 5,757 1,696
Cash at beginning of year....................................... 9,143 3,386 1,690
-------- -------- -------
CASH AT END OF YEAR............................................. $ 27,778 $ 9,143 $ 3,386
======== ======== =======
</TABLE>
F-27
<PAGE> 79
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994
NOTE X -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1994 and 1993. Certain quarterly amounts have been
adjusted to conform with the year-end presentation.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1994
Interest income..................................... $34,090 $31,543 $ 36,268 $41,738
Interest expense.................................... 20,679 18,964 21,920 27,203
Net interest income................................. 13,411 12,579 14,348 14,535
Provision for loan losses........................... 4,241 2,512 3,273 3,007
Investment and mortgage-backed security gains
(losses).......................................... 448 313 (425)
Income before income taxes.......................... 7,176 6,791 8,535 10,137
Income taxes........................................ 3,248 2,692 3,552 4,327
Net income.......................................... 3,928 4,099 4,983 5,810
Net income per common share......................... 0.17 0.18 0.21 0.25
1993
Interest income..................................... $43,767 $40,334 $ 38,386 $35,459
Interest expense.................................... 27,600 25,950 25,356 22,297
Net interest income................................. 16,167 14,384 13,030 13,162
Provision for loan losses........................... 6,680 7,446 6,192 2,266
Investment and mortgage-backed security gains....... 2,301 202
Income before income taxes.......................... 4,950 5,915 7,608 5,900
Income taxes........................................ 1,905 2,763 3,290 2,428
Income before extraordinary item.................... 3,045 3,152 4,318 3,471
Extraordinary loss.................................. (1,113)
Net income.......................................... 3,045 3,152 3,205 3,472
Net income per common share before extraordinary
loss.............................................. 0.16 0.17 0.19 0.15
Extraordinary loss due to the redemption of
subordinated debentures........................... (0.05)
Net income per common share......................... 0.16 0.17 0.14 0.15
</TABLE>
F-28
<PAGE> 80
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
- ------ ------
<C> <S> <C>
3.1 Certificate of Incorporation*..............................................
3.2 Bylaws*....................................................................
10.1 Westcorp Incentive Stock Option Plan**.....................................
10.2 Westcorp Employee Stock Ownership and Salary Savings Plan*.................
10.3 Westcorp 1991 Stock Option Plan***.........................................
11.1 Statement Re Computation of Earnings Per Share............................. F-30
22.1 Subsidiaries of Westcorp................................................... F-31
23.1 Consent of Independent Auditors............................................ F-32
27 Financial Data Schedule....................................................
</TABLE>
- ---------------
* Exhibits previously filed with Westcorp Registration Statement on Form S-4
(File No. 33-34286), filed April 11, 1990 incorporated herein by reference
under Exhibit Number indicated.
** Exhibit previously filed with Westcorp Registration Statement in Form S-1
(File No. 33-4295), filed May 2, 1986 incorporated by reference under
Exhibit Number indicated.
*** Exhibit previously filed with Westcorp Registration Statement on Form S-8
(No. 33-43898), filed December 11, 1991 incorporated by reference under the
Exhibit Number indicated.
F-29
<PAGE> 1
EXHIBIT 11.1
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
PRIMARY
Weighted average shares outstanding................. 23,082,976 20,797,447 18,381,545
Net effect of diluting stock options................ 74,559 34,021 187,129
----------- ----------- -----------
Total.......................................... 23,157,535 20,831,468 18,568,674
=========== =========== ===========
Net income before extraordinary loss................ $18,819,507 $13,987,733 $ 2,254,758
Extraordinary loss.................................. (1,113,486)
----------- ----------- -----------
Net Income.......................................... $18,819,507 $12,874,247 $ 2,254,758
=========== =========== ===========
Net income per share before extraordinary loss...... $ 0.81 $ 0.67 $ 0.12
Extraordinary loss per share........................ (0.05)
----------- ----------- -----------
Net income per share................................ $ 0.81 $ 0.62 $ 0.12
=========== =========== ===========
FULLY DILUTED
Weighted average shares outstanding................. 23,082,976 20,797,447 18,381,545
Net effect of diluting stock options................ 74,559 74,726 187,129
----------- ----------- -----------
Total.......................................... 23,157,535 20,872,173 18,568,674
=========== =========== ===========
Net income before extraordinary loss................ $18,819,507 $13,987,733 $ 2,254,758
Extraordinary loss.................................. (1,113,486)
----------- ----------- -----------
Net income.......................................... $18,819,507 $12,874,247 $ 2,254,758
=========== =========== ===========
Net income per share before extraordinary loss...... $ 0.81 $ 0.67 $ 0.12
Extraordinary loss per share........................ (0.05)
----------- ----------- -----------
Net income per share................................ $ 0.81 $ 0.62 $ 0.12
=========== =========== ===========
</TABLE>
F-30
<PAGE> 1
EXHIBIT 22.1
SUBSIDIARIES OF WESTCORP
Western Financial Savings Bank, F.S.B., a federal savings bank
Westplan Insurance Agency, a California corporation
Western Reconveyance Company, Inc., a California corporation
Western Financial Auto Loans, Inc., a California corporation
Western Financial Auto Loans 2, Inc., a California corporation
Westcorp Financial Services, Inc., a California corporation
Western Consumer Services, Inc., a California corporation
Westhrift Life Insurance Company, an Arizona corporation
Westplan Investments, a California corporation
F-31
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 33-8405 and No. 33-43898) pertaining to the Incentive Stock
Option Plan of Westcorp and the Westcorp 1991 Stock Option Plan, respectively,
and in the related prospectus of our report dated January 11, 1995, with respect
to the consolidated financial statements of Westcorp included in the Annual
Report (Form 10-K) for the year ended December 31, 1994.
ERNST & YOUNG LLP
Los Angeles, California
March 1, 1995
F-32
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 165,730
<INT-BEARING-DEPOSITS> 563
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 268,922
<INVESTMENTS-CARRYING> 316,511
<INVESTMENTS-MARKET> 305,466
<LOANS> 1,751,492
<ALLOWANCE> 41,323
<TOTAL-ASSETS> 2,742,289
<DEPOSITS> 1,632,782
<SHORT-TERM> 456,598
<LIABILITIES-OTHER> 247,746
<LONG-TERM> 192,851
<COMMON> 23,146
0
0
<OTHER-SE> 189,166
<TOTAL-LIABILITIES-AND-EQUITY> 2,742,289
<INTEREST-LOAN> 119,649
<INTEREST-INVEST> 19,647
<INTEREST-OTHER> 4,343
<INTEREST-TOTAL> 143,639
<INTEREST-DEPOSIT> 68,295
<INTEREST-EXPENSE> 88,766
<INTEREST-INCOME-NET> 54,873
<LOAN-LOSSES> 13,033
<SECURITIES-GAINS> 336
<EXPENSE-OTHER> 92,391
<INCOME-PRETAX> 32,639
<INCOME-PRE-EXTRAORDINARY> 18,820
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,820
<EPS-PRIMARY> .81
<EPS-DILUTED> .81
<YIELD-ACTUAL> 2.79
<LOANS-NON> 17,667
<LOANS-PAST> 183
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 39,677
<CHARGE-OFFS> 19,219
<RECOVERIES> 7,832
<ALLOWANCE-CLOSE> 41,323
<ALLOWANCE-DOMESTIC> 41,323
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
